0001193125-20-014692.txt : 20200127 0001193125-20-014692.hdr.sgml : 20200127 20200127063232 ACCESSION NUMBER: 0001193125-20-014692 CONFORMED SUBMISSION TYPE: S-11/A PUBLIC DOCUMENT COUNT: 22 FILED AS OF DATE: 20200127 DATE AS OF CHANGE: 20200127 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NexPoint Real Estate Finance, Inc. CENTRAL INDEX KEY: 0001786248 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 842178264 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-11/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-235698 FILM NUMBER: 20547061 BUSINESS ADDRESS: STREET 1: 300 CRESCENT COURT, SUITE 700 CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: (972) 628-4100 MAIL ADDRESS: STREET 1: 300 CRESCENT COURT, SUITE 700 CITY: DALLAS STATE: TX ZIP: 75201 S-11/A 1 d759970ds11a.htm FORM S-11 (AMEND. NO. 2) Form S-11 (Amend. No. 2)
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As filed with the Securities and Exchange Commission on January 27, 2020

Registration No. 333-235698

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

AMENDMENT NO. 2

TO

FORM S-11

FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933

OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES

 

 

NEXPOINT REAL ESTATE FINANCE, INC.

(Exact name of Registrant as Specified in Governing Instruments)

 

 

300 Crescent Court

Suite 700

Dallas, Texas 75201

(972) 628-4100

(Address, including zip code and telephone number, including area code, of registrant’s principal executive offices)

 

 

Brian Mitts

President

300 Crescent Court

Suite 700

Dallas, Texas 75201

(972) 628-4100

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Charles T. Haag

Justin S. Reinus

Winston & Strawn LLP

2121 N. Pearl Street

Suite 900

Dallas, Texas 75201

(214) 453-6500

 

Robert K. Smith

James V. Davidson

Hunton Andrews Kurth LLP

2200 Pennsylvania Avenue NW

Washington, D.C. 20037

(202) 955-1500

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ☐     Accelerated filer  ☐     Non-accelerated filer  ☑     Smaller reporting company  ☑     Emerging growth company  ☑

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  

Amount

to be
Registered (1)

  

Proposed

Maximum
Offering Price
Per Share (2)

  

Proposed

Maximum

Aggregate
Offering Price (1)(2)

  

Amount of

Registration Fee (3)

Common Stock, par value $0.01 per share

  

5,750,000

  

$21.00

   $120,750,000    $15,674

 

(1)

Includes the aggregate offering price of additional shares that the underwriters have the option to purchase.

(2)

Estimated pursuant to Rule 457(a) under the Securities Act of 1933 solely for the purpose of determining the registration fee.

(3)

Of this amount, $14,927 was previously paid in connection with prior filings of this registration statement.

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion, dated January 27, 2020

5,000,000 Shares

 

PRELIMINARY PROSPECTUS                
  LOGO  

NEXPOINT REAL ESTATE FINANCE, INC.

Common Stock

 

 

NexPoint Real Estate Finance, Inc., or we, us or our, is a newly formed commercial real estate finance company. Our strategy is to originate, structure and invest in first mortgage loans, mezzanine loans, preferred equity and alternative structured financings in commercial real estate properties, as well as multifamily commercial mortgage backed securities, or CMBS, securitizations. Upon completion of this offering, we will be externally managed by NexPoint Real Estate Advisors VII, L.P., or our Manager, a subsidiary of NexPoint Advisors, L.P., or our Sponsor.

We are offering 5,000,000 shares of our common stock in this offering. We expect the public offering price of our common stock to be between $19.00 and $21.00 per share. This is our initial public offering and no public market currently exists for our common stock. Our common stock has been approved for listing, subject to official notice of issuance, on the New York Stock Exchange, or NYSE, under the symbol “NREF.”

At our request, the underwriters have reserved for sale, at the public offering price, up to 250,000 shares, or the Reserved Shares, offered by this prospectus for sale to our Sponsor and its affiliates. No underwriting discounts or commissions will be applied to the Reserved Shares.

We intend to elect to be treated as a mortgage real estate investment trust, or REIT, for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2020. Shares of our common stock are subject to ownership limitations that are primarily intended to assist us in maintaining our qualification as a REIT. Our charter contains certain restrictions relating to the ownership and transfer of our common stock, including, subject to certain exceptions, a 6.2% ownership limit of common stock by value or number of shares, whichever is more restrictive. Our board of directors may grant waivers from this ownership limit to stockholders and, in connection with this offering, intends to grant our Sponsor and its affiliates a waiver allowing them to own up to 25% of our common stock. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

We are an “emerging growth company” and a “smaller reporting company” under the federal securities laws and are subject to reduced public company reporting requirements. Investing in our shares of common stock involves a high degree of risk. See “Risk Factors” beginning on page 32 of this prospectus. The most significant risks relating to your investment in our common stock include the following:

 

   

Our loans and investments expose us to risks similar to and associated with debt-oriented real estate investments generally.

 

   

Commercial real estate-related investments that are secured, directly or indirectly, by real property are subject to delinquency, foreclosure and loss, which could result in losses to us.

 

   

Fluctuations in interest rate and credit spreads, which may not be adequately protected or protected at all, by our hedging strategies, could reduce our ability to generate income on our loans and other investments, which could lead to a significant decrease in our results of operations, cash flows and the market value of our investments.

 

   

Our loans and investments will be concentrated in terms of geography, asset types and sponsors upon completion of the formation transaction and may continue to be so in the future.

 

   

Upon the completion of the formation transaction, we will have a substantial amount of indebtedness which may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs.

 

   

We have limited operating history as a standalone company and may not be able to operate our business successfully, find suitable investments, or generate sufficient revenue to make or sustain distributions to our stockholders.

 

   

We are dependent upon our Manager and its affiliates to conduct our day-to-day operations; thus, adverse changes in their financial health or our relationship with them could cause our operations to suffer.

 

   

We may not replicate the historical results achieved by other entities managed or sponsored by affiliates of our Manager, members of our Manager’s management team or by our Sponsor or its affiliates.

 

   

Our Manager and its affiliates will face conflicts of interest, including significant conflicts created by our Manager’s compensation arrangements with us, including compensation which may be required to be paid to our Manager if our management agreement is terminated, which could result in decisions that are not in the best interests of our stockholders.

 

   

We will pay substantial fees and expenses to our Manager and its affiliates, which payments increase the risk that you will not earn a profit on your investment.

 

   

If we fail to qualify as a REIT for U.S. federal income tax purposes, cash available for distributions to be paid to you could decrease materially, which would limit our ability to make distributions to our stockholders.

 

 

 

     Per Share      Total  

Price to the public

   $                    $                

Underwriting discounts and commissions (1)(2)

   $                    $                

Proceeds, before expenses, to us (2)

   $                    $                

 

(1)

Includes a structuring fee payable to Raymond James & Associates, Inc. equal to 1.0% of the gross proceeds of this offering (excluding any proceeds from sale of the Reserved Shares). Excludes certain compensation payable to the underwriters. See “Underwriting” for a detailed description of compensation payable to the underwriters.

(2)

Reflects that no underwriting discounts or commissions will be applied to the Reserved Shares.

We have granted the underwriters an option to purchase up to an additional 750,000 shares of our common stock on the same terms and conditions set forth above within 30 days of the date of this prospectus solely to cover overallotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares on or about                     , 2020.

 

RAYMOND JAMES   

KEEFE, BRUYETTE & WOODS

                             A STIFEL COMPANY

   BAIRD

The date of this prospectus is                     , 2020


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TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1  

THE OFFERING

     30  

RISK FACTORS

     32  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     80  

USE OF PROCEEDS

     82  

DISTRIBUTION POLICY

     83  

CAPITALIZATION

     84  

SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

     85  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     87  

BUSINESS

     101  

MANAGEMENT

     129  

MANAGEMENT COMPENSATION

     145  

PRINCIPAL STOCKHOLDERS

     148  

CONFLICTS OF INTEREST

     149  

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     155  

CERTAIN ERISA CONSIDERATIONS

     181  

DESCRIPTION OF CAPITAL STOCK

     186  

CERTAIN PROVISIONS OF MARYLAND LAW AND OUR CHARTER AND BYLAWS

     193  

OUR OPERATING PARTNERSHIP AND THE PARTNERSHIP AGREEMENT

     200  

SHARES ELIGIBLE FOR FUTURE SALE

     204  

UNDERWRITING

     207  

LEGAL MATTERS

     212  

EXPERTS

     212  

WHERE YOU CAN FIND MORE INFORMATION

     212  

INDEX TO FINANCIAL STATEMENTS

     F-1  

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. Neither we nor the underwriters have authorized anyone to provide you with additional or different information. We and the underwriters are offering to sell, and seeking offers to buy, our common stock only in jurisdictions where offers and sales thereof are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock.

 

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PROSPECTUS SUMMARY

This prospectus summary highlights material information contained elsewhere in this prospectus. Because it is a summary, it may not contain all of the information that is important to you. To understand this offering fully, you should read the entire prospectus carefully, including the “Risk Factors” section, before making a decision to invest in our common stock. Except where the context suggests otherwise, the terms:

 

   

“we,” “us,” “our,” “NREF” and the “Company” refer to NexPoint Real Estate Finance, Inc., a Maryland corporation;

 

   

“Manager” refers to NexPoint Real Estate Advisors VII, L.P., a Delaware limited partnership;

 

   

“Sponsor” refers to NexPoint Advisors, L.P., a Delaware limited partnership; and

 

   

“OP” refers to NexPoint Real Estate Finance Operating Partnership, L.P., a Delaware limited partnership.

Our Company

We are a newly formed commercial real estate finance company. Our strategy is to originate, structure and invest in first mortgage loans, mezzanine loans, preferred equity and alternative structured financings in commercial real estate properties, as well as multifamily commercial mortgage backed securities, or CMBS, securitizations, or collectively our target assets. We will primarily focus on investments in real estate sectors where our senior management team has operating expertise, including in the multifamily, single-family rental, or SFR, self-storage, hospitality and office sectors predominantly in the top 50 metropolitan statistical areas, or MSAs. In addition, we will primarily focus on lending or investing in properties that are stabilized or have a “light-transitional” business plan, meaning a property that requires limited deferred funding primarily to support leasing or ramp-up of operations and for which most capital expenditures are for value-add improvements.

Our primary investment objective is to generate attractive, risk-adjusted returns for stockholders over the long term, primarily through dividends and secondarily through capital appreciation. We will seek to employ a flexible and relative value focused investment strategy and expect to re-allocate capital periodically among our target investment classes. We believe this flexibility will enable us to efficiently manage risk and deliver attractive risk-adjusted returns under a variety of market conditions and economic cycles.

We will be externally managed by our Manager, a subsidiary of our Sponsor, an SEC-registered investment advisor, which has extensive real estate experience, having completed as of September 30, 2019 approximately $9.0 billion of gross real estate transactions since the beginning of 2012. In addition, our Sponsor, together with its affiliates, including NexBank, is one of the most experienced global alternative credit managers managing approximately $13.3 billion of loans and debt or credit related investments as of September 30, 2019 and has managed credit investments for over 25 years. We believe our relationship with our Sponsor benefits us by providing access to resources including research capabilities, an extensive relationship network, other proprietary information, scalability, a vast wealth of information on real estate in our target assets and sectors and sourcing of investments by NexBank.



 

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Substantially all of our assets will be owned directly or indirectly through our OP. Upon the completion of this offering, we will hold all of the limited partnership interests in our OP.

We intend to elect to be treated as a real estate investment trust, or REIT, for U.S. federal income tax purposes beginning with our taxable year ending December 31, 2020. We also intend to operate our business in a manner that will permit us and our subsidiaries to maintain one or more exclusions or exemptions from registration under the Investment Company Act of 1940, or the Investment Company Act.

The Formation Transaction

Prior to the closing of this offering, we plan to engage in a series of transactions, or the Formation Transaction, through which we will acquire an initial portfolio consisting of senior pooled mortgage loans backed by SFR properties, the junior most bonds of multifamily CMBS securitizations, or CMBS B-Pieces, mezzanine loan and preferred equity investments in real estate companies and properties and other structured real estate investments within the multifamily, SFR and self-storage asset classes, or collectively, the Initial Portfolio. We will acquire the Initial Portfolio from affiliates of our Sponsor, or the Contribution Group, pursuant to a contribution agreement with the Contribution Group in exchange for limited partnership interests in subsidiary partnerships of our OP. The limited partnership units of the subsidiary partnerships issued to the Contribution Group in connection with the Formation Transaction will be redeemable for an aggregate of approximately 12,635,047 OP units (assuming the Contribution Group contributes $252.7 million of net value and based on $20.00 per share, the midpoint of the range set forth on the cover of this prospectus) or cash in an amount equal to the number of OP units multiplied by the per share price of our common stock (at the discretion of the OP); provided that such subsidiary partnership units have been outstanding for at least one year or earlier at the discretion of the OP following the direction and approval of our board of directors. At the closing of the Formation Transaction, the number of OP units for which subsidiary partnership units may be redeemed is subject to change based on changes in the subsidiary partnerships’ working capital balances. See “Use of Proceeds” and “Our Operating Partnership and the Partnership Agreement” for additional information.

Upon completion of the Formation Transaction, our Initial Portfolio based on total unpaid principal balance, excluding the consolidation of the CMBS B-Pieces as described further below, is expected to be approximately 82% senior pooled mortgage loans backed by SFR properties, approximately 13% multifamily CMBS B-Pieces and approximately 6% mezzanine loan and preferred equity investments in real estate companies and properties and other structured real estate investments. Total liabilities, excluding the consolidation of the CMBS B-Pieces, with respect to each of the aforementioned investment structures in our Initial Portfolio are expected to be approximately $788.9 million, $0 and $0, respectively, upon completion of the Formation Transaction. Our CMBS B-Piece investments as a percentage of total assets, excluding the consolidation of the CMBS B-Pieces, reflects the assets that we will actually own following the Formation Transaction. However, in accordance with the applicable accounting standards, we expect to consolidate all of the assets of the trusts that issued the CMBS B-Pieces that we will own following the Formation Transaction.

Upon completion of the Formation Transaction, our Initial Portfolio based on total unpaid principal balance, including the consolidation of the CMBS B-Pieces, is expected to be approximately 32% senior pooled mortgage loans backed by SFR properties, approximately 66% multifamily CMBS B-Pieces and approximately 2% mezzanine loan and preferred equity investments in real estate companies and properties and other structured real estate investments. Total liabilities, including the consolidation of the CMBS B-Pieces, with respect to each of the aforementioned investment structures in our Initial Portfolio are expected to be approximately $788.9 million, $1.7 billion and $0, respectively, upon completion of the Formation Transaction.



 

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See the table in “—Our Financing Strategy—Freddie Mac Credit Facility” for additional information.

Upon completion of the Formation Transaction, our Initial Portfolio based on net equity is expected to be approximately 43% senior pooled mortgage loans backed by SFR properties, approximately 39% multifamily CMBS B-Pieces and approximately 18% mezzanine loan and preferred equity investments in real estate companies and properties and other structured real estate investments. Net equity represents the carrying value less our leverage on the asset.

Our Manager

Upon completion of this offering, we will be externally managed by our Manager pursuant to a management agreement that we will enter into with our Manager, or the Management Agreement. Our Manager is a recently formed indirect subsidiary of our Sponsor. All our investment decisions will be made by our Manager, subject to general oversight by the Manager’s investment committee and our board of directors. The members of the Manager’s investment committee are James Dondero, Matthew Goetz, Brian Mitts and Matt McGraner.

Our senior management team will be provided by our Manager and includes James Dondero, Matthew Goetz, Brian Mitts and Matt McGraner. Paul Richards and David Willmore are also key members of the management team, with Mr. Richards focusing on underwriting, originations and investments and Mr. Willmore focusing on accounting and financial reporting. The senior management team has significant experience across real estate investing and private lending. See “Management” for biographical information regarding these individuals.

We will pay our Manager an annual management fee but will not pay management fees to our Manager based on the equity portion of the Initial Portfolio contributed to us in the Formation Transaction. We will not pay any incentive fees to our Manager. We will also reimburse our Manager for expenses it incurs on our behalf. However, our Manager is responsible, and we will not reimburse our Manager or its affiliates, for the salaries or benefits to be paid to personnel of our Manager or its affiliates who serve as our officers, except that we may grant equity awards to our officers under a long-term incentive plan adopted by us and approved by our stockholders. Direct payment of operating expenses by us, which includes compensation expense relating to equity awards granted under our long-term incentive plan, together with reimbursement of operating expenses to our Manager, plus the Annual Fee (as defined in “—Our Management Agreement”), may not exceed 2.5% of equity book value determined in accordance with accounting principles generally accepted in the United States, or GAAP, for any calendar year or portion thereof, provided, however, that this limitation will not apply to offering expenses, legal, accounting, financial, due diligence and other service fees incurred in connection with extraordinary litigation and mergers and acquisitions and other events outside the ordinary course of our business or any out-of-pocket acquisition or due diligence expenses incurred in connection with the acquisition or disposition of certain real estate-related investments. To the extent total corporate G&A expenses would otherwise exceed 2.5% of equity book value, our Manager will waive all or a portion of its annual management fee to keep our total corporate general and administrative expenses at or below 2.5% of equity book value. For additional information regarding our Management Agreement and the conflicts of interest that the Management Agreement poses, see “—Our Management Agreement,” “—Conflicts of Interest and Related Policies” and “Risk Factors”.

Our Sponsor

Our Sponsor and its subsidiaries have extensive experience managing real estate investment activities. Our Sponsor’s real estate team includes 15 individuals and as of September 30, 2019 has



 

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completed over 160 transactions totaling approximately $9.0 billion of gross real estate value since 2012. The members of our Sponsor’s real estate team have extensive experience investing in commercial real estate and debt related to real estate properties both at our Sponsor and in previous positions.

Our Sponsor is affiliated through common control with Highland Capital Management, L.P., or Highland, an SEC-registered investment adviser. This common control is a result of the general partners of each of our Sponsor and Highland being wholly owned by Mr. Dondero, who will be our President and a director upon completion of this offering. Highland and its affiliates oversee approximately $10.0 billion in assets as of October 31, 2019. While Highland oversees institutional products, such as private equity funds, hedge funds and collateralized loan obligations, our Sponsor oversees real estate investments and registered investment company products. Our Sponsor is a party to a shared services arrangement with Highland. Under this arrangement, our Manager may utilize employees from Highland in connection with various services such as human resources, accounting, tax, valuation, information technology services, office space, employees, compliance and legal. We do not expect Highland’s bankruptcy filing, discussed below, to impact its provision of services to our Manager. Other than Mr. Dondero, none of our directors or executive officers is a director, executive officer or employee of Highland or any of its controlled affiliates. Mr. Mitts and Mr. McGraner are executive officers of our Manager, the general partner of which is wholly owned by our Sponsor.

On October 16, 2019, Highland filed for Chapter 11 bankruptcy protection with the United States Bankruptcy Court for the District of Delaware, or the Highland Bankruptcy. The Highland Bankruptcy stems from a potential judgment being sought against Highland relating to a financial crisis-era fund previously managed by Highland. The fund has been in liquidation since 2011. The liquidation plan, which was finalized and approved by investors and Highland in 2011, established a committee of fund investor representatives, or the Redeemer Committee, to coordinate the liquidation process. Between 2011 and 2016, Highland distributed over $1.55 billion of the approximately $1.70 billion amount to be liquidated. Then, on July 5, 2016, the Redeemer Committee filed a complaint against Highland resulting from a contract dispute over the timing of management fees and other related claims. Highland believes it acted in the interest of investors and disputes the Redeemer Committee’s claims. However, in consideration of its liquidity profile, Highland determined that it was necessary to commence the voluntary Chapter 11 proceedings. Although Highland disputes the underlying claims, entry of the judgment in its maximum potential amount could result in a judgment against Highland in an amount greater than Highland’s liquid assets. Neither our Manager nor our Sponsor are parties to Highland’s bankruptcy filing. For additional information, see “Risk Factors—Risks Related to Our Corporate Structure”.

Our Strategic Relationship with Our Sponsor

Significant Stockholder Alignment—Investor as well as Manager

Our Sponsor and our Manager believe in taking proactive measures intended to align themselves with investors by holding substantial stakes in the investment vehicles they manage as well as implementing investor friendly governance provisions further supporting the alignment among our Sponsor, our Manager and investors.

The underwriters have at our request reserved for sale, at the public offering price, up to 250,000 shares, or the Reserved Shares, offered by this prospectus for sale to our Sponsor and its affiliates. No underwriting discounts or commissions will be applied to the Reserved Shares. Additionally, affiliates



 

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of our Sponsor are contributing approximately $252.7 million of net value, of which our management team owns approximately $21.1 million, to subsidiary partnerships of our OP as part of the Formation Transaction. Pro forma for the Formation Transaction and the offering, our management team will have invested approximately $26.1 million in us on a consolidated basis, and will own approximately 7.4% of our common shares outstanding on a fully diluted basis after giving effect to the Formation Transaction and the offering (assuming our Sponsor and its affiliates purchase all 250,000 Reserved Shares and all subsidiary partnership units are redeemed for shares of our common stock). The Contribution Group will receive limited partnership units of the subsidiary partnerships in exchange for their contribution of assets in the Formation Transaction that will be redeemable for an aggregate of approximately 12,635,047 OP units (assuming the Contribution Group contributes $252.7 million of net value and based on $20.00 per share, the midpoint of the range set forth on the cover of this prospectus) or cash in an amount equal to the number of OP units multiplied by the per share price of our common stock (at the discretion of the OP); provided that such subsidiary partnership units have been outstanding for at least one year or earlier at the discretion of the OP following the direction and approval of our board of directors. At the closing of the Formation Transaction, the number of OP units for which subsidiary partnership units may be redeemed is subject to change based on changes in the subsidiary partnerships’ working capital balances. See “Use of Proceeds” and “Our Operating Partnership and the Partnership Agreement” for additional information. We believe our Sponsor, our Manager, their affiliates and our Manager’s management team will be highly aligned with our stockholders as a result of these investments.

Leveraging Our Sponsor’s Platforms

We expect to benefit from our Sponsor’s platform, which provides access to resources including research capabilities, an extensive relationship network, other proprietary information, scalability, a vast wealth of information on real estate in our target assets and sectors and sourcing of investments by NexBank. We believe this access and the network, resources and core competencies developed by our Sponsor can allow our Manager to research, source, and evaluate opportunities on our behalf that may not be available to our competitors.

Leading Credit Focused Platform

Our Sponsor, together with its affiliates, including NexBank, is one of the most experienced global alternative credit managers managing approximately $13.3 billion of loans and debt or credit related investments as of September 30, 2019 and has managed credit investments for over 25 years. Our Sponsor and its affiliates’ debt and credit related investments are primarily managed through the following entities:

NexBank is a financial services company with total assets of approximately $10.2 billion, including real estate related assets of approximately $5.7 billion as of September 30, 2019, and whose primary subsidiary is a commercial bank. NexBank provides commercial banking, mortgage banking, investment banking and corporate advisory services to institutional clients and financial institutions throughout the U.S. We expect to have access to the resources of NexBank to help source and execute investments, provide servicing infrastructure and asset management. NexBank’s credit and underwriting team has extensive experience in real estate and asset based lending and underwriting.

Highland Income Fund, or HFRO (NYSE: HFRO), is a closed-end fund managed by Highland Capital Management Fund Advisors, L.P., an affiliate of our Sponsor. As of September 30, 2019, HFRO had $1.3 billion of assets under management. HFRO seeks to provide a high level of current income consistent with preservation of capital. HFRO pursues its investment objectives by investing primarily in floating-rate loans and other securities deemed to be floating-rate investments.

 



 

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NexPoint Strategic Opportunities Fund, or NHF (NYSE: NHF), is a closed-end fund managed by our Sponsor. As of September 30, 2019, NHF had $1.3 billion in assets under management. NHF’s investment objectives are to provide both current income and capital appreciation. NHF is invested primarily in (i) secured and unsecured floating and fixed rate loans; (ii) bonds and other debt obligations; (iii) debt obligations of stressed, distressed and bankrupt issuers; (iv) structured products, including but not limited to, mortgage-backed and other asset-backed securities and collateralized debt obligations; (v) equities; (vi) other investment companies, including business development companies; and (vii) REITs.

Leading Real Estate Focused Platform

Our Sponsor is an experienced manager of real estate. Our Sponsor and its affiliates manage approximately $7.3 billion of gross value in real estate related investments as of September 30, 2019. Our Sponsor and its affiliates’ real estate related investments are primarily managed through the following entities:

NexPoint Residential Trust, Inc., or NXRT (NYSE: NXRT), is a publicly traded REIT. NXRT is primarily focused on acquiring, renovating, owning and operating well-located, middle-income multifamily properties with “value-add” potential in large cities and suburban submarkets of large cities, primarily in the Southeastern and Southwestern United States. As of September 30, 2019, NXRT owned 37 properties encompassing 13,757 units.

VineBrook Homes Trust, Inc., or VineBrook, is a privately held REIT and is a leading owner and operator of workforce SFR properties. VineBrook acquires, renovates, owns and manages SFR properties that management deems to be in the “affordable” or “workforce” category with a focus on “value-add” potential. As of September 30, 2019, VineBrook owned and operated 6,392 homes in primarily Midwestern cities and had 269 homes under contract.

NexPoint Hospitality Trust, Inc., or NHT (TSXV: NHT-U), is a publicly traded REIT. NHT is primarily focused on acquiring, owning, renovating, and operating select-service, extended-stay and efficient full-service hotels located in attractive U.S. markets. As of September 30, 2019, NHT owned 11 hotel properties encompassing 1,607 rooms across the United States. On July 21, 2019, NHT entered into an agreement to acquire Condor Hospitality Trust, Inc. (NYSE: CDOR), which owned 15 select service and extended stay properties, encompassing 1,908 rooms as of September 30, 2019.

Affiliates of our Sponsor manage multiple privately held REITs that are wholly owned by funds managed by affiliates of our Sponsor, including (1) NexPoint Real Estate Opportunities, or NREO, (2) NexPoint Real Estate Capital, or NREC, (3) NFRO REIT Sub, LLC, (4) NexPoint Capital REIT, LLC, (5) NRESF REIT Sub, LLC and (6) GAF REIT, LLC, and manage multiple Delaware Statutory Trusts, or DSTs.

Experience in Target Property Sectors

Our Sponsor and its affiliates have extensive experience in our target property sectors and as of September 30, 2019 have completed approximately $9.0 billion in gross real estate transactions since 2012. These transactions include activity in the following sectors:

Multifamily

Affiliates of our Sponsor have been active in the multifamily sector since 2013 and have invested or loaned approximately $5.7 billion in the multifamily sector, including in NXRT, six separate multifamily CMBS B-Piece securitizations totaling approximately $292.3 million as of September 30, 2019, preferred equity investments in 28 multifamily properties with approximately



 

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$1.0 billion of gross real estate value as of September 30, 2019, 14 multifamily properties in DSTs with $668.3 million in gross real estate value as of September 30, 2019 and NexBank’s outstanding loans in the multifamily sector as of September 30, 2019.

Single-Family Rental

Affiliates of our Sponsor have been active in the SFR sector, investing or loaning approximately $2.1 billion as a continuation of our Sponsor’s affordable housing investment thesis, including approximately $1.2 billion in SFR mortgages, an investment in VineBrook, which owns SFR assets directly, and NexBank’s outstanding loans in the SFR sector as of September 30, 2019. VineBrook is externally managed by an affiliate of our Sponsor and our Sponsor plays an integral role in the expansion of VineBrook’s business.

Self-Storage

Affiliates of our Sponsor have invested or loaned approximately $211 million in the self-storage sector, including a $125 million preferred equity investment in Jernigan Capital, Inc., or JCAP (NYSE: JCAP), a publicly traded REIT that provides capital to private developers, owners and operators of self-storage facilities, approximately $77.4 million of equity invested directly into self-storage developments and NexBank’s outstanding loans in the self-storage sector as of September 30, 2019.

Hospitality

Affiliates of our Sponsor have invested or loaned approximately $477 million in the hospitality sector since 2014, including in NHT and NexBank’s outstanding loans in the hospitality sector as of September 30, 2019. NHT is externally managed by an affiliate of our Manager.

Office

Affiliates of our Sponsor have invested or loaned approximately $521 million in the office sector since 2012, including NexBank’s outstanding loans in the office sector as of September 30, 2019, and have primarily focused on opportunistic repositioning investments.

Other

Affiliates of our Sponsor have also made investments and loans in alternative real estate sectors, including timber, triple net retail, strip malls and single family residential totaling $6.0 billion, which includes NexBank’s outstanding loans in other sectors as of September 30, 2019.

Our Competitive Strengths

Credit Strength of Initial Portfolio

As a whole, we believe our Initial Portfolio investments have a relatively low risk profile: 99.7% of the underlying properties in the Initial Portfolio are stabilized and have a weighted average occupancy of 92%; the portfolio-wide weighted average debt service coverage ratio, or DSCR, a metric used to assess the performance and credit worthiness of an investment, is 1.8x; the weighted average loan-to-value, or LTV, of our investments is 66.9%; and the weighted average maturity is 8.1 years as of December 31, 2019. These metrics do not reflect our alternative structured financing investment. The Initial Portfolio has associated leverage that is matched in term and structure to provide stable contractual spreads and net interest income, which we believe in the long-term will help protect us from fluctuations in market interest rates that may occur over the life of the portfolio investments.



 

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Public Company REIT Experience

Our Manager’s management team took NXRT public in 2015 through a spin-off of 38 multifamily properties owned by NHF. NXRT is primarily focused on acquiring, renovating, owning and operating well-located, middle-income multifamily properties with “value-add” potential in large cities and suburban submarkets of large cities, primarily in the Southeastern and Southwestern United States. As of September 30, 2019, NXRT owned 13,757 rental units across 37 properties.

Network of Existing Partners Provides Us An Immediately Available Investment Pipeline

We also believe that one of our key competitive strengths is the network of local, regional and national operating partners with which our Sponsor and its affiliates do business. Our Sponsor and its affiliates work closely with high quality sponsors to forge long-standing relationships so that our Sponsor is viewed as an “investment partner of choice” when partners are seeking investment in new transactions. Our Sponsor has made investments with over 75 real estate sponsors.

Scalability, Strength and Experience in Target Sectors

We expect to deploy a significant amount of our capital in investments in the multifamily, SFR, self-storage, hospitality and office property sectors in which our Sponsor and its affiliates have a large network of relationships and extensive experience. As of September 30, 2019, our Sponsor and its affiliates have completed approximately $5.7 billion of multifamily investments, $2.1 billion of SFR investments, $211 million of self-storage investments, $477 million of hospitality investments, $521 million of office investments and $6.0 billion of other investments since 2012, which includes NexBank’s outstanding loans in these sectors as of September 30, 2019.

Our Sponsor’s Financing Solutions are Pre-Approved and Comply with Freddie Mac and Fannie Mae Standards

Our Sponsor is a select sponsor with Freddie Mac and has experience structuring financing solutions behind first mortgage lenders, including banks, life insurance companies, Freddie Mac and The Federal National Mortgage Association, or Fannie Mae, including mezzanine loans and preferred equity investments. Our Sponsor and its affiliates have successfully tailored financing solutions to property owners in creative ways but also highly symbiotic with a typical Freddie Mac or Fannie Mae first mortgage. Our multifamily loan and investment platform complies with current Freddie Mac and Fannie Mae standards, giving us a unique opportunity to invest alongside quality sponsors and the largest multifamily lenders in the U.S.

Access to Our Sponsor’s Real Estate Platform

Our Sponsor and its subsidiaries have extensive experience managing real estate investment activities. Our Sponsor’s real estate team includes 15 individuals and as of September 30, 2019 has completed over 160 transactions totaling approximately $9.0 billion of gross real estate value since 2012. The members of our Sponsor’s investment team have on average 15 years of investment experience with leading institutions and investors in the following asset classes: real estate, private equity, alternatives, credit and equity. In addition, we expect to have access to the resources of NexBank to help source and execute investments, provide servicing and infrastructure and asset management.



 

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Our Investment Strategy

Primary Investment Objective

Our primary investment objective is to generate attractive, risk-adjusted returns for stockholders over the long term, primarily through dividends and secondarily through capital appreciation. We intend to achieve this objective primarily by originating, structuring and investing in first mortgage loans, mezzanine loans, preferred equity and alternative structured financings in commercial real estate properties, as well as multifamily CMBS securitizations. We intend to primarily focus on lending or investing in properties that are stabilized or have a light transitional business plan with positive DSCRs and high quality sponsors.

Through active portfolio management we will seek to take advantage of market opportunities to achieve a superior portfolio risk-mix, while delivering attractive total return. Our Manager will regularly monitor and stress-test each investment and the portfolio as a whole under various scenarios, enabling us to make informed and proactive investment decisions.

Target Investments

We intend to invest primarily in first mortgage loans, mezzanine loans, preferred equity and alternative structured financings in commercial real estate properties, as well as multifamily CMBS securitizations, with a focus on lending or investing in properties that are stabilized or have a light transitional business plan primarily in the multifamily, SFR, self-storage, hospitality and office real estate sectors predominantly in the top 50 MSAs, including, but not limited to, the following:

 

   

First Mortgage Loans: We intend to make investments in senior loans that are secured by first priority mortgage liens on real estate properties. The loans may vary in duration, bear interest at a fixed or floating rate and amortize, typically with a balloon payment of principal at maturity. These investments may include whole loans or pari passu participations within such senior loans.

 

   

Mezzanine Loans: We may originate or acquire mezzanine loans. These loans are subordinate to the first mortgage loan on a property, but senior to the equity of the borrower. These loans are not secured by the underlying real estate, but generally can be converted into preferred equity of the mortgage borrower or owner of a mortgage borrower, as applicable.

 

   

Preferred Equity: We may make investments that are subordinate to any mortgage or mezzanine loan, but senior to the common equity of the borrower. Preferred equity investments typically receive a preferred return from the issuer’s cash flow rather than interest payments and often have the right for such preferred return to accrue if there is insufficient cash flow for current payment. These investments are not secured by the underlying real estate, but upon the occurrence of a default, the preferred equity provider typically has the right to effect a change of control with respect to the ownership of the property.

 

   

Alternative Structured Financing: We may also look to construct innovative financing solutions that are symbiotic for both parties. We expect to provide flexibility and structured financings that enable counterparties to strategically draw capital when needed or “match funded” commitments. Terms may entail a maximum commitment over a certain period with monthly minimums in exchange for a preferred equity investment with a stated cash coupon and a back-end payment-in-kind component that is in the form of additional preferred equity or common equity, which provides an additional avenue for value accretion to us.



 

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CMBS B-Pieces: We intend to make investments in the junior-most bonds comprising some or all of the BB-rated, B-rated and unrated tranches of CMBS securitization pools. In the CMBS structure, underlying commercial real estate loans are typically aggregated into a pool with the pool issuing and selling different tranches of bonds and securities to different investors. Under the pooling and servicing agreements that govern these securitization pools, the loans are administered by a trustee and servicers, who act on behalf of all CMBS investors, distribute the underlying cash flows to the different classes of securities in accordance with their seniority. Historically, a single investor acquires all of the below-investment grade securities that comprise each CMBS B-Piece. CMBS B-Pieces have been a successful and sought-after securitization program offering a wide-range of residential and multifamily products. As of September 30, 2019, there have been 307 Freddie Mac K-deal issuances for a combined $334 billion and 16,790 loans originated and securitized since 2009.

Market Opportunity

Strong Demand for Commercial Real Estate Debt Capital

Borrower demand for commercial real estate debt capital remains at historically high levels. This demand is expected to be sustained by the significant upcoming maturities of commercial real estate debt originated during the credit boom preceding the economic recession in 2008 and 2009. According to the Mortgage Bankers Association $130 billion to more than $150 billion of non-bank-held mortgages are set to mature each year from 2020 to 2024.

Large, Addressable Market Opportunity

The U.S. commercial real estate market has current total outstanding loan balances of more than $4.5 trillion as reported by the U.S. Federal Reserve Bank as of September 30, 2019. Financing opportunities are created by strong commercial real estate transaction volumes, which totaled $537 billion in 2018, the second-largest year on record for commercial real estate sales in the U.S., according to Ten-X. In addition, commercial real estate transaction volumes are expected to continue at these levels due to the large amount of “dry powder” of real estate funds and appreciation of commercial real estate property values, as illustrated by the charts below.

Dry Powder of Real Estate Funds ($ in Billions)

 

 

LOGO

Source: Preqin, data for 2020 as of January 2020



 

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National All-Property Price Index

 

 

LOGO

Source: Real Capital Analytics, data through December 2019

Traditional Lenders Have Been Constrained

Traditional lenders have been scaling back from both the new construction and refinancing market due in large part to more onerous underwriting standards and an increase in banking regulations such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, which has called for stricter liquidity and capital requirements. As a result, this has led to sweeping changes to the banking sector’s conventional lending practices and has created a strong demand for “gap” financing from experienced and trusted non-bank conduit lenders. Gap financing refers to the financing needed to bridge the “gap” between the lending bank’s first mortgage and a sponsor’s equity investment due to a lending bank’s unwillingness and limitation to lend beyond a certain LTV ratio. Over the years, banks have shortened interest only periods and lowered average LTV ratios leaving a large void across the lending landscape. Historically, a significant amount of commercial real estate mortgage loans have been financed through the CMBS markets. CMBS issuance has been significantly lower than before the financial crisis, resulting in a need for alternative lenders to meet debt capital demand, as illustrated by the chart below.

CMBS Issuance ($ in Billions)

 

 

LOGO

Source: Commercial Mortgage Alert



 

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Due to the increased regulatory environment, commercial real estate mortgage REITs and other lenders have captured 10% of the U.S. commercial real estate debt market at September 30, 2019, steadily increasing from their 8.1% share at the beginning of the financial crisis.  

Commercial Real Estate Debt Market Share

 

 

LOGO

Source: Federal Reserve

Our Initial Portfolio

Our Initial Portfolio will consist of senior pooled mortgage loans backed by SFR properties, multifamily CMBS B-Pieces, mezzanine loan and preferred equity investments in real estate companies and properties and other structured real estate investments within the multifamily, SFR and self-storage asset classes.

Upon completion of the Formation Transaction, our Initial Portfolio based on total unpaid principal balance, excluding the consolidation of the CMBS B-Pieces as described further below, is expected to be approximately 82% senior pooled mortgage loans backed by SFR properties, approximately 13% multifamily CMBS B-Pieces and approximately 6% mezzanine loan and preferred equity investments in real estate companies and properties and other structured real estate investments. Total liabilities, excluding the consolidation of the CMBS B-Pieces, with respect to each of the aforementioned investment structures in our Initial Portfolio are expected to be approximately $788.9 million, $0 and $0, respectively, upon completion of the Formation Transaction. Our CMBS B-Piece investments as a percentage of total assets, excluding the consolidation of the CMBS B-Pieces, reflects the assets that we will actually own following the Formation Transaction. However, in accordance with the applicable accounting standards, we expect to consolidate all of the assets of the trusts that issued the CMBS B-Pieces that we will own following the Formation Transaction.

Upon completion of the Formation Transaction, our Initial Portfolio based on total unpaid principal balance, including the consolidation of the CMBS B-Pieces, is expected to be approximately 32% senior pooled mortgage loans backed by SFR properties, approximately 66% multifamily CMBS B-Pieces and approximately 2% mezzanine loan and preferred equity investments in real estate companies and properties and other structured real estate investments.



 

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Total liabilities, including the consolidation of the CMBS B-Pieces, with respect to each of the aforementioned investment structures in our Initial Portfolio are expected to be approximately $788.9 million, $1.7 billion and $0, respectively, upon completion of the Formation Transaction. See the table in “—Our Financing Strategy—Freddie Mac Credit Facility” for additional information.

Upon completion of the Formation Transaction, our Initial Portfolio based on net equity is expected to be approximately 43% senior pooled mortgage loans backed by SFR properties, approximately 39% multifamily CMBS B-Pieces and approximately 18% mezzanine loan and preferred equity investments in real estate companies and properties and other structured real estate investments. Net equity represents the carrying value less our leverage on the asset.



 

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As a whole, we believe our Initial Portfolio investments have a relatively low risk profile: 99.7% of the underlying properties in the Initial Portfolio are stabilized and have a weighted average occupancy of 92%; the portfolio-wide weighted average DSCR is 1.8x; the weighted average LTV of our investments is 66.9%; and the weighted average maturity is 8.1 years as of December 31, 2019. These metrics do not reflect our alternative structured financing investment. For additional information related to the diversification of the collateral associated with the Initial Portfolio, including with respect to interest rate category, underlying property type, investment structure and geography, see the charts on the following page.

 

#

 

Investment

  Origination
Date
    UPB (1)     Carrying
Value
    Net Equity     Interest
Rate
    PIK /
Other
Rate
    All-in
Rate (2)
    Fixed /
Floating
    Maturity
Date (3)
    City, State     Property
Type (4)
    LTV (5)     Stabilized (6)  

SENIOR LOANS

                         
1   Senior Loan     8/8/18     $ 508,700,000     $ 550,828,126     $ 85,138,711       4.7           4.7     Fixed       9/1/28       Multiple       SFR       68.1     Yes  
2   Senior Loan     2/15/19       62,023,000       67,159,451       11,171,289       5.0           5.0     Fixed       3/1/29       Multiple       SFR       65.0     Yes  
3   Senior Loan     9/28/18       51,362,000       55,615,558       9,469,369       4.7           4.7     Fixed       10/1/25       Multiple       SFR       54.2     Yes  
4   Senior Loan     10/16/18       38,637,060       41,836,799       5,546,940       5.6           5.6     Fixed       11/1/28       Multiple       SFR       73.8     Yes  
5   Senior Loan     1/28/19       17,439,248       18,883,484       2,651,904       5.6           5.6     Fixed       2/1/29       Multiple       SFR       65.2     Yes  
6   Senior Loan     10/17/18       15,300,000       16,567,074       2,963,844       5.5           5.5     Fixed       11/1/23       Multiple       SFR       55.8     Yes  
7   Senior Loan     9/14/18       12,414,407       13,442,509       2,077,741       5.5           5.5     Fixed       10/1/28       Multiple       SFR       67.5     Yes  
8   Senior Loan     11/15/18       10,739,777       11,629,194       1,560,117       5.6           5.6     Fixed       12/1/28       Multiple       SFR       74.1     Yes  
9   Senior Loan     8/15/18       10,664,870       11,548,084       1,812,124       5.3           5.3     Fixed       9/1/28       Multiple       SFR       70.5     Yes  
10   Senior Loan     11/28/18       10,316,356       11,170,708       1,577,528       5.7           5.7     Fixed       12/1/28       Multiple       SFR       66.1     Yes  
11   Senior Loan     1/4/18       10,726,883       11,615,233       2,278,554       5.4           5.4     Fixed       2/1/28       Multiple       SFR       72.7     Yes  
12   Senior Loan     2/11/19       10,523,000       11,394,465       2,110,022       4.7           4.7     Fixed       3/1/26       Multiple       SFR       63.2     Yes  
13   Senior Loan     9/28/18       9,875,000       10,692,801       1,535,220       6.1           6.1     Fixed       10/1/28       Multiple       SFR       74.3     Yes  
14   Senior Loan     12/18/18       9,313,105       10,084,372       1,590,355       5.9           5.9     Fixed       1/1/29       Multiple       SFR       56.9     Yes  
15   Senior Loan     10/10/18       8,334,194       9,024,392       1,288,594       5.9           5.9     Fixed       11/1/28       Multiple       SFR       72.5     Yes  
16   Senior Loan     1/31/19       7,948,371       8,606,618       1,235,696       5.5           5.5     Fixed       2/1/29       Multiple       SFR       56.8     Yes  
17   Senior Loan     1/18/19       7,823,472       8,471,375       1,382,527       5.3           5.3     Fixed       2/1/29       Multiple       SFR       74.2     Yes  
18   Senior Loan     6/29/18       7,676,055       8,311,750       1,330,378       5.1           5.1     Fixed       7/1/28       Multiple       SFR       57.1     Yes  
19   Senior Loan     2/5/19       6,874,210       7,443,499       1,232,307       5.5           5.5     Fixed       3/1/29       Multiple       SFR       72.2     Yes  
20   Senior Loan     10/26/18       6,421,247       6,953,024       960,074       5.5           5.5     Fixed       11/1/28       Multiple       SFR       74.0     Yes  
21   Senior Loan     1/3/19       6,752,435       7,311,639       1,411,362       4.8           4.8     Fixed       2/1/24       Multiple       SFR       69.1     Yes  
22   Senior Loan     8/9/18       6,618,588       7,166,708       1,315,876       5.8           5.8     Fixed       9/1/23       Multiple       SFR       57.9     Yes  
23   Senior Loan     11/30/18       5,760,000       6,237,016       890,584       6.0           6.0     Fixed       12/1/28       Multiple       SFR       70.0     Yes  
24   Senior Loan     9/14/18       5,719,004       6,192,625       937,718       5.2           5.2     Fixed       10/1/28       Multiple       SFR       57.8     Yes  
25   Senior Loan     7/27/18       5,653,308       6,121,488       1,123,964       5.3           5.3     Fixed       8/1/23       Multiple       SFR       67.4     Yes  
26   Senior Loan     12/14/18       5,410,402       5,858,466       910,112       5.5           5.5     Fixed       1/1/29       Multiple       SFR       74.1     Yes  
27   Senior Loan     1/11/19       4,736,000       5,128,213       849,000       5.4           5.4     Fixed       2/1/29       Multiple       SFR       74.0     Yes  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

       

 

 

   

 

 

 

Senior Loans - Total / Wtd. Avg.

    $ 863,761,992     $ 935,294,671     $ 146,351,910       4.9           4.9       8.4           67.0     100.0
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

       

 

 

   

 

 

 

CMBS

                         
28  

CMBS

    3/28/19     $ 75,617,792     $ 75,466,556     $ 75,466,556       7.8           7.8     Floating       2/25/26       Multiple       MF       65.4     Yes  
29  

CMBS

    11/26/19       58,661,484       58,368,177       58,368,177       7.8           7.8     Floating       11/25/26       Multiple       MF       64.8     Yes  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

       

 

 

   

 

 

 

CMBS - Total / Wtd. Avg.

    $ 134,279,276     $ 133,834,733     $ 133,834,733       7.8           7.8       6.5           65.1     100.0
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

       

 

 

   

 

 

 

MEZZANINE LOANS

                         
30  

Mezzanine Loan

    2/5/18     $ 3,250,000     $ 3,221,343     $ 3,221,343       8.0     5.8 %(7)      13.8     Floating       1/31/22      

North
Charleston,
SC
 
 
 
    MF       73.4     No  

PREFERRED EQUITY

                         
31  

Preferred Equity

    8/31/15     $ 10,000,000     $ 9,746,231     $ 9,746,231       8.5     3.0     11.5     Fixed       7/1/25      
Columbus,
GA
 
 
    MF       85.8     Yes  
32  

Preferred Equity

    3/22/19       5,056,000       5,056,000       5,056,000       8.5     4.0     12.5     Fixed       12/1/27      
Jackson,
MS
 
 
    MF       75.6     Yes  
33  

Preferred Equity

    7/14/14       3,821,000       3,821,000       3,821,000       10.3     5.0     15.3     Fixed       8/1/22      
Corpus
Christi, TX
 
 
    MF       57.0     Yes  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

       

 

 

   

 

 

 

Preferred Equity - Total / Wtd. Avg.

    $ 18,877,000     $ 18,623,231     $ 18,623,231       8.9     3.7     12.5       5.6           77.1     100.0
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

       

 

 

   

 

 

 

ALTERNATIVE STRUCTURED FINANCING

                         
34  

Alternative Structured Financing

    7/27/16     $ 40,000,000     $ 40,507,265     $ 40,507,265       7.0     6.4 %(8)      13.4     Fixed       NA       Multiple       SS       NA       NA  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

       

 

 

   

 

 

 

Total Portfolio - Total / Wtd. Avg.

    $ 1,060,168,268     $ 1,131,481,243     $ 342,538,482       5.4     0.3     5.7       8.1           66.9     99.7
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

       

 

 

   

 

 

 


 

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(1)

UPB as of December 31, 2019.

(2)

All-in Rate is calculated as the Interest Rate plus the PIK / Other Rate. The All-in Rates for the CMBS investments numbered 28 and 29 are based on one-month LIBOR of 1.8% as of December 31, 2019 plus a spread over the index of 6.0%.

(3)

Weighted average years to maturity as of December 31, 2019.

(4)

SFR is single-family rental, MF is multifamily and SS is self-storage properties.

(5)

LTV is generally based on the initial first mortgage loan amount plus the preferred equity or mezzanine loan investment, if any, divided by the as-is appraised value as of the date the investment was originated or by the current principal amount as of the date of the most recent as-is appraised value.

(6)

We consider stabilized investments to be those with an in-place debt service coverage ratio (DSCR), including the current pay of preferred equity or mezzanine loan, if applicable, of 1.2x or greater. Weighted average is the percentage of the total Carrying Value that is Stabilized.

(7)

Interest income for the Mezzanine Loan numbered 30 is calculated using the December 31, 2019 WSJ Prime of 4.8% plus a spread over the index of 9.0%. A fixed minimum rate of 8.0% is paid in cash on a monthly basis. The difference between the 8.0% minimum monthly payment and the 13.8% stated rate is accrued as paid-in-kind (PIK) interest and is compounded on a monthly basis. Accrued PIK is to be paid at maturity.

(8)

The preferred stock pays a fixed quarterly dividend of $2.125 million payable pro rata to the holders of the preferred stock for the first three quarters of 2018, 2019 and 2020 and for the first fiscal quarter of 2021. For the last fiscal quarter of each of 2018, 2019 and 2020 and for the second fiscal quarter of 2021, the stock dividend varies based on the underlying company’s book value and past aggregate dividends among other things, but will be no lower than $2.125 million. Given that the stock dividend for the last fiscal quarter of 2020 cannot be predicted, the Company assumes a dividend of $2.125 million as a conservative estimate. It is expected that the company will own 40,000 shares of $1,000 par value preferred stock out of a total 133,500 shares outstanding as of December 31, 2019.

Loan 1 has a total unpaid principal balance of $508.7 million at December 31, 2019, which equates to 48.0% of the total unpaid principal balance of our Initial Portfolio, and net equity of $85.1 million, which equates to 24.8% of the total net equity of our Initial Portfolio. Loan 1 is collateralized by a diversified portfolio of 4,812 SFR workforce housing properties with values that average approximately $155,202 per home and rents that average $1,206 per month. The portfolio is stabilized with a weighted average occupancy of 90.0% and a DSCR of 1.7x. The portfolio’s underlying tenants are diverse with over 4,800 unique leases or tenants and the portfolio is located in 32 MSAs in 12 states. The guarantor of Loan 1 is a well-capitalized and publicly traded company.

The following charts illustrate our Initial Portfolio based on interest rate category, underlying property type, investment structure, and geography:

 

 

LOGO

Note: The charts above do not reflect the GAAP consolidation of the trusts that issued the CMBS B-Pieces in our financial statements. In addition, the geography charts do not reflect our alternative structured financing investment.



 

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Our Financing Strategy

While we do not have any formal restrictions or policy with respect to our debt-to-equity leverage ratio, we currently expect that our initial leverage will not exceed a ratio of 3-to-1. We believe this leverage ratio is prudent given that leverage typically exists at the asset level. The amount of leverage we may employ for particular assets will depend upon the availability of particular types of financing and our Manager’s assessment of the credit, liquidity, price volatility and other risks of those assets and financing counterparties. Our decision to use leverage to finance our assets will be at the discretion of our Manager, subject to review by our board of directors, and will not be subject to the approval of our stockholders. We generally intend to match leverage terms and interest rate type to that of the underlying investment financed.

Sources of Liquidity

Our primary source of cash will generally consist of cash generated from our operating results. From time to time, we may enter into repurchase agreements to finance the acquisition of a portion of our target assets.

Bridge Facility

In connection with the Formation Transaction, we, through our subsidiaries, will enter into a $95 million bridge facility with Key Bank, National Association, as lender, and the entities that will contribute the CMBS B-Pieces to us in the Formation Transaction, as co-borrowers (the “Bridge Facility”). We will guarantee the Bridge Facility and the obligations under the Bridge Facility will be secured by the CMBS B-Pieces that we will own following the Formation Transaction. The co-borrowers will use the proceeds from the Bridge Facility to repay the indebtedness outstanding on the CMBS B-Pieces that they will contribute to us in the Formation Transaction.

Freddie Mac Credit Facility

Following the Formation Transaction, two of our subsidiaries will be a party to a loan and security agreement that was entered into on July 12, 2019 with Freddie Mac, or the Credit Facility. Under the Credit Facility, these entities borrowed approximately $788.9 million in connection with their acquisition of senior pooled mortgage loans backed by SFR properties, or the Underlying Loans, that will be part of our Initial Portfolio following the Formation Transaction. No additional borrowings can be made under the Credit Facility. Our obligations under the Credit Facility will be secured by the Underlying Loans. Our borrowings under the Credit Facility will mature on July 12, 2029.



 

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The leverage utilized on all senior loans in our Initial Portfolio are matched in duration and structure, with a weighted average spread of 2.5% between the asset interest rate and the liability interest rate.

 

        Asset Metrics     Debt Metrics  

#

 

Investment

  Fixed /
Floating
Rate
    Interest
Rate
    Maturity
Date (1)
    Fixed /
Floating
Rate
    Interest
Rate
    Maturity
Date (1)
 

SENIOR LOANS

 
1   Senior Loan     Fixed       4.7     9/1/2028       Fixed       2.2     9/1/2028  
2   Senior Loan     Fixed       5.0     3/1/2029       Fixed       2.7     3/1/2029  
3   Senior Loan     Fixed       4.7     10/1/2025       Fixed       2.1     10/1/2025  
4   Senior Loan     Fixed       5.6     11/1/2028       Fixed       2.7     11/1/2028  
5   Senior Loan     Fixed       5.6     2/1/2029       Fixed       2.9     2/1/2029  
6   Senior Loan     Fixed       5.5     11/1/2023       Fixed       2.6     11/1/2023  
7   Senior Loan     Fixed       5.5     10/1/2028       Fixed       3.0     10/1/2028  
8   Senior Loan     Fixed       5.6     12/1/2028       Fixed       2.8     12/1/2028  
9   Senior Loan     Fixed       5.3     9/1/2028       Fixed       2.8     9/1/2028  
10   Senior Loan     Fixed       5.7     12/1/2028       Fixed       3.0     12/1/2028  
11   Senior Loan     Fixed       5.4     2/1/2028       Fixed       3.5     2/1/2028  
12   Senior Loan     Fixed       4.7     3/1/2026       Fixed       2.5     3/1/2026  
13   Senior Loan     Fixed       6.1     10/1/2028       Fixed       3.3     10/1/2028  
14   Senior Loan     Fixed       5.9     1/1/2029       Fixed       3.1     1/1/2029  
15   Senior Loan     Fixed       5.9     11/1/2028       Fixed       3.0     11/1/2028  
16   Senior Loan     Fixed       5.5     2/1/2029       Fixed       2.8     2/1/2029  
17   Senior Loan     Fixed       5.3     2/1/2029       Fixed       3.0     2/1/2029  
18   Senior Loan     Fixed       5.1     7/1/2028       Fixed       2.7     7/1/2028  
19   Senior Loan     Fixed       5.5     3/1/2029       Fixed       3.0     3/1/2029  
20   Senior Loan     Fixed       5.5     11/1/2028       Fixed       2.7     11/1/2028  
21   Senior Loan     Fixed       4.8     2/1/2024       Fixed       2.4     2/1/2024  
22   Senior Loan     Fixed       5.8     9/1/2023       Fixed       2.9     9/1/2023  
23   Senior Loan     Fixed       6.0     12/1/2028       Fixed       3.1     12/1/2028  
24   Senior Loan     Fixed       5.2     10/1/2028       Fixed       2.6     10/1/2028  
25   Senior Loan     Fixed       5.3     8/1/2023       Fixed       2.5     8/1/2023  
26   Senior Loan     Fixed       5.5     1/1/2029       Fixed       3.0     1/1/2029  
27   Senior Loan     Fixed       5.4     2/1/2029       Fixed       3.1     2/1/2029  
     

 

 

   

 

 

     

 

 

   

 

 

 

Senior Loans—Total / Wtd. Avg.

    100% Fixed       4.9     8.4       100% Fixed       2.4     8.4  
     

 

 

   

 

 

     

 

 

   

 

 

 

 

(1)

Weighted average years to maturity as of December 31, 2019.



 

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Investment Process

We expect to benefit from the tested method of capital allocation and on-going investment monitoring developed by our Sponsor. The primary objectives of the investment process are for it to be repeatable, dependable, and produce attractive risk-adjusted returns. The primary components of the investment process are as follows:

 

LOGO

Investment Guidelines

Upon completion of this offering, we expect our board of directors will approve the following investment guidelines:

 

   

No investment will be made that would cause us to fail to qualify or maintain our qualification as a REIT under the Code;

 

   

No investment will be made that would cause us or any of our subsidiaries to be required to be registered as an investment company under the Investment Company Act;

 

   

Our Manager will seek to invest our capital in our target assets;

 

   

Prior to the deployment of our capital into our target assets, our Manager may cause our capital to be invested in any short-term investments in money market funds, bank accounts, overnight repurchase agreements with primary Federal Reserve Bank dealers collateralized by direct U.S. government obligations and other instruments or investments determined by our Manager to be of high quality and consistent with our qualification as a REIT under the Code; and

 

   

Without the approval of a majority of our independent directors, no more than 25% of our Equity (as defined in our Management Agreement) may be invested in any individual investment (it being understood, however, that for purposes of the foregoing concentration limit, in the case of any investment that is comprised (whether through a structured investment vehicle or other arrangement) of securities, instruments or assets of multiple portfolio issuers, such investment will be deemed to be multiple investments in such underlying securities, instruments and assets and not the particular vehicle, product or other arrangement in which they are aggregated).



 

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These investment guidelines may be amended, supplemented or waived by our board of directors (which must include a majority of our independent directors) from time to time, but without the approval of our stockholders.

Summary Risk Factors

An investment in shares of our common stock involves various risks. You should consider carefully the following risks and those under the heading “Risk Factors” before purchasing our common stock:

 

   

Our loans and investments expose us to risks similar to and associated with debt-oriented real estate investments generally.

 

   

Commercial real estate-related investments that are secured, directly or indirectly, by real property are subject to delinquency, foreclosure and loss, which could result in losses to us.

 

   

Fluctuations in interest rate and credit spreads, which may not be adequately protected or protected at all, by our hedging strategies, could reduce our ability to generate income on our loans and other investments, which could lead to a significant decrease in our results of operations, cash flows and the market value of our investments.

 

   

Our loans and investments will be concentrated in terms of geography, asset types and sponsors upon completion of the formation transaction and may continue to be so in the future.

 

   

Upon the completion of the formation transaction, we will have a substantial amount of indebtedness which may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs.

 

   

We have limited operating history as a standalone company and may not be able to operate our business successfully, find suitable investments, or generate sufficient revenue to make or sustain distributions to our stockholders.

 

   

We are dependent upon our Manager and its affiliates to conduct our day-to-day operations; thus, adverse changes in their financial health or our relationship with them could cause our operations to suffer.

 

   

We may not replicate the historical results achieved by other entities managed or sponsored by affiliates of our Manager, members of our Manager’s management team or by our Sponsor or its affiliates.

 

   

Our Manager and its affiliates will face conflicts of interest, including significant conflicts created by our Manager’s compensation arrangements with us, including compensation which may be required to be paid to our Manager if our management agreement is terminated, which could result in decisions that are not in the best interests of our stockholders.

 

   

We will pay substantial fees and expenses to our Manager and its affiliates, which payments increase the risk that you will not earn a profit on your investment.



 

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If we fail to qualify as a REIT for U.S. federal income tax purposes, cash available for distributions to be paid to you could decrease materially, which would limit our ability to make distributions to our stockholders.

If any of the factors enumerated above or in “Risk Factors” occurs, our business, financial condition, liquidity, results of operations and prospects could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment.

Our Structure

The following chart summarizes our organizational structure following the Formation Transaction and this offering. This chart is provided for illustrative purposes only and does not show all of our legal entities or ownership percentages of such entities.

 

LOGO

Our Management Agreement

Prior to or concurrently with the completion of this offering, we intend to enter into the Management Agreement, pursuant to which NexPoint Real Estate Advisors VII, L.P. will serve as our Manager. Pursuant to the Management Agreement, subject to the overall supervision of our board of directors, our Manager will manage our day-to-day operations, and provide investment management services to us. Under the terms of this agreement, our Manager will, among other things:

 

   

identify, evaluate and negotiate the structure of our investments (including performing due diligence);

 

   

find, present and recommend investment opportunities consistent with our investment policies and objectives;

 

   

structure the terms and conditions of our investments;

 

   

review and analyze financial information for each investment in our overall portfolio;



 

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close, monitor and administer our investments; and

 

   

identify debt and equity capital needs and procure the necessary capital.

As consideration for the Manager’s services, we will pay our Manager an annual management fee of 1.5% of Equity (as defined below), paid monthly, in cash or shares of our common stock at the election of our Manager, or the Annual Fee.

“Equity” means (a) the sum of (1) total stockholders’ equity immediately prior to the closing of this offering, plus (2) the net proceeds received by us from all issuances of our common stock in and after this offering, plus (3) our cumulative Core Earnings (as defined below) from and after this offering to the end of the most recently completed calendar quarter, (b) less (1) any distributions to our common stockholders from and after this offering to the end of the most recently completed calendar quarter and (2) all amounts that we have paid to repurchase our common stock from and after this offering to the end of the most recently completed calendar quarter. In our calculation of Equity, we will adjust our calculation of Core Earnings to remove the compensation expense relating to awards granted under one or more of our long-term incentive plans that is added back in our calculation of Core Earnings. Additionally, for the avoidance of doubt, Equity will not include the assets contributed to us in the Formation Transaction as they will be contributed to subsidiary partnerships of the OP, which will not result in an increase in our stockholders’ equity attributable to common stockholders.

“Core Earnings” means the net income (loss) attributable to our common stockholders computed in accordance with GAAP, including realized gains and losses not otherwise included in net income (loss), excluding any unrealized gains or losses or other similar non-cash items that are included in net income (loss) for the applicable reporting period, regardless of whether such items are included in other comprehensive income (loss), or in net income (loss) and adding back amortization of stock-based compensation. Net income (loss) attributable to common stockholders may also be adjusted for one-time events pursuant to changes in GAAP and certain material non-cash income or expense items, in each case after discussions between the Manager and our independent directors and approved by a majority of the independent directors of our board.

Incentive compensation may be payable to our executive officers and certain other employees of our Manager or its affiliates pursuant to a long-term incentive plan approved by our stockholders. As discussed above, compensation expense is not considered when determining Core Earnings, in that we add back compensation expense to net income in the calculation of Core Earnings. However, compensation expense is considered when determining Equity, in that we will adjust our calculation of Core Earnings to remove the compensation expense that is added back in our calculation of Core Earnings.

We will be required to pay directly or reimburse our Manager for all of the documented “operating expenses” (all out-of-pocket expenses of our Manager in performing services for us, including but not limited to the expenses incurred by our Manager in connection with any provision by our Manager of legal, accounting, financial and due diligence services performed by our Manager that outside professionals or outside consultants would otherwise perform, compensation expenses under any long-term incentive plan adopted by us and approved by our stockholders and our pro rata share of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of our Manager required for our operations) and “offering expenses” (any and all expenses (other than underwriters’ discounts and commissions) paid or to be paid by us in connection with an offering of our securities, including,



 

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without limitation, our legal, accounting, printing, mailing and filing fees and other documented offering expenses) paid or incurred by our Manager or its affiliates in connection with the services it provides to us pursuant to the Management Agreement. However, our Manager is responsible, and we will not reimburse our Manager or its affiliates, for the salaries or benefits to be paid to personnel of our Manager or its affiliates who serve as our officers, except that we may grant equity awards to our officers under a long-term incentive plan adopted by us and approved by our stockholders. Direct payment of operating expenses by us, which includes compensation expense relating to equity awards granted under our long-term incentive plan, together with reimbursement of operating expenses to our Manager, plus the Annual Fee, may not exceed 2.5% of equity book value for any calendar year or portion thereof, provided, however, that this limitation will not apply to offering expenses, legal, accounting, financial, due diligence and other service fees incurred in connection with extraordinary litigation and mergers and acquisitions and other events outside the ordinary course of our business or any out-of-pocket acquisition or due diligence expenses incurred in connection with the acquisition or disposition of certain real estate-related investments.

The Management Agreement has an initial term of three years, and is automatically renewed thereafter for a one-year term unless earlier terminated. We will have the right to terminate the Management Agreement on 30 days’ written notice for cause (as defined in the Management Agreement). The Management Agreement can be terminated by us or our Manager without cause with 180 days’ written notice to the other party. Our Manager may also terminate the agreement with 30 days’ written notice if we have materially breached the agreement and such breach has continued for 30 days. A termination fee will be payable to our Manager by us upon termination of our Management Agreement for any reason, including non-renewal, other than a termination by us for cause. The termination fee will be equal to three times the average Annual Fee earned by our Manager during the two-year period immediately preceding the most recently completed calendar quarter prior to the effective termination date; provided, however, if the Management Agreement is terminated prior to the two-year anniversary of the date of the Management Agreement, the management fee earned during such period will be annualized for purposes of calculating the average annual management fee.

Under the terms of the Management Agreement, our Manager will indemnify and hold harmless us, our subsidiaries and the OP from all claims, liabilities, damages, losses, costs and expenses, including amounts paid in satisfaction of judgments, in compromises and settlements, as fines and penalties and legal or other costs and expenses of investigating or defending against any claim or alleged claim, of any nature whatsoever, known or unknown, liquidated or unliquidated, that are incurred by reason of our Manager’s bad faith, fraud, willful misfeasance, intentional misconduct, gross negligence or reckless disregard of its duties; provided, however, that our Manager will not be held responsible for any action of our board of directors in following or declining to follow any written advice or written recommendation given by our Manager. However, the aggregate maximum amount that our Manager may be liable to us pursuant to the Management Agreement will, to the extent not prohibited by law, never exceed the amount of the management fees received by our Manager under the Management Agreement prior to the date that the acts or omissions giving rise to a claim for indemnification or liability have occurred. In addition, our Manager will not be liable for special, exemplary, punitive, indirect, or consequential loss, or damage of any kind whatsoever, including without limitation lost profits. The limitations described in the preceding two sentences will not apply, however, to the extent such damages are determined in a final binding non-appealable court or arbitration proceeding to result from the bad faith, fraud, willful misfeasance, intentional misconduct, gross negligence or reckless disregard of our Manager’s duties. See “Management Compensation.”



 

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Conflicts of Interest and Related Policies

The scope of the activities of the affiliates of our Manager and the funds and clients advised by affiliates of our Manager may give rise to conflicts of interest or other restrictions and/or limitations imposed on us in the future that cannot be foreseen or mitigated at this time. For additional information on our conflicts of interest and related policies, see “Conflicts of Interest.”

Management Agreement

Under our Management Agreement, our Manager will be entitled to fees that are structured in a manner intended to provide incentives to our Manager to perform in our best interests and in the best interest of our stockholders. However, because performance is only one aspect of our Manager’s compensation, our Manager’s interests are not wholly aligned with those of our stockholders. In that regard, our Manager could be motivated to recommend riskier or more speculative investments that would entitle our Manager to a higher fee.

Other Accounts and Relationships

As part of their regular business, our Manager, its affiliates and their respective officers, directors, trustees, stockholders, members, partners and employees and their respective funds and investment accounts, or collectively, the Related Parties, hold, purchase, sell, trade or take other related actions both for their respective accounts and for the accounts of their respective clients, on a principal or agency basis, subject to applicable law with respect to loans, securities and other investments and financial instruments of all types. The Related Parties also provide investment advisory services, among other services, and engage in private equity, real estate and capital markets-oriented investment activities. The Related Parties will not be restricted in their performance of any such services or in the types of debt, equity, real estate or other investments which they may make. The Related Parties may have economic interests in or other relationships with respect to investments made by us. In particular, the Related Parties may make and/or hold an investment, including investments in securities, that may compete with, be pari passu, senior or junior in ranking to an, investment, including investments in securities, made and/or held by us or in which partners, security holders, members, officers, directors, agents or employees of such Related Parties serve on boards of directors or otherwise have ongoing relationships. Each of such ownership and other relationships may result in restrictions on transactions by us and otherwise create conflicts of interest for us. In such instances, the Related Parties may in their discretion make investment recommendations and decisions that may be the same as or different from those made with respect to our investments. In connection with any such activities described above, the Related Parties may hold, purchase, sell, trade or take other related actions in securities or investments of a type that may be suitable for us. The Related Parties will not be required to offer such securities or investments to us or provide notice of such activities to us. In addition, in managing our portfolio, our Manager may take into account its relationship or the relationships of its affiliates with obligors and their respective affiliates, which may create conflicts of interest. Furthermore, in connection with actions taken in the ordinary course of business of our Manager in accordance with its fiduciary duties to its other clients, our Manager may take, or be required to take, actions which adversely affect our interests.

The Related Parties have invested and may continue to invest in investments that would also be appropriate for us. Such investments may be different from those made on behalf of us. Neither our Manager nor any Related Party has any duty, in making or maintaining such investments, to act in a way that is favorable to us or to offer any such opportunity to us, subject to our Manager’s



 

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allocation policy. The investment policies, fee arrangements and other circumstances applicable to such other parties may vary from those applicable to us. Our Manager and/or any Related Party may also provide advisory or other services for a customary fee with respect to investments made or held by us, and neither our stockholders nor we shall have any right to such fees. Our Manager and/or any Related Party may also have ongoing relationships with, render services to or engage in transactions with other clients and other REITs, who make investments of a similar nature to ours, and with companies whose securities or properties are acquired by us. In connection with the foregoing activities our Manager and/or any Related Party may from time to time come into possession of material nonpublic information that limits the ability of our Manager to effect a transaction for us, and our investments may be constrained as a consequence of our Manager’s inability to use such information for advisory purposes or otherwise to effect transactions that otherwise may have been initiated on our behalf. In addition, officers or affiliates of our Manager and/or Related Parties may possess information relating to our investments that is not known to the individuals at our Manager responsible for monitoring our investments and performing the other obligations under the Management Agreement.

Although the professional staff of our Manager will devote as much time to our business and investments as our Manager deems appropriate to perform its duties in accordance with the Management Agreement and in accordance with reasonable commercial standards, the staff may have conflicts in allocating its time and services among us and Related Parties’ other accounts. The Management Agreement places restrictions on our Manager’s ability to buy and sell investments for us. Accordingly, during certain periods or in certain circumstances, our Manager may be unable as a result of such restrictions to buy or sell investments or to take other actions that it might consider to be in our best interests.

The directors, officers, employees and agents of the Related Parties, and our Manager may, subject to applicable law, serve as directors (whether supervisory or managing), officers, employees, partners, agents, nominees or signatories, and receive arm’s length fees in connection with such service, for us or any Related Party, or for any of our investments or any affiliate thereof, and neither we nor our stockholders shall have the right to any such fees.

The Related Parties serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as us, or of other investment funds managed by our Manager or its affiliates. In serving in these multiple capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may not be in our best interests. We may compete with other entities managed by our Manager and its affiliates for capital and investment opportunities.

There is no limitation or restriction on our Manager or any of its Related Parties with regard to acting as investment manager (or in a similar role) to other parties or persons. This and other future activities of our Manager and/or its Related Parties may give rise to additional conflicts of interest. Such conflicts may be related to obligations that our Manager or its affiliates have to other clients.

Allocation Policy

If a potential investment is appropriate for either us or another entity managed by our Manager or its affiliates, our Manager and its affiliates, including their respective personnel, have an allocation policy that provides opportunities will be allocated among those accounts for which participation in the respective opportunity is considered most appropriate. Our Manager is not



 

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required to offer to us any opportunities that do not meet our investment objectives and criteria. Personnel of our Manager and its affiliates may invest in any such investment opportunities not required to be presented to us.

Our Manager will allocate investment opportunities across the entities for which such opportunities are appropriate, consistent with its internal conflict of interest and allocation policies. Our Manager will seek to allocate investment opportunities among such entities in a manner that is fair and equitable over time and consistent with its allocation policy. However, there is no assurance that such investment opportunities will be allocated to us fairly or equitably in the short-term or over time, and there can be no assurance that we will be able to participate in all such investment opportunities that are suitable for us.

Cross Transactions and Principal Transactions

Our Manager may effect client cross-transactions where our Manager causes a transaction to be effected between us and another client advised by our Manager or any of its affiliates. Our Manager may engage in a client cross-transaction involving us any time that our Manager believes such transaction to be fair to us and the other client of our Manager or its affiliates in accordance with our Manager’s internal written cross-transaction policies and procedures.

Our Manager may effect principal transactions where we may make and/or hold an investment, including an investment in securities, in which our Manager and/or its affiliates have a debt, equity or participation interest, in each case in accordance with applicable law and with our Manager’s internal written policies and procedures for principal transactions, which may include our Manager obtaining our consent and approval prior to engaging in any such principal transaction between us and our Manager or its affiliates.

In each such case, our Manager and such affiliates may have a potentially conflicting division of loyalties and responsibilities regarding us and the other parties to such investment. Under certain circumstances, our Manager and its affiliates may determine that it is appropriate to avoid such conflicts by selling an investment at a fair value that has been calculated pursuant to our Manager’s valuation procedures to another fund managed or advised by our Manager or such affiliates. In addition, our Manager may enter into agency cross-transactions where it or any of its affiliates acts as broker for us and for the other party to the transaction, to the extent permitted under applicable law. Our Manager may obtain our written consent as provided herein if any such transaction requires the consent of the board.

Participation in Creditor Committees, Underwriting and Other Activities

Our Manager and/or its Related Parties may participate in creditors or other committees with respect to the bankruptcy, restructuring or workout or foreclosure of our investments. In such circumstances, our Manager may take positions on behalf of itself or Related Parties that are adverse to our interests.

Our Manager and/or its Related Parties may act as an underwriter, arranger or placement agent, or otherwise participate in the origination, structuring, negotiation, syndication or offering of investments purchased by us. Such transactions are on an arm’s-length basis and may be subject to arm’s-length fees. There is no expectation for preferential access to transactions involving investments that are underwritten, originated, arranged or placed by our Manager and/or its Related Parties and neither we nor our stockholders shall have the right to any such fees.



 

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Material Non-Public Information

There are generally no ethical screens or information barriers among our Manager and certain of its affiliates of the type that many firms implement to separate persons who make investment decisions from others who might possess material, non-public information that could influence such decisions. If our Manager, any of its personnel or its affiliates were to receive material non-public information about an investment or issuer, or have an interest in causing us to acquire a particular investment, our Manager may be prevented from causing us to purchase or sell such asset due to internal restrictions imposed on our Manager. Notwithstanding the maintenance of certain internal controls relating to the management of material non-public information, it is possible that such controls could fail and result in our Manager, or one of its investment professionals, buying or selling an asset while, at least constructively, in possession of material non-public information. Inadvertent trading on material non-public information could have adverse effects on our Manager’s reputation, result in the imposition of regulatory or financial sanctions, and as a consequence, negatively impact our Manager’s ability to perform its investment management services to us. In addition, while our Manager and certain of its affiliates currently operate without information barriers on an integrated basis, such entities could be required by certain regulations, or decide that it is advisable, to establish information barriers. In such event, our Manager’s ability to operate as an integrated platform could also be impaired, which would limit our Manager’s access to personnel of its affiliates and potentially impair its ability to manage our investments.

Operating and Regulatory Structure

REIT Qualification

We intend to elect to be treated as a REIT under the Code, commencing with our taxable year ending on December 31, 2020. We believe that we have been organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and that our intended manner of operation will enable us to meet the requirements for qualification and taxation as a REIT. We further believe that, after the consummation of this offering, we will satisfy the stock ownership diversity requirement for qualification as a REIT. To qualify as a REIT, we must meet on a continuing basis, through our organization and actual investment and operating results, various 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 shares of our stock. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax at regular corporate rates and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which we failed to qualify as a REIT. Even if we qualify for taxation as a REIT, we may be subject to some U.S. federal, state and local taxes on our income or property or REIT “prohibited transactions” taxes with respect to certain of our activities. Any distributions paid by us generally will not be eligible for taxation at the preferred U.S. federal income tax rates that apply to certain distributions received by individuals from taxable corporations. For additional information see “Risk Factors—Risks Related to Our Corporate Structure.”

Investment Company Act Exclusion

We, as well as our subsidiaries, intend to conduct our operations so that we are not required to register as an investment company under the Investment Company Act. Section 3(a)(1)(A) of the Investment Company Act defines an investment company as any issuer that is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting



 

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or trading in securities. Section 3(a)(1)(C) of the Investment Company Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test. Excluded from the term “investment securities,” among other things, are U.S. Government securities and securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on the exclusion from the definition of investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.

We are organized as a holding company and will conduct our business primarily through our OP and through subsidiaries of our OP. We anticipate that our OP will always be at least a majority-owned subsidiary. We intend to conduct our operations so that neither we nor our OP will hold investment securities in excess of the limit imposed by the 40% test. The securities issued by any wholly owned or majority-owned subsidiaries that we may form in the future that are excluded from the definition of “investment company” based on Section 3(c)(1) or 3(c)(7) of the Investment Company Act, together with any other investment securities we may own, may not have a value in excess of 40% of the value of our total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We will monitor our holdings to ensure continuing and ongoing compliance with this test. In addition, we believe that neither we nor our OP will be considered an investment company under Section 3(a)(1)(A) of the Investment Company Act because neither of us will engage primarily, propose to engage primarily, or hold ourselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, we and our OP will be primarily engaged in the non-investment company businesses of our subsidiaries.

We anticipate that certain of our subsidiaries will meet the requirements of the exclusion set forth in Section 3(c)(5)(C) of the Investment Company Act, which excludes entities primarily engaged in the business of “purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” To meet this exclusion, the SEC staff has taken the position that at least 55% of a subsidiary’s assets must constitute qualifying assets (as interpreted by the SEC staff under the Investment Company Act) and at least another 25% of assets (subject to reduction to the extent the subsidiary invested more than 55% of its total assets in qualifying assets) must constitute real estate-related assets under the Investment Company Act (and no more than 20% comprised of miscellaneous assets). We expect to treat residential mortgage loans as qualifying real estate assets and CMBS B-Pieces, mezzanine loans and other real estate-related investments as real estate-related assets. In general, we also expect, with regard to our subsidiaries relying on Section 3(c)(5)(C), to rely on other guidance published by the SEC staff and on our analyses of guidance published with respect to other types of assets to determine which assets are qualifying assets and real estate-related assets. Maintaining the Section 3(c)(5)(C) exclusion, however, will limit our ability to make certain investments.

In August 2011, the SEC solicited public comment on a wide range of issues relating to Section 3(c)(5)(C), including the nature of the assets that qualify for purposes of this exclusion and whether mortgage REITs should be regulated in a manner similar to investment companies. There can be no assurance that the laws and regulations governing the Investment Company Act status of REITs (and/or their subsidiaries), including guidance of the SEC or its staff regarding this exclusion, will not change in a manner that adversely affects our operations. To the extent that the SEC or its staff publishes new or different guidance with respect to these matters, we may be required to adjust our strategy accordingly. In addition, we may be limited in our ability to make



 

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certain investments, and these limitations could result in a subsidiary holding assets we might wish to sell or not acquiring or selling assets we might wish to hold. Although we intend to continually monitor the portfolios of our subsidiaries relying on the Section 3(c)(5)(C) exclusion, there can be no assurance that such subsidiaries will be able to maintain compliance with this exclusion. For our subsidiaries that do maintain this exclusion, our interests in these subsidiaries will not constitute “investment securities.”

The determination of whether an entity is a majority-owned subsidiary of our company is made by us. The Investment Company Act defines a majority-owned subsidiary of a person as a company 50% or more of the outstanding voting securities of which are owned by such person, or by another company which is a majority-owned subsidiary of such person. The Investment Company Act further defines voting securities as any security presently entitling the owner or holder thereof to vote for the election of directors, or the equivalent, of a company. We treat companies in which we own at least a majority of the outstanding voting securities as majority-owned subsidiaries for purposes of the 40% test. We have not requested the SEC to approve our treatment of any company as a majority-owned subsidiary, and the SEC has not done so. If the SEC were to disagree with our treatment of one or more companies as majority-owned subsidiaries, we would need to adjust our strategy and our assets in order to continue to pass the 40% test. Any such adjustment in our strategy could have a material adverse effect on us.

To the extent that the SEC staff provides more specific guidance regarding any of the matters bearing upon such exclusions, we may be required to adjust our strategy accordingly. Any additional guidance from the SEC staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the strategies we have chosen.

Restrictions on Ownership of Our Common Stock

Restrictions on Ownership and Transfer of Our Common Stock

To assist us in complying with the limitations on the concentration of ownership of a REIT imposed by the Code, among other purposes, our charter prohibits, with certain exceptions, any stockholder from beneficially or constructively owning, applying certain attribution rules under the Code, more than 6.2% by value or number of shares, whichever is more restrictive, of the aggregate of the outstanding shares of our common stock, or 6.2% by value of the aggregate of the outstanding shares of our capital stock. Our board of directors may, in its sole discretion, subject to such conditions as it may determine and the receipt of certain representations and undertakings, waive the 6.2% ownership limit with respect to a particular stockholder if such ownership will not then or in the future jeopardize our qualification as a REIT. In connection with this offering, our board of directors intends to grant our Sponsor and its affiliates a waiver allowing them to own up to 25% of our common stock. Our charter also prohibits any person from, among other things, beneficially or constructively owning shares of our capital stock that would result in our being “closely held” under Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year), or otherwise cause us to fail to qualify as a REIT.

Our charter provides that any ownership or purported transfer of our capital stock in violation of the foregoing restrictions will result in the shares so owned or transferred being automatically transferred to a charitable trust for the benefit of a charitable beneficiary, and the purported owner or transferee acquiring no rights in such shares. If a transfer of shares of our capital stock would result in our capital stock being beneficially owned by fewer than 100 persons or the transfer to a



 

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charitable trust would be ineffective for any reason to prevent a violation of the other restrictions on ownership and transfer of our capital stock, the transfer resulting in such violation will be void ab initio.

Implications of Being an Emerging Growth Company and Smaller Reporting Company

Emerging Growth Company and Smaller Reporting Company Status

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

The JOBS Act permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to take advantage of this extended transition period. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates for such new or revised standards. We may elect to comply with public company effective dates at any time, and such election would be irrevocable pursuant to Section 107(b) of the JOBS Act.

We could remain an “emerging growth company” until the earliest of (1) the end of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement, (2) the last day of the fiscal year in which our annual gross revenues exceed $1.07 billion, (3) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, or the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (4) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.

We are also a “smaller reporting company” as defined in Regulation S-K under the Securities Act, and may elect to take advantage of certain of the scaled disclosures available to smaller reporting companies. We may be a smaller reporting company even after we are no longer an “emerging growth company.”

Corporate Information

Our and our Manager’s offices are located at 300 Crescent Court, Suite 700, Dallas, Texas 75201. Our and our Manager’s telephone number is (972) 628-4100. We will maintain a website at www.nexpointfinance.com. Information contained on, or accessible through our website is not incorporated by reference into and does not constitute a part of this prospectus or any other report or documents we file with or furnish to the SEC.



 

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THE OFFERING

 

Common stock offered by us

5,000,000 shares (plus up to an additional 750,000 shares of our common stock that we may issue and sell upon the exercise of the underwriters’ option to purchase additional shares).

 

Common stock to be outstanding after this offering(1)

5,000,000 shares (5,750,000 shares if the underwriters exercise their option to purchase additional shares of common stock in full).

 

Use of proceeds

We estimate that we will receive net proceeds from this offering of approximately $90.6 million, or approximately $104.6 million if the underwriters’ overallotment option is exercised in full, assuming an initial public offering price of $20.00 per share, which is the mid-point of the range set forth on the cover of this prospectus, and after deducting the underwriting discounts and commissions, and estimated expenses of this offering. We intend to contribute the net proceeds from this offering to our OP in exchange for limited partnership interests in the OP and our OP intends to contribute the net proceeds from this offering to our subsidiary partnerships for limited partnership interests in the subsidiary partnerships. Our subsidiary partnerships intend to use the net proceeds from this offering to repay the amount that will be outstanding under the $95 million Bridge Facility. The remainder of the net proceeds will be used to acquire investments that fit within our investment strategy. Pending this application, the OP and our subsidiary partnerships may invest the net proceeds from this offering in interest bearing accounts and short term, interest bearing securities or in any other manner that is consistent with our intention to qualify for taxation as a REIT and maintain our exclusion from registration under the Investment Company Act. See “Use of Proceeds” for additional information.

 

Dividend policy

We intend to make regular quarterly distributions to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its REIT taxable income.

 

Listing and Trading Symbol

Our common stock has been approved for listing, subject to official notice of issuance, on the NYSE under the symbol “NREF.”

 

(1) 

Except as otherwise indicated, all information in this prospectus assumes that all 250,000 Reserved Shares to which no underwriting discounts or commissions will be applied are sold in this offering.



 

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Ownership and transfer restrictions

To assist us in complying with the limitations on the concentration of ownership of a REIT imposed by the Code, among other purposes, our charter generally prohibits, among other prohibitions, any stockholder from beneficially or constructively owning more than 6.2% by value or number of shares, whichever is more restrictive, of any of the outstanding shares of our common stock, or 6.2% in value of the aggregate of the outstanding shares of our capital stock. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

 

Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully read and consider the information set forth under “Risk Factors” and all other information in this prospectus before investing in our common stock.

 

Reserved Shares Program

The underwriters have at our request reserved for sale, at the public offering price, up to 250,000 shares, or the Reserved Shares, offered by this prospectus for sale to our Sponsor and its affiliates. No underwriting discounts or commissions will be applied to the Reserved Shares.


 

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RISK FACTORS

An investment in our common stock involves various risks and uncertainties. You should carefully consider the following material risk factors in conjunction with the other information contained in this prospectus before purchasing our common stock. The risks discussed in this prospectus can adversely affect our business, operating results, prospects and financial condition. This could cause the value of our common stock to decline and could cause you to lose all or part of your investment. The risks and uncertainties described below are not the only ones we face, but represent those risks and uncertainties that we believe are material to our business, operating results, prospects and financial condition. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business.

Risks Related to Our Business

Our loans and investments expose us to risks similar to and associated with debt-oriented real estate investments generally.

We seek to invest primarily in investments in or relating to real estate-related businesses, assets or interests. Any deterioration of real estate fundamentals generally, and in the United States in particular, could negatively impact our performance by making it more difficult for entities in which we have an investment, or “borrower entities,” to satisfy debt payment obligations, increasing the default risk applicable to borrower entities, and/or making it relatively more difficult for us to generate attractive risk-adjusted returns. Changes in general economic conditions will affect the creditworthiness of borrower entities and may include economic and/or market fluctuations, changes in environmental, zoning and other laws, casualty or condemnation losses, regulatory limitations on rents, decreases in property values, changes in the appeal of properties to tenants, changes in supply and demand, fluctuations in real estate fundamentals, energy supply shortages, various uninsured or uninsurable risks, natural disasters, changes in government regulations (such as rent control), changes in real property tax rates and operating expenses, changes in interest rates, changes in the availability of debt financing and/or mortgage funds which may render the sale or refinancing of properties difficult or impracticable, increased mortgage defaults, increases in borrowing rates, negative developments in the economy that depress travel activity, demand and/or real estate values generally and other factors that are beyond our control. The value of securities of companies that service the real estate business sector may also be affected by such risks.

We cannot predict the degree to which economic conditions generally, and the conditions for loans and investments in real estate, will continue to improve or whether they will deteriorate further. Declines in the performance of the U.S. and global economies or in the real estate debt markets could have a material adverse effect on our business, financial condition and results from operations. In addition, market conditions relating to real estate debt and preferred equity investments have evolved since the global financial crisis, which has resulted in a modification to certain structures and/or market terms. Any such changes in structures and/or market terms may make it relatively more difficult for us to monitor and evaluate our loans and investments

Our real estate investments are subject to risks particular to real property. These risks may result in a reduction or elimination of or return from an investment secured by a particular property.

Real estate investments are subject to various risks, including:

 

   

acts of nature, including earthquakes, floods and other natural disasters, which may result in uninsured losses;

 

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acts of war or terrorism, including the consequences of such acts;

 

   

adverse changes in national and local economic and market conditions;

 

   

changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations and ordinances;

 

   

costs of remediation and liabilities associated with environmental conditions including, but not limited to, indoor mold; and

 

   

the potential for uninsured or under-insured property losses.

If any of these or similar events occurs, it may reduce our return from an affected property or investment and reduce or eliminate our ability to pay dividends to stockholders.

Commercial real estate-related investments that are secured, directly or indirectly, by real property are subject to delinquency, foreclosure and loss, which could result in losses to us.

Commercial real estate debt instruments (e.g., first mortgage loans, mezzanine loans, preferred equity and CMBS) that are secured by commercial property are subject to risks of delinquency and foreclosure and risks of loss that are greater than similar risks associated with loans made on the security of single-family residential property. The ability of a borrower to repay a loan secured by an income-producing property or properties typically is dependent primarily upon the successful operation of the property or properties rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. Net operating income of an income-producing property can be affected by, among other things:

 

   

tenant mix and tenant bankruptcies;

 

   

success of tenant businesses;

 

   

property management decisions, including with respect to capital improvements, particularly in older building structures;

 

   

property location and condition;

 

   

competition from other properties offering the same or similar services;

 

   

changes in laws that increase operating expenses or limit rents that may be charged;

 

   

any need to address environmental contamination at the property;

 

   

changes in national, regional or local economic conditions and/or specific industry segments;

 

   

declines in regional or local real estate values;

 

   

declines in regional or local rental or occupancy rates;

 

   

changes in interest rates and in the state of the debt and equity capital markets, including diminished availability or lack of debt financing for commercial real estate;

 

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changes in real estate tax rates and other operating expenses;

 

   

changes in governmental rules, regulations and fiscal policies, including environmental legislation;

 

   

acts of God, terrorism, social unrest and civil disturbances, which may decrease the availability of or increase the cost of insurance or result in uninsured losses; and

 

   

adverse changes in zoning laws.

In addition, we are exposed to the risk of judicial proceedings with our borrowers and entities we invest in, including bankruptcy or other litigation, as a strategy to avoid foreclosure or enforcement of other rights by us as a lender or investor. In the event that any of the properties or entities underlying or collateralizing our loans or investments experiences any of the foregoing events or occurrences, the value of, and return on, such investments, and could adversely affect our results of operations and financial condition.

Fluctuations in interest rates and credit spreads could reduce our ability to generate income on our loans and other investments, which could lead to a significant decrease in our results of operations, cash flows and the market value of our investments.

Our primary interest rate exposures relate to the yield on our loans and other investments and the financing cost of our debt, as well as our interest rate swaps that we may utilize for hedging purposes. Changes in interest rates and credit spreads may affect our net income from loans and other investments, which is the difference between the interest and related income we earn on our interest-earning investments and the interest and related expense we incur in financing these investments. Interest rate and credit spread fluctuations resulting in our interest and related expense exceeding interest and related income would result in operating losses for us. Changes in the level of interest rates and credit spreads also may affect our ability to make loans or investments, the value of our loans and investments and our ability to realize gains from the disposition of assets. Increases in interest rates and credit spreads may also negatively affect demand for loans and could result in higher borrower default rates.

Our operating results depend, in part, on differences between the income earned on our investments, net of credit losses, and our financing costs. The yields we earn on our floating-rate assets and our borrowing costs tend to move in the same direction in response to changes in interest rates. However, one can rise or fall faster than the other, causing our net interest margin to expand or contract. In addition, we could experience reductions in the yield on our investments and an increase in the cost of our financing. Although we seek to match the terms of our liabilities to the expected lives of loans that we acquire or originate, circumstances may arise in which our liabilities are shorter in duration than our assets, resulting in their adjusting faster in response to changes in interest rates. For any period during which our investments are not match-funded, the income earned on such investments may respond more slowly to interest rate fluctuations than the cost of our borrowings. Consequently, changes in interest rates, particularly short-term interest rates, may immediately and significantly decrease our results of operations and cash flows and the market value of our investments. In addition, unless we enter into hedging or similar transactions with respect to the portion of our assets that we fund using our balance sheet, returns we achieve on such assets will generally increase as interest rates for those assets rise and decrease as interest rates for those assets decline.

 

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Our loans and investments may be subject to fluctuations in interest rates that may not be adequately protected, or protected at all, by our hedging strategies.

Our assets include loans with either floating interest rates or fixed interest rates. Floating rate loans earn interest at rates that adjust from time to time (typically monthly) based upon an index (typically one-month LIBOR). These floating rate loans are insulated from changes in value specifically due to changes in interest rates; however, the coupons they earn fluctuate based upon interest rates (again, typically one-month LIBOR) and, in a declining and/or low interest rate environment, these loans will earn lower rates of interest and this will impact our operating performance. For more information about our risks related to changes to, or the elimination of, LIBOR, see “Changes to, or the elimination of, LIBOR may adversely affect interest expense related to our loans and investments” below. Fixed interest rate loans, however, do not have adjusting interest rates and the relative value of the fixed cash flows from these loans will decrease as prevailing interest rates rise or increase as prevailing interest rates fall, causing potentially significant changes in value. We may employ various hedging strategies to limit the effects of changes in interest rates (and in some cases credit spreads), including engaging in interest rate swaps, caps, floors and other interest rate derivative products. We believe that no strategy can completely insulate us from the risks associated with interest rate changes and there is a risk that such strategies may provide no protection at all and potentially compound the impact of changes in interest rates. Hedging transactions involve certain additional risks such as counterparty risk, leverage risk, the legal enforceability of hedging contracts, the early repayment of hedged transactions and the risk that unanticipated and significant changes in interest rates may cause a significant loss of basis in the contract and a change in current period expense. We cannot make assurances that we will be able to enter into hedging transactions or that such hedging transactions will adequately protect us against the foregoing risks.

Accounting for derivatives under GAAP may be complicated. Any failure by us to meet the requirements for applying hedge accounting in accordance with GAAP could adversely affect our earnings. In particular, derivatives are required to be highly effective in offsetting changes in the value or cash flows of the hedged items (and appropriately designated and/or documented as such). If it is determined that a derivative is not highly effective at hedging the designated exposure, hedge accounting is discontinued and the changes in fair value of the instrument are included in our reported net income.

Our loans and investments will be concentrated in terms of geography, asset types and sponsors upon completion of the Formation Transaction and may continue to be so in the future.

Upon the completion of the Formation Transaction, one of our loans that is a fixed rate loan will have an unpaid principal balance of approximately $508.7 million, which equates to approximately 48.0% of the total unpaid principal balance of our Initial Portfolio. This loan is collateralized by a portfolio of 4,812 SFR properties with 51% of the units being located in the Atlanta-Sandy Springs-Roswell, Georgia MSA. In addition, approximately 82% of our Initial Portfolio is in the SFR asset class and approximately 47% of the net equity in our Initial Portfolio is located in Florida and Georgia. In the future, our investments may continue to be concentrated in terms of type of interest (i.e. fixed vs. floating), geography, asset type and sponsors, as we are not required to observe specific diversification criteria, except as may be set forth in the investment guidelines adopted by our board of directors. Therefore, our investments in our target assets will be and could in the future be, secured by properties concentrated in a limited number of geographic locations or concentrated in certain property types that are subject to higher risk of default or foreclosure.

Asset concentration may cause even modest changes in the value of the underlying real estate assets to significantly impact the value of our investments. As a result of any high levels of

 

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concentration, any adverse economic, political or other conditions that disproportionately affects those geographic areas or asset classes could have a magnified adverse effect on our results of operations and financial condition, and the value of our stockholders’ investments could vary more widely than if we invested in a more diverse portfolio of loans.

We operate in a competitive market for lending and investment opportunities and competition may limit our ability to originate or acquire desirable loans and investments in our target assets and could also affect the yields of these assets.

A number of entities compete with us to make the types of loans and investments that we seek to make. Our profitability depends, in large part, on our ability to originate or acquire our target assets on attractive terms. In originating or acquiring our target assets, we compete with a variety of institutional lenders and investors, including other REITs, specialty finance companies, public and private funds (including other funds managed by affiliates of our Manager and Sponsor), commercial and investment banks, commercial finance and insurance companies and other financial institutions. Several other REITs have raised, or are expected to raise, significant amounts of capital, and may have investment objectives that overlap with ours, which may create additional competition for lending and investment opportunities. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. Many of our competitors are not subject to the operating constraints associated with REIT compliance or maintenance of an exclusion from regulation under the Investment Company Act. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments, offer more attractive pricing or other terms and establish more relationships than us. Furthermore, competition for originations of and investments in our target assets may lead to the yields of such assets decreasing, which may further limit our ability to generate satisfactory returns. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, desirable loans and investments in our target assets may be limited in the future, and we may not be able to take advantage of attractive lending and investment opportunities from time to time, as we can provide no assurance that we will be able to identify and originate loans or make investments that are consistent with our investment objectives.

Prepayment rates may adversely affect the value of our portfolio of assets.

The value of our assets may be affected by prepayment rates on loans. If we originate or acquire mortgage-related securities or a pool of mortgage securities, we anticipate that the underlying mortgages will prepay at a projected rate generating an expected yield. If we purchase assets at a premium to par value, when borrowers prepay their loans faster than expected, the corresponding prepayments on the mortgage-related securities may reduce the expected yield on such securities because we will have to amortize the related premium on an accelerated basis. Conversely, if we purchase assets at a discount to par value, when borrowers prepay their loans slower than expected, the decrease in corresponding prepayments on the mortgage-related securities may reduce the expected yield on such securities because we will not be able to accrete the related discount as quickly as originally anticipated. Prepayment rates on loans may be affected by a number of factors including, but not limited to, the availability of mortgage credit, the relative economic vitality of the area in which the related properties are located, the servicing of the loans, possible changes in tax laws, other opportunities for investment, and other economic, social, geographic, demographic and legal factors and other factors beyond our control. Consequently, such prepayment rates cannot be predicted with certainty and no strategy can completely insulate us from prepayment or other such risks. In periods of declining interest rates, prepayment rates on loans generally increase. If general interest rates decline at the same time, the

 

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proceeds of such prepayments received during such periods are likely to be reinvested by us in assets yielding less than the yields on the assets that were prepaid. In addition, as a result of the risk of prepayment, the market value of the prepaid assets may benefit less than other fixed income securities from declining interest rates.

The lack of liquidity in certain of our target assets may adversely affect our business.

The illiquidity of certain of our target assets may make it difficult for us to sell such investments if the need or desire arises. Certain target assets such as first mortgage loans, CMBS B-Pieces, mezzanine and other loans (including participations) and preferred equity, in particular, are relatively illiquid investments. In addition, certain of our investments may become less liquid after our investment as a result of periods of delinquencies or defaults or turbulent market conditions, which may make it more difficult for us to dispose of such assets at advantageous times or in a timely manner. Moreover, many of the loans and securities we invest in will not be registered under the relevant securities laws, resulting in prohibitions against their transfer, sale, pledge or their disposition except in transactions that are exempt from registration requirements or are otherwise in accordance with such laws. As a result, we expect many of our investments will be illiquid, and if we are required to liquidate all or a portion of our portfolio quickly, for example as a result of margin calls, we may realize significantly less than the value at which we have previously recorded our investments. Further, we may face other restrictions on our ability to liquidate an investment to the extent that we or our Manager and/or its affiliates has or could be attributed as having material, non-public information regarding such business entity. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited, which could adversely affect our results of operations and financial condition.

Our success depends on the availability of attractive loans and investments and our Manager’s ability to identify, structure, consummate, leverage, manage and realize returns on our loans and investments.

Our operating results are dependent upon the availability of, as well as our Manager’s ability to identify, structure, consummate, leverage, manage and realize returns on our loans and investments. In general, the availability of favorable investment opportunities and, consequently, our returns, will be affected by the level and volatility of interest rates, conditions in the financial markets, general economic conditions, the demand for loan and investment opportunities in our target assets and the supply of capital for such opportunities. We cannot make any assurances that our Manager will be successful in identifying and consummating loans and investments that satisfy our rate of return objectives or that such loans and investments, once made, will perform as anticipated.

Any distressed loans or investments we make, or loans and investments that later become distressed, may subject us to losses and other risks relating to bankruptcy proceedings.

Our loans and investments may include making distressed investments from time to time (e.g., investments in defaulted, out-of-favor or distressed bank loans and debt securities) or may involve investments that become “non-performing” following our acquisition thereof. Certain of our investments may include properties that typically are highly leveraged, with significant burdens on cash flow and, therefore, involve a high degree of financial risk. During an economic downturn or recession, loans or securities of financially or operationally troubled borrowers or issuers are more likely to go into default than loans or securities of other borrowers or issuers. Loans or securities of financially or operationally troubled issuers are less liquid and more volatile than loans or securities of borrowers or issuers not experiencing such difficulties. The market prices of such securities are subject to erratic and abrupt market movements and the spread between bid

 

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and asked prices may be greater than normally expected. Investment in the loans or securities of financially or operationally troubled borrowers or issuers involves a high degree of credit and market risk.

In certain limited cases (e.g., in connection with a workout, restructuring and/or foreclosing proceedings involving one or more of our investments), the success of our investment strategy with respect thereto will depend, in part, on our ability to effectuate loan modifications and/or restructure and improve the operations of the borrower entities. The activity of identifying and implementing successful restructuring programs and operating improvements entails a high degree of uncertainty. There can be no assurance that we will be able to identify and implement successful restructuring programs and improvements with respect to any distressed loans or investments we may have from time to time.

These financial difficulties may not be overcome and may cause borrower entities to become subject to bankruptcy or other similar administrative proceedings. There is a possibility that we may incur substantial or total losses on our loans and investments and, in certain circumstances, become subject to certain additional potential liabilities that may exceed the value of our original investment therein. For example, under certain circumstances, a lender that has inappropriately exercised control over the management and policies of a debtor may have its claims subordinated or disallowed or may be found liable for damages suffered by parties as a result of such actions. In any reorganization or liquidation proceeding relating to our investments, we may lose our entire investment, may be required to accept cash or securities with a value less than our original investment and/or may be required to accept different terms, including payment over an extended period of time. In addition, under certain circumstances, payments to us may be reclaimed if any such payment or distribution is later determined to have been a fraudulent conveyance, preferential payment, or similar transaction under applicable bankruptcy and insolvency laws. Furthermore, bankruptcy laws and similar laws applicable to administrative proceedings may delay our ability to realize on collateral for loan positions held by us, may adversely affect the economic terms and priority of such loans through doctrines such as equitable subordination or may result in a restructuring of the debt through principles such as the “cramdown” provisions of the bankruptcy laws.

We may not have control over certain of our loans and investments.

Our ability to manage our portfolio of loans and investments may be limited by the form in which they are made. In certain situations, we may:

 

   

acquire investments subject to rights of senior classes and servicers under intercreditor or servicing agreements;

 

   

acquire only a minority and/or a non-controlling participation in an underlying investment;

 

   

co-invest with others through partnerships, joint ventures or other entities, thereby acquiring non-controlling interests; or

 

   

rely on independent third party management or servicing with respect to the management of an asset.

Therefore, we may not be able to exercise control over all aspects of our loans or investments. Such financial assets may involve risks not present in investments where senior creditors, junior creditors, servicers or third parties controlling investors are not involved. Our rights to control the process following a borrower default may be subject to the rights of senior or junior creditors or

 

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servicers whose interests may not be aligned with ours. A partner or co-venturer may have financial difficulties resulting in a negative impact on such asset, may have economic or business interests or goals that are inconsistent with ours, or may be in a position to take action contrary to our investment objectives. In addition, we may, in certain circumstances, be liable for the actions of our partners or co-venturers.

We may make preferred equity investments in entities over which we will not have voting control. We intend to ensure that the terms of our investments require that the partnerships and limited liability companies take all actions necessary to preserve our REIT status and avoid taxation at the REIT level. However, because we will not control such entities, they may cause us to fail one or more of the REIT tests. In that event, we intend to take advantage of all available provisions in the REIT statutes and regulations to cure any such failure, which provisions may require payments of penalties. We believe that we will be successful in maintaining our REIT status, but no assurances can be given.

CMBS B-Pieces, mezzanine loans, preferred equity and other investments that are subordinated or otherwise junior in an issuer’s capital structure and that involve privately negotiated structures expose us to greater risk of loss.

We will invest in debt instruments (including CMBS B-Pieces) and preferred equity that are subordinated or otherwise junior in an issuer’s capital structure and that involve privately negotiated structures. Our investments in subordinated debt and mezzanine tranches of a borrower’s capital structure and our remedies with respect thereto, including the ability to foreclose on any collateral securing such investments, are subject to the rights of any senior creditors and, to the extent applicable, contractual intercreditor and/or participation agreement provisions. Significant losses related to such loans or investments could adversely affect our results of operations and financial condition.

Investments in subordinated debt involve greater credit risk of default than the senior classes of the issue or series. As a result, with respect to our investments in CMBS B-Pieces, mezzanine loans and other subordinated debt, we would potentially receive payments or interest distributions after, and must bear the effects of losses or defaults on the senior debt (including underlying senior loans, senior mezzanine loans, B-Notes, preferred equity or senior CMBS bonds, as applicable) before the holders of other more senior tranches of debt instruments with respect to such issuer. As the terms of such loans and investments are subject to contractual relationships among lenders, co-lending agents and others, they can vary significantly in their structural characteristics and other risks. For example, the rights of holders of B-Notes to control the process following a borrower default may vary from transaction to transaction.

Like B-Notes, mezzanine loans are by their nature structurally subordinated to more senior property-level financings. If a borrower defaults on our mezzanine loan or on debt senior to our loan, or if the borrower is in bankruptcy, our mezzanine loan will be satisfied only after the property-level debt and other senior debt is paid in full. As a result, a partial loss in the value of the underlying collateral can result in a total loss of the value of the mezzanine loan. In addition, even if we are able to foreclose on the underlying collateral following a default on a mezzanine loan, we would be substituted for the defaulting borrower and, to the extent income generated on the underlying property is insufficient to meet outstanding debt obligations on the property, may need to commit substantial additional capital and/or deliver a replacement guarantee by a creditworthy entity, which could include us, to stabilize the property and prevent additional defaults to lenders with existing liens on the property.

Investments in preferred equity involve a greater risk of loss than conventional debt financing due to a variety of factors, including their non-collateralized nature and subordinated ranking to

 

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other loans and liabilities of the entity in which such preferred equity is held. Accordingly, if the issuer defaults on our investment, we would only be able to proceed against such entity in accordance with the terms of the preferred equity, and not against any property owned by such entity. Furthermore, in the event of bankruptcy or foreclosure, we would only be able to recoup our investment after all lenders to, and other creditors of, such entity are paid in full. As a result, we may lose all or a significant part of our investment, which could result in significant losses.

In addition, our investments in senior loans may be effectively subordinated to the extent we borrow under a warehouse loan (which can be in the form of a repurchase agreement) or similar facility and pledge the senior loan as collateral. Under these arrangements, the lender has a right to repayment of the borrowed amount before we can collect on the value of the senior loan, and therefore if the value of the pledged senior loan decreases below the amount we have borrowed, we would experience a loss.

Our investments in CMBS will pose additional risks, including the risk that we will not be able to recover some or all of our investment and the risk that we will not be able to hedge or transfer our CMBS B-Piece investments for a significant period of time.

We intend to invest in pools or tranches of CMBS. The collateral underlying CMBS generally consists of commercial mortgages or real property that have a multifamily or commercial use, such as retail space, office buildings, warehouse property and hotels. CMBS have been issued in a variety of issuances, with varying structures including senior and subordinated classes. Our investments in CMBS will be subject to losses. In general, losses on a mortgaged property securing a senior loan included in a securitization will be borne first by the equity holder of the property, then by a cash reserve fund or letter of credit, if any, then by the holder of a mezzanine loan or B-Note, if any, then by the “first loss” subordinated security holder (generally, the B-Piece buyer) and then by the holder of a higher-rated security. In the event of default and the exhaustion of any equity support, reserve fund, letter of credit, mezzanine loans or B-Notes, and any classes of securities junior to those in which we invest, we will not be able to recover some or all of our investment in the securities we purchase. There can be no assurance that our CMBS underwriting practices will yield their desired results and there can be no assurance that we will be able to effectively achieve our investment objective or that projected returns will be achieved.

If we invest in a CMBS B-Piece because a sponsor of a CMBS utilizes us as an eligible third-party purchaser to satisfy the risk retention rules under the Dodd-Frank Act, we will be required to meet certain conditions, including holding the related CMBS B-Piece, without transferring or hedging the CMBS B-Piece, for a significant period of time (at least five years), which could prevent us from mitigating losses on the CMBS B-Piece. Even if we seek to transfer the CMBS B-Piece after five years, any subsequent purchaser of the CMBS B-Piece will be required to satisfy the same conditions that we were required to satisfy when we acquired the interest from the CMBS sponsor. Accordingly, no assurance can be given that any secondary market liquidity will exist for such CMBS B-Pieces.

Loans on properties in transition will involve a greater risk of loss than conventional mortgage loans.

We may in the future invest in properties that have a light-transitional business plan. The typical borrower in a transitional loan has usually identified an undervalued asset that has been under-managed and/or is located in a recovering market. If the market in which the asset is located fails to improve according to the borrower’s projections, or if the borrower fails to improve the quality of the asset’s management and/or the value of the asset, the borrower may not receive a sufficient return on the asset to satisfy the transitional loan, and we bear the risk that we may not recover all or a portion of our investment.

 

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In addition, borrowers usually use the proceeds of a conventional mortgage to repay a transitional loan. Transitional loans therefore are subject to the risk of a borrower’s inability to obtain permanent financing to repay the transitional loan. In the event of any default under transitional loans that may be held by us, we bear the risk of loss of principal and non-payment of interest and fees to the extent of any deficiency between the value of the mortgage collateral and the principal amount and unpaid interest of the transitional loan. To the extent we suffer such losses with respect to these transitional loans, it could adversely affect our results of operations and financial condition.

We may not realize gains or income from our investments, which could cause the value of our common stock to decline.

We will seek to generate both current income and capital appreciation from our investments. However, it is possible that investments in our target assets will not appreciate in value and some investments may decline in value. In addition, the obligors on our investments may default on, or be delayed in making, interest and/or principal payments, especially given that we may invest in sub-performing and non-performing loans. Accordingly, we are subject to an increased risk of loss and may not be able to realize gains or income from our investments. Moreover, any gains that we do realize may not be sufficient to offset our losses and expenses.

We may allocate the net proceeds from this offering to investments with which you may not agree.

We will have significant flexibility in investing the net proceeds of this offering. You will be unable to evaluate the manner in which the net proceeds of this offering will be invested or the economic merit of our expected investments and, as a result, we may use the net proceeds to invest in investments with which you may not agree. Our failure to apply these proceeds effectively or find investments that meet our investment criteria in sufficient time or on acceptable terms could result in unfavorable returns, which could cause a material adverse effect on our business, financial condition, liquidity and results of operations. Because assets we expect to acquire may experience periods of illiquidity, we may lose profits or be prevented from earning capital gains if we cannot sell mortgage-related assets at an opportune time.

Difficulty in deploying the net proceeds from this offering or the repayments of our loans and investments may cause our financial performance and returns to investors to suffer.

In light of our investment strategy and the need to be able to deploy capital quickly to capitalize on potential investment opportunities, we may from time to time maintain cash pending deployment into investments, which may at times be significant. Such cash may be held in an account of ours for the benefit of stockholders or may be invested in money market accounts or other similar temporary investments. While the expected duration of such holding period is expected to be relatively short, in the event we are unable to find suitable investments, these cash positions may be maintained for longer periods. It is not anticipated that the temporary investment of such cash into money market accounts or other similar temporary investments pending deployment into investments will generate significant interest, and such low interest payments on the temporarily invested cash may adversely affect our financial performance and returns to investors.

Real estate valuation is inherently subjective and uncertain.

The valuation of real estate and therefore the valuation of any underlying security relating to loans and/or investments made by us is inherently subjective due to, among other factors, the

 

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individual nature of each property, its location, the expected future rental revenues from that particular property and the valuation methodology adopted. As a result, the valuations of the real estate assets against which we will make loans and/or investments are subject to a large degree of uncertainty and are made on the basis of assumptions and methodologies that may not prove to be accurate, particularly in periods of volatility, low transaction flow or restricted debt availability in the commercial or residential real estate markets.

Some of our portfolio investments may be recorded at fair value not readily available and, as a result, there will be uncertainty as to the value of these investments.

Some or all of our portfolio investments may be in the form of positions or securities that are not publicly traded. The fair value of investments that are not publicly traded may not be readily determinable. Our Manager will value these investments at fair value which may include unobservable inputs. Because such valuations are subjective, the fair value of certain of our assets may fluctuate over short periods of time and our Manager’s determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. Our results of operations and financial condition could be adversely affected if our Manager’s determinations regarding the fair value of these investments were materially higher than the values that we ultimately realize upon their disposal.

We may experience a decline in the fair value of our assets.

A decline in the fair value of our assets may require us to recognize an “other-than-temporary” impairment against such assets under GAAP if we were to determine that, with respect to any assets in unrealized loss positions, we do not have the ability and intent to hold such assets to maturity or for a period of time sufficient to allow for recovery to the original acquisition cost of such assets. If such a determination were to be made, we would recognize unrealized losses through earnings and write down the amortized cost of such assets to a new cost basis, based on the fair value of such assets on the date they are considered to be other-than-temporarily impaired. Such impairment charges reflect non-cash losses at the time of recognition; subsequent disposition or sale of such assets could further affect our future losses or gains, as they are based on the difference between the sale price received and adjusted amortized cost of such assets at the time of sale. If we experience a decline in the fair value of our assets, it could adversely affect our results of operations and financial condition.

The due diligence process that our Manager undertakes in regard to investment opportunities may not reveal all facts that may be relevant in connection with an investment and if our Manager incorrectly evaluates the risks of our loans and investments, we may experience losses.

Before making investments for us, our Manager will conduct due diligence that it deems reasonable and appropriate based on the facts and circumstances relevant to each potential investment. When conducting due diligence, our Manager may be required to evaluate important and complex business, financial, tax, accounting, environmental and legal issues. Outside consultants, legal advisors, accountants and investment banks may be involved in the due diligence process in varying degrees depending on the type of potential investment. Relying on the resources available to it, our Manager will evaluate our potential investments based on criteria it deems appropriate for the relevant investment. Our Manager’s loss estimates may not prove accurate; as actual results may vary from estimates. If our Manager underestimates the asset-level losses relative to the price we pay for a particular investment, we may experience losses with respect to such investment.

 

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Insurance on loans and real estate securities collateral may not cover all losses.

There are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes, terrorism or acts of war, which may be uninsurable or not economically insurable. Inflation, changes in building codes and ordinances, environmental considerations and other factors, including terrorism or acts of war, also might result in insurance proceeds insufficient to repair or replace a property if it is damaged or destroyed. Under these circumstances, the insurance proceeds received with respect to a property relating to one of our investments might not be adequate to restore our economic position with respect to our investment. Any uninsured loss could result in the corresponding nonperformance of or loss on our investment related to such property.

Terrorist attacks, other acts of violence or war or a prolonged economic slowdown may affect the real estate industry generally and our business, financial condition and results of operations.

We cannot predict the severity of the effect that potential future terrorist attacks would have on us. We may suffer losses as a result of the adverse impact of any future attacks and these losses may adversely impact our performance and may cause the market value of shares of our common stock to decline or be more volatile. A prolonged economic slowdown, a recession or declining real estate values could impair the performance of our investments and harm our financial condition and results of operations, increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. Losses resulting from these types of events may not be fully insurable.

The absence of affordable insurance coverage may adversely affect the general real estate lending market, lending volume and the market’s overall liquidity and may reduce the number of suitable investment opportunities available to us and the pace at which we are able to make investments. If the properties underlying our interests are unable to obtain affordable insurance coverage, the value of our interests could decline, and in the event of an uninsured loss, we could lose all or a portion of our investment.

The federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae, Freddie Mac and Ginnie Mae and the U.S. Government, may materially adversely affect our business, financial condition and results of operations.

During 2008, there were increased market concerns about Fannie Mae’s and Freddie Mac’s ability to withstand future credit losses associated with securities held in their investment portfolios, and on which they provide guarantees, without the direct support of the U.S. Government. In September 2008 Fannie Mae and Freddie Mac were placed into the conservatorship of the U.S. Federal Housing Finance Agency, or FHFA, their federal regulator, pursuant to its powers under The Federal Housing Finance Regulatory Reform Act of 2008, a part of the Housing and Economic Recovery Act of 2008. Under this conservatorship, Fannie Mae and Freddie Mac are required to reduce the amount of mortgage loans they own or for which they provide guarantees.

Shortly after Fannie Mae and Freddie Mac were placed in federal conservatorship, the Secretary of the U.S. Treasury noted that changes in the structures of the entities were necessary to reduce risk to the financial system. The future roles of Fannie Mae and Freddie Mac could be significantly reduced or eliminated or these entities could be privatized. The U.S. Treasury could also stop providing financial support for Fannie Mae and Freddie Mac in the future. These reforms could materially adversely affect our business, financial condition and results of operations.

 

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The Dodd-Frank Act and regulations implementing such legislation have had a substantial impact on the mortgage industry; these regulations, as well as new and pending regulations yet to be implemented under the Dodd-Frank Act and new and pending legislation intended to modify the Dodd-Frank Act may have an adverse impact on our business, financial condition, liquidity and results of operations.

The Dodd-Frank Act tasked many agencies with issuing a variety of new regulations, including rules related to mortgage origination, mortgage servicing, securitization transactions and derivatives. While a majority of the rulemaking requirements established by the Dodd-Frank Act have been finalized, some of the rulemakings remain in the proposal phase or have yet to be proposed. In addition, the Trump administration has called for a comprehensive review of the Dodd-Frank Act that may result in the modification or repeal of certain of its components. For example, on May 24, 2018, President Trump signed into law a financial services regulatory reform bill that received bipartisan support, the Economic Growth, Regulatory Relief, and Consumer Protection Act, or Economic Growth Act. The Economic Growth Act makes certain modifications to post-financial crisis regulatory requirements, including, among other things, improving consumer access to mortgage credit and tailoring regulations for certain bank holding companies, including raising the relevant thresholds for the application of the U.S. Federal Reserve’s enhanced prudential standards, as well as for the designation by the Financial Stability Oversight Council, or FSOC, of non-bank financial companies as systemically important. In addition, on October 31, 2018, the U.S. Federal Reserve issued a notice of proposed rulemaking that would build on the Federal Reserve’s existing tailoring of its enhanced prudential standards rules for domestic U.S. banking organizations and would be consistent with the changes from the Economic Growth Act. The comment period for such proposal ended on January 22, 2019. On April 8, 2019, the U.S. Federal Reserve issued a notice of proposed rulemaking that would revise the framework for applying the enhanced prudential standards applicable to foreign banking organizations under Section 165 of the Dodd-Frank Act, as amended by the Economic Growth Act, by, among other things, amending standards relating to liquidity, risk management, stress testing, and single-counterparty credit limits. It is not possible at this stage to predict how additional regulatory changes under the Dodd-Frank Act and new and pending legislation intended to modify the Dodd-Frank Act related to, among other things, mortgage origination, mortgage servicing, securitization transactions and derivatives will affect our business, and there can be no assurance that such new or revised rules and regulations and new and pending legislation will not have an adverse effect on our business, financial condition, liquidity and results of operations.

In addition, as required by the Dodd-Frank Act, a collection of federal agencies have adopted a joint Risk Retention Rule that generally requires the sponsor of asset-backed securities to retain not less than 5 percent of the credit risk of the assets collateralizing the securities. The rule generally prohibits the sponsor or its affiliate from directly or indirectly hedging or otherwise selling or transferring the retained credit risk for a specified period of time, depending on the type of asset that is securitized. For purposes of the rule, the term “asset-backed security” means a fixed-income or other security collateralized by any type of self-liquidating financial asset (including a loan, a lease, a mortgage, or a secured or unsecured receivable) that allows the holder of the security to receive payments that depend primarily on cash flow from the asset, including, among other things, a collateralized mortgage obligation, or CMO, or a collateralized debt obligation, or CDO. The Risk Retention Rules provide a variety of exemptions, including an exemption for asset-backed securities that are collateralized exclusively by residential mortgages that qualify as “qualified residential mortgages,” which are defined in turn as qualified mortgage loans under the Ability to Repay Rule of the Bureau of Consumer Financial Protections, or the Bureau. As part of our strategy, we may acquire target assets that are not qualified mortgage loans (such as loans made primarily for business purposes). If we sponsor the securitization of such assets, we may be required to retain 5% of the credit risk of those assets, which would expose us to loss and could increase the administrative and operational cost of asset securitization.

 

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Further, Title VII of the Dodd-Frank Act requires that certain derivative instruments be centrally cleared and executed through an exchange or other approved trading platform, which could result in increased costs in the form of intermediary fees and additional margin requirements imposed by derivatives clearing organizations and their respective clearing members.

In addition, pursuant to Title VII of the Dodd-Frank Act, the SEC, U.S. Commodity Futures Trading Commission, or CFTC, and federal prudential regulators have issued margin requirements for uncleared over-the-counter, or OTC, swaps and security-based swaps for certain regulated entities. While we expect to qualify for relief from mandatory clearing and margin requirements for uncleared swaps, given that the more nuanced application of these regulations, and those subject to it, is still evolving, there is no guarantee that such relief will continue to be available in the future. Should the margin and clearing requirements apply to us, such requirements could result in increased costs and could adversely affect our willingness to use derivatives to hedge our risks in the future and/or to amend or novate existing swaps after the date on which we are required to comply with the rules.

In addition to the Dodd-Frank Act, regulators in Europe, Asia, Canada, Australia, Switzerland and the other members of the G-20 have adopted, or have committed to adopting, local reforms pertaining to over-the-counter, or OTC, derivative contracts generally comparable with the reforms under Title VII of the Dodd-Frank Act, including margin requirements for OTC derivatives and mandatory clearing of certain contracts. In Europe, for example, the European Market Infrastructure Regulation is aimed at increasing the safety and transparency of the OTC derivatives markets and, like the Dodd-Frank Act, requires certain OTC derivative contracts to be cleared and has finalized regulatory standards addressing margin requirements for uncleared OTC derivatives between certain counterparties. While we currently qualify for an exemption from these requirements, should these global regulatory requirements apply to us, this may reduce our ability to hedge market risks with non-U.S. counterparties and may make transactions involving cross-border swaps more expensive and burdensome. Because these requirements continue to evolve and be further refined by regulators (and some of the rules are not yet final), their ultimate impact remains unclear. However, even if we are not located in a particular jurisdiction or directly subject to the jurisdiction’s derivatives regulations, we may still be impacted to the extent that we enter into a derivatives transaction with a regulated market participant or counterparty that is organized in that jurisdiction or otherwise subject to that jurisdiction’s derivatives regulations.

In addition, under the Dodd-Frank Act, financial regulators belonging to FSOC are authorized to name financial institutions that are deemed to be systemically important to the economy and which may require closer regulatory supervision. Such systemically important financial institutions, or SIFIs, may be required to operate with greater safety margins, such as higher levels of capital, and may face further limitations on their activities. The determination of what constitutes a SIFI is evolving, and in time SIFIs may include large investment funds and even asset managers. There can be no assurance that we will not be deemed to be a SIFI and thus subject to further regulation.

We expect to incur operational and system costs necessary to maintain processes to ensure compliance with the rules and regulations applicable to us as well as to monitor compliance by our business partners. Additional rules and regulations promulgated under the Dodd-Frank Act and implemented by various federal regulators and new and pending legislation intended to modify the Dodd-Frank Act provisions related to mortgage origination, mortgage servicing, securitization transactions and derivatives will likely impact the way we conduct our business and increase costs of compliance, which may have an adverse impact on our business, financial condition, liquidity and results of operations.

 

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The securitization process is subject to an evolving regulatory environment that may affect certain aspects of our current business.

As a result of the dislocation of the credit markets during the previous recession, and in anticipation of more extensive regulation, including regulations promulgated pursuant to the Dodd-Frank Act, the securitization industry has crafted and continues to craft changes to securitization practices, including changes to representations and warranties in securitization transaction documents, new underwriting guidelines and disclosure guidelines. Pursuant to the Dodd-Frank Act, various federal agencies, including the SEC, have promulgated regulations with respect to issues that affect securitizations.

As required by the Dodd-Frank Act, a collection of federal agencies have adopted a joint Risk Retention Rule that generally requires the sponsor of asset-backed securities to retain not less than 5% of the credit risk of the assets collateralizing the securities. The rule generally prohibits the sponsor or its affiliate from directly or indirectly hedging or otherwise selling or transferring the retained credit risk for a specified period of time, depending on the type of asset that is securitized. For purposes of the rule, the term “asset-backed security” means a fixed-income or other security collateralized by any type of self-liquidating financial asset (including a loan, a lease, a mortgage, or a secured or unsecured receivable) that allows the holder of the security to receive payments that depend primarily on cash flow from the asset, including, among other things, a CMO or a CDO. The Risk Retention Rules provide a variety of exemptions, including an exemption for asset-backed securities that are collateralized exclusively by residential mortgages that qualify as “qualified residential mortgages,” which are defined in turn as qualified mortgage loans under the Bureau’s Ability to Repay Rule. As part of our strategy, we may acquire target assets that are not qualified mortgage loans (such as loans made primarily for business purposes). If we sponsor the securitization of such assets, we may be required to retain 5% of the credit risk of those assets, which would expose us to loss and could increase the administrative and operational cost of asset securitization.

On February 9, 2018, a three-judge panel of the United States Court of Appeals for the District of Columbia held, in The Loan Syndications and Trading Association v. Securities and Exchange Commission and Board of Governors of the U.S. Federal Reserve System, No. 1:16-cv-0065, or the LSTA Decision, that collateral managers of “open market CLOs” (described in the LSTA Decision as CLOs where assets are acquired from “arms-length negotiations and trading on an open market”) are not “securitizers” or “sponsors” under the risk retention requirements of the Dodd-Frank Act and, therefore, are not subject to risk retention and do not have to comply with the Risk Retention Rule. In reaching this decision, the panel determined, among other things, that an asset manager that was not in the chain of title on the transferred assets could not be required to “retain” risk that it had never held. Although the LSTA Decision is limited by its terms to asset managers of open market CLOs, the court’s analysis may have broader implications with respect to compliance with the Risk Retention Rule, especially in the context of managed funds that utilize securitizations. Even though we have a Manager, we may be considered a securitizer or sponsor of securitizations, requiring us to hold risk retention in accordance with the Risk Retention Rule.

The current regulatory environment may be impacted by future legislative developments, such as amendments to key provisions of the Dodd-Frank Act, including provisions setting forth capital and risk retention requirements. In particular, the Economic Growth Act makes certain modifications to post-financial crisis regulatory requirements, including, among other things, improving consumer access to mortgage credit and tailoring regulations for certain bank holding companies, including raising the relevant thresholds for the application of the U.S. Federal Reserve’s enhanced prudential standards, as well as for the designation by the FSOC of non-bank financial companies as systemically important. While the Economic Growth Act will result in

 

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significant modifications to certain aspects of the Dodd-Frank Act and other post-financial crisis regulatory requirements, the immediate impact of the Economic Growth Act remains uncertain, as many of the provisions of the Economic Growth Act must be implemented through regulations issued by the federal regulatory agencies.

These legislative developments, and other proposed regulations affecting securitization, could alter the structure of securitizations in the future, pose additional risks to our participation in future securitizations or reduce or eliminate the economic incentives for participating in future securitizations, increase the costs associated with our origination, securitization or acquisition activities, or otherwise increase the risks or costs of our doing business.

If we were required to register with the CFTC as a Commodity Pool Operator, it could materially adversely affect our business, financial condition and results of operations.

Under Title VII of the Dodd-Frank Act, the CFTC was given jurisdiction over the regulation of swaps. Under rules implemented by the CFTC, operators of certain entities (including many mortgage REITs) may fall within the statutory definition of commodity pool operator, or CPO, and, absent an applicable exemption or other relief from the CFTC, may be required to register with the CFTC as a CPO. As a result of numerous requests for no-action relief from CPO registration, in December 2012 the CFTC’s Division of Swap Dealer and Intermediary Oversight, or DSIO, issued a no-action letter entitled “No-Action Relief from the Commodity Pool Operator Registration Requirement for Commodity Pool Operators of Certain Pooled Investment Vehicles Organized as Mortgage Real Estate Investment Trusts,” which permits a CPO to receive relief from registration requirements by filing a claim stating that the CPO meets the criteria specified in the no-action letter. We will submit a claim for relief within the required time period and believe we will meet the criteria for such relief. There can be no assurance, however, that the CFTC will not modify or withdraw the no-action letter in the future or that we will be able to satisfy the criteria specified in the no-action letter in order to qualify for relief from CPO registration. The CFTC regulations, interpretation and guidance with respect to commodity pools may be revised, which may affect our regulatory status or cause us to modify or terminate the use of commodity interests in connection with our investment program. If we were required to register as a CPO in the future or change our business model to ensure that we can continue to satisfy the requirements of the no-action relief, it could materially and adversely affect our financial condition, our results of operations and our ability to operate our business. Furthermore, we may determine to register as a CPO hereafter, and in such event we will operate in a manner designed to comply with applicable CFTC requirements, which requirements may impose additional obligations on us or our investors.

We may need to foreclose on certain of the loans and/or exercise our “foreclosure option” under the terms of our investments we originate or acquire, which could result in losses that harm our results of operations and financial condition.

We may find it necessary or desirable to foreclose on certain of the loans and/or exercise our “foreclosure option” under the terms of our investments we originate or acquire, and this process may be lengthy and expensive. We cannot assure you as to the adequacy of the protection of the terms of the applicable loan or investment, including the validity or enforceability of the loan and/or investments and the maintenance of the anticipated priority and perfection of the applicable security interests, if any. Furthermore, claims may be asserted by lenders or borrowers that might interfere with enforcement of our rights. Borrowers may resist foreclosure actions by asserting numerous claims, counterclaims and defenses against us, including, without limitation, lender liability claims and defenses, even when the assertions may have no basis in fact, in an effort to prolong the foreclosure action and seek to force the lender into a modification of the loan or a favorable buy-out of the borrower’s position in the loan. In some states, foreclosure actions can

 

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take several years or more to litigate. At any time prior to or during the foreclosure proceedings, the borrower may file for bankruptcy, which would have the effect of staying the foreclosure actions and further delaying the foreclosure process and potentially result in a reduction or discharge of a borrower’s debt. Foreclosure may create a negative public perception of the related property, resulting in a diminution of its value. Even if we are successful in foreclosing on a loan and/or investment, the liquidation proceeds upon sale of the underlying real estate may not be sufficient to recover our cost basis in the loan and/or investment, resulting in a loss to us. Furthermore, any costs or delays involved in the foreclosure of the loan and/or investment or a liquidation of the underlying property will further reduce the net proceeds and, thus, increase the loss.

Liability relating to environmental matters may impact the value of properties that we may acquire or the properties underlying our investments.

Under various U.S. federal, state and local laws, an owner or operator of real property may become liable for the costs of removal of certain hazardous substances released on its property. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances.

The presence of hazardous substances may adversely affect an owner’s ability to sell real estate or borrow using real estate as collateral. To the extent that an owner of a property underlying one of our investments becomes liable for removal costs, the ability of the owner to make payments to us may be reduced, which in turn may adversely affect the value of the relevant investment held by us and our ability to make distributions to our stockholders.

The presence of hazardous substances on a property may adversely affect our ability to sell the property upon a default and foreclosure of one of our investments and we may incur substantial remediation costs, thus harming our financial condition. The discovery of material environmental liabilities attached to such properties could have a material adverse effect on our results of operations and financial condition and our ability to make distributions to our stockholders.

We may be subject to lender liability claims, and if we are held liable under such claims, we could be subject to losses.

In recent years, a number of judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has either violated a duty, whether implied or contractual, of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or stockholders. We cannot assure prospective investors that such claims will not arise or that we will not be subject to significant liability if a claim of this type did arise.

Our ability to generate returns for our stockholders through our investment, finance and operating strategies is subject to then existing market conditions, and we may make significant changes to these strategies in response to changing market conditions.

We seek to provide attractive risk-adjusted returns to our stockholders over the long term, primarily through dividends and distributions and secondarily through capital appreciation. We intend to achieve this objective by originating, structuring and investing in our target assets. In the future, to the extent that market conditions change and we have sufficient capital to do so, we may, depending on prevailing market conditions, change our investment guidelines in response to

 

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opportunities available in different interest rate, economic and credit environments. As a result, we cannot predict the percentage of our equity that will be invested in any of our target assets at any given time.

If we fail to develop, enhance and implement strategies to adapt to changing conditions in the real estate industry and capital markets, our financial condition and results of operations may be materially and adversely affected.

The manner in which we compete and the types of assets in which we seek to invest will be affected by changing conditions resulting from sudden changes in our industry, regulatory environment, the role and structures of GSEs, the role of credit rating agencies or their rating criteria or process, or the U.S. and global economies generally. If we do not effectively respond to these changes, or if our strategies to respond to these changes are not successful, our financial condition and results of operations may be adversely affected. In addition, we may not be successful in executing our business strategies and, even if we successfully implement our business strategies, we may not ever generate revenues or profits.

Any credit ratings assigned to our loans and investments will be subject to ongoing evaluations and revisions and we cannot assure you that those ratings will not be downgraded.

Our loans and investments may be rated by rating agencies such as Moody’s Investors Service, Fitch Ratings or Standard & Poor’s. Any credit ratings on our loans and investments are subject to ongoing evaluation by credit rating agencies, and we cannot assure you that any such ratings will not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. If rating agencies assign a lower-than-expected rating or reduce or withdraw, or indicate that they may reduce or withdraw, their ratings of our loans and investments in the future, the value and liquidity of our investments could significantly decline, which would adversely affect the value of our portfolio and could result in losses upon disposition.

Some of our investments and investment opportunities may be in synthetic form.

Synthetic investments are contracts between parties whereby payments are exchanged based upon the performance of another security or asset, or “reference asset.” In addition to the risks associated with the performance of the reference asset, these synthetic interests carry the risk of the counterparty not performing its contractual obligations. Market standards, GAAP accounting methodology, regulatory oversight and compliance requirements, tax and other regulations related to these investments are evolving, and we cannot be certain that their evolution will not adversely impact the value or sustainability of these investments. Furthermore, our ability to invest in synthetic investments, other than through taxable REIT subsidiaries, or TRSs, may be severely limited by the REIT qualification requirements because synthetic investment contracts generally are not qualifying assets and do not produce qualifying income for purposes of the REIT asset and income tests.

We may invest in derivative instruments, which would subject us to increased risk of loss.

Subject to maintaining our qualification as a REIT, we may invest in derivative instruments. Derivative instruments, especially when purchased in large amounts, may not be liquid in all circumstances, so that in volatile markets we may not be able to close out a position without incurring a loss. The prices of derivative instruments, including swaps, futures, forwards and options, are highly volatile, and such instruments may subject us to significant losses. The value of such derivatives also depends upon the price of the underlying instrument or commodity. Such derivatives and other customized instruments also are subject to the risk of non-performance by

 

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the relevant counterparty. In addition, actual or implied daily limits on price fluctuations and speculative position limits on the exchanges or OTC markets in which we may conduct our transactions in derivative instruments may prevent prompt liquidation of positions, subjecting us to the potential of greater losses. Derivative instruments that may be purchased or sold by us may include instruments not traded on an exchange. The risk of nonperformance by the obligor on such an instrument may be greater, and the ease with which we can dispose of or enter into closing transactions with respect to such an instrument may be less than in the case of an exchange-traded instrument. In addition, significant disparities may exist between “bid” and “asked” prices for derivative instruments that are traded OTC and not on an exchange. Such OTC derivatives are also typically not subject to the same type of investor protections or governmental regulation as exchange-traded instruments.

In addition, we may invest in derivative instruments that are neither presently contemplated nor currently available, but which may be developed in the future, to the extent such opportunities are both consistent with our investment objectives and legally permissible. Any such investments may expose us to unique and presently indeterminate risks, the impact of which may not be capable of determination until such instruments are developed and/or we determine to make such an investment.

Rapid changes in the values of our real estate investments may make it more difficult for us to maintain our qualification as a REIT or exclusion from regulation under the Investment Company Act.

If the market value or income potential of real estate-related investments declines as a result of increased interest rates, prepayment rates or other factors, we may need to increase our real estate investments and income and/or liquidate our non-qualifying assets in order to maintain our REIT qualification or exclusion from Investment Company Act regulation. If a decline in real estate asset values and/or income occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of any non-qualifying assets that we may own. We may have to make investment decisions that we otherwise would not make absent the REIT and Investment Company Act considerations.

As a consequence of our seeking to avoid registration under the Investment Company Act on an ongoing basis, we and/or our subsidiaries may be restricted from making certain investments or may structure investments in a manner that would be less advantageous to us than would be the case in the absence of such requirements. In particular, a change in the value of any of our assets could negatively affect our ability to avoid registration under the Investment Company Act and cause the need for a restructuring of our investment portfolio. For example, these restrictions may limit our and our subsidiaries’ ability to invest directly in mortgage-backed securities that represent less than the entire ownership in a pool of senior loans, debt and equity tranches of securitizations and certain asset-backed securities, non-controlling equity interests in real estate companies or in assets not related to real estate. In addition, seeking to avoid registration under the Investment Company Act may cause us and/or our subsidiaries to acquire or hold additional assets that we might not otherwise have acquired or held or dispose of investments that we and/or our subsidiaries might not have otherwise disposed of, which could result in higher costs or lower proceeds to us than we would have paid or received if we were not seeking to comply with such requirements. Thus, avoiding registration under the Investment Company Act may hinder our ability to operate solely on the basis of maximizing profits.

There can be no assurance that we and our subsidiaries will be able to successfully avoid operating as an unregistered investment company. If it were established that we were an unregistered investment company, there would be a risk that we would be subject to monetary

 

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penalties and injunctive relief in an action brought by the SEC that we would be unable to enforce contracts with third parties, that third parties could seek to obtain rescission of transactions undertaken during the period it was established that we were an unregistered investment company, and that we would be subject to limitations on corporate leverage that would have an adverse impact on our investment returns.

If we were required to register as an investment company under the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use borrowings), management, operations, transactions with affiliated persons (as defined in the Investment Company Act) and portfolio composition, including disclosure requirements and restrictions with respect to diversification and industry concentration and other matters. Compliance with the Investment Company Act would, accordingly, limit our ability to make certain investments and require us to significantly restructure our business plan, which could materially adversely affect our ability to pay distributions to our stockholders.

We are an “emerging growth company” and a “smaller reporting company” under the federal securities laws and will be subject to reduced public company reporting requirements.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, and are eligible to take advantage of certain exemptions from, or reduced disclosure obligations relating to, various reporting requirements that are normally applicable to public companies.

We could remain an “emerging growth company” until the earliest of (1) the last day of the fiscal year following the fifth anniversary of becoming a public company, (2) the last day of the first fiscal year in which we have total annual gross revenue of $1.07 billion or more, (3) the date on which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, or the Exchange Act, (which would occur if the market value of our common stock held by non-affiliates exceeds $700 million, measured as of the last business day of our most recently completed second fiscal quarter, and we have been publicly reporting for at least 12 months) or (4) the date on which we have, during the preceding three year period, issued more than $1.0 billion in non-convertible debt. Under the JOBS Act, emerging growth companies are not required to, among others, (1) provide an auditor’s attestation report on management’s assessment of the effectiveness of internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, (2) provide certain disclosures relating to executive compensation generally required for larger public companies or (3) hold stockholder advisory votes on executive compensation. We intend to take advantage of the JOBS Act exemptions that are applicable to us. Some investors may find our common stock less attractive as a result.

Additionally, the JOBS Act provides that an “emerging growth company” may take advantage of an extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies. This means an “emerging growth company” can delay adopting certain accounting standards until such standards are otherwise applicable to private companies. We have elected to take advantage of this extended transition period. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates for such new or revised standards. We may elect to comply with public company effective dates at any time, and such election would be irrevocable pursuant to Section 107(b) of the JOBS Act.

Similarly, as a smaller reporting company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “smaller

 

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reporting companies,” including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.

Although we are an emerging growth company and smaller reporting company, the requirements of being a public company, including compliance with the reporting requirements of the Exchange Act and the requirements of the Sarbanes-Oxley Act, may strain our resources, increase our costs and place additional demands on management, and we may be unable to comply with these requirements in a timely or cost-effective manner.

As a public company with listed equity securities, we are required to comply with new laws, regulations and requirements, certain corporate governance provisions of the Sarbanes-Oxley Act, related regulations of the SEC, including compliance with the reporting requirements of the Exchange Act and the requirements of the NYSE with which we were not required to comply with as a private company. Complying with these statutes, regulations and requirements will occupy a significant amount of time of our board of directors and management and will require us to incur significant costs and expenses. As a result of becoming a public company upon the completion of the offering, we will be required in the future, to:

 

   

institute a more comprehensive compliance function;

 

   

design, establish, evaluate and maintain a system of internal controls over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board, or the PCAOB;

 

   

comply with rules promulgated by the NYSE;

 

   

prepare and distribute periodic public reports in compliance with our obligations under federal securities laws;

 

   

establish new internal policies, such as those relating to disclosure controls and procedures and insider trading;

 

   

involve and retain to a greater degree outside counsel and accountants in the above activities; and

 

   

establish an investor relations function.

If our profitability is adversely affected because of these additional costs, it could have a negative effect on the trading price of our common stock.

Our business could be adversely impacted if there are deficiencies in our disclosure controls and procedures or internal control over financial reporting.

The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations. While management will continue to review the effectiveness of our disclosure controls and procedures and internal control over financial reporting, there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. Deficiencies, including any material weakness, in our internal control over financial reporting which may occur in the future could result in misstatements of our results of operations, restatements of our financial statements, a decline in our stock price, or otherwise materially adversely affect our business, reputation, results of operations, financial condition or liquidity.

 

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We are highly dependent on information technology and security breaches or systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay dividends.

Our business is highly dependent on information technology. In the ordinary course of our business, we may store sensitive data, including our proprietary business information and that of our business partners on our networks. The secure maintenance and transmission of this information is critical to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disrupt our operations, disrupt our trading activities, or damage our reputation, which could have a material adverse effect on our financial results and negatively affect the market price of our common stock and our ability to pay dividends to stockholders.

The resources required to protect our information technology and infrastructure, and to comply with the laws and regulations related to data and privacy protection, are subject to uncertainty. Even in circumstances where we are able to successfully protect such technology and infrastructure from attacks, we may incur significant expenses in connection with our responses to such attacks. In addition, recent well-publicized security breaches have led to enhanced government and regulatory scrutiny of the measures taken by companies to protect against cyber-security attacks, and may in the future result in heightened cyber-security requirements and/or additional regulatory oversight. As cyber-security threats and government and regulatory oversight of associated risks continue to evolve, we may be required to expend additional resources to enhance or expand upon the security measures we currently maintain. Any such actions may adversely impact our results of operations and financial condition.

See “Prospectus Summary—Operating and Regulatory Structure—Investment Company Act Exclusion.”

Risks Related to our Indebtedness and Financing Strategy

Upon completion of the Formation Transaction, we will have a substantial amount of indebtedness which may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs.

Upon the closing of the Formation Transaction, we will have approximately $789 million of indebtedness outstanding related to the Initial Portfolio, excluding indebtedness relating to the portion of the CMBS that we do not own, but are required to consolidate pursuant to applicable accounting standards.

Payments of principal and interest on borrowings may leave us with insufficient cash resources to acquire additional investments or pay the dividends necessary to maintain our REIT qualification. Our level of debt and the limitations imposed on us by our debt agreements could have significant adverse consequences, including the following:

 

   

require us to dedicate a substantial portion of cash flow from operations to the payment of principal, and interest on, indebtedness, thereby reducing the funds available for other purposes;

 

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make it more difficult for us to borrow additional funds as needed or on favorable terms, which could, among other things, adversely affect our ability to meet operational needs;

 

   

force us to dispose of one or more of our investments, possibly on unfavorable terms or in violation of certain covenants to which we may be subject;

 

   

subject us to increased sensitivity to interest rate increases;

 

   

make us more vulnerable to economic downturns, adverse industry conditions or catastrophic external events;

 

   

limit our ability to withstand competitive pressures;

 

   

limit our ability to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness;

 

   

reduce our flexibility in planning for or responding to changing business, industry and economic conditions; and/or

 

   

place us at a competitive disadvantage to competitors that have relatively less debt than we have.

If any one of these events were to occur, our financial condition, results of operations, cash flow and trading price of our common stock could be adversely affected.

Any credit facilities (including term loans and revolving facilities), repurchase agreements, warehouse facilities and securitizations may impose restrictive covenants, which may restrict our flexibility to determine our operating policies and investment strategy.

We intend to enter into agreements with various counterparties to finance our operations, which may include credit facilities (including term loans and revolving facilities), repurchase agreements, warehouse facilities and securitizations. The documents that govern these agreements may contain, customary affirmative and negative covenants, including financial covenants applicable to us that may restrict our flexibility to determine our operating policies and investment strategy. In particular, these agreements may require us to maintain specified minimum levels of capacity under our credit facilities and cash. As a result, we may not be able to leverage our assets as fully as we would otherwise choose, which could reduce our return on assets. If we are unable to meet these collateral obligations, our financial condition and prospects could deteriorate significantly. In addition, lenders may require that our Manager continue to serve in such capacity. If we fail to meet or satisfy any of these covenants, we would be in default under these agreements, and our lenders could elect to declare outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral and enforce their interests against existing collateral. We may also be subject to cross-default and acceleration rights in our other debt arrangements. Further, this could also make it difficult for us to satisfy the distribution requirements necessary to maintain our qualification as a REIT for U.S. federal income tax purposes.

Inability to access funding could have a material adverse effect on our results of operations, financial condition and business.

Our ability to fund our loans and investments may be impacted by our ability to secure bank credit facilities (including term loans and revolving facilities), warehouse facilities and structured

 

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financing arrangements, public and private debt issuances and derivative instruments, in addition to transaction or asset specific funding arrangements and additional repurchase agreements on acceptable terms. We may also rely on short-term financing that would be especially exposed to changes in availability. Our access to sources of financing will depend upon a number of factors, over which we have little or no control, including:

 

   

general economic or market conditions;

 

   

the market’s view of the quality of our assets;

 

   

the market’s perception of our growth potential;

 

   

our current and potential future earnings and cash distributions; and

 

   

the market price of the shares of our common stock.

We may need to periodically access the capital markets to raise cash to fund new loans and investments. Unfavorable economic or capital market conditions may increase our funding costs, limit our access to the capital markets or could result in a decision by our potential lenders not to extend credit. An inability to successfully access the capital markets could limit our ability to grow our business and fully execute our business strategy and could decrease our earnings and liquidity. In addition, any dislocation or weakness in the capital and credit markets could adversely affect our lenders and could cause one or more of our lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing. In addition, as regulatory capital requirements imposed on our lenders are increased, they may be required to limit, or increase the cost of, financing they provide to us. In general, this could potentially increase our financing costs and reduce our liquidity or require us to sell assets at an inopportune time or price. We cannot make assurances that we will be able to obtain any additional financing on favorable terms or at all.

We are subject to counterparty risk associated with our debt obligations.

Our counterparties for critical financial relationships may include both domestic and international financial institutions. These institutions could be severely impacted by credit market turmoil, changes in legislation, allegations of civil or criminal wrongdoing and may as a result experience financial or other pressures. In addition, if a lender or counterparty files for bankruptcy or becomes insolvent, our borrowings under financing agreements with them may become subject to bankruptcy or insolvency proceedings, thus depriving us, at least temporarily, of the benefit of these assets. Such an event could restrict our access to financing and increase our cost of capital. If any of our counterparties were to limit or cease operation, it could lead to financial losses for us.

Hedging may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders.

Subject to qualifying and maintaining our qualification as a REIT, we may pursue various hedging strategies to seek to reduce our exposure to adverse changes in interest rates and fluctuations in currencies. Our hedging activity will vary in scope based on the level and volatility of interest rates, exchange rates, the type of assets held and other changing market conditions. Interest rate and currency hedging may fail to protect or could adversely affect us because, among other things:

 

   

interest rate and/or credit hedging can be expensive and may result in us generating less net income;

 

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available interest rate hedges may not correspond directly with the interest rate for which protection is sought;

 

   

due to a credit loss, prepayment or asset sale, the duration of the hedge may not match the duration of the related asset or liability;

 

   

the amount of income that a REIT may earn from hedging transactions (other than hedging transactions that satisfy certain requirements of the Code or that are done through a TRS) to offset interest rate losses is limited by U.S. federal income tax provisions governing REITs;

 

   

the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction;

 

   

the hedging counterparty owing money in the hedging transaction may default on its obligation to pay;

 

   

we may fail to recalculate, readjust and execute hedges in an efficient manner; and

 

   

legal, tax and regulatory changes could occur and may adversely affect our ability to pursue our hedging strategies and/or increase the costs of implementing such strategies.

Any hedging activity in which we engage may materially and adversely affect our results of operations and cash flows. Therefore, while we may enter into such transactions seeking to reduce risks, unanticipated changes in interest rates or credit spreads may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio positions or liabilities being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and furthermore may expose us to risk of loss.

In addition, some hedging instruments involve additional risk because they are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities. Consequently, we cannot make assurances that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in significant losses. In addition, regulatory requirements with respect to derivatives, including eligibility of counterparties, reporting, recordkeeping, exchange of margin, financial responsibility or segregation of customer funds and positions are still under development and could impact our hedging transactions and how we and our counterparty must manage such transactions.

We are subject to counterparty risk associated with our hedging activities.

We are subject to credit risk with respect to the counterparties to derivative contracts (whether a clearing corporation in the case of exchange-traded instruments or another third party in the case of OTC instruments). If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, we may experience significant delays in obtaining any recovery under the derivative contract in a dissolution, assignment for the benefit of creditors, liquidation, winding-up, bankruptcy, or other analogous proceeding. In the event of the insolvency of a counterparty to a derivative transaction, the derivative transaction

 

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would typically be terminated at its fair market value. If we are owed this fair market value in the termination of the derivative transaction and its claim is unsecured, we will be treated as a general creditor of such counterparty, and will not have any claim with respect to the underlying security. We may obtain only a limited recovery or may obtain no recovery in such circumstances. In addition, the business failure of a counterparty with whom we enter into a hedging transaction will most likely result in its default, which may result in the loss of potential future value and the loss of our hedge and force us to cover our commitments, if any, at the then current market price.

We may enter into hedging transactions that could expose us to contingent liabilities in the future.

Subject to qualifying and maintaining our qualification as a REIT, part of our investment strategy may involve entering into hedging transactions that could require us to fund cash payments in certain circumstances (such as the early termination of the hedging instrument caused by an event of default or other early termination event, or the decision by a counterparty to request margin securities it is contractually owed under the terms of the hedging instrument). The amount due with respect to an early termination would generally be equal to the unrealized loss of such open transaction positions with the respective counterparty and could also include other fees and charges. These economic losses will be reflected in our results of operations, and our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time, and the need to fund these obligations could adversely affect our results of operations and financial condition.

We may fail to qualify for, or choose not to elect, hedge accounting treatment.

We expect to account for any derivative and hedging transactions in accordance with Topic 815 of the Financial Accounting Standards Board’s Accounting Standard Codification, or Topic 815. Under these standards, we may fail to qualify for, or choose not to elect, hedge accounting treatment for a number of reasons, including if we fail to satisfy Topic 815 hedge documentation and hedge effectiveness assessment requirements or our instruments are not highly effective. If we fail to qualify for, or choose not to elect, hedge accounting treatment, our operating results may suffer because losses on the derivatives that we enter into may not be offset by a change in the fair value of the related hedged transaction or item.

Any credit facilities (including term loans and revolving facilities), repurchase agreements, warehouse facilities and securitizations that we may use to finance our assets may require us to provide additional collateral or pay down debt.

We expect to utilize credit facilities, repurchase agreements, warehouse facilities, securitizations and other forms of financing to finance our assets if they are available on acceptable terms. In the event we utilize these financing arrangements, they would involve the risk that the market value of our assets pledged or sold by us to the repurchase agreement counterparty, provider of the credit facility, lender of the warehouse facility or the securitization counterparty may decline in value, in which case the applicable creditor may require us to provide additional collateral or to repay all or a portion of the funds advanced. We may not have the funds available to repay our debt at that time, which would likely result in defaults unless we are able to raise the funds from alternative sources, which we may not be able to achieve on favorable terms or at all. Posting additional collateral would reduce our liquidity and limit our ability to leverage our assets. If we cannot meet these requirements, the applicable creditor could accelerate our indebtedness, increase the interest rate on advanced funds and terminate our ability to borrow funds from them, which could materially and adversely affect our financial condition and ability to implement our business plan. In addition, in the event that the applicable creditor files for bankruptcy or becomes

 

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insolvent, our loans may become subject to bankruptcy or insolvency proceedings, thus depriving us, at least temporarily, of the benefit of these assets. Such an event could restrict our access to credit and increase our cost of capital. The applicable creditor may also require us to maintain a certain amount of cash or set aside assets sufficient to maintain a specified liquidity position that would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose which could reduce our return on assets. In the event that we are unable to meet these collateral obligations, our financial condition and prospects could deteriorate rapidly.

If a counterparty to a repurchase agreement defaults on its obligation to resell the underlying security back to us at the end of the purchase agreement term, or if the value of the underlying asset has declined as of the end of that term, or if we default on our obligations under the repurchase agreement, we may incur losses.

Under any repurchase agreements we enter into in the future, we will sell the assets to lenders (i.e., repurchase agreement counterparties) and receive cash from the lenders. The lenders are obligated to resell the same assets back to us at the end of the term of the repurchase agreement. Because the cash that we receive from the lender when we initially sell the assets to the lender is less than the value of those assets (the difference being the “haircut”), if the lender defaults on its obligation to resell the same assets back to us, we would incur a loss on the repurchase agreement equal to the amount of the haircut (assuming there was no change in the value of the securities). We would also incur losses on a repurchase agreement if the value of the underlying assets has declined as of the end of the repurchase agreement term, because we would have to repurchase the assets for their initial value but would receive assets worth less than that amount. Further, if we default on our obligations under a repurchase agreement, the lender will be able to terminate the repurchase agreement and cease entering into any other repurchase agreements with us. In the future, any repurchase agreements we may enter into are likely to contain cross-default provisions, so that if a default occurs under any repurchase agreement, the lender can also declare a default with respect to all other repurchase agreements they have with us. If a default occurs under any of our repurchase agreements and a lender terminates one or more of its repurchase agreements, we may need to enter into replacement repurchase agreements with different lenders. There can be no assurance that we will be successful in entering into such replacement repurchase agreements on the same terms as the repurchase agreements that were terminated or at all. Any losses that we incur on our repurchase agreements could adversely affect our earnings and thus our cash available for distribution to stockholders.

Changes to, or the elimination of, LIBOR may adversely affect interest expense related to our loans and investments.

Regulators and law-enforcement agencies from a number of governments, including entities in the United States, Japan, Canada and the United Kingdom, have been conducting civil and criminal investigations into whether the banks that contributed to the British Bankers’ Association, or the BBA, in connection with the calculation of daily LIBOR may have underreported or otherwise manipulated or attempted to manipulate LIBOR. Several financial institutions have reached settlements with the CFTC, the U.S. Department of Justice Fraud Section and the U.K. Financial Services Authority in connection with investigations by such authorities into submissions made by such financial institutions to the bodies that set LIBOR and other interbank offered rates. In such settlements, such financial institutions admitted to submitting rates to the BBA that were lower than the actual rates at which such financial institutions could borrow funds from other banks. Additional investigations remain ongoing with respect to other major banks, and no assurance can be made that there will not be further admissions or findings of rate setting manipulation or that improper manipulation of LIBOR or other similar inter-bank lending rates will not occur in the future.

 

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Based on a review conducted by the Financial Conduct Authority of the U.K., or the FCA, and a consultation conducted by the European Commission, proposals have been made for governance and institutional reform, regulation, technical changes and contingency planning. In particular: (a) new legislation has been enacted in the United Kingdom pursuant to which LIBOR submissions and administration are now “regulated activities” and manipulation of LIBOR has been brought within the scope of the market abuse regime; (b) legislation has been proposed which if implemented would, among other things, alter the manner in which LIBOR is determined, compel more banks to provide LIBOR submissions, and require these submissions to be based on actual transaction data; and (c) LIBOR rates for certain currencies and maturities are no longer published daily. In addition, pursuant to authorization from the FCA, ICE Benchmark Administration Limited (formerly NYSE Euronext Rate Administration Limited), or the IBA, took over the administration of LIBOR from the BBA on February 1, 2014. Any new administrator of LIBOR may make methodological changes to the way in which LIBOR is calculated or may alter, discontinue or suspend calculation or dissemination of LIBOR.

In a speech on July 27, 2017, Andrew Bailey, the Chief Executive of the FCA, announced the FCA’s intention to cease sustaining LIBOR after 2021. The FCA has statutory powers to require panel banks to contribute to LIBOR where necessary. The FCA has decided not to ask, or to require, that panel banks continue to submit contributions to LIBOR beyond the end of 2021. The FCA has indicated that it expects that the current panel banks will voluntarily sustain LIBOR until the end of 2021. The FCA’s intention is that after 2021, it will no longer be necessary for the FCA to ask, or to require, banks to submit contributions to LIBOR. The FCA does not intend to sustain LIBOR through using its influence or legal powers beyond that date. It is possible that the IBA and the panel banks could continue to produce LIBOR on the current basis after 2021, if they are willing and able to do so, but we cannot make assurances that LIBOR will survive in its current form, or at all. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S.-dollar LIBOR with the Secured Overnight Financing Rate, or SOFR, a new index calculated by short-term repurchase agreements, backed by Treasury securities. Although there have been a few issuances utilizing SOFR or the Sterling Over Night Index Average, an alternative reference rate that is based on transactions, it is unknown whether these alternative reference rates will attain market acceptance as replacements for LIBOR.

Approximately 13% of our Initial Portfolio pays interest at a variable rate that is tied to LIBOR. If LIBOR is no longer available, our loan documents generally allow us to choose a new index based upon comparable information. However, if LIBOR is no longer available, we may need to renegotiate some of our agreements to determine a replacement index or rate of interest. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, the potential effect of any such event on our cost of capital and net investment income cannot yet be determined and any changes to benchmark interest rates could increase our financing costs, which could impact our results of operations, cash flows and the market value of our investments. In addition, the elimination of LIBOR and/or changes to another index could result in mismatches with the interest rate of investments that we are financing.

Risks Related to Our Corporate Structure

We have limited operating history as a standalone company and may not be able to operate our business successfully, find suitable investments, or generate sufficient revenue to make or sustain distributions to our stockholders.

We were organized on June 7, 2019 and have limited operating history as a standalone company. We may not be able to operate our business successfully, find suitable investments or

 

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implement our operating policies and strategies as described in this prospectus. Our ability to provide attractive risk-adjusted returns to our stockholders over the long term depends on our ability both to generate sufficient cash flow to pay an attractive dividend and to achieve capital appreciation, and we may not be able to do either. Similarly, we may not be able to generate sufficient revenue from operations to pay our operating expenses and make distributions to stockholders. The results of our operations will depend on several factors, including the availability of opportunities for the acquisition or origination of target assets, the level and volatility of interest rates, the availability of equity capital as well as adequate short- and long-term financing, conditions in the financial markets and economic conditions.

In addition, our future operating results and financial data may vary materially from the historical operating results and financial data as well as the pro forma operating results and financial data contained in this prospectus because of a number of factors. Consequently, the historical and pro forma financial statements contained in this prospectus may not be useful in assessing our likely future performance.

We depend upon key personnel of our Manager and its affiliates.

We are externally managed and therefore we do not have any internal management capacity. We will depend to a significant degree on the diligence, skill and network of business contacts of the management team and other key personnel of our Manager, including Messrs. Dondero, Goetz, Mitts, McGraner, Richards and Willmore, all of whom may be difficult to replace. We expect that our Manager will evaluate, negotiate, structure, close and monitor our loans and investments in accordance with the terms of the Management Agreement.

We will also depend upon the senior professionals of our Manager to maintain relationships with sources of potential loans and investments, and we intend to rely upon these relationships to provide us with potential investment opportunities. We cannot assure you that these individuals will continue to provide indirect investment advice to us. If these individuals, including the members of the management team of our Manager, do not maintain their existing relationships with our Manager, maintain existing relationships or develop new relationships with other sources of investment opportunities, we may not be able to grow our investment portfolio. In addition, individuals with whom the senior professionals of our Manager have relationships are not obligated to provide us with investment opportunities. Therefore, we can offer no assurance that these relationships will generate investment opportunities for us.

Our Manager will rely on our Sponsor and its affiliates to provide investment research and operational support to our Manager, including services in connection with research, due diligence of actual or potential investments, the execution of investment transactions approved by our Manager, accounting and financial reporting services and other back-office and administrative services. If our Sponsor and its affiliates do not provide these services to our Manager, there can be no assurances that our Manager would be able to find a substitute service provider with the same experience or on the same terms.

We are dependent upon our Manager and its affiliates to conduct our day-to-day operations; thus, adverse changes in their financial health or our relationship with them could cause our operations to suffer.

We are dependent on our Manager and its affiliates to manage our operations and originate, structure and manage our loans and investments. All of our investment decisions will be made by our Manager, subject to general oversight by our Manager’s investment committee and our board of directors. Any adverse changes in the financial condition of our Manager or its affiliates, or our

 

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relationship with our Manager, could hinder our Manager’s ability to successfully manage our operations and our portfolio of loans and investments, which could materially adversely affect our business, results of operations, financial condition and ability to make distributions to our stockholders.

Our Manager manages our portfolio pursuant to very broad investment guidelines and is not required to seek the approval of our board of directors for each investment, financing, asset allocation or hedging decision made by it, which may result in our making riskier investments and which could materially and adversely affect us.

Our Manager is authorized to follow very broad investment guidelines that provide it with substantial discretion in investment, financing, asset allocation and hedging decisions. Our board of directors will periodically review our investment guidelines and our portfolio but will not, and will not be required to, review and approve in advance all of our proposed investments or our Manager’s financing, asset allocation or hedging decisions. In addition, in conducting periodic reviews, our directors may rely primarily on information provided, or recommendations made, to them by our Manager or its affiliates. Subject to qualifying and maintaining our REIT qualification and our exclusion from regulation under the Investment Company Act, our Manager has significant latitude within the broad investment guidelines in determining the types of investments it makes for us, and how such investments are financed or hedged, which could result in investment returns that are substantially below expectations or losses, which could materially and adversely affect us.

We may not replicate the historical results achieved by other entities managed or sponsored by affiliates of our Manager, members of our Manager’s management team or by our Sponsor or its affiliates.

Our primary focus in making loans and investments generally differs from that of existing investment funds, accounts or other investment vehicles that are or have been managed by affiliates of our Manager, members of our Manager’s management team, our Sponsor or affiliates of our Sponsor. Past performance is not a guarantee of future results, and there can be no assurance that we will achieve comparable results of those Sponsor affiliates. In addition, investors in our common stock are not acquiring an interest in any such investment funds, accounts or other investment vehicles that are or have been managed by members of our Manager’s management team or our Sponsor or its affiliates. We also cannot assure you that we will replicate the historical results achieved by members of the management team, and we caution you that our investment returns could be substantially lower than the returns achieved by them in prior periods. Additionally, all or a portion of the prior results may have been achieved in particular market conditions which may never be repeated.

The Management Agreement may be terminated by (a) us, for cause (as defined in the Management Agreement), on 30 days’ written notice, (b) either party, without cause, with 180 days’ written notice to the other party or (c) our Manager, upon 30 days’ written notice if we materially breach the agreement. If the Management Agreement is terminated for any one of these reasons, we may not be able to find a suitable replacement, resulting in a disruption in our operations that could adversely affect our financial condition, business, and results of operations and cash flows.

The Management Agreement may be terminated by (a) us, for cause (as defined in the Management Agreement), on 30 days’ written notice, (b) either party, without cause, with 180 days’ written notice to the other party or (c) our Manager, upon 30 days’ written notice if we materially breach the agreement. If the Management Agreement is terminated and no suitable

 

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replacement is found, we may not be able to execute our business plan. In addition, the coordination of our internal management and investment activities is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by our Manager and its affiliates. Even if we are able to retain comparable management, the integration of such management and its lack of familiarity with our investment objectives may result in additional costs and time delays that may adversely affect our business, financial condition, results of operations and cash flows. Furthermore, we may incur certain costs in connection with a termination or non-renewal of the Management Agreement, including a termination fee equal to three times the Manager’s Annual Fee (unless the Management Agreement is terminated for cause).

Our Manager maintains a contractual as opposed to a fiduciary relationship with us. Our Manager’s liability is limited under the Management Agreement, and we have agreed to indemnify our Manager against certain liabilities.

Our Manager maintains a contractual as opposed to a fiduciary relationship with us. Under the terms of the Management Agreement, our Manager and its affiliates and their respective partners, members, officers, directors, employees and agents will not be liable to us (including but not limited to (1) any act or omission in connection with the conduct of our business that is determined in good faith to be in or not opposed to our best interests, (2) any act or omission based on the suggestions of certain professional advisors, (3) any act or omission by us, or (4) any mistake, negligence, misconduct or bad faith of certain brokers or other agents), unless any act or omission constitutes bad faith, fraud, willful misfeasance, intentional misconduct, gross negligence or reckless disregard of duties. We have also agreed to indemnify our Manager and its affiliates and their respective partners, members, officers, directors, employees and agents from and against any and all claims, liabilities, damages, losses, costs and expenses that are incurred and arise out of or in connection with our business or investments, or the performance by the indemnitee of its responsibilities under the Management Agreement, provided that the conduct at issue did not constitute bad faith, fraud, willful misfeasance, intentional misconduct, gross negligence or reckless disregard of duties. As a result, we could experience poor performance or losses for which our Manager would not be liable.

Under the terms of the Management Agreement, our Manager will indemnify and hold harmless us, our subsidiaries and the OP from all claims, liabilities, damages, losses, costs and expenses, including amounts paid in satisfaction of judgments, in compromises and settlements, as fines and penalties and legal or other costs and expenses of investigating or defending against any claim or alleged claim, of any nature whatsoever, known or unknown, liquidated or unliquidated, that are incurred by reason of our Manager’s bad faith, fraud, willful misfeasance, intentional misconduct, gross negligence or reckless disregard of its duties; provided, however, that our Manager will not be held responsible for any action of our board of directors in following or declining to follow any written advice or written recommendation given by our Manager. However, the aggregate maximum amount that our Manager may be liable to us pursuant to the Management Agreement will, to the extent not prohibited by law, never exceed the amount of the management fees received by our Manager under the Management Agreement prior to the date that the acts or omissions giving rise to a claim for indemnification or liability have occurred. In addition, our Manager will not be liable for special, exemplary, punitive, indirect, or consequential loss, or damage of any kind whatsoever, including without limitation lost profits. The limitations described in the preceding two sentences will not apply, however, to the extent such damages are determined in a final binding non-appealable court or arbitration proceeding to result from the bad faith, fraud, willful misfeasance, intentional misconduct, gross negligence or reckless disregard of our Manager’s duties.

 

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We may change our targeted investments without stockholder consent.

We expect our portfolio of investments will consist primarily of first mortgage loans, multifamily CMBS B-Pieces, mezzanine loans and preferred equity investments. Though this is our current target portfolio, we may make adjustments to our target portfolio based on real estate market conditions and investment opportunities, and we may change our targeted investments and investment guidelines at any time without the consent of our stockholders. Any such change could result in our making investments that are different from, and possibly riskier than, the investments described in this prospectus. These policies may change over time. A change in our targeted investments or investment guidelines, which may occur without notice to you or without your consent, may increase our exposure to interest rate risk, default risk and real estate market fluctuations, all of which could adversely affect the value of our common stock and our ability to make distributions to you. We intend to disclose any changes in our investment policies in our next required periodic report.

We will pay substantial fees and expenses to our Manager and its affiliates, which payments increase the risk that you will not earn a profit on your investment.

Pursuant to the Management Agreement, we will pay significant fees to our Manager and its affiliates. Those fees include management fees and obligations to reimburse our Manager and its affiliates for expenses they incur in connection with their providing services to us, including certain personnel services. Additionally, we will adopt a long-term incentive plan that we will use to grant awards to employees of our Manager and its affiliates. For additional information on these fees and the fees paid to our Manager, see “Management Compensation” and “Management—NexPoint Real Estate Finance, Inc. 2020 Long Term Incentive Plan.”

If we internalize our management functions, we may not achieve the perceived benefits of the internalization transaction.

In the future, the board may consider internalizing the functions performed for us by our Manager by, among other methods, acquiring our Manager’s assets. The method by which we could internalize these functions could take many forms. There is no assurance that internalizing our management functions will be beneficial to us and our stockholders. An acquisition of our Manager could result in dilution of your interests as a stockholder and could reduce earnings per share. Additionally, we may not realize the perceived benefits or we may not be able to properly integrate a new staff of managers and employees or we may not be able to effectively replicate the services provided previously by our Manager or its affiliates. Internalization transactions, including, without limitation, transactions involving the acquisition of affiliated advisors have also, in some cases, been the subject of litigation. Even if these claims are without merit, we could be forced to spend significant amounts of money defending claims which would reduce the amount of funds available for us to invest and to pay distributions. All of these factors could have a material adverse effect on our results of operations, financial condition and ability to pay distributions.

There are significant potential conflicts of interest that could affect our investment returns.

As a result of our arrangements with our Sponsor and our Manager, there may be times when our Sponsor and our Manager or their affiliated persons have interests that differ from those of our stockholders, giving rise to a conflict of interest.

Our directors and management team serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as we do, or of investment funds

 

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managed by our Manager or its affiliates. Similarly, our Manager or its affiliates may have other clients with similar, different or competing investment objectives, including NXRT. In serving in these multiple capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may not be in the best interests of us or our stockholders. For example, the management team of our Manager has, and will continue to have, management responsibilities for other investment funds, accounts or other investment vehicles managed or sponsored by our Manager and its affiliates. Our investment objectives may overlap with the investment objectives of such affiliated investment funds, accounts or other investment vehicles. As a result, those individuals may face conflicts in the allocation of investment opportunities among us and other investment funds or accounts advised by or affiliated with our Manager and its affiliates. Our Manager will seek to allocate investment opportunities among eligible accounts in a manner consistent with its allocation policy. However, we can offer no assurance that such opportunities will be allocated to us fairly or equitably in the short-term or over time. See “Conflicts of Interest.”

The recent Chapter 11 bankruptcy filing by Highland may have materially adverse consequences on our business, financial condition and results of operations.

On October 16, 2019, Highland, an affiliate of our Sponsor, filed for Chapter 11 bankruptcy protection with the United States Bankruptcy Court for the District of Delaware, or the Highland Bankruptcy. The Highland Bankruptcy stems from a potential judgment being sought against Highland relating to a financial crisis-era fund previously managed by Highland. The fund has been in liquidation since 2011. The liquidation plan, which was finalized and approved by investors and Highland in 2011, established a committee of fund investor representatives, or the Redeemer Committee, to coordinate the liquidation process. Between 2011 and 2016, Highland distributed over $1.55 billion of the approximately $1.70 billion amount to be liquidated. Then, on July 5, 2016, the Redeemer Committee filed a complaint against Highland resulting from a contract dispute over the timing of management fees and other related claims. Highland believes it acted in the interest of investors and disputes the Redeemer Committee’s claims. However, in consideration of its liquidity profile, Highland determined that it was necessary to commence the voluntary Chapter 11 proceedings. Although Highland disputes the underlying claims, entry of the judgment in its maximum potential amount could result in a judgment against Highland in an amount greater than Highland’s liquid assets. While neither our Sponsor nor our Manager were parties to the bankruptcy filing, the Highland Bankruptcy could expose our Sponsor, our Manager, our affiliates, our management and/or us to negative publicity, which might adversely affect our reputation and/or investor confidence in us, the success of this offering and/or future capital raising activities. In addition, the Highland Bankruptcy may be both time consuming and disruptive to our operations and cause significant diversion of management attention and resources which may materially and adversely affect our business, financial condition and results of operations.

The Highland Bankruptcy could create potential conflicts of interest and uncertainty related to our commercial relationship with Highland.

The implications and outcome of the Highland Bankruptcy are inherently uncertain. Mr. Dondero serves in various capacities at Highland and its affiliated entities and, due to the uncertain nature of bankruptcy proceedings and the respective parties’ objectives, Highland or Mr. Dondero may encounter potential conflicts of interests with us, including between Mr. Dondero’s duties to and interest in us and Mr. Dondero’s duties to and interests in Highland, our Sponsor and our Manager. In addition, the treatment of relationships (including as related to contractual obligations) between associated parties in bankruptcy proceedings can be uncertain and subject to the approval of the bankruptcy court, which could harm our commercial relationship with Highland.

 

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We may compete with other entities affiliated with our Manager and our Sponsor for investments.

Neither our Manager nor our Sponsor and their affiliates are prohibited from engaging, directly or indirectly, in any other business or from possessing interests in any other business ventures that compete with ours. Our Manager, our Sponsor and/or their affiliates may provide financing to similar situated investments. Our Manager and our Sponsor may face conflicts of interest when evaluating investment opportunities for us, and these conflicts of interest may have a negative impact on our ability to make attractive investments. See “Conflicts of Interest.”

Our Manager, our Sponsor and their respective affiliates, officers and employees face competing demands relating to their time, and this may cause our operating results to suffer.

Our Manager, our Sponsor and their respective affiliates, officers and employees are key personnel, general partners, sponsors, managers, owners and advisors of other real estate investment programs, including affiliate-sponsored investment products, some of which have investment objectives and legal and financial obligations similar to ours and may have other business interests as well. Because these persons have competing demands on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities. If this occurs, the returns on our investments may suffer.

Our Manager and its affiliates will face conflicts of interest, including significant conflicts created by our Manager’s compensation arrangements with us, including compensation which may be required to be paid to our Manager if our Management Agreement is terminated, which could result in actions that are not necessarily in the long-term best interests of our stockholders.

Under our Management Agreement, our Manager or its affiliates will be entitled to fees based on our “Equity.” Because performance is only one aspect of our Manager’s compensation (as a component of “Equity”), our Manager’s interests are not wholly aligned with those of our stockholders. In that regard, our Manager could be motivated to recommend riskier or more speculative investments that would entitle our Manager to a higher fee. For example, because asset management fees payable to our Manager are based in part on the amount of equity raised, our Manager may have an incentive to raise additional equity capital in order to increase its fees.

Risks Related to Our REIT Status and Other Tax Items

We intend to elect to be treated as a REIT commencing with our taxable year ending December 31, 2020. Our failure to qualify or maintain our qualification as a REIT for federal income tax purposes would reduce the amount of funds we have available for distribution and limit our ability to make distributions to our stockholders.

We believe that our organization and proposed method of operation will enable us to meet the requirements for qualification and taxation as a REIT commencing with our taxable year ending December 31, 2020. However, we cannot assure you that we will qualify and remain qualified as a REIT. In connection with this offering, we will receive an opinion from Winston & Strawn LLP that, commencing with our taxable year ending December 31, 2020, we will be organized in conformity with the requirements for qualification and taxation as a REIT under the federal income tax laws and our proposed method of operations will enable us to satisfy the requirements for qualification and taxation as a REIT under the federal income tax laws for our taxable year ending December 31, 2020 and subsequent taxable years. Investors should be aware that Winston & Strawn LLP’s opinion will be based upon customary assumptions, will be conditioned upon certain representations made by us as to factual matters, including representations regarding the

 

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nature of our assets and the conduct of our business, and is not binding upon the Internal Revenue Service, or the IRS, or any court and speaks as of the date issued. In addition, Winston & Strawn LLP’s opinion will be based on existing federal income tax law governing qualification as a REIT, which is subject to change either prospectively or retroactively. Moreover, our qualification and taxation as a REIT depend upon our ability to meet on a continuing basis, through actual annual operating results, certain qualification tests set forth in the federal tax laws. Winston & Strawn LLP will not review our compliance with those tests on a continuing basis. Accordingly, no assurance can be given that our actual results of operations for any particular taxable year will satisfy such requirements.

If we fail to qualify as a REIT in any taxable year, we will face serious tax consequences that will substantially reduce the funds available for distributions to our stockholders because:

 

   

we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to federal income tax at the corporate tax rate;

 

   

we could be subject to increased state and local taxes; and

 

   

unless we are entitled to relief under certain federal income tax laws, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT.

In addition, if we fail to qualify as a REIT, we will no longer be required to make distributions. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it would adversely affect the value of our common stock. See “Material U.S. Federal Income Tax Considerations” for a discussion of material federal income tax consequences relating to us and our common stock.

Even if we qualify as a REIT for federal income tax purposes, we may be subject to other tax liabilities that reduce our cash flow and our ability to make distributions to you.

Even if we qualify for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. In addition, our TRSs or any TRS we form will be subject to federal income tax and applicable state and local taxes on their net income. Any federal or state taxes we pay will reduce our cash available for distribution to you.

Failure to make required distributions would subject us to federal corporate income tax.

We intend to operate in a manner so as to qualify as a REIT for federal income tax purposes. In order to qualify as a REIT, we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, each year to our stockholders. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under the Code (as set forth below).

 

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To maintain our REIT qualification, we may be forced to borrow funds during unfavorable market conditions, and the unavailability of such capital on favorable terms at the desired times, or at all, may cause us to curtail our investment activities and/or to dispose of assets at inopportune times, which could adversely affect our financial condition, results of operations, cash flow and value of our common stock.

In order to qualify and maintain our qualification as a REIT, we must distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. We will be subject to U.S. federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (a) 85% of our ordinary income, (b) 95% of our capital gain net income and (c) 100% of our undistributed income from prior years. To maintain our REIT qualification and avoid the payment of federal income and excise taxes, we may need to borrow funds to meet the REIT distribution requirements, even if the then-prevailing market conditions are not favorable for these borrowings. These borrowing needs could result from differences in timing between the actual receipt of income and inclusion of income for federal income tax purposes. For example, we may be required to accrue interest and discount income on single family residential mortgage loans, CMBS B-Pieces, and other types of debt securities or interests in debt securities before we receive any payments of interest or principal on such assets. Our access to third-party sources of capital depends on a number of factors, including the market’s perception of our growth potential, our current debt levels, and our current and potential future earnings. We cannot assure you that we will have access to such capital on favorable terms at the desired times, or at all, which may cause us to curtail our investment activities and/or to dispose of assets at inopportune times, and could adversely affect our financial condition, results of operations, cash flow and the value of our common stock. Alternatively, we may make taxable in-kind distributions of our own stock, which may cause our stockholders to be required to pay income taxes with respect to such distributions in excess of any cash they receive, or we may be required to withhold taxes with respect to such distributions in excess of any cash our stockholders receive.

The failure of a mezzanine loan to qualify as a real estate asset could adversely affect our ability to qualify as a REIT.

We plan to originate mezzanine loans for which the IRS has provided a safe harbor but not rules of substantive law. Pursuant to the safe harbor, if a mezzanine loan meets certain requirements, it will be treated by the IRS as a real estate asset for purposes of the REIT asset tests, and interest derived from the mezzanine loan will be treated as qualifying mortgage interest for purposes of the REIT 75% income test. We may originate mezzanine loans that do not meet all of the requirements of this safe harbor. In the event we own a mezzanine loan that does not meet the safe harbor, the IRS could challenge such loan’s treatment as a real estate asset for purposes of the REIT asset and income tests and, if such a challenge were sustained, we could fail to qualify as a REIT.

There is a lack of clear authority governing the characterization of our mezzanine loans or preferred equity investments for REIT qualification purposes.

There is limited case law and administrative guidance addressing whether instruments similar to any mezzanine loans or preferred equity investments that we may acquire will be treated as equity or debt for U.S. federal income tax purposes. We typically do not anticipate obtaining private letter rulings from the IRS or opinions of counsel on the characterization of those investments for U.S. federal income tax purposes. If the IRS successfully recharacterizes a

 

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mezzanine loan or preferred equity investment that we have treated as debt for U.S. federal income tax purposes as equity for U.S. federal income tax purposes, we would be treated as owning the assets held by the partnership or limited liability company that issued the security and we would be treated as receiving our proportionate share of the income of the entity. There can be no assurance that such an entity will not derive nonqualifying income for purposes of the 75% or 95% gross income test or earn income that could be subject to a 100% penalty tax. Alternatively, if the IRS successfully recharacterizes a mezzanine loan or preferred equity investment that we have treated as equity for U.S. federal income tax purposes as debt for U.S. federal income tax purposes, then that investment may be treated as producing interest income that would be qualifying income for the 95% gross income test, but not for the 75% gross income test. If the IRS successfully challenges the classification of our mezzanine loans or preferred equity investments for U.S. federal income tax purposes, no assurance can be provided that we will not fail to satisfy the 75% or 95% gross income test.

The “taxable mortgage pool” rules may increase the taxes that we or our stockholders may incur, and may limit the manner in which we effect future securitizations.

Securitizations by us or our subsidiaries could result in the creation of taxable mortgage pools, or TMPs, for U.S. federal income tax purposes. As a result, we could have “excess inclusion income.” Certain categories of stockholders, such as non-U.S. stockholders eligible for treaty or other benefits, stockholders with net operating losses, and certain tax-exempt stockholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their dividend income from us that is attributable to any such excess inclusion income. In addition, to the extent that our common stock is owned by tax-exempt “disqualified organizations,” such as certain government-related entities and charitable remainder trusts that are not subject to tax on unrelated business taxable income, we may incur a corporate level tax on a portion of any excess inclusion income. Moreover, we could face limitations in selling equity interests in these securitizations to outside investors, or selling any debt securities issued in connection with these securitizations that might be considered to be equity interests for tax purposes. These limitations may prevent us from using certain techniques to maximize our returns from securitization transactions.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments.

To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually and that, at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities, stock in REITs and other qualifying real estate assets, including certain mortgage loans and certain kinds of CMBS and debt instruments of publicly offered REITs. The remainder of our investments in securities (other than government securities and REIT qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and securities that are qualifying real estate assets) can consist of the securities of any one issuer, and no more than 20% of the value of our total securities can be represented by securities of one or more TRSs. In order to meet these tests, we may be required to forego investments we might otherwise make. Thus, compliance with the REIT requirements may hinder our performance. Moreover, if we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate from our portfolio, or contribute to a TRS, otherwise attractive investments, and may be unable to pursue investments

 

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that would be otherwise advantageous to us in order to satisfy the income or asset requirements for qualifying as a REIT. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

If our OP failed to qualify as a partnership for U.S. federal income tax purposes, we would cease to qualify as a REIT.

We believe that our OP will be treated as a partnership for federal income tax purposes. As a partnership, our OP generally will not be subject to federal income tax on its income. Instead, each of its partners, including us, will be allocated, and may be required to pay tax with respect to, its share of our OP’s income. We cannot assure you, however, that the IRS will not challenge the status of our OP or any other subsidiary partnership in which we own an interest as a partnership for federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating our OP or any other such subsidiary partnership as an entity taxable as a corporation for federal income tax purposes (including by reason of being classified as a publicly traded partnership or “taxable mortgage pool” for U.S. federal income tax purposes), we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, we would likely cease to qualify as a REIT. Also, the failure of our OP or any subsidiary partnerships to qualify as a partnership could cause it to become subject to federal and state corporate income tax, which would reduce significantly the amount of cash available for debt service and for distribution to its partners, including us.

Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends.

Currently, the maximum tax rate applicable to qualified dividend income payable to U.S. stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, generally are not eligible for this reduced rate. Under the Tax Cuts and Jobs Act, or the TCJA, however, U.S. stockholders that are individuals, trusts and estates generally may deduct up to 20% of the ordinary dividends (e.g., dividends not designated as capital gain dividends or qualified dividend income) received from a REIT for taxable years beginning before January 1, 2026. Although this deduction reduces the effective U.S. federal income tax rate applicable to certain dividends paid by REITs (generally to 29.6% assuming the stockholder is subject to the 37% maximum rate), such tax rate is still higher than the tax rate applicable to corporate dividends that constitute qualified dividend income. Accordingly, investors who are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could materially and adversely affect the value of the stock of REITs, including the per share trading price of our common stock.

The share ownership restrictions of the Code for REITs and the 6.2% share ownership limit in our charter may inhibit market activity in shares of our stock and restrict our business combination opportunities.

In order to qualify as a REIT, five or fewer individuals, as defined in the Code, may not own, actually or constructively, more than 50% in value of our issued and outstanding shares of stock at any time during the last half of each taxable year, other than the first year for which a REIT election is made. Attribution rules in the Code determine if any individual or entity actually or constructively owns shares of our common stock under this requirement. Additionally, at least 100 persons must beneficially own shares of our common stock during at least 335 days of a taxable year for each taxable year, other than the first year for which a REIT election is made. To help insure that we meet these tests, among other purposes, our charter includes restrictions on the acquisition and ownership of shares of our common stock.

 

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Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary or appropriate to preserve our qualification as a REIT. Unless exempted by our board of directors (prospectively or retroactively), for so long as we qualify as a REIT, our charter provides, among other limitations on ownership and transfer of shares of our stock, that no person may beneficially or constructively own (applying certain attribution rules under the Code) more than 6.2% in value of the aggregate of the outstanding shares of our capital stock or more than 6.2% (in value or in number of shares, whichever is more restrictive) of the outstanding shares of our common stock. Our board of directors may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of the 6.2% ownership limit would result in our failing to qualify as a REIT. The board intends to grant waivers from the ownership limits to our Sponsor and its affiliates and may grant additional waivers in the future. These waivers may be subject to certain initial and ongoing conditions designed to preserve our status as a REIT. These restrictions on transferability and ownership will not apply, however, if our board of directors determines that it is no longer in our best interest to qualify as a REIT or that compliance with the restrictions is no longer required in order for us to so qualify as a REIT.

These ownership limits could delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of the stockholders.

Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities.

The REIT provisions of the Code may limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets or to offset certain other positions, if properly identified under applicable Treasury regulations, does not constitute “gross income” for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions will likely be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRSs would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in a TRS generally will not provide any tax benefit, except for being carried forward against future taxable income of such TRS.

Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on your investment.

For so long as we qualify as a REIT, our ability to dispose of assets may be restricted to a substantial extent as a result of our REIT qualification. Under applicable provisions of the Code regarding prohibited transactions by REITs, while we qualify as a REIT, we will be subject to a 100% penalty tax on any gain recognized on the sale or other disposition of any asset (other than foreclosure property) that we own or hold an interest in, directly or indirectly through any subsidiary entity, including our OP, but generally excluding TRSs, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of a trade or business. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. During such time as we qualify as a REIT, we intend to avoid the 100% prohibited transaction tax by (a) conducting activities that may otherwise be considered prohibited transactions through a TRS (but such TRS will incur corporate rate income taxes with respect to

 

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any income or gain recognized by it), (b) conducting our operations in such a manner so that no sale or other disposition of an asset we own or hold an interest in, directly or through any subsidiary, will be treated as a prohibited transaction, or (c) structuring certain dispositions to comply with the requirements of the prohibited transaction safe harbor available under the Code that, among other requirements, have been held for at least two years. No assurance can be given that any particular asset that we own or hold an interest in, directly or through any subsidiary entity, including our OP, but generally excluding TRSs, will not be treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or business.

We may be required to report taxable income for certain investments in excess of the economic income we ultimately realize from them.

We may acquire CMBS or debt instruments in the secondary market for less than their face amount. The amount of such discount will generally be treated as “market discount” for U.S. federal income tax purposes. Accrued market discount is reported as income when, and to the extent that, any payment of principal of the debt instrument is made, unless we elect to include accrued market discount in income as it accrues. Principal payments on certain loans are made monthly, and consequently accrued market discount may have to be included in income each month as if the debt instrument were assured of ultimately being collected in full. If we collect less on the debt instrument than our purchase price plus the market discount we had previously reported as income, we may not be able to benefit from any offsetting loss deductions.

Similarly, some of the CMBS that we acquire may have been issued with original issue discount. We will be required to report such original issue discount based on a constant yield method and will be taxed based on the assumption that all future projected payments due on such CMBS will be made. If such CMBS turns out not to be fully collectible, an offsetting loss deduction will become available only in the later year that uncollectability is provable. Finally, in the event that any debt instruments or CMBS acquired by us are delinquent as to mandatory principal and interest payments, or in the event payments with respect to a particular debt instrument are not made when due, we may nonetheless be required to continue to recognize the unpaid interest as taxable income as it accrues, despite doubt as to its ultimate collectability. Similarly, we may be required to accrue interest income with respect to subordinate CMBS at their stated rate regardless of whether corresponding cash payments are received or are ultimately collectable. In each case, while we would in general ultimately have an offsetting loss deduction available to us when such interest was determined to be uncollectible, the utility of that deduction could depend on our having taxable income in that later year or thereafter.

The interest apportionment rules under Treasury Regulation Section 1.856-5(c) provide that, if a mortgage is secured by both real property and other property, a REIT is required to apportion its annual interest income to the real property security based on a fraction, the numerator of which is the value of the real property securing the loan, determined when the REIT commits to acquire the loan, and the denominator of which is the highest “principal amount” of the loan during the year. In IRS Revenue Procedure 2014-51, the IRS interprets the “principal amount” of the loan to be the face amount of the loan, despite the Code requiring taxpayers to treat any market discount, that is the difference between the purchase price of the loan and its face amount, for all purposes (other than certain withholding and information reporting purposes) as interest rather than principal.

If we invest in mortgage loans to which the interest apportionment rules described above would apply and the IRS were to assert successfully that our mortgage loans were secured by property other than real estate, the interest apportionment rules applied for purposes of our REIT testing, and that the position taken in IRS Revenue Procedure 2014-51 should be applied to our portfolio, then depending upon the value of the real property securing our mortgage loans and

 

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their face amount, and the sources of our gross income generally, we may fail to meet the 75% REIT gross income test discussed under “Material U.S. Federal Income Tax Considerations—Income Tests.” If we do not meet this test, we could potentially lose our REIT qualification or be required to pay a penalty to the IRS.

The ability of the board to revoke our REIT qualification without stockholder approval may cause adverse consequences to our stockholders.

Our board may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to be a REIT, we will not be allowed a deduction for dividends paid to stockholders in computing our taxable income and will be subject to U.S. federal income tax at regular corporate rates and state and local taxes, which may have adverse consequences on our total return to our stockholders.

Legislative or other actions affecting REITs could have a negative effect on our stockholders or us.

The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive application, could materially and adversely affect our investors or us. We cannot predict how changes in the tax laws might affect our investors or us. New legislation, Treasury regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the federal income tax consequences of such qualification, or the federal income tax consequences of an investment in us. Also, the law relating to the tax treatment of other entities, or an investment in other entities, could change, making an investment in such other entities more attractive relative to an investment in a REIT.

Risks Related to the Ownership of our Common Stock

There are no established trading markets for our common stock and broad market fluctuations could negatively impact the market price of our stock.

Currently, there is no established trading market for our common stock. Our common stock has been approved for listing, subject to official notice of issuance, on the NYSE under the symbol “NREF,” to be effective upon completion of this offering. We cannot assure you that, if accepted, an active trading market for our common stock will develop after this offering or if one does develop, that it will be sustained.

Even if an active trading market develops, the market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. Some of the factors that could affect our stock price or result in fluctuations in the price or trading volume of our common stock include:

 

   

actual or anticipated variations in our quarterly operating results, financial condition, cash flow and liquidity, or changes in investment strategy or prospects;

 

   

changes in our operations or earnings estimates or publication of research reports about us or the real estate industry;

 

   

loss of a major funding source or inability to obtain new favorable funding sources in the future;

 

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our financing strategy and leverage;

 

   

actual or anticipated accounting problems;

 

   

changes in market valuations of similar companies;

 

   

increases in market interest rates that lead purchasers of our shares to demand a higher yield;

 

   

adverse market reaction to any increased indebtedness we incur in the future;

 

   

additions or departures of key management personnel;

 

   

actions by institutional stockholders;

 

   

speculation in the press or investment community;

 

   

the realization of any of the other risk factors presented in this prospectus;

 

   

the extent of investor interest in our securities;

 

   

the general reputation of REITs and the attractiveness of our equity securities in comparison to other equity securities, including securities issued by other real estate-based companies;

 

   

our underlying asset value;

 

   

investor confidence and price and volume fluctuations in the stock and bond markets, generally;

 

   

changes in laws, regulatory policies or tax guidelines, or interpretations thereof, particularly with respect to REITs;

 

   

future equity issuances by us, or share resales by our stockholders, or the perception that such issuances or resales may occur;

 

   

failure to meet income estimates;

 

   

failure to meet and maintain REIT qualifications or exclusion from Investment Company Act regulation or listing on the NYSE; and

 

   

general market and economic conditions.

In the past, class-action litigation has often been instituted against companies following periods of volatility in the price of their common stock. This type of litigation could result in substantial costs and divert our management’s attention and resources, which could have an adverse effect on our financial condition, results of operations, cash flow and trading price of our common stock.

The form, timing and/or amount of dividend distributions in future periods may vary and be impacted by economic and other considerations.

The form, timing and/or amount of dividend distributions will be declared at the discretion of the board and will depend on actual cash from operations, our financial condition, capital

 

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requirements, the annual distribution requirements under the REIT provisions of the Code and other factors as the board may consider relevant. The board may modify our dividend policy from time to time.

We may be unable to make distributions at expected levels, which could result in a decrease in the market price of our common stock.

If sufficient cash is not available for distribution from our operations, we may have to fund distributions from working capital, borrow to provide funds for such distributions, reduce the amount of such distributions, or issue stock dividends. To the extent we borrow to fund distributions, our future interest costs would increase, thereby reducing our earnings and cash available for distribution from what they otherwise would have been. If cash available for distribution generated by our assets is less than we expect, our inability to make the expected distributions could result in a decrease in the market price of our common stock. In addition, if we make stock dividends in lieu of cash distributions it may have a dilutive effect on the holdings of our stockholders.

All distributions will be made at the discretion of the board and will be based upon, among other factors, our historical and projected results of operations, financial condition, cash flows and liquidity, maintenance of our REIT qualification and other tax considerations, and other expense obligations, debt covenants, contractual prohibitions or other limitations and applicable law and such other matters as the board may deem relevant from time to time. We may not be able to make distributions in the future, and our inability to make distributions, or to make distributions at expected levels, could result in a decrease in the market price of our common stock.

Our charter permits the board to issue stock with terms that may subordinate the rights of our common stockholders or discourage a third party from acquiring us in a manner that could otherwise result in a premium price to our stockholders.

The board may classify or reclassify any unissued shares of common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms or conditions of redemption of any such stock. Thus, the board could authorize the issuance of preferred stock with terms and conditions that could have priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Such preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price to holders of our common stock.

Future issuances of debt securities and equity securities may negatively affect the market price of shares of our common stock and, in the case of equity securities, may be dilutive to owners of our common stock and could reduce the overall value of your investment.

In the future, we may issue debt or equity securities or incur other financial obligations, including stock dividends and shares that may be issued in exchange for common stock. Upon liquidation, holders of our debt securities and other loans and preferred stock will receive a distribution of our available assets before common stockholders. We are not required to offer any such additional debt or equity securities to stockholders on a preemptive basis. Therefore, additional common stock issuances, directly or through convertible or exchangeable securities (including common stock and convertible preferred stock), warrants or options, will dilute the holdings of our existing common stockholders and such issuances or the perception of such issuances may reduce the market price of shares of our common stock. Any convertible preferred

 

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stock would have, and any series or class of our preferred stock would likely have, a preference on distribution payments, periodically or upon liquidation, which could eliminate or otherwise limit our ability to make distributions to common stockholders.

Holders of shares of our common stock do not have preemptive rights to any shares we issue in the future. Our charter authorizes us to issue 600,000,000 shares of capital stock, of which 500,000,000 shares may be shares of common stock and 100,000,000 shares may be shares of preferred stock. The board may increase the number of authorized shares of capital stock without stockholder approval. After this offering, the board may elect to (1) sell additional shares in future public offerings; (2) issue equity interests in private offerings; (3) issue shares of our common stock under a long-term incentive plan to our non-employee directors or to employees of our Manager or its affiliates; (4) issue shares to our Manager, its successors or assigns, in payment of an outstanding fee obligation or as consideration in a related-party transaction; or (5) issue shares of our common stock in connection with a redemption of limited partnership interests of our OP. To the extent we issue additional equity interests after this offering, your percentage ownership interest in us will be diluted. Further, depending upon the terms of such transactions, most notably the offering price per share, holders of shares of our common stock may also experience a dilution in the book value of their investment in us.

Common stock eligible for future sale may have adverse effects on our share price.

We are offering 5,000,000 shares of our common stock as described in this prospectus (excluding the underwriters’ overallotment option to purchase up to an additional 750,000 shares).

We cannot predict the effect, if any, of future sales of our common stock, or the availability of shares for future sales, on the market price of our common stock.

Sales of substantial amounts of common stock or the perception that such sales could occur may adversely affect the prevailing market price for our common stock.

After the completion of this offering, we may issue additional shares in subsequent public offerings or private placements to make new investments or for other purposes. We are not required to offer any such shares to stockholders on a preemptive basis. Therefore, it may not be possible for stockholders to participate in such future share issuances, which may dilute the such stockholders’ interests in us.

Our rights and the rights of our stockholders to recover claims against our directors and officers are limited by Maryland law and our organizational documents, which could reduce your and our recovery against them if they cause us to incur losses.

Maryland law provides that a director has no liability in the capacity as a director if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. As permitted by the Maryland General Corporation Law, or the MGCL, our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:

 

   

actual receipt of an improper benefit or profit in money, property or services; or

 

   

a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.

 

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In addition, our charter and our bylaws require us to indemnify our directors and officers for actions taken by them in those capacities and, without requiring a preliminary determination of the ultimate entitlement to indemnification, to pay or reimburse their reasonable expenses in advance of final disposition of a proceeding to the maximum extent permitted by Maryland law.

In connection with the offering, we will enter into indemnification agreements with each of our directors and executive officers that provide for indemnification to the maximum extent permitted by Maryland law.

As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist under common law. Accordingly, in the event that actions taken by any of our directors or officers are immune or exculpated from, or indemnified against, liability but which impede our performance, our stockholders’ ability to recover damages from that director or officer will be limited.

Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Circuit Court of Baltimore City, Maryland, will be the sole and exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (a) any derivative action or proceeding brought on our behalf other than actions arising under the federal securities laws, (b) any action asserting a claim of breach of any duty owed by any of our directors or officers or other employees to us or to our stockholders, (c) any action asserting a claim against us or any of our directors or officers or other employees arising pursuant to any provision of the MGCL or our charter or bylaws or (d) any action asserting a claim against us or any of our directors or officers or other employees that is governed by the internal affairs doctrine shall be, in each case, the Circuit Court for Baltimore City, Maryland, or, if that Court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division.

The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. It could also increase costs to bring a claim. Alternatively, if a court were to find the choice of forum provision contained in our bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.

Our charter and bylaws contain provisions that may delay, defer or prevent an acquisition of our common stock or a change in control.

Our charter and bylaws contain a number of provisions, the exercise or existence of which could delay, defer or prevent a transaction or a change in control that might involve a premium price for our stockholders or otherwise be in their best interests, including the following:

 

   

Our Charter Contains Restrictions on the Ownership and Transfer of Our Stock. In order for us to qualify, and elect to be taxed, as a REIT, no more than 50% of the value of outstanding shares of our stock may be owned, beneficially or constructively, by five or fewer individuals at any time during the last half of each taxable year other than the first year for which we elect to be taxed as a REIT. Subject to certain exceptions, our charter provides

 

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that no stockholder may beneficially or constructively own more than 6.2% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our common stock, or more than 6.2% in value of the aggregate of the outstanding shares of all shares of our capital stock. We refer to these restrictions collectively as the “ownership limits.” The constructive ownership rules under the Code are complex and may cause the outstanding stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than 6.2% of our outstanding shares of common stock or the outstanding shares of all classes or series of our stock by an individual or entity could cause that individual or entity or another individual or entity to own constructively in excess of the relevant ownership limits. Our charter also provides that no person may own shares of our stock that would result in our being “closely held” under Section 856(h) of the Code or otherwise cause us to fail to qualify as a REIT. Any attempt to own or transfer shares of our common stock or of any of our other capital stock in violation of these restrictions may result in the shares being automatically transferred to a charitable trust or may be void. These ownership limits may prevent a third party from acquiring control of us if the board does not grant an exemption from the ownership limits, even if our stockholders believe the change in control is in their best interests. The board intends to grant waivers from the ownership limits applicable to holders of our common stock to our Sponsor and its affiliates and may grant additional waivers in the future. These waivers may be subject to certain initial and ongoing conditions designed to preserve our status as a REIT.

 

   

The Board Has the Power to Cause Us to Issue Additional Shares of Our Stock without Stockholder Approval. Our charter authorizes us to issue additional authorized but unissued shares of common or preferred stock. In addition, the board may, without stockholder approval, amend our charter to increase the aggregate number of shares of our common stock or the number of shares of stock of any class or series that we have authority to issue and classify or reclassify any unissued shares of common or preferred stock and set the preferences, rights and other terms of the classified or reclassified shares. As a result, the board may establish a series of shares of common or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for our shares of common stock or otherwise be in the best interests of our stockholders. See “Description of Capital Stock—Power to Increase or Decrease Authorized Shares of Stock, Reclassify Unissued Shares of Stock and Issue Additional Shares of Common and Preferred Stock.”

Certain provisions of Maryland law may limit the ability of a third party to acquire control of us.

Certain provisions of the MGCL may have the effect of inhibiting a third party from acquiring us or of impeding a change of control under circumstances that otherwise could provide our common stockholders with the opportunity to realize a premium over the then-prevailing market price of such shares.

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 our outstanding shares of voting stock or an affiliate or associate of the corporation who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding stock of the corporation), or an affiliate of any such interested stockholder, are prohibited for five years after the most recent date on which such interested stockholder becomes an interested

 

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stockholder. Thereafter any such business combination must be generally recommended by the board of directors of the corporation and approved by the affirmative vote of at least (a) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation and (b) 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 who will (or whose affiliate will) be a party to the business combination or held by an affiliate or associate of the interested stockholder. These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by our board of directors prior to the time that someone becomes an interested stockholder or comply with certain fair price requirements set forth in the MGCL.

The MGCL provides that holders of “control shares” of our Company acquired in a “control share acquisition” (defined as the direct or indirect acquisition of issued and outstanding “control shares”, subject to certain exceptions) have no voting rights with respect to such shares except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all of the votes entitled to be cast on the matter, excluding all interested shares (defined as shares of the corporation that any of the following persons is entitled to exercise, or direct the exercise of, the voting power in the election of directors: an acquiring person, an officer of the corporation or an employee of the corporation who is also a director of the corporation).

“Control shares” are voting shares of stock that, 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:

 

   

one-tenth or more but less than one-third;

 

   

one-third or more but less than a majority; or

 

   

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, shares acquired directly from the corporation or shares acquired in a merger, consolidation or statutory share exchange if the corporation is a party to the transaction or acquisitions approved or exempted by the charter or bylaws of the corporation.

Pursuant to the Maryland Business Combination Act, and in connection with the completion of this offering, we expect that our board will by resolution exempt from the provisions of the Maryland Business Combination Act all business combinations (1) between our Manager or its respective affiliates and us and (2) between any other person and us, provided that such business combination is first approved by the board (including a majority of our directors who are not affiliates or associates of such person). Our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions by any person of shares of our stock. There can be no assurance that these exemptions or resolutions will not be amended or eliminated at any time in the future.

Additionally, Title 3, 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, without stockholder approval and regardless of what is currently provided in its charter or bylaws, to implement any or all of the following takeover defenses:

 

   

a classified board;

 

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a two-thirds vote requirement for removing a director;

 

   

a requirement that the number of directors be fixed only by vote of the board of directors;

 

   

a requirement that a vacancy on the board be filled only by the remaining directors in office and (if the board is classified) for the remainder of the full term of the class of directors in which the vacancy occurred; and

 

   

a majority requirement for the calling of a stockholder-requested special meeting of stockholders.

Through provisions in our charter and bylaws unrelated to Subtitle 8, we already (a) vest in the board the exclusive power to fix the number of directorships (b) require a vacancy on our board to be filled only by the remaining directors in office, even if the remaining directors do not constitute a quorum and (c) require, unless called by our chairman of the board, our chief executive officer, our president or the board, the written request of stockholders entitled to cast a majority of all of the votes entitled to be cast at such a meeting to call a special meeting. If we made an election to be subject to the provisions of Subtitle 8 relating to a classified board, our board would automatically be classified into three classes with staggered terms of office of three years each. In such instance, the classification and staggered terms of office of the directors would make it more difficult for a third party to gain control of the board since at least two annual meetings of stockholders, instead of one, generally would be required to effect a change in the majority of the directors.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are subject to risks and uncertainties. In particular, statements relating to our business and investment strategies, plans or intentions, our use of proceeds, our liquidity and capital resources, our performance and results of operations contain forward-looking statements. Furthermore, all of the statements regarding future financial performance (including market conditions) are forward-looking statements. We caution investors that any forward-looking statements presented in this prospectus are based on management’s beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “would,” “result,” the negative version of these words and similar expressions that do not relate solely to historical matters are intended to identify forward-looking statements.

Forward-looking statements are subject to risks, uncertainties and assumptions and may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you against relying on any of these forward-looking statements.

Some of the risks and uncertainties that may cause our actual results, performance, liquidity or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

 

   

Our loans and investments expose us to risks similar to and associated with debt-oriented real estate investments generally.

 

   

Commercial real estate-related investments that are secured, directly or indirectly, by real property are subject to delinquency, foreclosure and loss, which could result in losses to us.

 

   

Fluctuations in interest rate and credit spreads, which may not be adequately protected or protected at all, by our hedging strategies, could reduce our ability to generate income on our loans and other investments, which could lead to a significant decrease in our results of operations, cash flows and the market value of our investments.

 

   

Our loans and investments will be concentrated in terms of geography, asset types and sponsors upon completion of the formation transaction and may continue to be so in the future.

 

   

Upon the completion of the formation transaction, we will have a substantial amount of indebtedness which may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs.

 

   

We have limited operating history as a standalone company and may not be able to operate our business successfully, find suitable investments, or generate sufficient revenue to make or sustain distributions to our stockholders.

 

   

We are dependent upon our Manager and its affiliates to conduct our day-to-day operations; thus, adverse changes in their financial health or our relationship with them could cause our operations to suffer.

 

   

We may not replicate the historical results achieved by other entities managed or sponsored by affiliates of our Sponsor, members of our Manager’s management team or their affiliates.

 

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Our Manager and its affiliates will face conflicts of interest, including significant conflicts created by our Manager’s compensation arrangements with us, including compensation which may be required to be paid to our Manager if our management agreement is terminated, which could result in decisions that are not in the best interests of our stockholders.

 

   

We will pay substantial fees and expenses to our Manager and its affiliates, which payments increase the risk that you will not earn a profit on your investment.

 

   

If we fail to qualify as a REIT for U.S. federal income tax purposes, cash available for distributions to be paid to you could decrease materially, which would limit our ability to make distributions to our stockholders.

 

   

Any of the other risks included in this prospectus, including those set forth under the heading “Risk Factors.”

 

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USE OF PROCEEDS

We estimate that the net proceeds we will receive from this offering will be approximately $90.6 million after deducting underwriting discounts and commissions of $6.7 million and estimated offering expenses of approximately $2.8 million (or, if the underwriters exercise their overallotment option of 750,000 additional shares of common stock in full, approximately $104.6 million after deducting underwriting discounts and commissions of $7.7 million and estimated offering expenses of approximately $2.8 million).

We intend to contribute the net proceeds from this offering to our OP in exchange for limited partnership interests in the OP and our OP intends to contribute the net proceeds from this offering to our subsidiary partnerships for limited partnership interests in the subsidiary partnerships. Pursuant to the terms of the OP’s limited partnership agreement, the OP will contribute the net proceeds in an amount equal to 28.0% to its first subsidiary partnership, 39.3% to its second subsidiary partnership and 32.7% to its third subsidiary partnership and will own approximately 26.4% of each of the subsidiary partnerships (assuming the underwriters do not exercise their option to purchase additional shares).

Our subsidiary partnerships intend to use the net proceeds from this offering to repay the amount that will be outstanding under the $95 million Bridge Facility. In connection with the Formation Transaction, we, through our subsidiaries, will enter into the Bridge Facility with Key Bank, National Association, as lender, and the entities that will contribute the CMBS B-Pieces to us in the Formation Transaction, as co-borrowers. We will guarantee the Bridge Facility and the obligations under the Bridge Facility will be secured by the CMBS B-Pieces that we will own following the Formation Transaction. The co-borrowers will use the proceeds from the Bridge Facility to repay the indebtedness outstanding on the CMBS B-Pieces that they will contribute to us in the Formation Transaction. The Bridge Facility will bear interest at a rate of one-month LIBOR plus 1.75% and will mature 30 days after we enter into it. In addition, a 0.1% commitment fee will be incurred in connection with entering into the Bridge Facility.

The remainder of the net proceeds will be used to acquire investments that fit within our investment strategy.

Pending these applications, the OP and our subsidiary partnerships may invest the net proceeds from this offering in interest bearing accounts and short term, interest bearing securities or in any other manner that is consistent with our intention to qualify for taxation as a REIT and maintain our exclusion from registration under the Investment Company Act.

 

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DISTRIBUTION POLICY

Our Policy

Following the completion of this offering, we intend to make regular quarterly distributions to our stockholders, consistent with our intention to qualify as a REIT for U.S. federal income tax purposes. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its REIT taxable income. As a result, in order to satisfy the requirements for us to qualify as a REIT and generally not be subject to U.S. federal income and excise tax, we intend to make regular quarterly distributions of all or substantially all of our REIT taxable income to our stockholders out of assets legally available therefor. REIT taxable income as computed for purposes of the foregoing tax rules will not necessarily correspond to our net income as determined for financial reporting purposes.

Distributions to our stockholders, if any, will be authorized by our board of directors in its sole discretion out of funds legally available therefor and will be dependent upon a number of factors, including our historical and projected results of operations, cash flows and financial condition, any financing covenants, the annual distribution requirements under the REIT provisions of the Code, our REIT taxable income, applicable provisions of the MGCL and such other factors as our board of directors deems relevant. Our results of operations, liquidity and financial condition will be affected by various factors, including the amount of our net interest income, our operating expenses and any other expenditures.

To the extent that our cash available for distribution is less than the amount required to be distributed under the REIT provisions of the Code, we may be required to fund distributions from working capital or through equity, equity-related or debt financings or, in certain circumstances, asset sales, as to which our ability to consummate transactions in a timely manner on favorable terms, or at all, cannot be assured. In addition, we may choose to make a portion of a required distribution in the form of a taxable stock dividend to preserve our cash balance.

Currently, we have no intention to use any net proceeds from this offering to make distributions to our stockholders or to make distributions to our stockholders using shares of our stock.

Distributions to our stockholders, if any, will be generally taxable to them as ordinary income, although a portion of our distributions may be designated by us as capital gain or qualified dividend income, or may constitute a return of capital. We will furnish annually to each of our stockholders a statement setting forth the amount of distributions paid during the preceding year and their characterization as ordinary income, return of capital, qualified dividend income or capital gain.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2019:

 

  (1)

on an actual basis;

 

  (2)

on a pro forma basis to give effect to the Formation Transaction and entry into the Bridge Facility; and

 

  (3)

on a pro forma as adjusted basis to give effect to (2) above and the sale of shares of common stock in this offering at an assumed initial public offering price of $20.00 per share, the midpoint of the range set forth on the cover of this prospectus, and after deducting underwriting discounts and commissions and estimated fees and expenses payable by us and giving effect to the use of proceeds described herein.

You should read the following table in conjunction with “Use of Proceeds,” “Selected Historical and Pro Forma Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our Financial Statements and accompanying notes thereto and our Unaudited Pro Forma Consolidated Financial Statements and accompanying notes thereto included elsewhere in this prospectus.

 

     As of December 31, 2019  
     Actual      Pro Forma      Pro Forma As
Adjusted (1)
 
     (unaudited)  

Cash and cash equivalents

   $ 10.00      $ 301,791      $ 301,791  
  

 

 

    

 

 

    

 

 

 

Debt:

                                          

Notes, net

            788,942,764        788,942,764  

Bonds payable held in VIEs, at fair value

            1,656,105,104        1,656,105,104  

Bridge Facility

            95,000,000        4,400,000  

Total Debt

            2,540,047,868        2,449,447,868  

Stockholders’ equity:

        

Preferred stock, par value $0.01; 100 shares authorized and no shares outstanding on an actual basis and a pro forma basis and 100,000,000 shares authorized and no shares outstanding on a pro forma as adjusted basis

                    

Common stock, par value $0.01; 900 shares authorized and 10 shares outstanding on an actual basis and a pro forma basis and 500,000,000 shares authorized and 5,000,000 shares outstanding on a pro forma as adjusted basis

                   50,000  

Additional paid-in capital (2)

     10.00        10.00        90,550,000  

Accumulated deficit

                    

Accumulated other comprehensive loss

                    
  

 

 

    

 

 

    

 

 

 

Total stockholders’ equity

   $ 10.00      $ 10.00      $ 90,600,000  
  

 

 

    

 

 

    

 

 

 

Total capitalization

   $ 10.00      $ 2,540,047,878      $ 2,540,047,868  
  

 

 

    

 

 

    

 

 

 

 

(1)

Assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and the underwriters do not exercise their option to purchase additional shares, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, (i) a $1.00 increase in the assumed initial public offering price of $20.00 per share, the midpoint of the range set forth on the cover of this prospectus, would decrease bridge facility debt by $4.4 million, increase cash and cash equivalents by $267,500, increase total stockholders’ equity by $4.7 million and increase total capitalization by $267,500 and (ii) a $1.00 decrease in the assumed initial public offering price of $20.00 per share, the midpoint of the range set forth on the cover of this prospectus, would increase bridge facility debt by $4.7 million, decrease total stockholders’ equity by $4.7 million and have no effect on total capitalization.

(2)

In connection with the offering, the Company will repurchase the 10 shares of common stock outstanding from the sole stockholder.

 

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SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

The following table sets forth our selected financial information as of December 31, 2019, that has been derived from our historical audited balance sheet as of that date and the accompanying notes included elsewhere in this prospectus. We have limited operating history and no investments at this time.

The following selected financial information is only a summary and is qualified by reference to, and should be read in conjunction with, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited balance sheet as of December 31, 2019 and accompanying notes, each of which are included elsewhere in this prospectus.

 

      December 31, 2019   
ASSETS   

Cash and cash equivalents

   $ 10  
  

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Stockholders’ Equity:

  

Preferred stock, $0.01 par value: 100 shares authorized; 0 shares issued

      

Common stock, $0.01 par value: 900 shares authorized; 10 shares issued and outstanding

      

Additional paid-in capital

     10  
  

 

 

 

Total Stockholders’ Equity

   $ 10  
  

 

 

 

The following table sets forth our selected pro forma financial and operating data. The selected pro forma financial and operating data has been derived from our Unaudited Pro Forma Consolidated Financial Statements included elsewhere in this prospectus. Our management believes the assumptions underlying our Unaudited Pro Forma Consolidated Financial Statements and accompanying notes are reasonable. However, our Unaudited Pro Forma Consolidated Financial Statements may not necessarily reflect our financial condition and results of operations in the future or what they would have been had we been a separate, stand-alone company during the periods presented. The results of operations presented for interim periods are not necessarily representative of operations for the entire year.

 

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The following selected pro forma financial and operating data is only a summary and is qualified by reference to, and should be read in conjunction with, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our Unaudited Pro Forma Consolidated Financial Statements and accompanying notes, each of which are included elsewhere in this prospectus.

 

     Pro Forma NREF  
     For the Year Ended
December 31, 2019
 
(dollars in thousands)    (unaudited)  

Operating Data:

  

Net interest income

  

Interest income from loans

   $ 37,276  

Interest expense

     19,558  
  

 

 

 

Total net interest income

   $ 17,718  
  

 

 

 

Other income

  

Change in net assets related to consolidated CMBS variable interest entities

   $ 10,592  

Dividend income

     5,350  
  

 

 

 

Total other income

   $ 15,942  
  

 

 

 

Operating expenses

  

General and administrative expenses

      

Loan servicing fees

     4,790  

Management fees

      
  

 

 

 

Total operating expenses

   $ 4,790  
  

 

 

 

Net income

     28,870  

Net income attributable to redeemable noncontrolling interests

     28,870  
  

 

 

 

Net income attributable to common stockholders

   $  
  

 

 

 

 

(dollars in thousands)

   Pro Forma NREF  
   As of
December 31, 2019
 
   (unaudited)  

Balance Sheet Data:

  

Total assets

   $ 2,792,749  

Total liabilities

     2,445,048  

Redeemable noncontrolling interests

     347,701  

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a newly formed commercial real estate company incorporated in Maryland on June 7, 2019. Our strategy is to originate, structure and invest in first mortgage loans, mezzanine loans, preferred equity and alternative structured financings in commercial real estate properties, as well as multifamily CMBS securitizations. We will primarily focus on investments in real estate sectors where our senior management team has operating expertise, including in the multifamily, SFR, self-storage, hospitality and office sectors predominantly in the top 50 MSAs. In addition, we will primarily focus on lending or investing in properties that are stabilized or have a light-transitional business plan.

Our primary investment objective is to generate attractive, risk-adjusted returns for stockholders over the long term, primarily through dividends and secondarily through capital appreciation. We will seek to employ a flexible and relative value focused investment strategy and expect to re-allocate capital periodically among our target investment classes. We believe this flexibility will enable us to efficiently manage risk and deliver attractive risk-adjusted returns under a variety of market conditions and economic cycles.

We will be externally managed by our Manager, a subsidiary of our Sponsor, an SEC-registered investment advisor, which has extensive real estate experience, having completed as of September 30, 2019 approximately $9.0 billion of gross real estate transactions since the beginning of 2012. In addition, our Sponsor, together with its affiliates, including NexBank, is one of the most experienced global alternative credit managers managing approximately $13.3 billion of loans and debt or credit related investments as of September 30, 2019 and has managed credit investments for over 25 years. We believe our relationship with our Sponsor benefits us by providing access to resources including research capabilities, an extensive relationship network, other proprietary information, scalability, a vast wealth of knowledge of information on real estate in our target assets and sectors and sourcing of investments by NexBank.

Substantially all of our assets will be owned directly or indirectly through the OP. Upon the completion of this offering, we will hold all of the limited partnership interests in our OP.

We intend to elect to be treated as a REIT for U.S. federal income tax purposes beginning with our taxable year ending December 31, 2020. We also intend to operate our business in a manner that will permit us to maintain one or more exclusions or exemptions from registration under the Investment Company Act.

Factors Impacting Our Operating Results

We expect that our results of operations will be affected by a number of factors and will primarily depend on, among other things, the level of our net interest income, the market value of our assets and the supply of, and demand for, our target assets in the marketplace. We expect to invest, directly or indirectly, principally in our target assets, earning the spread between the yield on our assets and the cost of our borrowings and economic hedging activities. Our net interest income includes the actual interest payments we receive on our first mortgage loans, mezzanine loans, preferred equity and alternative structured financing, as well as CMBS securitizations and is also impacted by the amortization of purchase premiums and accretion of purchase discounts. Changes in various factors such as prepayment speeds, estimated future cash flows and credit quality could impact the amount of premium to be amortized or discount to be accreted into

 

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interest income for a given period. Interest rates and prepayment rates vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. Our operating results may also be impacted by credit losses in excess of initial expectations or unanticipated credit events experienced by borrowers whose mortgage loans are included in our CMBS B-Pieces or that are held directly by us.

The following sets forth what we believe to be the most significant factors that could impact our results:

Changes in Fair Value of our Assets. We will report the financial assets and liabilities of each CMBS trust that we consolidate at fair value using the measurement alternative included in Accounting Standards Codification, or ASC, 810, Consolidation. Pursuant to ASC 810, we will measure both the financial assets and financial liabilities of the CMBS trusts we consolidate using the fair value of the financial liabilities, which we consider more observable than the fair value of the financial assets. As a result, we will present the CMBS issued by the consolidated trusts, but not beneficially owned by us, as financial liabilities in our consolidated financial statements, measured at their estimated fair value; we will measure the financial assets as the total estimated fair value of the CMBS issued by the consolidated trusts, regardless of whether such CMBS represent interests beneficially owned by us. Under the measurement alternative prescribed by ASC 810, our “Net income (loss)” will reflect the economic interests in the consolidated CMBS beneficially owned by us, presented as “Change in net assets related to consolidated CMBS variable interest entities” in our consolidated statements of operations, which will include applicable (1) changes in the fair value of CMBS beneficially owned by us, (2) interest income, interest expense and servicing fees earned from the CMBS trusts and (3) other residual returns or losses of the CMBS trusts, if any.

Changes in Market Interest Rates. With respect to our proposed business operations, increases in interest rates, in general, may over time cause: (1) the interest expense associated with our borrowings to increase; (2) the value of our fixed rate investments to decline; (3) the coupons on our variable rate investments to reset, although on a delayed basis, to higher interest rates; (4) prepayments on our investments to decrease; and (5) to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to increase. Conversely, decreases in interest rates, in general, may over time cause: (A) the interest expense associated with our borrowings to decrease; (B) the value of our fixed rate investments to increase; (C) coupons on our variable rate investments to reset, although on a delayed basis, to lower interest rates; (D) prepayments on our investments to increase, and (E) to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to decrease.

Prepayment Rates. The value of our securities collateralized by mortgage loans may be affected by prepayment rates on the underlying mortgage loans. If we acquire mortgage loans or mortgage related securities, we anticipate that the mortgage loans or the underlying mortgages will prepay at a projected rate generating an expected yield. If we purchase assets at a premium to the par or principal balance of the security or loans, when borrowers prepay their mortgage loans faster than expected, the corresponding prepayments on the mortgage-related securities may reduce the expected yield on such securities because we will have to amortize the related premium on an accelerated basis. Conversely, if we purchase assets at a discount to either the principal balance of the loans or loans underlying the securities, when borrowers prepay their mortgage loans slower than expected, the decrease in corresponding prepayments on the mortgage-related securities may reduce the expected yield on such securities because we will not be able to accrete the related discount as quickly as originally anticipated. Prepayment rates may be affected by a number of factors including, but not limited to, the availability of mortgage credit, the relative economic vitality of the area in which the related properties are located, the servicing of the

 

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mortgage loans, possible changes in tax laws, changes in market interest rates, other opportunities for investment, homeowner mobility and other economic, social, geographic, demographic and legal factors, none of which can be predicted with any certainty.

Credit Risk. We will be subject to the risk of potential credit losses on our assets. We will seek to mitigate credit losses by utilizing a comprehensive underwriting, diligence and investment selection process and by ongoing monitoring of our investments. However, unanticipated credit losses may occur that could adversely impact our results of operations.

Net Interest Spread. The spread between the yield on our assets and our funding costs will affect the performance of our business. Wider spreads imply greater income on new asset purchases but may have a negative impact on our equity by negatively impacting prices on our existing assets. In an environment where market spreads are widening, counterparties may require additional collateral to secure our borrowings, which may require us to reduce leverage by selling assets. Conversely, tighter market spreads imply lower income on new asset purchases, but may have a positive impact on the value of our existing assets. As market spreads tighten, we may be able to reduce the amount of collateral required to secure borrowings.

Extension Risk. Our Manager will compute the projected weighted-average life of our assets based on assumptions regarding the rate at which borrowers will prepay underlying mortgages. In general, when we acquire an asset, we may, but are not required to, enter into an interest rate swap agreement or other hedging instrument that effectively fixes all or a portion of our borrowing costs for a period close to the anticipated average life of the related assets. This strategy is designed to protect us from rising interest rates.

If prepayment rates decrease in a rising interest rate environment, however, the life of the related assets could extend beyond the term of the swap agreement or other hedging instrument. This longer than expected life of the related asset could have a negative impact on our results of operations, as borrowing costs would no longer be fixed after the end of the swap agreement while the income earned would remain fixed. This situation may also cause the market value of our investments to decline, with little or no offsetting gain from the related hedging transactions. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.

Size of Investment Portfolio. The size of our investment portfolio, as measured by the aggregate unpaid principal balance of our mortgage loans and mortgage-backed securities and the other real estate related assets we own, will be a key revenue driver. Generally, as the size of our investment portfolio grows, the amount of interest income we receive will increase. The larger investment portfolio, however, will drive increased expenses to the extent that we incur additional interest expense to finance the purchase of our assets.

Critical Accounting Polices and the Use of Estimates

Critical Accounting Estimates

The preparation of our consolidated financial statements in conformity with GAAP, requires us to make estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties. Our most critical accounting policies will involve decisions and assessments that could affect the reported amounts of assets, liabilities, and disclosure of contingent assets and liabilities at the date of our consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We believe, however, that all of the decisions and assessments upon which

 

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our consolidated financial statements will be based will be reasonable at the time made, based upon information available to us at that time, and subject to well controlled processes and reviews. Our critical accounting policies and accounting estimates will be expanded over time as we fully implement our business strategy. The material accounting policies and estimates that we initially expect to be most critical to an investor’s understanding of our financial results and condition and require complex management judgment are discussed below.

Consolidation

The Company conducts its operations through the OP, which will act as the general partner of the subsidiary partnerships that own the investments through limited liability companies that are SPEs. The Company consolidates the OP as, following the completion of the Formation Transaction, the Company will be the sole limited partner in the OP, will have 100% of the limited partnerships interests in the OP and will have the ability to remove the general partner of the OP with or without cause. The Company consolidates the SPEs that it controls as well as any VIEs where it is the primary beneficiary. All of the investments the SPEs own are consolidated in the pro forma financial statements. Generally, the assets of each entity can only be used to settle obligations of that particular entity, and the creditors of each entity have no recourse to the assets of other entities or the Company notwithstanding equity pledges various lenders may have in certain entities.

Variable Interest Entities (VIEs)

The analysis as to whether to consolidate an entity is subject to a significant amount of judgment. Some of the criteria considered are the determination as to the degree of control over an entity by its various equity holders, the design of the entity, how closely related the entity is to each of its equity holders, the relation of the equity holders to each other and a determination of the primary beneficiary in entities in which we have a variable interest. These analyses involve estimates, based on our assumptions, as well as judgments regarding significance and the design of entities.

Variable interest entities (“VIEs”) are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, and only by its primary beneficiary, which is defined as the party who has the power to direct the activities of a VIE that most significantly impact its economic performance and who has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

In accordance with GAAP, the Company determines whether it must consolidate transferred financial assets and VIEs for financial reporting purposes. The Company consolidates those entities for which (1) it controls significant operating, financial and investing decisions of the entity or (2) management determines that the Company is the primary beneficiary of the entities deemed to be VIEs. The Company consolidates the trusts that issue beneficial ownership interests in mortgage loans secured by commercial real estate (commonly known as CMBS) when the Company holds a variable interest in, and management considers the Company to be the primary beneficiary of, those trusts. Management believes the performance of the assets that underlie CMBS issuances most significantly impacts the economic performance of the trust, and the primary beneficiary is generally the entity that conducts activities that most significantly impact the performance of the underlying assets. In particular, the most subordinate tranches of CMBS expose the holder to greater variability of economic performance when compared to more senior tranches since the subordinate tranches absorb a disproportionately higher amount of the credit

 

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risk related to the underlying assets. Generally, a trust designates the most junior subordinate tranche outstanding as the controlling class, which entitles the holder of the controlling class to unilaterally appoint and remove the special servicer for the trust. For the CMBS that the Company consolidates, the Company holds the most subordinate tranche of the securities issued by the trusts which include the controlling class, and has the ability to remove and replace the special servicer. For financial reporting purposes, the underlying mortgage loans held by the trusts are recorded as a separate line item on the balance sheet under “Mortgage loans held in variable interest entities, at fair value”. The liabilities of the trusts consist solely of obligations to the CMBS holders of the consolidated trusts, excluding the CMBS held by the Company as these are eliminated in consolidation along with the accrued interest thereon. The liabilities are presented as “Bonds payable held in variable interest entities, at fair value” on the pro forma consolidated balance sheet.

Interest Income Recognition

Loans held-for-investment, available-for-sale securities, mortgage loans from the consolidated CMBS entities and debt securities held-to-maturity where the Company expects to collect the contractual interest and principal payments are considered to be performing loans. The Company recognizes income on performing loans in accordance with the terms of the loan on an accrual basis. Interest income also includes amortization of loan premiums or discounts and initial direct loan origination costs. We will expense origination discount for loans acquired but not originated by us as incurred.

Income Taxes

In connection with this offering, we intend to elect to qualify as a REIT under the Code, commencing with our taxable year ending December 31, 2020. We believe that our organization and proposed method of operation will enable us to meet the requirements for qualification and taxation as a REIT. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding net capital gains) to our stockholders. So long as we qualify as a REIT, we generally will not be subject to federal income tax on our REIT taxable income we currently distribute to our stockholders.

If we fail to qualify as a REIT in any taxable year, we will be subject to federal corporate income tax. Even if we qualify for taxation as a REIT, we may be subject to some federal, state and local taxes on our income or property. In addition, the income of any TRS that we own will be subject to regular federal corporate income tax. See “Material U.S. Federal Income Tax Considerations.”

The dividends paid deduction of a REIT for qualifying dividends paid to its stockholders is computed using its REIT taxable income as opposed to net income reported on the financial statements. REIT taxable income, generally, will differ from net income reported on the financial statements because the determination of REIT taxable income is based on tax provisions and not financial accounting principles.

We may elect to treat certain of our subsidiaries as TRSs. In general, a TRS of ours may hold assets and engage in activities that we cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business. A TRS is subject to U.S. federal and applicable state and local corporate income taxes. Our REIT financial results are generally not expected to reflect provisions for current or deferred income taxes except to the extent attributable to a TRS.

 

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Income generated by a TRS generally will not be included in our income, except to the extent the TRS makes a dividend distribution to us. If we receive a dividend from a TRS, such amount will be included in our income and taken into account in determining whether we have met the REIT distribution requirements. If a TRS retains its earnings, we will not be required to distribute such income to our stockholders and can increase book equity of the consolidated entity.

Allowance for Loan Losses

We will perform a quarterly evaluation of loans classified as held-for-investment for impairment on a loan-by-loan basis. If we deem that it is probable that we will be unable to collect all amounts owed according to the contractual terms of a loan, impairment of that loan is indicated. If we consider a loan to be impaired, we will establish an allowance for loan losses, through a valuation provision in earnings that reduces carrying value of the loan to the present value of expected future cash flows discounted at the loan’s contractual effective rate or the fair value of the collateral, if repayment is expected solely from the collateral. Significant judgment is required in determining impairment and in estimating the resulting loss allowance, and actual losses, if any, could materially differ from those estimates.

We will perform a quarterly review of our portfolio. In conjunction with this review, we will assess the risk factors of each loan, including, without limitation, loan-to-value ratio, debt yield, property type, geographic and local market dynamics, physical condition, collateral, cash flow volatility, leasing and tenant profile, loan structure and exit plan and project sponsorship. Based on a 5-point scale, our loans are rated “1” through “5,” from least risk to greatest risk, respectively, which ratings are defined as follows:

1- Outperform—Materially exceeds performance metrics (for example, technical milestones, occupancy, rents, net operating income) included in original or current credit underwriting and business plan;

2- Exceeds Expectations—Collateral performance exceeds substantially all performance metrics included in original or current underwriting / business plan;

3- Satisfactory—Collateral performance meets or is on track to meet underwriting; business plan is met or can reasonably be achieved;

4- Underperformance—Collateral performance falls short of original underwriting, material differences exist from business plan, or both; technical milestones have been missed; defaults may exist, or may soon occur absent material improvement; and

5- Risk of Impairment/Default—Collateral performance is significantly worse than underwriting; major variance from business plan; loan covenants or technical milestones have been breached; timely exit from loan via sale or refinancing is questionable.

We will regularly evaluate the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral, as well as the financial and operating capability of the borrower. Specifically, the collateral’s operating results and any cash reserves are analyzed and used to assess (i) whether cash from operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan and/or (iii) the collateral’s liquidation value. We also evaluate the financial condition of any loan guarantors as well as the borrower’s competency in managing and operating the collateral. In addition, we consider the overall economic environment, real estate or industry sector and geographic sub-market in which the borrower operates. Such impairment analyses are completed

 

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and reviewed by asset management and finance personnel who utilize various data sources, including (i) periodic financial data such as property operating statements, occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, and capitalization and discount rates, (ii) site inspections and (iii) current credit spreads and discussions with market participants.

We will consider loans to be past due when a monthly payment is due and unpaid for 60 days or more. Loans will be placed on nonaccrual status and considered non-performing when full payment of principal and interest is in doubt, which generally occurs when they become 120 days or more past due unless the loan is both well secured and in the process of collection. Accrual of interest on individual loans is discontinued when management believes that, after considering economic and business conditions and collection efforts, the borrower’s financial condition is such that collection of interest is doubtful. Our policy is to stop accruing interest when a loan’s delinquency exceeds 120 days. All interest accrued but not collected for loans that are placed on nonaccrual status or subsequently charged-off are reversed against interest income. Income is subsequently recognized on the cash basis until, in management’s judgment, the borrower’s ability to make periodic principal and interest payments returns and future payments are reasonably assured, in which case the loan is returned to accrual status.

For individual loans, a troubled debt restructuring is a formal restructuring of a loan where, for economic or legal reasons related to the borrower’s financial difficulties, a concession that would not otherwise be considered is granted to the borrower. The concession may be granted in various forms, including providing a below-market interest rate, a reduction in the loan balance or accrued interest, an extension of the maturity date, or a combination of these. An individual loan that has had a troubled debt restructuring is considered to be impaired and is subject to the relevant accounting for impaired loans.

A loan is written off when it is no longer realizable and/or it is legally discharged.

We will evaluate acquired loans and debt securities for which it is probable at acquisition that all contractually required payments will not be collected in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.

Other-Than-Temporary Impairment

Debt securities held to maturity will be evaluated on a quarterly basis, and more frequently when triggering events or market conditions warrant such an evaluation, to determine whether declines in their value are other-than-temporary. To determine whether a loss in value is other-than-temporary, we will utilize criteria including, the reasons underlying the decline, the magnitude and duration of the decline (greater or less than twelve months) and whether or not we intend to sell or expect that it is more likely than not that we will be required to sell the investment prior to an anticipated recovery of the carrying value. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment.

In the event that the fair value of debt securities held-to-maturity is less than amortized cost, we will consider whether the unrealized holding loss represents an other-than-temporary impairment, or OTTI. If we do not expect to recover the carrying value of the preferred interest held-to-maturity based on future expected cash flows, an OTTI exists and we will reduce the carrying value by the impairment amount, recognize the portion of the impairment related to credit factors in earnings and the portion of the impairment related to other factors in accumulated other comprehensive income.

 

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Fair Value

We will account for our mortgage loans held and bonds payable in variable interest entities, which constitute our CMBS B-Piece investments, at fair value using the measurement alternative for collateralized financing entities in ASC 810. As such, these assets and liabilities will be carried on our consolidated balance sheets at their estimated fair value and changes in the fair values of these assets and liabilities are recorded in our consolidated statements of operations in the period in which the valuation change occurs. Periodic fluctuations in the values of these assets and liabilities are inherently volatile and thus can lead to significant period-to-period GAAP earnings volatility.

The fair value of each of the CMBS B-Pieces is tied to the loans underlying such CMBS and is affected by, among other things, changes in interest rates, credit performance, repayments, and market liquidity. To the extent interest rates change or market liquidity and or credit conditions materially change, the value of these loans could decline, which could have a material effect on reported earnings.

Additionally, we expect to account for our JCAP preferred stock as a debt security held to maturity which results in recording our investment at amortized cost and measured for impairment on a quarterly basis. While this asset will not reflect quarterly changes in fair value being recorded in earnings, fair value measurements must be derived and discloses as further discussed below.

The SFR Loans, mezzanine debt and preferred equity investments will be accounted for as loans held for investment, which results in being held at cost and measured for impairment on a quarterly basis. While these assets will not reflect quarterly changes in fair value being recorded in earnings, fair value measurements must be derived and disclosed as further discussed below.

Financial Instruments Not Carried at Fair Value

The fair values of cash, accrued interest and dividends, accounts payable and other accrued liabilities and accrued interest payable approximated their carrying values because of the short term nature of these instruments. The estimated fair values of other financial instruments were determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company would realize on the disposition of the financial instruments. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts.

Long-term indebtedness is carried at amounts that reasonably approximate their fair value. In calculating the fair value of its long-term indebtedness, the Company used interest rate and spread assumptions that reflect current credit worthiness and market conditions available for the issuance of long-term debt with similar terms and remaining maturities. These financial instruments utilize Level 2 inputs.

General—GAAP requires the categorization of the fair value of financial instruments into three broad levels that form a hierarchy based on the transparency of inputs to the valuation.

 

Level 1 —   Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

 

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Level 2 —   Inputs are other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability.
Level 3 —   Inputs are unobservable for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

We will follow this hierarchy for our financial instruments. Classifications will be based on the lowest level of input that is significant to the fair value measurement. We will review the valuation of Level 3 financial instruments as part of our quarterly process.

Valuation of Consolidated VIEs—We will report the financial assets and liabilities of each CMBS trust that we consolidate at fair value using the measurement alternative included in Accounting Standards Codification, or ASC, 810, Consolidation. Pursuant to ASC 820, we will measure both the financial assets and financial liabilities of the CMBS trusts we consolidate using the fair value of the financial liabilities, which we consider more observable than the fair value of the financial assets. As a result, we will present the CMBS issued by the consolidated trusts, but not beneficially owned by us, as financial liabilities in our consolidated financial statements, measured at their estimated fair value; we will measure the financial assets as the total estimated fair value of the CMBS issued by the consolidated trust, regardless of whether such CMBS represent interests beneficially owned by us. Under the measurement alternative prescribed by ASC 810, our “Net income (loss)” will reflect the economic interests in the consolidated CMBS beneficially owned by us, presented as “Change in net assets related to consolidated CMBS variable interest entities” in our consolidated statements of operations, which will include applicable (1) changes in the fair value of CMBS beneficially owned by us, (2) interest income, interest expense and servicing fees earned from the CMBS trusts and (3) other residual returns or losses of the CMBS trusts, if any.

Other Valuation Matters—For Level 3 financial assets originated, or otherwise acquired, and financial liabilities assumed during the calendar month immediately preceding a quarter end that were conducted in an orderly transaction with an unrelated party, we generally believe that the transaction price provides the most observable indication of fair value given the illiquid nature of these financial instruments, unless we are aware of any circumstances that may cause a material change in the fair value through the remainder of the reporting period. For instance, significant changes to the underlying property or its planned operations may cause material changes in the fair value of senior loans acquired, or originated, by us.

Our determination of fair value will be based upon the best information available for a given circumstance and may incorporate assumptions that are our best estimates after consideration of a variety of internal and external factors. When an independent valuation firm expresses an opinion on the fair value of a financial instrument in the form of a range, we select a value within the range provided by the independent valuation firm, generally the midpoint, to assess the reasonableness of our estimated fair value for that financial instrument.

Valuation Methodologies

CMBS Trusts—The financial liabilities of the consolidated CMBS trusts will be valued using broker quotes. Broker quotes represent the price that the financial liabilities could be sold for in a market transaction and represent fair market value. Loans and bonds with quotes that are based on actual trades with a sufficient level of activity on or near the valuation date are classified as Level 2 assets. Loans and bonds that are priced using quotes derived from implied values, bid/ask prices for trades that were never consummated, or a limited amount of actual trades are classified as

 

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Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable.

Preferred Equity Investments, Preferred Stock and Mezzanine Loans—We will categorize our preferred equity, preferred stock and mezzanine loan investments as Level 3 assets in the fair value hierarchy. Preferred equity, preferred stock and mezzanine loan investments will be valued using a discounted cash flow model using discount rates derived from observable market data applied to the internal rate of return implied by the expected contractual cash flows. On a quarterly basis, we will engage an independent valuation firm to express an opinion on the fair value of our preferred equity, preferred stock and mezzanine loan investments in the form of a range based upon the unpaid principal balance of the security. We will select a value within the range provided by the independent valuation firm, generally the midpoint, to assess the reasonableness of the fair value, as determined by us, of the security. In the event that our estimate of fair value differs from the opinion of fair value provided by the independent valuation firm, we will ultimately rely solely upon the valuation prepared by the investment personnel of our Manager.

The fair values of the CMBS not beneficially owned by us will not impact our net assets or the net income attributable to our common stockholders.

Repurchase Agreements—We will generally consider our repurchase agreements Level 3 liabilities in the fair value hierarchy as such liabilities represent borrowings on illiquid collateral with terms specific to each borrower. Given the short to moderate term of the floating-rate facilities, we generally expect the fair value of our repurchase agreements to approximate their outstanding principal balances. On a quarterly basis, we will engage an independent valuation firm to express an opinion on the fair value of our repurchase agreements using a market-based methodology to assess the reasonableness of the fair value, as determined by us, of the repurchase agreement.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis—Certain assets not measured at fair value on an ongoing basis but that are subject to fair value adjustments only in certain circumstances, such as when there is evidence of impairment, will be measured at fair value on a nonrecurring basis. For first mortgage loans, mezzanine loans and preferred equity investments, we will apply the amortized cost method of accounting, but may be required, from time to time, to record a nonrecurring fair value adjustment in the form of a provision for loan loss or other-than-temporary impairment.

Results of Operations

As of the date of this prospectus, we have not commenced operations other than the organization of our company. We will not complete the Formation Transaction until immediately prior to the completion of this offering. Therefore, we have no results of operations to disclose. For pro forma financial information relating to our Initial Portfolio, see “Selected Historical and Pro Forma Financial and Operating Data” and our “Unaudited Pro Forma Consolidated Financial Statements” included elsewhere in the prospectus.

Liquidity and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders and other general business needs. We will use significant cash to purchase our target assets, repay principal and interest on our borrowings, make distributions to our stockholders and fund our operations.

 

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While we generally intend to hold our target assets as long-term investments, certain of our investments may be sold in order to manage our interest rate risk and liquidity needs, meet other operating objectives and adapt to market conditions. The timing and impact of future sales of our investments, if any, cannot be predicted with any certainty.

We believe our sources of funds discussed further below will be adequate for purposes of meeting our short-term (within one year) liquidity and long-term liquidity needs. However, our ability to meet our long-term liquidity and capital resource requirements may require additional financing. If we are unable to obtain or renew our sources of financing or unable to obtain them on attractive terms, it may have an adverse effect on our business and results of operations.

Sources of Liquidity

Our primary source of cash will generally consist of cash generated from our operating results and the following:

Repurchase Agreements

From time to time, we may enter into repurchase agreements to finance the acquisition of our target assets. Repurchase agreements will effectively allow us to borrow against loans and securities that we own in an amount equal to (1) the market value of such loans and/or securities multiplied by (2) the applicable advance rate. Under these agreements, we will sell our loans and securities to a counterparty and agree to repurchase the same loans and securities from the counterparty at a price equal to the original sales price plus an interest factor. During the term of a repurchase agreement, we will receive the principal and interest on the related loans and securities and pay interest to the lender under the repurchase agreement. At any point in time, the amounts and the cost of our repurchase borrowings will be based upon the assets being financed. For example, higher risk assets will result in lower advance rates (i.e., levels of leverage) at higher borrowing costs. In addition, these facilities may include various financial covenants and limited recourse guarantees.

Bridge Facility

In connection with the Formation Transaction, we, through our subsidiaries, will enter into a $95 million bridge facility with Key Bank, National Association, as lender, and the entities that will contribute the CMBS B-Pieces to us in the Formation Transaction, as co-borrowers (the “Bridge Facility”). We will guarantee the Bridge Facility and the obligations under the Bridge Facility will be secured by the CMBS B-Pieces that we will own following the Formation Transaction. The co-borrowers will use the proceeds from the Bridge Facility to repay the indebtedness outstanding on the CMBS B-Pieces that they will contribute to us in the Formation Transaction.

Freddie Mac Credit Facility

Following the Formation Transaction, we will have indebtedness equal to 85% of the value of our senior pooled mortgage loans under a credit facility with Freddie Mac.

Following the Formation Transaction, two of our subsidiaries will be a party to a loan and security agreement that was entered into on July 12, 2019 with Freddie Mac, or the Credit Facility. Under the Credit Facility, these entities borrowed approximately $788.9 million in connection with their acquisition of senior pooled mortgage loans backed by SFR properties, or the Underlying Loans, that will be part of our Initial Portfolio following the Formation Transaction. No additional borrowings can be made under the Credit Facility. Our obligations under the Credit Facility will be secured by the Underlying Loans.

 

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Our borrowings under the Credit Facility will mature on July 12, 2029, or the Credit Facility Maturity Date. However, if an Underlying Loan matures prior to the Credit Facility Maturity Date, we will be required to repay the portion of the Credit Facility that is allocated to that loan. The portion of the Credit Facility that is allocated to a specific loan is generally equal to 85% of the original purchase price of the loan.

The Credit Facility bears interests at a fixed rate for fixed rate Underlying Loans. The weighted average interest rate for the fixed rate portion of the Credit Facility is 2.44% per annum. Interest on the Credit Facility will be paid monthly in cash in arrears on the 25th day of each month.

The Credit Facility contains a number of customary covenants that, among other things, restrict the ability of our subsidiaries that are a party to the agreement to grant liens, engage in mergers or the sale of substantially all of their assets, sell or dispose of the Underlying Loans and undertake transactions with affiliates.

Contractual Obligations and Commitments

We have no contractual obligations as of the date of this prospectus. Prior to the completion of this offering, we will enter into the Management Agreement with our Manager that will be effective upon closing of this offering. Pursuant to the Management Agreement, our Manager will be entitled to receive a management fee, the reimbursement of certain expenses and, in certain circumstances, a fee upon termination. See “Business—Management Agreement” and “Management Compensation.”

We expect to enter into certain contracts that may contain a variety of indemnification obligations, principally with brokers, underwriters and counterparties to repurchase agreements.

Off-Balance Sheet Arrangements

As of the date of this prospectus, we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment or intent to provide additional funding to any such entities.

Dividends

We intend to make regular quarterly distributions to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, determined without regard to the dividends paid deduction and excluding net capital gains, and that it pay regular U.S. federal income tax to the extent that it annually distributes less than 100% of its REIT taxable income (determined without regard to the dividends paid deduction and including net capital gains). We intend to pay regular quarterly dividends to our stockholders in an amount equal to our REIT taxable income, if and to the extent authorized by our board of directors. If our cash available for distribution is less than our REIT taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or a distribution of debt securities. In addition, prior to the time we have fully used the net proceeds of this offering to acquire our other assets, we may fund our quarterly distributions out of such proceeds.

 

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Inflation

Virtually all of our assets and liabilities will be interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and our distributions will be determined by our board of directors consistent with our obligation to distribute to our stockholders at least 90% of our REIT taxable income on an annual basis in order to maintain our REIT qualification; in each case, our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.

Quantitative and Qualitative Disclosures About Market Risk

We seek to manage our risks related to the credit quality of our assets, interest rates, liquidity, prepayment rates and market value, while at the same time seeking to provide an opportunity for our stockholders to realize attractive risk-adjusted returns. While risks are inherent in any business enterprise, we seek to quantify and justify risks in light of available returns and to maintain capital levels consistent with the risks we undertake.

Credit Risk

Our loans and investments are subject to credit risk, including the risk of default. The performance and value of our loans and investments depend upon the ability of the sponsor or homeowner to pay interest and principal due to us. To monitor this risk, our Manager will use active asset surveillance to evaluate collateral pool performance and will proactively manage positions.

Credit Yield Risk

Credit yields measure the return demanded on financial instruments by the lending market based on their risk of default. Increasing supply of credit-sensitive financial instruments and reduced demand will generally cause the market to require a higher yield on such financial instruments, resulting in a lower price for the financial instruments we hold.

Interest Rate Risk

Generally, the composition of our investments is such that rising interest rates will increase our net income, while declining interest rates will decrease net income. If interest rates were to decline, the value of our fixed-rate investments may increase and if interest rates were to increase, the value of these fixed-rate investments may decrease; however, the interest income generated by these investments would not be affected by market interest rates. Further, the interest rates we pay under repurchase agreements may be variable. Accordingly, our interest expense would generally increase as interest rates increase and decrease and interest rates decrease.

Prepayment Risk

Prepayment risk is the risk that principal will be repaid at a different rate than anticipated, causing the return on certain investments to be less than expected. As we receive prepayments of principal on our assets, any premiums paid on such assets are amortized against interest income. In general, an increase in prepayment rates accelerates the amortization of purchase premiums, thereby reducing the interest income earned on the assets. Conversely, discounts on such assets are accreted into interest income. In general, an increase in prepayment rates accelerates the accretion of purchase discounts, thereby increasing the interest income earned on the assets.

 

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Financing Risk

We may finance our target assets with borrowed funds under repurchase agreements and other credit facilities. Over time, as market conditions change, we may use other forms of leverage in addition to these methods of financing. Weakness or volatility in the financial markets, the commercial real estate and mortgage markets and the economy generally could adversely affect one or more of our lenders or potential lenders and could cause one or more of our lenders or potential lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing.

Real Estate Risk

The market values of commercial mortgage assets are subject to volatility and may be adversely affected by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loans, which could also cause us to suffer losses.

 

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BUSINESS

Our Company

We are a newly formed commercial real estate finance company. Our strategy is to originate, structure and invest in first mortgage loans, mezzanine loans, preferred equity and alternative structured financings in commercial real estate properties, as well as multifamily commercial mortgage backed securities, or CMBS, securitizations, or collectively our target assets. We will primarily focus on investments in real estate sectors where our senior management team has operating expertise, including in the multifamily, single-family rental, or SFR, self-storage, hospitality and office sectors predominantly in the top 50 metropolitan statistical areas, or MSAs. In addition, we will primarily focus on lending or investing in properties that are stabilized or have a “light-transitional” business plan, meaning a property that requires limited deferred funding primarily to support leasing or ramp-up of operations and for which most capital expenditures are for value-add improvements.

Our primary investment objective is to generate attractive, risk-adjusted returns for stockholders over the long term, primarily through dividends and secondarily through capital appreciation. We will seek to employ a flexible and relative value focused investment strategy and expect to re-allocate capital periodically among our target investment classes. We believe this flexibility will enable us to efficiently manage risk and deliver attractive risk-adjusted returns under a variety of market conditions and economic cycles.

We will be externally managed by our Manager, a subsidiary of our Sponsor, an SEC-registered investment advisor, which has extensive real estate experience, having completed as of September 30, 2019 $9.0 billion of gross real estate transactions since the beginning of 2012. In addition, our Sponsor, together with its affiliates, including NexBank, is one of the most experienced global alternative credit managers managing approximately $13.3 billion of loans and debt or credit related investments as of September 30, 2019 and has managed credit investments for over 25 years. We believe our relationship with our Sponsor benefits us by providing access to resources including research capabilities, an extensive relationship network, other proprietary information, scalability, a vast wealth of information on real estate in our target assets and sectors and sourcing of investments by NexBank.

Substantially all of our assets will be owned directly or indirectly through our OP. Upon the completion of this offering, we will hold all of the limited partnership interests in our OP.

We intend to elect to be treated as a real estate investment trust, or REIT, for U.S. federal income tax purposes beginning with our taxable year ending December 31, 2020. We also intend to operate our business in a manner that will permit us and our subsidiaries to maintain one or more exclusions or exemptions from registration under the Investment Company Act.

The Formation Transaction

Prior to the closing of this offering, we plan to engage in a series of transactions, or the Formation Transaction, through which we will acquire an initial portfolio consisting of senior pooled mortgage loans backed by SFR properties, the junior most bonds of multifamily CMBS securitizations, or CMBS B-Pieces, mezzanine loan and preferred equity investments in real estate companies and properties and other structured real estate investments within the multifamily, SFR and self-storage asset classes, or collectively, the Initial Portfolio. We will acquire the Initial Portfolio from affiliates of our Sponsor, or the Contribution Group, pursuant to a contribution agreement with the Contribution Group in exchange for limited partnership interests in subsidiary

 

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partnerships of our OP. The limited partnership units of the subsidiary partnerships issued to the Contribution Group in connection with the Formation Transaction will be redeemable for an aggregate of approximately 12,635,047 OP units (assuming the Contribution Group contributes $252.7 million of net value and based on $20.00 per share, the midpoint of the range set forth on the cover of this prospectus) or cash in an amount equal to the number of OP units multiplied by the per share price of our common stock (at the discretion of the OP); provided that such subsidiary partnership units have been outstanding for at least one year or earlier at the discretion of the OP following the direction and approval of our board of directors. At the closing of the Formation Transaction, the number of OP units for which subsidiary partnership units may be redeemed is subject to change based on changes in the subsidiary partnerships’ working capital balances. See “Use of Proceeds” and “Our Operating Partnership and the Partnership Agreement” for additional information.

Upon completion of the Formation Transaction, our Initial Portfolio based on total unpaid principal balance, excluding the consolidation of the CMBS B-Pieces as described further below, is expected to be approximately 82% senior pooled mortgage loans backed by SFR properties, approximately 13% multifamily CMBS B-Pieces and approximately 6% mezzanine loan and preferred equity investments in real estate companies and properties and other structured real estate investments. Total liabilities, excluding the consolidation of the CMBS B-Pieces, with respect to each of the aforementioned investment structures in our Initial Portfolio are expected to be approximately $788.9 million, $0 and $0, respectively, upon completion of the Formation Transaction. Our CMBS B-Piece investments as a percentage of total assets, excluding the consolidation of the CMBS B-Pieces, reflects the assets that we will actually own following the Formation Transaction. However, in accordance with the applicable accounting standards, we expect to consolidate all of the assets of the trusts that issued the CMBS B-Pieces that we will own following the Formation Transaction.

Upon completion of the Formation Transaction, our Initial Portfolio based on total unpaid principal balance, including the consolidation of the CMBS B-Pieces, is expected to be approximately 32% senior pooled mortgage loans backed by SFR properties, approximately 66% multifamily CMBS B-Pieces and approximately 2% mezzanine loan and preferred equity investments in real estate companies and properties and other structured real estate investments. Total liabilities, including the consolidation of the CMBS B-Pieces, with respect to each of the aforementioned investment structures in our Initial Portfolio are expected to be approximately $788.9 million, $1.7 billion and $0, respectively, upon completion of the Formation Transaction. See the table in “—Our Financing Strategy—Freddie Mac Credit Facility” for additional information.

Upon completion of the Formation Transaction, our Initial Portfolio based on net equity is expected to be approximately 43% senior pooled mortgage loans backed by SFR properties, approximately 39% multifamily CMBS B-Pieces and approximately 18% mezzanine loan and preferred equity investments in real estate companies and properties and other structured real estate investments. Net equity represents the carrying value less our leverage on the asset.

Our Manager

Upon completion of this offering, we will be externally managed by our Manager pursuant to a management agreement that we will enter into with our Manager, or the Management Agreement. Our Manager is a recently formed indirect subsidiary of our Sponsor. All our investment decisions will be made by our Manager, subject to general oversight by the Manager’s investment committee and our board of directors. The members of the Manager’s investment committee are James Dondero, Matthew Goetz, Brian Mitts and Matt McGraner.

Our senior management team will be provided by our Manager and includes James Dondero, Matthew Goetz, Brian Mitts and Matt McGraner. Paul Richards and David Willmore are also key

 

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members of the management team, with Mr. Richards focusing on underwriting, originations and investments and Mr. Willmore focusing on accounting and financial reporting. The senior management team has significant experience across real estate investing and private lending. See “Management” for biographical information regarding these individuals.

We will pay our Manager an annual management fee but will not pay management fees to our Manager based on the equity portion of the Initial Portfolio contributed to us in the Formation Transaction. We will not pay any incentive fees to our Manager. We will also reimburse our Manager for expenses it incurs on our behalf. However, our Manager is responsible, and we will not reimburse our Manager or its affiliates, for the salaries or benefits to be paid to personnel of our Manager or its affiliates who serve as our officers, except that we may grant equity awards to our officers under a long-term incentive plan adopted by us and approved by our stockholders. Direct payment of operating expenses by us, which includes compensation expense relating to equity awards granted under our long-term incentive plan, together with reimbursement of operating expenses to our Manager, plus the Annual Fee (as defined in “—Our Management Agreement”), may not exceed 2.5% of equity book value determined in accordance with accounting principles generally accepted in the United States, or GAAP, for any calendar year or portion thereof, provided, however, that this limitation will not apply to offering expenses, legal, accounting, financial, due diligence and other service fees incurred in connection with extraordinary litigation and mergers and acquisitions and other events outside the ordinary course of our business or any out-of-pocket acquisition or due diligence expenses incurred in connection with the acquisition or disposition of certain real estate-related investments. To the extent total corporate G&A expenses would otherwise exceed 2.5% of equity book value, our Manager will waive all or a portion of its annual management fee to keep our total corporate general and administrative expenses at or below 2.5% of equity book value. For additional information regarding our Management Agreement and the conflicts of interest that the Management Agreement poses, see “—Our Management Agreement,” “—Conflicts of Interest and Related Policies” and “Risk Factors”.

Our Sponsor

Our Sponsor and its subsidiaries have extensive experience managing real estate investment activities. Our Sponsor’s real estate team includes 15 individuals and as of September 30, 2019 has completed over 160 transactions totaling approximately $9.0 billion of gross real estate value since 2012. The members of our Sponsor’s real estate team have extensive experience investing in commercial real estate and debt related to real estate properties both at our Sponsor and in previous positions.

Our Sponsor will also enter into a shared services arrangement with its affiliates, pursuant to which our Sponsor may utilize employees from affiliated entities in connection with various services such as human resources, accounting, tax, valuation, information technology services, office space, employees, compliance and legal. Under the shared services arrangement, these costs will be allocated to our Manager and reimbursable by us based on a per employee charge for each employee who provides services to our Manager, subject to the 2.5% equity book value cap described above in “—Our Manager”. To the extent an employee is not fully allocated to our Manager, the charge for services will be pro-rated accordingly. We will not provide base salary or cash bonus compensation to any of the employees of our Sponsor, our Manager or their affiliates who provide services to us or our Manager, all of which cash compensation will be payable by our Sponsor, our Manager or its affiliates.

Our Sponsor is affiliated through common control with Highland Capital Management, L.P., or Highland, an SEC-registered investment adviser. This common control is a result of the general partners of each of our Sponsor and Highland being wholly owned by Mr. Dondero, who will be our President and a director upon completion of this offering. Highland and its affiliates oversee approximately $10.0 billion in assets as of October 31, 2019. While Highland oversees institutional products, such as private equity funds, hedge funds and collateralized loan obligations, our

 

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Sponsor oversees real estate investments and registered investment company products. Our Sponsor is a party to a shared services arrangement with Highland. Under this arrangement, our Manager may utilize employees from Highland in connection with various services such as human resources, accounting, tax, valuation, information technology services, office space, employees, compliance and legal. We do not expect Highland’s bankruptcy filing, discussed below, to impact its provision of services to our Manager. Other than Mr. Dondero, none of our directors or executive officers is a director, executive officer or employee of Highland or any of its controlled affiliates. Mr. Mitts and Mr. McGraner are executive officers of our Manager, the general partner of which is wholly owned by our Sponsor.

On October 16, 2019, Highland filed for Chapter 11 bankruptcy protection with the United States Bankruptcy Court for the District of Delaware, or the Highland Bankruptcy. The Highland Bankruptcy stems from a potential judgment being sought against Highland relating to a financial crisis-era fund previously managed by Highland. The fund has been in liquidation since 2011. The liquidation plan, which was finalized and approved by investors and Highland in 2011, established a committee of fund investor representatives, or the Redeemer Committee, to coordinate the liquidation process. Between 2011 and 2016, Highland distributed over $1.55 billion of the approximately $1.70 billion amount to be liquidated. Then, on July 5, 2016, the Redeemer Committee filed a complaint against Highland resulting from a contract dispute over the timing of management fees and other related claims. Highland believes it acted in the interest of investors and disputes the Redeemer Committee’s claims. However, in consideration of its liquidity profile, Highland determined that it was necessary to commence the voluntary Chapter 11 proceedings. Although Highland disputes the underlying claims, entry of the judgment in its maximum potential amount could result in a judgment against Highland in an amount greater than Highland’s liquid assets. Neither our Manager nor our Sponsor are parties to Highland’s bankruptcy filing. For additional information, see “Risk Factors—Risks Related to Our Corporate Structure”.

Our Strategic Relationship with Our Sponsor

Significant Stockholder Alignment—Investor as well as Manager

Our Sponsor and our Manager believe in taking proactive measures intended to align themselves with investors by holding substantial stakes in the investment vehicles they manage as well as implementing investor friendly governance provisions further supporting the alignment among our Sponsor, our Manager and investors.

The underwriters have at our request reserved for sale, at the public offering price, up to 250,000 shares, or the Reserved Shares, offered by this prospectus for sale to our Sponsor and its affiliates. No underwriting discounts or commissions will be applied to the Reserved Shares. Additionally, affiliates of our Sponsor are contributing approximately $252.7 million of net value, of which our management team owns approximately $21.1 million, to subsidiary partnerships of our OP as part of the Formation Transaction. Pro forma for the Formation Transaction and the offering, our management team will have invested approximately $26.1 million in us on a consolidated basis, and will own approximately 7.4% of our common shares outstanding on a fully diluted basis after giving effect to the Formation Transaction and the offering (assuming our Sponsor and its affiliates purchase all 250,000 Reserved Shares and all subsidiary partnership units are redeemed for shares of our common stock). The Contribution Group will receive limited partnership units of the subsidiary partnerships in exchange for their contribution of assets in the Formation Transaction that will be redeemable for an aggregate of approximately 12,635,047 OP units (assuming the Contribution Group contributes $252.7 million of net value and based on $20.00 per share, the midpoint of the range set forth on the cover of this prospectus) or cash in an amount equal to the number of OP units multiplied by the per share price of our common stock (at the discretion of the OP); provided that such subsidiary partnership units have been outstanding for at least one year or earlier at the discretion of the OP following the direction and approval of

 

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our board of directors. At the closing of the Formation Transaction, the number of OP units for which subsidiary partnership units may be redeemed is subject to change based on changes in the subsidiary partnerships’ working capital balances. See “Use of Proceeds” and “Our Operating Partnership and the Partnership Agreement” for additional information. We believe our Sponsor, our Manager, their affiliates and our Manager’s management team will be highly aligned with our stockholders as a result of these investments.

Leveraging Our Sponsor’s Platforms

We expect to benefit from our Sponsor’s platform, which provides access to resources including research capabilities, an extensive relationship network, other proprietary information, scalability, a vast wealth of information on real estate in our target assets and sectors and sourcing of investments by NexBank. We believe this access and the network, resources and core competencies (as described below) developed by our Sponsor can allow our Manager to research, source, and evaluate opportunities on our behalf that may not be available to our competitors.

 

   

Investment Processes: Our Sponsor has an investment process that is rooted in its ability to identify mispricing through robust analysis, proactive diligence and monitoring. Its investment teams are responsible for reviewing existing investments, evaluating opportunities across issuer capital structures and monitoring trends within relevant industries. It believes its active and focused portfolio identification and management process has been a key driver of returns over time.

 

   

Strategic Partnerships and Robust Third-Party Relationships: Our Sponsor’s creative financing solutions has forged mutually beneficial relationships and partnerships that have served to provide increased deal flow for attractive real estate with quality sponsors and as a result attractive debt related investment opportunities.

 

   

Scalability and Experienced Back-Office Support: We expect to achieve cost efficiencies and economies of scale as part of an investment enterprise (through our Sponsor’s shared services arrangement with its affiliates) with approximately $20.4 billion in assets (including $10.2 billion in assets under management) as of September 30, 2019 and with experienced back-office support groups. Our Sponsor and its affiliates’ back-office and operations teams cover all functional areas for the on-going operation of the firm and its various products, including tax, human resources, IT, legal and compliance.

Leading Credit Focused Platform

Our Sponsor, together with its affiliates, including NexBank, is one of the most experienced global alternative credit managers managing approximately $13.3 billion of loans and debt or credit related investments as of September 30, 2019 and has managed credit investments for over 25 years. Our Sponsor and its affiliates’ debt and credit related investments are primarily managed through the following entities:

NexBank is a financial services company with total assets of approximately $10.2 billion, including real estate related assets of approximately $5.7 billion as of September 30, 2019, and whose primary subsidiary is a commercial bank. NexBank provides commercial banking, mortgage banking, investment banking and corporate advisory services to institutional clients and financial institutions throughout the U.S. We expect to have access to the resources of NexBank to help source and execute investments, provide servicing infrastructure and asset management. NexBank’s credit and underwriting team has extensive experience in real estate and asset based lending and underwriting.

Highland Income Fund, or HFRO (NYSE: HFRO), is a closed-end fund managed by Highland Capital Management Fund Advisors, L.P., an affiliate of our Sponsor. As of September 30, 2019,

 

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HFRO had $1.3 billion of assets under management. HFRO seeks to provide a high level of current income consistent with preservation of capital. HFRO pursues its investment objectives by investing primarily in floating-rate loans and other securities deemed to be floating-rate investments.

NexPoint Strategic Opportunities Fund, or NHF (NYSE: NHF), is a closed-end fund managed by our Sponsor. As of September 30, 2019, NHF had $1.3 billion in assets under management. NHF’s investment objectives are to provide both current income and capital appreciation. NHF is invested primarily in (i) secured and unsecured floating and fixed rate loans; (ii) bonds and other debt obligations; (iii) debt obligations of stressed, distressed and bankrupt issuers; (iv) structured products, including but not limited to, mortgage-backed and other asset-backed securities and collateralized debt obligations; (v) equities; (vi) other investment companies, including business development companies; and (vii) REITs.

Leading Real Estate Focused Platform

Our Sponsor is an experienced manager of real estate. Our Sponsor and its affiliates manage approximately $7.3 billion of gross value in real estate related investments as of September 30, 2019. Our Sponsor and its affiliates’ real estate related investments are primarily managed through the following entities:

NexPoint Residential Trust, Inc., or NXRT (NYSE: NXRT), is a publicly traded REIT. NXRT is primarily focused on acquiring, renovating, owning and operating well-located, middle-income multifamily properties with “value-add” potential in large cities and suburban submarkets of large cities, primarily in the Southeastern and Southwestern United States. As of December 31, 2019, according to Bloomberg, NXRT was one of the top performing REITs in the MSCI U.S. REIT Index, or RMZ, for the trailing three-year period, returning an annualized 30.5% total return to stockholders. For additional information regarding total return to stockholders, see “—Our Competitive Strengths—Public Company REIT Experience.” As of September 30, 2019, NXRT had an enterprise value of $2.3 billion, total debt of approximately $1.2 billion and owned 37 properties encompassing 13,757 units.

VineBrook Homes Trust, Inc., or VineBrook, is a privately held REIT and is a leading owner and operator of workforce SFR properties. VineBrook acquires, renovates, owns and manages SFR properties that management deems to be in the “affordable” or “workforce” category with a focus on “value-add” potential. As of September 30, 2019, VineBrook had an enterprise value of $514.8 million, total debt of approximately $307.2 million, owned and operated 6,392 homes in primarily Midwestern cities and had 269 homes under contract.

NexPoint Hospitality Trust, Inc., or NHT (TSXV: NHT-U), is a publicly traded REIT. NHT is primarily focused on acquiring, owning, renovating, and operating select-service, extended-stay and efficient full-service hotels located in attractive U.S. markets. As of September 30, 2019, NHT had an enterprise value of $390.7 million, total debt of approximately $259.6 and owned 11 hotel properties encompassing 1,607 rooms across the United States. On July 21, 2019, NHT entered into an agreement to acquire Condor Hospitality Trust, Inc. (NYSE: CDOR), which had an enterprise value of $271 million, total debt of approximately $135.2 million and owned 15 select service and extended stay properties, encompassing 1,908 rooms as of September 30, 2019.

Affiliates of our Sponsor manage multiple privately held REITs that are wholly owned by funds managed by affiliates of our Sponsor, including (1) NexPoint Real Estate Opportunities, or NREO, (2) NexPoint Real Estate Capital, or NREC, (3) NFRO REIT Sub, LLC, (4) NexPoint Capital REIT, LLC, (5) NRESF REIT Sub, LLC and (6) GAF REIT, LLC, and manage multiple Delaware Statutory Trusts, or DSTs.

 

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Experience in Target Property Sectors

Our Sponsor and its affiliates have extensive experience in our target property sectors and as of September 30, 2019 have completed approximately $9.0 billion in gross real estate transactions since 2012. These transactions include activity in the following sectors:

Multifamily

Affiliates of our Sponsor have been active in the multifamily sector since 2013 and have invested or loaned approximately $5.7 billion in the multifamily sector, including in NXRT with $2.3 billion in enterprise value and total debt of approximately $1.2 billion as of September 30, 2019, six separate multifamily CMBS B-Piece securitizations totaling approximately $292.3 million as of September 30, 2019, preferred equity investments in 28 multifamily properties with approximately $1.0 billion of gross real estate value as of September 30, 2019, 14 multifamily properties in DSTs with $668.3 million in gross real estate value as of September 30, 2019 and NexBank’s outstanding loans in the multifamily sector as of September 30, 2019.

Single-Family Rental

Affiliates of our Sponsor have been active in the SFR sector, investing or loaning approximately $2.1 billion as a continuation of our Sponsor’s affordable housing investment thesis, including approximately $1.2 billion in SFR mortgages, an investment in VineBrook, which owns SFR assets directly, and NexBank’s outstanding loans in the SFR sector as of September 30, 2019. VineBrook is externally managed by an affiliate of our Sponsor and our Sponsor plays an integral role in the expansion of VineBrook’s business.

Self-Storage

Affiliates of our Sponsor have invested or loaned approximately $211 million in the self-storage sector, including a $125 million preferred equity investment in Jernigan Capital, Inc., or JCAP (NYSE: JCAP), a publicly traded REIT that provides capital to private developers, owners and operators of self-storage facilities, approximately $77.4 million of equity invested directly into self-storage developments and NexBank’s outstanding loans in the self-storage sector as of September 30, 2019.

Hospitality

Affiliates of our Sponsor have invested or loaned approximately $477 million in the hospitality sector since 2014, including in NHT and NexBank’s outstanding loans in the hospitality sector as of September 30, 2019. NHT is externally managed by an affiliate of our Manager.

Office

Affiliates of our Sponsor have invested or loaned approximately $521 million in the office sector since 2012, including NexBank’s outstanding loans in the office sector as of September 30, 2019, and have primarily focused on opportunistic repositioning investments.

Other

Affiliates of our Sponsor have also made investments and loans in alternative real estate sectors, including timber, triple net retail, strip malls and single family residential totaling $6.0 billion, which includes NexBank’s outstanding loans in other sectors as of September 30, 2019.

Our Competitive Strengths

Credit Strength of Initial Portfolio

As a whole, we believe our Initial Portfolio investments have a relatively low risk profile: 99.7% of the underlying properties in the Initial Portfolio are stabilized and have a weighted

 

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average occupancy of 92%; the portfolio-wide weighted average debt service coverage ratio, or DSCR, a metric used to assess the performance and credit worthiness of an investment, is 1.8x; the weighted average loan-to-value, or LTV, of our investments is 66.9%; and the weighted average maturity is 8.1 years as of December 31, 2019. These metrics do not reflect our alternative structured financing investment. The Initial Portfolio has associated leverage that is matched in term and structure to provide stable contractual spreads and net interest income, which we believe in the long-term will help protect us from fluctuations in market interest rates that may occur over the life of the portfolio investments.

Public Company REIT Experience

Our Manager’s management team took NXRT public in 2015 through a spin-off of 38 multifamily properties owned by NHF. NXRT is primarily focused on acquiring, renovating, owning and operating well-located, middle-income multifamily properties with “value-add” potential in large cities and suburban submarkets of large cities, primarily in the Southeastern and Southwestern United States. NXRT’s common stock began trading on the New York Stock Exchange, or NYSE, under the symbol “NXRT” on April 1, 2015. Our Manager’s management team has grown the market capitalization of NXRT from $262 million, which was the private REIT’s total contributed capital prior to the spin-off on March 31, 2015, to $1.2 billion as of September 30, 2019. As of September 30, 2019, NXRT had an enterprise value of approximately $2.3 billion, total debt of approximately $1.2 billion and owned 13,757 rental units across 37 properties. According to Bloomberg, NXRT was one of the top performing publicly traded REITs in the RMZ in any sector based on total return to stockholders for the trailing three-year period ended December 31, 2019. NXRT delivered a 295% total return to stockholders, outperforming the RMZ by 260% since NXRT’s listing on April 1, 2015 through December 31, 2019. For the periods from NXRT’s listing on April 1, 2015 through December 31, 2015, January 1, 2016 through December 31, 2016, January 1, 2017 through December 31, 2017, January 1, 2018 through December 31, 2018 and January 1, 2019 through December 31, 2019, NXRT delivered a total return (loss) to stockholders of (1.1)%, 79.0%, 29.8%, 30.2% and 36.4%, respectively. For the nine months ended September 30, 2019 and the years ended December 31, 2018, 2017, 2016 and 2015, NXRT had net income (loss) of $112.7 million, $(1.6) million, $56.4 million, $25.9 million and $(11.0) million, respectively. For the year ended December 31, 2015, NXRT began operations on March 31, 2015 and therefore had no operating activities before March 31, 2015. Total return to stockholder information is calculated by dividing the increase/decrease in a company’s stock price at the end of a period (as adjusted to assume the reinvestment of all cash dividends during the specified period into additional shares of common stock) by the company’s stock price at the beginning of the period. Stock price information used in these calculations were based on the closing price of each company on the relevant day.

NXRT Performance vs. RMZ

 

 

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Source: S&P Global Market Intelligence as of December 31, 2019

 

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Note: We selected the RMZ as a comparison because it currently includes 149 U.S. equity REITs and is considered the primary benchmark for U.S. equity REIT performance. However, comparison of the return performance of NXRT to the performance of the RMZ may be limited due to differences between NXRT and the companies represented in the RMZ, including with respect to size, asset type, geographic concentration and investment strategy. A few companies represented in the RMZ with operations that differ from NXRT include (a) Prologis, Inc., which owns, manages and develops well-located, high-quality logistics facilities, (b) Public Storage, which acquires, develops, owns and operates self-storage facilities, and (c) Welltower Inc., which invests in senior housing and health care real estate. NXRT’s past performance is not a guarantee, prediction or indication of the returns that you may achieve with an investment in us and we cannot offer any assurance that we can replicate NXRT’s returns. Moreover, this performance data includes periods with economic characteristics, interest rate environments and other market forces that are significantly different from those we face today and may face in the future.

Network of Existing Partners Provides Us An Immediately Available Investment Pipeline

We also believe that one of our key competitive strengths is the network of local, regional and national operating partners with which our Sponsor and its affiliates do business. Our Sponsor and its affiliates work closely with high quality sponsors to forge long-standing relationships so that our Sponsor is viewed as an “investment partner of choice” when partners are seeking investment in new transactions. Our Sponsor has made investments with over 75 real estate sponsors.

Scalability, Strength and Experience in Target Sectors

We expect to deploy a significant amount of our capital in investments in the multifamily, SFR, self-storage, hospitality and office property sectors in which our Sponsor and its affiliates have a large network of relationships and extensive experience. As of September 30, 2019 our Sponsor and its affiliates have completed approximately $5.7 billion of multifamily investments, $2.1 billion of SFR investments, $211 million of self-storage investments, $477 million of hospitality investments, $521 million of office investments and $6.0 billion of other investments since 2012, which includes NexBank’s outstanding loans in these sectors as of September 30, 2019.

Our Sponsor’s Financing Solutions are Pre-Approved and Comply with Freddie Mac and Fannie Mae Standards

Our Sponsor and its affiliates have experience structuring financing solutions behind first mortgage lenders, including banks, life insurance companies, Freddie Mac and The Federal National Mortgage Association, or Fannie Mae, including mezzanine loans and preferred equity investments. Our Sponsor and its affiliates have successfully tailored financing solutions to property owners in creative ways but also highly symbiotic with a typical Freddie Mac or Fannie Mae first mortgage. Our multifamily loan and investment platform complies with current Freddie Mac and Fannie Mae standards, giving us a unique opportunity to invest alongside quality sponsors and the largest multifamily lenders in the U.S.

In addition, our Sponsor is a “select sponsor” with Freddie Mac, having borrowed, with its affiliates, approximately $3.2 billion from government sponsored entities, or GSEs, such as Freddie Mac and Fannie Mae as of September 30, 2019. We believe our Sponsor and its affiliates’ relationship, status and expertise with the GSEs provide proprietary deal flow, access and exposure to a superior risk-adjusted, total return investment product.

Our Sponsor and its affiliates have also successfully structured investments behind non-agency first mortgage lenders on both hospitality and self-storage real property by providing sponsors attractively priced capital, while delivering attractive risk-adjusted returns to investors.

Access to Our Sponsor’s Real Estate Platform

Our Sponsor and its subsidiaries have extensive experience managing real estate investment activities. Our Sponsor’s real estate team includes 15 individuals and as of September 30, 2019 has

 

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completed over 160 transactions totaling approximately $9.0 billion of gross real estate value since 2012. The members of our Sponsor’s investment team have on average 15 years of investment experience with leading institutions and investors in the following asset classes: real estate, private equity, alternatives, credit and equity.

In addition, our Sponsor is also affiliated through common control with NexBank, a financial services company with total assets of approximately $10.2 billion, including real estate related assets of approximately $5.7 billion, as of September 30, 2019, and whose primary subsidiary is a commercial bank. NexBank provides commercial banking, mortgage banking, investment banking and corporate advisory services to institutional clients and financial institutions throughout the U.S. We expect to have access to the resources of NexBank to help source and execute investments, provide servicing and infrastructure and asset management. NexBank’s credit and underwriting team has extensive experience in real estate and asset based lending and underwriting.

Our Investment Strategy

Primary Investment Objective

Our primary investment objective is to generate attractive, risk-adjusted returns for stockholders over the long term, primarily through dividends and secondarily through capital appreciation. We intend to achieve this objective primarily by originating, structuring and investing in first mortgage loans, mezzanine loans, preferred equity and alternative structured financings in commercial real estate properties, as well as multifamily CMBS securitizations. We intend to primarily focus on lending or investing in properties that are stabilized or have a light transitional business plan with positive DSCRs and high quality sponsors.

Through active portfolio management we will seek to take advantage of market opportunities to achieve a superior portfolio risk-mix, while delivering attractive total return. Our Manager will regularly monitor and stress-test each investment and the portfolio as a whole under various scenarios, enabling us to make informed and proactive investment decisions.

Target Investments

We intend to invest primarily in first mortgage loans, mezzanine loans, preferred equity and alternative structured financings in commercial real estate properties, as well as multifamily CMBS securitizations, with a focus on lending or investing in properties that are stabilized or have a light transitional business plan primarily in the multifamily, SFR, self-storage, hospitality and office real estate sectors predominantly in the top 50 MSAs, including, but not limited to, the following:

 

   

First Mortgage Loans: We intend to make investments in senior loans that are secured by first priority mortgage liens on real estate properties. The loans may vary in duration, bear interest at a fixed or floating rate and amortize, typically with a balloon payment of principal at maturity. These investments may include whole loans or pari passu participations within such senior loans.

 

   

Mezzanine Loans: We may originate or acquire mezzanine loans. These loans are subordinate to the first mortgage loan on a property, but senior to the equity of the borrower. These loans are not secured by the underlying real estate, but generally can be converted into preferred equity of the mortgage borrower or owner of a mortgage borrower, as applicable.

 

   

Preferred Equity: We may make investments that are subordinate to any mortgage or mezzanine loan, but senior to the common equity of the borrower. Preferred equity

 

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investments typically receive a preferred return from the issuer’s cash flow rather than interest payments and often have the right for such preferred return to accrue if there is insufficient cash flow for current payment. These investments are not secured by the underlying real estate, but upon the occurrence of a default, the preferred equity provider typically has the right to effect a change of control with respect to the ownership of the property.

 

   

Alternative Structured Financing: We may also look to construct innovative financing solutions that are symbiotic for both parties. We expect to provide flexibility and structured financings that enable counterparties to strategically draw capital when needed or “match funded” commitments. Terms may entail a maximum commitment over a certain period with monthly minimums in exchange for a preferred equity investment with a stated cash coupon and a back-end payment-in-kind component that is in the form of additional preferred equity or common equity, which provides an additional avenue for value accretion to us.

 

   

CMBS B-Pieces: We intend to make investments in the junior-most bonds comprising some or all of the BB-rated, B-rated and unrated tranches of CMBS securitization pools. In the CMBS structure, underlying commercial real estate loans are typically aggregated into a pool with the pool issuing and selling different tranches of bonds and securities to different investors. Under the pooling and servicing agreements that govern these securitization pools, the loans are administered by a trustee and servicers, who act on behalf of all CMBS investors, distribute the underlying cash flows to the different classes of securities in accordance with their seniority. Historically, a single investor acquires all of the below-investment grade securities that comprise each CMBS B-Piece. CMBS B-Pieces have been a successful and sought-after securitization program offering a wide-range of residential and multifamily products. As of September 30, 2019, there have been 307 Freddie Mac K-deal issuances for a combined $334 billion and 16,790 loans originated and securitized since 2009. We believe CMBS B-Pieces offer an attractive risk-adjusted return with a strong underlying credit profile, pooled diversification, and are backed by an asset class our Sponsor intimately understands. We generally intend to hold these CMBS B-Piece investments through maturity, but may, from time to time, opportunistically sell positions should liquidity become available or be required, as permitted under applicable risk retention rules. The multifamily loans included in typical multifamily CMBS generally are secured by occupied, stabilized and completed projects and have experienced default rates of less than one basis point of losses on the $334 billion of CMBS B-Pieces issued by Freddie Mac from 2009 through September 30, 2019.

Market Opportunity

Strong Demand for Commercial Real Estate Debt Capital

Borrower demand for commercial real estate debt capital remains at historically high levels. This demand is expected to be sustained by the significant upcoming maturities of commercial real estate debt originated during the credit boom preceding the economic recession in 2008 and 2009. According to the Mortgage Bankers Association $130 billion to more than $150 billion of non-bank-held mortgages are set to mature each year from 2020 to 2024.

Large, Addressable Market Opportunity

The U.S. commercial real estate market has current total outstanding loan balances of more than $4.5 trillion as reported by the U.S. Federal Reserve Bank as of September 30, 2019.

 

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Financing opportunities are created by strong commercial real estate transaction volumes, which totaled $537 billion in 2018, the second-largest year on record for commercial real estate sales in the U.S., according to Ten-X. In addition, commercial real estate transaction volumes are expected to continue at these levels due to the large amount of “dry powder” of real estate funds and appreciation of commercial real estate property values, as illustrated by the charts below.

Dry Powder of Real Estate Funds ($ in Billions)

 

 

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Source: Preqin, data for 2020 as of January 2020

National All-Property Price Index

 

 

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Source: Real Capital Analytics, data through December 2019

Traditional Lenders Have Been Constrained

Traditional lenders have been scaling back from both the new construction and refinancing market due in large part to more onerous underwriting standards and an increase in banking regulations such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, which has called for stricter liquidity and capital requirements. As a result, this has led to sweeping changes to the banking sector’s conventional lending practices and has created a strong demand for “gap” financing from experienced and trusted non-bank conduit lenders. Gap financing refers to the financing needed to bridge the “gap” between the lending bank’s first mortgage and a sponsor’s equity investment due to a lending bank’s unwillingness and limitation to lend beyond a certain LTV ratio. Over the years, banks have shortened interest only periods and lowered average LTV ratios leaving a large void across the lending landscape. Historically, a significant amount of commercial real estate mortgage loans have been financed through the CMBS markets. CMBS

 

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issuance has been significantly lower than before the financial crisis, resulting in a need for alternative lenders to meet debt capital demand, as illustrated by the chart below.

CMBS Issuance ($ in Billions)

 

 

LOGO

Source: Commercial Mortgage Alert

Due to the increased regulatory environment, commercial real estate mortgage REITs and other lenders have captured 10% of the U.S. commercial real estate debt market at September 30, 2019, steadily increasing from their 8.1% share at the beginning of the financial crisis.

Commercial Real Estate Debt Market Share

 

 

LOGO

Source: Federal Reserve

Our Initial Portfolio

Our Initial Portfolio will consist of senior pooled mortgage loans backed by SFR properties, multifamily CMBS B-Pieces, mezzanine loan and preferred equity investments in real estate companies and properties and other structured real estate investments within the multifamily, SFR and self-storage asset classes.

Upon completion of the Formation Transaction, our Initial Portfolio based on total unpaid principal balance, excluding the consolidation of the CMBS B-Pieces as described further below, is

 

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expected to be approximately 82% senior pooled mortgage loans backed by SFR properties, approximately 13% multifamily CMBS B-Pieces and approximately 6% mezzanine loan and preferred equity investments in real estate companies and properties and other structured real estate investments. Total liabilities, excluding the consolidation of the CMBS B-Pieces, with respect to each of the aforementioned investment structures in our Initial Portfolio are expected to be approximately $788.9 million, $0 and $0, respectively, upon completion of the Formation Transaction. Our CMBS B-Piece investments as a percentage of total assets, excluding the consolidation of the CMBS B-Pieces, reflects the assets that we will actually own following the Formation Transaction. However, in accordance with the applicable accounting standards, we expect to consolidate all of the assets of the trusts that issued the CMBS B-Pieces that we will own following the Formation Transaction.

Upon completion of the Formation Transaction, our Initial Portfolio based on total unpaid principal balance, including the consolidation of the CMBS B-Pieces, is expected to be approximately 32% senior pooled mortgage loans backed by SFR properties, approximately 66% multifamily CMBS B-Pieces and approximately 2% mezzanine loan and preferred equity investments in real estate companies and properties and other structured real estate investments. Total liabilities, including the consolidation of the CMBS B-Pieces, with respect to each of the aforementioned investment structures in our Initial Portfolio are expected to be approximately $788.9 million, $1.7 billion and $0, respectively, upon completion of the Formation Transaction. See the table in “—Our Financing Strategy—Freddie Mac Credit Facility” for additional information.

Upon completion of the Formation Transaction, our Initial Portfolio based on net equity is expected to be approximately 43% senior pooled mortgage loans backed by SFR properties, approximately 39% multifamily CMBS B-Pieces and approximately 18% mezzanine loan and preferred equity investments in real estate companies and properties and other structured real estate investments. Net equity represents the carrying value less our leverage on the asset.

 

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As a whole, we believe our Initial Portfolio investments have a relatively low risk profile: 99.7% of the underlying properties in the Initial Portfolio are stabilized and have a weighted average occupancy of 92%; the portfolio-wide weighted average DSCR is 1.8x; the weighted average LTV of our investments is 66.9%; and the weighted average maturity is 8.1 years as of December 31, 2019. These metrics do not reflect our alternative structured financing investment. For additional information related to the diversification of the collateral associated with the Initial Portfolio, including with respect to interest rate category, underlying property type, investment structure and geography, see the charts on the following page.

 

#

 

Investment

  Origination
Date
    UPB (1)     Carrying
Value
    Net Equity     Interest
Rate
    PIK /
Other
Rate
    All-in
Rate (2)
    Fixed /
Floating
    Maturity
Date (3)
    City, State     Property
Type (4)
    LTV (5)     Stabilized (6)  

SENIOR LOANS

                         
1   Senior Loan     8/8/18     $ 508,700,000     $ 550,828,126     $ 85,138,711       4.7           4.7     Fixed       9/1/28       Multiple       SFR       68.1     Yes  
2   Senior Loan     2/15/19       62,023,000       67,159,451       11,171,289       5.0           5.0     Fixed       3/1/29       Multiple       SFR       65.0     Yes  
3   Senior Loan     9/28/18       51,362,000       55,615,558       9,469,369       4.7           4.7     Fixed       10/1/25       Multiple       SFR       54.2     Yes  
4   Senior Loan     10/16/18       38,637,060       41,836,799       5,546,940       5.6           5.6     Fixed       11/1/28       Multiple       SFR       73.8     Yes  
5   Senior Loan     1/28/19       17,439,248       18,883,484       2,651,904       5.6           5.6     Fixed       2/1/29       Multiple       SFR       65.2     Yes  
6   Senior Loan     10/17/18       15,300,000       16,567,074       2,963,844       5.5           5.5     Fixed       11/1/23       Multiple       SFR       55.8     Yes  
7   Senior Loan     9/14/18       12,414,407       13,442,509       2,077,741       5.5           5.5     Fixed       10/1/28       Multiple       SFR       67.5     Yes  
8   Senior Loan     11/15/18       10,739,777       11,629,194       1,560,117       5.6           5.6     Fixed       12/1/28       Multiple       SFR       74.1     Yes  
9   Senior Loan     8/15/18       10,664,870       11,548,084       1,812,124       5.3           5.3     Fixed       9/1/28       Multiple       SFR       70.5     Yes  
10   Senior Loan     11/28/18       10,316,356       11,170,708       1,577,528       5.7           5.7     Fixed       12/1/28       Multiple       SFR       66.1     Yes  
11   Senior Loan     1/4/18       10,726,883       11,615,233       2,278,554       5.4           5.4     Fixed       2/1/28       Multiple       SFR       72.7     Yes  
12   Senior Loan     2/11/19       10,523,000       11,394,465       2,110,022       4.7           4.7     Fixed       3/1/26       Multiple       SFR       63.2     Yes  
13   Senior Loan     9/28/18       9,875,000       10,692,801       1,535,220       6.1           6.1     Fixed       10/1/28       Multiple       SFR       74.3     Yes  
14   Senior Loan     12/18/18       9,313,105       10,084,372       1,590,355       5.9           5.9     Fixed       1/1/29       Multiple       SFR       56.9     Yes  
15   Senior Loan     10/10/18       8,334,194       9,024,392       1,288,594       5.9           5.9     Fixed       11/1/28       Multiple       SFR       72.5     Yes  
16   Senior Loan     1/31/19       7,948,371       8,606,618       1,235,696       5.5           5.5     Fixed       2/1/29       Multiple       SFR       56.8     Yes  
17   Senior Loan     1/18/19       7,823,472       8,471,375       1,382,527       5.3           5.3     Fixed       2/1/29       Multiple       SFR       74.2     Yes  
18   Senior Loan     6/29/18       7,676,055       8,311,750       1,330,378       5.1           5.1     Fixed       7/1/28       Multiple       SFR       57.1     Yes  
19   Senior Loan     2/5/19       6,874,210       7,443,499       1,232,307       5.5           5.5     Fixed       3/1/29       Multiple       SFR       72.2     Yes  
20   Senior Loan     10/26/18       6,421,247       6,953,024       960,074       5.5           5.5     Fixed       11/1/28       Multiple       SFR       74.0     Yes  
21   Senior Loan     1/3/19       6,752,435       7,311,639       1,411,362       4.8           4.8     Fixed       2/1/24       Multiple       SFR       69.1     Yes  
22   Senior Loan     8/9/18       6,618,588       7,166,708       1,315,876       5.8           5.8     Fixed       9/1/23       Multiple       SFR       57.9     Yes  
23   Senior Loan     11/30/18       5,760,000       6,237,016       890,584       6.0           6.0     Fixed       12/1/28       Multiple       SFR       70.0     Yes  
24   Senior Loan     9/14/18       5,719,004       6,192,625       937,718       5.2           5.2     Fixed       10/1/28       Multiple       SFR       57.8     Yes  
25   Senior Loan     7/27/18       5,653,308       6,121,488       1,123,964       5.3           5.3     Fixed       8/1/23       Multiple       SFR       67.4     Yes  
26   Senior Loan     12/14/18       5,410,402       5,858,466       910,112       5.5           5.5     Fixed       1/1/29       Multiple       SFR       74.1     Yes  
27   Senior Loan     1/11/19       4,736,000       5,128,213       849,000       5.4           5.4     Fixed       2/1/29       Multiple       SFR       74.0     Yes  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

       

 

 

   

 

 

 

Senior Loans - Total / Wtd. Avg.

    $ 863,761,992     $ 935,294,671     $ 146,351,910       4.9           4.9       8.4           67.0     100.0
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

       

 

 

   

 

 

 

CMBS

                         
28  

CMBS

    3/28/19     $ 75,617,792     $ 75,466,556     $ 75,466,556       7.8           7.8     Floating       2/25/26       Multiple       MF       65.4     Yes  
29  

CMBS

    11/26/19       58,661,484       58,368,177       58,368,177       7.8           7.8     Floating       11/25/26       Multiple       MF       64.8     Yes  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

       

 

 

   

 

 

 

CMBS - Total / Wtd. Avg.

    $ 134,279,276     $ 133,834,733     $ 133,834,733       7.8           7.8       6.5           65.1     100.0
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

       

 

 

   

 

 

 

MEZZANINE LOANS

                         
30  

Mezzanine Loan

    2/5/18     $ 3,250,000     $ 3,221,343     $ 3,221,343       8.0     5.8 %(7)      13.8     Floating       1/31/22      

North
Charleston,
SC
 
 
 
    MF       73.4     No  

PREFERRED EQUITY

                         
31  

Preferred Equity

    8/31/15     $ 10,000,000     $ 9,746,231     $ 9,746,231       8.5     3.0     11.5     Fixed       7/1/25      
Columbus,
GA
 
 
    MF       85.8     Yes  
32  

Preferred Equity

    3/22/19       5,056,000       5,056,000       5,056,000       8.5     4.0     12.5     Fixed       12/1/27      
Jackson,
MS
 
 
    MF       75.6     Yes  
33  

Preferred Equity

    7/14/14       3,821,000       3,821,000       3,821,000       10.3     5.0     15.3     Fixed       8/1/22      
Corpus
Christi, TX
 
 
    MF       57.0     Yes  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

       

 

 

   

 

 

 

Preferred Equity - Total / Wtd. Avg.

    $ 18,877,000     $ 18,623,231     $ 18,623,231       8.9     3.7     12.5       5.6           77.1     100.0
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

       

 

 

   

 

 

 

ALTERNATIVE STRUCTURED FINANCING

                         
34  

Alternative Structured Financing

    7/27/16     $ 40,000,000     $ 40,507,265     $ 40,507,265       7.0     6.4 %(8)      13.4     Fixed       NA       Multiple       SS       NA       NA  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

       

 

 

   

 

 

 

Total Portfolio - Total / Wtd. Avg.

    $ 1,060,168,268     $ 1,131,481,243     $ 342,538,482       5.4     0.3     5.7       8.1           66.9     99.7
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

       

 

 

   

 

 

 

 

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(1)

UPB as of December 31, 2019.

(2)

All-in Rate is calculated as the Interest Rate plus the PIK / Other Rate. The All-in Rates for the CMBS investments numbered 28 and 29 are based on one-month LIBOR of 1.8% as of December 31, 2019 plus a spread over the index of 6.0%.

(3)

Weighted average years to maturity as of December 31, 2019.

(4)

SFR is single-family rental, MF is multifamily and SS is self-storage properties.

(5)

LTV is generally based on the initial first mortgage loan amount plus the preferred equity or mezzanine loan investment, if any, divided by the as-is appraised value as of the date the investment was originated or by the current principal amount as of the date of the most recent as-is appraised value.

(6)

We consider stabilized investments to be those with an in-place debt service coverage ratio (DSCR), including the current pay of preferred equity or mezzanine loan, if applicable, of 1.2x or greater. Weighted average is the percentage of the total Carrying Value that is Stabilized.

(7)

Interest income for the Mezzanine Loan numbered 30 is calculated using the December 31, 2019 WSJ Prime of 4.8% plus a spread over the index of 9.0%. A fixed minimum rate of 8.0% is paid in cash on a monthly basis. The difference between the 8.0% minimum monthly payment and the 13.8% stated rate is accrued as paid-in-kind (PIK) interest and is compounded on a monthly basis. Accrued PIK is to be paid at maturity.

(8)

The preferred stock pays a fixed quarterly dividend of $2.125 million payable pro rata to the holders of the preferred stock for the first three quarters of 2018, 2019 and 2020 and for the first fiscal quarter of 2021. For the last fiscal quarter of each of 2018, 2019 and 2020 and for the second fiscal quarter of 2021, the stock dividend varies based on the underlying company’s book value and past aggregate dividends among other things, but will be no lower than $2.125 million. Given that the stock dividend for the last fiscal quarter of 2020 cannot be predicted, the Company assumes a dividend of $2.125 million as a conservative estimate. It is expected that the company will own 40,000 shares of $1,000 par value preferred stock out of a total 133,500 shares outstanding as of December 31, 2019.

Loan 1 has a total unpaid principal balance of $508.7 million at December 31, 2019, which equates to 48.0% of the total unpaid principal balance of our Initial Portfolio, and net equity of $85.1 million, which equates to 24.8% of the total net equity of our Initial Portfolio. Loan 1 is collateralized by a diversified portfolio of 4,812 SFR workforce housing properties with values that average approximately $155,202 per home and rents that average $1,206 per month. The portfolio is stabilized with a weighted average occupancy of 90.0% and a DSCR of 1.7x. The portfolio’s underlying tenants are diverse with over 4,800 unique leases or tenants and the portfolio is located in 32 MSAs in 12 states. The guarantor of Loan 1 is a well-capitalized and publicly traded company.

The following charts illustrate our Initial Portfolio based on interest rate category, underlying property type, investment structure, and geography:

 

LOGO

Note: The charts above do not reflect the GAAP consolidation of the trusts that issued the CMBS B-Pieces in our financial statements. In addition, the geography charts do not reflect our alternative structured financing investment.

Our Financing Strategy

While we do not have any formal restrictions or policy with respect to our debt-to-equity leverage ratio, we currently expect that our initial leverage will not exceed a ratio of 3-to-1. We believe this leverage ratio is prudent given that leverage typically exists at the asset level. The amount of leverage we may employ for particular assets will depend upon the availability of particular types of financing and our Manager’s assessment of the credit, liquidity, price volatility and other risks of those assets and financing counterparties. Our decision to use leverage to

 

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finance our assets will be at the discretion of our Manager, subject to review by our board of directors, and will not be subject to the approval of our stockholders. We generally intend to match leverage terms and interest rate type to that of the underlying investment financed.

Sources of Liquidity

Our primary source of cash will generally consist of cash generated from our operating results and the following:

Repurchase Agreements

From time to time, we may enter into repurchase agreements to finance the acquisition of a portion of our target assets. Repurchase agreements will effectively allow us to borrow against loans and securities that we own in an amount equal to (1) the market value of such loans and/or securities multiplied by (2) the applicable advance rate. Under these agreements, we will sell our loans and securities to a counterparty and agree to repurchase the same loans and securities from the counterparty at a price equal to the original sales price plus an interest factor. During the term of a repurchase agreement, we will receive the principal and interest on the related loans and securities and pay interest to the lender under the repurchase agreement. At any point in time, the amounts and the cost of our repurchase borrowings will be based upon the assets being financed. For example, higher risk assets will result in lower advance rates (i.e., levels of leverage) at higher borrowing costs. In addition, these facilities may include various financial covenants and limited recourse guarantees.

Bridge Facility

In connection with the Formation Transaction, we, through our subsidiaries, will enter into a $95 million bridge facility with Key Bank, National Association, as lender, and the entities that will contribute the CMBS B-Pieces to us in the Formation Transaction, as co-borrowers (the “Bridge Facility”). We will guarantee the Bridge Facility and the obligations under the Bridge Facility will be secured by the CMBS B-Pieces that we will own following the Formation Transaction. The co-borrowers will use the proceeds from the Bridge Facility to repay the indebtedness outstanding on the CMBS B-Pieces that they will contribute to us in the Formation Transaction.

Freddie Mac Credit Facility

Following the Formation Transaction, we will have indebtedness equal to 85% of the value of our senior pooled mortgage loans under a credit facility with Freddie Mac.

Following the Formation Transaction, two of our subsidiaries will be a party to a loan and security agreement that was entered into on July 12, 2019 with Freddie Mac, or the Credit Facility. Under the Credit Facility, these entities borrowed approximately $788.9 million in connection with their acquisition of senior pooled mortgage loans backed by SFR properties, or the Underlying Loans, that will be part of our Initial Portfolio following the Formation Transaction. No additional borrowings can be made under the Credit Facility. Our obligations under the Credit Facility will be secured by the Underlying Loans.

Our borrowings under the Credit Facility will mature on July 12, 2029, or the Credit Facility Maturity Date. However, if an Underlying Loan matures prior to the Credit Facility Maturity Date, we will be required to repay the portion of the Credit Facility that is allocated to that loan. The portion of the Credit Facility that is allocated to a specific loan is generally equal to 85% of the original purchase price of the loan.

 

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The Credit Facility bears interests at a fixed rate for fixed rate Underlying Loans. The weighted average interest rate for the fixed rate portion of the Credit Facility is 2.44% per annum. Interest on the Credit Facility will be paid monthly in cash in arrears on the 25th day of each month.

The Credit Facility contains a number of customary covenants that, among other things, restrict the ability of our subsidiaries that are a party to the agreement to grant liens, engage in mergers or the sale of substantially all of their assets, sell or dispose of the Underlying Loans and undertake transactions with affiliates.

The leverage utilized on all senior loans in our Initial Portfolio are matched in duration and structure, with a weighted average spread of 2.5% between the asset interest rate and the liability interest rate.

 

        Asset Metrics     Debt Metrics  

#

 

Investment

  Fixed /
Floating
Rate
    Interest
Rate
    Maturity
Date (1)
    Fixed /
Floating
Rate
    Interest
Rate
    Maturity
Date (1)
 

SENIOR LOANS

           
1   Senior Loan     Fixed       4.7     9/1/2028       Fixed       2.2     9/1/2028  
2   Senior Loan     Fixed       5.0     3/1/2029       Fixed       2.7     3/1/2029  
3   Senior Loan     Fixed       4.7     10/1/2025       Fixed       2.1     10/1/2025  
4   Senior Loan     Fixed       5.6     11/1/2028       Fixed       2.7     11/1/2028  
5   Senior Loan     Fixed       5.6     2/1/2029       Fixed       2.9     2/1/2029  
6   Senior Loan     Fixed       5.5     11/1/2023       Fixed       2.6     11/1/2023  
7   Senior Loan     Fixed       5.5     10/1/2028       Fixed       3.0     10/1/2028  
8   Senior Loan     Fixed       5.6     12/1/2028       Fixed       2.8     12/1/2028  
9   Senior Loan     Fixed       5.3     9/1/2028       Fixed       2.8     9/1/2028  
10   Senior Loan     Fixed       5.7     12/1/2028       Fixed       3.0     12/1/2028  
11   Senior Loan     Fixed       5.4     2/1/2028       Fixed       3.5     2/1/2028  
12   Senior Loan     Fixed       4.7     3/1/2026       Fixed       2.5     3/1/2026  
13   Senior Loan     Fixed       6.1     10/1/2028       Fixed       3.3     10/1/2028  
14   Senior Loan     Fixed       5.9     1/1/2029       Fixed       3.1     1/1/2029  
15   Senior Loan     Fixed       5.9     11/1/2028       Fixed       3.0     11/1/2028  
16   Senior Loan     Fixed       5.5     2/1/2029       Fixed       2.8     2/1/2029  
17   Senior Loan     Fixed       5.3     2/1/2029       Fixed       3.0     2/1/2029  
18   Senior Loan     Fixed       5.1     7/1/2028       Fixed       2.7     7/1/2028  
19   Senior Loan     Fixed       5.5     3/1/2029       Fixed       3.0     3/1/2029  
20   Senior Loan     Fixed       5.5     11/1/2028       Fixed       2.7     11/1/2028  
21   Senior Loan     Fixed       4.8     2/1/2024       Fixed       2.4     2/1/2024  
22   Senior Loan     Fixed       5.8     9/1/2023       Fixed       2.9     9/1/2023  
23   Senior Loan     Fixed       6.0     12/1/2028       Fixed       3.1     12/1/2028  
24   Senior Loan     Fixed       5.2     10/1/2028       Fixed       2.6     10/1/2028  
25   Senior Loan     Fixed       5.3     8/1/2023       Fixed       2.5     8/1/2023  
26   Senior Loan     Fixed       5.5     1/1/2029       Fixed       3.0     1/1/2029  
27   Senior Loan     Fixed       5.4     2/1/2029       Fixed       3.1     2/1/2029  
     

 

 

   

 

 

     

 

 

   

 

 

 

Senior Loans—Total / Wtd. Avg.

    100% Fixed       4.9     8.4       100% Fixed       2.4     8.4  
     

 

 

   

 

 

     

 

 

   

 

 

 

 

(1)

Weighted average years to maturity as of December 31, 2019.

 

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Investment Process

We expect to benefit from the tested method of capital allocation and on-going investment monitoring developed by our Sponsor. The primary objectives of the investment process are for it to be repeatable, dependable, and produce attractive risk-adjusted returns. The primary components of the investment process are as follows:

 

LOGO

Sourcing and Due Diligence:

 

   

Identify and Leverage: Our Manager begins with idea generation and honing in on potential investment opportunities with key attributes it feels are attractive by combining a fundamental macro view paired with local knowledge of key geographical areas of interest and property type fundamentals. Our Manager maintains a robust pipeline of deal flow created through strong relationships with institutions, brokers, investment banks and other investment professionals forged by our Manager’s affiliates over the years. This allows our Manager to be selective and only move forward with investments it believes to be best suited and aligned with our investment strategy. Our Manager is able to harness the expertise and resources of our Sponsor, which we believe may allow it to source opportunities that may not be available to competitors.

 

   

Due Diligence: Our Manager’s extensive due diligence process involves a rigorous three-pronged examination in the underwriting of the investment, a deep credit analysis of the sponsor, and lastly a physical inspection of the actual asset in a final attempt to investigate any potential issues not discovered or disclosed in the initial due diligence package.

 

   

Assess: Our Manager will stress test potential investments under various scenarios in an attempt to discover the durability and sustainability of cash flows.

 

   

Acquire/Invest/Structure: Once due diligence and stress-testing screens are completed, the investment opportunity will first be presented to a member of our Manager’s senior management for preliminary approval, and then presented to the Investment Committee of our Manager to examine the investment thesis, and finally decide if the overall investment fits within the parameters of our investment strategy and provides us the appropriate risk/return profile.

 

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Structuring and Enhancing Value:

 

   

Differentiated: We believe we will be differentiated from many other financing sources as we seek to offer a wide variety of financing solutions to best meet the needs of borrowers and to create symbiotic, long-lasting relationships.

 

   

Leverage: We intend to have a majority of our investment solutions crafted with protective rights to enhance value to stockholders. This allows for added downside protection in the event the borrower is unable to pay the interest or preferred return.

 

   

Top Quality Borrowers: We will seek to lend to top U.S. sponsors with strong balance sheets, thoughtful business plans, and stellar reputations.

Monitor and Exit:

 

   

Monitor: Our Manager will integrate risk management and investment discipline throughout the investment process and continually evaluate and monitor risk factors and market fundamentals in its investment-level analysis developed over our Sponsor’s 25 years of investing.

 

   

Exit: Through regular evaluation of our portfolio, we will evaluate when to harvest gains or reposition the portfolio to optimize risk-adjusted returns.

Investment Guidelines

Upon completion of this offering, we expect our board of directors will approve the following investment guidelines:

 

   

No investment will be made that would cause us to fail to qualify or maintain our qualification as a REIT under the Code;

 

   

No investment will be made that would cause us or any of our subsidiaries to be required to be registered as an investment company under the Investment Company Act;

 

   

Our Manager will seek to invest our capital in our target assets;

 

   

Prior to the deployment of our capital into our target assets, our Manager may cause our capital to be invested in any short-term investments in money market funds, bank accounts, overnight repurchase agreements with primary Federal Reserve Bank dealers collateralized by direct U.S. government obligations and other instruments or investments determined by our Manager to be of high quality and consistent with our qualification as a REIT under the Code; and

 

   

Without the approval of a majority of our independent directors, no more than 25% of our Equity (as defined in our Management Agreement) may be invested in any individual investment (it being understood, however, that for purposes of the foregoing concentration limit, in the case of any investment that is comprised (whether through a structured investment vehicle or other arrangement) of securities, instruments or assets of multiple portfolio issuers, such investment will be deemed to be multiple investments in such underlying securities, instruments and assets and not the particular vehicle, product or other arrangement in which they are aggregated).

 

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These investment guidelines may be amended, supplemented or waived by our board of directors (which must include a majority of our independent directors) from time to time, but without the approval of our stockholders.

Our Structure

The following chart summarizes our organizational structure following the Formation Transaction and this offering. This chart is provided for illustrative purposes only and does not show all of our legal entities or ownership percentages of such entities.

 

LOGO

Our Management Agreement

Prior to or concurrently with the completion of this offering, we intend to enter into the Management Agreement, pursuant to which NexPoint Real Estate Advisors VII, L.P. will serve as our Manager. Pursuant to the Management Agreement, subject to the overall supervision of our board of directors, our Manager will manage our day-to-day operations, and provide investment management services to us. Under the terms of this agreement, our Manager will, among other things:

 

   

identify, evaluate and negotiate the structure of our investments (including performing due diligence);

 

   

find, present and recommend investment opportunities consistent with our investment policies and objectives;

 

   

structure the terms and conditions of our investments;

 

   

review and analyze financial information for each investment in our overall portfolio;

 

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close, monitor and administer our investments; and

 

   

identify debt and equity capital needs and procure the necessary capital.

As consideration for the Manager’s services, we will pay our Manager an annual management fee of 1.5% of Equity (as defined below), paid monthly, in cash or shares of our common stock at the election of our Manager, or the Annual Fee.

“Equity” means (a) the sum of (1) total stockholders’ equity immediately prior to the closing of this offering, plus (2) the net proceeds received by us from all issuances of our common stock in and after this offering, plus (3) our cumulative Core Earnings (as defined below) from and after this offering to the end of the most recently completed calendar quarter, (b) less (1) any distributions to our common stockholders from and after this offering to the end of the most recently completed calendar quarter and (2) all amounts that we have paid to repurchase our common stock from and after this offering to the end of the most recently completed calendar quarter. In our calculation of Equity, we will adjust our calculation of Core Earnings to remove the compensation expense relating to awards granted under one or more of our long-term incentive plans that is added back in our calculation of Core Earnings. Additionally, for the avoidance of doubt, Equity will not include the assets contributed to us in the Formation Transaction as they will be contributed to subsidiary partnerships of the OP, which will not result in an increase in our stockholders’ equity attributable to common stockholders.

“Core Earnings” means the net income (loss) attributable to our common stockholders computed in accordance with GAAP, including realized gains and losses not otherwise included in net income (loss), excluding any unrealized gains or losses or other similar non-cash items that are included in net income (loss) for the applicable reporting period, regardless of whether such items are included in other comprehensive income (loss), or in net income (loss) and adding back amortization of stock-based compensation. Net income (loss) attributable to common stockholders may also be adjusted for one-time events pursuant to changes in GAAP and certain material non-cash income or expense items, in each case after discussions between the Manager and our independent directors and approved by a majority of the independent directors of our board.

Incentive compensation may be payable to our executive officers and certain other employees of our Manager or its affiliates pursuant to a long-term incentive plan approved by our stockholders. As discussed above, compensation expense is not considered when determining Core Earnings, in that we add back compensation expense to net income in the calculation of Core Earnings. However, compensation expense is considered when determining Equity, in that we will adjust our calculation of Core Earnings to remove the compensation expense that is added back in our calculation of Core Earnings.

We will be required to pay directly or reimburse our Manager for all of the documented “operating expenses” (all out-of-pocket expenses of our Manager in performing services for us, including but not limited to the expenses incurred by our Manager in connection with any provision by our Manager of legal, accounting, financial and due diligence services performed by our Manager that outside professionals or outside consultants would otherwise perform, compensation expenses under any long-term incentive plan adopted by us and approved by our stockholders and our pro rata share of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of our Manager required for our operations) and “offering expenses” (any and all expenses (other than underwriters’ discounts and commissions) paid or to be paid by us in connection with an offering of our securities, including, without limitation, our legal, accounting, printing, mailing and filing fees and other documented offering expenses) paid or incurred by our Manager or its affiliates in connection with the services

 

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it provides to us pursuant to the Management Agreement. However, our Manager is responsible, and we will not reimburse our Manager or its affiliates, for the salaries or benefits to be paid to personnel of our Manager or its affiliates who serve as our officers, except that we may grant equity awards to our officers under a long-term incentive plan adopted by us and approved by our stockholders. Direct payment of operating expenses by us, which includes compensation expense relating to equity awards granted under our long-term incentive plan, together with reimbursement of operating expenses to our Manager, plus the Annual Fee, may not exceed 2.5% of equity book value for any calendar year or portion thereof, provided, however, that this limitation will not apply to offering expenses, legal, accounting, financial, due diligence and other service fees incurred in connection with extraordinary litigation and mergers and acquisitions and other events outside the ordinary course of our business or any out-of-pocket acquisition or due diligence expenses incurred in connection with the acquisition or disposition of certain real estate-related investments.

The Management Agreement has an initial term of three years, and is automatically renewed thereafter for a one-year term unless earlier terminated. We will have the right to terminate the Management Agreement on 30 days’ written notice for cause (as defined in the Management Agreement). We may terminate the Manager for cause upon the occurrence of any one of the following: (i) the Manager or any of its agents or assignees is convicted of a felony or material violation of securities laws that has a material adverse effect on the business of the Company or the ability of the Manager to perform it duties under the terms of the Management Agreement; (ii) an order for relief in an involuntary bankruptcy case relating to the Manager or the Manager authorizing or filing a voluntary bankruptcy petition; (iii) the dissolution of the Manager; (iv) the Manager’s fraud, misappropriation of funds or embezzlement against us; (v) the Manager’s bad faith, willful misconduct, gross negligence or reckless disregard in the performance of its duties under the Management Agreement or (vi) the Manager’s material breach of any material provision of the Management Agreement that continues for a period of 30 days after written notice thereof, unless the Manager has taken certain actions to cure such material breach within 30 days of the written notice. The Management Agreement can be terminated by us or our Manager without cause with 180 days’ written notice to the other party. Our Manager may also terminate the agreement with 30 days’ written notice if we have materially breached the agreement and such breach has continued for 30 days. A termination fee will be payable to our Manager by us upon termination of our Management Agreement for any reason, including non-renewal, other than a termination by us for cause. The termination fee will be equal to three times the average Annual Fee earned by our Manager during the two-year period immediately preceding the most recently completed calendar quarter prior to the effective termination date; provided, however, if the Management Agreement is terminated prior to the two-year anniversary of the date of the Management Agreement, the management fee earned during such period will be annualized for purposes of calculating the average annual management fee.

Under the terms of the Management Agreement, our Manager will indemnify and hold harmless us, our subsidiaries and the OP from all claims, liabilities, damages, losses, costs and expenses, including amounts paid in satisfaction of judgments, in compromises and settlements, as fines and penalties and legal or other costs and expenses of investigating or defending against any claim or alleged claim, of any nature whatsoever, known or unknown, liquidated or unliquidated, that are incurred by reason of our Manager’s bad faith, fraud, willful misfeasance, intentional misconduct, gross negligence or reckless disregard of its duties; provided, however, that our Manager will not be held responsible for any action of our board of directors in following or declining to follow any written advice or written recommendation given by our Manager. However, the aggregate maximum amount that our Manager may be liable to us pursuant to the Management Agreement will, to the extent not prohibited by law, never exceed the amount of the management fees received by our Manager under the Management Agreement prior to the date that

 

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the acts or omissions giving rise to a claim for indemnification or liability have occurred. In addition, our Manager will not be liable for special, exemplary, punitive, indirect, or consequential loss, or damage of any kind whatsoever, including without limitation lost profits. The limitations described in the preceding two sentences will not apply, however, to the extent such damages are determined in a final binding non-appealable court or arbitration proceeding to result from the bad faith, fraud, willful misfeasance, intentional misconduct, gross negligence or reckless disregard of our Manager’s duties. See “Management Compensation.”

Operating and Regulatory Structure

REIT Qualification

We intend to elect to be treated as a REIT under the Code, commencing with our taxable year ending on December 31, 2020. We believe that we have been organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and that our intended manner of operation will enable us to meet the requirements for qualification and taxation as a REIT. We further believe that, after the consummation of this offering, we will satisfy the stock ownership diversity requirement for qualification as a REIT. To qualify as a REIT, we must meet on a continuing basis, through our organization and actual investment and operating results, various 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 shares of our stock. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax at regular corporate rates and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which we failed to qualify as a REIT. Even if we qualify for taxation as a REIT, we may be subject to some U.S. federal, state and local taxes on our income or property or REIT “prohibited transactions” taxes with respect to certain of our activities. Any distributions paid by us generally will not be eligible for taxation at the preferred U.S. federal income tax rates that apply to certain distributions received by individuals from taxable corporations. For additional information see “Risk Factors—Risks Related to Our Corporate Structure.”

Investment Company Act Exclusion

We, as well as our subsidiaries, intend to conduct our operations so that we are not required to register as an investment company under the Investment Company Act. Section 3(a)(1)(A) of the Investment Company Act defines an investment company as any issuer that is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Section 3(a)(1)(C) of the Investment Company Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test. Excluded from the term “investment securities,” among other things, are U.S. Government securities and securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on the exclusion from the definition of investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.

We are organized as a holding company and will conduct our business primarily through our OP and through subsidiaries of our OP. We anticipate that our OP will always be at least a majority-owned subsidiary. We intend to conduct our operations so that neither we nor our OP will hold investment securities in excess of the limit imposed by the 40% test. The securities

 

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issued by any wholly owned or majority-owned subsidiaries that we may form in the future that are excluded from the definition of “investment company” based on Section 3(c)(1) or 3(c)(7) of the Investment Company Act, together with any other investment securities we may own, may not have a value in excess of 40% of the value of our total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We will monitor our holdings to ensure continuing and ongoing compliance with this test. In addition, we believe that neither we nor our OP will be considered an investment company under Section 3(a)(1)(A) of the Investment Company Act because neither of us will engage primarily, propose to engage primarily, or hold ourselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, we and our OP will be primarily engaged in the non-investment company businesses of our subsidiaries.

We anticipate that certain of our subsidiaries will meet the requirements of the exclusion set forth in Section 3(c)(5)(C) of the Investment Company Act, which excludes entities primarily engaged in the business of “purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” To meet this exclusion, the SEC staff has taken the position that at least 55% of a subsidiary’s assets must constitute qualifying assets (as interpreted by the SEC staff under the Investment Company Act) and at least another 25% of assets (subject to reduction to the extent the subsidiary invested more than 55% of its total assets in qualifying assets) must constitute real estate-related assets under the Investment Company Act (and no more than 20% comprised of miscellaneous assets). We expect to treat residential mortgage loans as qualifying real estate assets and CMBS B-Pieces, mezzanine loans and other real estate-related investments as real estate-related assets. In general, we also expect, with regard to our subsidiaries relying on Section 3(c)(5)(C), to rely on other guidance published by the SEC staff and on our analyses of guidance published with respect to other types of assets to determine which assets are qualifying assets and real estate-related assets. Maintaining the Section 3(c)(5)(C) exclusion, however, will limit our ability to make certain investments.

In August 2011, the SEC solicited public comment on a wide range of issues relating to Section 3(c)(5)(C), including the nature of the assets that qualify for purposes of this exclusion and whether mortgage REITs should be regulated in a manner similar to investment companies. There can be no assurance that the laws and regulations governing the Investment Company Act status of REITs (and/or their subsidiaries), including guidance of the SEC or its staff regarding this exclusion, will not change in a manner that adversely affects our operations. To the extent that the SEC or its staff publishes new or different guidance with respect to these matters, we may be required to adjust our strategy accordingly. In addition, we may be limited in our ability to make certain investments, and these limitations could result in a subsidiary holding assets we might wish to sell or not acquiring or selling assets we might wish to hold. Although we intend to continually monitor the portfolios of our subsidiaries relying on the Section 3(c)(5)(C) exclusion, there can be no assurance that such subsidiaries will be able to maintain compliance with this exclusion. For our subsidiaries that do maintain this exclusion, our interests in these subsidiaries will not constitute “investment securities.”

The determination of whether an entity is a majority-owned subsidiary of our company is made by us. The Investment Company Act defines a majority-owned subsidiary of a person as a company 50% or more of the outstanding voting securities of which are owned by such person, or by another company which is a majority-owned subsidiary of such person. The Investment Company Act further defines voting securities as any security presently entitling the owner or holder thereof to vote for the election of directors, or the equivalent, of a company. We treat companies in which we own at least a majority of the outstanding voting securities as majority-owned subsidiaries for purposes of the 40% test. We have not requested the SEC to approve our treatment of any company as a majority-owned subsidiary, and the SEC has not done so. If the SEC

 

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were to disagree with our treatment of one or more companies as majority-owned subsidiaries, we would need to adjust our strategy and our assets in order to continue to pass the 40% test. Any such adjustment in our strategy could have a material adverse effect on us.

To the extent that the SEC staff provides more specific guidance regarding any of the matters bearing upon such exclusions, we may be required to adjust our strategy accordingly. Any additional guidance from the SEC staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the strategies we have chosen.

Restrictions on Ownership of Our Common Stock

Restrictions on Ownership and Transfer of Our Common Stock

To assist us in complying with the limitations on the concentration of ownership of a REIT imposed by the Code, among other purposes, our charter prohibits, with certain exceptions, any stockholder from beneficially or constructively owning, applying certain attribution rules under the Code, more than 6.2% by value or number of shares, whichever is more restrictive, of the aggregate of the outstanding shares of our common stock, or 6.2% by value of the aggregate of the outstanding shares of our capital stock. Our board of directors may, in its sole discretion, subject to such conditions as it may determine and the receipt of certain representations and undertakings, waive the 6.2% ownership limit with respect to a particular stockholder if such ownership will not then or in the future jeopardize our qualification as a REIT. In connection with this offering, our board of directors intends to grant our Sponsor and its affiliates a waiver allowing them to own up to 25% of our common stock. Our charter also prohibits any person from, among other things, beneficially or constructively owning shares of our capital stock that would result in our being “closely held” under Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year), or otherwise cause us to fail to qualify as a REIT.

Our charter provides that any ownership or purported transfer of our capital stock in violation of the foregoing restrictions will result in the shares so owned or transferred being automatically transferred to a charitable trust for the benefit of a charitable beneficiary, and the purported owner or transferee acquiring no rights in such shares. If a transfer of shares of our capital stock would result in our capital stock being beneficially owned by fewer than 100 persons or the transfer to a charitable trust would be ineffective for any reason to prevent a violation of the other restrictions on ownership and transfer of our capital stock, the transfer resulting in such violation will be void ab initio.

Implications of Being an Emerging Growth Company and Smaller Reporting Company

Emerging Growth Company and Smaller Reporting Company Status

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

The JOBS Act permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to

 

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public companies. We have elected to take advantage of this extended transition period. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates for such new or revised standards. We may elect to comply with public company effective dates at any time, and such election would be irrevocable pursuant to Section 107(b) of the JOBS Act.

We could remain an “emerging growth company” until the earliest of (1) the end of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement, (2) the last day of the fiscal year in which our annual gross revenues exceed $1.07 billion, (3) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, or the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (4) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.

We are also a “smaller reporting company” as defined in Regulation S-K under the Securities Act, and may elect to take advantage of certain of the scaled disclosures available to smaller reporting companies. We may be a smaller reporting company even after we are no longer an “emerging growth company.”

Competition

Our profitability depends, in large part, on our ability to acquire our target assets at attractive prices. We are subject to significant competition in acquiring our target assets. In particular, we will compete with a variety of institutional investors, including other REITs, specialty finance companies, public and private funds, commercial and investment banks, hedge funds, mortgage bankers, commercial finance and insurance companies, governmental bodies and other financial institutions. We may also compete with our Sponsor and its affiliates for investment opportunities. See “Risk Factors— There are significant potential conflicts of interest that could affect our investment returns” and “Conflicts of Interest.” In addition, there are several REITs with similar investment objectives and others may be organized in the future. These other REITs will increase competition for the available supply of first mortgage loans, CMBS B-Pieces and other real estate related assets suitable for investment. Some of our anticipated competitors have greater financial resources, access to lower costs of capital and access to funding sources that may not be available to us, such as funding from the U.S. government, if we are not eligible to participate in programs established by the U.S. government. In addition, some of our competitors are not subject to the operating constraints associated with REIT tax compliance or maintenance of an exclusion or exemption from the 1940 Act. Furthermore, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments, or pay higher prices, than we can. Current market conditions may attract more competitors, which may increase the competition for our target assets. An increase in the competition for such assets may increase the price of such assets, which may limit our ability to generate attractive risk-adjusted current income and capital appreciation for our stockholders, thereby adversely affecting the market price of our common stock.

In the face of this competition, we expect to have access to our Sponsor’s professionals and their industry experience, which we believe will provide us with a competitive advantage and help us assess investment risks and determine appropriate pricing for potential investments. We expect that these relationships will enable us to compete more efficiently and effectively for attractive investment opportunities. Although we believe we are well positioned to compete effectively, there can be no assurance that we will be able to achieve our business goals or expectations due to the extensive competition in our market sector. We operate in a competitive

 

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market for investment opportunities and future competition may limit our ability to acquire desirable investments in our target assets and could also affect the pricing of our securities.

Employees

We are externally managed by our Manager pursuant to the Management Agreement between us and our Manager. All of our executive officers are employees of our Manager or its affiliates. Upon completion of this offering we anticipate having one paid employee, who will be an accounting employee dedicated to us. We will have the flexibility to hire additional employees in the future and will be responsible for any such employee’s salary and other compensation.

Legal Proceedings

We are not currently a party to any legal proceedings which, individually or in the aggregate, would be expected to have a material effect on our business, financial condition, results of operations, or financial statements, taken as a whole, if determined adversely to us.

Corporate Information

Our and our Manager’s offices are located at 300 Crescent Court, Suite 700, Dallas, Texas 75201. Our and our Manager’s telephone number is (972) 628-4100. We will maintain a website at www.nexpointfinance.com. Information contained on, or accessible through our website is not incorporated by reference into and does not constitute a part of this prospectus or any other report or documents we file with or furnish to the SEC.

 

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MANAGEMENT

Board of Directors

We operate under the direction of our board of directors. Our board of directors is responsible for directing the management of our business and affairs. Our board of directors has retained our Manager to manage our day-to-day operations and our portfolio of real estate assets, subject to the supervision of our board of directors.

Each director will serve until the next annual meeting of stockholders and until his successor has been duly elected and qualified. At any meeting of stockholders, the presence in person or by proxy of stockholders entitled to cast a majority of the votes entitled to be cast at such meeting on any matter constitutes a quorum. A plurality of the votes cast at a meeting of stockholders duly called and at which a quorum is present is sufficient to elect a director.

Although our board of directors may increase or decrease the number of directors, a decrease may not have the effect of shortening the term of any incumbent director. Any director may resign at any time or may be removed only for cause, and then only by the stockholders upon the affirmative vote of at least a majority of all the votes entitled to be cast generally in the election of directors.

A vacancy created by an increase in the number of directors or the death, resignation, removal, adjudicated incompetence or other incapacity of a director may be filled only by a vote of 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 serve for the remainder of the full term of the directorship in which the vacancy occurred.

In addition to meetings of the various committees of our board of directors, which committees we describe below, we expect our directors to hold at least four regular board meetings each year.

Our Directors

Upon completion of this offering, our board of directors will consist of five members. The following sets forth certain information with respect to our directors as of January 27, 2020:

 

Name

   Age     

Position(s)

James Dondero

     57      President and Director

Brian Mitts

     49      Chief Financial Officer, Executive VP-Finance, Secretary and Treasurer and Director

Edward Constantino

     73      Director

Scott Kavanaugh

     59      Director

Dr. Arthur Laffer

     79      Director

James Dondero: Mr. Dondero will serve as our President and as a director upon the completion of this offering. Mr. Dondero has also served as the chairman of the Board and as a member of the Board of NXRT since May 2015. Mr. Dondero also currently serves as NXRT’s President. Mr. Dondero is also: the co-founder and president of Highland; founder and president of our Sponsor, an SEC-registered investment advisor; and president of NexPoint Capital. Mr. Dondero co-founded Highland in 1993 with Mark Okada. Mr. Dondero has over 30 years of experience investing in credit and equity markets and has helped pioneer credit asset classes. Mr. Dondero has also served as the Chief Executive Officer of NHT, a publicly traded hospitality

 

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real estate investment trust listed on the TSX Venture Exchange, or TSXV, since December 2018, and has been a director of Jernigan Capital, Inc., a self-storage lending real estate investment trust, since August 2016. On October 16, 2019, Highland filed for Chapter 11 bankruptcy protection with the United States Bankruptcy Court for the District of Delaware. Mr. Dondero was selected to serve on the Board because of his prior service as a director and his experience as an executive officer.

Brian Mitts: Mr. Mitts will serve as our Chief Financial Officer, Executive Vice President-Finance, Secretary and Treasurer upon the completion of this offering. Mr. Mitts has served as a member of our board of directors since June 2019. Mr. Mitts also served as our President and Treasurer from June 2019 until the completion of this offering. Mr. Mitts is also a member of the investment committee of our Manager. Mr. Mitts joined Highland Capital Management Fund Advisors, L.P. in February 2007 and served in various roles until May 2017. Mr. Mitts joined NexPoint in June 2016 and currently serves as the Chief Operations Officer of, and leads business development for, the NexPoint real estate platform, developing new products and exploring new markets. Mr. Mitts has also served as a director of NXRT since September 2014 and as the Chief Financial Officer, Executive Vice President-Finance and Treasurer of NXRT since March 2015. On February 13, 2019, Mr. Mitts was also appointed Secretary of NXRT. From September 2014 to March 2015, Mr. Mitts served as President and Treasurer of NXRT. Mr. Mitts has also served as the Chief Financial Officer, Executive VP-Finance, Treasurer and Corporate Secretary of NexPoint Hospitality Trust, or NHT, since December 2018. Mr. Mitts was selected to serve on the Board because of his prior service as a director and his experience as an executive officer.

Edward Constantino: Mr. Constantino will be a director upon the completion of this offering. Mr. Constantino has also served as a member of the Board of NXRT since March 2015. Mr. Constantino has over 40 years of audit, advisory and tax experience working for two major accounting firms, Arthur Andersen LLP and KPMG. Mr. Constantino retired from KPMG in late 2009, where he was an audit partner in charge of the firm’s real estate and asset management businesses. Mr. Constantino is, and since 2010 has been, a member of the Board of Directors of Patriot Bank N.A. Mr. Constantino has also served as a consultant for the law firm Skadden, Arps, Slate, Meagher & Flom LLP. He is a licensed CPA, a member of the American Institute of Certified Public Accountants and a member of the New York State Society of Public Accountants. He is currently a member of the Board of Trustees and the Audit Committee Chairman of St. Francis College in Brooklyn Heights, New York. Mr. Constantino was selected to serve on the Board because of his extensive accounting experience, particularly in the real estate field.

Scott Kavanaugh: Mr. Kavanaugh will be a director upon the completion of this offering. Mr. Kavanaugh has also served as a member of the Board of NXRT since March 2015. Mr. Kavanaugh is, and since December 2009 has been the CEO of First Foundation Inc. (“FFI”), a California based financial services company. From June 2007 until December 2009, he served as President and Chief Operating Officer of FFI. Mr. Kavanaugh has been the Vice-Chairman of FFI since June 2007. He also is, and since September 2007 has been, the Chairman and CEO of FFI’s wholly owned banking subsidiary, First Foundation Bank. Mr. Kavanaugh was a founding stockholder and served as an Executive Vice President and Chief Administrative Officer and a member of the board of directors of Commercial Capital Bancorp, Inc., the parent holding company of Commercial Capital Bank, from 1999 until 2003. From 1998 until 2003, Mr. Kavanaugh served as the Executive Vice President and Chief Operating Officer and a director of Commercial Capital Mortgage. From 1993 to 1998, Mr. Kavanaugh was a partner and head of trading for fixed income and equity securities at Great Pacific Securities, Inc., a west coast-based regional securities firm. Mr. Kavanaugh is, and since 2009 has been, a member of the board of directors of Colorado Federal Savings Bank and its parent holding company, Silver Queen Financial Services, Inc. Mr. Kavanaugh also served as a member of the boards of directors of NexBank and its parent holding company, NexBank Capital, Inc., an affiliate of Highland from 2014 until 2015. From 1998 until June 2012, Mr. Kavanaugh

 

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served as Independent Trustee and Chairman of the Audit Committee, and from June 2012 until December 2013 served as Chairman, of Highland Mutual Funds, a mutual fund group managed by Highland. Mr. Kavanaugh was selected to serve on the Board because of his expertise in investment management and his experience as both an executive officer and a director of multiple companies.

Arthur Laffer: Dr. Laffer will be a director upon the completion of this offering. Dr. Laffer has also served as a member of the Board of NXRT since May 2015. Dr. Laffer is the founder and chairman of Laffer Associates, an economic research and consulting firm and served as the chairman and director of Laffer Investments, a registered investment advisor, from 1999 to 2019. Dr. Laffer has also been a director of GEE Group, Inc., a provider of specialized staffing solutions, since January 2015. A former member of President Reagan’s Economic Policy Advisory Board during the 1980s, Dr. Laffer’s economic acumen and influence have earned him the distinction in many publications as The Father of Supply-Side Economics. He has served on several boards of directors of public and private companies, including staffing company MPS Group, Inc., which was sold to Adecco Group for $1.3 billion in 2009. Dr. Laffer has served as a director of GEE Group Inc. since 2014 and VerifyMe, Inc. since 2019. Dr. Laffer also served on the board of directors of EVO Transportation & Energy Services, Inc. from 2018 to 2019. Dr. Laffer was previously a consultant to Secretary of the Treasury William Simon, Secretary of Defense Donald Rumsfeld, and Secretary of the Treasury George Shultz. In the early 1970s, Dr. Laffer was the first to hold the title of Chief Economist at the Office of Management and Budget under Mr. Shultz. Additionally, Dr. Laffer was formerly the Distinguished University Professor at Pepperdine University and a member of the Pepperdine Board of Directors. He also served as Charles B. Thornton Professor of Business Economics at the University of Southern California and as Associate Professor of Business Economics at the University of Chicago. Dr. Laffer was selected to serve on the Board because of his expertise in economics and his experience as a director of multiple companies.

Director Independence

The board of directors will review the materiality of any relationship that each of our directors has with us, either directly or indirectly. We expect that the board of directors will determine that each of Mr. Constantino, Mr. Kavanaugh and Dr. Laffer is independent as defined by the NYSE rules.

Corporate Governance Profile

We have structured our corporate governance in a manner we believe aligns our interests with those of our stockholders. Notable features of our corporate governance structure include the following:

 

   

the board of directors is not staggered, meaning that each of our directors is subject to re-election annually;

 

   

at least one of our directors qualifies as an “audit committee financial expert” as defined by the SEC; and

 

   

we have opted out of the business combination provisions and the control share acquisition provisions of the MGCL.

Board Committees

The board of directors will have three standing committees: an audit committee, a compensation committee and a nominating and corporate governance committee. The principal

 

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functions of each committee are briefly described below. Additionally, the board of directors may from time to time establish certain other committees to facilitate the management of our Company.

Audit Committee

Our audit committee will consist of Mr. Constantino, Mr. Kavanaugh and Dr. Laffer, with Mr. Constantino serving as chair of the committee. We expect that the board of directors will determine that Mr. Constantino qualifies as an “audit committee financial expert” as that term is defined by the applicable SEC regulations and NYSE corporate governance listing standards. We also expect that the board of directors will determine that each of Mr. Constantino, Mr. Kavanaugh and Dr. Laffer is “financially literate” as that term is defined by the NYSE corporate governance listing standards and is independent as defined by NYSE rules and SEC requirements relating to the independence of audit committee members. Our audit committee charter details the principal functions of the audit committee, including oversight related to:

 

   

our accounting and financial reporting processes;

 

   

the integrity of our consolidated financial statements;

 

   

our systems of disclosure controls and procedures and internal control over financial reporting;

 

   

our compliance with financial, legal and regulatory requirements;

 

   

the performance of our internal audit function; and

 

   

our overall risk assessment and management.

The audit committee will also be responsible for engaging an independent registered public accounting firm, reviewing with the independent registered public accounting firm the plans and results of the audit engagement, approving professional services provided by the independent registered public accounting firm, including all audit and non-audit services, reviewing the independence of the independent registered public accounting firm, considering the range of audit and non-audit fees and reviewing the adequacy of our internal accounting controls. A copy of the audit committee charter will be available under the Investors section of our website at www.nexpointfinance.com.

Compensation Committee

Our compensation committee will consist of Mr. Constantino, Dr. Laffer and Mr. Kavanaugh, with Dr. Laffer serving as chair of the committee. We expect that the board of directors will determine that each of Mr. Constantino, Dr. Laffer and Mr. Kavanaugh is independent as defined by NYSE rules and SEC requirements relating to the independence of compensation committee members. Our compensation committee charter details the principal functions of the compensation committee, including:

 

   

reviewing our compensation policies and plans;

 

   

implementing and administering a long-term incentive plan; and

 

   

reviewing, evaluating and recommending changes, if appropriate, to the remuneration for directors.

 

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The compensation committee will have the sole authority to retain and terminate compensation consultants to assist in the evaluation of our compensation and the sole authority to approve the fees and other retention terms of such compensation consultants. The committee will also be able to retain independent counsel and other independent advisors to assist it in carrying out its responsibilities. A copy of the compensation committee charter will be available under the Investors section of our website at www.nexpointfinance.com.

Nominating and Corporate Governance Committee

Our nominating and corporate governance committee will consist of Mr. Constantino, Dr. Laffer and Mr. Kavanaugh, with Mr. Kavanaugh serving as chair of the committee. We expect that the board of directors will determine that each of Mr. Constantino, Dr. Laffer and Mr. Kavanaugh is independent as defined by NYSE rules. Our nominating and corporate governance committee charter details the principal functions of the nominating and corporate governance committee, including:

 

   

identifying and recommending to the full board of directors qualified candidates for election as directors and recommending nominees for election as directors at the annual meeting of stockholders;

 

   

developing and recommending to the board of directors corporate governance guidelines and implementing and monitoring such guidelines;

 

   

reviewing and making recommendations on matters involving the general operation of the board of directors, including board size and composition, and committee composition and structure;

 

   

recommending to the board of directors nominees for each committee of the board of directors;

 

   

annually facilitating the assessment of the board of directors’ performance, as required by applicable law, regulations and the NYSE corporate governance listing standards; and

 

   

annually reviewing and making recommendations to the board of directors regarding revisions to the corporate governance guidelines and the code of business conduct and ethics.

The nominating and corporate governance committee will have the sole authority to retain and terminate any search firm to assist in the identification of director candidates and the sole authority to set the fees and other retention terms of such search firms. The committee will also be able to retain independent counsel and other independent advisors to assist it in carrying out its responsibilities. A copy of the nominating and corporate governance committee charter will be available under the Investors section of our website at www.nexpointfinance.com.

Other Committees

The board of directors may establish other committees as it deems necessary or appropriate from time to time.

Corporate Governance Guidelines and Code of Business Conduct and Ethics

The board of directors will adopt corporate governance guidelines that describe the principles under which the board of directors will operate and will establish a code of business conduct and

 

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ethics that applies to our directors and executive officers, who are employees of our Manager. Among other matters, our code of business conduct and ethics will be designed to deter wrongdoing and to promote:

 

   

honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

 

   

full, fair, accurate, timely and understandable disclosure in our SEC reports and other public communications;

 

   

compliance with laws, rules and regulations;

 

   

prompt internal reporting of violations of the code to appropriate persons identified in the code; and

 

   

accountability for adherence to the code of business conduct and ethics.

Copies of our corporate governance guidelines and code of business conduct and ethics will be available under the Investors section of our website at www.nexpointfinance.com.

Board Leadership Structure and Board’s Role in Risk Oversight

James Dondero, our President, will serve as Chairman of the Board. The board of directors believes that combining these positions is the most effective leadership structure for us at this time. As President, Mr. Dondero is involved in the day-to-day operations and is familiar with the opportunities and challenges that we face at any given time. With this insight, he is able to assist the board of directors in setting strategic priorities, lead the discussion of business and strategic issues and translate board of directors’ recommendations into Company operations and policies.

The board of directors will appoint Mr. Kavanaugh as its lead independent director. His key responsibilities in this role include:

 

   

developing agendas for, and presiding over, the executive sessions of the non-management or independent directors;

 

   

reporting the results of the executive sessions to the Chairman;

 

   

providing feedback from executive sessions to the Chairman;

 

   

serving as a liaison between the independent directors and the Chairman;

 

   

presiding at all meetings of the board of directors at which the Chairman is not present;

 

   

approving information sent to the board of directors;

 

   

approving agendas for meetings of the board of directors;

 

   

approving board meeting schedules to ensure that there is sufficient time for discussion of all agenda items;

 

   

calling meetings of the independent directors; and

 

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if requested by major stockholders, ensuring that he is available for consultation and direct communication.

Risk is inherent with every business, and we face a number of risks as outlined in the “Risk Factors” section of this prospectus. Management is responsible for the day-to-day management of risks we face, while the board of directors, as a whole and through our audit committee, is responsible for overseeing our management and operations, including overseeing its risk assessment and risk management functions. The board of directors will delegate responsibility for reviewing our policies with respect to risk assessment and risk management to our audit committee through its charter. The board of directors has determined that this oversight responsibility can be most efficiently performed by our audit committee as part of its overall responsibility for providing independent, objective oversight with respect to our accounting and financial reporting functions, internal and external audit functions and systems of internal controls over financial reporting and legal, ethical and regulatory compliance. Our audit committee will regularly report to the board of directors with respect to its oversight of these areas.

Communications with the Board

Any stockholder or other interested party who wishes to communicate directly with the board of directors or any of its members may do so by writing to: Board of Directors, c/o NexPoint Real Estate Finance, Inc., 300 Crescent Court, Suite 700, Dallas, Texas 75201, Attn: Corporate Secretary. The mailing envelope should clearly indicate whether the communication is intended for the board of directors as a group, the non-employee directors or a specific director.

Compensation of Our Executive Officers

Because our Management Agreement provides that our Manager is responsible for managing our affairs, our officers, who are employees of our Manager or its affiliates, have not received, nor do we expect they will in the future receive, any cash compensation from us for their services as our officers. Instead, we pay our Manager the fees described under “Management Compensation.” We may, however, compensate our officers and individuals affiliated with our Manager with equity and equity-based awards or other types of awards in accordance with a long-term incentive plan. Awards that may be granted under an incentive plan include restricted stock, restricted stock units, options, stock appreciation rights, performance incentive awards, profits interest units, dividend equivalents, and other stock based or cash based awards (collectively referred to herein as “awards”). Our compensation committee will determine if and when any of our officers or individuals affiliated with our Manager will receive such awards. As of the date of this prospectus, we have not granted any equity awards to our officers or individuals affiliated with our Manager as compensation or otherwise. Additionally, our officers or such individuals affiliated with our Manager are officers of one or more of our affiliates and are compensated by those entities, in part, for their services rendered to us. For additional information regarding our long-term incentive plan, see “—NexPoint Real Estate Finance, Inc. 2020 Long-Term Incentive Plan” below.

Compensation of Our Directors

In connection with the completion of this offering, we expect that our board of directors will adopt a director compensation policy that provides that:

 

   

each non-management director will receive an annual director’s fee payable in cash equal to $20,000 and an annual grant of restricted stock units to be determined by the compensation committee;

 

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the chair of the audit committee will receive an additional annual fee payable in cash equal to $15,000;

 

   

the chair of the compensation committee will receive an additional annual fee payable in cash equal to $7,500;

 

   

the chair of the nominating and corporate governance committee will receive an additional annual fee payable in cash equal to $7,500; and

 

   

the lead independent director, if any, will receive an additional annual fee payable in cash equal to $10,000.

We have not made any payments to any of our directors or director nominees to date.

We also expect to reimburse directors for all expenses incurred in attending board and committee meetings.

NexPoint Real Estate Finance, Inc. 2020 Long-Term Incentive Plan

Prior to this offering, our board of directors will adopt and our stockholders will approve the NexPoint Real Estate Finance, Inc. 2020 Long-Term Incentive Plan, or the 2020 LTIP. The description of the 2020 LTIP set forth below is a summary of the material features of the 2020 LTIP. This summary does not purport to be a complete description of all provisions of the 2020 LTIP. As a result, the following description is qualified in its entirety by reference to the 2020 LTIP, which is filed as an exhibit to the registration statement of which this prospectus forms a part.

Administration of the 2020 LTIP and Eligibility

The 2020 LTIP will generally be administered by the compensation committee, or any other committee of the board designated by the board to administer the 2020 LTIP. The compensation committee may from time to time delegate all or any part of its authority under the 2020 LTIP to any subcommittee thereof. Any interpretation, construction and determination by the compensation committee of any provision of the 2020 LTIP, or of any agreement, notification or document evidencing the grant of awards under the 2020 LTIP, will be final and conclusive. To the maximum extent permitted by applicable law, the compensation committee may delegate to one or more of its members or to one or more of our officers, or to one or more of our agents or advisors, such administrative duties or powers as it deems advisable. In addition, the compensation committee may by resolution, subject to certain restrictions set forth in the 2020 LTIP, authorize one or more of our officers to (a) designate employees to be recipients of awards under the 2020 LTIP, and (b) determine the size of such awards. However, the compensation committee may not delegate such responsibilities to officers for awards granted to certain employees who are subject to the reporting requirements of Section 16 of the Exchange Act.

Any person who is selected by the compensation committee to receive awards under the 2020 LTIP and who is at that time an officer, service provider or other key employee of ours or any of our affiliates or subsidiaries (including a person who has agreed to commence serving in such capacity within 90 days of the date of grant) or director is eligible to participate in the 2020 LTIP. In addition, certain persons who provide services to us or any of our affiliates or subsidiaries that are equivalent to those typically provided by an employee, including employees of our Manager may also be selected to participate in the 2020 LTIP. At the consummation of this offering, there will be approximately six employees of our Manager and three independent directors expected to participate in the 2020 LTIP.

 

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Stock Options

The 2020 LTIP authorizes the grant of incentive stock options and options that do not qualify as incentive stock options, except that incentive stock options will be granted only to eligible participants who meet the definition of “employees” under Section 3401(c) of the Code. The exercise price of each option cannot be less than the market value per share of our common stock on the date on which the option is granted. The term of an option cannot exceed ten years from the date of grant (or five years in the case of an incentive stock option granted to a ten percent stockholder).

Appreciation Rights

The 2020 LTIP authorizes the grant of appreciation rights. An appreciation right provides the recipient with the right to receive, upon exercise of the appreciation right, shares of our common stock, cash, or a combination of the two, as specified in the award agreement. The amount that the recipient will receive upon exercise of the appreciation right generally will equal the excess of the market value per share of our common stock on the date when the appreciation right is exercised over the base price provided for in the related stock appreciation right. Appreciation rights will become exercisable in accordance with terms determined by our compensation committee. Appreciation rights may be granted in tandem with an option grant or as independent grants. The term of an appreciation right cannot exceed, in the case of a tandem appreciation right, the expiration, cancellation, forfeiture or other termination of the related option and, in the case of a free-standing appreciation right, ten years from the date of grant.

Restricted Stock and RSUs

The 2020 LTIP also provides for the grant of restricted stock and RSUs. Our compensation committee will determine the number of shares of common stock subject to a restricted stock or RSU award and the restriction period, performance period (if any), the performance measures (if any) and the other terms applicable to a stock award under the 2020 LTIP. A RSU confers on the participant the right to receive common stock, cash or a combination thereof. The holders of awards of restricted stock will be entitled to receive dividends, and unless otherwise set forth in the applicable award agreement, the holders of awards of RSUs will not be entitled to receive dividend equivalents.

Performance Awards

The 2020 LTIP also authorizes the grant of performance awards in the form of performance shares, performance units or cash incentive awards. Performance awards represent the participant’s right to receive an amount of cash, shares of our common stock, or a combination of both, contingent upon the attainment of specified performance measures within a specified period. Our compensation committee will determine the applicable performance period, the performance goals and such other conditions that apply to the performance award.

Profits Interest Units

The 2020 LTIP also provides for the grant of profits interest units. Profits interest units are units of the OP that may be granted under the 2020 LTIP that are intended to constitute “profits interests” within the meaning of the Code. The compensation committee will determine the number of units subject to a profits interest unit award, the vesting period, performance period (if any), performance measures (if any) and the other terms applicable to the award.

 

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Other Stock-Based Awards

Our compensation committee may grant other forms of awards that are denominated in or payable in, valued in whole or in part by reference to, or otherwise based on or related to, shares of our common stock or factors that may influence the value of shares of our common stock.

Share Authorization

Subject to adjustment as described in the 2020 LTIP, the number of shares of our common stock available under the 2020 LTIP for awards shall be, in the aggregate, 7.5% of our common shares outstanding on a fully diluted basis after giving effect to the Formation Transaction and the offering (assuming all subsidiary partnership units are redeemed for shares of our common stock) plus any shares of our common stock that become available under the 2020 LTIP as a result of forfeiture, cancellation, expiration, or cash settlement of awards. Each profits interest unit issued pursuant to an award agreement shall count as one share for purposes of calculating the aggregate number of shares available for issuance under the 2020 LTIP.

Our compensation committee will make or provide for such adjustments in the numbers of shares of our common stock covered by outstanding awards under the 2020 LTIP as the committee, in its sole discretion, exercised in good faith, determines is equitably required to prevent dilution or enlargement of the rights of participants that otherwise would result from (a) any stock dividend, stock split, combination of shares, recapitalization or other change in our capital structure, (b) any merger, consolidation, spin-off, split-off, spin-out, split-up, reorganization, partial or complete liquidation or other distribution of assets, issuance of rights or warrants to purchase securities, or (c) any other corporate transaction or event having an effect similar to any of the foregoing. Moreover, in the event of any such transaction or event or in the event of a change in control, the compensation committee will provide in substitution for any or all outstanding awards under the 2020 LTIP such alternative consideration (including cash), if any, as it, in good faith, may determine to be equitable in the circumstances. Subject to certain limitations, the compensation committee will also make or provide for such adjustments in the numbers of authorized shares under the 2020 LTIP as the committee in its sole discretion, exercised in good faith, determines is appropriate to reflect any transaction or event described above.

Termination; Amendment

No grant will be made under the 2020 LTIP after the tenth anniversary of the 2020 LTIP’s effective date, but all grants made on or prior to such date will continue in effect thereafter subject to the terms thereof and of the 2020 LTIP. The board of directors may at any time and from time to time amend the 2020 LTIP in whole or in part; provided, however, that if an amendment to the 2020 LTIP (1) would materially increase the benefits accruing to participants under the 2020 LTIP, (2) would materially increase the number of securities which may be issued under the 2020 LTIP, (3) would materially modify the requirements for participation in the 2020 LTIP, or (4) must otherwise be approved by our stockholders in order to comply with applicable law or the rules of the NYSE or other principal national securities exchange upon which shares of our common stock are traded or quoted, then such amendment will be subject to stockholder approval and will not be effective unless and until such approval has been obtained.

Limited Liability and Indemnification of Directors, Officers, Employees and Agents

We are permitted to limit the liability of our directors and officers to us and our stockholders for monetary damages and to indemnify and advance expenses to our directors, officers, employees and agents, to the extent permitted by Maryland law and our charter.

Maryland law permits us to include in our charter a provision eliminating the liability of our directors and officers to our stockholders and us for money damages, except for liability resulting

 

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from (1) actual receipt of an improper benefit or profit in money, property or services or (2) active and deliberate dishonesty established by a final judgment and that is material to the cause of action.

Maryland law 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 or threatened to be made a party by reason of his or her service in that capacity. Maryland law allows current and former directors and officers, among others, to be indemnified against judgments, penalties, fines, settlements and reasonable expenses actually incurred in a proceeding unless the following can be established:

 

   

an act or omission of the director or officer was material to the cause of action adjudicated in the proceeding and (a) was committed in bad faith or (b) was the result of active and deliberate dishonesty;

 

   

the director or officer actually received an improper personal benefit in money, property or services; or

 

   

with respect to any criminal proceeding, the director or officer had reasonable cause to believe his or her act or omission was unlawful.

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 the corporation or in its right, or for a judgment of liability on the basis that personal benefit was improperly received, is limited to expenses. Maryland law permits a corporation to advance reasonable expenses to a director or officer upon receipt of a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification and a written undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed if it is ultimately determined that the standard of conduct was not met.

Subject to the limitations contained in Maryland law, our charter contains a provision that limits directors’ and officers’ liability to us and our stockholders for monetary damages, and our charter and bylaws require us 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 directors and our officers and permit us to provide such indemnification and advance of expenses to our employees and agents. Furthermore, in connection with the offering we will enter into indemnification agreements with our directors and officers that provide for indemnification to the maximum extent permitted by Maryland law.

These provisions neither reduce the exposure of directors and officers to liability under federal or state securities laws nor limit the stockholders’ ability to obtain injunctive relief or other equitable remedies for a violation of a director’s or an officer’s duties to us, although the equitable remedies may not be an effective remedy in some circumstances.

We will also purchase and maintain insurance on behalf of all of our directors and executive officers against liability asserted against or incurred by them in their official capacities with us, whether or not we are required or have the power to indemnify them against the same liability.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been advised that in the opinion of the staff of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

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Our Manager

Our Manager is NexPoint Real Estate Advisors VII, L.P. and its address is 300 Crescent Court, Suite 700, Dallas, Texas 75201. Our Manager has contractual responsibilities to us, including to provide us with a management team, who will be our executive officers. We also anticipate having one paid employee, who will be an accounting employee dedicated to us.

The following table sets forth information regarding our Manager’s management team as of January 27, 2020, who will be executive officers and significant employees of ours upon the completion of this offering:

 

NAME

   AGE     

POSITIONS

Executive Officers

     

James Dondero

     57      President and Director

Matthew Goetz

     33      Senior VP-Investments and Asset Management

Brian Mitts

     49      Chief Financial Officer, Executive VP – Finance, Secretary and Treasurer and Director

Matt McGraner

     36      Executive VP and Chief Investment Officer

Significant Employees

     

Paul Richards

     31      VP of Originations and Investments

David Willmore

     34      VP of Finance

Information regarding Mr. Dondero and Mr. Mitts is included above under “—Our Directors.”

Matthew Goetz: Mr. Goetz will serve as our Senior VP-Investments and Asset Management upon completion of this offering. Mr. Goetz has also served as the Senior VP-Investments and Asset Management of NXRT since March 2015. Mr. Goetz is also a Director at our Sponsor and was previously a Senior Financial Analyst at Highland from 2014 to 2017. With over ten years of real estate, private equity and equity trading experience, his primary responsibilities are to asset manage, source acquisitions, manage risk and develop potential business opportunities for Highland, including fundraising, private investments and joint ventures. Before joining Highland in June 2014, Mr. Goetz was a Senior Financial Analyst in CBRE’s Debt and Structured Finance group from May 2011 to June 2014 where he underwrote over $7 billion and more than 30 million square feet of multifamily, office, and retail commercial real estate. In his time at CBRE, a commercial real estate services firm, Mr. Goetz and his team closed over $2.5 billion in debt and equity financing. Prior to joining CBRE’s Debt and Structured Finance group, he held roles as an Analyst and Senior Analyst for CBRE’s Recovery and Restructuring Services group from September 2009 to May 2011 where he assisted in the asset management and disposition of over 3,000 real estate owned assets valued at more than $750 million. He also provided commercial real estate consulting services to banks, special servicers, hedge funds, and private equity groups.

Matt McGraner: Mr. McGraner will serve as our Executive VP and Chief Investment Officer upon the completion of this offering and has served as Secretary since June 2019. Mr. McGraner has also served as the Executive VP and Chief Investment Officer of NXRT since March 2015. From September 2014 to March 2015, Mr. McGraner served as NXRT’s Secretary. Mr. McGraner has also served as Chief Investment Officer of NHT since December 2018 and as a Managing Director at NexPoint since 2016. He previously served as a Managing Director at Highland from May 2013 through May 2016. With over ten years of real estate, private equity and legal experience, his primary responsibilities are to lead the operations of the real estate platform at NexPoint, as well as source and execute investments, manage risk and develop potential business opportunities, including fundraising, private investments and joint ventures. Mr. McGraner is also a licensed

 

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attorney and was formerly an associate at Jones Day from 2011 to 2013, with a practice primarily focused on private equity, real estate and mergers and acquisitions. While at Jones Day, Mr. McGraner led the acquisition and financing of over $200 million of real estate investments and advised on $16.3 billion of M&A and private equity transactions. Since joining Highland in 2013, Mr. McGraner has led the acquisition and financing of approximately $9.0 billion of real estate investments.

Paul Richards: Mr. Richards will serve as our VP of Originations and Investments upon the completion of this offering. Mr. Richards has also served as Vice President of Asset Management of NHT since March 2019. Mr. Richards is also a Director at our Sponsor. His primary responsibilities are to research and conduct due diligence on new investment ideas, perform valuation and benchmark analysis, monitor and manage investments in the existing real estate portfolio, and provide industry support for NexPoint’s real estate team. From January 2014 through March 2017, Mr. Richards served in various roles at Highland, including as a Product Strategy Associate, where he was responsible for evaluating and optimizing the registered product lineup, a Senior Fund Analyst and a Financial Analyst. Prior to joining Highland in January 2014, Mr. Richards was employed with Deloitte & Touche LLP’s state and local tax practice where he served as a tax consultant specializing in state strategic tax reviews, voluntary disclosure agreements, state tax exposure research, and overall state tax compliance.

David Willmore: Mr. Willmore will serve as VP of Finance upon completion of this offering. Mr. Willmore has also served as Senior Manager at NXRT since March 2019 and was previously a Senior Manager at Highland from February 2017 to March 2019. With over nine years of accounting, auditing, and financial reporting experience, his primary responsibilities are to implement the financial and operational strategies of NexPoint’s public and private REITs as well as ensure timely and accurate accounting and reporting. As a Senior Manager at Highland, Mr. Willmore was responsible for the accounting, reporting and operations of Highland’s hedge fund, separately management accounts and private equity businesses consisting of approximately 20 different fund structures with combined assets under management of $2.4 billion as of March 2019. Before joining Highland in October 2011, Mr. Willmore began his career at Deloitte & Touche LLP as an auditor in the Audit and Enterprise Risk Services Group.

Management Agreement

Subject to the overall supervision of our board of directors, our Manager will manage our day-to-day operations and provide investment management services to us. Under the terms of the Management Agreement, our Manager will, among other things:

 

   

identify, evaluate and negotiate the structure of our investments (including performing due diligence);

 

   

find, present and recommend investment opportunities consistent with our investment policies and objectives;

 

   

structure the terms and conditions of our investments;

 

   

review and analyze financial information for each underlying property of the overall portfolio;

 

   

close, monitor and administer our investments; and

 

   

identify debt and equity capital needs and procure the necessary capital.

 

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Our Manager’s services under the Management Agreement are not exclusive, and it is free to furnish similar services to other entities so long as its services to us are not impaired. We will pay our Manager fees and reimburse it for certain expenses incurred on our behalf. However, our Manager is responsible, and we will not reimburse our Manager or its affiliates, for the salaries or benefits to be paid to personnel of our Manager or its affiliates who serve as our officers, except that we may grant equity awards to our officers under a long-term incentive plan adopted by us and approved by our stockholders. We will not pay our Manager and its affiliates any fees associated with arranging for financing and refinancing of properties, or a debt financing fee, but we will pay unaffiliated third parties a debt financing fee, if applicable. For a detailed description of the fees and expense reimbursements payable to our Manager, see the section in this prospectus entitled “Management Compensation.”

Related-Party Transactions

Our Management Agreement

Upon the completion of this offering, we will be externally managed by our Manager pursuant to our Management Agreement. For a summary of the terms of Management Agreement and fees to be paid to our Manager, see “—Management Agreement” and “Management Compensation.”

The Formation Transaction

Prior to the closing of this offering, we plan to engage in a series of transactions through which we will acquire an initial portfolio consisting of senior pooled mortgage loans backed by SFR properties, multifamily CMBS B-Pieces, mezzanine loans and preferred equity in real estate companies and properties and other structured real estate investments within the multifamily, SFR and self-storage asset classes. We will acquire the Initial Portfolio from the Contribution Group pursuant to a contribution agreement with the Contribution Group in exchange for limited partnership interests in the subsidiary partnerships of our OP. The Contribution Group is contributing approximately $252.7 million of net value, of which our management team owns approximately $21.1 million, to the subsidiary partnerships of our OP in the Formation Transaction. The Contribution Group will receive limited partnership units of the subsidiary partnerships in exchange for their contribution of assets in the Formation Transaction that will be redeemable for an aggregate of approximately 12,635,047 OP units (assuming the Contribution Group contributes $252.7 million of net value and based on $20.00 per share, the midpoint of the range set forth on the cover of this prospectus) or cash in an amount equal to the number of OP units multiplied by the per share price of our common stock (at the discretion of the OP); provided that such subsidiary partnership units have been outstanding for at least one year or earlier at the discretion of the OP following the direction and approval of our board of directors. At the closing of the Formation Transaction, the number of OP units for which subsidiary partnership units may be redeemed is subject to change based on changes in the subsidiary partnerships’ working capital balances.

Registration Rights

Upon the completion of this offering, we will enter into a registration rights agreement with our Manager with respect to (1) all current and future shares of our common stock owned by our Manager and affiliates of our Manager, including our Sponsor and its affiliates and (2) shares of our common stock at any time beneficially owned by our Manager which are issuable or issued as compensation for our Manager’s services under the Management Agreement and any additional shares of our common stock issued as a dividend, distribution or exchange for, or in respect of such shares. Pursuant to the registration rights agreement, if we propose to file a registration statement (or a prospectus supplement pursuant to a then-existing shelf registration statement) under the Securities Act with respect to a proposed underwritten equity offering by us for our own account or for the account of any of our respective securityholders of any class of security other than a registration statement on Form S-4 or S-8 (or any substitute form that may be adopted by the

 

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SEC) filed in connection with an exchange offer or offering of securities solely to our existing securityholders, then we will give written notice of such proposed filing to the holders of registrable securities and such notice will offer such holders the opportunity to register such number of shares of registrable securities as each such holder may request. We will use commercially reasonable efforts to cause the managing underwriter or underwriters of a proposed underwritten offering to permit the registrable securities requested to be included in such a registration to be included on the same terms and conditions as any similar securities included therein.

In addition, commencing on or after the date that is one year after the date of the Management Agreement, holders of registrable securities may make a written request for registration under the Securities Act of all or part of their registrable securities, or a demand registration. However, we will not be obligated to effect more than one such registration in any 12-month period and not more than two such registrations during the term of the Management Agreement. If the Management Agreement is extended, the holders will be entitled to one additional demand registration per year that the Management Agreement is extended. Holders making such written request must propose the sale of at least 100,000 shares of registrable securities (as adjusted for stock splits or recapitalizations) or such lesser number of registrable securities if such lesser number is all of the registrable securities owned by the holders. Any such request must specify the number of shares of registrable securities proposed to be sold and will also specify the intended method of disposition. Within 10 days after receipt of such request, we will give written notice of such registration request to all other holders of registrable securities and include in such registration all such registrable securities with respect to which we have received written requests for inclusion therein within 10 business days after the receipt by the applicable holder of our notice.

Notwithstanding the foregoing, any registration will be subject to cutback provisions, and we will be permitted to suspend the registration or sale of registrable securities in certain situations.

Policies and Procedures for Transactions with Related Persons

In connection with this offering, the board of directors will adopt a related party transaction policy for the review, approval or ratification of any related party transaction. This policy provides that all related party transactions other than those for an aggregate amount of $120,000 or less and on terms comparable to those that could reasonably be expected to be obtained in arm’s length dealings with an unrelated third party, must be reviewed and approved by the disinterested members of the audit committee. The term “related party transaction” refers to any transaction, arrangement or relationship (including charitable contributions and including any series of similar transactions, arrangements or relationships) with us in which any Related Party (as defined below) has a direct or indirect material interest, other than: (a) transactions available to employees generally; (b) transactions involving less than $50,000 when aggregated with all related or similar transactions, except if receipt of any amount would result in a director no longer being considered independent under NYSE rules or would disqualify a director from serving as a member of a committee of the Board; (c) transactions involving compensation or indemnification of executive officers and directors duly authorized by the Board or an authorized Board committee; (d) transactions involving reimbursement for routine expenses in accordance with Company policy; and (e) purchases of any products on terms generally available to third parties.

For the purposes of this policy, “Related Parties” include:

 

   

our directors, nominees for director and executive officers;

 

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immediate family members of such directors, nominees for director and executive officers, including an individual’s spouse, parents, step-parents, children, step-children, siblings, mothers- and fathers-in law, sons- and daughters-in law, brothers- and sisters-in law and other persons (except tenants or employees) who share such individual’s household;

 

   

our Manager;

 

   

a stockholder owning in excess of five percent of our voting securities or an immediate family member of such a stockholder; or

 

   

an entity which is owned or controlled by any of the above persons.

We may do business with NexBank, NexTitle, LLC, or NexTitle, and other affiliated entities in the ordinary course of its business. NexBank and NexTitle will be considered related parties under this policy. Upon adoption of the related party transaction policy, the audit committee will review and approve these transactions in accordance with the policy.

 

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MANAGEMENT COMPENSATION

Our Manager and its affiliates will manage our day-to-day affairs. The following table summarizes all of the compensation and fees we will pay to our Manager, including amounts to reimburse their costs in providing services.

 

Type

  

Description

Management Fee

  

1.5% of Equity per annum, calculated and payable monthly in cash or shares of our common stock at the election of our Manager.

 

For purposes of calculating the management fee, “Equity” means (a) the sum of (1) total stockholders’ equity immediately prior to the closing of this offering, plus (2) the net proceeds received by us from all issuances of our common stock in and after this offering, plus (3) our cumulative Core Earnings (as defined below) from and after this offering to the end of the most recently completed calendar quarter, (b) less (1) any distributions to our common stockholders from and after this offering to the end of the most recently completed calendar quarter and (2) all amounts that we have paid to repurchase our common stock from and after this offering to the end of the most recently completed calendar quarter. In our calculation of Equity, we will adjust our calculation of Core Earnings to remove the compensation expense relating to awards granted under one or more of our long-term incentive plans that is added back in our calculation of Core Earnings. Additionally, for the avoidance of doubt, Equity will not include the assets contributed to us in the Formation Transaction as they will be contributed to subsidiary partnerships of the OP, which will not result in an increase in our stockholders’ equity attributable to common stockholders.

 

As used herein, “Core Earnings” means the net income (loss) attributable to our common stockholders computed in accordance with GAAP, including realized gains and losses not otherwise included in net income (loss), excluding any unrealized gains or losses or other similar non-cash items that are included in net income (loss) for the applicable reporting period, regardless of whether such items are included in other comprehensive income (loss), or in net income (loss) and adding back amortization of stock-based compensation. Net income (loss) attributable to common stockholders may also be adjusted for one-time events pursuant to changes in GAAP and certain material non-cash income or expense items, in each case after discussions between the Manager and independent directors and approved by a majority of the independent directors of our board.

 

Incentive Fee

  

None.

 

 

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Type

  

Description

Reimbursement of Expenses

  

We will be required to pay directly or reimburse our Manager for all of the documented “operating expenses” (all out-of-pocket expenses of our Manager in performing services for us, including but not limited to the expenses incurred by our Manager in connection with any provision by our Manager of legal, accounting, financial and due diligence services performed by our Manager that outside professionals or outside consultants would otherwise perform, compensation expenses under any long-term incentive plan adopted by us and approved by our stockholders and our pro rata share of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of our Manager required for our operations) and “offering expenses” (any and all expenses (other than underwriters’ discounts and commissions) paid or to be paid by us in connection with an offering of our securities, including, without limitation, our legal, accounting, printing, mailing and filing fees and other documented offering expenses) paid or incurred by our Manager or its affiliates in connection with the services it provides to us pursuant to the Management Agreement. However, our Manager is responsible, and we will not reimburse our Manager or its affiliates, for the salaries or benefits to be paid to personnel of our Manager or its affiliates who serve as our officers, except that we may grant equity awards to our officers under a long-term incentive plan adopted by us and approved by our stockholders. Direct payment of operating expenses by us, which includes compensation expense relating to equity awards granted under our long-term incentive plan, together with reimbursement of operating expenses to our Manager, plus an annual management fee of 1.5% of Equity, paid monthly, in cash or shares of our common stock at the election of our Manager, or the Annual Fee, may not exceed 2.5% of equity book value for any calendar year or portion thereof, provided, however, that this limitation will not apply to offering expenses, legal, accounting, financial, due diligence and other service fees incurred in connection with extraordinary litigation and mergers and acquisitions and other events outside the ordinary course of our business or any out-of-pocket acquisition or due diligence expenses incurred in connection with the acquisition or disposition of certain real estate-related investments.

 

Termination Fee

   Equal to three times the average Annual Fee earned by our Manager during the two-year period immediately preceding the most recently completed calendar quarter prior to the effective termination date; provided, however, if the Management Agreement is terminated prior to the two-year anniversary of the date of the Management Agreement, the management fee earned during such period will be annualized for purposes of calculating the average annual management fee. The

 

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Type

  

Description

  

termination fee will be payable to our Manager upon termination of our Management Agreement for any reason, including non-renewal, other than a termination by us for cause.

 

Management Fee Estimate

Under the Management Agreement, we will pay our Manager an annual management fee of 1.5% of Equity, paid monthly in cash, or, at the election of our Manager, shares of our common stock. For the 12 months following this offering, we estimate we will pay our Manager approximately $1.6 million in management fees, assuming:

 

  (1)

we issue approximately $115.0 million of common stock in this offering, with net proceeds to us of approximately $105.2 million;

 

  (2)

we distribute all Core Earnings to holders of our common stock; and

 

  (3)

we do not repurchase or sell any shares of our capital stock during the 12 months following this offering.

For additional information regarding the components of Equity, see above “—Management Fee.”

The foregoing is solely an estimate of the Management Fee that we will pay to our Manager for the 12 months following this offering and is based on the beliefs and assumptions of management as of the date of this prospectus. The estimate above is subject to numerous risks, uncertainties and assumptions and may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. See “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.”

 

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PRINCIPAL STOCKHOLDERS

The following table shows, as of January 27, 2020, the amount of our common stock beneficially owned (unless otherwise indicated) by (1) any person who is known by us to be the beneficial owner of more than 5% of the outstanding shares of common stock, (2) our directors, (3) our director nominees, (4) our executive officers, and (5) all of our directors and executive officers as a group. The address for each beneficial owner is c/o NexPoint Real Estate Finance, Inc., 300 Crescent Court, Suite 700, Dallas, Texas 75201 unless otherwise provided.

 

Name of Beneficial Owners

  Number of
Shares
Beneficially
Owned Prior to
the Offering  (1)
     Percentage     Number of
Shares
Beneficially
Owned After
the Offering
     Percentage  

Directors, Director Nominees and Executive Officers

         

James Dondero

           *       250,000        5 % (2) 

Matthew Goetz

           *              *  

Brian Mitts

    10        100            *  

Matthew McGraner

           *              *  

Edward Constantino

           *              *  

Scott Kavanaugh

           *              *  

Arthur Laffer

           *              *  

All Directors, Director Nominees and Executive Officers as a group (seven persons)

    10        100     250,000        5 % (2) 

 

*

Reports less than 1%

(1)

Prior to the completion of this offering, 10 shares were issued and outstanding. We will repurchase the 10 shares currently owned by Mr. Mitts in connection with this offering.

(2)

Assumes that our Sponsor purchases all 250,000 Reserved Shares and excludes ownership of any subsidiary partnership units. Mr. Dondero may be deemed to be an indirect beneficial owner of shares held by our Sponsor as Mr. Dondero wholly owns the general partner of our Sponsor. Mr. Dondero has sole voting and investment power with respect to shares held by our Sponsor.

 

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CONFLICTS OF INTEREST

The following briefly summarizes the material potential and actual conflicts of interest which may arise from the overall investment activity of our Manager, its clients and its affiliates, but is not intended to be an exhaustive list of all such conflicts. The scope of the activities of the affiliates of our Manager and the funds and clients advised by affiliates of our Manager may give rise to conflicts of interest or other restrictions and/or limitations imposed on us in the future that cannot be foreseen or mitigated at this time.

Management Agreement

Under our Management Agreement, our Manager will be entitled to fees that are structured in a manner intended to provide incentives to our Manager to perform in our best interests and in the best interest of our stockholders. However, because performance is only one aspect of our Manager’s compensation, our Manager’s interests are not wholly aligned with those of our stockholders. In that regard, our Manager could be motivated to recommend riskier or more speculative investments that would entitle our Manager to a higher fee. For example, because management fees payable to our Manager are based in part on the amount of equity raised, our Manager may have an incentive to raise additional equity capital in order to increase its fees. Externally managed REITs may also have conflicts of interest with their advisors that are not common with self-managed REITs. These conflicts as they relate to us and our Manager are discussed in the following sections.

Other Accounts and Relationships

As part of their regular business, our Manager, its affiliates and their respective officers, directors, trustees, stockholders, members, partners and employees and their respective funds and investment accounts, or collectively, the “Related Parties”, hold, purchase, sell, trade or take other related actions both for their respective accounts and for the accounts of their respective clients, on a principal or agency basis, subject to applicable law with respect to loans, securities and other investments and financial instruments of all types. The Related Parties also provide investment advisory services, among other services, and engage in private equity, real estate and capital markets-oriented investment activities. The Related Parties will not be restricted in their performance of any such services or in the types of debt, equity, real estate or other investments which they may make. The Related Parties may have economic interests in or other relationships with respect to investments made by us. In particular, the Related Parties may make and/or hold an investment, including investments in securities, that may compete with, be pari passu, senior or junior in ranking to an, investment, including investments in securities, made and/or held by us or in which partners, security holders, members, officers, directors, agents or employees of such Related Parties serve on boards of directors or otherwise have ongoing relationships. Each of such ownership and other relationships may result in restrictions on transactions by us and otherwise create conflicts of interest for us. In such instances, the Related Parties may in their discretion make investment recommendations and decisions that may be the same as or different from those made with respect to our investments. In connection with any such activities described above, the Related Parties may hold, purchase, sell, trade or take other related actions in securities or investments of a type that may be suitable for us. The Related Parties will not be required to offer such securities or investments to us or provide notice of such activities to us. In addition, in managing our portfolio, our Manager may take into account its relationship or the relationships of its affiliates with obligors and their respective affiliates, which may create conflicts of interest. Furthermore, in connection with actions taken in the ordinary course of business of our Manager in accordance with its fiduciary duties to its other clients, our Manager may take, or be required to take, actions which adversely affect our interests.

 

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The Related Parties have invested and may continue to invest in investments that would also be appropriate for us. Such investments may be different from those made on our behalf. Neither our Manager nor any Related Party has any duty, in making or maintaining such investments, to act in a way that is favorable to us or to offer any such opportunity to us, subject to our Manager’s allocation policy set forth below. The investment policies, fee arrangements and other circumstances applicable to such other parties may vary from those applicable to us. Our Manager and/or any Related Party may also provide advisory or other services for a customary fee with respect to investments made or held by us, and neither our stockholders nor we shall have any right to such fees. Our Manager and/or any Related Party may also have ongoing relationships with, render services to or engage in transactions with other clients, including HFRO, NHF, NexPoint Real Estate Strategies Fund, or NRESF, NexPoint Capital, Inc., or NexPoint Capital, Highland Global Allocation Fund, or Global Allocation Fund, VineBrook, NXRT and NHT and other REITs, who make investments of a similar nature to those of ours, and with companies whose securities or properties are acquired by us. In connection with the foregoing activities our Manager and/or any Related Party may from time to time come into possession of material nonpublic information that limits the ability of our Manager to effect a transaction for us, and our investments may be constrained as a consequence of our Manager’s inability to use such information for advisory purposes or otherwise to effect transactions that otherwise may have been initiated on our behalf. In addition, officers or affiliates of our Manager and/or Related Parties may possess information relating to our investments that is not known to the individuals at our Manager responsible for monitoring our investments and performing the other obligations under the Management Agreement.

The Related Parties currently provide services to HFRO, NHF, NRESF, NexPoint Capital, Global Allocation Fund, VineBrook, NXRT and NHT and may in the future provide services to other REITs or funds that compete with us for similar investments.

Although the professional staff of our Manager will devote as much time to our business and investments as our Manager deems appropriate to perform its duties in accordance with the Management Agreement and in accordance with reasonable commercial standards, the staff may have conflicts in allocating its time and services among us and any Related Parties’ other accounts. The Management Agreement places restrictions on our Manager’s ability to buy and sell investments for us. Accordingly, during certain periods or in certain circumstances, our Manager may be unable as a result of such restrictions to buy or sell investments or to take other actions that it might consider to be in our best interests.

The directors, officers, employees and agents of the Related Parties, and our Manager may, subject to applicable law, serve as directors (whether supervisory or managing), officers, employees, partners, agents, nominees or signatories, and receive arm’s length fees in connection with such service, for us or any Related Party, or for any of our investments or any affiliate thereof, and neither we nor our stockholders shall have the right to any such fees.

The Related Parties serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as us, or of other investment funds managed by our Manager or its affiliates. In serving in these multiple capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may not be in our best interests. We may compete with other entities managed by our Manager and its affiliates for capital and investment opportunities.

There is no limitation or restriction on our Manager or any of its Related Parties with regard to acting as investment manager (or in a similar role) to other parties or persons. This and other future activities of our Manager and/or its Related Parties may give rise to additional conflicts of interest. Such conflicts may be related to obligations that our Manager or its affiliates have to other clients.

 

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Subject to prior approval of the board, certain Related Parties, including NexBank and Governance Re among others, may provide banking, agency, insurance and other services to us and its operating affiliates for customary fees, and neither we, nor our subsidiaries will have a right to any such fees.

Allocation Policy

If a potential investment is appropriate for either us or another entity managed by our Manager or its affiliates, such as HFRO, which as of September 30, 2019 has approximately $1.3 billion of assets under management, NHF, which as of September 30, 2019 has approximately $1.3 billion of assets under management, NRESF, which as of September 30, 2019 has approximately $20.1 million of assets under management, NexPoint Capital, which as of September 30, 2019 has approximately $134 million of assets under management, Global Allocation Fund, which as of September 30, 2019 has approximately $592 million of assets under management, VineBrook, which as of September 30, 2019 has an enterprise value of approximately $514.8 million, NXRT, which as of September 30, 2019 has an enterprise value of approximately $2.3 billion, and NHT, which as of September 30, 2019 has an enterprise value of approximately $390.7 million, our Manager and its affiliates, including their respective personnel, have an allocation policy that provides that opportunities will be allocated among those accounts for which participation in their respective opportunity is considered most appropriate, taking into account the following objective factors.

First, the allocation policy looks to the investment objectives of the REITs managed by our Manager and its affiliates. For example, our targeted investments differ from the targeted investments of NXRT, which generally are direct ownership of well-located middle-income multifamily properties with value-add potential. We believe that most investment opportunities will be more appropriate for us, NXRT or other entities based on the differences in our primary investment objectives. We expect we will be the primary vehicle in which investments are made in first mortgage loans, multifamily CMBS B-Pieces, preferred equity, mezzanine loans and alternative structured financings to the extent this offering is successful and cash is available. Our Manager is not required to offer to us any opportunities that do not meet our investment objectives and criteria. Personnel of our Manager and its affiliates may invest in any such investment opportunities not required to be presented to us.

To the extent the opportunity is consistent with the investment objectives of more than one REIT managed by our Manager and its affiliates, the allocation policy then looks to other factors, such as:

 

   

which REIT has available cash (including availability under lines of credit) to acquire the investment;

 

   

whether there are any positive or negative income tax effects on any of the REITs relating to the purchase;

 

   

whether the investment opportunity creates geographic, asset class or tenant concentration / diversification concerns for any of the REITs;

 

   

how the investment size, potential leverage, transaction structure and anticipated cash flows affect each REIT, including earnings and distribution coverage; and

 

   

whether one or more of the REITs has an existing relationship with the tenant(s), operator, facility or system associated with the investment, or a significant geographic presence that would make the investment strategically more important.

 

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Our Manager will allocate investment opportunities across the entities for which such opportunities are appropriate, consistent with its internal conflict of interest and allocation policies. Our Manager will seek to allocate investment opportunities among such entities in a manner that is fair and equitable over time and consistent with its allocation policy. However, there is no assurance that such investment opportunities will be allocated to us fairly or equitably in the short-term or over time, and there can be no assurance that we will be able to participate in all such investment opportunities that are suitable for us.

Cross Transactions and Principal Transactions

As further described below, our Manager may effect client cross-transactions where our Manager causes a transaction to be effected between us and another client advised by our Manager or any of its affiliates. Our Manager may engage in a client cross-transaction involving us any time that our Manager believes such transaction to be fair to us and the other client of our Manager or its affiliates in accordance with our Manager’s internal written cross-transaction policies and procedures.

As further described below, our Manager may effect principal transactions where we may make and/or hold an investment, including an investment in securities, in which our Manager and/or its affiliates have a debt, equity or participation interest, in each case in accordance with applicable law and with our Manager’s internal written policies and procedures for principal transactions, which may include our Manager obtaining our consent and approval prior to engaging in any such principal transaction between us and our Manager or its affiliates.

Our Manager may direct us to acquire or dispose of investments in cross trades between us and other clients of our Manager or its affiliates in accordance with applicable legal and regulatory requirements. In addition, we may make and/or hold an investment, including an investment in securities, in which our Manager and/or its affiliates have a debt, equity or participation interest, and the holding and sale of such investments by us may enhance the profitability of our Manager’s own investments in such companies. Moreover, we, along with our operating affiliates, may invest in assets originated by, or enter into loans, borrowings and/or financings with our Manager or its affiliates, including but not limited to NexBank, including in primary and secondary transactions with respect to which our Manager or a Related Party may receive customary fees from the applicable issuer, and neither we nor our subsidiaries shall have the right to any such fees. In each such case, our Manager and such affiliates may have a potentially conflicting division of loyalties and responsibilities regarding us and the other parties to such investment. Under certain circumstances, our Manager and its affiliates may determine that it is appropriate to avoid such conflicts by selling an investment at a fair value that has been calculated pursuant to our Manager’s valuation procedures to another fund managed or advised by our Manager or such affiliates. In addition, our Manager may enter into agency cross-transactions where it or any of its affiliates acts as broker for us and for the other party to the transaction, to the extent permitted under applicable law. Our Manager may obtain our written consent as provided herein if any such transaction requires the consent of the board.

Participation in Creditor Committees, Underwriting and Other Activities

Our Manager and/or its Related Parties may participate in creditors or other committees with respect to the bankruptcy, restructuring or workout or foreclosure of our investments. In such circumstances, our Manager may take positions on behalf of itself or Related Parties that are adverse to our interests.

Our Manager and/or its Related Parties may act as an underwriter, arranger or placement agent, or otherwise participate in the origination, structuring, negotiation, syndication or offering

 

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of investments purchased by us. Such transactions are on an arm’s-length basis and may be subject to arm’s-length fees. There is no expectation for preferential access to transactions involving investments that are underwritten, originated, arranged or placed by our Manager and/or its Related Parties and neither we nor our stockholders shall have the right to any such fees.

Material Non-Public Information

There are generally no ethical screens or information barriers among our Manager and certain of its affiliates of the type that many firms implement to separate persons who make investment decisions from others who might possess material, non-public information that could influence such decisions. If our Manager, any of its personnel or its affiliates were to receive material non-public information about an investment or issuer, or have an interest in causing us to acquire a particular investment, our Manager may be prevented from causing us to purchase or sell such asset due to internal restrictions imposed on our Manager. Notwithstanding the maintenance of certain internal controls relating to the management of material non-public information, it is possible that such controls could fail and result in our Manager, or one of its investment professionals, buying or selling an asset while, at least constructively, in possession of material non-public information. Inadvertent trading on material non-public information could have adverse effects on our Manager’s reputation, result in the imposition of regulatory or financial sanctions, and as a consequence, negatively impact our Manager’s ability to perform its investment management services to us. In addition, while our Manager and certain of its affiliates currently operate without information barriers on an integrated basis, such entities could be required by certain regulations, or decide that it is advisable, to establish information barriers. In such event, our Manager’s ability to operate as an integrated platform could also be impaired, which would limit our Manager’s access to personnel of its affiliates and potentially impair its ability to manage our investments.

Other Benefits to Our Manager

Our long-term incentive plan provides us with the ability to grant awards to directors and officers of, and certain consultants to, us, our Manager and its affiliates and other entities that provide services to us. The management team of our Manager is expected to receive awards under the long-term incentive plan and will benefit from the compensation provided by these awards. Any compensation payable under such plan is expected to be subject to the 2.5% of equity book value determined in accordance with GAAP described above under “Management Compensation.”

In addition to the compensation provided to our Manager by the Management Agreement and any long-term incentive plan, our Manager may also receive reputational benefits from our future growth through capital-raising transactions and acquisitions. Our Manager will also have an incentive to raise capital and cause us to acquire additional assets, which would then contribute to the management fee. The reputational benefit to our Manager from our future growth could assist our Manager and its affiliates in pursuing other real estate investments. These investments could be made through other entities managed by our Manager or its affiliates, and there can be no assurance that we will be able to participate in all such investment opportunities.

Policies With Respect to Certain Other Activities

If our board of directors determines that additional funding is required, we may raise such funds through additional public and private offerings of common and preferred equity or debt securities or the retention of cash flow (subject to the distribution requirements applicable to REITs and our desire to minimize our U.S. federal income tax obligations) or a combination of these methods. In the event that our board of directors determines to raise additional equity or

 

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debt capital, it has the authority, without stockholder approval, to cause us to issue additional shares of common stock, shares of preferred stock or debt securities in any manner and on such terms and for such consideration as it deems appropriate, at any time, and has similarly broad authority to incur debt.

In addition, we may finance the acquisition of investments using the various sources of financing discussed above under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Our investment guidelines, the assets in our portfolio and the decision to utilize, and the appropriate levels of, leverage are periodically reviewed by our board of directors as part of their oversight of our Manager.

We may offer equity or debt securities in exchange for property and may repurchase or otherwise reacquire shares of our common stock. Subject to the requirements for qualification as a REIT, we may in the future invest in debt securities of other REITs, other entities engaged in real estate-related activities or securities of other issuers, including for the purpose of exercising control over these entities. We do not intend that our investments in securities will require us to register as an investment company under the Investment Company Act, and we would intend to divest such securities before any such registration would be required.

We engage in the purchase and sale of investments. Consistent with our investment guidelines, we may in the future make loans to third parties in the ordinary course of business for investment purposes and may underwrite securities of other issuers.

We intend to make available to our stockholders our annual reports, including our audited financial statements. After this offering, we will become subject to the information reporting requirements of the Exchange Act. Pursuant to those requirements, we will be required to file annual and periodic reports, proxy statements and other information, including audited financial statements, with the SEC.

Our board of directors may change any of these policies without prior notice to you or a vote of our stockholders.

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

The following is a summary of material U.S. federal income tax considerations relating to ownership of shares of our common stock. The law firm of Winston & Strawn LLP has acted as our tax counsel and reviewed this summary. For purposes of this section under the heading “Material U.S. Federal Income Tax Considerations,” references to “the Company,” “we,” “our” and “us” mean only NexPoint Real Estate Finance, Inc. and not its subsidiaries or other lower-tier entities, except as otherwise indicated. This summary is based upon the Code, the regulations promulgated by the U.S. Treasury Department, rulings and other administrative pronouncements issued by the IRS, and judicial decisions, all as currently in effect, and all of which are subject to differing interpretations or to change, possibly with retroactive effect. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below. We have not sought and do not currently expect to seek an advance ruling from the IRS regarding any matter discussed in this prospectus. The summary is also based upon the assumption that we will operate the Company and its subsidiaries and affiliated entities in accordance with their applicable organizational documents. This summary is for general information only and does not purport to discuss all aspects of U.S. federal income taxation that may be important to a particular investor in light of its investment or tax circumstances or to investors subject to special tax rules, such as: financial institutions or broker-dealers; insurance companies; entities treated as partnerships for federal income tax purposes; tax-exempt organizations (except to the limited extent discussed in “—Taxation of Tax-Exempt U.S. Holders of our Common Stock” below); non-U.S. individuals and foreign corporations (except to the limited extent discussed in “—Taxation of Non-U.S. Holders of Our Common Stock” below); U.S. expatriates; persons who mark-to-market our stock; subchapter S corporations; persons whose functional currency is not the U.S. dollar; regulated investment companies and REITs; trust and estates; holders who receive our stock through the exercise of employee stock options or otherwise as compensation; persons holding our stock as part of a “straddle,” “hedge,” “conversion transaction,” “synthetic security” or other integrated investment; persons subject to the alternative minimum tax provisions of the Code; and persons holding our stock through a partnership or similar pass-through entity.

This summary assumes that investors will hold their common stock as a capital asset, which generally means property held for investment.

WE URGE YOU TO CONSULT YOUR OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO YOU OF THE PURCHASE, OWNERSHIP AND SALE OF OUR STOCK AND OF OUR ELECTION TO BE TAXED AS A REIT. SPECIFICALLY, YOU SHOULD CONSULT YOUR TAX ADVISOR REGARDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION, AND REGARDING POTENTIAL CHANGES IN APPLICABLE TAX LAWS.

Taxation of the Company

We intend to elect to be taxed as a REIT commencing with our taxable year ending December 31, 2020. We believe that our organization and current and proposed method of operation will allow us to qualify for taxation as a REIT.

In connection with this offering, Winston & Strawn LLP will render an opinion that, commencing with our taxable year ending December 31, 2020, we will be organized 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 satisfy the requirements for qualification and taxation as a REIT under the U.S. federal income tax laws for our taxable year

 

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ending December 31, 2020 and subsequent taxable years. Investors should be aware that Winston & Strawn LLP’s opinion is based upon customary assumptions, will be conditioned upon certain representations made by us as to factual matters, including representations regarding the nature of our assets and the conduct of our business, is not binding upon the IRS, or any court and speaks as of the date issued. In addition, Winston & Strawn LLP’s opinion will be based on existing U.S. federal income tax law governing qualification as a REIT, which is subject to change either prospectively or retroactively. Moreover, our qualification and taxation as a REIT will depend upon 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 the percentage of income that we earn from specified sources, the percentage of our assets that falls within specified categories, the diversity of our capital stock ownership, and the percentage of our earnings that we distribute. Winston & Strawn LLP will not review our compliance with those tests on a continuing basis. Accordingly, no assurance can be given that our actual results of operations for any particular taxable year will satisfy such requirements. Winston & Strawn 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 could require us to pay an excise or penalty tax (which could be material) in order for us to maintain our REIT qualification. For a discussion of the tax consequences of our failure to qualify as a REIT, see “—Failure to Qualify.”

Qualification and taxation as a REIT depend on our ability to meet on a continuing basis, through actual operating results, distribution levels, and diversity of stock and asset ownership, various qualification requirements imposed upon REITs by the Code. Our ability to qualify as a REIT also requires that we satisfy certain asset tests, some of which depend upon the fair market values of assets that we own directly or indirectly. Such values may not be susceptible to a precise determination. Accordingly, no assurance can be given that the actual results of our operations for any taxable year will satisfy such requirements for qualification and taxation as a REIT.

Taxation of REITs in General

As indicated above, our qualification and taxation as a REIT depends upon our ability to meet, on a continuing basis, various qualification requirements imposed upon REITs by the Code. The principal qualification requirements are summarized below under “—Requirements for Qualification—General.” While we intend to operate so that we qualify as a REIT, no assurance can be given that the IRS will not challenge our qualification, or that we will be able to operate in accordance with the REIT requirements in the future. See “—Failure to Qualify.”

Provided that we qualify as a REIT, generally we will be entitled to a deduction for distributions that we pay that are treated as dividends for U.S. federal income tax purposes and therefore will not be subject to federal corporate income tax on our taxable income that is currently distributed to our stockholders. This treatment substantially eliminates the “double taxation” at the corporate and stockholder levels that generally results from owning stock in a regular corporation. In general, the income that we generate is taxed only at the stockholder level upon distribution to our stockholders.

Our tax attributes, such as net operating losses (if any), generally do not pass through to our stockholders, subject to special rules for certain items such as the capital gains that we recognize. See “—Taxation of Stockholders.”

If we qualify as a REIT, we will nonetheless be subject to federal tax in the following circumstances:

 

   

We will be taxed at regular corporate rates on any undistributed taxable income, including undistributed net capital gains.

 

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If we have net income from prohibited transactions, which are, in general, sales or other dispositions of inventory or property held primarily for sale to customers in the ordinary course of business, other than foreclosure property, such income will be subject to a 100% tax. See “—Prohibited Transactions” and “—Foreclosure Property” below.

 

   

If we elect to treat property that we acquire in connection with a foreclosure of a mortgage loan or certain leasehold terminations as “foreclosure property,” we may thereby avoid the 100% tax on gain from a resale of that property (if the sale would otherwise constitute a prohibited transaction), but the income from the sale or operation of the property may be subject to corporate income tax at the corporate tax rate.

 

   

If, due to reasonable cause and not willful neglect, we fail to satisfy the 75% gross income test or the 95% gross income test, as discussed below under “—Income Tests”, but nonetheless maintain our qualification as a REIT because we satisfy other requirements, we will be subject to a 100% tax on an amount based on the magnitude of the failure, as adjusted to reflect the profit margin associated with our gross income.

 

   

If we violate the asset tests (other than certain de minimis violations) or other requirements applicable to REITs, as described below, and yet maintain our qualification as a REIT because there is reasonable cause for the failure and other applicable requirements are met, we may be subject to an excise tax. In that case, the amount of the excise tax will be at least $50,000 per failure, and, in the case of certain asset test failures, will be determined as the amount of net income generated by the assets in question multiplied by the corporate tax rate if that amount exceeds $50,000 per failure.

 

   

If we fail to distribute during each calendar year at least the sum of (a) 85% of our REIT ordinary income for such year, (b) 95% of our REIT capital gain net income for such year, and (c) any undistributed taxable income from prior periods, we would be subject to a nondeductible 4% excise tax on the excess of the required distribution over the sum of (1) the amounts that we actually distributed and (2) the amounts we retained and upon which we paid income tax at the corporate level.

 

   

We may be required to pay monetary penalties to the IRS in certain circumstances, including if we fail to meet record keeping requirements intended to monitor our compliance with rules relating to the composition of a REIT’s stockholders, as described below in “—Requirements for Qualification—General.”

 

   

A 100% tax may be imposed on transactions between us and a TRS (as described below) that do not reflect arms’-length terms.

 

   

If 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 corporate tax rate if we recognize gain on the sale or disposition of the asset during the five-year period after we acquire the asset provided no election is made for the transaction to be taxable on a current basis. The amount of gain on which we will pay tax 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.

 

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The earnings of our subsidiaries, including any subsidiary we may elect to treat as a TRS, are subject to federal corporate income tax to the extent that such subsidiaries are subchapter C corporations.

In addition, we and our subsidiaries may be subject to a variety of taxes, including payroll taxes and state and local and foreign income, property and other taxes on our assets and operations. We could also be subject to tax in situations and on transactions not presently contemplated.

Requirements for Qualification—General

The Code defines a REIT as a corporation, trust or association:

 

  (1)

that is managed by one or more trustees or directors;

 

  (2)

the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest;

 

  (3)

that would be taxable as a domestic corporation but for its election to be subject to tax as a REIT;

 

  (4)

that is neither a financial institution nor an insurance company subject to specific provisions of the Code;

 

  (5)

the beneficial ownership of which is held by 100 or more persons;

 

  (6)

in which, during the last half of each taxable year, not more than 50% in value of the outstanding stock is owned, directly or indirectly, by five or fewer “individuals” (as defined in the Code to include specified tax-exempt entities);

 

  (7)

that elects to be taxed as a REIT, or has made such election for a previous taxable year, and satisfies all relevant filing and other administrative requirements that must be met to elect and maintain REIT qualification; and

 

  (8)

that meets other tests described below, including with respect to the nature of its income and assets.

The Code provides that conditions (1) through (4), (7) and (8) must be met during the entire taxable year, and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a shorter taxable year. Conditions (5) and (6) will apply to us beginning with our 2021 tax year.

We believe that, after completion of this offering, we will meet condition (5) and that our shares of our common stock will be owned with sufficient diversity of ownership to satisfy condition (6). In addition, our charter contains restrictions on the ownership and transfer of our stock that are intended to assist us in continuing to satisfy these requirements; however, they may not ensure that we will, in all cases, be able to satisfy these requirements. The provisions of our charter restricting the ownership and transfer of our common stock are described in “Description of Capital Stock—Restrictions on Ownership and Transfer.”

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

 

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statements each year from the record holders of significant percentages of our stock pursuant to which the record holders must disclose the actual owners of the shares (i.e., the persons required to include our distributions 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, a corporation generally may not elect to become a REIT unless its taxable year is the calendar year. We have adopted December 31 as our year-end, and thereby satisfy this requirement.

The Code provides relief from violations of the REIT gross income requirements, as described below under “—Income Tests,” in cases where a violation is due to reasonable cause and not willful neglect, and other requirements are met, including the payment of a penalty tax that is based upon the magnitude of the violation. In addition, certain provisions of the Code extend similar relief in the case of certain violations of the REIT asset requirements (see “—Asset Tests” below) and other REIT requirements, again provided that the violation is due to reasonable cause and not willful neglect, and other conditions are met, including the payment of a penalty tax. If we fail to satisfy any of the various REIT requirements, there can be no assurance that these relief provisions would be available to enable us to maintain our qualification as a REIT, and, even if such relief provisions are available, the amount of any resultant penalty tax could be substantial.

Effect of Subsidiary Entities

Ownership of Partnership Interests

An unincorporated domestic entity, such as a partnership, limited liability company, or trust, that has a single owner, generally is not treated as an entity separate from its owner for U.S. federal income tax purposes. An unincorporated domestic entity with two or more owners generally is treated as a partnership for U.S. federal income tax purposes. If we are a partner in an entity that is treated as a partnership for U.S. federal income tax purposes, Treasury regulations provide that we are deemed to own our proportionate share of the partnership’s assets, and to earn our proportionate share of the partnership’s income, for purposes of the asset and gross income tests applicable to REITs. Our proportionate share of a partnership’s assets and income is based on our capital interest in the partnership (except that for purposes of the 10% asset test (see “—Asset Tests” below), our proportionate share of the partnership’s assets is based on our proportionate interest in the equity and certain debt securities issued by the partnership). In addition, the assets and gross income of the partnership are deemed to retain the same character in our hands. Thus, our proportionate share of the assets and items of income of any partnerships in which we own interests will be treated as our assets and items of income for purposes of applying the REIT requirements.

We may invest in preferred equity investments in the form of limited partner or non-managing member interests in partnerships and limited liability companies. Although the character of our income and assets for purposes of REIT income and asset tests will depend upon those partnerships’ and limited liability companies’ income and assets, we will typically have limited control over the operations of the partnerships and limited liability companies that issue preferred equity investments. If a partnership or limited liability company in which we own an interest takes or expects to take actions that could jeopardize our qualification as a REIT or require us to pay tax, we may be forced to dispose of our interest in such entity. In addition, a partnership or limited liability company could take an action which could cause us to fail a REIT gross income or

 

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asset test, and we may 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.

Disregarded Subsidiaries

If we own a corporate subsidiary that is a “qualified REIT subsidiary,” that subsidiary is generally disregarded for U.S. federal income tax purposes, and all of the subsidiary’s assets, liabilities and items of income, deduction and credit are treated for U.S. federal income tax purposes as our assets, liabilities and items of income, deduction and credit, including for purposes of the gross income and asset tests applicable to REITs. A qualified REIT subsidiary is any corporation, other than a TRS (as described below), with respect to which 100% of the stock of such corporation is held by a REIT. Other domestic entities that are wholly owned by us, including single member limited liability companies that have not elected to be taxed as corporations for U.S. federal income tax purposes, are also generally disregarded as separate entities for U.S. federal income tax purposes, including for purposes of the REIT income and asset tests. Disregarded subsidiaries, along with any partnerships in which we hold an equity interest, are sometimes referred to herein as “pass-through subsidiaries.”

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 securities of another corporation. See “—Asset Tests” and “—Income Tests.”

Taxable REIT Subsidiaries

We may jointly elect with any of our subsidiary corporations, whether or not wholly owned, to treat such subsidiary corporations as TRSs. A REIT is permitted to own up to 100% of the stock of one or more TRSs. A domestic TRS is a fully taxable corporation that may earn income that would not be qualifying income if earned directly by the parent REIT. The subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation with respect to which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. We generally may not own more than 10% of the securities of a taxable corporation, as measured by voting power or value, unless we and such corporation elect to treat such corporation as a TRS. Overall, no more than 20% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs.

The separate existence of a TRS or other taxable corporation is not ignored for U.S. federal income tax purposes. Accordingly, a TRS or other taxable corporation generally will be subject to corporate income tax on its earnings, which may reduce the cash flow that we and our subsidiaries generate in the aggregate, and may reduce our ability to make distributions to our stockholders.

We are not treated for U.S. federal income tax purposes as holding the assets of a TRS or other taxable subsidiary corporation or as receiving any income that the subsidiary earns. Rather, the stock issued by a taxable subsidiary to us is an asset in our hands, and we treat the distributions paid to us from such taxable subsidiary, if any, as income. This treatment can affect our income and asset test calculations, as described below. Because we do not include the assets and income

 

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of TRSs or other taxable subsidiary corporations in determining our compliance with the REIT requirements, we may use such entities to undertake indirectly activities that the REIT rules might otherwise preclude us from doing directly or through pass-through subsidiaries. For example, we may use TRSs or other taxable subsidiary corporations to conduct activities that give rise to certain categories of income such as management fees or activities that would be treated in our hands as prohibited transactions.

Certain restrictions imposed on TRSs (as well as on taxable corporations generally) are intended to ensure that such entities will be subject to appropriate levels of U.S. federal income taxation. First, overall limitations on the deductibility of net interest expense by businesses could apply to our TRS. In addition, if amounts are paid to a REIT or deducted by a TRS due to transactions between the REIT and a TRS that exceed the amount that would be paid to or deducted by a party in an arm’s-length transaction, the REIT generally will be subject to an excise tax equal to 100% of such excess. We intend to scrutinize all of our transactions with any of our subsidiaries that are treated as a TRS in an effort to ensure that we do not become subject to this excise tax; however, we cannot assure you that we will be successful in avoiding this excise tax.

Taxable Mortgage Pools and Excess Inclusion Income

An entity, or a portion of an entity, may be classified as a taxable mortgage pool under the Code if:

 

   

substantially all of its assets consist of debt obligations or interests in debt obligations;

 

   

more than 50% of those debt obligations are real estate mortgage loans or interests in real estate mortgage loans as of specified testing dates;

 

   

the entity has issued debt obligations that have two or more maturities; and

 

   

the payments required to be made by the entity on its debt obligations “bear a relationship” to the payments to be received by the entity on the debt obligations that it holds as assets.

Under applicable Treasury regulations, if less than 80% of the assets of an entity (or a portion of an entity) consist of debt obligations, these debt obligations are not considered to comprise “substantially all” of its assets, and therefore the entity would not be treated as a taxable mortgage pool.

A taxable mortgage pool generally is treated as a corporation for federal income tax purposes and cannot be included in any consolidated federal corporate income tax return. However, if a REIT is a taxable mortgage pool, or if a REIT owns a qualified REIT subsidiary that is a taxable mortgage pool, then the REIT or the qualified REIT subsidiary will not be taxable as a corporation, but a portion of the REIT’s income will be treated as “excess inclusion income” and a portion of the dividends the REIT pays to its shareholders will be considered to be excess inclusion income. Securitizations by us or our subsidiaries could result in the creation of taxable mortgage pools for U.S. federal income tax purposes. As a result, we could have “excess inclusion income.” Certain categories of stockholders, such as non-U.S. stockholders eligible for treaty or other benefits, stockholders with net operating losses, and certain tax-exempt stockholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their dividend income from us that is attributable to any such excess inclusion income. In addition, to the extent that our common stock is owned by tax-exempt “disqualified organizations,” such as certain government-related entities and charitable remainder trusts that are not subject to tax on unrelated business taxable income, we may incur a corporate level tax on a portion of any excess inclusion

 

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income. Moreover, we could face limitations in selling equity interests in these securitizations to outside investors, or selling any debt securities issued in connection with these securitizations that might be considered to be equity interests for tax purposes. These limitations may prevent us from using certain techniques to maximize our returns from securitization transactions. We do not currently intend to hold REMIC residual interests (other than through a TRS) or engage in financing activities that may result in treatment of us or a portion of our assets as a taxable mortgage pool.

Income Tests

In order to qualify as a REIT, we must satisfy two gross income requirements on an annual basis. First, at least 75% of our gross income for each taxable year, excluding gross income from sales of inventory or dealer property in “prohibited transactions” and from certain hedging transactions, generally must be derived from investments relating to real property or mortgages on real property, including interest income derived from mortgage loans secured by real property (including certain types of CMBS), “rents from real property,” distributions received from other REITs, income derived from real estate mortgage investment conduits, or REMICs, in proportion to the real estate mortgages held by the REMIC, and gains from the sale of real estate assets, as well as specified income from temporary investments.

Second, at least 95% of our gross income in each taxable year, excluding gross income from prohibited transactions and certain hedging transactions, must be derived from some combination of such income from investments in real property (i.e., income that qualifies under the 75% income test described above), as well as other distributions, interest, and gain from the sale or disposition of stock or securities, which need not have any relation to real property.

Interest income constitutes qualifying mortgage interest for purposes of the 75% income test (as described above) to the extent that the obligation upon which such interest is paid is secured by a mortgage on real property. If we receive interest income with respect to a mortgage loan that is secured by both real property and other property, and both (1) 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 or originated the mortgage loan and (2) the value of the personal property securing the loan exceeds 15% of the total value of all property securing the 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% income test only to the extent that the interest is allocable to the real property. Even if a loan is not secured by real property, or is undersecured, the income that it generates may nonetheless qualify for purposes of the 95% income test.

To the extent that the terms of a loan provide for contingent interest that is based on the cash proceeds realized upon the sale of the property securing the loan (a “shared appreciation provision”), income attributable to the participation feature will be treated as gain from sale of the underlying property, which generally will be qualifying income for purposes of both the 75% and 95% gross income tests provided that the real property is not held as inventory or dealer property or primarily for sale to customers in the ordinary course of business. To the extent that we derive interest income from a mortgage loan or income from the rental of real property (discussed below) where all or a portion of the amount of interest or rental income payable is contingent, such income generally will qualify for purposes of the gross income tests only if it is based upon the gross receipts or sales and not on the net income or profits of the borrower or lessee. This limitation does not apply, however, where the borrower or lessee leases substantially all of its interest in the property to tenants or subtenants to the extent that the rental income derived by the borrower or lessee, as the case may be, would qualify as rents from real property had we earned the income directly.

 

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We may acquire participation interests, or subordinated mortgage interests, in mortgage loans and mezzanine loans. A subordinated mortgage interest is an interest created in an underlying loan by virtue of a participation or similar agreement, to which the originator of the loan is a party, along with one or more participants. The borrower on the underlying loan is typically not a party to the participation agreement. The performance of a participant’s investment depends upon the performance of the underlying loan and if the underlying borrower defaults, the participant typically has no recourse against the originator of the loan. The originator often retains a senior position in the underlying loan and grants junior participations, which will be a first loss position in the event of a default by the borrower. We anticipate any participation interests we acquire will qualify as real estate assets for purposes of the REIT asset tests described below and that interest derived from such investments will be treated as qualifying interest for purposes of the 75% gross income test. The appropriate treatment of participation interests for federal income tax purposes is not entirely certain, and no assurance can be given that the IRS will not challenge our treatment of any participation interests we acquire.

We may acquire interests in mezzanine loans, which are loans secured by equity interests in an entity that directly or indirectly owns real property, rather than by a direct mortgage of the real property. In Revenue Procedure 2003-65, the IRS established a safe harbor under which loans secured by a first priority security interest in the ownership interests in a partnership or limited liability company owning real property will be treated as real estate assets for purposes of the REIT asset tests described below, and interest derived from those loans will be treated as qualifying income for both the 75% and 95% gross income tests, provided several requirements are satisfied. Although the Revenue Procedure provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law. Moreover, mezzanine loans may not meet all of the requirements for reliance on the safe harbor. To the extent any mezzanine loans that we acquire do not qualify for the safe harbor described above, the interest income from the loans will be qualifying income for purposes of the 95% gross income test, but there is a risk that such interest income will not be qualifying income for purposes of the 75% gross income test.

There is limited case law and administrative guidance addressing whether instruments similar to any mezzanine loans or preferred equity investments that we may acquire will be treated as equity or debt for U.S. federal income tax purposes. We typically do not anticipate obtaining private letter rulings from the IRS or opinions of counsel on the characterization of those investments for U.S. federal income tax purposes. If the IRS successfully recharacterizes a mezzanine loan or preferred equity investment that we have treated as debt for U.S. federal income tax purposes as equity for U.S. federal income tax purposes, we would be treated as owning the assets held by the partnership or limited liability company that issued the security and we would be treated as receiving our proportionate share of the income of the entity. There can be no assurance that such an entity will not derive nonqualifying income for purposes of the 75% or 95% gross income test or earn income that could be subject to a 100% penalty tax. Alternatively, if the IRS successfully recharacterizes a mezzanine loan or preferred equity investment that we have treated as equity for U.S. federal income tax purposes as debt for U.S. federal income tax purposes, then that investment may be treated as producing interest income that would be qualifying income for the 95% gross income test, but not for the 75% gross income test. If the IRS successfully challenges the classification of our mezzanine loans or preferred equity investments for U.S. federal income tax purposes, no assurance can be provided that we will not fail to satisfy the 75% or 95% gross income test.

We may modify the terms of mortgages or mezzanine loans after acquiring them. Under the Code, if the terms of a loan are modified in a manner constituting a “significant modification,” such modification triggers a deemed exchange of the original loan for the modified loan. IRS Revenue Procedure 2014-51 provides a safe harbor pursuant to which we will not be required to

 

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redetermine the fair market value of the real property securing a loan for purposes of the gross income and asset tests in connection with a loan modification that is (1) occasioned by a borrower default or (2) made at a time when we reasonably believe that the modification to the loan will substantially reduce a significant risk of default on the original loan. To the extent we significantly modify loans in a manner that does not qualify for that safe harbor, we will be required to redetermine the value of the real property securing the loan at the time it was significantly modified, which could result in a portion of the interest income on the loan being treated as nonqualifying income for purposes of the 75% gross income test. In determining the value of the real property securing such a loan, we generally will not obtain third-party appraisals but rather will rely on internal valuations.

We expect that the interest, original issue discount, and market discount income that we will receive from our mortgage-related assets generally will be qualifying income for purposes of both gross income tests.

Fee income generally will be qualifying income for purposes of both the 75% and 95% gross income tests if it is received in consideration for entering into an agreement to make a loan secured by real property and the fees are not determined by income and profits. Other fees generally are not qualifying income for purposes of either gross income test. Any fees earned by a TRS will not be included for purposes of the gross income tests.

Rents received by us will qualify as “rents from real property” in satisfying the gross income requirements described above only if several conditions are met. If rent is partly attributable to personal property leased in connection with a lease of real property, the portion of the rent that is attributable to the personal property will not qualify as “rents from real property” unless it constitutes 15% or less of the total rent received under the lease. In addition, the amount of rent must not be based in whole or in part on the income or profits of any person. Amounts received as rent, however, generally will not be excluded from rents from real property solely by reason of being based on fixed percentages of gross receipts or sales. Moreover, for rents received to qualify as “rents from real property,” we generally must not operate or manage the property or furnish or render services to the tenants of such property, other than through an “independent contractor” from which we derive no revenue. We are permitted, however, to perform services that are “usually or customarily rendered” in connection with the rental of space for occupancy only and which are not otherwise considered rendered to the occupant of the property. In addition, we may directly or indirectly provide noncustomary services to tenants of our properties without disqualifying all of the rent from the property if the payments for such services do not exceed 1% of the total gross income from the properties. For purposes of this test, we are deemed to have received income from such non-customary services in an amount equal to at least 150% of the direct cost of providing the services. Moreover, we are generally permitted to provide services to tenants or others through a TRS without disqualifying the rental income received from tenants for purposes of the income tests. Also, rental income will qualify as rents from real property only to the extent that we do not directly or constructively hold a 10% or greater interest, as measured by vote or value, in the lessee’s equity.

We may directly or indirectly receive distributions from TRSs or other corporations that are not REITs or qualified REIT subsidiaries. These distributions generally are treated as dividend income to the extent of the earnings and profits of the distributing corporation. Such distributions will generally constitute qualifying income for purposes of the 95% gross income test, but not for purposes of the 75% gross income test. Any distributions that we receive from a REIT, however, will be qualifying income for purposes of both the 95% and 75% income tests.

We and our subsidiaries may enter into hedging transactions with respect to one or more of our assets or liabilities. Hedging transactions could take a variety of forms, including interest rate

 

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swap agreements, interest rate cap agreements, options, futures contracts, forward rate agreements or similar financial instruments. Except to the extent provided by Treasury regulations, any income from a hedging transaction we entered into (1) in the normal course of our business primarily to manage risk of interest rate, inflation and/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, which is clearly identified as specified in Treasury regulations before the closing of the day on which it was acquired, originated, or entered into, including gain from the sale or disposition of such a transaction, (2) primarily to manage risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the 75% or 95% income tests which is clearly identified as such before the closing of the day on which it was acquired, originated, or entered to, will not constitute gross income for purposes of the 75% or 95% gross income tests, or (3) in connection with the effective termination of certain hedging transactions described above will not constitute gross income for purposes of both the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of the 75% or 95% gross income tests. We intend to structure any hedging transactions in a manner that does not jeopardize our qualification as a REIT.

If we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may still qualify as a REIT for such year if we are entitled to relief under applicable provisions of the Code. These relief provisions will be generally available if (1) our failure to meet these tests was due to reasonable cause and not due to willful neglect and (2) following our identification of the failure to meet the 75% or 95% gross income test for any taxable year, we file a schedule with the IRS setting forth each item of our gross income for purposes of the 75% or 95% gross income test for such taxable year in accordance with Treasury regulations yet to be issued. It is not possible to state whether we would be entitled to the benefit of these relief provisions in all circumstances. If these relief provisions are inapplicable to a particular set of circumstances, we will not qualify as a REIT. As discussed above under “—Taxation of REITs in General,” even where these relief provisions apply, the Code imposes a tax based upon the amount by which we fail to satisfy the particular gross income test.

Due to the nature of the assets in which we will invest, we may be required to recognize taxable income from certain assets in advance of our receipt of cash flow from or proceeds from disposition of such assets, and may be required to report taxable income that exceeds the economic income ultimately realized on such assets.

We may originate loans with original issue discount. In general, we will be required to accrue original issue discount based on the constant yield to maturity of the loan, and to treat it as taxable income in accordance with applicable federal income tax rules even though such yield may exceed cash payments, if any, received on such loan.

Under the TCJA, we generally will be required to take certain amounts in income no later than the time such amounts are reflected in our financial statements. This rule may require the accrual of income with respect to any loans we may acquire, such as original issue discount, earlier than would be the case under the general tax rules.

In addition, in the event that any loan is delinquent as to mandatory principal and interest payments, or in the event payments with respect to a particular loan are not made when due, we may nonetheless be required to continue to recognize the unpaid interest as taxable income.

Finally, we may be required under the terms of indebtedness that we incur to use cash received from interest payments to make principal payments on that indebtedness, with the effect of recognizing income but not having a corresponding amount of cash available for distribution to our stockholders.

 

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As a result of potential timing differences between income recognition or expense deduction and cash receipts or disbursements, there is a risk that we may have substantial taxable income in excess of cash available for distribution. In that event, we may need to borrow funds or take other action (such as paying dividends consisting of a combination of cash and stock) to satisfy the REIT distribution requirements for the taxable year in which this “phantom income” is recognized.

Asset Tests

At the close of each calendar quarter, we must also satisfy tests relating to the nature of our assets. First, at least 75% of the value of our total assets must be represented by some combination of “real estate assets,” cash, cash items, U.S. government securities, and, under some circumstances, temporary investments in stock or debt instruments purchased with new capital. For this purpose, real estate assets include interests in real property, such as land, buildings, leasehold interests in real property, equity interests in other entities that qualify as REITs, mortgage loans, certain kinds of CMBS, and residual and regular interests in REMICs if at least 95% of the REMIC’s assets constitute qualifying mortgage loans. Assets that do not qualify for purposes of the 75% test are subject to the additional asset tests described below.

Second, the value of any one issuer’s securities that we own may not exceed 5% of the value of our total assets. Third, we may not own more than 10% of any one issuer’s outstanding securities, as measured by either voting power or value. The 5% and 10% asset tests do not apply to securities of TRSs and qualified REIT subsidiaries and the 10% asset test does not apply to “straight debt” having specified characteristics and to certain other securities that meet specified statutory requirements. Solely for purposes of the 10% asset test, the determination of our interest in the assets of a partnership or limited liability company in which we own an interest will be based on our proportionate interest in any securities issued by the partnership or limited liability company, excluding for this purpose certain securities described in the Code. Fourth, the aggregate value of all securities of TRSs that we hold may not exceed 20% of the value of our total assets. Finally, not more than 25% of the value of our total assets may be represented by debt instruments of “publicly offered” REITs that are not secured by real property or interests in real property.

A real property mortgage loan is generally a qualifying asset for purposes of the 75% asset test to the extent that the fair market value of the real property securing the loan exceeds the principal amount of the loan. If a 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 (1) the date the REIT agreed to acquire or originate the loan; or (2) in the event of a significant modification, the date the REIT modified the loan, then a portion of the mortgage loan will not be a qualifying asset for purposes of the 75% asset test. Generally, the non-qualifying portion of such loan will be equal to the portion of the loan amount that exceeds the value of the associated real property that is securing that loan. Mortgage loans that are qualifying real estate assets for purposes of the 75% asset test are also not considered securities for purposes of the 10% and 5% asset tests mentioned above.

Notwithstanding the general rule, as noted above, that for purposes of the REIT income and asset tests we are treated as owning our proportionate share of the underlying assets of a subsidiary partnership, if we hold indebtedness issued by a partnership, the indebtedness will be subject to, and may cause a violation of, the asset tests unless the indebtedness is a qualifying mortgage asset or other conditions are met. Similarly, although stock of another REIT is a qualifying asset for purposes of the REIT asset tests, any non-mortgage debt that is issued by another REIT may not so qualify unless such debt was issued by a “publicly offered REIT.”

 

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As noted above, there is limited case law and administrative guidance addressing whether instruments that are in the form of mezzanine loans or preferred equity will be treated as equity or debt for U.S. federal income tax purposes. If the IRS successfully recharacterizes a mezzanine loan or preferred equity investment that we have treated as debt for U.S. federal income tax purposes as equity for U.S. federal income tax purposes, we would be treated as owning the assets held by the partnership or limited liability company that issued the security. If that partnership or limited liability company owned nonqualifying assets, we may not be able to satisfy all of the asset tests. Alternatively, if the IRS successfully recharacterizes a mezzanine loan or preferred equity investment that we have treated as equity for U.S. federal income tax purposes as debt for U.S. federal income tax purposes, then that investment may be treated as a nonqualifying asset for purposes of the 75% asset test and would be subject to the 10% value test and the 5% asset test.

Certain relief provisions are available to REITs to satisfy the asset requirements or to maintain REIT qualification notwithstanding certain violations of the asset and other requirements. One such provision allows a REIT which fails one or more of the asset requirements to nevertheless maintain its REIT qualification if (1) the REIT provides the IRS with a description of each asset causing the failure, (2) the failure is due to reasonable cause and not willful neglect, (3) the REIT pays a tax equal to the greater of (a) $50,000 per failure, and (b) the product of the net income generated by the assets that caused the failure multiplied by the corporate tax rate, and (4) the REIT either disposes of the assets causing the failure within six months after the last day of the quarter in which it identifies the failure, or otherwise satisfies the relevant asset tests within that time frame.

In the case of de minimis violations of the 10% and 5% asset tests, a REIT may maintain its qualification despite a violation of such requirements if (1) the value of the assets causing the violation does not exceed the lesser of 1% of the REIT’s total assets and $10.0 million, and (2) the REIT either disposes of the assets causing the failure within six months after the last day of the quarter in which it identifies the failure, or the relevant tests are otherwise satisfied within that time frame.

We believe that our holdings of securities and other assets will comply with the foregoing REIT asset requirements, and we intend to monitor compliance on an ongoing basis.

No independent appraisals will be obtained to support our conclusions as to the value of our total assets or the value of any particular security or securities. Moreover, values of some assets may not be susceptible to a precise determination, and values are subject to change in the future. Accordingly, there can be no assurance that the IRS will not contend that our interests in our subsidiaries or in the securities of other issuers will not cause a violation of the REIT asset tests.

If we fail to satisfy the asset tests at the end of a calendar quarter, such a failure would not cause us to lose our REIT qualification if we (1) satisfied the asset tests at the close of the preceding calendar quarter and (2) the discrepancy between the value of our assets and the asset requirements was not wholly or partly caused by an acquisition of non-qualifying assets, but instead arose from changes in the market value of our assets. If the condition described in (2) were not satisfied, we still could avoid disqualification by eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose or by making use of relief provisions described above.

 

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Annual Distribution Requirements

In order to qualify to be taxed as a REIT, we are required to distribute dividends, other than capital gain distributions, to our stockholders in an amount at least equal to:

 

  1.

the sum of

 

  (a)

90% of our “REIT taxable income,” computed without regard to our net capital gains and the dividends paid deduction; and

 

  (b)

90% of our net income, if any, (after tax) from foreclosure property (as described below), minus

 

  2.

the excess of the sum of specified items of non-cash income (including original issue discount on any loans) over 5% of our REIT taxable income, computed without regard to the dividends paid deduction and our net capital gain.

We generally must make these distributions in the taxable year to which they relate, or in the following taxable year if either (1) the distributions are declared before we timely file our tax return for the year and paid with or before the first regular distribution payment after such declaration; or (2) the distributions are declared in October, November or December of the taxable year, payable to stockholders of record on a specified day in any such month, and actually paid before the end of January of the following year. The distributions under clause (1) are taxable to the holders of our common stock in the year in which paid, and the distributions in clause (2) 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.

To the extent that we distribute at least 90%, but less than 100%, of our “REIT taxable income,” as adjusted, we will be subject to tax at the ordinary corporate tax rate on the retained portion of such income. We may elect to retain, rather than distribute, our net long-term capital gains and pay tax on such gains. In this case, we could elect for our stockholders to include their proportionate shares of such undistributed long-term capital gains in income, and to receive a corresponding credit for their share of the tax that we paid. Our stockholders would then increase their adjusted tax basis of their stock by the difference between (a) the amounts of capital gain distributions that we designated and that they include in their taxable income, minus (b) the tax that we paid on their behalf with respect to that income.

To the extent that we have available net operating losses carried forward from prior tax years, such losses may reduce the amount of distributions that we must make in order to comply with the REIT distribution requirements. Such losses, however, will generally not affect the character, in the hands of our stockholders, of any distributions that are actually made as ordinary dividends or capital gains. See “—Taxation of Stockholders” below.

If we should fail to distribute during each calendar year at least the sum of (a) 85% of our REIT ordinary income for such year, (b) 95% of our REIT capital gain net income for such year, and (c) any undistributed taxable income from prior periods, we would be subject to a non-deductible 4% excise tax on the excess of such required distribution over the sum of (x) the amounts actually distributed, plus (y) the amounts of income we retained and on which we have paid corporate income tax.

It is possible that, from time to time, we may experience timing differences between the actual receipt of income and actual payment of deductible expenses and the inclusion of that income and

 

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deduction of such expenses in arriving at our REIT taxable income. For example, we may not deduct recognized capital losses from our “REIT taxable income.” Further, it is possible that, from time to time, we may be allocated taxable income or gain from an entity in which we have made a preferred equity investment that exceeds the cash distributions we receive from the entity. As a result of the foregoing, we may have less cash than is necessary to distribute taxable income sufficient to avoid corporate income tax and the excise tax imposed on certain undistributed income or even to meet the 90% distribution requirement. In such a situation, we may need to borrow funds or, if possible, pay taxable dividends of our capital stock or debt securities.

We may satisfy the 90% distribution test with taxable distributions of our stock or debt securities. The IRS has issued a revenue procedure creating a safe harbor authorizing publicly traded REITs to make elective cash/stock dividends that fully qualify for the dividends paid deduction. We have no current intention to make a taxable dividend payable in our stock. If we elect to do so in the future, we expect that any such distribution would comply with the requirements of the revenue procedure.

We may be able to rectify a failure to meet the distribution requirements for a year by paying “deficiency dividends” to stockholders in a later year, which may be included in our deduction for distributions paid for the earlier year. In this case, we may be able to avoid losing REIT qualification or being taxed on amounts distributed as deficiency dividends. We will be required to pay interest and a penalty based on the amount of any deduction taken for deficiency dividends.

Recordkeeping Requirements

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 stock. We intend to comply with these requirements.

Failure to Qualify

If we fail to satisfy one or more requirements for REIT qualification other than the gross income or 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. Relief provisions are available for failures of the gross income tests and asset tests, as described above in “—Income Tests” and “—Asset Tests.”

If we fail to qualify for taxation as a REIT in any taxable year, and the relief provisions described above do not apply, we would be subject to tax on our taxable income at the regular corporate rate. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of, and trading prices for, our stock.

Unless we are entitled to relief under specific statutory provisions, we would also be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year during which we lost qualification. It is not possible to state whether, in all circumstances, we would be entitled to this statutory relief.

Prohibited Transactions

Net income that we derive from a prohibited transaction is subject to a 100% tax. The term “prohibited transaction” generally includes a sale or other disposition of property (other than foreclosure property, as discussed below) that is held primarily for sale to customers in the

 

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ordinary course of a trade or business. We intend to conduct our operations so that no asset that we own (or are treated as owning) will be treated as, or as having been, held for sale to customers, and that a sale of any such asset will not be treated as having been in the ordinary course of our business. Whether property is held “primarily for sale to customers in the ordinary course of a trade or business” depends on the particular facts and circumstances. No assurance can be given that any asset that we sell will not be treated as property held for sale to customers, or that we can comply with certain safe-harbor provisions of the Code that would prevent such treatment. The 100% tax does not apply to gains from the sale of property that is held through a TRS or other taxable corporation, although such income will potentially be subject to tax in the hands of the corporation at the regular corporate rate, nor does the tax apply to sales that qualify for a safe harbor as described in Section 857(b)(6) of the Code.

Foreclosure Property

Foreclosure property is real property and any personal property incident to such real property (1) that we acquire as the result of having bid on the property at foreclosure, or having otherwise reduced the property to ownership or possession by agreement or process of law, after a default (or upon imminent default) on a lease of the property or a mortgage loan held by us and secured by the property, (2) for which we acquired the related loan or lease at a time when default was not imminent or anticipated, and (3) with respect to which we made a proper election to treat the property as foreclosure property. We generally will be subject to tax at the corporate rate on any net income from foreclosure property, including any gain from the disposition of the foreclosure property, other than income that would otherwise be qualifying income for purposes of the 75% gross income test. Any gain from the sale of property for which a foreclosure property election has been made will not be subject to the 100% tax on gains from prohibited transactions described above, even if the property would otherwise constitute inventory or dealer property. To the extent that we receive any income from foreclosure property that does not qualify for purposes of the 75% gross income test, we intend to make an election to treat the related property as foreclosure property.

Tax Aspects of Investments in Partnerships

General

We currently hold and anticipate holding direct or indirect interests in one or more partnerships, including the OP. Such non-corporate entities would generally be organized as limited liability companies, partnerships or trusts that would either be disregarded as entities for U.S. federal income tax purposes or treated as partnerships for U.S. federal income tax purposes.

The following is a summary of the U.S. federal income tax consequences of our investment in the OP if the OP is treated as a partnership for U.S. federal income tax purposes. This discussion should also generally apply to any investment by us in other entities classified as partnerships for such purposes.

A partnership (that is not a publicly traded partnership taxed as a corporation) is not subject to tax as an entity for U.S. federal income tax purposes. Rather, partners are allocated their allocable share of the items of income, gain, loss, deduction and credit of the partnership, and are potentially subject to tax thereon, without regard to whether the partners receive any distributions from the partnership. We will be required to take into account our allocable share of the foregoing items for purposes of the various REIT gross income and asset tests, and in the computation of our REIT taxable income and U.S. federal income tax liability. Further, there can be no assurance that distributions from the OP will be sufficient to pay the tax liabilities resulting from an investment in the OP.

 

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We intend that interests in the OP (and any partnership invested in by the OP) will fall within one of the “safe harbors” for the partnership to avoid being classified as a publicly traded partnership. However, we reserve the right to not satisfy any safe harbor. Even if a partnership is a publicly traded partnership, it generally will not be taxed as a corporation if at least 90% of its gross income each taxable year is from certain sources, which generally include rents from real property and other types of passive income. We believe that our OP will have sufficient qualifying income so that it would be treated as a partnership, even if it were a publicly traded partnership.

To the extent that the OP (or any subsidiary partnership in which the OP owns an interest) were treated as a taxable mortgage pool, it would be taxable as a corporation for U.S. federal income tax purposes. In such case, we may not be able to qualify as a REIT. We do not believe that the OP (or any subsidiary partnership in which the OP owns an interest) will be treated as a taxable mortgage pool, but no assurance can be given that it will not be treated as such.

If for any reason the OP (or any partnership invested in by the OP) is taxable as a corporation for U.S. federal income tax purposes, the character of our assets and items of gross income would change, and as a result, we would most likely be unable to satisfy the applicable REIT requirements under U.S. federal income tax laws discussed above. In addition, any change in the status of any partnership may be treated as a taxable event, in which case we could incur a tax liability without a related cash distribution. Further, if any partnership was treated as a corporation, items of income, gain, loss, deduction and credit of such partnership would be subject to corporate income tax, and the partners of any such partnership would be treated as stockholders, with distributions to such partners being treated as dividends.

Income Taxation of Partnerships and Their Partners

Although a partnership agreement generally will determine the allocation of a partnership’s income and losses among the partners, such allocations may be disregarded for U.S. federal income tax purposes under Code Section 704(b) and the Treasury regulations promulgated thereunder. If any allocation is not recognized for U.S. federal income tax purposes, the item subject to the allocation will be reallocated in accordance with the partners’ economic interests in the partnership. We believe that the allocations of taxable income and loss in the OP’s partnership agreement comply with the requirements of Code Section 704(b) and the Treasury regulations promulgated thereunder.

In some cases, special allocations of net profits or net losses will be required to comply with the U.S. federal income tax principles governing partnership tax allocations. Additionally, pursuant to Code Section 704(c), income, gain, loss and deduction attributable to property contributed to the OP in exchange for units must be allocated in a manner so that the contributing partner is charged with, or benefits from, the unrealized gain or loss attributable to the property at the time of contribution. The amount of such unrealized gain or loss is generally equal to the difference between the fair market value and the adjusted tax basis of the property at the time of contribution. These allocations are designed to eliminate book-tax differences by allocating to contributing partners lower amounts of depreciation deductions and increased taxable income and gain attributable to the contributed property than would ordinarily be the case for economic or book purposes. The application of the principles of Code Section 704(c) in tiered partnership arrangements is not entirely clear. Accordingly, the IRS may assert a different allocation method than the one selected by the OP to cure any book-tax differences. In certain circumstances, we create book-tax differences by adjusting the values of properties for economic or book purposes and generally the rules of Code Section 704(c) would apply to such differences as well.

 

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Partnership Audit Rules

The Bipartisan Budget Act of 2015 changed the rules applicable to federal income tax audits of partnerships. Under the new rules, 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, absent an election to the contrary. It is possible that the new rules could result in the OP (or any partnership invested in by the OP) in which we directly or indirectly invest being required to pay additional taxes, interest and penalties as a result of an audit adjustment, and we, as a direct or indirect partner of these partnerships, could be required to bear the economic burden of those taxes, interest, and penalties. Stockholders are urged to consult their tax advisors with respect to these changes and their potential impact on their investment in our stock.

Taxation of Stockholders

Taxation of Taxable U.S. Holders of Our Common Stock

The following summary describes certain U.S. federal income tax considerations for taxable U.S. Holders (as defined below) relating to ownership of shares of our common stock. Certain U.S. federal income tax consequences applicable to tax-exempt stockholders are described under the subheading “—Taxation of Tax-Exempt U.S. Holders of Our Common Stock,” below and certain U.S. federal income tax consequences applicable to Non-U.S. Holders are described under the subheading “—Taxation of Non-U.S. Holders of Our Common Stock,” below.

As used herein, the term “U.S. Holder” means a beneficial owner of our common stock who, for U.S. federal income tax purposes:

 

   

is an individual who is a citizen or resident of the United States;

 

   

is a corporation (or other entity classified as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;

 

   

is an estate the income of which is subject to U.S. federal income taxation regardless of its source; or

 

   

any trust if (1) a 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 (2) it has a valid election in place to be treated as a U.S. person.

If a partnership, including for this purpose any arrangement or entity that is treated as a partnership for U.S. federal income tax purposes, holds shares of our common stock, the tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. If you are a partner in a partnership holding shares of our common stock, you are urged to consult with your own tax advisors about the consequences of the purchase, ownership and disposition of shares of our common stock by the partnership.

Distributions Generally

As long as we qualify as a REIT, distributions out of our current or accumulated earnings and profits, other than capital gain dividends discussed below, generally will constitute dividends

 

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taxable to our taxable U.S. Holders as ordinary income. These distributions will not be eligible for the dividends-received deduction in the case of U.S. Holders that are corporations.

Individuals, trusts and estates may deduct up to 20% of certain pass-through income, including ordinary REIT dividends that are not “capital gain dividends” or “qualified dividend income,” subject to certain limitations (the “pass-through deduction”). For taxable years beginning before January 1, 2026, the maximum tax rate for U.S. stockholders taxed at individual rates is 37%. For taxpayers qualifying for the full pass-through deduction, the effective maximum tax rate on ordinary REIT dividends for taxable years beginning before January 1, 2026 would be 29.6%. In addition, individuals, trusts and estates whose income exceeds certain thresholds are also subject to a 3.8% Medicare tax on dividends received from us.

Because, as discussed above, we generally are not subject to U.S. federal income tax on the portion of our REIT taxable income distributed to our stockholders, our ordinary dividends generally are not eligible for the preferential rates currently available to most non-corporate taxpayers and will continue to be taxed at the higher tax rates applicable to ordinary income. However, we may designate a portion of our dividends as eligible for the preferential rate, provided that the amount so designated may not exceed that portion of our distributions attributable to:

 

   

dividends received by us from non-REIT corporations, such as a TRS; and

 

   

income upon which we have paid corporate income tax (for example, if we distribute taxable income that we retained and paid tax on in the prior year).

To the extent that we make distributions in excess of our current and accumulated earnings and profits, these distributions will be treated first as a tax-free return of capital to each U.S. Holder. This treatment will reduce the adjusted tax basis that each U.S. Holder has in its shares of our common stock for tax purposes by the amount of the distribution (but not below zero). Distributions in excess of a U.S. Holder’s adjusted tax basis in its shares of our common stock will be taxable as capital gains (provided that the shares of our common stock have been held as a capital asset) and will be taxable as long-term capital gain if the shares of our common stock have been held for more than one year. Dividends we declare in October, November, or December of any year and payable to a stockholder of record on a specified date in any of these months will be treated as both paid by us and received by the stockholders on December 31 of that year, provided we actually pay the dividend on or before January 31 of the following calendar year. Stockholders may not include in their own income tax returns any of our net operating losses or capital losses.

Capital Gain Distributions

Distributions that we properly designate as capital gain dividends (and undistributed amounts for which we properly make a capital gains designation) will be taxable to U.S. Holders as gains (to the extent that they do not exceed our actual net capital gain for the taxable year) from the sale or disposition of a capital asset. Depending on the period of time we have held the assets which produced these gains, and on certain designations, if any, which we may make, these gains may be taxable to non-corporate U.S. Holders at preferential rates, depending on the nature of the asset giving rise to the gain. Corporate U.S. Holders may, however, be required to treat up to 20% of certain capital gain dividends as ordinary income.

Passive Activity Losses and Investment Interest Limitations

Distributions we make and gain arising from the sale or exchange by a U.S. Holder of shares of our common stock will be treated as portfolio income. As a result, U.S. Holders generally will not

 

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be able to apply any “passive losses” against this income or gain. A U.S. Holder may elect to treat capital gain dividends, capital gains from the disposition of shares of our common stock and qualified dividend income as investment income for purposes of computing the investment interest limitation, but in such case, the stockholders will be taxed at ordinary income rates on such amount. Other distributions we make (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. Gain arising from the sale or other disposition of shares of our common stock, however, will not be treated as investment income under certain circumstances.

Retention of Net Long-Term Capital Gains

We may elect to retain, rather than distribute as a capital gain dividend, our net long-term capital gains. If we make this election, or a Capital Gains Designation, we would pay tax on our retained net long-term capital gains. In addition, to the extent we make a Capital Gains Designation, a U.S. Holder generally would:

 

   

include its proportionate share of our undistributed long-term capital gains in computing its long-term capital gains in its income tax return for its taxable year in which the last day of our taxable year falls (subject to certain limitations as to the amount that is includable);

 

   

be deemed to have paid the capital gains tax imposed on us on the designated amounts included in the U.S. Holder’s long-term capital gains;

 

   

receive a credit or refund for the amount of tax deemed paid by it;

 

   

increase the adjusted tax basis of its shares of our common stock by the difference between the amount of includable gains and the tax deemed to have been paid by it; and

 

   

in the case of a U.S. Holder that is a corporation, appropriately adjust its earnings and profits for the retained capital gains in accordance with Treasury regulations to be promulgated.

Dispositions of Shares of Our Common Stock

Generally, if you are a U.S. Holder and you sell or dispose of your shares of our common stock, you will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount of cash and the fair market value of any property you receive on the sale or other disposition and your adjusted tax basis in the shares of our common stock for tax purposes. This gain or loss will be capital if you have held the shares of our common stock as a capital asset and, except as provided below, will be long-term capital gain or loss if you have held the shares of our common stock for more than one year. However, if you are a U.S. Holder and you recognize loss upon the sale or other disposition of shares of our common stock that you have held for six months or less (after applying certain holding period rules), the loss you recognize will be treated as a long-term capital loss, to the extent you received distributions from us that were required to be treated as long-term capital gains. Certain non-corporate U.S. Holders (including individuals) may be eligible for reduced rates of taxation in respect of long-term capital gains. The deductibility of capital losses is subject to certain limitations.

Information Reporting and Backup Withholding

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withholding rules, a stockholder may be subject to backup withholding with respect to dividends paid unless the 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 applicable requirements of the backup withholding rules. A U.S. Holder that does not provide us with its correct taxpayer identification number may also be subject to penalties imposed by the IRS. Backup withholding is not an additional tax. Rather, any amounts withheld under the backup withholding rules will generally be allowed as a credit against your U.S. federal income tax liability and may entitle you to a refund, provided the required information is timely furnished to the IRS. In addition, we may be required to withhold a portion of capital gain distributions to any stockholders who fail to certify their non-foreign status. See “—Taxation of Non-U.S. Holders of Our Common Stock.”

Medicare Tax

Certain U.S. Holders of shares of our common stock that are individuals, estates or trusts and whose income exceeds certain thresholds will be subject to a 3.8% Medicare tax on, among other things, dividends on and capital gains from the sale or other disposition of stock, unless such dividends or gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). If you are a U.S. Holder that is an individual, estate or trust, you are urged to consult your tax advisors regarding the applicability of the Medicare tax to your income and gains in respect of your investment in our common stock.

Taxation of Tax-Exempt U.S. Holders of Our Common Stock

Our distributions to a U.S. Holder that is a domestic tax-exempt entity generally should not constitute unrelated business taxable income, or UBTI, unless the U.S. Holder borrows funds (or otherwise incurs acquisition indebtedness within the meaning of the Code) to acquire or to carry its common shares, the common shares are otherwise used in an unrelated trade or business of the tax-exempt entity. We may engage in transactions that would result in a portion of our dividend income being considered “excess inclusion income,” and accordingly, a portion of our dividends received by a tax-exempt stockholder may be treated as UBTI.

Tax-exempt stockholders that are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans exempt from U.S. federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code, respectively, are subject to different UBTI rules, that generally will require them to characterize distributions from us as UBTI.

Notwithstanding the above, a pension trust (1) that is described in Section 401(a) of the Code and is tax-exempt under Section 501(a) of the Code and (2) that owns more than 10% of the value of shares of our common stock could be required to treat a percentage of the dividends from us as UBTI if we are a pension-held REIT. We will not be a pension-held REIT unless (1) either (a) one pension trust owns more than 25% of the value of shares of our common stock or (b) a group of pension trusts, each individually holding more than 10% of the value of shares of our common stock, collectively owns more than 50% of our outstanding shares of our common stock and (2) we would not have qualified as a REIT without relying upon the “look through” exemption for certain trusts under Section 856(h)(3) of the Code to satisfy the requirement that not more than 50% in value of our outstanding shares of our common stock is owned by five or fewer individuals. Given the stock ownership restrictions in our charter, we do not expect to be classified as a pension held REIT.

 

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Tax-exempt stockholders are encouraged to consult their own tax advisors concerning the U.S. federal, state, local and foreign tax consequences of an investment in shares of our common stock.

Taxation of Non-U.S. Holders of Our Common Stock

The following summary describes certain U.S. federal income tax considerations for Non-U.S. Holders (as defined below) relating to ownership of shares of our common stock. As used herein, a “Non-U.S. Holder” means a beneficial owner of shares of our common stock that, for U.S. federal income tax purposes, is an individual, corporation or estate that is not a U.S. Holder. The rules governing U.S. federal income taxation of Non-U.S. Holders of shares of our common stock are complex and no attempt is made herein to provide more than a brief summary of such rules. Non-U.S. Holders are urged to consult their own tax advisors concerning the U.S. federal, state, local and foreign tax consequences to them of an acquisition of shares of our common stock, including tax return filing requirements and the U.S. federal, state, local and foreign tax treatment of dispositions of interests in, and the receipt of distributions from, us.

Distributions Generally

Distributions that are neither attributable to gain from our sale or exchange of U.S. real property interests nor designated by us as capital gain dividends will be treated as dividends to the extent that they are made out of our current or accumulated earnings and profits. Such distributions ordinarily will be subject to withholding of U.S. federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty, unless the distributions are treated as effectively connected with the conduct by you of a U.S. trade or business. Under some treaties, however, lower withholding rates generally applicable to dividends do not apply to dividends from REITs.

Dividends that are treated as effectively connected with the conduct of a U.S. trade or business will be subject to tax on a net basis (that is, after allowance for deductions) at graduated rates, in the same manner as dividends paid to U.S. Holders are subject to tax, and are generally not subject to withholding. Any such dividends received by a Non-U.S. Holder that is a corporation may also be subject to an additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.

We expect to withhold U.S. income tax at the rate of 30% on any distributions made to Non-U.S. Holders unless:

 

   

a lower treaty rate applies and you provide us with an IRS Form W-8BEN or IRS Form W-8BEN-E or other appropriate form, as applicable, evidencing eligibility for an exemption from withholding or a reduced treaty rate; or

 

   

you provide to us an IRS Form W-8ECI claiming that the distribution is income effectively connected with your U.S. trade or business.

Distributions in excess of our current and accumulated earnings and profits will not be taxable to you to the extent that such distributions do not exceed your adjusted tax basis in shares of our common stock. Instead, the distribution will reduce the adjusted tax basis of such shares of common stock. To the extent that such distributions exceed your adjusted tax basis in shares of our common stock, they will give rise to gain from the sale or exchange of such shares of common stock. The tax treatment of this gain is 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, we expect to treat all distributions as made out of our current or accumulated

 

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earnings and profits and we therefore expect to withhold tax on the entire amount of any distribution at the same rate as we would withhold on a dividend. However, amounts withheld should generally be refundable if it is subsequently determined that the distribution was, in fact, in excess of our current and accumulated earnings and profits.

As described above, if a REIT is a taxable mortgage pool, or if a REIT owns a qualified REIT subsidiary that is a taxable mortgage pool, then the REIT or the qualified REIT subsidiary will not be taxable as a corporation, but a portion of the REIT’s income will be treated as “excess inclusion income” and a portion of the dividends the REIT pays to its shareholders likewise will be considered to be excess inclusion income. Any portion of the dividends paid to Non-U.S. Holders that is treated as excess inclusion income will generally be subject to a 30% U.S. federal income tax withholding, without reduction under any otherwise applicable income tax treaty.

Capital Gain Dividends and Distributions Attributable to a Sale or Exchange of U.S. Real Property Interests

Except as described below, distributions to a Non-U.S. Holder that we properly designate as capital gain dividends, other than those arising from the disposition of a U.S. real property interest, generally should not be subject to U.S. federal income taxation, unless (1) the investment in shares of our common stock is treated as effectively connected with your U.S. trade or business, in which case you will be subject to the same treatment as U.S. Holders with respect to such gain, except that a Non-U.S. Holder that is a foreign corporation may also be subject to the 30% branch profits tax, as discussed above; or (2) you are a nonresident alien individual who is present in the United States for 183 days or more during the taxable year and certain other conditions are met, in which case you will be subject to a 30% tax on your capital gains.

Distributions that are attributable to gain from sales or exchanges of “U.S. real property interests” by us are taxable to a Non-U.S. Holder under special provisions of the Code known as the Foreign Investment in Real Property Tax Act, or FIRPTA. The term “U.S. real property interests” includes interests in U.S. real property including interests owned indirectly through investments in partnerships, but generally does not include mortgage loans or mortgage-backed securities, such as CMBS. As a result, we do not anticipate being a United States real property holding corporation, but no assurance can be given that we will not be treated as such. Under FIRPTA, a distribution attributable to gain from sales of U.S. real property interests is considered effectively connected with a U.S. business of the Non-U.S. Holder and will be subject to U.S. federal income tax at the rates applicable to U.S. Holders (subject to a special alternative minimum tax adjustment in the case of nonresident alien individuals), without regard to whether the distribution is designated as a capital gain dividend. The income may also be subject to the 30% branch profits tax in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes. In addition, we will be required to withhold tax equal to 21% of the amount of distribution attributable to gain from the sale or exchange of the U.S. real property interest.

However, any distribution with respect to any class of equity securities which is regularly traded on an established securities market located in the United States is not subject to FIRPTA, and therefore, not subject to the 21% U.S. withholding tax described above, if you did not own more than 10% of such class of equity securities at any time during the one-year period ending on the date of the distribution, or the 10% Exception. In addition, capital gains distributions by a REIT to “qualified shareholders” meeting certain statutory requirements, including that the shareholders be eligible for treaty benefits and publicly traded, or constitute a foreign partnership or other type of foreign collective investment vehicle, are not subject to FIRPTA. Instead, all such distributions will be treated as ordinary dividend distributions and, as a result, Non-U.S. Holders generally would be subject to withholding tax on such distributions in the same manner as they are subject to ordinary dividends.

 

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“Qualified foreign pension funds” are not subject to the taxes imposed by FIRPTA. Accordingly, capital gains distributions by a REIT to a qualified foreign pension fund are not subject to the FIRPTA rules set forth above but may still be subject to regular U.S. withholding tax. To qualify, a pension fund must be created or organized under the law of a country other than the U.S., and have been established to provide retirement or pension benefits to participants or beneficiaries that are current or former employees (or persons designated by those employees) of one or more employers in consideration for services rendered, and meet other requirements. Stockholders that are non-U.S. pension funds are urged to contact their own tax advisors to determine whether they qualify for the exemption to FIRPTA.

Retention of Net Capital Gains

Although the law is not clear on the matter, it appears that amounts designated by us as retained capital gains in respect of the shares of common stock held by Non-U.S. Holders generally should be treated in the same manner as actual distributions by us of capital gain dividends. Under this approach, you would be able to offset as a credit against your U.S. federal income tax liability resulting from your proportionate share of the tax paid by us on such retained capital gains, and to receive from the IRS a refund to the extent your proportionate share of such tax paid by us exceeds your actual U.S. federal income tax liability.

Sale of Shares of Common Stock

Gain recognized by a Non-U.S. Holder upon the sale or exchange of shares of our common stock generally will not be subject to United States federal income taxation unless such shares of common stock constitute a U.S. real property interest. As noted above, the term U.S. real property interest does not include mortgage loans or mortgage-backed securities, such as CMBS. As a result, we do not anticipate being a United States real property holding corporation, but no assurance can be given that we will not be treated as such. Even if we were treated as a United States real property holding corporation, shares of our common stock will not constitute a U.S. real property interest if we are a domestically controlled qualified investment entity, which includes a REIT. A REIT is domestically controlled if, at all times during a specified testing period, less than 50% in value of its shares of common stock are held directly or indirectly by Non-U.S. Holders. Because our common stock will be publicly traded, no assurance can be given that we are or will be a domestically controlled REIT.

Even if we do not qualify as a domestically controlled REIT at the time you sell or exchange shares of our common stock, gain arising from such a sale or exchange would not be subject to tax under FIRPTA as a sale of a U.S. real property interest provided that (1) such shares of common stock are of a class of shares of our common stock that is regularly traded, as defined by applicable Treasury regulations, on an established securities market such as the NYSE; and (2) you owned, actually and constructively, 10% or less in value of such class of shares of our common stock throughout the shorter of the period during which you held such shares of common stock or the five-year period ending on the date of the sale or exchange. We believe our common stock will be treated as regularly traded on an established securities market after this offering.

If gain on the sale or exchange of shares of our common stock were subject to taxation under FIRPTA, you would be subject to regular U.S. federal income tax with respect to such gain in the same manner as a taxable U.S. Holder (subject to any applicable alternative minimum tax and a special alternative minimum tax adjustment in the case of nonresident alien individuals) and the purchaser of the shares of our common stock would be required to withhold and remit to the IRS 15% of the purchase price.

 

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Notwithstanding the foregoing, gain from the sale or exchange of shares of our common stock not otherwise subject to FIRPTA will be taxable to you if either (1) the investment in shares of our common stock is effectively connected with your U.S. trade or business or (2) you are a nonresident alien individual who is present in the United States for 183 days or more during the taxable year and certain other conditions are met.

Backup Withholding Tax and Information Reporting

We will, where required, report to the IRS and to Non-U.S. Holders, the amount of dividends paid, the name and address of the recipients, and the amount, if any, of tax withheld. Pursuant to tax treaties or other agreements, the IRS may make its reports available to tax authorities in the Non-U.S. Holder’s country of residence. Payments of dividends made to a Non-U.S. Holder may be subject to backup withholding (currently at a rate of 24%) unless the Non-U.S. Holder establishes an exemption, for example, by properly certifying its non-United States status on an IRS Form W-8BEN, IRS Form W-8BEN-E or another appropriate version of IRS Form W-8. Notwithstanding the foregoing, backup withholding may apply if either we or our paying agent has actual knowledge, or reason to know, that the holder is a United States person.

The gross proceeds from the disposition of our common stock may be subject to information reporting and backup withholding. If a Non-U.S. Holder sells shares of our common stock outside the United States through a non-United States office of a non-United States broker and the sales proceeds are paid to such Non-U.S. Holder outside the United States, then the backup withholding and information reporting requirements generally will not apply to that payment. However, information reporting, but not backup withholding, generally will apply to a payment of sales proceeds, even if that payment is made outside the United States, if the Non-U.S. Holder sells shares of our common stock through a non-United States office of a broker that has specified types of connections with the United States, unless the broker has documentary evidence in its records that the Non-U.S. Holder is not a United States person and specified conditions are met, or the holder otherwise establishes an exemption. If a Non-U.S. Holder receives payments of the proceeds of a sale of our common stock to or through a United States office of a broker, the payment will be subject to both United States backup withholding and information reporting unless such holder properly provides an IRS Form W-8BEN or IRS Form W-8BEN-E (or another appropriate version of IRS Form W-8) certifying that such holder is not a United States person or otherwise establishes an exemption, and the broker does not know or have reason to know that such Non-U.S. Holder is a United States person.

Backup withholding is not an additional tax. Rather, any amounts withheld under the backup withholding rules will generally be allowed as a credit against your U.S. federal income tax liability and may entitle you to a refund, provided the required information is timely furnished to the IRS. You are urged to consult your own tax advisors regarding the application of information reporting and backup withholding rules to your particular situation, the availability of an exemption therefrom, and the procedure for obtaining such an exemption, if applicable.

Other Tax Considerations

Additional FATCA Withholding

The Foreign Account Tax Compliance Act provisions of the Hiring Incentives to Restore Employment Act and Treasury regulations thereunder, commonly referred to as “FATCA,” when applicable will impose a U.S. federal withholding tax of 30% on certain types of payments, including payments of U.S.-source dividends made to (1) ”foreign financial institutions” unless they agree to collect and disclose to the IRS information regarding their direct and indirect U.S.

 

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account holders, and (2) certain non-financial foreign entities unless they certify certain information regarding their direct and indirect U.S. owners. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different rules. Under certain circumstances, a holder might be eligible for refunds or credits of such taxes. Thirty percent withholding under FATCA was scheduled to apply to payments of gross proceeds from the sale or other disposition of property that produces U.S.-source dividends beginning on January 1, 2019, but on December 13, 2018, the IRS released proposed regulations that, if finalized in their proposed form, would eliminate the obligation to withhold on gross proceeds. The rules under FATCA are complex. Holders that hold our stock through a non-U.S. intermediary or that are Non-U.S. Holders should consult their own tax advisors regarding the implications of FATCA on an investment in our stock.

Legislative or Other Actions Affecting REITs

The present federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial, or administrative action at any time. The REIT rules are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department which may result in statutory changes as well as revisions to regulations and interpretations. We cannot predict the long-term effect of any future law changes on REITs and their stockholders. Prospective investors are urged to consult with their own tax advisors regarding the effect of potential changes to the federal tax laws on an investment in our stock.

State and Local Taxes

We and our subsidiaries and stockholders may be subject to state, local or foreign taxation in various jurisdictions including those in which we or they transact business, own property or reside. We may own real property assets located in numerous jurisdictions, and may be required to file tax returns in some or all of those jurisdictions. Our state, local or foreign tax treatment and that of our stockholders may not conform to the U.S. federal income tax treatment discussed above. Prospective investors should consult their tax advisors regarding the application and effect of state and local income and other tax laws on an investment in our stock.

 

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CERTAIN ERISA CONSIDERATIONS

The following is a summary of certain considerations associated with an investment in our shares by employee benefit plans that are subject to Title I of the U.S. Employee Retirement Income Security Act of 1974, as amended, or ERISA, plans, individual retirement accounts and other arrangements to which Section 4975 of the Code applies, and entities whose underlying assets are deemed to include “plan assets” of any such employee benefit plan or plan, or each, a Plan. This summary is based on 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 U.S. Department of Labor and the IRS.

For any governmental plan or church plan, or other plans or arrangements not subject to ERISA or the Code, those persons responsible for the investment of the assets of such a plan or arrangement should carefully consider the impact of any other federal, state, local, non-U.S. or other laws or regulations that are similar to such provisions of ERISA or the Code, or collectively, Similar Laws, on an investment in our shares.

General Fiduciary Matters

ERISA and the Code impose certain duties on persons who are fiduciaries of a Plan subject to Title I of ERISA or Section 4975 of the Code, or an ERISA Plan, and prohibit certain transactions involving the assets of an ERISA Plan and its fiduciaries or other interested parties. Under ERISA and the Code, any person who exercises any discretionary authority or control over the administration of such an ERISA Plan or the management or disposition of the assets of such an ERISA Plan, or who renders investment advice for a fee or other compensation to such an ERISA Plan, is generally considered to be a fiduciary of the ERISA Plan.

In considering an investment in our shares of a portion of the assets of any Plan, a fiduciary should determine whether the investment is in accordance with the documents and instruments governing the Plan and the applicable provisions of ERISA, the Code or any Similar Law relating to a fiduciary’s duties to the Plan including, without limitation, the prudence, diversification, delegation of control and prohibited transaction provisions of ERISA, the Code and any other applicable Similar Laws. Further, a fiduciary should consider that in the future there may be no public market in which such Plan would be able to sell or otherwise dispose of our shares of common stock.

This offering is not directed to any particular purchaser, nor does it address the needs of any particular purchaser. We will not provide, and none of the Company, any of our respective affiliates or the underwriters will provide any advice or recommendation with respect to the management of any purchase of our shares or the advisability of acquiring, holding, disposing or exchanging of our shares.

Plan Asset Considerations

In order to determine whether an investment in our shares by a Plan creates or gives rise to the potential for prohibited transactions referred to above, an individual making an investment decision must consider whether an investment in our shares will cause our assets to be treated as “plan assets” of the investing Plan. Section 3(42) of ERISA defines the term “plan assets” in accordance with previously issued U.S. Department of Labor regulations with certain express exceptions. The regulations under 29 CFR Section 2510.3-101 promulgated by the Department of Labor (as modified by the express exceptions noted in Section 3(42) of ERISA), or the Plan Assets 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 a Plan invests in that entity.

 

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Under the Plan Assets Regulations, 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. Generally, the exceptions require that the investment in the entity be one of the following:

 

   

In securities issued by an investment company registered under the Investment Company Act;

 

   

In “publicly offered securities” (generally defined as interests that are “freely transferable,” “widely held,” and registered with the SEC);

 

   

In an “operating company,” which includes “venture capital operating companies” and “real estate operating companies;” or

 

   

In an investment in which equity participation by “benefit plan investors” is “not significant.”

We believe that we will satisfy one or more of the exceptions as described in more detail below.

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 Regulations. A publicly-offered security must be:

 

   

either (1) part of a class of securities registered under the Exchange Act, or (2) 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;

 

   

“widely held” (meaning that the securities must be owned by 100 or more persons who are independent of the issuer and one another); and

 

   

“freely transferable.”

Our shares are being sold as part of an offering of securities to the public pursuant to an effective registration statement under the Securities Act and are part of a class that will be registered under the Exchange Act within the specified period. In addition, we anticipate having in excess of 100 independent stockholders; however, having 100 independent stockholders is not a condition to our selling shares in this offering.

Whether a security is “freely transferable” depends upon the particular facts and circumstances. The Plan Assets Regulations provide 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 a 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;

 

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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.

We have been structured with the intent to satisfy the “freely transferable” requirement set forth in the Plan Assets Regulations with respect to our shares, although there is no assurance that our shares will meet such requirement. Our shares are subject to certain restrictions on transfer intended to ensure that we continue to qualify for federal income tax treatment as a REIT and to comply with state securities laws and regulations with respect to investor suitability. The minimum investment in our shares is less than $10,000; thus, these restrictions should not cause the shares to be deemed not “freely transferable.”

If our common stock is held by 100 or more independent stockholders, and assuming that no other facts and circumstances other than those referred to in the preceding paragraphs exist that restrict transferability of shares of our common stock and the offering takes place as described in this prospectus, shares of our common stock should constitute “publicly-offered securities” and, accordingly, we believe that our underlying assets should not be considered “plan assets” under the Plan Assets Regulations although no assurance can be given in this regard.

Exception for Insignificant Participation by Benefit Plan Investors. The Plan Assets Regulations provide that the assets of an entity will not be deemed to be the assets of a Plan if equity participation in the entity by “benefit plan investors,” including Plans, is not significant. The Plan Asset Regulations provide that equity participation in an entity by “benefit plan investors” is “significant” if at any time 25% or more of the value of any class of equity interest is held by “benefit plan investors.” The term “benefit plan investors” is defined for this purpose under ERISA Section 3(42) and is defined to mean any employee benefit plan subject to Part 4 of Subtitle B of Title I of ERISA, any plan to which Section 4975 of the Code applies, and any entity whose underlying assets include plan assets by reasons of a plan’s investment in such entity. 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. It is not clear whether we will qualify for this exception since there can be no assurance that equity participation by “benefit plan investors” will not be deemed to be significant, as defined above, at the completion of this offering or thereafter, and no monitoring or other measures will be undertaken with respect to the level of such equity participation.

Exception for Operating Companies. The Plan Assets Regulations provide an exception with respect to securities issued by an “operating company,” which includes a “real estate operating company” or a “venture capital operating company.” Generally, we will be deemed to be a real estate operating company if during the relevant valuation periods at least 50% of our assets are invested in real estate that is managed or developed, and with respect to which we have the right to participate substantially in management or development activities. To constitute a venture capital operating company, 50% or more of our assets must be invested in “venture capital investments” during the relevant valuation periods. A venture capital investment is an investment in an operating company, including a “real estate operating company,” as to which the investing entity has or obtains direct management rights. If an entity satisfies these requirements on the date it first makes a “long-term investment,” or the “initial investment date,” or at any time during the

 

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entity’s first “annual valuation period,” each as defined in the Plan Asset Regulations, it will be considered a real estate operating company for the entire period beginning on the initial investment date and ending on the last day of the first annual valuation period.

It is anticipated that, from and after the date we make our first investment, either (1) our shares will qualify for the exception for a “publicly offered security” or (2) the terms and conditions of our investments, and the rights obtained and exercised with respect to such investments, will enable us to qualify as a “real estate operating company” within the meaning of the Plan Assets Regulations. However, no assurance can be given that this will be the case.

Prohibited Transactions

If our assets are deemed to constitute “plan assets” under the Plan Assets Regulations, certain transactions that we might enter into, or may have entered into, in the ordinary course of our business may constitute non-exempt “prohibited transactions” under Section 406 of ERISA and Section 4975 of the Code, which prohibit ERISA Plans from engaging in specified transactions involving plan assets with persons or entities who are “parties in interest,” within the meaning of ERISA, or “disqualified persons,” within the meaning of Section 4975 of the Code, unless an exemption is available. A party in interest or disqualified person who engaged 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 the ERISA Plan that engaged in such a non-exempt prohibited transaction may be subject to penalties and liabilities under ERISA and the Code.

Regardless of whether the shares qualify for the “publicly-offered securities” exception of the Plan Assets Regulations, a prohibited transaction could occur if we, our Manager, 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 shares. Accordingly, unless an administrative or statutory exemption applies, shares should not be purchased by a Plan with respect to which any of the above persons is a fiduciary. The U.S. Department of Labor, or the DOL, has issued prohibited transaction class exemptions, or “PTCEs,” that may provide exemptive relief for direct or indirect prohibited transactions resulting from the sale, acquisition and holding of our shares. These PTCEs include, without limitation, PTCE 84-14 respecting transactions determined by independent qualified professional asset managers, PTCE 90-1 respecting insurance company pooled separate accounts, PTCE 91-38 respecting bank collective investment funds, PTCE 95-60 respecting life insurance company general accounts and PTCE 96-23 respecting transactions determined by in-house asset managers. In addition, Section 408(b)(17) of ERISA and Section 4975(d)(20) of the Code provide relief from the prohibited transaction provisions of ERISA and Section 4975 of the Code for certain transactions, provided that neither the issuer of the securities nor any of its affiliates (directly or indirectly) have or exercise any discretionary authority or control or render any investment advice with respect to the assets of any Plan involved in the transaction and provided further that the Plan pays no more than adequate consideration in connection with the transaction. There can be no assurance that all of the conditions of any such exemptions will be satisfied.

In addition, if our assets are deemed to be “plan assets” of a Plan, our management, as well as various providers of fiduciary or other services to us, and any other parties with authority or control with respect to us or our assets, may be considered fiduciaries under ERISA and Section 4975 of the Code, or otherwise parties in interest or disqualified persons by virtue of their provision of such services (and there could be an improper delegation of authority to such providers).

 

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In addition, ERISA generally provides that discretionary authority with respect to the management and disposition of the assets of an ERISA Plan may be delegated to certain “investment managers” who acknowledge that they are fiduciaries of the ERISA Plan. In such case, an ERISA Plan fiduciary who has appointed an investment manager will generally not be liable for the acts of such investment manager. We do not expect to be an “investment manager” within the meaning of ERISA. Consequently, if our assets are deemed to constitute “plan assets” of any stockholder which is an ERISA Plan, the fiduciary of any such ERISA Plan may not be protected from liability resulting from our decisions.

Representation

Accordingly, by acceptance of our common stock, each purchaser and subsequent transferee of our common stock will be deemed to have represented and warranted that either (1) no portion of the assets used by such purchaser or transferee to acquire and hold our common stock constitutes assets of any Plan or (2) the purchase and holding of our common stock 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.

None of the Transaction Parties is undertaking to provide impartial investment advice, or to give advice in a fiduciary capacity, in connection with the acquisition of any shares of our common stock by any ERISA Plan.

The foregoing discussion is general in nature and is not intended to be all-inclusive. Due to the complexity of these rules and the penalties that may be imposed upon persons involved in non-exempt prohibited transactions, it is particularly important that fiduciaries, or other persons considering purchasing our common stock on behalf of, or with the assets of, any Plan, consult with their counsel regarding the potential applicability of ERISA, Section 4975 of the Code and any Similar Laws to such investment and whether such investment will constitute or result in a prohibited transaction or any other violation of an applicable requirement of ERISA, Section 4975 of the Code or any applicable Similar Laws.

 

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DESCRIPTION OF CAPITAL STOCK

The following is a summary of the terms of the capital stock of our Company. While we believe that the following description covers the material terms of our capital stock, the description may not contain all of the information that is important to you. We encourage you to read carefully this entire prospectus, our charter and bylaws and the relevant provisions of the MGCL for a more complete understanding of our capital stock. Copies of our charter and bylaws will be filed as exhibits to the registration statement of which this prospectus is a part and the following summary, to the extent it relates to those documents, is qualified in its entirety by reference thereto. See “Where You Can Find More Information.”

General

Upon completion of this offering, our amended and restated charter will authorize the issuance of 600,000,000 shares of capital stock, of which 500,000,000 shares will be shares of common stock with a par value of $0.01 per share, and 100,000,000 shares will be shares of preferred stock with a par value of $0.01 per share. In addition, our board of directors may, without stockholder approval, amend our charter from time to time to increase or decrease the aggregate number of authorized shares of stock or the number of authorized shares of stock of any class or series. As of January 27, 2020, 10 shares of our common stock were issued and outstanding and no shares of our preferred stock were issued and outstanding. Upon completion of this offering (assuming the underwriters do not exercise their option to purchase additional shares) and our receipt of the proceeds therefrom, 5,000,000 shares of our common stock and no shares of our preferred stock will be issued and outstanding and all of the outstanding shares of our common stock will be fully paid and nonassessable. Under Maryland law, our stockholders generally are not liable for our debts or obligations solely as a result of their status as stockholders.

Shares of Common Stock

Subject to the preferential rights, if any, of holders of any other class or series of our stock and to the provisions of our charter relating to the restrictions on ownership and transfer of our stock, holders of our common stock are entitled to receive dividends and other distributions on such shares of stock when, as and if authorized by our board of directors and declared by us out of assets legally available for distribution to our stockholders and will be entitled to share ratably in our net assets legally available for distribution to our stockholders in the event of our liquidation, dissolution or winding up after payment of or adequate provision for all of our known debts and liabilities.

Subject to the provisions of our charter regarding the restrictions on ownership and transfer of our stock and except as may be otherwise specified in the terms of any class or series of common stock, each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors, and, except as may be provided with respect to any other class or series of our stock, the holders of shares of our common stock will possess the exclusive voting power. There is no cumulative voting in the election of directors. Consequently, the holders of a majority of the outstanding shares of our common stock can elect all of the directors then standing for election, and the holders of the remaining shares will not be able to elect any directors. Directors will be elected by a plurality of all of the votes cast in the election of directors.

Holders of shares of our common stock have no preference, conversion, exchange, sinking fund, redemption or appraisal rights and have no preemptive rights to subscribe for any securities of our Company. Subject to the provisions of our charter regarding the restrictions on ownership

 

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and transfer of our stock, shares of our common stock will have equal distribution, liquidation and other rights.

Under the MGCL, a Maryland corporation generally cannot dissolve, amend its charter, merge or consolidate with, or convert into, another entity, sell all or substantially all of its assets or engage in a statutory share exchange unless the action is advised by our board of directors and approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter, unless a lesser percentage (but not less than a majority of all of the votes entitled to be cast on the matter) is specified in the corporation’s charter. Our charter provides that these actions must be approved by a majority of all of the votes entitled to be cast on the matter.

Maryland law also permits a corporation to transfer all or substantially all of its assets without the approval of its stockholders to an entity owned, directly or indirectly, by the corporation.

Power to Increase or Decrease Authorized Shares of Stock, Reclassify Unissued Shares of Stock and Issue Additional Shares of Common and Preferred Stock

Our charter authorizes the board of directors, with the approval of a majority of the board of directors and without stockholder approval, to amend our charter to increase or decrease the aggregate number of shares of stock or the number of shares of any class or series of stock that we are authorized to issue. In addition, our charter authorizes the board of directors to authorize the issuance from time to time of shares of our common and preferred stock.

Our charter also authorizes the board of directors to classify and reclassify any unissued shares of our common or preferred stock into other classes or series of stock, including one or more classes or series of stock that have priority over our common stock with respect to voting rights, distributions or upon liquidation, and authorize us to issue the newly classified shares. Prior to the issuance of shares of each new class or series, the board of directors is required by Maryland law and by our charter to set, subject to the provisions of our charter regarding the restrictions on ownership and transfer of our stock, the preferences, conversion and other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms and conditions of redemption for each class or series. Therefore, although our board of directors does not currently intend to do so, it could authorize the issuance of shares of common or preferred stock with terms and conditions that could have the effect of delaying, deferring or preventing 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. Upon the completion of this offering, no shares of preferred stock will be outstanding, and we have no present plans to issue any shares of preferred stock.

We believe that the power of our board of directors to approve amendments to our charter to increase or decrease the number of authorized shares of stock, to authorize us to issue additional authorized but unissued shares of common or preferred stock and to classify or reclassify unissued shares of common or preferred stock and thereafter to authorize us to issue such classified or reclassified shares of stock will provide us with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs that might arise.

Restrictions on Ownership and Transfer

In order for us to qualify as a REIT under the Code, shares of our stock must be owned by 100 or more persons during at least 335 days of a taxable year of 12 months (other than the first year for which an election to qualify as a REIT has been made) or during a proportionate part of a shorter taxable year. Also, not more than 50% of the value of the outstanding shares of our stock may be

 

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owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities such as private foundations) during the last half of a taxable year (other than the first year for which an election to be a REIT has been made). To qualify as a REIT, we must satisfy other requirements as well. See “Material U.S. Federal Income Tax Considerations—Requirements for Qualification–General.”

Our charter contains restrictions on the ownership and transfer of our stock that will become effective on the date of the closing of the issuance of shares of common stock in our first underwritten public offering. The relevant sections of our charter provide that, subject to the exceptions described below, from and after the date of the closing of the issuance of shares of common stock in our first underwritten public offering, no person or entity may own, or be deemed to own, beneficially or by virtue of the applicable constructive ownership provisions of the Code, more than 6.2%, in value or in number of shares, whichever is more restrictive, of the outstanding shares of our common stock, or the common stock ownership limit, or 6.2% in value of the outstanding shares of all classes or series of our stock, or the aggregate stock ownership limit. We refer to the common stock ownership limit and the aggregate stock ownership limit collectively as the “ownership limits.” We refer to the person or entity that, but for operation of the ownership limits or another restriction on ownership and transfer of our stock as described below, would beneficially own or constructively own shares of our stock in violation of such limits or restrictions and, if appropriate in the context, a person or entity that would have been the record owner of such shares of our stock as a “prohibited owner.”

The constructive ownership rules under the Code are complex and may cause shares of stock owned beneficially or constructively by a group of related individuals and/or entities to be owned beneficially or constructively by one individual or entity. As a result, the acquisition of less than 6.2%, in value or in number of shares, whichever is more restrictive, of the outstanding shares of our common stock, or less than 6.2% in value of the outstanding shares of all classes and series of our stock (or the acquisition by an individual or entity of an interest in an entity that owns, beneficially or constructively, shares of our stock), could, nevertheless, cause that individual or entity, or another individual or entity, to own beneficially or constructively shares of our stock in excess of the ownership limits.

Our board of directors, in its sole discretion, may exempt, prospectively or retroactively, a particular stockholder from the ownership limits or establish a different limit on ownership, or the excepted holder limit, if the board of directors determines that:

 

   

no individual’s beneficial or constructive ownership of our stock will result in our being “closely held” under Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year), or otherwise result in our failing to qualify as a REIT; and

 

   

such stockholder does not and will not own, actually or constructively, an interest in a tenant of ours (or a tenant of any entity owned or controlled by us) that would cause us to own, actually or constructively, more than a 9.9% interest (as set forth in Section 856(d)(2)(B) of the Code) in such tenant (or the board of directors determines that revenue derived from such tenant will not affect our ability to qualify as a REIT).

Our charter provides that any violation or attempted violation of any such representations or undertakings will result in such stockholder’s shares of stock being automatically transferred to a charitable trust. As a condition of granting the waiver or establishing the excepted holder limit, our board of directors may require an opinion of counsel or a ruling from the IRS, in either case in form and substance satisfactory to the board of directors, in its sole discretion, in order to determine or ensure our status as a REIT and such representations and undertakings from the

 

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person requesting the exception as the board of directors may require in its sole discretion to make the determinations above. Our board of directors may impose such conditions or restrictions as it deems appropriate in connection with granting such a waiver or establishing an excepted holder limit. Our board of directors intends to grant waivers from the ownership limits applicable to holders of our common stock to our Sponsor and its affiliates and may grant additional waivers in the future. These waivers will be subject to certain initial and ongoing conditions designed to preserve our status as a REIT.

In connection with granting a waiver of the ownership limits or creating an excepted holder limit or at any other time, our board of directors may from time to time increase or decrease the common stock ownership limit, the aggregate stock ownership limit or both, for all other persons, unless, after giving effect to such increase, five or fewer individuals could beneficially own, in the aggregate, more than 49.9% in value of our outstanding stock or we would otherwise fail to qualify as a REIT. A reduced ownership limit will not apply to any person or entity whose percentage ownership of our common stock or our stock of all classes and series, as applicable, is, at the effective time of such reduction, in excess of such decreased ownership limit until such time as such person’s or entity’s percentage ownership of our common stock or our stock of all classes and series, as applicable, equals or falls below the decreased ownership limit, but any further acquisition of shares of our common stock or stock of all other classes or series, as applicable, will violate the decreased ownership limit.

Upon effectiveness, our charter will further prohibit:

 

   

any person from beneficially or constructively owning, applying certain attribution rules of the Code, shares of our stock that would result in our being “closely held” under Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year) or otherwise cause us to fail to qualify as a REIT;

 

   

any person from transferring shares of our stock if the transfer would result in shares of our stock being beneficially owned by fewer than 100 persons (determined under the principles of Section 856(a)(5) of the Code); and

 

   

any person from beneficially or constructively owning shares of our stock to the extent such ownership would result in our failing to qualify as a “domestically controlled qualified investment entity” within the meaning of Section 897(h) of the Code.

Our charter provides that any person who acquires or attempts or intends to acquire beneficial or constructive ownership of shares of our stock that will or may violate the ownership limits or any of the other restrictions on ownership and transfer of our stock described above, or who would have owned shares of our stock transferred to the trust as described below, must immediately give notice to us of such event or, in the case of an attempted or proposed transaction, give us at least 15 days’ prior written notice and provide us with such other information as we may request in order to determine the effect of such transfer on our status as a REIT. The foregoing restrictions on ownership and transfer of our stock will not apply if our board of directors determines that it is no longer in our best interest to attempt to qualify, or to continue to qualify, as a REIT or that compliance with the restrictions and limits on ownership and transfer of our stock described above is no longer required in order for us to qualify as a REIT.

Our charter further provides that, if any transfer of shares of our stock would result in shares of our stock being beneficially owned by fewer than 100 persons, the transfer will be null and void and the intended transferee will acquire no rights in the shares. In addition, our charter provides that, if any purported transfer of shares of our stock or any other event would otherwise result in any person violating the ownership limits or an excepted holder limit established by our board of

 

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directors, or in our being “closely held” under Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year) or otherwise failing to qualify as a REIT or as a “domestically controlled qualified investment entity” within the meaning of Section 897(h)(4)(B) of the Code, then that number of shares (rounded up to the nearest whole share) that would cause the violation will be automatically transferred to, and held by, a trust for the exclusive benefit of one or more charitable organizations selected by us, and the intended transferee or other prohibited owner will acquire no rights in the shares. The automatic transfer will be effective as of the close of business on the business day prior to the date of the violative transfer or other event that results in a transfer to the trust. If the transfer to the trust as described above would not be automatically effective for any reason to prevent violation of the applicable ownership limits or our being “closely held” under Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year) or our otherwise failing to qualify as a REIT or as a “domestically controlled qualified investment entity,” then our charter provides that the transfer of the shares will be null and void and the intended transferee will acquire no rights in such shares.

Shares of our stock held in the trust will be issued and outstanding shares. Our charter provides that the prohibited owner will not benefit economically from ownership of any shares of our stock held in the trust and will have no rights to distributions and no rights to vote or other rights attributable to the shares of our stock held in the trust. The trustee of the trust will exercise all voting rights and receive all distributions with respect to shares held in the trust for the exclusive benefit of the charitable beneficiary of the trust. Any distribution made before we discover that the shares have been transferred to a trust as described above must be repaid by the recipient to the trustee upon demand. Subject to Maryland law, effective as of the date that the shares have been transferred to the trust, the trustee will have the authority to rescind as void any vote cast by a prohibited owner before our discovery that the shares have been transferred to the trust and to recast the vote in accordance with the desires of the trustee acting for the benefit of the charitable beneficiary of the trust. However, if we have already taken irreversible corporate action, then the trustee may not rescind and recast the vote.

Shares of our stock transferred to the trustee are deemed offered for sale to us, or our designee, at a price per share equal to the lesser of (a) the price paid by the prohibited owner for the shares (or, in the case of a devise or gift, the market price at the time of such devise or gift) and (b) the market price on the date we accept, or our designee, accepts such offer. We may reduce the amount so payable to the trustee by the amount of any distribution that we made to the prohibited owner before we discovered that the shares had been automatically transferred to the trust and that are then owed by the prohibited owner to the trustee as described above, and we may pay the amount of any such reduction to the trustee for distribution to the charitable beneficiary. We have the right to accept such offer until the trustee has sold the shares of our stock held in the trust as discussed below. Upon a sale to us, the interest of the charitable beneficiary in the shares sold terminates, and the trustee must distribute the net proceeds of the sale to the prohibited owner and must distribute any distributions held by the trustee with respect to such shares to the charitable beneficiary.

If we do not buy the shares, the trustee must, within 20 days of receiving notice from us of the transfer of shares to the trust, sell the shares to a person or entity designated by the trustee who could own the shares without violating the ownership limits or the other restrictions on ownership and transfer of our stock. After the sale of the shares, the interest of the charitable beneficiary in the shares transferred to the trust will terminate and the trustee must distribute to the prohibited owner an amount equal to the lesser of (a) the price paid by the prohibited owner for the shares (or, if the prohibited owner did not give value for the shares in connection with the event causing the shares to be held in the trust (for example, in the case of a gift, devise or other such

 

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transaction), the market price of the shares on the day of the event causing the shares to be held in the trust) and (b) the sales proceeds (net of any commissions and other expenses of sale) received by the trust for the shares. The trustee may reduce the amount payable to the prohibited owner by the amount of any distribution that we paid to the prohibited owner before we discovered that the shares had been automatically transferred to the trust and that are then owed by the prohibited owner to the trustee as described above. Any net sales proceeds in excess of the amount payable to the prohibited owner must be paid immediately to the charitable beneficiary, together with any distributions thereon. In addition, if, prior to the discovery by us that shares of stock have been transferred to a trust, such shares of stock are sold by a prohibited owner, then such shares will be deemed to have been sold on behalf of the trust and, to the extent that the prohibited owner received an amount for, or in respect of, such shares that exceeds the amount that such prohibited owner was entitled to receive, such excess amount will be paid to the trustee upon demand. Our charter provides that the prohibited owner has no rights in the shares held by the trustee.

In addition, if our board of directors determines in good faith that a transfer or other event has occurred that would violate the restrictions on ownership and transfer of our stock described above, the board of directors may take such action as it deems advisable to refuse to give effect to or to prevent such transfer, including, but not limited to, causing us to redeem shares of our stock, refusing to give effect to the transfer on our books or instituting proceedings to enjoin the transfer.

Our charter provides that every owner of 5% or more (or such lower percentage as required by the Code or the regulations promulgated thereunder) of our stock, within 30 days after the end of each taxable year, must give us written notice stating the stockholder’s name and address, the number of shares of each class and series of our stock that the stockholder beneficially owns and a description of the manner in which the shares are held. Each such owner must provide to us in writing such additional information as we may request in order to determine the effect, if any, of the stockholder’s beneficial ownership on our status as a REIT and to ensure compliance with the ownership limits. In addition, our charter provides that any person or entity that is a beneficial owner or constructive owner of shares of our stock and any person or entity (including the stockholder of record) who is holding shares of our stock for a beneficial owner or constructive owner must, on request, provide to us such information as we may request in good faith in order to determine our status as a REIT and to comply with the requirements of any taxing authority or governmental authority or to determine such compliance and to ensure compliance with the ownership limits.

Any certificates representing shares of our stock will bear a legend referring to the restrictions on ownership and transfer of our stock described above.

These restrictions on ownership and transfer of our stock will take effect on the date of the closing of the issuance of shares of common stock in our first underwritten public offering and will not apply if our board of directors determines that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT or that compliance is no longer required in order for us to qualify as a REIT.

The restrictions on ownership and transfer of our stock described above could delay, defer or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders.

Listing

Our common stock has been approved for listing, subject to official notice of issuance, on the NYSE under the symbol “NREF.”

 

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Transfer Agent and Registrar

The transfer agent and registrar for our common stock will be American Stock Transfer & Trust Company, LLC.

 

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CERTAIN PROVISIONS OF MARYLAND LAW AND OUR CHARTER AND BYLAWS

The following is a summary of certain provisions of Maryland law and provisions of our charter and bylaws that will be in effect on the date our registration statement is declared effective. While we believe that the following description covers the material aspects of these provisions, the description may not contain all of the information that is important to you. We encourage you to read carefully the prospectus, our charter and bylaws and the relevant provisions of the MGCL, for a more complete understanding of these provisions. Copies of our charter and bylaws will be filed as exhibits to the registration statement of which this prospectus is a part and the following summary, to the extent it relates to those documents, is qualified in its entirety by reference thereto. See “Where You Can Find More Information.”

The Board

Our charter provides that the number of directors on the board is to be fixed exclusively by the board pursuant to our bylaws, but may not be fewer than the minimum required by Maryland law, which is one. Our bylaws provide that the board is to consist of not less than one and not more than 15 directors. Upon the completion of this offering, the board will consist of five directors.

Subject to the terms of any class or series of preferred stock, vacancies on the board 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 qualified.

Each of our directors elected by our stockholders is elected to serve until the next annual meeting of our stockholders and until his or her successor is duly elected and qualified. Holders of shares of common stock will have no right to cumulative voting in the election of directors. Consequently, the holders of a majority of the outstanding shares of our common stock can elect all of the directors then standing for election, and the holders of the remaining shares will not be able to elect any directors. Directors will be elected by a plurality of all of the votes cast in the election of directors.

Removal of Directors

Our charter provides that a director may be removed only for cause (as defined in our charter) and only by the affirmative vote of a majority of the votes entitled to be cast generally in the election of directors. This provision, when coupled with the exclusive power of the board to fill vacancies on the board, precludes stockholders from removing incumbent directors (except for cause and upon a substantial affirmative vote) and filling the vacancies created by such removal with their own nominees.

Business Combinations

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 during the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding stock of the corporation) or an affiliate of such an interested stockholder are prohibited for five years after the

 

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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 the corporation and approved by the affirmative vote of at least (a) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation and (b) 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 determined in accordance with the applicable provisions of 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 corporation’s board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.

Pursuant to the statute, we expect that the board will by resolution exempt business combinations (a) between us and our Manager and its respective affiliates and (b) between us and any other person, provided that in the latter case the business combination is first approved by the board (including a majority of our directors who are not affiliates or associates of such person). Consequently, the five-year prohibition and the supermajority vote requirements will not apply to a business combination between us and our Manager and its affiliates or to a business combination between us and any other person if the board has first approved the combination. As a result, any person described in the preceding sentence may be able to enter into business combinations with us that may not be in the best interests of our stockholders, without compliance with the supermajority vote requirements and other provisions of the statute. We cannot assure you that the board will not amend or repeal this resolution in the future.

Control Share Acquisitions

The MGCL provides that holders of “control shares” of a Maryland corporation acquired in a “control share acquisition” have no voting rights with respect to such 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. Shares owned by the acquirer, an officer of the corporation or an employee of the corporation who is also a director of the corporation are excluded from shares entitled to vote on the matter.

“Control shares” are voting shares of stock that, 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:

 

   

one-tenth or more but less than one-third;

 

   

one-third or more but less than a majority; or

 

   

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.

 

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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 making 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, if a meeting of stockholders was held at which the voting rights of such shares are considered and not approved, as of the date of such meeting. 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 shares acquired in a merger, consolidation or statutory share exchange if the corporation is a party to the transaction or 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. This provision may be amended or eliminated at any time in the future by the board.

Subtitle 8

Subtitle 8 of Title 3 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 that provide, respectively, for:

 

   

a classified board;

 

   

a two-thirds vote requirement for removing a director;

 

   

a requirement that the number of directors be fixed only by vote of the board of directors;

 

   

a requirement that a vacancy on the board be filled only by the remaining directors in office and (if the board is classified) for the remainder of the full term of the class of directors in which the vacancy occurred; and

 

   

a majority requirement for the calling of a stockholder-requested special meeting of stockholders.

Our charter provides that, at such time as we are able to make a Subtitle 8 election, vacancies on the board may be filled only by the remaining directors and that directors elected by the board to fill vacancies will serve 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

 

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already (a) vest in the board the exclusive power to fix the number of directorships, (b) require a vacancy on our board to be filled only by the remaining directors in office, even if the remaining directors do not constitute a quorum and (c) require, unless called by our chairman of the board, our chief executive officer, our president or the board, the written request of stockholders entitled to cast a majority of all of the votes entitled to be cast at such a meeting to call a special meeting. If we made an election to be subject to the provisions of Subtitle 8 relating to a classified board, our board would automatically be classified into three classes with staggered terms of office of three years each. In such instance, the classification and staggered terms of office of the directors would make it more difficult for a third party to gain control of the board since at least two annual meetings of stockholders, instead of one, generally would be required to effect a change in the majority of the directors.

Meetings of 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 the board. The chairman of the board, our president or the board may call a special meeting of our stockholders. Subject to the provisions of 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 on such matter at the meeting and containing the information required by our bylaws. Our secretary will inform the requesting stockholders of the reasonably estimated cost of preparing and delivering the notice of meeting (including our proxy materials), and the requesting stockholder must pay such estimated cost before our secretary is required to prepare and deliver the notice of the special meeting.

Amendments to Our Charter and Bylaws

Except for those amendments permitted to be made without stockholder approval under Maryland law or our charter, our charter generally may be amended only if the amendment is first declared advisable by the board and thereafter approved by the affirmative vote of stockholders entitled to cast a majority of all of the votes entitled to be cast on the matter. However, amendments to the provisions in our charter relating to the removal of directors and to the sentence in our charter relating to the vote required to approve such amendments must first be declared advisable by our board and thereafter be approved by the affirmative vote of stockholders entitled to cast at least two-thirds of all of the votes entitled to be cast on the matter.

The board has the exclusive power to adopt, alter or repeal any provision of our bylaws and to make new bylaws.

Transactions Outside the Ordinary Course of Business

Under the MGCL, a Maryland corporation generally may not dissolve, merge or consolidate with, or convert into, another entity, sell all or substantially all of its assets or engage in a statutory share exchange unless the action is declared advisable by the board and approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter, unless a lesser percentage (but not less than a majority of all of the votes entitled to be cast on the matter) is specified in the corporation’s charter. Our charter provides that these actions must be approved by a majority of all of the votes entitled to be cast on the matter.

 

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Dissolution

The dissolution of our company must be declared advisable by a majority of the entire board and approved by the affirmative vote of the holders of a majority of all of the votes entitled to be cast on the matter.

Advance Notice of Director Nominations and New Business

Our bylaws provide that, with respect to an annual meeting of our stockholders, nominations of individuals for election to the board and the proposal of other business to be considered by our stockholders may be made only (a) pursuant to our notice of the meeting, (b) by or at the direction of the board or (c) by any 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 has provided notice to us within the time period, and containing the information and other materials, specified in the advance notice provisions of 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 the board may be made only (a) by or at the direction of the board or (b) if the meeting has been called for the purpose of electing directors, by any 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 in the election of each such nominee and who has provided notice to us within the time period, and containing the information and other materials, specified in the advance notice provisions of our bylaws.

The advance notice procedures of our bylaws provide that, to be timely, a stockholder’s notice with respect to director nominations or other proposals for an annual meeting must be delivered to our corporate secretary at our principal executive office not earlier than the 150th day nor later than 5:00 p.m., Eastern Time, on the 120th day prior to the first anniversary of the date of the proxy statement for our preceding year’s annual meeting. With respect to our first annual meeting, which we expect to be in 2021, or in the event that the date of the annual meeting is advanced or delayed by more than 30 days from the first anniversary of the date of the preceding year’s annual meeting, to be timely, a stockholder’s notice must be delivered not earlier than the 150th day prior to the date of such annual meeting and not later than 5:00 p.m., Eastern Time, on the later of the 120th day prior to the date of such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made.

REIT Qualification

Our charter provides that the board 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 continue to qualify as a REIT.

Forum Selection Clause

Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (a) any derivative action or proceeding brought on our behalf other than actions arising under the federal securities laws, (b) any action asserting a claim of breach of any duty owed by any of our directors or officers or other employees to us or to our stockholders, (c) any action asserting a claim against us or any of our directors or officers or other employees arising pursuant to any provision of the MGCL or our charter or bylaws or (d) any

 

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action asserting a claim against us or any of our directors or officers or other employees that is governed by the internal affairs doctrine shall be, in each case, the Circuit Court for Baltimore City, Maryland, or, if that Court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division.

Effects of Certain Provisions of Maryland Law and of Our Charter and Bylaws

Our charter and bylaws and Maryland law contain provisions that may 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, including business combination provisions, supermajority vote requirements and advance notice requirements for director nominations and other stockholder proposals. Likewise, if the provision in our bylaws opting out of the control share acquisition provisions of the MGCL were rescinded or if we were to opt in to the classified board or other provisions of Subtitle 8, these provisions of the MGCL could have similar anti-takeover effects.

Indemnification and Limitation of Directors’ and Officers’ Liability

Maryland law permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages, except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty that is established by a final judgment and that is 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:

 

   

the act or omission of the director or officer was material to the matter giving rise to the proceeding and (a) was committed in bad faith or (b) was the result of active and deliberate dishonesty;

 

   

the director or officer actually received an improper personal benefit in money, property or services; or

 

   

in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful.

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. 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.

 

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In addition, the MGCL permits us to advance reasonable expenses to a director or officer upon our receipt of:

 

   

a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by us; and

 

   

a written undertaking by or on behalf of the director or officer to repay the amount paid or reimbursed by us if it is ultimately determined that the director or officer did not meet the standard of conduct.

Our charter and our bylaws obligate us, to the maximum 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:

 

   

any present or former director or officer who is made or threatened to be made a party to, or witness in, a proceeding by reason of his or her service in that capacity; or

 

   

any individual who, while a director or officer of our Company and at our request, serves or has served as a director, officer, partner, trustee, member or manager of another corporation, real estate investment trust, limited liability company, partnership, joint venture, trust, employee benefit plan or any other enterprise and who is made or threatened to be made a party to, or witness in, the proceeding by reason of his or her service in that capacity.

Our charter and bylaws also permit us to indemnify and advance expenses to any person who served a predecessor of ours in any of the capacities described above and to any employee or agent of our Company or a predecessor of our Company.

In connection with the offering, we will enter into indemnification agreements with each of our directors and executive officers that provide for indemnification to the maximum extent permitted by Maryland law.

 

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OUR OPERATING PARTNERSHIP AND THE PARTNERSHIP AGREEMENT

Although the following describes certain provisions of the partnership agreement, it may not contain all of the information that is important to you. For a complete description, we refer you to the partnership agreement and the applicable provisions of the Delaware Revised Uniform Limited Partnership Act, or the DRULPA.

General

Our operating partnership has been organized as a Delaware limited partnership. We will be considered to be an UPREIT in which all of our assets will be owned by a limited partnership. NexPoint Real Estate Finance OP GP, LLC will be the sole, independent general partner, or the general partner, of our operating partnership. The general partner will hold a non-economic general partnership interest in our operating partnership. The purpose of our operating partnership will include the conduct of any business that may be lawfully conducted by a limited partnership formed under the DRULPA.

We will hold all of our assets and conduct our business through our operating partnership. Pursuant to the partnership agreement, the management powers over the business and affairs of our operating partnership are vested in the general partner, subject to certain oversight rights delegated to our board of directors. Our operating partnership may admit additional limited partners in accordance with the terms of the partnership agreement subject to the consent of our board of directors. Upon the completion of this offering, we will hold all of the limited partnership interests outstanding. None of the limited partners of our operating partnership have the authority in their capacity as limited partners to transact business for, or participate in the management activities or decisions of, our operating partnership except as required by applicable law and subject to certain oversight rights delegated to our board of directors pursuant to the partnership agreement.

In the partnership agreement, the limited partners of our operating partnership expressly acknowledge that the general partner is acting for the benefit of our operating partnership, the limited partners and the Company, collectively. Neither the general partner nor our board of directors is under any obligation to give priority to the separate interests of the limited partners in deciding whether to cause our operating partnership to take or decline to take any actions. In particular, neither the general partner nor our board of directors will be under any obligation to consider the tax consequence to the limited partners when making decisions for the benefit of our operating partnership. If there is a conflict between the interests of the Company, on the one hand, and the interests of the limited partners, on the other, the general partner will consult with our board of directors and will endeavor in good faith to resolve the conflict in a manner not adverse to either the Company or the limited partners; provided, however, the general partner will resolve any conflict that the general partner in good faith determines cannot be resolved in a manner not adverse to either the Company or the limited partners in favor of the Company. The general partner is not liable under the partnership agreement to our operating partnership or to any partner for monetary damages for losses sustained, liabilities incurred, or benefits not derived by the limited partners in connection with such decisions so long as the general partner has acted in good faith.

Partnership Units

Following the completion of this offering, our operating partnership will have one class of limited partnership interests. The general partner will hold a non-economic general partnership interest in our operating partnership.

 

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Transfers of limited partnership interests are generally not permitted without the consent of our board of directors, subject to limited exceptions, including (1) pursuant to the redemption of limited partnership interests and (2) transfers to an affiliate (as defined in the partnership agreement).

Amendments to the Partnership Agreement

A proposed amendment shall be adopted and be effective as an amendment to our operating partnership if it is approved by the general partner and our board of directors.

Amendments that would, among other things, convert a limited partner’s interest into a general partner’s interest, modify the limited liability of a limited partner in a manner materially adverse to such limited partner, or materially adversely alter a limited partner’s right to receive any distributions or allocations of profits or losses, must be approved by each limited partner that would be materially adversely affected by such amendment; provided, however, if any such amendment would affect all holders of the same class of units on a uniform or pro rata basis, only the approval of the holders of a majority of the limited partnership units will be required.

Distributions

The partnership agreement provides that our operating partnership shall distribute cash from operations at times and in amounts determined by the general partner, following the direction and approval of our board of directors, to the partners, in accordance with their respective percentage interests in our operating partnership. Upon liquidation of our operating partnership, after payment of, or adequate provision for, debts and obligations of our operating partnership, including any partner loans, it is anticipated that any remaining assets of our operating partnership will be distributed to all partners in accordance with their respective capital account balances.

Allocations

The partnership agreement provides generally that, subject to special allocations set forth in the partnership agreement, net income of our operating partnership for each fiscal year will be allocated among the partners (a) first to the general partner until the cumulative net income allocated to the general partner equals the cumulative net loss allocated to the general partner, (b) next to the limited partners until the cumulative net income allocated to such holders equals the cumulative net loss allocated to such holders and (c) next to the limited partners on a pro rata basis in accordance with their respective ownership interests. The partnership agreement provides generally that, subject to special allocations set forth in the partnership agreement, net loss of our operating partnership for each fiscal year will be allocated among the partners (x) first to the limited partners with positive balances in their economic capital account in accordance with such balances until their economic capital account balances are reduced to zero and (y) thereafter to the general partner.

Capital Contributions and Borrowings

The partnership agreement provides that if our operating partnership requires additional funds at any time in excess of funds available to our operating partnership from borrowing or capital contributions, the general partner may, following direction and approval from our board of directors, borrow such funds from a financial institution or other lender and lend such funds to our operating partnership.

 

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Issuance of Additional Limited Partnership Interests

The general partner of our operating partnership, is authorized, following the approval from our board of directors, to cause our operating partnership to issue additional partnership units to us, to other limited partners or to other persons for such consideration and on such terms and conditions as the general partner may deem appropriate (following direction and approval from our board of directors). Consideration for additional partnership interests may be cash or other property or assets. No person, including any partner or assignee, has preemptive, preferential or similar rights with respect to additional capital contributions to our operating partnership or the issuance or sale of any partnership interests therein.

The general partner may issue units of limited partnership interest that are common units, units of limited partnership interest that are preferred as to distributions and upon liquidation and other types of units with such rights and obligations as may be established by the general partner from time to time (following direction and approval from our board of directors).

In connection with this offering, we will contribute the net proceeds from this offering to our operating partnership in exchange for limited partnership interests in the operating partnership. The general partner will cause the operating partnership to further contribute the net proceeds from this offering to three subsidiary partnerships in exchange for limited partnership interests in such subsidiary partnerships. Of the net proceeds, the general partner will cause the operating partnership to contribute 28.0% to its first subsidiary partnership, 39.3% to its second subsidiary partnership and 32.7% to its third subsidiary partnership.

Redemption Rights

Pursuant to the partnership agreement, the limited partners have the right to cause our operating partnership to redeem their limited partnership interests, as applicable, for cash or, at our election, our common shares on a one-for-one basis, subject to adjustment, as provided in the partnership agreement; provided that such units have been outstanding for at least one year or earlier at the discretion of the general partner following the direction and approval of our board of directors. The subsidiary partnership units that will be held by the Contribution Group following the completion of this offering are subject to similar restrictions on a unitholders ability to redeem them. Notwithstanding the foregoing, a limited partner will not be entitled to exercise its redemption right to the extent the issuance of our common shares to such limited partner would (1) be prohibited, as determined in our sole discretion, under our charter or (2) cause the acquisition of common shares by such limited partner to be “integrated” with any other distribution of our common shares for purposes of complying with the Securities Act. Limited partners will not have registration rights with respect to shares of common stock that they may receive pursuant to this redemption right, except for limited partnership interests held by our Manager and its affiliates. For additional information regarding these registration rights, see “Management—Related Party Transactions—Registration Rights.”

Independent General Partner; Removal

The management powers over the business and affairs over our operating partnership are vested in the general partner, subject to certain oversight rights delegated to our board of directors. The general partner is wholly owned by a party that is not affiliated with us, our Manager or our Sponsor. The general partner may be removed at any time, with or without cause, by the holders of a majority of the limited partnership units outstanding.

 

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Withdrawal of General Partner; Transfer of General Partner’s Interest

The general partner may not withdraw as general partner or transfer its general partnership interest without the consent of our board of directors unless a bankruptcy event occurs with respect to the general partner.

Restrictions on Transfer by Limited Partners

The partnership agreement provides that, subject to certain limited exceptions (including transfers to affiliates), a limited partner may not transfer any portion of its partnership interest to any person without the consent of our board of directors. No limited partner shall have the right to substitute a transferee as a limited partner in its place. A transferee of the interest of a limited partner may be admitted as a substituted limited partner only with the consent of our board of directors.

Term

Our operating partnership shall continue until dissolved pursuant to the terms of the partnership agreement or by operation of law.

Tax Matters

Pursuant to the partnership agreement, the general partner is the partnership representative of our operating partnership and, in such capacity, has the authority to handle tax audits on behalf of the operating partnership. In addition, the general partner has the authority to arrange for the preparation and filing of the operating partnership’s tax returns and to make tax elections under the Code on behalf of our operating partnership.

 

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SHARES ELIGIBLE FOR FUTURE SALE

After giving effect to this offering and the other transactions described in this prospectus (assuming the underwriters exercise their option to purchase additional shares in full), we will have 5,750,000 shares of common stock outstanding. Following the completion of this offering, the Contribution Group will hold subsidiary partnership units that are redeemable for an aggregate of approximately 12,635,047 OP units (assuming the Contribution Group contributes $252.7 million of net value and based on $20.00 per share, the midpoint of the range set forth on the cover of this prospectus) or cash in an amount equal to the number of OP units multiplied by the per share price of our common stock (at the discretion of the OP). However, subject to the terms of the subsidiary partnership agreements, the subsidiary partnership units cannot be redeemed until such units have been outstanding for at least one year or earlier at the discretion of the OP following the direction and approval of our board of directors. At the closing of the Formation Transaction, the number of OP units for which subsidiary partnership units may be redeemed is subject to change based on changes in the subsidiary partnerships’ working capital balances. Additionally, our OP’s operating partnership has similar restrictions on a unitholders ability to redeem OP units. Shares of our common stock are newly issued securities for which there is no established trading market. Therefore, future sales of substantial amounts of our shares of common stock in the public market could adversely affect prevailing market prices for our shares. No assurance can be given as to (1) the likelihood that an active market for shares of our common stock will develop, (2) the liquidity of any such market, (3) the ability of the stockholders to sell the shares or (4) the prices that stockholders may obtain for any of the shares. No prediction can be made as to the effect, if any, that future sales of shares or the availability of shares for future sale will have on the market price prevailing from time to time. Sales of substantial amounts of shares of common stock, or the perception that such sales could occur, may affect adversely prevailing market prices of the shares of common stock. See “Risk Factors—Risks Related to the Ownership of Our Common Stock.”

For a description of certain restrictions on ownership and transfer of shares of our common stock, see “Description of Capital Stock—Restrictions on Ownership and Transfer.”

Rule 144

In general, under Rule 144 under the Securities Act, a person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of ours at any time during the three months preceding a sale, and who has beneficially owned “restricted” securities within the meaning of Rule 144 for at least six months (including any period of consecutive ownership of preceding non-affiliated holders) would be entitled to sell those shares, subject only to the availability of current public information about us. A non-affiliated person who has beneficially owned restricted securities within the meaning of Rule 144 for at least one year would be entitled to sell those shares without regard to the provisions of Rule 144.

A person (or persons whose shares are aggregated) who is deemed to be an affiliate of ours and who has beneficially owned restricted securities within the meaning of Rule 144 for at least six months would be entitled to sell within any three-month period a number of shares that does not exceed the greater of one percent of the then outstanding shares of our common stock or the average weekly trading volume of our common stock during the four calendar weeks preceding such sale. Such sales are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about us (which requires that we are current in our periodic reports under the Exchange Act).

 

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Registration Rights

Upon the completion of this offering, we will enter into a registration rights agreement with our Manager with respect to (1) all current and future shares of our common stock owned by our Manager and affiliates of our Manager, including our Sponsor and its affiliates and (2) shares of our common stock at any time beneficially owned by our Manager which are issuable or issued as compensation for our Manager’s services under the Management Agreement and any additional shares of our common stock issued as a dividend, distribution or exchange for, or in respect of such shares. Pursuant to the registration rights agreement, if we propose to file a registration statement (or a prospectus supplement pursuant to a then-existing shelf registration statement) under the Securities Act with respect to a proposed underwritten equity offering by us for our own account or for the account of any of our respective securityholders of any class of security other than a registration statement on Form S-4 or S-8 (or any substitute form that may be adopted by the SEC) filed in connection with an exchange offer or offering of securities solely to our existing securityholders, then we will give written notice of such proposed filing to the holders of registrable securities and such notice will offer such holders the opportunity to register such number of shares of registrable securities as each such holder may request. We will use commercially reasonable efforts to cause the managing underwriter or underwriters of a proposed underwritten offering to permit the registrable securities requested to be included in such a registration to be included on the same terms and conditions as any similar securities included therein.

In addition, commencing on or after the date that is one year after the date of the Management Agreement, holders of registrable securities may make a written request for registration under the Securities Act of all or part of their registrable securities, or a demand registration. However, we will not be obligated to effect more than one such registration in any 12-month period and not more than two such registrations during the term of the Management Agreement. If the Management Agreement is extended, the holders will be entitled to one additional demand registration per year that the Management Agreement is extended. Holders making such written request must propose the sale of at least 100,000 shares of registrable securities (as adjusted for stock splits or recapitalizations) or such lesser number of registrable securities if such lesser number is all of the registrable securities owned by the holders. Any such request must specify the number of shares of registrable securities proposed to be sold and will also specify the intended method of disposition. Within ten days after receipt of such request, we will give written notice of such registration request to all other holders of registrable securities and include in such registration all such registrable securities with respect to which we have received written requests for inclusion therein within ten business days after the receipt by the applicable holder of our notice.

Notwithstanding the foregoing, any registration will be subject to cutback provisions, and we will be permitted to suspend the registration or sale of registrable securities in certain situations.

Lock-up Agreements

We, our executive officers and directors and affiliates of our Sponsor have agreed not to sell or transfer any common stock or securities convertible into, exchangeable for, exercisable for, or repayable with common stock, for 180 days after the date of this prospectus without first obtaining the written consent of Raymond James & Associates, Inc. Specifically, we and these other persons have agreed, with certain limited exceptions, not to directly or indirectly

 

   

offer, pledge, sell, or contract to sell any common stock;

 

   

sell any option or contract to purchase any common stock;

 

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purchase any option or any contract to sell any common stock;

 

   

grant any option, right, or warrant for the sale of any common stock;

 

   

lend or otherwise dispose of or transfer any common stock;

 

   

file or cause to be filed any registration statement related to the common stock; or

 

   

enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of any common stock whether any such swap or transaction is to be settled by delivery of shares or other securities, in cash or otherwise.

This lock-up provision also applies to common stock and to securities convertible into or exchangeable for or repayable with common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition. Raymond James & Associates, Inc. may release the common stock and other securities subject to the lock-up agreements described above, in whole or in part, at any time.

Registration Statement on Form S-8

Following the completion of this offering, we intend to file a registration statement on Form S-8 under the Securities Act to register the offer and sale of 7.5% of our common shares outstanding on a fully diluted basis after giving effect to the Formation Transaction and the offering (assuming all subsidiary partnership units are redeemed for shares of our common stock) under the 2020 LTIP. This registration statement on Form S-8 will become effective immediately upon filing, and shares of our common stock covered by the registration statement may then be publicly resold without restriction, subject to the Rule 144 limitations applicable to affiliates and the applicable lock-up agreements.

 

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UNDERWRITING

Raymond James & Associates, Inc. is acting as representative of each of the underwriters named below. Subject to the terms and conditions set forth in an underwriting agreement between us, our OP, our Manager and the underwriters, we have agreed to sell to the underwriters, and each of the underwriters has agreed, severally and not jointly, to purchase from us, the number of shares of our common stock set forth opposite its name below.

 

Underwriters

   Number
of
Shares
 

Raymond James & Associates, Inc.

                   

Keefe, Bruyette & Woods, Inc.

                   

Robert W. Baird & Co. Incorporated

                   

Total

     5,000,000  
  

 

 

 

Subject to the terms and conditions set forth in the underwriting agreement, the underwriters have agreed, severally and not jointly, to purchase all of the shares of our common stock sold under the underwriting agreement if any of these shares of common stock are purchased. If an underwriter defaults, the underwriting agreement provides that the purchase commitments of the non-defaulting underwriters may be increased or the underwriting agreement may be terminated.

We have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities.

The underwriters are offering the shares of our common stock, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the shares, and other conditions contained in the underwriting agreement, such as the receipt by the underwriters of officers’ certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.

Underwriting Discounts and Expenses

The representative has advised us that the underwriters propose initially to offer the shares of our common stock to the public at the public offering price set forth on the cover page of this prospectus and to dealers at that price less a concession not in excess of $        per share. After this offering, the public offering price, concession or any other term of this offering may be changed.

The following table shows the public offering price, underwriting discount and proceeds before expenses to us. The information assumes either no exercise or full exercise by the underwriters of their option to purchase additional shares.

 

     Per
Share
     Without
Option
     With
Option
 

Public offering price

   $                    $                    $                

Underwriting discount (1)(2)

        

Proceeds, before expenses, to us (2)

   $        $        $    

 

(1)

Includes a structuring fee payable to Raymond James & Associates, Inc. equal to 1.0% of the gross proceeds of this offering (excluding any proceeds from sale of the Reserved Shares). Excludes certain other compensation payable to the underwriters.

 

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(2)

Assumes all 250,000 Reserved Shares are purchased and that no underwriting discounts or commissions will be applied to the Reserved Shares.

The estimated expenses of this offering payable by us, exclusive of the underwriting discount, are approximately $2,750,000. We have agreed to reimburse the underwriters for the legal fees and other reasonable disbursements of counsel for the underwriters in connection with any required Blue Sky filings and the filing for review of the public offering of our common stock by the Financial Industry Regulatory Authority, Inc. (up to $20,000 collectively).

Over-Allotment Option

We have granted an option to the underwriters to purchase up to 750,000 additional shares of our common stock at the offering price, less the underwriting discount. The underwriters may exercise this option at any time or from time to time for 30 days from the date of this prospectus solely to cover any over-allotments. If the underwriters exercise this option, each will be obligated, subject to conditions contained in the underwriting agreement, to purchase a number of additional shares of our common stock proportionate to that underwriter’s initial amount reflected in the above table.

No Sales of Similar Securities

We, our executive officers and directors, and our Sponsor have agreed with the underwriters not to offer, sell, transfer or otherwise dispose of any common stock or any securities convertible into or excercisable or, exchangeable for, exercisable for, or repayable with common stock, for a period of 180 days after the date of this prospectus without first obtaining the written consent of the representative. Specifically, we and these other persons have agreed, with certain limited exceptions, not to directly or indirectly:

 

   

offer, pledge, sell or contract to sell any common stock;

 

   

sell any option or contract to purchase any common stock;

 

   

purchase any option or contract to sell any common stock;

 

   

grant any option, right or warrant for the sale of any common stock;

 

   

lend or otherwise dispose of or transfer any common stock;

 

   

file or cause to be filed any registration statement related to the common stock; or

 

   

enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of any common stock whether any such swap or other agreement is to be settled by delivery of shares or other securities, in cash or otherwise.

This lock-up provision applies to common stock and to securities convertible into or exchangeable or exercisable for or repayable with common stock. It also applies to common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition.

Raymond James & Associates, Inc., in its sole discretion, may release the common stock and other securities subject to the lock-up agreements described above in whole or in part at any time with or without notice; provided, however, that (i) if the release is granted for one of our officers or

 

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directors, Raymond James & Associates, Inc. on behalf of the underwriters, agrees that at least three business days before the effective date of the release or waiver, Raymond James & Associates, Inc., on behalf of the underwriters, will notify us of the impending release or waiver, and (ii) we are obligated to announce the impending release or waiver by press release through a major news service at least two business days before the effective date of the release or waiver.

Listing

Our common stock has been approved for listing, subject to official notice of issuance, on the NYSE under the symbol “NREF.” In order to meet the requirements for listing on that exchange, the underwriters will undertake to sell a minimum number of shares of our common stock to a minimum number of beneficial owners as required by that exchange.

Determination of Offering Price

Before this offering, there has been no public market for our common stock. The public offering price will be determined through negotiations between us and the representatives. In addition to prevailing market conditions, the factors to be considered in determining the public offering price are:

 

   

the valuation multiples of publicly traded companies that the representative believes to be comparable to us;

 

   

our financial information;

 

   

the history of, and the prospects for, our company and the industry in which we compete;

 

   

an assessment of our Manager, its past and present operations, and the prospects for, and timing of, our future revenues;

 

   

the present state of our development;

 

   

the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours; and

 

   

other factors deemed relevant by the underwriters and us.

An active trading market for our common stock may not develop or, if developed, be maintained or be liquid. It is also possible that after this offering our common stock will not trade in the public market at or above the public offering price.

The underwriters do not expect to sell more than 10% of the shares in the aggregate to accounts over which they exercise discretionary authority.

Price Stabilization, Short Positions and Penalty Bids

Until the distribution of our shares of common stock is completed, SEC rules may limit underwriters and selling group members from bidding for and purchasing our common stock. However, the underwriters may engage in transactions that stabilize the price of the common stock, such as bids or purchases to peg, fix or maintain that price.

In connection with this offering, the underwriters may purchase and sell our common stock in the open market. These transactions may include short sales, purchases on the open market to

 

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cover positions created by short sales and stabilizing transactions. Short sales involve the sale by the underwriters of a greater number of shares of our common stock than they are required to purchase in this offering. “Covered” short sales are sales made in an amount not greater than the underwriters’ overallotment option to purchase additional shares described above. The underwriters may close out any covered short position by either exercising their option or purchasing shares in the open market. In determining the source of shares of our common stock to close out the covered short position, the underwriters will consider, among other things, the price of shares of our common stock available for purchase in the open market as compared to the price at which they may purchase shares of our common stock through the option. “Naked” short sales are sales in excess of the overallotment option. The underwriters must close out any naked short position by purchasing shares of our common stock in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our common stock in the open market after pricing that could adversely affect investors who purchase in this offering. Stabilizing transactions consist of various bids for or purchases of shares of our common stock made by the underwriters in the open market prior to the completion of this offering.

The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the underwriters have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.

Similar to other purchase transactions, the underwriters’ purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. The underwriters may conduct these transactions on the NYSE, in the OTC market or otherwise.

Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor any of the underwriters make any representation that the representatives will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.

Electronic Distribution

In connection with this offering, certain of the underwriters or securities dealers may distribute prospectuses by electronic means, such as e-mail. In addition, the underwriters may facilitate Internet distribution for this offering to certain of their Internet subscription customers. The underwriters may allocate a limited number of shares of our common stock for sale to their online brokerage customers. An electronic prospectus may be available on the websites maintained by the underwriters. Other than the prospectus in electronic format, the information on the underwriters’ websites is not part of this prospectus.

Reserved Share Program

The underwriters have at our request reserved for sale, at the public offering price, up to 250,000 shares, or the Reserved Shares, offered by this prospectus for sale to our Sponsor and its affiliates. No underwriting discounts or commissions will be applied to the Reserved Shares. If the Sponsor and its affiliates purchase the Reserved Shares it will reduce the number of shares available for sale to the general public. All Reserved Shares sold pursuant to the reserved share

 

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program will be restricted from resale for a period of 60 days after the date of this prospectus supplement without first obtaining the written consent of the representatives of the underwriters. Any Reserved Shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus supplement.

Other Relationships

We will pay Raymond James & Associates, Inc. a structuring fee equal to 1.0% of the gross proceeds of this offering (excluding any proceeds from sale of the Reserved Shares), or $950,000 (or $1,100,000 if the underwriters exercise their option to purchase additional shares of our common stock).

Our Manager has agreed to retain Raymond James & Associates, Inc. to provide select capital markets activities to us. The rights of Raymond James & Associates, Inc. described in this paragraph will terminate on October 17, 2020.

In addition, in the ordinary course of their business activities, the underwriters and their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers. Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

 

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LEGAL MATTERS

The validity of the shares of our common stock being offered hereby has been passed upon for us by Winston & Strawn LLP, Dallas, Texas, and, with respect to certain matters of Maryland law, by Ballard Spahr LLP, Baltimore, Maryland. In addition, the description of material federal income tax matters will be passed upon for us by Winston & Strawn LLP. Certain legal matters in connection with this offering will be passed upon for the underwriters by Hunton Andrews Kurth LLP.

EXPERTS

The balance sheet of NexPoint Real Estate Finance, Inc. as of December 31, 2019 has been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-11, including exhibits and schedules filed with the registration statement of which this prospectus is a part, under the Securities Act with respect to the shares of common stock to be sold in this offering. This prospectus does not contain all of the information set forth in the registration statement and exhibits and schedules to the registration statement. For further information with respect to us and the shares of common stock to be sold in this offering, reference is made to the registration statement, including the exhibits and schedules to the registration statement. Our SEC filings, including our registration statement, are also available to you, free of charge, on the SEC’s website at www.sec.gov. You can also find additional information about us at www.nexpointfinance.com. The contents of that site are not incorporated by reference in, or otherwise a part of, this prospectus.

As a result of this offering, we will become subject to the information and reporting requirements of the Exchange Act and will file periodic reports, proxy statements and will make available to our stockholders annual reports containing audited financial information for each year and quarterly reports for the first three quarters of each fiscal year containing unaudited interim financial information.

 

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NEXPOINT REAL ESTATE FINANCE, INC.

INDEX TO FINANCIAL STATEMENTS

 

     Page  

Historical Financial Statements:

  

Report of the Independent Registered Public Accounting Firm

     F-2  

Balance Sheet as of December 31, 2019

     F-3  

Notes to the Financial Statement

     F-4  

Unaudited Pro Forma Consolidated Financial Statements:

  

Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 2019

     F-7  

Unaudited Pro Forma Consolidated Statements of Operations for the year ended December 31, 2019

     F-8  

Notes to Unaudited Pro Forma Consolidated Financial Statements

     F-9  

 

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Report of Independent Registered Public Accounting Firm

Management and Stockholder

NexPoint Real Estate Finance, Inc.:

Opinion on the Financial Statement

We have audited the accompanying balance sheet of NexPoint Real Estate Finance, Inc. (the Company) as of December 31, 2019, and the related notes (collectively, the financial statement). In our opinion, the financial statement presents fairly, in all material respects, the financial position of the Company as of December 31, 2019, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

The financial statement is the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statement based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statement, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statement. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement. We believe that our audit provides a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company’s auditor since 2019.

Dallas, Texas

January 17, 2020

 

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NEXPOINT REAL ESTATE FINANCE, INC.

BALANCE SHEET

 

      December 31, 2019   
ASSETS   

Cash

   $ 10  
  

 

 

 
LIABILITIES AND STOCKHOLDER’S EQUITY   

Stockholder’s Equity:

  

Preferred stock, $0.01 par value: 100 shares authorized; 0 shares issued

      

Common stock, $0.01 par value: 900 shares authorized; 10 shares issued and outstanding

      

Additional paid-in capital

     10  
  

 

 

 

Total Stockholder’s Equity

   $ 10  
  

 

 

 

See Notes to the Financial Statement

 

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NEXPOINT REAL ESTATE FINANCE, INC.

NOTES TO THE FINANCIAL STATEMENT

DECEMBER 31, 2019

1. Organization and Description of Business

NexPoint Real Estate Finance, Inc. (the “Company”, “we”, “our”) was incorporated in Maryland on June 7, 2019. Under the Company’s charter, the Company is authorized to issue up to 900 shares of common stock and 100 shares of preferred stock. As of December 31, 2019, the Company has not commenced operations. Substantially all of the Company’s business will be conducted through NexPoint Real Estate Finance Operating Partnership, L.P. (the “OP”).

2. Formation of the Company and Initial Public Offering

The Company intends to conduct an initial public offering of shares of its common stock (the “IPO”). Before the completion of the IPO, the Company intends to engage in a series of transactions intended to establish its operating and capital structure (the “Formation Transaction”), through which it will acquire a portfolio of first mortgage loans, the most subordinate tranches (“CMBS B-Pieces”) of commercial mortgage backed securities and other real estate related assets (the “Initial Portfolio”), that are currently owned by affiliated entities (the “Contribution Group”). The Company intends to enter into a contribution agreement with members of the Contribution Group through which the Contribution Group will contribute all or a portion of their interests in the Initial Portfolio to partnerships owned by the OP in exchange for limited partnership interests in the subsidiary partnerships.

The Company intends to qualify as a real estate investment trust (a “REIT”) for U.S. federal income tax purposes beginning with the taxable year ending December 31, 2020.

The Company’s primary investment objective is to generate attractive, risk-adjusted returns to stockholders over the long term, primarily through dividends and distributions and secondarily through capital appreciation. The Company intends to achieve this objective by originating, investing in and structuring first mortgage loans, CMBS B-Pieces and other real estate related assets, including mezzanine loans, preferred equity and alternative structured financing. The Company will seek to employ a flexible and relative value focused investment strategy and expects to reallocate capital from time to time among its target assets. The Company believes this flexibility will enable it to more efficiently manage risk and deliver attractive risk-adjusted returns under a variety of market conditions and economic cycles.

Upon completion of the IPO, the Company will be externally managed by NexPoint Real Estate Advisors VII, L.P., a Delaware limited partnership.

3. Summary of Significant Accounting Policies

Basis of Accounting

The accompanying financial statement is presented in accordance with accounting principles generally accepted in the United States (“GAAP”). GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the dates of the financial statement and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates.

 

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In the opinion of management, all adjustments and eliminations necessary for the fair presentation of the Company’s financial position as of December 31, 2019 have been included.

4. Subsequent Events

Management has evaluated the impact of all subsequent events on the Company through January 17, 2020, the date the financial statement was issued, and determined there are no subsequent events to report.

 

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NEXPOINT REAL ESTATE FINANCE, INC.

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENT INFORMATION

The following unaudited pro forma consolidated financial statements (the “Pro Forma Financial Statements”) of NexPoint Real Estate Finance, Inc. (together with its subsidiaries, “we”, “us”, “our”, and the “Company”) should be read in conjunction with the historical audited financial statements of the Company included elsewhere in this prospectus.

In connection with the Company’s initial public offering (the “IPO”), the Company intends to engage in a series of transactions (the “Formation Transaction”), through which it will acquire an initial portfolio consisting of senior pooled mortgage loans backed by single family rental (“SFR”) properties (the “SFR Loans”), the junior most bonds of multifamily commercial mortgage backed securities (“CMBS”) securitizations (the “CMBS B-Pieces”), mezzanine loan and preferred equity investments in real estate companies and properties and other structured real estate investments within the multifamily, SFR and self-storage asset classes (the “Initial Portfolio”). The Company will acquire the Initial Portfolio from affiliates of NexPoint Advisors, L.P. (the “Contribution Group”) pursuant to a contribution agreement with the Contribution Group through which the Contribution Group will contribute their interest in the Initial Portfolio to special purpose entities (“SPEs”) owned by subsidiary partnerships of the Company in exchange for limited partnership interest in the subsidiary partnerships. The pro forma statement of operations for the year ended December 31, 2019 gives effect to the Formation Transaction as if the Formation Transaction occurred on January 1, 2019. The pro forma balance sheet as of December 31, 2019 gives effect to the Formation Transaction as if the Formation Transaction occurred on December 31, 2019.

The contribution of the Initial Portfolio has been accounted for as a series of asset acquisitions. The total consideration is allocated to the assets and liabilities assumed at their respective fair values on the date of acquisition. The fair value of these assets and liabilities is allocated in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations.

These Pro Forma Financial Statements are prepared for informational purposes only. In management’s opinion, all material adjustments necessary to reflect the effects of the transactions referred to above have been made. You should read the information below along with all the other financial information and analysis presented elsewhere in this prospectus. The Pro Forma Financial Statements are based on assumptions and estimates considered appropriate by the Company’s management. However, they are not necessarily indicative of what our consolidated financial condition or results of operations actually would have been assuming the transactions referred to above had occurred as of the dates indicated, nor do they purport to represent our consolidated financial position or results of operations for future periods.

 

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NEXPOINT REAL ESTATE FINANCE, INC.

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

AS OF DECEMBER 31, 2019

 

         

 

     Pro Forma Adjustments for        
    NREF
(Historical)
           SFR Loans           CMBS B-Pieces           Mezzanine
Loan
     Preferred
Equity
    Alternative
Structured
Financing
Investment
(“ASFI”)
          Pro Forma  
    (a)            (b)           (c)           (d)      (e)     (f)           Total  
ASSETS                        

Cash

  $ 10        $ 301,791       $       $      $     $       $ 301,801  

Loans, held-for-investment, net

                             3,221,343        19,027,104               22,248,447  

Preferred Stock

                                          40,507,265         40,507,265  

Mortgage loans, held-for-investment, net

             935,294,671                                      935,294,671  

Accrued interest and dividends (g)

             307,584                 421,496        2,422,216       1,131,783         4,283,079  

Mortgage loans held in variable interest entities, at fair value

                     1,790,113,560                              1,790,113,560  
 

 

 

      

 

 

     

 

 

     

 

 

    

 

 

   

 

 

     

 

 

 

TOTAL ASSETS

  $ 10        $ 935,904,046       $ 1,790,113,560       $ 3,642,839      $ 21,449,320     $ 41,639,048       $ 2,792,748,823  
 

 

 

      

 

 

     

 

 

     

 

 

    

 

 

   

 

 

     

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY                        

Liabilities:

                       

Notes, net

             788,942,764  (h)                                     788,942,764  

Accounts payable and other accrued liabilities (i)

                                                   

Accrued interest payable (j)

                                                   

Bonds payable held in variable interest entities, at fair value

                     1,656,105,104  (k)                             1,656,105,104  
 

 

 

      

 

 

     

 

 

     

 

 

    

 

 

   

 

 

     

 

 

 
Total Liabilities   $           —        $ 788,942,764       $ 1,656,105,104       $                 —      $                 —     $                 —       $ 2,445,047,868  
 

 

 

      

 

 

     

 

 

     

 

 

    

 

 

   

 

 

     

 

 

 

Redeemable noncontrolling interests (l)

             146,961,282         134,008,456         3,642,839        21,449,320       41,639,048         347,700,945  

Stockholders’ Equity:

                       

Preferred stock, $0.01 par value: 100 shares authorized; 0 shares issued

                                                   

Common stock, $0.01 par value: 900 shares authorized; 10 shares issued and outstanding

                                                   

Additional paid-in capital

    10                                               10  

Accumulated earnings (deficit) less dividends

                                                   
 

 

 

      

 

 

     

 

 

     

 

 

    

 

 

   

 

 

     

 

 

 

Total Stockholders’ Equity

    10                                               10  
 

 

 

      

 

 

     

 

 

     

 

 

    

 

 

   

 

 

     

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

  $ 10        $ 935,904,046       $ 1,790,113,560       $ 3,642,839      $ 21,449,320     $ 41,639,048       $ 2,792,748,823  
 

 

 

      

 

 

     

 

 

     

 

 

    

 

 

   

 

 

     

 

 

 

See Notes to Unaudited Pro Forma Consolidated Balance Sheet

 

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NEXPOINT REAL ESTATE FINANCE, INC.

UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2019

 

 

          Pro Forma Adjustments for            
    NREF
(Historical)
    SFR Loans         CMBS B-Pieces         Mezzanine
Loan
        Preferred
Equity
        ASFI         Other         Pro Forma  
    (a)     (b)         (c)         (d)         (e)         (f)         Adjustments         Total  

Net interest income

                           

Interest income from loans

  $     $ 34,674,237     (g)   $       $ 490,619     (h)   $ 2,111,071     (i)   $       $       $ 37,275,927  

Interest expense

          19,558,452     (j)                                             19,558,452  
 

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total net interest income

  $     $ 15,115,785       $       $ 490,619       $ 2,111,071       $       $       $ 17,717,475  
 

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Other income

                           

Change in net assets related to consolidated CMBS variable interest entities

                  10,592,332     (k)                                     10,592,332  

Dividend income

                                          5,350,107     (l)             5,350,107  
 

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total other income

  $     $       $ 10,592,332       $       $       $ 5,350,107       $       $ 15,942,439  
 

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Operating expenses

                           

General and administrative expenses

                                                      (m)      

Loan servicing fees

          4,790,357     (n)                                             4,790,357  

Management fees

                                                      (o)      
 

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total operating expenses

  $     $ 4,790,357       $       $       $       $       $       $ 4,790,357  
 

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Net income

          10,325,428         10,592,332         490,619         2,111,071         5,350,107                 28,869,558  

Net income attributable to redeemable noncontrolling interests

          10,325,428         10,592,332         490,619         2,111,071         5,350,107                 28,869,558  
 

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Net income attributable to common stockholders

  $     $       $       $       $       $       $       $  
 

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Other comprehensive income

                           

Unrealized gains on interest rate derivatives

                           
 

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total comprehensive income

                           

Comprehensive income attributable to redeemable noncontrolling interests in the Operating Partnership

                           
 

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Comprehensive income attributable to common stockholders

  $     —     $       $       $       $       $       $             —       $  
 

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Pro Forma EPS will not be known until a future date

                           

See Notes to Unaudited Pro Forma Consolidated Statements of Operations

 

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Table of Contents

NEXPOINT REAL ESTATE FINANCE, INC.

NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Description of Business

NexPoint Real Estate Finance, Inc. (the “Company”, “we”, “our”) was incorporated in Maryland on June 7, 2019. Under the Company’s charter, the Company will be authorized to issue up to 500,000,000 shares of common stock and 100,000,000 shares of preferred stock. As of December 31, 2019, the Company had not commenced operations and does not anticipate commencing operations until the closing of the Formation Transaction (as defined below) and IPO (as defined below). Substantially all of the Company’s business will be conducted through NexPoint Real Estate Finance Operating Partnership, L.P. (the “OP”), the Company’s operating partnership. The Company intends to qualify as a real estate investment trust (a “REIT”) for U.S. federal income tax purposes beginning with its taxable year ending December 31, 2020.

2. Formation Transaction and Initial Public Offering

The Company intends to conduct an initial public offering of shares of its common stock (the “IPO”). Before the completion of the IPO, the Company intends to engage in a series of transactions (the “Formation Transaction”), through which it will acquire an initial portfolio consisting of senior pooled mortgage loans backed by single family rental (“SFR”) properties (the “SFR Loans”), the junior most bonds of multifamily commercial mortgage backed securities (“CMBS”) securitizations (the “CMBS B-Pieces”), mezzanine loan and preferred equity investments in real estate companies and properties and other structured real estate investments within the multifamily, SFR and self-storage asset classes (the “Initial Portfolio”). The Company will acquire the Initial Portfolio from affiliates of NexPoint Advisors, L.P. (the “Contribution Group”) pursuant to a contribution agreement with the Contribution Group through which the Contribution Group will contribute their interest in the Initial Portfolio to special purpose entities (“SPEs”) owned by subsidiary partnerships of the Company in exchange for limited partnership interest in the subsidiary partnerships.

The Company’s primary investment objective is to generate attractive, risk-adjusted returns for stockholders over the long term, primarily through dividends and secondarily through capital appreciation. The Company intends to achieve this objective by originating, structuring and investing in first mortgage loans, mezzanine loans, preferred equity, and alternative structured financings, as well as interests in multifamily CMBS securitizations. The Company will primarily focus on lending or investing in properties that are stabilized or have a light transitional business plan in investment structures where its senior management team has operating expertise, including in the multifamily, SFR, self-storage, hospitality, and office sectors. The Company will seek to employ a flexible and relative value focused investment strategy and expects to re-allocate capital periodically among its target investment classes. The Company believes this flexibility will enable it to more efficiently manage risk and deliver attractive risk-adjusted returns under a variety of market conditions and economic cycles.

Upon completion of the IPO, the Company will be externally managed by NexPoint Real Estate Advisors VII, L.P. (the “Manager”), a Delaware limited partnership, under a management agreement entered into between the Company and the Manager.

The pro forma consolidated balance sheet as of December 31, 2019 gives effect to the Formation Transaction as if it had occurred on December 31, 2019. The pro forma consolidated statement of operations for the year ended December 31, 2019 gives effect to the Formation Transaction as if it had occurred on January 1, 2019.

 

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Table of Contents

NEXPOINT REAL ESTATE FINANCE, INC.

NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

These Pro Forma Financial Statements are not necessarily indicative of the results that would have actually occurred had these transactions been consummated at the dates indicated, nor are they necessarily indicative of future operating results or the financial position of the Company, the OP or its subsidiaries.

3. Summary of Significant Accounting Policies

The significant accounting policies used in the preparation of these Pro Forma Financial Statements are described below and have been applied consistently to all periods presented:

Basis of Presentation

Securities and Exchange Commission (“SEC”) rules require the designation of a predecessor entity when a registrant succeeds to substantially all of the business or a separately identifiable line of business of another entity or group of entities and the registrant’s own operations before the succession appear insignificant relative to the operations assumed or acquired. If a predecessor entity is identified, its historical financial statements are required to be included as the historical financial statements of the newly formed entity. The Company determined that it will not succeed to substantially all of the business of another entity or group of entities or the separately identifiable line of business of another entity or group of entities. Additionally, the largest group of assets to be contributed to the Company, the pool of SFR Loans, was not owned by any entity in the Contribution Group until July 12, 2019, and so it would not be included in the historical financial statements for the twelve months ended December 31, 2017, 2018 and 2019. As a result, if a predecessor entity was identified, the assets included would be insignificant compared to the total assets that the Company would own following the Formation Transaction. Based on the foregoing, the Company determined there was not a predecessor entity.

In lieu of providing historical financial statements of a predecessor, management determined it would be more effective to provide detailed pro forma consolidated financial statements as if all of the investments to be contributed to the Company in the Formation Transaction by the Contribution Group were made as of January 1, 2019. The statement of operations for the year ended December 31, 2019 gives effect to the Formation Transaction as if it had occurred on January 1, 2019. The pro forma consolidated balance sheet as of December 31, 2019 gives effect to the Formation Transaction as if it had occurred on December 31, 2019, in accordance with Rule 11-02(b)(6) of Regulation S-X.

The information included in the pro forma consolidated statements of operations are derived from actual results of each investment being contributed if it was in existence as of January 1, 2019, or if not in existence as of January 1, 2019, from the contractual requirements under each investment as if it were in existence as of January 1, 2019. We used the contractual requirements contained in the governing documents of each investment to derive the income and expenses for the investment using the first month of results for January 2019 and then rolled the income and expenses forward month-by-month through December 31, 2019. We believe this approach is reasonable, as a majority of the cash inflows and outflows are contractual in nature (with the exception of early repayments, as discussed in more detail below). The assets, liabilities and equity shown as of December 31, 2019 were determined using actual December 31, 2019 fair market values.

Because the Formation Transaction involves the contribution of assets and entities to the subsidiary partnerships in exchange for limited partnership interests in the subsidiary

 

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NEXPOINT REAL ESTATE FINANCE, INC.

NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

partnerships, but does not contemplate an equity raise at the Company, the pro forma consolidated financial statements reflect nominal equity of $10. Once the IPO is completed, the amount of equity raised will be reflected in the equity section of the consolidated financial statements of the Company.

These pro forma consolidated financial statements are not necessarily indicative of the results that would have actually occurred had these transactions been consummated at the dates indicated, nor are they necessarily indicative of future operating results or the financial position of the Company.

Basis of Accounting

The accompanying Pro Forma Financial Statements are presented in accordance with accounting principles generally accepted in the United States (“GAAP”). GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the Pro Forma Financial Statements and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates.

In the opinion of management, all adjustments and eliminations necessary for the fair presentation of the Company’s pro forma financial position as of December 31, 2019 have been included in the Pro Forma Financial Statements.

Use of Estimates and Assumptions

The preparation of the Pro Forma Financial Statements requires us to make a number of estimates and assumptions. These include estimates of, and assumptions in regard to, income and expense items, interest rates and other estimates that affect the reported amounts of certain assets and liabilities as of the date of the Pro Forma Financial Statements. It is likely that changes in these estimates will occur in the near term. Our estimates are inherently subjective in nature and actual results could differ from our estimates and the differences could be material.

Principals of Consolidation

The analysis as to whether to consolidate an entity is subject to a significant amount of judgment. Some of the criteria considered are the determination as to the degree of control over an entity by its various equity holders, the design of the entity, how closely related the entity is to each of its equity holders, the relation of the equity holders to each other and a determination of the primary beneficiary in entities in which we have a variable interest. These analyses involve estimates, based on our assumptions, as well as judgments regarding significance and the design of entities.

Variable interest entities (“VIEs”) are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, and only by its primary beneficiary, which is defined as the party who has the power to direct the activities of a VIE that most significantly impact its economic performance and who has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

 

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NEXPOINT REAL ESTATE FINANCE, INC.

NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

In accordance with GAAP, the Company determines whether it must consolidate transferred financial assets and VIEs for financial reporting purposes that we hold variable interest in, including but not limited to certain legal entities often used in securitizations and other structured finance transactions. The Company consolidates those entities for which (1) it controls significant operating, financial and investing decisions of the entity or (2) management determines that the Company is the primary beneficiary of the entities deemed to be VIEs. The Company consolidates the trusts that issue beneficial ownership interests in mortgage loans secured by commercial real estate (commonly known as CMBS) when the Company holds a variable interest in, and management considers the Company to be the primary beneficiary of those trusts. Management believes the performance of the assets that underlie CMBS issuances most significantly impact the economic performance of the trust, and the primary beneficiary is generally the entity that conducts activities that most significantly impact the performance of the underlying assets. In particular, the most subordinate tranches of CMBS expose the holder to greater variability of economic performance when compared to more senior tranches since the subordinate tranches absorb a disproportionately higher amount of the credit risk related to the underlying assets. Generally, a trust designates the most junior subordinate tranche outstanding as the controlling class, which entitles the holder of the controlling class to unilaterally appoint, remove and replace the special servicer for the trust. For the CMBS that the Company consolidates, the Company holds the most subordinate tranche of the securities issued by the trusts, which include the controlling class, and has the ability to remove and replace the special servicer.

On the pro forma balance sheet as of December 31, 2019, we consolidated the two Freddie Mac K-Series securitization entities (the “CMBS Entities”) that we determined were VIEs and for which we determined we were the primary beneficiary. The CMBS Entities are independent of the Company and the assets and liabilities of the CMBS Entities are not owned by and are not legal obligations of ours. Our exposure to the CMBS Entities is through the subordinated tranches we will acquire in the Formation Transaction. At December 31, 2019, the estimated fair value of the consolidated CMBS Entities was $133.8 million. For financial reporting purposes, the underlying mortgage loans held by the trusts are recorded as a separate line item on the balance sheet under “Mortgage loans held in variable interest entities, at fair value”. The liabilities of the trusts consist solely of obligations to the CMBS holders of the consolidated trusts, excluding the CMBS B-Piece investments held by the Company. The liabilities are presented as “Bonds payable held in variable interest entities, at fair value” on the pro forma consolidated balance sheet. The CMBS B-Pieces held by the Company and the interest earned thereon are eliminated in consolidation. Management has elected the measurement alternative in ASC 810 to report the fair value of the assets and liabilities of the consolidated CMBS Entities in order to provide users of the financial statements with better information regarding the effects of credit risk and other market factors on the CMBS B-Pieces owned by the Company. Management has elected to show interest income and interest expense related to the CMBS Entities in aggregate with the change in fair value as “Change in net assets related to consolidated CMBS variable interest entities”. The residual difference between the fair value of the CMBS Entities’ assets and liabilities represents the Company’s investments in the CMBS B-Pieces.

Investment in subsidiaries

The Company conducts its operations through the OP, which will act as the general partner of the subsidiary partnerships that own the investments through limited liability companies that are SPEs. Following the completion of the Formation Transaction, the Company will be the sole limited partner of the OP, will have 100% of the limited partnership interests in the OP and will

 

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NEXPOINT REAL ESTATE FINANCE, INC.

NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

have the ability to remove the general partner of the OP with or without cause, and as such, consolidates the OP. The Company consolidates the SPEs that it controls as well as any VIEs where it is the primary beneficiary. All of the investments the SPEs own are consolidated in the Pro Forma Financial Statements. Generally, the assets of each entity can only be used to settle obligations of that particular entity, and the creditors of each entity have no recourse to the assets of other entities or the Company notwithstanding equity pledges various lenders may have in certain entities.

Redeemable Noncontrolling Interests

Following the completion of the Formation Transaction, the subsidiary partnerships of the OP will have redeemable noncontrolling interests. These redeemable noncontrolling interests will be classified on the consolidated balance sheet as temporary equity in accordance with ASC 480. The redeemable noncontrolling interests will initially be measured at the fair value of the contributed assets in accordance with ASC 805-50. Subsequent to the Formation Transaction, the redeemable noncontrolling interests will be marked to their redemption value if such value exceeds the carrying value of the redeemable noncontrolling interests. Capital contributions, distributions and profits and losses are allocated to the redeemable noncontrolling interests in accordance with the terms of the partnership agreements of the subsidiary partnerships.

Mortgage and other loans held-for-investment

Loans that are held-for-investment are carried at their aggregate outstanding face amount, net of applicable (i) unamortized origination or acquisition premium and discounts, (ii) unamortized deferred fees and other direct loan origination costs, (iii) valuation allowance for loan losses and (iv) write-downs of impaired loans. The effective interest method is used to amortize origination or acquisition premiums and discounts and deferred fees or other direct loan origination costs. In circumstances where, in management’s opinion, the difference between the straight-line and effective interest methods is immaterial, the straight-line method is used.

Acquisition Accounting

The Company will account for the acquisition of the SFR Loans and the acquisition of the CMBS B-Pieces as asset acquisitions pursuant to ASC 805-50 rather than as business combinations. Substantially all of the fair value of the assets acquired are concentrated in a group of similar identifiable assets, i.e. the SFR Loans represent one acquisition of similar identifiable assets and the acquisition of the CMBS B-Pieces represents an additional acquisition of similar identifiable assets. Additionally, there were no corresponding in-place workforce, servicing platforms or any other item that could be considered an input or process associated with these assets. As such the SFR Loans and the CMBS B-Pieces do not constitute businesses as defined by ASC 805-10-55. Transaction costs will be capitalized into the costs of the respective investments. As the investments will be contributed to the OP’s subsidiary partnerships in a non-cash transaction, cost will be based on the fair value of the assets acquired. The excess of the fair value over the par value of the SFR Loans will be recorded as a premium and amortized over the expected life of the SFR Loans.

Income Recognition

Interest Income – Loans held-for-investment, available-for-sale securities, mortgage loans from the consolidated CMBS entities and debt securities held-to-maturity where the Company expects

 

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NEXPOINT REAL ESTATE FINANCE, INC.

NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

to collect the contractual interest and principal payments are considered to be performing loans. The Company recognizes income on performing loans in accordance with the terms of the loan on an accrual basis. Interest income also includes amortization of loan premiums or discounts and loan origination costs. We will expense origination discount for loans acquired but not originated by us as incurred.

Dividend Income – Dividend income is recorded when declared.

Expense Recognition

Interest expense, in accordance with the Company’s financing agreements, is recorded on the accrual basis. General and administrative expenses are also expensed as incurred.

Allowance for Loan Losses

We will perform a quarterly evaluation of loans classified as held-for-investment for impairment on a loan-by-loan basis. If we deem that it is probable that we will be unable to collect all amounts owed according to the contractual terms of a loan, impairment of that loan is indicated. If we consider a loan to be impaired, we will establish an allowance for loan losses, through a valuation provision in earnings that reduces carrying value of the loan to the present value of expected future cash flows discounted at the loan’s contractual effective rate or the fair value of the collateral, if repayment is expected solely from the collateral. Significant judgment is required in determining impairment and in estimating the resulting loss allowance, and actual losses, if any, could materially differ from those estimates.

We will perform a quarterly review of our portfolio. In conjunction with this review, we will assess the risk factors of each loan, including, without limitation, loan-to-value ratio, debt yield, property type, geographic and local market dynamics, physical condition, collateral, cash flow volatility, leasing and tenant profile, loan structure, exit plan and project sponsorship. Based on a 5-point scale, our loans are rated “1” through “5,” from least risk to greatest risk, respectively, which ratings are defined as follows:

1- Outperform—Materially exceeds performance metrics (for example, technical milestones, occupancy, rents, net operating income) included in original or current credit underwriting and business plan;

2- Exceeds Expectations—Collateral performance exceeds substantially all performance metrics included in original or current underwriting / business plan;

3- Satisfactory—Collateral performance meets or is on track to meet underwriting; business plan is met or can reasonably be achieved;

4- Underperformance—Collateral performance falls short of original underwriting, material differences exist from business plan, or both; technical milestones have been missed; defaults may exist, or may soon occur absent material improvement; and

5- Risk of Impairment/Default—Collateral performance is significantly worse than underwriting; major variance from business plan; loan covenants or technical milestones have been breached; timely exit from loan via sale or refinancing is questionable.

 

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Table of Contents

NEXPOINT REAL ESTATE FINANCE, INC.

NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

The following table allocates the carrying value of our loan portfolio based on our internal risk ratings:

 

     December 31, 2019  

Risk Rating

   Number of
Loans
     Carrying
Value (1)
     % of Loan
Portfolio
 
1           $         
2                     
3      33        1,091,377,851        100.00
4                     
5                     
  

 

 

    

 

 

    

 

 

 
     33      $ 1,091,377,851        100.00
  

 

 

    

 

 

    

 

 

 

 

(1)

Risk rating excludes ASFI.

We regularly evaluate the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral, as well as the financial and operating capability of the borrower. Specifically, the collateral’s operating results and any cash reserves are analyzed and used to assess (i) whether cash from operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan and/or (iii) the collateral’s liquidation value. We also evaluate the financial condition of any loan guarantors as well as the borrower’s competency in managing and operating the collateral. In addition, we consider the overall economic environment, real estate or industry sector and geographic sub-market in which the borrower operates. Such impairment analyses are completed and reviewed by asset management and finance personnel who utilize various data sources, including (i) periodic financial data such as property operating statements, occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, and capitalization and discount rates, (ii) site inspections and (iii) current credit spreads and discussions with market participants.

We will consider loans to be past due when a monthly payment is due and unpaid for 60 days or more. Loans will be placed on nonaccrual status and considered non-performing when full payment of principal and interest is in doubt, which generally occurs when they become 120 days or more past due unless the loan is both well secured and in the process of collection. Accrual of interest on individual loans is discontinued when management believes that, after considering economic and business conditions and collection efforts, the borrower’s financial condition is such that collection of interest is doubtful. Our policy is to stop accruing interest when a loan’s delinquency exceeds 120 days. All interest accrued but not collected for loans that are placed on nonaccrual status or subsequently charged-off are reversed against interest income. Income is subsequently recognized on the cash basis until, in management’s judgment, the borrower’s ability to make periodic principal and interest payments returns and future payments are reasonably assured, in which case the loan is returned to accrual status.

For individual loans, a troubled debt restructuring is a formal restructuring of a loan where, for economic or legal reasons related to the borrower’s financial difficulties, a concession that would not otherwise be considered is granted to the borrower. The concession may be granted in various forms, including providing a below-market interest rate, a reduction in the loan balance or accrued interest, an extension of the maturity date, or a combination of these. An individual loan that has had a troubled debt restructuring is considered to be impaired and is subject to the relevant accounting for impaired loans.

 

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NEXPOINT REAL ESTATE FINANCE, INC.

NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

A loan is written off when it is no longer realizable and/or it is legally discharged.

We will evaluate acquired loans and debt securities for which it is probable at acquisition that all contractually required payments will not be collected in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.

Other-Than-Temporary Impairment

Debt securities held to maturity will be evaluated on a quarterly basis, and more frequently when triggering events or market conditions warrant such an evaluation, to determine whether declines in their value are other-than-temporary impairments (“OTTI”). To determine whether a loss in value is other-than-temporary, we will utilize criteria including: the reasons underlying the decline, the magnitude and duration of the decline (greater or less than twelve months) and whether or not we intend to sell or expect that it is more likely than not that we will be required to sell the investment prior to an anticipated recovery of the carrying value. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment.

In the event that the fair value of debt securities held-to-maturity is less than amortized cost, we will consider whether the unrealized holding loss represents an OTTI. If we do not expect to recover the carrying value of the debt security held-to-maturity based on future expected cash flows, an OTTI exists and we will reduce the carrying value by the impairment amount, recognize the portion of the impairment related to credit factors in earnings and the portion of the impairment related to other factors in accumulated other comprehensive income.

Recent Accounting Pronouncements

Section 107 of the Jumpstart Our Business Startups Act (“JOBS Act”) provides that an emerging growth company can take advantage of the extended transition period provided in Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for complying with new or revised accounting standards applicable to public companies. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of this extended transition period. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates for such new or revised standards. We may elect to comply with public company effective dates at any time, and such election would be irrevocable pursuant to Section 107(b) of the JOBS Act.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which establishes a new approach to estimate credit losses on certain types of financial instruments. The new approach changes the impairment model for most financial assets, and will require the use of an “expected credit loss” model for financial instruments measured at amortized cost and certain other instruments. This model applies to trade and other receivables, loans, debt securities, net investments in leases, and off-balance sheet credit exposures (such as loan commitments, standby letters of credit, and financial guarantees not accounted for as insurance). This model requires entities to estimate the lifetime expected credit loss on such instruments and record an allowance that represents the portion of the amortized cost basis that the entity does not expect to collect.

 

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NEXPOINT REAL ESTATE FINANCE, INC.

NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

This allowance is deducted from the financial asset’s amortized cost basis to present the net amount expected to be collected. The new expected credit loss model will also apply to purchased financial assets with credit deterioration, superseding current accounting guidance for such assets. The amended guidance also amends the impairment model for available-for-sale debt securities, requiring entities to determine whether all or a portion of the unrealized loss on such securities is a credit loss, and also eliminating the option for management to consider the length of time a security has been in an unrealized loss position as a factor in concluding whether or not a credit loss exists. The amended model states that an entity will recognize an allowance for credit losses on available-for-sale debt securities as a contra account to the amortized cost basis, instead of a direct reduction of the amortized cost basis of the investment, as under current guidance. As a result, entities will recognize improvements to estimated credit losses on available-for-sale debt securities immediately in earnings as opposed to in interest income over time. There are also additional disclosure requirements included in this guidance. The amended guidance is to be applied on a modified retrospective basis with the cumulative effect of initially applying the amendments recognized in retained earnings at the date of initial application. However, certain provisions of the guidance are only required to be applied on a prospective basis. That methodology replaces the probable, incurred loss model for those assets. The new standard is effective for the Company for annual and interim beginning after December 15, 2020. While the Company is currently evaluating the impact ASU 2016-13 will have on the Company’s consolidated financial statements, it is expected that adoption will result in an increase in the provision for potential loan losses as well as recognition of such provisions earlier in the credit cycle. All loans and debt securities in the Initial Portfolio are currently performing and as such the Company does not currently have any provision for loan losses recorded on the Pro Forma Financial Statements.

In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses (“ASU 2018-19”), which updated the effective dates of implementation to align the implementation date for annual and interim financial statements as well as clarify the scope of the guidance in ASU 2016-13. This standard’s effective date is the same as ASU 2016-13.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses (“ASU 2019-04”), which is intended to clarify the guidance introduced by ASU 2016-13. This standard’s effective date is the same as ASU 2016-13.

In May 2019, the FASB issued ASU 2019-05, Targeted Transition Relief for Topic 326, Financial Instruments – Credit Losses (“ASU 2019-05”), which provides for an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. The Company does not currently expect to elect the fair value option for assets expected to be held at amortized cost. This standard’s effective date is the same as ASU 2016-13.

4. Pro Forma Adjustments

The pro forma adjustments to these Pro Forma Financial Statements have been prepared to account for the impact of the Formation Transaction, as described below:

General Assumptions

 

   

Assumes the Formation Transaction was completed as of January 1, 2019 for the pro forma statements of operations and as of December 31, 2019 for the pro forma balance sheet. If

 

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NEXPOINT REAL ESTATE FINANCE, INC.

NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

 

the investment was not in existence at January 1, 2019, the first month of contractual income and expenses are assumed to have occurred in January 2019, and so on.

 

   

The Company’s pro forma adjustments on the pro forma statement of operations assume all assets were acquired on January 1, 2019 and held continuously through December 31, 2019.

 

   

Only contractual cash flows or non-cash income and expense items are used in the assumptions to derive pro forma income and expenses and only contractually required amortization is used to adjust the principal balance of loans, unless otherwise noted below. We have considered historic prepayment data where applicable as well as the terms and maturities of each investment and we do not anticipate any prepayments during the period covered by the pro forma financials other than those loan amortization payments that are contractually required and therefore assume there will be no prepayment penalty, defeasance or yield maintenance income to the Company.

 

   

For investments that derive income using a spread over a floating rate benchmark or for debt that charges interest using a spread over a floating rate benchmark, we assume a constant rate as it was reflected at December 31, 2019 for the entire pro forma period.

 

   

Assumes there are no defaults and no prepayments other than contractually obligated amortizations of principal in the portfolio and does not present loan loss reserves since all investments were performing for the period from January 1, 2019 through December 31, 2019.

 

   

Historical financial information is derived from the Company’s audited financial statement as of December 31, 2019.

Assumptions in regard to the unaudited pro forma consolidated balance sheet as of December 31, 2019

 

  (a)

The Company was formed on June 7, 2019 and had no operations through December 31, 2019 and does not intend to begin operations until completion of the Formation Transaction and IPO.

 

  (b)

Represents the contribution of a portfolio of SFR Loans. Management considers these loans to be held-for-investment. Loans held for investment are intended to be held to maturity and are carried at cost net of unamortized origination costs and fees, loan purchase premiums or discounts, and net of the allowance for loan losses when such loan or investment is deemed to be impaired. Cash attributable to the SFR Loans consists of net cash interest that will be contributed along with the SFR Loans. At December 31, 2019, none of the loans were deemed to be impaired and as such, no allowance for loan losses has been established.

 

  (c)

Represents the contribution of the CMBS B-Pieces. The Company will consolidate the entirety of the CMBS Entities with our CMBS B-Pieces shown net of the assets and liabilities attributable to other stakeholders. See Note 3 “Significant Accounting Policies” for additional information. We have adopted the measurement alternative included in Accounting Standards Codification, or ASC, 810, Consolidation. Pursuant

 

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NEXPOINT REAL ESTATE FINANCE, INC.

NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

  to ASC 810, we will measure both the financial assets and financial liabilities of the CMBS trusts we consolidate using the fair value of the financial liabilities, which we consider more observable than the fair value of the financial assets. As a result, we will present the CMBS issued by the consolidated trusts, but not beneficially owned by us, as financial liabilities in our consolidated financial statements, measured at their estimated fair value; we will measure the financial assets as the total estimated fair value of the CMBS issued by the consolidated trusts, regardless of whether such CMBS represent interests beneficially owned by us. Under the measurement alternative prescribed by ASC 810, our “Net income (loss)” will reflect the economic interests in the consolidated CMBS beneficially owned by us, presented as “Change in net assets related to consolidated CMBS variable interest entities” in our consolidated statements of operations, which will include applicable (1) changes in the fair value of CMBS beneficially owned by us, (2) interest income, interest expense and servicing fees earned from the CMBS trusts and (3) other residual returns or losses of the CMBS trusts, if any. The fair value of the Company’s investments in the CMBS B-Pieces is generally based on quotes received from brokers or independent pricing services. When possible, the Company will use actual market prices or relevant observable inputs to establish the fair value of its investments in the CMBS B-Pieces. In cases where observable inputs are not available, or are determined to be unreliable, the Company will develop methodologies that provide appropriate fair value estimates. These methodologies will be reviewed on a quarterly basis to account for changing market conditions. Cash attributable to the CMBS B-Pieces includes monthly interest payments from the underlying mortgage loans of the CMBS Entities net of interest expense paid to the holders of the two senior tranches of the CMBS Entities as well as payments to the various service providers of the trust for the costs of operating the CMBS Entities including master servicing fees, trustee fees, certificate administrator fees, guarantee fees, licensing fees and surveillance fees. As of December 31, 2019, the fair market value of the CMBS Entities includes a discount of approximately $445,000 to par value based on broker quotes.

 

  (d)

Represents the contribution of a mezzanine loan. Management considers the loan to be held-for-investment. Loans held for investment are intended to be held to maturity and are carried at cost net of unamortized origination costs and fees, loan purchase premiums, and net of the allowance for loan losses when such loan or investment is deemed to be impaired. At December 31, 2019, the loan was not deemed to be impaired and as such, no allowance for loan losses has been established.

 

  (e)

Represents the contribution of preferred equity investments in four multi-family residential communities. Management considers these investments as loans to be held-for-investment. Loans held for investment are intended to be held to maturity and are carried at cost net of unamortized origination costs and fees, loan purchase premiums, and net of the allowance for loan losses when such loan or investment is deemed to be impaired. At December 31, 2019, the loan was not deemed to be impaired and as such, no allowance for loan losses has been established.

 

  (f)

Represents the contribution of preferred stock in Jernigan Capital, Inc. (“JCAP”). Management intends to account for this investment as a debt security held-to-maturity and carried at cost net of any unamortized premium or discount.

 

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NEXPOINT REAL ESTATE FINANCE, INC.

NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

  (g)

Assumes all interest and dividend payments are made on time and in accordance with the contractual requirements of each investment’s governing documents. Any accrued but unpaid interest and dividends at December 31, 2019 are recorded as accrued interest and dividends.

 

  (h)

The SFR Loans were financed by the seller and it is expected that the debt will be assumed by the Company at carrying value with the SFR Loans.

 

  (i)

Represents accrued but unpaid primary servicing fees on the SFR Loans.

 

  (j)

Represents accrued but unpaid interest expense on the SFR Loans’ seller financing and the two senior tranches of the consolidated CMBS Entities.

 

  (k)

Represents the principal balances and associated accrued interest of the two senior tranches of the consolidated CMBS Entities and the accrued but unpaid costs of operating the CMBS Entities including master servicing fees, trustee fees, certificate administrator fees, guarantee fees, licensing fees and surveillance fees paid to the various service providers of the trusts.

 

  (l)

As discussed in Note 2, the Contribution Group will contribute their interest in the Initial Portfolio to SPEs owned by subsidiary partnerships of the OP. The Company consolidates the OP as well as the subsidiary partnerships and SPEs that own the investments. Prior to the completion of the IPO, all assets and liabilities are attributable to the Contribution Group through their noncontrolling interests in the SPEs.

Assumptions in regard to unaudited pro forma consolidated statement of operations for the year ended December 31, 2019

 

  (a)

The Company was formed on June 7, 2019 and has had no operations since formation and does not intend to begin operations until completion of the Formation Transaction and IPO.

 

  (b)

Represents pro forma income and expense assuming the SFR Loans were in place on January 1, 2019 and held through December 31, 2019. All of the loans are current with no delinquencies as of December 31, 2019. As such, we assume no defaults on the pro forma consolidated statement of operations for the year ended December 31, 2019.

 

  (c)

Represent pro forma change in net assets assuming the CMBS Entities were in place on January 1, 2019 and held through December 31, 2019. As the Company will hold the most junior tranches of the CMBS Entities and has the right to appoint special servicers, the Company expects to consolidate the CMBS Entities. All of the loans are current with no delinquencies as of December 31, 2019. As such, we assume no defaults on the pro forma consolidated statement of operations for the year ended December 31, 2019.

 

  (d)

Represents the pro forma income and expense assuming the mezzanine loan was in place on January 1, 2019 and held through December 31, 2019. All of the loans are

 

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NEXPOINT REAL ESTATE FINANCE, INC.

NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

  current with no delinquencies as of December 31, 2019. As such, we assume no defaults on the pro forma consolidated statements of operations for the year ended December 31, 2019.

 

  (e)

Represents the pro forma income and expense assuming the preferred equity investments were in place on January 1, 2019 and held through December 31, 2019. All of the loans are current with no delinquencies as of December 31, 2019, as such, we assume no defaults on the pro forma consolidated statements of operations for the year ended December 31, 2019.

 

  (f)

Represents pro forma dividend income assuming the JCAP preferred stock was in place on January 1, 2019 and held through December 31, 2019.

 

  (g)

Interest income for the year ended December 31, 2019 reflects the estimated interest income on the SFR Loans for the twelve months from January 1, 2020 to December 31, 2020. This period represents the twelve months subsequent to the assumed contribution date of December 31, 2019. The portfolio will be contributed at a premium of approximately $71.5 million. Amortization of this premium for the twelve months ended December 31, 2019 would have been approximately $8.4 million and is presented as an offset to interest income. Amortization was calculated using the straight-line method over the life of each loan in the portfolio as it approximates the effective interest method.

 

  (h)

Interest income on the mezzanine loan is calculated using the December 31, 2019 WSJ Prime Rate (“Prime”) of 4.75% held constant throughout the pro forma period plus a spread over the index of 9.0% for an all-in rate of 13.75%. A fixed minimum rate of 8% is paid in cash on a monthly basis. The difference between the 8% minimum monthly payment and the 13.75% all-in rate is accrued as paid-in-kind (“PIK”) interest and is compounded on a monthly basis. Accrued PIK is to be paid at maturity.

 

  (i)

Interest income on the preferred equity investments is calculated using the stated fixed interest rates for each investment ranging from 11.50% to 15.25%. A fixed minimum rate ranging from 8.50% to 10.25% is paid in cash on a monthly basis. The difference between the fixed minimum rate and the maximum rate ranging from 11.50% to 15.25% is accrued as PIK interest and is compounded on a monthly basis. Accrued PIK is to be paid at maturity.

 

  (j)

The SFR Loans were financed by the seller and it is expected that the debt will be assumed by the Company at carrying value along with the SFR Loans. Interest expense is calculated for the same periods as described in Note (g) above using an average fixed financing charge of approximately 2.5%.

 

  (k)

For the year ended December 31, 2019, the outstanding unpaid principal balances of the CMBS B-Pieces and CMBS Entities’ liabilities approximate fair value based on broker quotes marking them at or near per value. As such, there is no change in net assets related to consolidated variable interest entities other than the interest income, interest

 

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NEXPOINT REAL ESTATE FINANCE, INC.

NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

  expense and loan servicing fees that management has elected to report in the aggregate on the consolidated statement of operations. Interest income is calculated using the December 31, 2019 principal balance of all mortgage loans owned by the trusts of approximately $1.79 billion and weighted average interest rate of approximately 3.39%. Monthly principal amortization averages $0.2 million per month as a baseline. The Company believes this reflects the expected performance of the trusts following the completion of the IPO. Interest expense on the two senior tranches of the CMBS Entities that we consolidated is calculated using the December 31, 2019 1-month LIBOR rate of 1.76% and the fixed spread of 0.49% and 2.31% held constant throughout the year ended December 31, 2019. For the year ended December 31, 2019, interest expense related to the senior tranches that we consolidated was $38.8 million. The change in fair value also includes the costs of operating the CMBS Entities including master servicing fees, trustee fees, certificate administrator fees, guarantee fees, licensing fees and surveillance fees paid to the various service providers of the trusts. For the year ended December 31, 2019, these expenses are expected to total approximately $10.0 million.

 

  (l)

The preferred stock pays a fixed quarterly 7% cash dividend. It also pays a fixed quarterly stock dividend of $2.125 million payable pro rata to the holders of the preferred stock for the first three quarters of 2018, 2019 and 2020 and for the first fiscal quarter of 2021. For the last fiscal quarter of each of 2018, 2019 and 2020 and for the second fiscal quarter of 2021, the stock dividend varies based on the underlying company’s incremental book value and past aggregate dividends among other things, but will be no less than $2.125 million. Given that the stock dividend for the last fiscal quarter of 2020 cannot be predicted, the Company assumes a dividend of $2.125 million will be paid as a conservative estimate. It is expected that the company will own 40,000 shares of preferred stock out of a total of 133,500 shares outstanding.

 

  (m)

The Manager will be reimbursed for expenses it incurs on behalf of the Company. However, our Manager is responsible, and we will not reimburse our Manager or its affiliates, for the salaries or benefits to be paid to personnel of our Manager or its affiliates who serve as our officers, except that we may grant equity awards to our officers under a long-term incentive plan adopted by us and approved by our stockholders. Direct payment of operating expenses by us, which includes compensation expense relating to equity awards granted under our long-term incentive plan, together with reimbursement of operating expenses to our Manager, plus the Annual Fee (as defined below), may not exceed 2.5% of equity book value determined in accordance with GAAP, for any calendar year or portion thereof, provided, however, that this limitation will not apply to offering expenses, legal, accounting, financial, due diligence and other service fees incurred in connection with extraordinary litigation and mergers and acquisitions and other events outside the ordinary course of our business or any out-of-pocket acquisition or due diligence expenses incurred in connection with the acquisition or disposition of certain real estate-related investments. To the extent total corporate G&A expenses would otherwise exceed 2.5% of equity book value, our Manager will waive all or a portion of its Annual Fee to keep our total corporate G&A expenses at or below 2.5% of equity book value.

 

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NEXPOINT REAL ESTATE FINANCE, INC.

NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

  (n)

Represents primary servicing fees ranging from 15 to 56 basis points and a master servicing fee of 35 basis points on the unpaid principal balance of each loan in the portfolio for the periods described in (g).

 

  (o)

The Company intends to enter into a management agreement with NexPoint Real Estate Advisors VII, L.P. (the “Manager”). As consideration for the Manager’s services, the Company will pay an annual management fee of 1.5% of Equity (the “Annual Fee”), paid monthly, in cash or shares of our common stock at the election of our Manager. “Equity” means (a) the sum of (1) total stockholders’ equity immediately prior to our IPO, plus (2) the net proceeds received from all issuances of our common stock in and after the IPO, plus (3) our cumulative Core Earnings from and after the IPO to the end of the most recently completed calendar quarter, (b) less (1) any distributions to our common stockholders from and after the IPO to the end of the most recently completed calendar quarter and (2) all amounts that we have paid to repurchase our common stock from and after the IPO to the end of the most recently completed calendar quarter. In our calculation of Equity, we will adjust our calculation of Core Earnings to remove the compensation expense relating to awards granted under one or more of our long-term incentive plans that is added back in our calculation of Core Earnings. Additionally, for the avoidance of doubt, Equity will not include the assets contributed to us in the Formation Transaction as they will be contributed to subsidiary partnerships of the OP, which will not result in an increase in our stockholders’ equity attributable to common stockholders. “Core Earnings” is defined as the net income (loss) attributable to our common stockholders computed in accordance with GAAP, including realized gains and losses not otherwise included in net income (loss), excluding any unrealized gains or losses or other similar non-cash items that are included in net income (loss) for the applicable reporting period, regardless of whether such items are included in other comprehensive income (loss), or in net income (loss) and adding back amortization of stock-based compensation. Net income (loss) attributable to common stockholders may also be adjusted for one-time events pursuant to changes in GAAP and certain material non-cash income or expense items, in each case after discussions between the Manager and independent directors of our board and approved by a majority of the independent directors of our board.

5. Components of Our Revenues and Expenses

Net Interest Income

Interest income. Our earnings are primarily attributable to the interest income from mortgage loans, mezzanine loan and preferred equity investments. Loan premium/discount amortization is also included as a component of interest income.

Interest expense. Interest expense represents interest accrued on our various financing obligations used to fund our investments and is shown as a deduction to arrive at net interest income.

Other Income

Dividend income. Dividend income is comprised of contractual dividends from our JCAP preferred stock investment.

 

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NEXPOINT REAL ESTATE FINANCE, INC.

NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

Expenses

General and administrative expenses. G&A expenses include, but are not limited to, audit fees, legal fees, listing fees, board of director fees, equity-based compensation expense, investor relations costs and payments of reimbursements to our Manager. The Manager will be reimbursed for expenses it incurs on behalf of the Company. However, our Manager is responsible, and we will not reimburse our Manager or its affiliates, for the salaries or benefits to be paid to personnel of our Manager or its affiliates who serve as our officers, except that we may grant equity awards to our officers under a long-term incentive plan adopted by us and approved by our stockholders. Direct payment of operating expenses by us, which includes compensation expense relating to equity awards granted under our long-term incentive plan, together with reimbursement of operating expenses to our Manager, plus the Annual Fee, may not exceed 2.5% of equity book value determined in accordance with GAAP, for any calendar year or portion thereof, provided, however, that this limitation will not apply to offering expenses, legal, accounting, financial, due diligence and other service fees incurred in connection with extraordinary litigation and mergers and acquisitions and other events outside the ordinary course of our business or any out-of-pocket acquisition or due diligence expenses incurred in connection with the acquisition or disposition of certain real estate-related investments. To the extent total corporate G&A expenses would otherwise exceed 2.5% of equity book value, our Manager will waive all or a portion of its Annual Fee to keep our total corporate G&A expenses at or below 2.5% of equity book value.

Loan servicing fees. We pay various service providers fees for loan servicing of our SFR Loans and consolidated CMBS trusts. We classify all expenses related to the administration of these portfolios as servicing fees.

Management fees. Once we have commenced operations, management fees will include fees paid to our Manager pursuant to the Management Agreement (see (r) above).

6. Our Portfolio

Our portfolio consists of SFR Loans, CMBS B-Pieces, a mezzanine loan, preferred equity investments, and an ASFI with a combined unpaid principal balance of $1,060.3 million at December 31, 2019 on a pro forma basis and assumes the CMBS Entities’ assets and liabilities are not consolidated into the Company.

 

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NEXPOINT REAL ESTATE FINANCE, INC.

NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

The following table sets forth additional information relating to our portfolio as of December 31, 2019:

 

Investment (1)

  Investment
Date (2)
    Current
Principal
Amount
        Net Equity (3)     Location      Property Type     Coupon (4)     Remaining
Term (5)
(years)
 

SFR Loans

                
1    Senior loan     12/31/2019     $ 508,700,000       $ 85,138,711       Various        Single-family       4.65     8.68  
2    Senior loan     12/31/2019       10,726,882         11,171,289       Various        Single-family       5.35     8.09  
3    Senior loan     12/31/2019       5,653,308         9,469,369       Various        Single-family       5.33     3.59  
4    Senior loan     12/31/2019       10,664,870         5,546,940       Various        Single-family       5.30     8.68  
5    Senior loan     12/31/2019       7,676,055         2,651,904       Various        Single-family       5.08     8.51  
6    Senior loan     12/31/2019       5,719,004         2,963,844       Various        Single-family       5.24     8.76  
7    Senior loan     12/31/2019       12,414,408         2,077,741       Various        Single-family       5.54     8.76  
8    Senior loan     12/31/2019       6,618,588         1,560,117       Various        Single-family       5.79     3.67  
9    Senior loan     12/31/2019       8,334,194         1,812,124       Various        Single-family       5.85     8.84  
10    Senior loan     12/31/2019       51,362,000         1,577,528       Various        Single-family       4.74     5.76  
11    Senior loan     12/31/2019       9,875,000         2,278,554       Various        Single-family       6.10     8.76  
12    Senior loan     12/31/2019       38,637,060         2,110,022       Various        Single-family       5.55     8.84  
13    Senior loan     12/31/2019       6,421,247         1,535,220       Various        Single-family       5.47     8.84  
14    Senior loan     12/31/2019       15,300,000         1,590,355       Various        Single-family       5.46     3.84  
15    Senior loan     12/31/2019       5,760,000         1,288,594       Various        Single-family       5.99     8.93  
16    Senior loan     12/31/2019       10,316,356         1,235,696       Various        Single-family       5.72     8.93  
17    Senior loan     12/31/2019       10,739,777         1,382,527       Various        Single-family       5.60     8.93  
18    Senior loan     12/31/2019       5,410,402         1,330,378       Various        Single-family       5.46     9.01  
19    Senior loan     12/31/2019       9,313,105         1,232,307       Various        Single-family       5.88     9.01  
20    Senior loan     12/31/2019       6,752,435         960,074       Various        Single-family       4.83     4.09  
21    Senior loan     12/31/2019       4,736,000         1,411,362       Various        Single-family       5.35     9.10  
22    Senior loan     12/31/2019       17,439,248         1,315,876       Various        Single-family       5.61     9.10  
23    Senior loan     12/31/2019       7,823,472         890,584       Various        Single-family       5.34     9.10  
24    Senior loan     12/31/2019       7,948,371         937,718       Various        Single-family       5.47     9.10  
25    Senior loan     12/31/2019       6,874,210         1,123,964       Various        Single-family       5.46     9.17  
26    Senior loan     12/31/2019       10,523,000         910,112       Various        Single-family       4.72     6.17  
27    Senior loan     12/31/2019       62,023,000         849,000       Various        Single-family       4.95     9.17  
      

 

 

     

 

 

        

 

 

   

 

 

 

Total

      863,761,992         146,351,910            4.91     8.35  

CMBS B-Piece

                
1    CMBS B-Piece     12/31/2019       75,617,792     (6)     75,466,556       Various        Multifamily       L + 6.00     6.16  
2    CMBS B-Piece     12/31/2019       58,661,484     (6)     58,368,177       Various        Multifamily       L + 6.00     6.91  
      

 

 

     

 

 

        

 

 

   

 

 

 

Total

      134,279,276         133,834,733            L + 6.00     6.49  

Mezzanine Loan

                
1    Mezzanine     12/31/2019       3,250,000         3,221,343       Charleston, SC        Multifamily       Prime + 9.00     2.09  

Preferred Equity

                
1    Preferred Equity     12/31/2019       5,056,000         5,298,680       Jackson, MS        Multifamily       12.50     7.92  
2    Preferred Equity     12/31/2019       3,821,000         3,982,192       Corpus Christi, TX        Multifamily       15.25     2.59  
3    Preferred Equity     12/31/2019       10,000,000         9,746,231       Columbus, GA        Multifamily       11.50     5.50  
      

 

 

     

 

 

        

 

 

   

 

 

 

Total

      18,877,000         19,027,104            12.53     5.56  

ASFI

                
1    ASFI     12/31/2019       40,000,000     (7)     40,507,265       N/A        N/A       7.00     N/A  

 

(1)

Our total portfolio represents the current principal amount of the consolidated SFR Loans, the mezzanine loan, preferred equity, and ASFI, as well as the net equity of our CMBS B-Piece investments.

(2)

All investments are assumed to have been entered into as of December 31, 2019 on a pro forma basis.

(3)

Net equity represents the carrying value less borrowings.

(4)

One-month LIBOR (“L”) is held constant at the December 31, 2019 rate of 1.76%. The Prime rate is held constant at the December 31, 2019 rate of 4.75%. The weighted average coupon is weighted on current principal balance.

(5)

The weighted average life is weighted on current principal balance and assumes no prepayments. The maturity date for preferred equity investments represents the maturity date of the senior mortgage, as the preferred equity investments have no stated maturity date, and require repayment upon the sale or refinancing of the asset.

(6)

The CMBS B-Pieces are shown on an unconsolidated basis reflecting the value of our investment.

(7)

ASFI consists of JCAP preferred stock.

 

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Table of Contents

NEXPOINT REAL ESTATE FINANCE, INC.

NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

7. Core Earnings

We use Core Earnings to evaluate our performance which excludes the effects of certain GAAP adjustments and transactions that we believe are not indicative of our current operations and loan performance. Core Earnings is a non-GAAP financial measure of performance. Core Earnings is defined as the net income (loss) attributable to our common stockholders computed in accordance with GAAP, including realized gains and losses not otherwise included in net income (loss), excluding any unrealized gains or losses or other similar non-cash items that are included in net income (loss) for the applicable reporting period, regardless of whether such items are included in other comprehensive income (loss), or in net income (loss) and adding back amortization of stock-based compensation. Net income (loss) attributable to common stockholders may also be adjusted for one-time events pursuant to changes in GAAP and certain material non-cash income or expense items, in each case after discussions between the Manager and independent directors of our board and approved by a majority of the independent directors of our board.

We believe providing Core Earnings as a supplement to GAAP net income to our investors is helpful to their assessment of our performance. Core Earnings should not be used as a substitute for GAAP net income. The methodology used to calculate Core Earnings may differ from other REITs. As such, our Core Earnings may not be comparable to similar measures provided by other REITs.

We also use Core Earnings as a component of the management fee paid to our Manager. As consideration for the Manager’s services, we will pay our Manager an annual management fee of 1.5% of Equity, paid monthly, in cash or shares of our common stock at the election of our Manager. “Equity” means (a) the sum of (1) total stockholders’ equity immediately prior to our IPO, plus (2) the net proceeds received from all issuances of our common stock in and after the IPO, plus (3) our cumulative Core Earnings from and after the IPO to the end of the most recently completed calendar quarter, (b) less (1) any distributions to our common stockholders from and after the IPO to the end of the most recently completed calendar quarter and (2) all amounts that we have paid to repurchase our common stock from and after the IPO to the end of the most recently completed calendar quarter. In our calculation of Equity, we will adjust our calculation of Core Earnings to remove the compensation expense relating to awards granted under one or more of our long-term incentive plans that is added back in our calculation of Core Earnings. Additionally, for the avoidance of doubt, Equity will not include the assets contributed to us in the Formation Transaction as they will be contributed to subsidiary partnerships of the OP, which will not result in an increase in our stockholders’ equity attributable to common stockholders.

 

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Table of Contents

NEXPOINT REAL ESTATE FINANCE, INC.

NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

The following table provides a reconciliation of Core Earnings to GAAP net income attributable to common stockholders:

 

      Year Ended
December 31, 2019
 

Net income attributable to common stockholders (a)

      

Adjustments

  

Realized (gains) losses

      

Amortization of stock-based compensation

      
  

 

 

 

Core Earnings

   $  
  

 

 

 

Weighted average common shares outstanding - basic (a)

     10  
  

 

 

 

Weighted average common shares outstanding - diluted (a)

     10  
  

 

 

 
  

 

 

 

Core Earnings per Diluted Weighted Average Share (a)

   $  
  

 

 

 

 

(a)

Prior to the Company’s IPO, all earnings will be attributable to the subsidiary partnerships which are wholly owned by the Contribution Group and not attributable to common shareholders.

8. Dividends

We intend to make regular quarterly dividend payments to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. We intend to make regular quarterly dividend payments of all or substantially all of our taxable income to holders of our common stock out of assets legally available for this purpose, if and to the extent authorized by our Board. Before we make any dividend payments, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our debt payable. If our cash available for distribution is less than our taxable income, we could be required to sell assets, borrow funds or raise additional capital to make cash dividends or we may make a portion of the required dividend in the form of a taxable distribution of stock or debt securities.

We will make dividend payments based on our estimate of taxable earnings per share of common stock, but not earnings calculated pursuant to GAAP. Our dividends and taxable income and GAAP earnings will typically differ due to items such as amortization, fair value adjustments, differences in premium amortization and discount accretion, and non-deductible general and administrative expenses. Our quarterly dividends per share may be substantially different than our quarterly taxable earnings and GAAP earnings per share.

 

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NEXPOINT REAL ESTATE FINANCE, INC.

NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

9. Net Interest Income

The following table presents the components of net interest income for the year ended December 31, 2019 on a pro forma basis:

 

     Year Ended
December 31, 2019
 

(Dollars in Thousands)

   Interest
income/
(expense)
    Average
Balance (1)
     Yield  

Interest income

       

SFR Loans, held-for-investment

   $ 34,674     $ 929,553        3.73

CMBS B-Piece (2)

     60,802       1,789,201        3.40

Mezzanine loan

     491       3,228        15.21

Preferred equity

     2,111       18,644        11.32
  

 

 

   

 

 

    

 

 

 

Total interest income

   $ 98,078     $ 2,740,626        3.58
  

 

 

   

 

 

    

 

 

 

Interest expense

       

Long-term seller financing

     (19,558     787,657        -2.48

Consolidated CMBS tranches (2)

     (38,771     1,655,011        -2.34
  

 

 

   

 

 

    

 

 

 

Total interest expense

   $ (58,329   $ 2,442,668        -2.39
  

 

 

   

 

 

    

 

 

 

Net interest income (3)

   $ 39,749       
  

 

 

      

 

(1)

Average balances for the SFR Loans, the mezzanine loan and preferred equity are calculated based upon carrying values. Average balances for the CMBS B-Pieces are based upon fair value.

(2)

Interest income and interest expense related to the consolidated CMBS entities are presented separate from the change in net assets related to consolidated CMBS variable interest entities in the table above.

(3)

Net interest income is calculated as the difference between total interest income and total interest expense.

 

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NEXPOINT REAL ESTATE FINANCE, INC.

NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

10. Obligations and Commitments

The following table summarized our contractual obligations and commitments (including interest payments) as of December 31, 2019 for the next five calendar years subsequent to December 31, 2019. We used one-month LIBOR as of December 31, 2019 to calculate interest expense due by period on our floating rate debt.

 

    Payments Due by Period  
    Total     2020     2021     2022     2023     2024     Thereafter  

Recourse Obligations

             

Asset Specific Financing

             

Senior loan

  $ 566,445,952     $ 10,624,285     $ 10,595,257     $ 10,595,257     $ 10,595,257     $ 10,624,285     $ 513,411,612  

Senior loan

    12,277,048       473,619       476,841       479,746       482,812       485,587       9,878,443  

Senior loan

    5,416,212       196,369       198,889       201,137       4,819,816              

Senior loan

    12,343,800       412,693       417,020       420,879       424,951       428,585       10,239,673  

Senior loan

    8,761,137       294,200       297,286       300,054       302,968       305,585       7,261,043  

Senior loan

    6,601,957       215,241       217,669       219,835       222,118       224,157       5,502,937  

Senior loan

    14,676,219       500,334       505,173       509,464       514,002       518,023       12,129,223  

Senior loan

    6,434,021       245,377       248,162       250,621       5,689,861              

Senior loan

    10,003,835       333,158       336,668       339,755       343,031       345,907       8,305,316  

Senior loan

    52,733,466       1,002,471       999,732       999,732       999,732       1,002,471       47,729,327  

Senior loan

    12,159,575       307,632       306,792       306,792       323,144       407,417       10,507,798  

Senior loan

    45,871,120       1,443,090       1,459,515       1,473,897       1,489,110       1,502,374       38,503,133  

Senior loan

    7,566,492       244,030       246,874       249,397       252,064       254,429       6,319,698  

Senior loan

    14,922,118       360,503       359,518       359,518       13,842,580              

Senior loan

    7,044,852       170,725       170,258       170,258       170,258       230,168       6,133,185  

Senior loan

    12,430,086       416,015       420,229       423,944       427,879       431,342       10,310,676  

Senior loan

    12,817,495       414,875       419,595       423,767       428,182       432,080       10,698,997  

Senior loan

    6,400,506       215,399       217,477       219,319       221,264       222,987       5,304,060  

Senior loan

    11,121,682       374,674       378,343       381,563       384,980       387,969       9,214,154  

Senior loan

    6,446,230       232,673       235,343       237,734       5,740,480              

Senior loan

    5,598,142       133,172       179,497       189,158       190,553       191,754       4,714,007  

Senior loan

    20,930,378       687,930       695,132       701,485       708,210       714,131       17,423,490  

Senior loan

    9,186,831       310,692       313,564       316,112       318,802       321,187       7,606,473  

Senior loan

    9,432,400       307,438       310,740       313,661       316,748       319,477       7,864,335  

Senior loan

    8,072,227       270,515       273,076       275,340       277,732       279,843       6,695,721  

Senior loan

    10,903,577       231,667       231,034       231,034       231,034       231,667       9,747,143  

Senior loan

    71,674,855       1,538,901       1,534,697       1,534,697       1,534,697       2,115,854       63,416,010  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 968,272,210     $ 21,957,676     $ 22,044,379     $ 22,124,153     $ 51,252,266     $ 21,977,281     $ 828,916,455  

Consolidated CMBS liabilities

             

CMBS B-Piece 1—A

    1,096,304,909       27,801,207       27,692,596       27,656,615       27,620,635       27,656,906       957,876,949  

CMBS B-Piece 1—B

    33,843,014       1,247,637       1,242,677       1,241,034       1,239,390       1,241,061       27,631,216  

CMBS B-Piece 2—A

    835,763,182       17,007,317       18,401,886       21,932,337       24,693,994       24,823,765       728,903,884  

CMBS B-Piece 2—B

    25,643,870       790,401       827,824       924,146       997,539       998,027       21,105,933  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,991,554,976     $ 46,846,562     $ 48,164,983     $ 51,754,132     $ 54,551,559     $ 54,719,759     $ 1,735,517,981  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual obligations and commitments

  $ 2,959,827,186     $ 68,804,238     $ 70,209,361     $ 73,878,285     $ 105,803,824     $ 76,697,041     $ 2,564,434,436  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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NEXPOINT REAL ESTATE FINANCE, INC.

NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

11. Interest Rate Sensitivity

Generally, the composition of our investments is such that an increase in interest rates will increase net interest income and a decrease in interest rates will decrease net interest income.

The following table shows the sensitivity of net interest income to 1/8th percent changes in interest rates for the Company’s floating rate assets and liabilities as of December 31, 2019 on a pro forma basis.

 

Change in Interest Rates

   Annual change to net interest income  

0.125%

   $ 171,910  

0.250%

     343,820  

0.375%

     515,730  

0.500%

     687,640  

 

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LOGO

NEXPOINT REAL ESTATE FINANCE, INC.

5,000,000 Shares

Common Stock

 

 

PROSPECTUS

 

 

 

RAYMOND JAMES

KEEFE, BRUYETTE & WOODS

                              A STIFEL COMPANY

BAIRD

                    , 2020

Through and including                 , 2020 (the 25th day after the date of this prospectus), all dealers that effect transactions in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

 


Table of Contents

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 31. Other Expenses of Issuance and Distribution.

 

SEC registration fee

   $ 15,674  

FINRA filing fee

   $ 17,750  

NYSE listing fee

   $ 150,000  

Accounting fees and expenses

   $ 450,000  

Legal fees and expenses (including Blue Sky fees)

   $ 1,500,000  

Printing expenses

   $ 575,000  

Transfer agent fees and expenses

   $ 5,000  

Miscellaneous

   $ 36,576  
  

 

 

 

Total

   $ 2,750,000  

 

*

To be filed by amendment.

The amounts set forth above, except for the SEC registration and FINRA filing fees, are in each case estimated and assume that the registrant sells all of the shares being registered by this registration statement. All of the expenses set forth above shall be borne by the registrant.

Item 32. Sales to Special Parties.

On June 10, 2019, in connection with our formation, the Registrant issued 10 shares of common stock to Brian Mitts in exchange for $10.00 in cash to provide for our initial capitalization.

Item 33. Recent Sales of Unregistered Securities.

On June 10, 2019, in connection with our formation, the Registrant issued 10 shares of common stock to Brian Mitts in exchange for $10.00 in cash. Such issuance was exempt from the requirements of the Securities Act of 1933, as amended, or the Securities Act, pursuant to Section 4(a)(2) thereof.

Item 34. Indemnification of Directors and Officers.

The registrant is permitted to limit the liability of its directors and officers to the corporation and its stockholders for monetary damages and to indemnify and advance expenses to its directors, officers, employees and agents, to the extent permitted by Maryland law and its charter.

Maryland law permits the registrant to include in its charter a provision eliminating the liability of its directors and officers to its stockholders and the registrant for money damages, except for liability resulting from (i) actual receipt of an improper benefit or profit in money, property or services or (ii) active and deliberate dishonesty established by a final judgment and that is material to the cause of action.

Maryland law requires the registrant (unless its charter provides otherwise, which the registrant’s 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 or threatened to be made a party by reason of his or her service in that capacity.

 

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Maryland law allows present and former directors and officers, among others, to be indemnified against judgments, penalties, fines, settlements and reasonable expenses actually incurred 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 capacities unless the following can be established:

 

   

an act or omission of the director or officer was material to the cause of action adjudicated in the proceeding and (a) was committed in bad faith or (b) was the result of active and deliberate dishonesty;

 

   

the director or officer actually received an improper personal benefit in money, property or services; or

 

   

with respect to any criminal proceeding, the director or officer had reasonable cause to believe his or her act or omission was unlawful.

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 the corporation or in its right, or for a judgment of liability on the basis that personal benefit was improperly received, is limited to expenses. Maryland law permits a corporation to advance reasonable expenses to a director or officer upon receipt of a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification and a written undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed if it is ultimately determined that the standard of conduct was not met.

Subject to the limitations contained in Maryland law, the registrant’s charter contains a provision that limits directors’ and officers’ liability to the registrant and its stockholders for monetary damages, and the registrant’s charter and bylaws require the registrant 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 its directors and its officers and permit the registrant to provide such indemnification and advance of expenses to its employees and agents.

Indemnification may reduce the legal remedies available to the registrant and the registrant’s stockholders against the indemnified individuals. The aforementioned charter and bylaw provisions do not reduce the exposure of directors and officers to liability under federal or state securities laws, nor do they limit a stockholder’s ability to obtain injunctive relief or other equitable remedies for a violation of a director’s or an officer’s duties to the registrant or the registrant’s stockholders, although the equitable remedies may not be an effective remedy in some circumstances.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been advised that in the opinion of the staff of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

Item 35. Treatment of Proceeds from Stock Being Registered.

None of the proceeds will be credited to an account other than the appropriate capital share account.

 

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Table of Contents

Item 36. Financial Statements and Exhibits.

(a) Financial Statements. See page F-1 for an index of the financial statements included in the registration statement.

(b) Exhibits.

 

Exhibit No.

 

Description

1.1*   Form of Underwriting Agreement
2.1   Form of Formation Transaction Contribution Agreement
3.1   Form of Articles of Amendment and Restatement
3.2   Form of Amended and Restated Bylaws
5.1*   Opinion of Ballard Spahr LLP
8.1*   Opinion of Winston & Strawn LLP
10.1   Form of Management Agreement
10.2   Form of Limited Partnership Agreement
10.3   Form of Subsidiary Partnership Limited Partnership Agreement
10.4   Loan and Security Agreement, dated as of July 12, 2019, by and among NexPoint WLIF I Borrower, LLC, NexPoint WLIF II Borrower, LLC, and NexPoint WLIF III Borrower, LLC, as Borrower, and Federal Home Loan Mortgage Corporation, as Lender.
10.5†   Form of 2020 Long Term Incentive Plan
10.6†   Form of Indemnification Agreement
10.7   Form of Registration Rights Agreement
21.1   List of subsidiaries of the Registrant
23.1*   Consent of Ballard Spahr LLP (included in Exhibit 5.1)
23.2*   Consent of Winston & Strawn LLP (included in Exhibit 8.1)
23.3   Consent of KPMG LLP
24.1**   Power of Attorney (included on signature page to a previous filing)
99.1**   Consent of Director Nominee (James Dondero)
99.2**   Consent of Director Nominee (Edward Constantino)
99.3**   Consent of Director Nominee (Scott Kavanaugh)
99.4**   Consent of Director Nominee (Arthur Laffer)

 

*

To be filed by amendment.

**

Previously filed.

Management contract, compensatory plan or arrangement.

Item 37. Undertakings.

 

  (a)

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of

 

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Table of Contents
  appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

 

  (b)

The undersigned registrant hereby undertakes that:

 

  (1)

For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

 

  (2)

For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-11 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, in the State of Texas, on the 27th day of January, 2020.

 

NEXPOINT REAL ESTATE FINANCE, INC.
By:  

/s/ Brian Mitts

  Brian Mitts
  President and Treasurer

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

 

Name

  

Capacity

 

Date

/s/ Brian Mitts

Brian Mitts

   President, Treasurer and Director
(Principal Executive and Financial Officer)
  January 27, 2020

 

II-5

EX-2.1 2 d759970dex21.htm EX-2.1 EX-2.1

Exhibit 2.1

FORM OF

CONTRIBUTION AND ASSIGNMENT OF INTERESTS AGREEMENT

This Contribution and Assignment of Interests Agreement (this Agreement) is dated effective as of                 , 2020 (the “Effective Date”), by and among NexPoint WLIF, LLC, Series I, a Delaware series limited liability company (“NexPoint WLIF, Series I”), NexPoint Real Estate Strategies Fund, a continuously offered, non-diversified, closed-end management investment company (“NRESF”), Highland Global Allocation Fund, a diversified, closed-end management investment company (“Highland Global”), NexPoint Strategic Opportunities Fund, a non-diversified, closed-end management investment company (“NHF”), NREF OP I, L.P., a Delaware limited partnership (“NREF OP I”), NREF OP I Holdco, LLC, a Delaware limited liability company (“NREF OP I Holdco”), NREF OP I SubHoldco, LLC, a Delaware limited liability company (“NREF OP I SubHoldco”), NexPoint WLIF, LLC, Series II, a Delaware series limited liability company (“NexPoint WLIF, Series II”), Highland Income Fund, a non-diversified, closed-end management investment company (“HIF”), NREF OP II, L.P., a Delaware limited partnership (“NREF OP II”), NREF OP II Holdco, LLC, a Delaware limited liability company (“NREF OP II Holdco”), NREF OP II SubHoldco, LLC, a Delaware limited liability company (“NREF OP II SubHoldco”), NREC TRS, Inc., a Texas corporation (“NREC TRS”), NexPoint Real Estate Capital, LLC, a Delaware limited liability company (“NREC”), NRESF REIT Sub, LLC, a Delaware limited liability company (“NRESF Sub”), NexPoint Capital REIT, LLC, a Delaware limited liability company (“NexPoint Capital REIT”), NexPoint Capital, Inc., a Delaware corporation (“NexPoint Capital”), NREF OP IV, L.P., a Delaware limited partnership (“NREF OP IV”), NREF OP IV REIT Sub, LLC, a Delaware limited liability company (“NREF OP IV REIT Sub”), and NREF OP IV REIT Sub TRS, LLC, a Delaware limited liability company (“NREF OP IV REIT Sub TRS”).

WHEREAS, in connection with the closing of the initial public offering of NexPoint Real Estate Finance, Inc. (“NREF”), the parties hereto desire to engage in the transactions set forth in this Agreement to provide for the initial capitalization of NREF.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed, the parties do hereby agree as follows:

1. Contribution of Interests. The parties hereto acknowledge and agree that a series of contributions shall take place as set forth below.

a. First, the parties hereto acknowledge and agree that the following contributions shall take place simultaneously (collectively, the “Initial Contribution”):

(i) NexPoint WLIF, Series I shall contribute, convey, assign, transfer and deliver to NREF OP I, and NREF OP I shall accept from NexPoint WLIF, Series I, all of its rights, title and limited liability company interest in, to and under NexPoint WLIF I Borrower, LLC, (the “NexPoint WLIF I Borrower Interest”), including, without limitation, all voting, consent and financial rights now or hereafter existing and associated with ownership of the NexPoint WLIF I Borrower Interest, free and clear of all liens and encumbrances, in exchange for                  common partnership units of NREF OP I;


(ii) NRESF shall contribute, convey, assign, transfer and deliver to NREF OP I, and NREF OP I shall accept from NRESF,                  aggregate principal amount of its FREMF 2019-KF60 C Float – 30308HAJ7 (the “NRESF KF60”), including, without limitation, all voting, consent and financial rights now or hereafter existing and associated with ownership of the NRESF KF60, free and clear of all liens and encumbrances, in exchange for                  common partnership units of NREF OP I;

(iii) Highland Global shall contribute, convey, assign, transfer and deliver to NREF OP I, and NREF OP I shall accept from Highland Global,                  aggregate principal amount of its FREMF 2019-KF60 C Float – 30308HAJ7 (the “Highland Global KF60”), including, without limitation, all voting, consent and financial rights now or hereafter existing and associated with ownership of the Highland Global KF60, free and clear of all liens and encumbrances, in exchange for                  common partnership units of NREF OP I;

(iv) NHF shall contribute, convey, assign, transfer and deliver to NREF OP I, and NREF OP I shall accept from NHF,                  aggregate principal amount of its FREMF 2019-KF72 C Float –30314JAC0 (the “NHF KF72-A”), including, without limitation, all voting, consent and financial rights now or hereafter existing and associated with ownership of the NHF KF72-A, free and clear of all liens and encumbrances, in exchange for                  common partnership units of NREF OP I;

(v) NexPoint WLIF, Series II shall contribute, convey, assign, transfer and deliver to NREF OP II, and NREF OP II shall accept from NexPoint WLIF, Series II, all of its rights, title and limited liability company interest in, to and under NexPoint WLIF II Borrower, LLC, (the “NexPoint WLIF II Borrower Interest”), including, without limitation, all voting, consent and financial rights now or hereafter existing and associated with ownership of the NexPoint WLIF II Borrower Interest, free and clear of all liens and encumbrances, in exchange for                  common partnership units of NREF OP II;

(vi) HIF shall contribute, convey, assign, transfer and deliver to NREF OP II, and NREF OP II shall accept from HIF,                  of its FREMF 2019-KF60 C Float – 30308HAJ7 (the “HIF KF60-A”), including, without limitation, all voting, consent and financial rights now or hereafter existing and associated with ownership of the HIF KF60-A, free and clear of all liens and encumbrances, in exchange for                  common partnership units of NREF OP II;

 

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(vii) NREC TRS shall contribute, convey, assign, transfer and deliver to NREF OP IV, and NREF OP IV shall accept from NREC TRS, all of its rights, title and limited liability company interest in, to and under HMCF PB Investors, LLC (“Marbella”), including, without limitation, all voting, consent and financial rights now or hereafter existing and associated with ownership of Marbella, free and clear of all liens and encumbrances, in exchange for                  common partnership units of NREF OP IV;

(viii) NREC shall contribute, convey, assign, transfer and deliver to NREF OP IV, and NREF OP IV shall accept from NREC, all of its rights, title and limited liability company interest in, to and under NREC WW Investors, LLC (“Whisperwood”) and NREA Ashley Village Investors, LLC (“Ashley Village”), including, without limitation, all voting, consent and financial rights now or hereafter existing and associated with ownership of Whisperwood and Ashley Village, free and clear of all liens and encumbrances, in exchange for                  and                  common partnership units of NREF OP IV, respectively;

(ix) NREC, NRESF Sub and NexPoint Capital REIT shall contribute, convey, assign, transfer and deliver to NREF OP IV, and NREF OP IV shall accept from NREC, NRESF Sub and NexPoint Capital REIT, all of their respective rights, title and limited liability company interest in, to and under NREA Crossings Ridgewood Coinvestment, LLC (“Crossings at Ridgewood”), including, without limitation, all voting, consent and financial rights now or hereafter existing and associated with ownership of Crossings at Ridgewood, free and clear of all liens and encumbrances, in exchange for                 ,                 , and                  common partnership units of NREF OP IV, respectively, and such transfer is hereby approved by NREC, NRESF Sub and NexPoint Capital REIT and this Agreement is hereby deemed to be written consent of such approval as required by the LLC agreement of Crossings at Ridgewood;

(x) NHF shall contribute, convey, assign, transfer and deliver to NREF OP IV, and NREF OP IV shall accept from NHF, all of its rights, title and interest in, to and under 32,000 shares of Series A preferred stock (the “NHF Preferred Stock”) of Jernigan Capital, Inc. (“JCAP”), including, without limitation, all voting, consent and financial rights now or hereafter existing and associated with ownership of the NHF Preferred Stock, free and clear of all liens and encumbrances, in exchange for                  common partnership units of NREF OP IV;

(xi) HIF shall contribute, convey, assign, transfer and deliver to NREF OP IV, and NREF OP IV shall accept from HIF, all of its rights, title and interest in, to and under 7,200 shares of Series A preferred stock (the “HIF Preferred Stock”) of JCAP, including, without limitation, all voting, consent and financial rights now or hereafter existing and associated with ownership of the HIF Preferred Stock, free and clear of all liens and encumbrances, in exchange for                  common partnership units of NREF OP IV;

(xii) NRESF shall contribute, convey, assign, transfer and deliver to NREF OP IV, and NREF OP IV shall accept from NRESF, all of its rights, title and interest in, to and under 800 shares of Series A preferred stock (the “NRESF Preferred Stock”) of JCAP, including, without limitation, all voting, consent and financial rights now or hereafter existing and associated with ownership of the NRESF Preferred Stock, free and clear of all liens and encumbrances, in exchange for                  common partnership units of NREF OP IV;

 

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(xiii) HIF shall contribute, convey, assign, transfer and deliver to NREF OP IV, and NREF OP IV shall accept from HIF,                  aggregate principal amount of its FREMF 2019-KF60 C Float –30308HAJ7 (the “HIF KF60-B”), including, without limitation, all voting, consent and financial rights now or hereafter existing and associated with ownership of the HIF KF60-B, free and clear of all liens and encumbrances, in exchange for                  common partnership units of NREF OP IV;

(xiv) NexPoint Capital shall contribute, convey, assign, transfer and deliver to NREF OP IV, and NREF OP IV shall accept from NexPoint Capital,                  aggregate principal amount of its FREMF 2019-KF60 C Float –30308HAJ7 (the “NexPoint Capital KF60”), including, without limitation, all voting, consent and financial rights now or hereafter existing and associated with ownership of the NexPoint Capital KF60, free and clear of all liens and encumbrances, in exchange for                  common partnership units of NREF OP IV; and

(xv) NHF shall contribute, convey, assign, transfer and deliver to NREF OP IV, and NREF OP IV shall accept from NHF,                  aggregate principal amount of its FREMF 2019-KF72 C Float –30314JAC0 (the “NHF KF72-B”), including, without limitation, all voting, consent and financial rights now or hereafter existing and associated with ownership of the NHF KF72-B, free and clear of all liens and encumbrances, in exchange for                  common partnership units of NREF OP IV.

b. Second, immediately following the Initial Contribution, the parties hereto acknowledge and agree that the following contributions shall take place simultaneously (collectively, the “Second Contribution”):

(i) NREF OP I shall contribute, convey, assign, transfer and deliver to NREF OP I Holdco, and NREF OP I Holdco shall accept from NREF OP I, all of its rights, title and interest in, to and under the NexPoint WLIF I Borrower Interest, NRESF KF60, Highland Global KF60 and NHF KF72-A including, without limitation, all voting, consent and financial rights now or hereafter existing and associated with ownership of the NexPoint WLIF I Borrower Interest, NRESF KF60, Highland Global KF60 and NHF KF72-A, free and clear of all liens and encumbrances, in exchange for 1,000 membership units representing membership interest in NREF OP I Holdco;

(ii) NREF OP II shall contribute, convey, assign, transfer and deliver to NREF OP II Holdco, and NREF OP II Holdco shall accept from NREF OP II, all of its rights, title and interest in, to and under the NexPoint WLIF II Borrower Interest and HIF KF60-A, including, without limitation, all voting, consent and financial rights now or hereafter existing and associated with ownership of the NexPoint WLIF II Borrower Interest and HIF KF60-A, free and clear of all liens and encumbrances, in exchange for 1,000 membership units representing membership interest in NREF OP II Holdco; and

 

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(iii) NREF OP IV shall contribute, convey, assign, transfer and deliver to NREF OP IV REIT Sub, and NREF OP IV REIT Sub shall accept from NREF OP IV, all of its rights, title and limited liability company interest in, to and under Marbella, Whisperwood, Crossings at Ridgewood and Ashley Village, including, without limitation, all voting, consent and financial rights now or hereafter existing and associated with ownership of Marbella, Whisperwood, Crossings at Ridgewood and Ashley Village, free and clear of all liens and encumbrances, in exchange for                  common membership units of NREF OP IV REIT Sub.

c. Third, immediately following the Second Contribution, the parties hereto acknowledge and agree that the following contributions shall take place simultaneously (the “Final Contribution” and collectively with the Initial Contribution and the Second Contribution, the “Contributions”):

(i) NREF OP I Holdco shall contribute, convey, assign, transfer and deliver to NREF OP I SubHoldco, and NREF OP I SubHoldco shall accept from NREF OP I Holdco, all of its rights, title and interest in, to and under the NRESF KF60, Highland Global KF60 and NHF KF72-A, including, without limitation, all voting, consent and financial rights now or hereafter existing and associated with ownership of the NRESF KF60, Highland Global KF60 and NHF KF72-A, free and clear of all liens and encumbrances, in exchange for 1,000 membership units representing membership interest in NREF OP I SubHoldco;

(ii) NREF OP II Holdco shall contribute, convey, assign, transfer and deliver to NREF OP II SubHoldco, and NREF OP II SubHoldco shall accept from NREF OP II Holdco, all of its rights, title and interest in, to and under the HIF KF60-A, including, without limitation, all voting, consent and financial rights now or hereafter existing and associated with ownership of the HIF KF60-A, free and clear of all liens and encumbrances, in exchange for 1,000 membership units representing membership interests in NREF OP II SubHoldco; and

(iii) NREF OP IV REIT Sub shall contribute, convey, assign, transfer and deliver to NREF OP IV REIT Sub TRS, and NREF OP IV REIT Sub TRS shall accept from NREF OP IV REIT Sub, all of its rights, title and limited liability company interest in, to and under Marbella, including, without limitation, all voting, consent and financial rights now or hereafter existing and associated with ownership of Marbella, free and clear of all liens and encumbrances, in exchange for                  common membership units of NREF OP IV REIT Sub.

To the extent permitted under applicable law, each contribution that constitutes the Initial Contribution is intended, for U.S. federal income tax purposes, to be a tax-deferred contribution of property to a partnership under Section 721 of the Internal Revenue Code of 1986, as amended (the “Code”). Each contribution that constitutes the Second Contribution is intended to be either (a) disregarded for U.S. federal income tax purposes since (i) NREF OP I Holdco and NREF OP I SubHoldco are intended to be disregarded entities of NREF OP I and (ii) NREF OP II Holdco and NREF OP II SubHoldco are intended to be disregarded entities of NREF OP II, or (b) a tax-free exchange under

 

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Section 351 of the Code since NREF OP IV REIT Sub is intended to be a corporation wholly-owned by NREF OP IV, in each case, at the time of such contribution. Each contribution that constitutes the Final Contribution is intended to be either (a) disregarded for U.S. federal income tax purposes, since (i) NREF OP I Holdco and NREF OP I SubHoldco are intended to be disregarded entities of NREF OP I and (ii) NREF OP II Holdco and NREF OP II SubHoldco are intended to be disregarded entities of NREF OP II, or (b) a tax-free exchange under Section 351 of the Code since NREF OP IV REIT Sub TRS is intended to be a corporation wholly-owned by NREF OP IV REIT Sub for U.S. federal income tax purposes, in each case, at the time of such contribution. Each of the Contributions shall be treated by the parties to this Agreement in accordance with the foregoing intentions, except to the extent required by applicable law. Upon the request of NREF OP I, NREF OP II, or NREF OP IV (as applicable), each contributor agrees to provide NREF OP I, NREF OP II, or NREF OP IV (as applicable) with information regarding such contributor’s adjusted tax basis in its membership interest in NREF OP I, NREF OP II, or NREF OP IV (as applicable), along with documentation substantiating such amount.

2. Delivery of Contribution. The closing of the transactions contemplated by this Agreement shall be deemed to occur as of the Effective Date (the “Contribution Date”).

3. Representations and Warranties of Each Party. Each party hereto represents and warrants: (i) that it is duly formed, validly existing and in good standing under the laws of its jurisdiction of formation; (ii) that it has all requisite power and authority to enter into and deliver this Agreement, to carry out the transactions contemplated hereby and to perform its obligations hereunder; (iii) that this Agreement has been duly and validly executed and delivered and, assuming due and valid authorization, execution and delivery hereof by the other parties, constitutes the valid and legally binding obligation of such party and is enforceable against such party in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights in general and subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law); and (iv) that neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby by such party will violate its organizational documents or conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel, or require any notice or consent under, any contract, or any franchise or permit to which such party is a party or by which such party is bound, other than those that have been previously obtained.

 

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4. Representations and Warranties of the Contributors.

The Contributors (as defined below) hereby represent and warrant that the following statements, as applicable to each Contributor, are true and correct as of the date hereof:

a. Organization; Authority. Other than pursuant to loan, repurchase or similar agreements:

(i) NexPoint WLIF, Series I is the owner of the NexPoint WLIF I Borrower Interest, and owns such interests free and clear of all liens, encumbrances, subscriptions, options, warrants, calls, proxies, rights, commitments or other restrictions of any kind.

(ii) NRESF is the owner of the NRESF KF60 and the NRESF Preferred Stock, and owns such interests free and clear of all liens, encumbrances, subscriptions, options, warrants, calls, proxies, rights, commitments or other restrictions of any kind.

(iii) Highland Global is the owner of the Highland Global KF60 Interest, and owns such interest free and clear of all liens, encumbrances, subscriptions, options, warrants, calls, proxies, rights, commitments or other restrictions of any kind.

(iv) NHF is the owner of the NHF KF72-A, NHF KF72-B, and NHF Preferred Stock, and owns such interest free and clear of all liens, encumbrances, subscriptions, options, warrants, calls, proxies, rights, commitments or other restrictions of any kind.

(v) NexPoint WLIF, Series II is the owner of the NexPoint WLIF II Borrower Interest, and owns such interests free and clear of all liens, encumbrances, subscriptions, options, warrants, calls, proxies, rights, commitments or other restrictions of any kind.

(vi) HIF is the owner of the HIF KF60-A, HIF KF60-B and the HIF Preferred Stock, and owns such interests free and clear of all liens, encumbrances, subscriptions, options, warrants, calls, proxies, rights, commitments or other restrictions of any kind.

(vii) NREC TRS is the owner of Marbella, and owns such interest free and clear of all liens, encumbrances, subscriptions, options, warrants, calls, proxies, rights, commitments or other restrictions of any kind.

(viii) NREC is the owner of Whisperwood and Ashley Village, and owns such interests free and clear of all liens, encumbrances, subscriptions, options, warrants, calls, proxies, rights, commitments or other restrictions of any kind.

(ix) NREC, NRESF Sub and NexPoint Capital REIT are the owners of Crossings at Ridgewood, and each own their respective interest free and clear of all liens, encumbrances, subscriptions, options, warrants, calls, proxies, rights, commitments or other restrictions of any kind.

 

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(x) NexPoint Capital is the owner of the NexPoint Capital KF60, and owns such interest free and clear of all liens, encumbrances, subscriptions, options, warrants, calls, proxies, rights, commitments or other restrictions of any kind.

b. Consents and Approvals. Other than those that have been previously obtained, no consent, waiver, approval, authorization, notice, order, license, permit or registration of, qualification, designation, declaration, or filing with, any person or any government or agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign (“Governmental Authority”) or under any applicable laws, statutes, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and policies of any Governmental Authority, including, without limitation, zoning, land use or other similar rules or ordinances (“Laws”) is required to be obtained by the Contributors in connection with the execution, delivery and performance of this Agreement and the transactions contemplated hereby.

c. Capitalization. All of the issued and outstanding equity interests of each of the Contributors and their subsidiaries are duly authorized, validly issued and fully paid and are not subject to preemptive rights or appraisal, dissenters’ or other similar rights under the articles of incorporation, bylaws, limited liability company agreement or operating agreement of each contributor or other similar documents (the “Organizational Documents”) or any contract to which the Contributors are a party or otherwise bound. There are no outstanding rights to purchase, subscriptions, warrants, options or any other security convertible into or exchangeable for equity interests in any of the Contributors.

d. No Violation. The execution, delivery or performance by each of the Contributors of this Agreement, any agreement contemplated hereby between the parties to this Agreement and the transactions contemplated hereby between the parties to this Agreement does not or will not, with or without the giving of notice, lapse of time, or both, violate, conflict with, result in a breach of, or constitute a default under or give to others any right of termination, acceleration, cancellation or other right under any term or provision of any judgment, order, writ, injunction, or decree binding on each of the Contributors or any of their subsidiaries or any of their respective assets or properties.

e. Licenses and Permits. All notices, licenses, permits, certificates and authorizations, required for the continued management and operation of the business of each of the Contributors, as applicable, have been obtained or can be obtained without material cost, are in full force and effect, are in good standing and are assignable, except in each case for items that, if not so obtained, obtainable and/or transferred, would not, individually or in the aggregate, reasonably be expected to have any material adverse change in any of the assets, business, condition (financial or otherwise), results of operation or prospects of the Contributors, taken as a whole (a “Material Adverse Effect”). There are no licenses, permits, certificates and authorizations held by the Contributors other than those copies of which have been made available to NREF. No third party has taken any action that (or failed to take any action the omission of which)

 

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would result in the revocation of any such notice, license, permit, certificate or authorization where such revocation or revocations would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, nor has any of them received any written notice of violation from any Governmental Authority or written notice of the intention of any entity to revoke any of such notice, license, permit, certificate or authorization, that in each case has not been cured or otherwise resolved to the satisfaction of such Governmental Authority except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

f. Litigation.

(i) To the knowledge of the undersigned (the “Contributors’ Knowledge”), there is no action, suit or proceeding pending or threatened against any of the Contributors affecting all or any portion of the Contributors’ ability to consummate the transactions contemplated hereby which, if adversely determined, would adversely affect the Contributors’ ability to so consummate the transactions contemplated hereby. To the Contributors’ Knowledge, there is no outstanding order, writ, injunction or decree of any Governmental Authority against or affecting the Contributors, which in any such case would impair the Contributors’ ability to enter into and perform all of their obligations under this Agreement.

(ii) There is no action, suit or proceeding pending (for which the Contributors have been properly served or otherwise have knowledge) or, to the Contributors’ Knowledge, threatened against the Contributors or any officer, director, principal or managing member of any of the foregoing or any of its assets which, if adversely determined, would have a Material Adverse Effect. There is no material judgment, decree, injunction, or order of a Governmental Authority outstanding against the Contributors or any officer, director, principal or managing member of any of the foregoing in their capacity as such which affects the ability of the Contributors to consummate the transactions contemplated hereby.

g. Compliance with Laws/Restrictions. Each of the Contributors have conducted their respective businesses in compliance with all applicable Laws, except for such failures that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. To the Contributors’ Knowledge, no third party has been informed in writing of any continuing violation of any such Laws or that any investigation has been commenced and is continuing or is contemplated respecting any such possible violation or violations of any of such covenants, conditions or other obligations, except in each case for violations that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

h. Taxes.

(i) The Contributors and each of their subsidiaries have timely and properly filed all Tax returns and reports required to be filed by it (after giving effect to any filing extension properly granted by a Governmental Authority having authority to do so), and all such returns and reports are accurate and complete in all material respects.

 

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Tax” means all federal, state, local and foreign income, gross receipts, license, property, withholding, sales, franchise, employment, payroll, goods and services, stamp, environmental, customs duties, capital stock, social security, transfer, alternative minimum, excise and other taxes, tariffs or governmental charges of any nature whatsoever, including estimated taxes, together with penalties, interest or additions to Tax with respect thereto, whether or not disputed.

(ii) No deficiencies for any Taxes have been proposed, asserted or assessed against the Contributors or any of their subsidiaries, and no requests for waivers of the time to assess any such Taxes are pending.

(iii) There are no pending or, to the Contributors’ Knowledge, threatened audits, assessments or other actions for or relating to any liability in respect of income or material non-income Taxes of the Contributors or their subsidiaries, there are no matters under discussion with any Tax authority with respect to income or material non-income Taxes that are likely to result in a material additional liability for Taxes with respect to the Contributors nor any of their subsidiaries.

(iv) NREC, NexPoint Capital REIT, and NRESF Sub have each satisfied the requirements to be treated as a real estate investment trust (“REIT”) within the meaning of Section 856 of the Code and satisfied such requirements for their taxable years ending December 31, 2019.

i. Insolvency. No attachments, execution proceedings, assignments for the benefit of creditors, insolvency, bankruptcy, reorganization or other proceedings are pending or, to the Contributors’ Knowledge, threatened against the Contributors or any of the Contributed Assets (as defined below), nor are any such proceedings contemplated by the Contributors.

j. Investment. The Contributors acknowledge that the offering and issuance of the securities to be acquired by the Contributors pursuant to this Agreement are intended to be exempt from registration under the Securities Act and that the issuing entities’ reliance on such exemptions is predicated in part on the accuracy and completeness of the representations and warranties of the Contributors contained herein. In furtherance thereof, each of the Contributors represents and warrants to NREF as follows:

(i) Each of the Contributors is an “accredited investor” (as such term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act).

(ii) Each of the Contributors acknowledges that the securities have not been registered under the Securities Act and, therefore, unless registered under the Securities Act or an exemption from registration is available, must be held (and each of the Contributors must continue to bear the economic risk of the investment in the securities) indefinitely.

 

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k. Other Agreements. Except for matters that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, (i) to the Contributors’ Knowledge, no party to any material agreement affecting any of the assets being contributed in the Contributions (the “Contributed Assets”), is in breach of or default under any material agreement affecting any Contributed Assets, (ii) no event has occurred or, to the Contributors’ Knowledge, has been threatened in writing, which with or without the passage of time or the giving of notice, or both, would, individually or together with all such other events, constitute a default under any such agreement, or would, individually or together with all such other events, reasonably be expected to cause the acceleration of any material obligation of the Contributors or any their subsidiaries, and (iii) to the Contributors’ Knowledge, all agreements required for the ownership and continued management and servicing of such Contributed Assets are valid and binding and in full force and effect, subject to applicable bankruptcy, insolvency, moratorium or other similar Laws relating to creditors’ rights and general principles of equity.

l. No Other Representations or Warranties. Other than the representations and warranties expressly set forth in this Section 4, the Contributors shall not be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby.

m. Survival of Representations and Warranties. All representations and warranties of the Contributors contained in this Agreement shall survive until the first anniversary of the Effective Date (the “Expiration Date”).    If written notice of a claim in accordance with indemnification has been given prior to the Expiration Date, then the relevant representation or warranty shall survive, but only with respect to such specific claim, until such claim has been finally resolved. Any claim for indemnification not so asserted in writing by the Expiration Date may not thereafter be asserted and shall forever be waived.

5. Indemnification:

a. Indemnification of NREF Entities. The NREF Entities and each of their respective directors, officers, employees, agents and representatives (each of which is an “Indemnified Party”), shall be indemnified and held harmless by the Contributors, under the terms and conditions of this Agreement, from and against any and all Losses arising out of or relating to, asserted against, imposed upon or incurred by the Indemnified Parties in connection with or as a result of any breach of a representation or warranty contained in Section 4 of this Agreement; provided, however, that the liability of each Contributor hereunder shall be limited to an amount equal to the OP Unit Amount (as defined in the subsidiary partnership limited partnership agreements) multiplied by the initial public offering price of the shares of common stock of NexPoint Real Estate Finance, Inc. assuming that such Contributor redeemed all of its partnership units it received as set forth in Section 1. No Indemnified Party may make a claim hereunder without the prior written consent of NREF.

 

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b. Claims.

(i) At the time when any Indemnified Party learns of any potential claim under this Agreement (a “Claim”) against an indemnifying party, it will promptly give written notice (a “Claim Notice”) to the indemnifying party; provided that the failure to so notify the indemnifying party shall not prevent recovery under this Agreement, except to the extent that the indemnifying party shall have been materially prejudiced by such failure. Each Claim Notice shall describe in reasonable detail the facts known to the Indemnified Party giving rise to such Claim and the amount or good faith estimate of the amount of Losses arising therefrom. The Indemnified Party shall deliver to the indemnifying party, promptly after the Indemnified Party’s receipt thereof, copies of all notices and documents (including court papers) received by such Indemnified Party relating to a Third-Party Claim (as defined below); provided that failure to do so shall not prevent recovery under this Agreement, except to the extent that the indemnifying party shall have been materially prejudiced by such failure. Any Indemnified Party may at its option demand indemnity under this Agreement as soon as a Claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as the Indemnified Party shall in good faith determine that such claim is not frivolous and that the Indemnified Party may be liable for, or otherwise incur, a Loss as a result thereof.

(ii) The indemnifying party shall be entitled, at its own expense, to elect, to assume and control the defense of any Claim based on claims asserted by third parties (“Third-Party Claims”), through counsel chosen by the indemnifying party and reasonably acceptable to the Indemnified Party, if it gives written notice of its intention to do so to the Indemnified Party within thirty (30) days of the receipt of the applicable Claim Notice; provided, however, that the Indemnified Parties may at all times participate in such defense at their own expense. Without limiting the foregoing, in the event that the indemnifying party exercises the right to undertake any such defense against a Third-Party Claim, the Indemnified Party shall cooperate with the indemnifying party in such defense and make available to the indemnifying party, at the indemnifying party’s expense, all witnesses, pertinent records, materials and information in the Indemnified Party’s possession or under such Indemnified Party’s control relating thereto as is reasonably required by the indemnifying party. No compromise or settlement of such Third-Party Claim may be effected by either the Indemnified Party, on the one hand, or the indemnifying party, on the other hand, without the other party’s consent (which shall not be unreasonably withheld or delayed) unless (i) there is no finding or admission of any violation of Law and no effect on any other claims that may be made against such other party, (ii) each Indemnified Party that is party to such claim is released from all liability with respect to such claim, and (iii) there is no equitable order, judgment or term that in any manner affects, restrains or interferes with the business of the Indemnified Party that is party to such claim or any of its Affiliates. Notwithstanding the foregoing, if the compromise or settlement of such Third-Party Claim could reasonably be expected to adversely affect the status of NREF as a real estate investment trust within the meaning of Section 856 of the Code, then NREF shall make such decision to compromise or settle the Third-Party Claim without the need to obtain the Contributors’ consent.

 

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c. Authorization. For purposes of this Section 5:

(i) a decision, act, consent, election or instruction of any of the Contributors shall be deemed to be authorized if approved in writing by the applicable Contributor and the NREF Entities may rely upon such decision, act, consent, election or instruction as provided in this Section 5(d)(i) as being the decision, act, consent, election or instruction of the applicable Contributor. The NREF Entities, including their directors, officers, employees, agents and representatives, are hereby relieved from any liability to any Person for any acts done by them in accordance with such decision, act, consent, election or instruction. The Contributors may from time to time by written notice to the NREF Entities appoint a representative or representatives to exercise such powers with respect to one or more claims as may be delegated by the Contributors.

(ii) a decision, act, consent, election or instruction of the NREF Entities shall be deemed to be authorized if approved in writing by NREF and the Contributors may rely upon such decision, act, consent, election or instruction as provided in this Section 5(d)(ii) as being the decision, act, consent, election or instruction of the NREF Entities. The Contributors, including their respective directors, officers, employees, agents and representatives, are hereby relieved from any liability to any Person for any acts done by them in accordance with such decision, act, consent, election or instruction. The NREF Entities may from time to time by written notice to the Contributors appoint a representative or representatives to exercise such powers with respect to one or more claims as may be delegated by the NREF Entities.

d. REIT Savings Provision. Notwithstanding the foregoing, in the event that counsel or independent accountants for NREF determine that there exists a material risk that any amounts due to an NREF Indemnified Party under Section 5(a) of this Agreement would be treated as an amount that is treated as gross income for purposes of Section 856 of the Code and which is not Qualifying Income (“Nonqualifying Income”) of NREF upon the payment of such amounts to the NREF Indemnified Party, the amount paid to such NREF Indemnified Party pursuant to Section 5(a) of this Agreement in any tax year shall not exceed the maximum amount that can be paid to the NREF Indemnified Party in such year without causing NREF or NREF OP IV REIT Sub to fail to meet the requirements imposed on REITs pursuant to Sections 856 through and including 860 of the Code (the “REIT Requirements”) for such year, determined as if the payment of such amount were Nonqualifying Income as determined by such counsel or independent accountants to NREF. If the amount payable for any tax year under the preceding sentence which the Contributors would otherwise be obligated to pay to an NREF Indemnified Party pursuant to Section 5(a) of this Agreement exceeds the maximum amount described in the preceding sentence (the excess being referred to as “Excess Indemnification Amount”), then at NREF’s sole cost and expense, including attorneys’ fees incurred by the Contributions in complying

 

13


with this Section 5(e): the Contributors shall place the Excess Indemnification Amount into an escrow account (the “Escrow Account”) using an escrow agent and agreement acceptable to the NREF Indemnified Party and shall not release any portion thereof to the NREF Indemnified Party, and the NREF Indemnified Party shall not be entitled to any such amount, unless and until NREF delivers to the Contributors, at the sole option of NREF, (i) an opinion (an “Excess Indemnification Amount Tax Opinion”) of NREF’s tax counsel to the effect that such amount, if and to the extent paid, would not constitute Nonqualifying Income of NREF or NREF OP IV REIT Sub, (ii) a letter (an “Excess Indemnification Amount Accountant’s Letter”) from NREF’s independent accountants indicating the maximum amount that can be paid at that time to the NREF Indemnified Party without causing NREF or NREF OP IV REIT Sub to fail to meet the REIT Requirements for any relevant taxable year, or (iii) a private letter ruling issued by the IRS to NREF indicating that the receipt of any Excess Indemnification Amount hereunder will not cause NREF or NREF OP IV REIT Sub to fail to satisfy the REIT Requirements (a “REIT Qualification Ruling” and, collectively with an Excess Indemnification Amount Tax Opinion and an Excess Indemnification Amount Accountant’s Letter, a “Release Document”).

6. For Sections 4 and 5 of this Agreement, the terms below have the following meanings:

Contributors” means NexPoint WLIF, Series I, NRESF, Highland Global, NHF, NexPoint WLIF, Series II, HIF, NREC TRS, NREC, NRESF Sub, NexPoint Capital REIT and NexPoint Capital.

NREF Entities” means NREF OP I, NREF OP I Holdco, NREF OP I SubHoldco, NREF OP II, NREF OP II Holdco, NREF OP II SubHoldco, NREF OP IV, NREF OP IV REIT Sub and NREF OP IV REIT Sub TRS.

7. Governing Law. This Agreement shall be governed by, and shall be construed in accordance with the domestic laws of the State of Delaware, without giving effect to any choice of law or conflict of law provision (whether of the State of Delaware or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the laws of the State of Delaware.

8. Binding Effect. This Agreement shall inure to the benefit of, and shall be binding upon, the parties hereto and their respective successors and permitted assigns.

9. Severability. If any provision of this Agreement or the application of any such provision to any person or circumstance shall be held invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement.

10. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall be deemed to be one and the same agreement. A signed copy of this Agreement delivered by facsimile, email or other means of electronic transmission shall be deemed to have the same legal effect as delivery of an original signed copy of this Agreement.

 

14


11. Further Assurances. At any time or from time to time after the date hereof, at the request of a party hereto and without further consideration, the other parties hereto and its successors or assigns, shall execute and deliver, or shall cause to be executed and delivered, such other instruments or documents and take such other actions as such party may reasonably request to further the purposes of this Agreement and the transactions contemplated by this Agreement. The parties hereto further agree that in all instances they will take all actions, and to do, or cause to be done, all things necessary to give effect to the transactions contemplated hereby in all manners including, without limitation, economically as of the Effective Date.

12. Entire Agreement. This Agreement delivered in connection herewith constitutes the sole and entire agreement of the parties to this Agreement with respect to the subject matter contained herein, and supersedes all prior and contemporaneous understandings, representations and warranties and agreements, both written and oral, with respect to such subject matter.

13. Successors and Assigns; No Third-Party Beneficiaries. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Agreement is for the sole benefit of the parties hereto and their respective successors and permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other person any legal or equitable right, benefit or remedy of any nature whatsoever, under or by reason of this Agreement.

14. Headings. The headings in this Agreement are for reference only and shall not affect the interpretations of this Agreement.

 

15


IN WITNESS WHEREOF, this Agreement has been duly executed by each of the parties hereto as of the date and year first above written.

 

NexPoint WLIF, Series I:
NexPoint WLIF, LLC, Series I
By:  

 

Name:  
Title:  
NRESF:
NexPoint Real Estate Strategies Fund
By:  

 

Name:  
Title:  
Highland Global:
Highland Global Allocation Fund
By:  

 

Name:  
Title:  
NHF:
NexPoint Strategic Opportunities Fund
By:  

 

Name:  
Title:  

 

[Signature Page to Contribution

and Assignment of Interests Agreement]


NREF OP I:
NREF OP I, L.P.
By:  

 

Name:  
Title:  
NREF OP I Holdco:
NREF OP I Holdco, LLC
By:  

 

Name:  
Title:  
NREF OP I SubHoldco:
NREF OP I SubHoldco, LLC
By:  

 

Name:  
Title:  
NexPoint WLIF, Series II:
NexPoint WLIF, LLC, Series II
By:  

 

Name:  
Title:  
HIF:  
Highland Income Fund
By:  

 

Name:  
Title:  

 

[Signature Page to Contribution

and Assignment of Interests Agreement]


NREF OP II:
NREF OP II, L.P.
By:  

 

Name:  
Title:  
NREF OP II Holdco:
NREF OP II Holdco, LLC
By:  

 

Name:  
Title:  
NREF OP II SubHoldco:
NREF OP II SubHoldco, LLC
By:  

 

Name:  
Title:  
NREC TRS:
NREC TRS, Inc.
By:  

 

Name:  
Title:  
NREC:
NexPoint Real Estate Capital, LLC
By:  

 

Name:  
Title:  

 

[Signature Page to Contribution

and Assignment of Interests Agreement]


NRESF Sub:
NRESF REIT Sub, LLC
By:  

 

Name:  
Title:  
NexPoint Capital REIT:
NexPoint Capital REIT, LLC
By:  

 

Name:  
Title:  
NexPoint Capital:
NexPoint Capital, Inc.
By:  

 

Name:  
Title:  
NREF OP IV:
NREF OP IV, L.P.
By:  

 

Name:  
Title:  
NREF OP IV REIT Sub:
NREF OP IV REIT Sub, LLC
By:  

 

Name:  
Title:  

 

[Signature Page to Contribution

and Assignment of Interests Agreement]


NREF OP IV REIT Sub TRS:
NREF OP IV REIT Sub TRS, LLC
By:  

 

Name:
Title:

 

[Signature Page to Contribution

and Assignment of Interests Agreement]

EX-3.1 3 d759970dex31.htm EX-3.1 EX-3.1

Exhibit 3.1

FORM OF

NEXPOINT REAL ESTATE FINANCE, INC.

ARTICLES OF AMENDMENT AND RESTATEMENT

FIRST: NexPoint Real Estate Finance, Inc., a Maryland corporation (the “Corporation”), desires to amend and restate its charter as currently in effect and as hereinafter amended.

SECOND: The following provisions are all the provisions of the charter currently in effect and as hereinafter amended:

ARTICLE I

INCORPORATOR

Brian Mitts, whose address is 300 Crescent Court, Suite 700, Dallas, Texas 75201, being at least 18 years of age, formed a corporation under the general laws of the State of Maryland on June 7, 2019.

ARTICLE II

NAME

The name of the corporation (the “Corporation”) is:

NexPoint Real Estate Finance, Inc.

ARTICLE III

PURPOSE

The purposes for which the Corporation is formed are to engage in any lawful act or activity (including, without limitation or obligation, engaging in business as a real estate investment trust under the Internal Revenue Code of 1986, as amended, or any successor statute (the “Code”)) for which corporations may be organized under the general laws of the State of Maryland as now or hereafter in force. For purposes of the charter of the Corporation (as the term charter is defined in the Maryland General Corporation Law, as amended from time to time (the “MGCL”), the “Charter”), the term “REIT” means a real estate investment trust under Sections 856 through 860 of the Code or any successor provisions.


ARTICLE IV

PRINCIPAL OFFICE IN STATE AND RESIDENT AGENT

The address of the principal office of the Corporation in the State of Maryland is c/o CSC-Lawyers Incorporating Service Company, 7 St. Paul Street, Suite 820, Baltimore, Maryland 21202. The name and address of the resident agent of the Corporation in the State of Maryland are CSC-Lawyers Incorporating Service Company, 7 St. Paul Street, Suite 820, Baltimore, Maryland 21202. The resident agent is a Maryland corporation.

ARTICLE V

PROVISIONS FOR DEFINING, LIMITING

AND REGULATING CERTAIN POWERS OF THE

CORPORATION AND OF THE STOCKHOLDERS AND DIRECTORS

Section 5.1 Number of Directors. The business and affairs of the Corporation shall be managed under the direction of the Board of Directors. The number of directors of the Corporation initially shall be one, which number may be increased or decreased only by the Board of Directors pursuant to the Bylaws of the Corporation (the “Bylaws”), but shall never be less than the minimum number required by the MGCL. The name of the director who shall serve until the annual meeting of stockholders and until his successor is duly elected and qualifies is:

Brian Mitts.

 

2


The Corporation elects, effective at such time as it becomes eligible under Section 3-802 of the MGCL to make the election provided for under Section 3-804(c) of the MGCL, that, except as may be provided by the Board of Directors in setting the terms of any class or series of stock, any and all vacancies on the Board of Directors may be filled only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy shall serve for the remainder of the full term of the directorship in which such vacancy occurred and until a successor is elected and qualified.

Section 5.2 Extraordinary Actions. Except as provided in Article VIII, notwithstanding any provision of law permitting or requiring any action to be taken or approved by the affirmative vote of stockholders entitled to cast a greater number of votes, any such action shall be effective and valid if declared advisable by the Board of Directors and taken or approved by the affirmative vote of stockholders entitled to cast a majority of all the votes entitled to be cast on the matter.

Section 5.3 Authorization by Board of Stock Issuance. The Board of Directors may authorize the issuance from time to time of shares of stock of the Corporation of any class or series, whether now or hereafter authorized, or securities or rights convertible into shares of its stock of any class or series, whether now or hereafter authorized, for such consideration as the Board of Directors may deem advisable (or without consideration in the case of a stock split or stock dividend), subject to such restrictions or limitations, if any, as may be set forth in the Charter or the Bylaws.

Section 5.4 Preemptive and Appraisal Rights. Except as may be provided by the Board of Directors in setting the terms of classified or reclassified shares of stock pursuant to Section 6.4 or as may otherwise be provided by a contract approved by the Board of Directors, no holder of shares of stock of the Corporation shall, as such holder, have any preemptive right to purchase or subscribe for any additional shares of stock of the Corporation or any other security of the Corporation which it may issue or sell. Holders of shares of stock shall not be entitled to exercise any rights of an objecting stockholder provided for under Title 3,

 

3


Subtitle 2 of the MGCL or any successor statute unless the Board of Directors, upon such terms and conditions as specified by the Board of Directors, shall determine that such rights apply, with respect to all or any shares of all or any classes or series of stock, to one or more transactions occurring after the date of such determination in connection with which holders of such shares would otherwise be entitled to exercise such rights. Notwithstanding the foregoing, in the event the Corporation is subject to the Maryland Control Share Acquisition Act, holders of shares of stock shall be entitled to exercise rights of an objecting stockholder under Section 3-708(a) of the MGCL, unless otherwise provided in the Bylaws.

Section 5.5 Indemnification. To the maximum extent permitted by Maryland law in effect from time to time, the Corporation shall indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, shall pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any individual who is a present or former director or officer of the Corporation and who is made or threatened to be made a party to, or witness in, the proceeding by reason of his or her service in that capacity or (b) any individual who, while a director or officer of the Corporation and at the request of the Corporation, serves or has served as a director, officer, trustee, member, manager or partner of another corporation, real estate investment trust, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made or threatened to be made a party to, or witness in, the proceeding by reason of his or her service in that capacity. The rights to indemnification and advancement of expenses provided by the Charter shall vest immediately upon election of a director or officer. The Corporation may, with the approval of the Board of Directors, provide such indemnification and advancement for expenses to an individual who served a predecessor of the Corporation in any of the capacities described in (a) or (b) above and to any employee or agent of the Corporation or a predecessor of the Corporation. The indemnification and payment or reimbursement of expenses provided in the Charter shall not be deemed exclusive of or limit in any way other rights to which any person seeking indemnification or payment or reimbursement of expenses may be or may become entitled under any bylaw, resolution, insurance, agreement or otherwise.

 

4


Neither the amendment nor repeal of this Section 5.5, nor the adoption or amendment of any other provision of the Charter inconsistent with this Section 5.5, shall apply to or affect in any respect the applicability of the preceding paragraph with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption.

Section 5.6 Determinations by the Board. The determination as to any of the following matters, made by or pursuant to the direction of the Board of Directors, shall be final and conclusive and shall be binding upon the Corporation and every holder of shares of its stock: the amount of the net income of the Corporation for any period and the amount of assets at any time legally available for the payment of dividends, acquisition of its stock or the payment of other distributions on its stock; the amount of paid-in surplus, net assets, other surplus, cash flow, funds from operations, core earnings, cash available for distributions, adjusted cash available for distributions, net operating income, net profit, net assets in excess of capital, undivided profits, excess of profits over losses on sales of assets or adjusted book value per share; the amount, purpose, time of creation, increase or decrease, alteration or cancellation of any reserves or charges and the propriety thereof (whether or not any obligation or liability for which such reserves or charges shall have been created shall have been paid or discharged); any interpretation or resolution of any ambiguity with respect to any provision of the Charter (including any of the terms, preferences, conversion or other rights, voting powers or rights, restrictions, limitations as to dividends or distributions, qualifications or terms or conditions of redemption of any shares of any class or series of stock of the Corporation) or of the Bylaws; the number of shares of stock of any class or series of the Corporation; the fair value, or any sale, bid or asked price to be applied in determining the fair value, of any asset owned or held by the Corporation or of any shares of stock of the Corporation; any matter relating to the acquisition, holding and disposition of any assets by the Corporation; any interpretation of the

 

5


terms and conditions of one or more agreements with any person, corporation, association, company, trust, partnership (limited or general) or other organization; the compensation of directors, officers, employees or agents of the Corporation; or any other matter relating to the business and affairs of the Corporation or required or permitted by applicable law, the Charter or Bylaws or otherwise to be determined by the Board of Directors.

Section 5.7 REIT Qualification. If the Corporation elects to qualify for federal income tax treatment as a REIT, the Board of Directors shall use its reasonable best efforts to take such actions as are necessary or appropriate to preserve the status of the Corporation as a REIT; however, if the Board of Directors determines that it is no longer in the best interest of the Corporation to attempt to, or continue to, qualify as a REIT, the Board of Directors may revoke or otherwise terminate the Corporation’s REIT election pursuant to Section 856(g) of the Code. The Board of Directors, in its sole and absolute discretion, also may (a) determine that compliance with any restriction or limitation on stock ownership and transfers set forth in Article VII is no longer required for REIT qualification and (b) make any other determination or take any other action pursuant to Article VII.

Section 5.8 Removal of Directors. Subject to the rights of holders of shares of one or more classes or series of stock to elect or remove one or more directors, any director, or the entire Board of Directors, may be removed from office at any time, but only for cause and only by the affirmative vote of holders of shares entitled to cast at least a majority of all the votes entitled to be cast generally in the election of directors. For the purpose of this paragraph, “cause” shall mean, with respect to any particular director, conviction of a felony or a final judgment of a court of competent jurisdiction holding that such director caused demonstrable, material harm to the Corporation through bad faith or active and deliberate dishonesty.

 

6


Section 5.9 Management Agreements. The Board of Directors may authorize the execution and performance by the Corporation of one or more agreements with any person, corporation, association, company, trust, partnership (limited or general) or other organization whereby, subject to the supervision and control of the Board of Directors, any such other person, corporation, association, company, trust, partnership (limited or general) or other organization shall render or make available to the Corporation managerial, investment, advisory and/or related services, office space and other services and facilities (including, if deemed advisable by the Board of Directors, the management or supervision of the investments of the Corporation) upon such terms and conditions as may be provided in such agreement or agreements (including, if deemed fair and equitable by the Board of Directors, the compensation payable thereunder by the Corporation).

Section 5.10 Corporate Opportunities. The Corporation shall have the power, by resolution of the Board of Directors, to renounce any interest or expectancy of the Corporation in, or in being offered an opportunity to participate in, business opportunities or classes or categories of business opportunities that are presented to the Corporation or developed by or presented to one or more directors or officers of the Corporation.

ARTICLE VI

STOCK

Section 6.1 Authorized Shares. The Corporation has authority to issue 600,000,000 shares of stock, consisting of 500,000,000 shares of common stock, $0.01 par value per share (“Common Stock”), and 100,000,000 shares of preferred stock, $0.01 par value per share (“Preferred Stock”). The aggregate par value of all authorized shares of stock having par value is $6,000,000. If shares of one class of stock are classified or reclassified into shares of another class of stock in accordance with this Article VI, the number of authorized shares of the former class shall be automatically decreased and the number of shares of the latter class shall be automatically increased, in each case by the number of shares so classified or reclassified, so that the aggregate number of shares of stock of all classes that the Corporation has authority to issue shall not be more than the total number of shares of stock set forth in the

 

7


first sentence of this paragraph. The Board of Directors, with the approval of a majority of the entire Board and without any action by the stockholders of the Corporation, may amend the Charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that the Corporation has authority to issue.

Section 6.2 Common Stock. Subject to the provisions of Article VII and except as may otherwise be specified in the Charter, each share of Common Stock shall entitle the holder thereof to one vote. The Board of Directors may reclassify any unissued shares of Common Stock from time to time into one or more classes or series of stock.

Section 6.3 Preferred Stock. The Board of Directors may classify any unissued shares of Preferred Stock and reclassify any previously classified but unissued shares of Preferred Stock of any series from time to time into one or more classes or series of stock.

Section 6.4 Classified or Reclassified Shares. Prior to the issuance of classified or reclassified shares of any class or series of stock, the Board of Directors by resolution shall: (a) designate that class or series to distinguish it from all other classes and series of stock of the Corporation; (b) specify the number of shares to be included in the class or series; (c) set or change, subject to the provisions of Article VII and subject to the express terms of any class or series of stock of the Corporation outstanding at the time, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each class or series; and (d) cause the Corporation to file articles supplementary with the State Department of Assessments and Taxation of Maryland. Any of the terms of any class or series of stock set or changed pursuant to clause (c) of this Section 6.4 may be made dependent upon facts or events ascertainable outside the Charter (including determinations by the Board of Directors or other facts or events within the control of the Corporation) and may vary among holders thereof, provided that the manner in which such facts, events or variations shall operate upon the terms of such class or series of stock is clearly and expressly set forth in the articles supplementary or other Charter document.

 

8


Section 6.5 Stockholders’ Consent in Lieu of Meeting. Any action required or permitted to be taken at any meeting of the holders of Common Stock entitled to vote generally in the election of directors may be taken without a meeting by consent, in writing or by electronic transmission, in any manner and by any vote permitted by the MGCL and set forth in the Bylaws.

Section 6.6 Charter and Bylaws. The rights of all stockholders and the terms of all shares of stock of the Corporation are subject to the provisions of the Charter and the Bylaws.

Section 6.7 Distributions. The Board of Directors from time to time may authorize the Corporation to declare and pay to stockholders such dividends or other distributions in cash or other assets of the Corporation or in securities of the Corporation, including in shares of one class or series of the Corporation’s stock payable to holders of shares of another class or series of stock of the Corporation, or from any other source as the Board of Directors in its sole and absolute discretion shall determine. The exercise of the powers and rights of the Board of Directors pursuant to this Section 6.7 shall be subject to the provisions of any class or series of shares of the Corporation’s stock at the time outstanding.

Section 6.8 Tax on Disqualified Organizations. To the extent that the Corporation incurs any tax pursuant to Section 860E(e)(6) of the Code as the result of any “excess inclusion” income (within the meaning of Section 860E of the Code) of the Corporation being allocated to a “disqualified organization” (as defined in Section 860E(e)(5) of the Code) that holds Common Stock or Preferred Stock in record name, the Corporation shall reduce the distributions payable to any such “disqualified organization” whose ownership of Common Stock or Preferred Stock caused such tax to be incurred by an amount equal to such tax, in the manner described in Treasury Regulations Section 1.860E-2(b)(4).

 

9


ARTICLE VII

RESTRICTIONS ON TRANSFER AND OWNERSHIP OF SHARES OF STOCK

Section 7.1 Definitions. For the purpose of this Article VII, the following terms shall have the following meanings:

Aggregate Stock Ownership Limit. The term “Aggregate Stock Ownership Limit” shall mean 6.2 percent in value of the aggregate of the outstanding shares of Capital Stock, or such other percentage determined by the Board of Directors in accordance with Section 7.2.8 of the Charter. For the purposes of determining the percentage ownership of Capital Stock by any Person, shares of Capital Stock that may be acquired upon conversion, exchange or exercise of any securities of the Corporation directly or constructively held by such Person, but not shares of Capital Stock issuable with respect to the conversion, exchange or exercise of securities for the Corporation held by other Persons, shall be deemed to be outstanding prior to conversion, exchange or exercise.

Beneficial Ownership. The term “Beneficial Ownership” shall mean ownership of Capital Stock by a Person, whether the interest in the shares of Capital Stock is held directly or indirectly (including by a nominee), and shall include interests that would be treated as owned through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms “Beneficial Owner,” “Beneficially Owns” and “Beneficially Owned” shall have the correlative meanings.

Business Day. The term “Business Day” shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in Texas or New York are authorized or required by law, regulation or executive order to close.

Capital Stock. The term “Capital Stock” shall mean all classes or series of stock of the Corporation, including, without limitation, Common Stock and Preferred Stock.

Charitable Beneficiary. The term “Charitable Beneficiary” shall mean one or more beneficiaries of the Trust as determined pursuant to Section 7.3.6, provided that each such organization must be described in Section 501(c)(3) of the Code and contributions to each such organization must be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code.

 

10


Common Stock Ownership Limit. The term “Common Stock Ownership Limit” shall mean 6.2 percent (in value or in number of shares, whichever is more restrictive) of the aggregate of the outstanding shares of Common Stock, or such other percentage determined by the Board of Directors in accordance with Section 7.2.8 of the Charter. For purposes of determining the percentage ownership of Common Stock by any Person, shares of Common Stock that may be acquired upon conversion, exchange or exercise of any securities of the Corporation directly or constructively held by such Person, but not shares of Common Stock issuable with respect to the conversion, exchange or exercise of securities for the Corporation held by other Persons, shall be deemed to be outstanding prior to conversion, exchange or exercise.

Constructive Ownership. The term “Constructive Ownership” shall mean ownership of Capital Stock by a Person, whether the interest in the shares of Capital Stock is held directly or indirectly (including by a nominee), and shall include interests that would be treated as owned through the application of Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code. The terms “Constructive Owner,” “Constructively Owns” and “Constructively Owned” shall have the correlative meanings.

Excepted Holder. The term “Excepted Holder” shall mean a stockholder of the Corporation for whom an Excepted Holder Limit is created by this Article VII or by the Board of Directors pursuant to Section 7.2.7.

Excepted Holder Limit. The term “Excepted Holder Limit” shall mean, provided that the affected Excepted Holder agrees to comply with the requirements established by the Board of Directors pursuant to Section 7.2.7 and subject to adjustment pursuant to Section 7.2.8, the percentage limit established by the Board of Directors pursuant to Section 7.2.7.

 

11


Initial Date. The term “Initial Date” shall mean the date of the closing of the issuance of shares of Common Stock in the Corporation’s first underwritten public offering.

Market Price. The term “Market Price” on any date shall mean, with respect to any class or series of outstanding shares of Capital Stock, the Closing Price for such Capital Stock on such date. The “Closing Price” on any date shall mean the last sale price for such Capital Stock, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, for such Capital Stock, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the NYSE or, if such Capital Stock is not listed or admitted to trading on the NYSE, as reported on the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which such Capital Stock is listed or admitted to trading or, if such Capital Stock is not listed or admitted to trading on any national securities exchange, the last quoted price, or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the principal automated quotation system that may then be in use or, if such Capital Stock is not quoted by any such system, the average of the closing bid and asked prices as furnished by a professional market maker making a market in such Capital Stock selected by the Board of Directors or, in the event that no trading price is available for such Capital Stock, the fair market value of the Capital Stock, as determined by the Board of Directors.

NYSE. The term “NYSE” shall mean The New York Stock Exchange.

Person. The term “Person” shall mean an individual, corporation, partnership, limited liability company, estate, trust (including a trust qualified under Sections 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, and a group to which an Excepted Holder Limit applies.

 

12


Prohibited Owner. The term “Prohibited Owner” shall mean, with respect to any purported Transfer, any Person who, but for the provisions of this Article VII, would Beneficially Own or Constructively Own shares of Capital Stock in violation of Section 7.2.1, and if appropriate in the context, shall also mean any Person who would have been the record owner of the shares that the Prohibited Owner would have so owned.

Restriction Termination Date. The term “Restriction Termination Date” shall mean the first day after the Initial Date on which the Board of Directors determines pursuant to Section 5.7 of the Charter that it is no longer in the best interest of the Corporation to attempt to, or continue to, qualify as a REIT or that compliance with the restrictions and limitations on Beneficial Ownership, Constructive Ownership and Transfers of shares of Capital Stock set forth herein is no longer required.

Transfer. The term “Transfer” shall mean any issuance, sale, transfer, gift, assignment, devise or other disposition, as well as any other event that causes any Person to acquire Beneficial Ownership or Constructive Ownership of Capital Stock or the right to vote or receive dividends on Capital Stock, or any agreement to take any such actions or cause any such events, including (a) the granting or exercise of any option (or any disposition of any option), (b) any disposition of any securities or rights convertible into or exchangeable for Capital Stock or any interest in Capital Stock or any exercise of any such conversion or exchange right and (c) transfers of interests in other entities that result in changes in Beneficial Ownership or Constructive Ownership of Capital Stock; in each case, whether voluntary or involuntary, whether owned of record, Constructively Owned or Beneficially Owned and whether by operation of law or otherwise. The terms “Transferring” and “Transferred” shall have the correlative meanings.

Trust. The term “Trust” shall mean any trust provided for in Section 7.3.1.

 

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Trustee. The term “Trustee” shall mean the Person unaffiliated with the Corporation and a Prohibited Owner that is appointed by the Corporation to serve as trustee of the Trust.

Section 7.2 Capital Stock.

Section 7.2.1 Ownership Limitations. During the period commencing on the Initial Date and prior to the Restriction Termination Date, but subject to Section 7.4:

(a) Basic Restrictions.

(i) (1) No Person, other than an Excepted Holder, shall Beneficially Own or Constructively Own shares of Capital Stock in excess of the Aggregate Stock Ownership Limit, (2) no Person, other than an Excepted Holder, shall Beneficially Own or Constructively Own shares of Common Stock in excess of the Common Stock Ownership Limit and (3) no Excepted Holder shall Beneficially Own or Constructively Own shares of Capital Stock in excess of the Excepted Holder Limit for such Excepted Holder.

(ii) No Person shall Beneficially Own or Constructively Own shares of Capital Stock to the extent that such Beneficial Ownership or Constructive Ownership of Capital Stock would result in the Corporation being “closely held” within the meaning of Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year), or otherwise failing to qualify as a REIT (including, but not limited to, Beneficial Ownership or Constructive Ownership that would result in the Corporation owning (actually or Constructively) an interest in a tenant that is described in Section 856(d)(2)(B) of the Code if the income derived by the Corporation from such tenant would cause the Corporation to fail to satisfy any of the gross income requirements of Section 856(c) of the Code).

(iii) Any Transfer of shares of Capital Stock that, if effective, would result in the Capital Stock being beneficially owned by less than 100 Persons (determined under the principles of Section 856(a)(5) of the Code) shall be void ab initio, and the intended transferee shall acquire no rights in such shares of Capital Stock.

 

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(iv) No Person shall Beneficially Own or Constructively Own shares of Capital Stock to the extent that such Beneficial Ownership or Constructive Ownership of Capital Stock could result in the Corporation failing to qualify as a “domestically controlled qualified investment entity” within the meaning of Section 897(h)(4)(B) of the Code.

(b) Transfer in Trust. If any Transfer of shares of Capital Stock occurs which, if effective, would result in any Person Beneficially Owning or Constructively Owning shares of Capital Stock in violation of Section 7.2.1(a)(i), (ii) or (iv),

(i) then that number of shares of the Capital Stock the Beneficial Ownership or Constructive Ownership of which otherwise would cause such Person to violate Section 7.2.1(a)(i), (ii) or (iv) (rounded up to the nearest whole share) shall be automatically transferred to a Trust for the benefit of a Charitable Beneficiary, as described in Section 7.3, effective as of the close of business on the Business Day prior to the date of such Transfer, and such Person shall acquire no rights in such shares; or

(ii) if the transfer to the Trust described in clause (i) of this sentence would not be effective for any reason to prevent the violation of Section 7.2.1(a)(i), (ii) or (iv), then the Transfer of that number of shares of Capital Stock that otherwise would cause any Person to violate Section 7.2.1(a)(i), (ii) or (iv) shall be void ab initio, and the intended transferee shall acquire no rights in such shares of Capital Stock.

(iii) To the extent that, upon a transfer of shares of Capital Stock pursuant to this Section 7.2.1(b), a violation of any provision of this Article VII would nonetheless be continuing (for example where the ownership of shares of Capital Stock by a single Trust would violate the 100 stockholder requirement applicable to REITs), then shares of Capital Stock shall be transferred to that number of Trusts, each having a distinct Trustee and a Charitable Beneficiary or Charitable Beneficiaries that are distinct from those of each other Trust, such that there is no violation of any provision of this Article VII.

 

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Section 7.2.2 Remedies for Breach. If the Board of Directors shall at any time determine in good faith that a Transfer or other event has taken place that results in a violation of Section 7.2.1 or that a Person intends to acquire or has attempted to acquire Beneficial Ownership or Constructive Ownership of any shares of Capital Stock in violation of Section 7.2.1 (whether or not such violation is intended), the Board of Directors shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer or other event, including, without limitation, causing the Corporation to redeem shares, refusing to give effect to such Transfer on the books of the Corporation or instituting proceedings to enjoin such Transfer or other event; provided, however, that any Transfer or attempted Transfer or other event in violation of Section 7.2.1 shall automatically result in the transfer to the Trust described above, and, where applicable, such Transfer (or other event) shall be void ab initio as provided above irrespective of any action (or non-action) by the Board of Directors.

Section 7.2.3 Notice of Restricted Transfer. Any Person who acquires or attempts or intends to acquire Beneficial Ownership or Constructive Ownership of shares of Capital Stock that will or may violate Section 7.2.1(a) or any Person who would have owned shares of Capital Stock that resulted in a transfer to the Trust pursuant to the provisions of Section 7.2.1(b) shall immediately give written notice to the Corporation of such event or, in the case of such a proposed or attempted transaction, give at least 15 days prior written notice, and shall provide to the Corporation such other information as the Corporation may request in order to determine the effect, if any, of such Transfer on the Corporation’s status as a REIT.

Section 7.2.4 Owners Required To Provide Information. From the Initial Date and prior to the Restriction Termination Date:

(a) every owner of five percent or more (or such lower percentage as required by the Code or the Treasury Regulations promulgated thereunder) of the outstanding shares of Capital Stock, within 30 days after the end of each taxable year, shall give written notice to the Corporation stating the name and address of such owner, the number of shares of Capital Stock Beneficially Owned and a description of the manner in which such shares are held. Each such owner shall provide to the Corporation such additional information as the Corporation may request in order to determine the effect, if any, of such Beneficial Ownership on the Corporation’s status as a REIT and to ensure compliance with the Aggregate Stock Ownership Limit and the Common Stock Ownership Limit; and

 

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(b) each Person who is a Beneficial Owner or Constructive Owner of Capital Stock and each Person (including the stockholder of record) who is holding Capital Stock for a Beneficial Owner or Constructive Owner shall provide to the Corporation such information as the Corporation may request in good faith in order to determine the Corporation’s status as a REIT and to comply with the requirements of any taxing authority or governmental authority or to determine such compliance and to ensure compliance with the Aggregate Stock Ownership Limit and the Common Stock Ownership Limit.

Section 7.2.5 Remedies Not Limited. Subject to Section 5.7 of the Charter, nothing contained in this Section 7.2 shall limit the authority of the Board of Directors to take such other action as it deems necessary or advisable to protect the Corporation in preserving the Corporation’s status as a REIT.

Section 7.2.6 Ambiguity. In the case of an ambiguity in the application of any of the provisions of this Section 7.2, Section 7.3 or any definition contained in Section 7.1, the Board of Directors may determine the application of the provisions of this Section 7.2 or Section 7.3 or any such definition with respect to any situation based on the facts known to it. In the event Section 7.2 or 7.3 requires an action by the Board of Directors and the Charter fails to provide specific guidance with respect to such action, the Board of Directors may determine the action to be taken so long as such action is not contrary to the provisions of Sections 7.1, 7.2 or 7.3. Absent a decision to the contrary by the Board of Directors, if a Person would have (but for the remedies set forth in Section 7.2.2) acquired Beneficial or Constructive Ownership of Capital Stock in violation of Section 7.2.1, such remedies (as applicable) shall apply first to the shares of Capital Stock which, but for such remedies, would have been Beneficially Owned or Constructively Owned (but not actually owned) by such Person, pro rata among the Persons who actually own such shares of Capital Stock based upon the relative number of the shares of Capital Stock held by each such Person.

 

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Section 7.2.7 Exceptions.

(a) Subject to Section 7.2.1(a)(ii) and (iv), the Board of Directors may exempt (prospectively or retroactively) a Person from the Aggregate Stock Ownership Limit and the Common Stock Ownership Limit, as the case may be, and may establish or increase an Excepted Holder Limit for such Person if the Corporation obtains such representations and undertakings from such Person as are reasonably necessary for the Board of Directors to determine that:

(i) no individual’s Beneficial or Constructive Ownership of such shares of Capital Stock will violate Section 7.2.1(a)(ii) or (iv); and

(ii) such Person does not and will not own, actually or Constructively, an interest in a tenant of the Corporation (or a tenant of any entity owned or controlled by the Corporation) that would cause the Corporation to own, actually or Constructively, more than a 9.9% interest (as set forth in Section 856(d)(2)(B) of the Code) in such tenant (for this purpose, a tenant shall not be treated as a tenant of the Corporation if the Corporation (or an entity owned or controlled by the Corporation) derives (and is expected to continue to derive) a sufficiently small amount of revenue from such tenant such that, in the judgment of the Board of Directors, rent from such tenant would not adversely affect the Corporation’s ability to qualify as a REIT).

Any violation or attempted violation of any such representations or undertakings (or other action which is contrary to the restrictions contained in Sections 7.2.1 through 7.2.6) will result in such shares of Capital Stock being automatically transferred to a Trust in accordance with Sections 7.2.1(b) and 7.3.

(b) Prior to granting any exception pursuant to Section 7.2.7(a), the Board of Directors may require a ruling from the Internal Revenue Service, or an opinion of counsel, in either case in form and substance satisfactory to the Board of Directors as it may deem necessary or advisable in order to determine or ensure the Corporation’s status as a REIT. Notwithstanding the receipt of any ruling or opinion, the Board of Directors may impose such conditions or restrictions as it deems appropriate in connection with granting such exception.

 

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(c) Subject to Section 7.2.1(a)(ii), an underwriter or placement agent that participates in a public offering or a private placement of Capital Stock (or securities convertible into or exchangeable for Capital Stock) may Beneficially Own or Constructively Own shares of Capital Stock (or securities convertible into or exchangeable for Capital Stock) in excess of the Aggregate Stock Ownership Limit, the Common Stock Ownership Limit, or both such limits, but only to the extent necessary to facilitate such public offering or private placement.

(d) The Board of Directors may only reduce the Excepted Holder Limit for an Excepted Holder: (1) with the written consent of such Excepted Holder at any time, or (2) pursuant to the terms and conditions of the agreements and undertakings entered into with such Excepted Holder in connection with the establishment of the Excepted Holder Limit for that Excepted Holder. No Excepted Holder Limit shall be reduced to a percentage that is less than the Aggregate Stock Ownership Limit or the Common Stock Ownership Limit, as the case may be.

Section 7.2.8 Increase or Decrease in Common Stock Ownership or Aggregate Stock Ownership Limits. Subject to Section 7.2.1(a)(ii) and this Section 7.2.8, the Board of Directors may from time to time increase or decrease the Common Stock Ownership Limit and the Aggregate Stock Ownership Limit for one or more Persons and increase or decrease the Common Stock Ownership Limit and the Aggregate Stock Ownership Limit for all other Persons. No decreased Common Stock Ownership Limit or Aggregate Stock Ownership Limit will be effective for any Person whose percentage of ownership of Capital Stock is in excess of such decreased Common Stock Ownership Limit or Aggregate Stock Ownership Limit, as applicable, until such time as such Person’s percentage of ownership of Capital Stock equals or falls below the decreased Common Stock Ownership Limit or Aggregate Stock Ownership Limit, as applicable; provided, however, any further acquisition of Capital Stock by

 

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any such Person (other than a Person for whom an exemption has been granted pursuant to Section 7.2.7(a) or an Excepted Holder) in excess of the Capital Stock owned by such person on the date the decreased Common Stock Ownership Limit or Aggregate Stock Ownership Limit, as applicable, became effective will be in violation of the Common Stock Ownership Limit or Aggregate Stock Ownership Limit. No increase to the Common Stock Ownership Limit or Aggregate Stock Ownership Limit may be approved if the new Common Stock Ownership Limit and/or Aggregate Stock Ownership Limit would allow five or fewer Persons to Beneficially Own, in the aggregate more than 49.9% in value of the outstanding Capital Stock.

Section 7.2.9 Legend. Each certificate for shares of Capital Stock, if certificated, or the notice in lieu of a certificate shall bear substantially the following legend:

The shares represented by this certificate are subject to restrictions on Beneficial Ownership and Constructive Ownership and Transfer for the purpose, among others, of the Corporation’s maintenance of its status as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the “Code”). Subject to certain further restrictions and except as expressly provided in the Corporation’s charter, (i) no Person may Beneficially Own or Constructively Own shares of Common Stock in excess of the Common Stock Ownership Limit, unless such Person is an Excepted Holder (in which case the Excepted Holder Limit shall be applicable); (ii) no Person may Beneficially Own or Constructively Own shares of Capital Stock in excess of the Aggregate Stock Ownership Limit, unless such Person is an Excepted Holder (in which case the Excepted Holder Limit shall be applicable); (iii) no Person may Beneficially Own or Constructively Own Capital Stock that would result in the Corporation being “closely held” under Section 856(h) of the Code or otherwise cause the Corporation to fail to qualify as a REIT; (iv) any Transfer of shares of Capital Stock that, if effective, would result in the Capital Stock being beneficially owned by fewer than 100 Persons (as determined under the principles of Section 856(a)(5) of the Code) shall be void ab initio, and the intended transferee shall acquire no rights in such shares of Capital Stock; and (v) no Person may Beneficially Own or Constructively Own shares of Capital Stock that could result in the Corporation failing to qualify as a “domestically controlled qualified investment entity”. Any Person who Beneficially Owns or Constructively Owns or attempts or intends to Beneficially Own or Constructively Own shares of Capital Stock which causes or will cause a Person to Beneficially Own or Constructively Own shares of Capital Stock in excess or in violation of the above limitations must immediately

 

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notify the Corporation in writing (or, in the case of any attempted transaction, give at least 15 days prior written notice). If any of the restrictions on transfer or ownership provided in (i), (ii), (iii), or (v) above are violated, the shares of Capital Stock in excess or in violation of the above limitations will be automatically transferred to a Trustee of a Trust for the benefit of one or more Charitable Beneficiaries. In addition, the Corporation may redeem shares upon the terms and conditions specified by the Board of Directors in its sole discretion if the Board of Directors determines that ownership or a Transfer or other event may violate the restrictions described above. Furthermore, if the ownership restriction provided in (iv) above would be violated, or upon the occurrence of certain events, attempted Transfers in violation of the restrictions described above may be void ab initio. All capitalized terms in this legend have the meanings given to them in the charter of the Corporation, as the same may be amended from time to time, a copy of which, including the restrictions on transfer and ownership, will be furnished to each holder of shares of Capital Stock on request and without charge. Requests for such a copy may be directed to the Secretary of the Corporation at its principal office.

Instead of the foregoing legend, the certificate or notice may state that the Corporation will furnish a full statement about certain restrictions on ownership and transferability to a stockholder on request and without charge.

Section 7.3 Transfer of Capital Stock in Trust.

Section 7.3.1 Ownership in Trust. Upon any purported Transfer or other event described in Section 7.2.1(b) that would result in a transfer of shares of Capital Stock to a Trust, such shares of Capital Stock shall be deemed to have been transferred to the Trustee as trustee of a Trust for the exclusive benefit of one or more Charitable Beneficiaries. Such transfer to the Trustee shall be deemed to be effective as of the close of business on the Business Day prior to the purported Transfer or other event that results in the transfer to the Trust pursuant to Section 7.2.1(b). The Trustee shall be appointed by the Corporation and shall be a Person unaffiliated with the Corporation and any Prohibited Owner. Each Charitable Beneficiary shall be designated by the Corporation as provided in Section 7.3.6.

 

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Section 7.3.2 Status of Shares Held by the Trustee. Shares of Capital Stock held by the Trustee shall be issued and outstanding shares of Capital Stock. The Prohibited Owner shall have no rights in the shares held by the Trustee. The Prohibited Owner shall not benefit economically from ownership of any shares held in trust by the Trustee, shall have no rights to dividends or other distributions and shall not possess any rights to vote or other rights attributable to the shares held in the Trust.

Section 7.3.3 Dividend and Voting Rights. The Trustee shall have all voting rights and rights to dividends or other distributions with respect to shares of Capital Stock held in the Trust, which rights shall be exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend or other distribution paid prior to the discovery by the Corporation that the shares of Capital Stock have been transferred to the Trustee shall be paid by the recipient of such dividend or distribution to the Trustee upon demand, and any dividend or other distribution authorized but unpaid shall be paid when due to the Trustee. Any dividend or distribution so paid to the Trustee shall be held in trust for the Charitable Beneficiary. The Prohibited Owner shall have no voting rights with respect to shares of Capital Stock held in the Trust and, subject to Maryland law, effective as of the date that the shares of Capital Stock have been transferred to the Trust, the Trustee shall have the authority (at the Trustee’s sole discretion) (i) to rescind as void any vote cast by a Prohibited Owner prior to the discovery by the Corporation that the shares of Capital Stock have been transferred to the Trust and (ii) to recast such vote in accordance with the desires of the Trustee acting for the benefit of the Charitable Beneficiary; provided, however, that if the Corporation has already taken irreversible corporate action, then the Trustee shall not have the authority to rescind and recast such vote. Notwithstanding the provisions of this Article VII, until the Corporation has received notification that shares of Capital Stock have been transferred into a Trust, the Corporation shall be entitled to rely on its stock transfer and other stockholder records for purposes of preparing lists of stockholders entitled to vote at meetings, determining the validity and authority of proxies and otherwise conducting votes and determining the other rights of stockholders.

 

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Section 7.3.4 Sale of Shares by Trustee. Within 20 days of receiving notice from the Corporation that shares of Capital Stock have been transferred to the Trust, the Trustee of the Trust shall sell the shares held in the Trust to a person, designated by the Trustee, whose ownership of the shares will not violate the ownership limitations set forth in Section 7.2.1(a). Upon such sale, the interest of the Charitable Beneficiary in the shares sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the Prohibited Owner and to the Charitable Beneficiary as provided in this Section 7.3.4. The Prohibited Owner shall receive the lesser of (1) the price paid by the Prohibited Owner for the shares or, if the Prohibited Owner did not give value for the shares in connection with the event causing the shares to be held in the Trust (e.g., in the case of a gift, devise or other such transaction), the Market Price of the shares on the day of the event causing the shares to be held in the Trust and (2) the price per share received by the Trustee (net of any commissions and other expenses of sale) from the sale or other disposition of the shares held in the Trust. The Trustee may reduce the amount payable to the Prohibited Owner by the amount of dividends and distributions which have been paid to the Prohibited Owner and are owed by the Prohibited Owner to the Trustee pursuant to Section 7.3.3 of this Article VII. Any net sales proceeds in excess of the amount payable to the Prohibited Owner shall be immediately paid to the Charitable Beneficiary. If, prior to the discovery by the Corporation that shares of Capital Stock have been transferred to the Trustee, such shares are sold by a Prohibited Owner, then (i) such shares shall be deemed to have been sold on behalf of the Trust and (ii) to the extent that the Prohibited Owner received an amount for, or in respect of, such shares that exceeds the amount that such Prohibited Owner was entitled to receive pursuant to this Section 7.3.4, such excess shall be paid to the Trustee upon demand.

 

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Section 7.3.5 Purchase Right in Stock Transferred to the Trustee. Shares of Capital Stock transferred to the Trustee shall be deemed to have been offered for sale to the Corporation, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that resulted in such transfer to the Trust (or, in the case of a devise or gift, the Market Price at the time of such devise or gift) and (ii) the Market Price on the date the Corporation, or its designee, accepts such offer. The Corporation may reduce the amount payable to the Trustee by the amount of dividends and distributions which have been paid to the Prohibited Owner and are owed by the Prohibited Owner to the Trustee pursuant to Section 7.3.3 of this Article VII. The Corporation may pay the amount of such reduction to the Trustee for the benefit of the Charitable Beneficiary. The Corporation shall have the right to accept such offer until the Trustee has sold the shares held in the Trust pursuant to Section 7.3.4. Upon such a sale to the Corporation, the interest of the Charitable Beneficiary in the shares sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the Prohibited Owner.

Section 7.3.6 Designation of Charitable Beneficiaries. By written notice to the Trustee, the Corporation shall designate one or more nonprofit organizations to be the Charitable Beneficiary or Charitable Beneficiaries of the interest in the Trust such that (i) the shares of Capital Stock held in the Trust would not violate the restrictions set forth in Section 7.2.1(a) in the hands of such Charitable Beneficiary or Charitable Beneficiaries and (ii) each such organization must be described in Section 501(c)(3) of the Code and contributions to each such organization must be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code. Neither the failure of the Corporation to make such designation nor the failure of the Corporation to appoint the Trustee before the automatic transfer provided in Section 7.2.1(b) shall make such transfer ineffective, provided that the Corporation thereafter makes such designation and appointment.

Section 7.4 NYSE Transactions. Nothing in this Article VII shall preclude the settlement of any transaction entered into through the facilities of the NYSE or any other national securities exchange or automated inter-dealer quotation system. The fact that the settlement of any transaction occurs shall not negate the effect of any other provision of this Article VII and any transferee in such a transaction shall be subject to all of the provisions and limitations set forth in this Article VII.

 

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Section 7.5 Enforcement. The Corporation is authorized specifically to seek equitable relief, including injunctive relief, to enforce the provisions of this Article VII.

Section 7.6 Non-Waiver. No delay or failure on the part of the Corporation or the Board of Directors in exercising any right hereunder shall operate as a waiver of any right of the Corporation or the Board of Directors, as the case may be, except to the extent specifically waived in writing.

ARTICLE VIII

AMENDMENTS

The Corporation reserves the right from time to time to make any amendment to the Charter, now or hereafter authorized by law, including any amendment altering the terms or contract rights, as expressly set forth in the Charter, of any shares of outstanding stock. All rights and powers conferred by the Charter on stockholders, directors and officers are granted subject to this reservation. Except for amendments to Section 5.8 of the Charter and except for those amendments permitted to be made without stockholder approval under Maryland law or by specific provision in the Charter, any amendment to the Charter shall be valid only if declared advisable by the Board of Directors and approved by the affirmative vote of holders of shares entitled to cast a majority of all the votes entitled to be cast on the matter. Any amendment to Section 5.8 or to this sentence of the Charter shall be valid only if declared advisable by the Board of Directors and approved by the affirmative vote of holders of shares entitled to cast two-thirds of all the votes entitled to be cast on the matter.

 

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ARTICLE IX

LIMITATION OF LIABILITY

To the maximum extent that Maryland law in effect from time to time permits limitation of the liability of directors and officers of a corporation, no present or former director or officer of the Corporation shall be liable to the Corporation or its stockholders for money damages. Neither the amendment nor repeal of this Article IX, nor the adoption or amendment of any other provision of the Charter or Bylaws inconsistent with this Article IX, shall apply to or affect in any respect the applicability of the preceding sentence with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption.

THIRD: The amendment to and restatement of the charter as hereinabove set forth have been duly advised by the Board of Directors and approved by the stockholders of the Corporation as required by law.

FOURTH: The current address of the principal office of the Corporation is as set forth in Article IV of the foregoing amendment and restatement of the charter.

FIFTH: The name and address of the Corporation’s current resident agent are as set forth in Article IV of the foregoing amendment and restatement of the charter.

SIXTH: The number of directors of the Corporation and the name(s) of those currently in office are as set forth in Article V of the foregoing amendment and restatement of the charter.

SEVENTH: The total number of shares of stock which the Corporation had authority to issue immediately prior to this amendment and restatement of the charter was 1,000 shares of stock, consisting of 900 shares of common stock, $0.01 par value per share, and 100 shares of preferred stock, $0.01 par value per share. The aggregate par value of all authorized shares of stock having par value was $10.00.

EIGHTH: The total number of shares of stock which the Corporation has authority to issue pursuant to this amendment and restatement of the charter is 600,000,000 shares of stock, consisting of 500,000,000 shares of common stock, $0.01 par value per share, and 100,000,000 shares of preferred stock, $0.01 par value per share. The aggregate par value of all authorized shares of stock having par value is $6,000,000.

 

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NINTH: The undersigned acknowledges these Articles of Amendment and Restatement to be the corporate act of the Corporation and as to all matters or facts required to be verified under oath, the undersigned acknowledges that, to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury.

 

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IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment and Restatement to be signed in its name and on its behalf by its President and attested to by its Secretary on this     th day of                 , 2020.

 

ATTEST:    NEXPOINT REAL ESTATE FINANCE, INC.

 

      By:   

 

Name: Matt McGraner          Name: Brian Mitts
Title: Secretary          Title: President

 

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EX-3.2 4 d759970dex32.htm EX-3.2 EX-3.2

Exhibit 3.2

FORM OF

NEXPOINT REAL ESTATE FINANCE, INC.

AMENDED AND RESTATED BYLAWS

ARTICLE I

OFFICES

Section 1. PRINCIPAL OFFICE. The principal office of NexPoint Real Estate Finance, Inc., a Maryland corporation (the “Corporation”), in the State of Maryland shall be located at such place as the Board of Directors may designate.

Section 2. ADDITIONAL OFFICES. The Corporation may have additional offices, including a principal executive office, at such places as the Board of Directors may from time to time determine or the business of the Corporation may require.

ARTICLE II

MEETINGS OF STOCKHOLDERS

Section 1. PLACE. All meetings of stockholders shall be held at the principal executive office of the Corporation or at such other place as shall be set in accordance with these Bylaws and stated in the notice of the meeting.

Section 2. ANNUAL MEETING. An annual meeting of stockholders for the election of directors and the transaction of any business within the powers of the Corporation shall be held on the date and at the time and place set by the Board of Directors.

Section 3. SPECIAL MEETINGS.

(a) General. Each of the chairman of the board, chief executive officer, president and Board of Directors may call a special meeting of stockholders. Except as provided in subsection (b)(4) of this Section 3, a special meeting of stockholders shall be held on the date and at the time and place set by the chairman of the board, chief executive officer, president or Board of Directors, whoever has called the meeting. Subject to subsection (b) of this Section 3, a special meeting of stockholders shall also be called by the secretary of the Corporation to act on any matter that may properly be considered at a meeting of stockholders upon the written request of stockholders entitled to cast not less than a majority of all the votes entitled to be cast on such matter at such meeting.

(b) Stockholder-Requested Special Meetings. (1) Any stockholder of record seeking to have stockholders request a special meeting shall, by sending written notice to the secretary (the “Record Date Request Notice”) by registered mail, return receipt requested, request the Board of Directors to fix a record date to determine the stockholders entitled to request a special meeting (the “Request Record Date”). The Record Date Request Notice shall set forth the purpose of the meeting and the matters proposed to be acted on at it, shall be signed by one or more stockholders of record as of the date of signature (or their agents duly authorized in a writing accompanying the Record Date Request Notice), shall bear the date of signature of each such stockholder (or such agent) and shall set forth all information relating to each such


stockholder and each matter proposed to be acted on at the meeting that would be required to be disclosed in connection with the solicitation of proxies for the election of directors in an election contest (even if an election contest is not involved), or would otherwise be required in connection with such a solicitation, in each case pursuant to Regulation 14A (or any successor provision) under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the “Exchange Act”). Upon receiving the Record Date Request Notice, the Board of Directors may fix a Request Record Date. The Request Record Date shall not precede and shall not be more than ten days after the close of business on the date on which the resolution fixing the Request Record Date is adopted by the Board of Directors. If the Board of Directors, within ten days after the date on which a valid Record Date Request Notice is received, fails to adopt a resolution fixing the Request Record Date, the Request Record Date shall be the close of business on the tenth day after the first date on which a Record Date Request Notice is received by the secretary.

(2) In order for any stockholder to request a special meeting to act on any matter that may properly be considered at a meeting of stockholders, one or more written requests for a special meeting (collectively, the “Special Meeting Request”) signed by stockholders of record (or their agents duly authorized in a writing accompanying the request) as of the Request Record Date entitled to cast not less than a majority of all of the votes entitled to be cast on such matter at such meeting (the “Special Meeting Percentage”) shall be delivered to the secretary. In addition, the Special Meeting Request shall (i) set forth the purpose of the meeting and the matters proposed to be acted on at it (which shall be limited to those lawful matters set forth in the Record Date Request Notice received by the secretary), (ii) bear the date of signature of each such stockholder (or such agent) signing the Special Meeting Request, (iii) set forth (A) the name and address, as they appear in the Corporation’s books, of each stockholder signing such request (or on whose behalf the Special Meeting Request is signed), (B) the class, series and number of all shares of stock of the Corporation which are owned (beneficially or of record) by each such stockholder and (C) the nominee holder for, and number of, shares of stock of the Corporation owned beneficially but not of record by such stockholder, (iv) be sent to the secretary by registered mail, return receipt requested, and (v) be received by the secretary within 60 days after the Request Record Date. Any requesting stockholder (or agent duly authorized in a writing accompanying the revocation of the Special Meeting Request) may revoke his, her or its request for a special meeting at any time by written revocation delivered to the secretary.

(3) The secretary shall inform the requesting stockholders of the reasonably estimated cost of preparing and mailing or delivering the notice of the meeting (including the Corporation’s proxy materials). The secretary shall not be required to call a special meeting upon stockholder request and such meeting shall not be held unless, in addition to the documents required by paragraph (2) of this Section 3(b), the secretary receives payment of such reasonably estimated cost prior to the preparation and mailing or delivery of such notice of the meeting.

(4) In the case of any special meeting called by the secretary upon the request of stockholders (a “Stockholder-Requested Meeting”), such meeting shall be held at such place, date and time as may be designated by the Board of Directors; provided, however, that the date of any Stockholder-Requested Meeting shall be not more than 90 days after the record date for such meeting (the “Meeting Record Date”); and provided further that if the Board of Directors fails to designate, within ten days after the date that a valid Special Meeting Request is actually received by the secretary (the “Delivery Date”), a date and time for a Stockholder-Requested Meeting, then such meeting shall be held at 2:00 p.m., local time, on the 90th day after the Meeting Record Date or, if such 90th day is not a Business Day (as defined below), on the first preceding

 

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Business Day; and provided further that in the event that the Board of Directors fails to designate a place for a Stockholder-Requested Meeting within ten days after the Delivery Date, then such meeting shall be held at the principal executive office of the Corporation. In fixing a date for a Stockholder-Requested Meeting, the Board of Directors may consider such factors as it deems relevant, including, without limitation, the nature of the matters to be considered, the facts and circumstances surrounding any request for the meeting and any plan of the Board of Directors to call an annual meeting or a special meeting. In the case of any Stockholder-Requested Meeting, if the Board of Directors fails to fix a Meeting Record Date that is a date within 30 days after the Delivery Date, then the close of business on the 30th day after the Delivery Date shall be the Meeting Record Date. The Board of Directors may revoke the notice for any Stockholder-Requested Meeting in the event that the requesting stockholders fail to comply with the provisions of paragraph (3) of this Section 3(b).

(5) If written revocations of the Special Meeting Request have been delivered to the secretary and the result is that stockholders of record (or their agents duly authorized in writing), as of the Request Record Date, entitled to cast less than the Special Meeting Percentage have delivered, and not revoked, requests for a special meeting on the matter to the secretary: (i) if the notice of meeting has not already been delivered, the secretary shall refrain from delivering the notice of the meeting and send to all requesting stockholders who have not revoked such requests written notice of any revocation of a request for a special meeting on the matter, or (ii) if the notice of meeting has been delivered and if the secretary first sends to all requesting stockholders who have not revoked requests for a special meeting on the matter written notice of any revocation of a request for the special meeting and written notice of the Corporation’s intention to revoke the notice of the meeting or for the chairman of the meeting to adjourn the meeting without action on the matter, (A) the secretary may revoke the notice of the meeting at any time before ten days before the commencement of the meeting or (B) the chairman of the meeting may call the meeting to order and adjourn the meeting without acting on the matter. Any request for a special meeting received after a revocation by the secretary of a notice of a meeting shall be considered a request for a new special meeting.

(6) The chairman of the board, chief executive officer, president or a majority of the Board of Directors may appoint regionally or nationally recognized independent inspectors of elections to act as the agent of the Corporation for the purpose of promptly performing a ministerial review of the validity of any purported Special Meeting Request received by the secretary. For the purpose of permitting the inspectors to perform such review, no such purported Special Meeting Request shall be deemed to have been received by the secretary until the earlier of (i) five Business Days after actual receipt by the secretary of such purported request and (ii) such date as the independent inspectors certify to the Corporation that the valid requests received by the secretary represent, as of the Request Record Date, stockholders of record entitled to cast not less than the Special Meeting Percentage. Nothing contained in this paragraph (6) shall in any way be construed to suggest or imply that the Corporation or any stockholder shall not be entitled to contest the validity of any request, whether during or after such five Business Day period, or to take any other action (including, without limitation, the commencement, prosecution or defense of any litigation with respect thereto, and the seeking of injunctive relief in such litigation).

(7) For purposes of these Bylaws, “Business Day” shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in the State of Texas or New York are authorized or obligated by law or executive order to close.

 

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Section 4. NOTICE. Not less than ten nor more than 90 days before each meeting of stockholders, the secretary shall give to each stockholder entitled to vote at such meeting and to each stockholder not entitled to vote who is entitled to notice of the meeting notice in writing or by electronic transmission stating the time and place of the meeting and, in the case of a special meeting or as otherwise may be required by any statute, the purpose for which the meeting is called, by mail, by presenting it to such stockholder personally, by leaving it at the stockholder’s residence or usual place of business, by electronic transmission or by any other means permitted by Maryland law. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the stockholder at the stockholder’s address as it appears on the records of the Corporation, with postage thereon prepaid. If transmitted electronically, such notice shall be deemed to be given when transmitted to the stockholder by an electronic transmission to any address or number of the stockholder at which the stockholder receives electronic transmissions. The Corporation may give a single notice to all stockholders who share an address, which single notice shall be effective as to any stockholder at such address, unless such stockholder objects to receiving such single notice or revokes a prior consent to receiving such single notice. Failure to give notice of any meeting to one or more stockholders, or any irregularity in such notice, shall not affect the validity of any meeting fixed in accordance with this Article II or the validity of any proceedings at any such meeting.

Subject to Section 11(a) of this Article II, any business of the Corporation may be transacted at an annual meeting of stockholders without being specifically designated in the notice, except such business as is required by any statute to be stated in such notice. No business shall be transacted at a special meeting of stockholders except as specifically designated in the notice. The Corporation may postpone or cancel a meeting of stockholders by making a public announcement (as defined in Section 11(c)(3) of this Article II) of such postponement or cancellation prior to the meeting. Notice of the date, time and place to which the meeting is postponed shall be given not less than ten days prior to such date and otherwise in the manner set forth in this section.

Section 5. ORGANIZATION AND CONDUCT. Every meeting of stockholders shall be conducted by an individual appointed by the Board of Directors to be chairman of the meeting or, in the absence of such appointment or appointed individual, by the chairman of the board or, in the case of a vacancy in the office or absence of the chairman of the board, by one of the following officers present at the meeting in the following order: the vice chairman of the board, if there is one, the chief executive officer, the president, the vice presidents in their order of rank and seniority, the secretary, or, in the absence of such officers, a chairman chosen by the stockholders by the vote of a majority of the votes cast by stockholders present in person or by proxy. The secretary, or, in the secretary’s absence, an assistant secretary, or, in the absence of both the secretary and assistant secretaries, an individual appointed by the Board of Directors or, in the absence of such appointment, an individual appointed by the chairman of the meeting shall act as secretary. In the event that the secretary presides at a meeting of stockholders, an assistant secretary, or, in the absence of all assistant secretaries, an individual appointed by the Board of Directors or the chairman of the meeting, shall record the minutes of the meeting. The order of business and all other matters of procedure at any meeting of stockholders shall be determined by the chairman of the meeting. The chairman of the meeting may prescribe such rules, regulations and procedures and take such action as, in the discretion of the chairman and without any action by the stockholders, are appropriate for the proper conduct of the meeting, including, without limitation, (a) restricting admission to the time set for the commencement of the meeting; (b) limiting attendance at the meeting to stockholders of record of the Corporation, their duly authorized proxies and such other individuals as the chairman of the meeting may determine; (c) limiting participation at the meeting on any matter to stockholders of record of the Corporation

 

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entitled to vote on such matter, their duly authorized proxies and other such individuals as the chairman of the meeting may determine; (d) limiting the time allotted to questions or comments; (e) determining when and for how long the polls should be opened and when the polls should be closed; (f) maintaining order and security at the meeting; (g) removing any stockholder or any other individual who refuses to comply with meeting procedures, rules or guidelines as set forth by the chairman of the meeting; (h) concluding a meeting or recessing or adjourning the meeting, whether or not a quorum is present, to a later date and time and at a place announced at the meeting; and (i) complying with any state and local laws and regulations concerning safety and security. Unless otherwise determined by the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure.

Section 6. QUORUM. At any meeting of stockholders, the presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at such meeting on any matter shall constitute a quorum; but this section shall not affect any requirement under any statute or the charter of the Corporation (the “Charter”) for the vote necessary for the approval of any matter. If such quorum is not established at any meeting of the stockholders, the chairman of the meeting may adjourn the meeting from time to time to a date not more than 120 days after the original record date without notice other than announcement at the meeting. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified.

The stockholders present either in person or by proxy, at a meeting which has been duly called and at which a quorum has been established, may continue to transact business until adjournment, notwithstanding the withdrawal from the meeting of enough stockholders to leave fewer than would be required to establish a quorum.

Section 7. VOTING. A plurality of all the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to elect a director. Each share entitles the holder thereof to vote for as many individuals as there are directors to be elected and for whose election the holder is entitled to vote. A majority of the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to approve any other matter which may properly come before the meeting, unless more than a majority of the votes cast is required by statute or by the Charter. Unless otherwise provided by statute or by the Charter, each outstanding share, regardless of class, entitles the holder thereof to cast one vote on each matter submitted to a vote at a meeting of stockholders. Voting on any question or in any election may be viva voce unless the chairman of the meeting shall order that voting be by ballot or otherwise.

Section 8. PROXIES. A holder of record of shares of stock of the Corporation may cast votes in person or by proxy executed by the stockholder or by the stockholder’s duly authorized agent in any manner permitted by law. Such proxy or evidence of authorization of such proxy shall be filed with the secretary of the Corporation before or at the meeting. No proxy shall be valid more than eleven months after its date unless otherwise provided in the proxy.

Section 9. VOTING OF STOCK BY CERTAIN HOLDERS. Stock of the Corporation registered in the name of a corporation, limited liability company, partnership, joint venture, trust or other entity, if entitled to be voted, may be voted by the president or a vice president, managing member, manager, general partner or trustee thereof, as the case may be, or a proxy appointed by any of the foregoing individuals, unless some other person who has been appointed to vote such stock pursuant to a bylaw or a resolution of the governing body of such corporation or other entity or agreement of the partners of a partnership presents a certified copy of such bylaw, resolution or agreement, in which case such person may vote such stock. Any trustee or fiduciary, in such capacity, may vote stock registered in such trustee’s or fiduciary’s name, either in person or by proxy.

 

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Shares of stock of the Corporation directly or indirectly owned by it shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares entitled to be voted at any given time, unless they are held by it in a fiduciary capacity, in which case they may be voted and shall be counted in determining the total number of outstanding shares at any given time.

The Board of Directors may adopt by resolution a procedure by which a stockholder may certify in writing to the Corporation that any shares of stock registered in the name of the stockholder are held for the account of a specified person other than the stockholder. The resolution shall set forth the class of stockholders who may make the certification, the purpose for which the certification may be made, the form of certification and the information to be contained in it; if the certification is with respect to a record date, the time after the record date within which the certification must be received by the Corporation; and any other provisions with respect to the procedure which the Board of Directors considers necessary or desirable. On receipt by the Corporation of such certification, the person specified in the certification shall be regarded as, for the purposes set forth in the certification, the holder of record of the specified stock in place of the stockholder who makes the certification.

Section 10. INSPECTORS. The Board of Directors or the chairman of the meeting may appoint, before or at the meeting, one or more inspectors for the meeting and any successor to the inspector. Except as otherwise provided by the chairman of the meeting, the inspectors, if any, shall (a) determine the number of shares of stock represented at the meeting, in person or by proxy, and the validity and effect of proxies, (b) receive and tabulate all votes, ballots or consents, (c) report such tabulation to the chairman of the meeting, (d) hear and determine all challenges and questions arising in connection with the right to vote, and (e) do such acts as are proper to fairly conduct the election or vote. Each such report shall be in writing and signed by the inspector or by a majority of them if there is more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be prima facie evidence thereof.

Section 11. ADVANCE NOTICE OF STOCKHOLDER NOMINEES FOR DIRECTOR AND OTHER STOCKHOLDER PROPOSALS.

(a) Annual Meetings of Stockholders. (1) Nominations of individuals for election to the Board of Directors and the proposal of other business to be considered by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the Corporation’s notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Corporation who was a stockholder of record both at the time of giving of notice by the stockholder as provided for in this Section 11(a) and at the time of the annual meeting, who is entitled to vote at the meeting in the election of each individual so nominated or on any such other business and who has complied with this Section 11(a).

(2) For any nomination or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of this Section 11, the stockholder must have given timely notice thereof in writing to the secretary of the Corporation and any such other business must otherwise be a proper matter for action by the stockholders. To

 

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be timely, a stockholder’s notice shall set forth all information required under this Section 11 and shall be delivered to the secretary at the principal executive office of the Corporation not earlier than the 150th day nor later than 5:00 p.m., Eastern Time, on the 120th day prior to the first anniversary of the date of the proxy statement (as defined in Section 11(c)(3) of this Article II) for the preceding year’s annual meeting; provided, however, that in connection with the Corporation’s first annual meeting or in the event that the date of the annual meeting is advanced or delayed by more than 30 days from the first anniversary of the date of the preceding year’s annual meeting, in order for notice by the stockholder to be timely, such notice must be so delivered not earlier than the 150th day prior to the date of such annual meeting and not later than 5:00 p.m., Eastern Time, on the later of the 120th day prior to the date of such annual meeting, as originally convened, or the tenth day following the day on which public announcement of the date of such meeting is first made. The public announcement of a postponement or adjournment of an annual meeting shall not commence a new time period for the giving of a stockholder’s notice as described above.

(3) Such stockholder’s notice shall set forth:

(i) as to each individual whom the stockholder proposes to nominate for election or reelection as a director (each, a “Proposed Nominee”), all information relating to the Proposed Nominee that would be required to be disclosed in connection with the solicitation of proxies for the election of the Proposed Nominee as a director in an election contest (even if an election contest is not involved), or would otherwise be required in connection with such solicitation, in each case pursuant to Regulation 14A (or any successor provision) under the Exchange Act;

(ii) as to any other business that the stockholder proposes to bring before the meeting, a description of such business, the stockholder’s reasons for proposing such business at the meeting and any material interest in such business of such stockholder or any Stockholder Associated Person (as defined below), individually or in the aggregate, including any anticipated benefit to the stockholder or the Stockholder Associated Person therefrom;

(iii) as to the stockholder giving the notice, any Proposed Nominee and any Stockholder Associated Person,

(A) the class, series and number of all shares of stock or other securities of the Corporation or any affiliate thereof (collectively, the “Company Securities”), if any, which are owned (beneficially or of record) by such stockholder, Proposed Nominee or Stockholder Associated Person, the date on which each such Company Security was acquired and the investment intent of such acquisition, and any short interest (including any opportunity to profit or share in any benefit from any decrease in the price of such stock or other security) in any Company Securities of any such person,

(B) the nominee holder for, and number of, any Company Securities owned beneficially but not of record by such stockholder, Proposed Nominee or Stockholder Associated Person,

(C) whether and the extent to which such stockholder, Proposed Nominee or Stockholder Associated Person, directly or indirectly (through brokers, nominees or otherwise), is subject to or during the last six months has engaged in any hedging, derivative or other transaction or series of transactions or entered into any other agreement, arrangement or understanding (including any short interest, any borrowing or lending of securities or any proxy or voting agreement), the effect or intent of which is to (I) manage risk or benefit of

 

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changes in the price of Company Securities for such stockholder, Proposed Nominee or Stockholder Associated Person or (II) increase or decrease the voting power of such stockholder, Proposed Nominee or Stockholder Associated Person in the Corporation or any affiliate thereof disproportionately to such person’s economic interest in the Company Securities, and

(D) any substantial interest, direct or indirect (including, without limitation, any existing or prospective commercial, business or contractual relationship with the Corporation), by security holdings or otherwise, of such stockholder, Proposed Nominee or Stockholder Associated Person, in the Corporation or any affiliate thereof, other than an interest arising from the ownership of Company Securities where such stockholder, Proposed Nominee or Stockholder Associated Person receives no extra or special benefit not shared on a pro rata basis by all other holders of the same class or series;

(iv) as to the stockholder giving the notice, any Stockholder Associated Person with an interest or ownership referred to in clauses (ii) or (iii) of this paragraph (3) of this Section 11(a) and any Proposed Nominee,

(A) the name and address of such stockholder, as they appear on the Corporation’s stock ledger, and the current name and business address, if different, of each such Stockholder Associated Person and any Proposed Nominee, and

(B) the investment strategy or objective, if any, of such stockholder and each such Stockholder Associated Person who is not an individual and a copy of the prospectus, offering memorandum or similar document, if any, provided to investors or potential investors in such stockholder and each such Stockholder Associated Person;

(v) the name and address of any person who contacted or was contacted by the stockholder giving the notice or any Stockholder Associated Person about the Proposed Nominee or other business proposal prior to the date of such stockholder’s notice; and

(vi) to the extent known by the stockholder giving the notice, the name and address of any other stockholder supporting the nominee for election or reelection as a director or the proposal of other business on the date of such stockholder’s notice.

(4) Such stockholder’s notice shall, with respect to any Proposed Nominee, be accompanied by a certificate executed by the Proposed Nominee (i) certifying that such Proposed Nominee (a) is not, and will not become, a party to any agreement, arrangement or understanding with any person or entity other than the Corporation in connection with service or action as a director that has not been disclosed to the Corporation and (b) will serve as a director of the Corporation if elected; and (ii) attaching a completed Proposed Nominee questionnaire (which questionnaire shall be provided by the Corporation, upon request, to the stockholder providing the notice and shall include all information relating to the Proposed Nominee that would be required to be disclosed in connection with the solicitation of proxies for the election of the Proposed Nominee as a director in an election contest (even if an election contest is not involved), or would otherwise be required in connection with such solicitation, in each case pursuant to Regulation 14A (or any successor provision) under the Exchange Act and the rules thereunder, or would be required pursuant to the rules of any national securities exchange on which any securities of the Corporation are listed or over-the-counter market on which any securities of the Corporation are traded).

 

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(5) Notwithstanding anything in this subsection (a) of this Section 11 to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased, and there is no public announcement of such action at least 130 days prior to the first anniversary of the date of the proxy statement (as defined in Section 11(c)(3) of this Article II) for the preceding year’s annual meeting, a stockholder’s notice required by this Section 11(a) shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the secretary at the principal executive office of the Corporation not later than 5:00 p.m., Eastern Time, on the tenth day following the day on which such public announcement is first made by the Corporation.

(6) For purposes of this Section 11, “Stockholder Associated Person” of any stockholder shall mean (i) any person acting in concert with such stockholder, (ii) any beneficial owner of shares of stock of the Corporation owned of record or beneficially by such stockholder (other than a stockholder that is a depositary) and (iii) any person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such stockholder or such Stockholder Associated Person.

(b) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation’s notice of meeting. Nominations of individuals for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected only (i) by or at the direction of the Board of Directors or (ii) provided that the special meeting has been called in accordance with Section 3(a) of this Article II for the purpose of electing directors, by any stockholder of the Corporation who is a stockholder of record both at the time of giving of notice provided for in this Section 11 and at the time of the special meeting, who is entitled to vote at the meeting in the election of each individual so nominated and who has complied with the notice procedures set forth in this Section 11. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more individuals to the Board of Directors, any stockholder may nominate an individual or individuals (as the case may be) for election as a director as specified in the Corporation’s notice of meeting, if the stockholder’s notice, containing the information required by paragraphs (a)(3) and (4) of this Section 11, is delivered to the secretary at the principal executive office of the Corporation not earlier than the 120th day prior to such special meeting and not later than 5:00 p.m., Eastern Time, on the later of the 90th day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. The public announcement of a postponement or adjournment of a special meeting shall not commence a new time period for the giving of a stockholder’s notice as described above.

(c) General. (1) If information submitted pursuant to this Section 11 by any stockholder proposing a nominee for election as a director or any proposal for other business at a meeting of stockholders shall be inaccurate in any material respect, such information may be deemed not to have been provided in accordance with this Section 11. Any such stockholder shall notify the Corporation of any inaccuracy or change (within two Business Days of becoming aware of such inaccuracy or change) in any such information. Upon written request by the secretary or the Board of Directors, any such stockholder shall provide, within five Business Days of delivery of such request (or such other period as may be specified in such request), (i) written verification, satisfactory, in the discretion of the Board of Directors or any authorized officer of the Corporation, to demonstrate the accuracy of any information submitted by the stockholder pursuant to this Section 11, and (ii) a written update of any information (including, if requested by the Corporation, written confirmation by such stockholder that it continues to intend to bring such

 

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nomination or other business proposal before the meeting) submitted by the stockholder pursuant to this Section 11 as of an earlier date. If a stockholder fails to provide such written verification or written update within such period, the information as to which written verification or a written update was requested may be deemed not to have been provided in accordance with this Section 11.

(2) Only such individuals who are nominated in accordance with this Section 11 shall be eligible for election by stockholders as directors, and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with this Section 11. The chairman of the meeting shall have the power to determine whether a nomination or any other business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with this Section 11.

(3) For purposes of this Section 11, “the date of the proxy statement” shall have the same meaning as “the date of the company’s proxy statement released to shareholders” as used in Rule 14a-8(e) promulgated under the Exchange Act, as interpreted by the Securities and Exchange Commission from time to time. “Public announcement” shall mean disclosure (i) in a press release reported by the Dow Jones News Service, Associated Press, Business Wire, PR Newswire or other widely circulated news or wire service or (ii) in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to the Exchange Act.

(4) Notwithstanding the foregoing provisions of this Section 11, a stockholder shall also comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 11. Nothing in this Section 11 shall be deemed to affect any right of a stockholder to request inclusion of a proposal in, or the right of the Corporation to omit a proposal from, any proxy statement filed by the Corporation with the Securities and Exchange Commission pursuant to Rule 14a-8 (or any successor provision) under the Exchange Act. Nothing in this Section 11 shall require disclosure of revocable proxies received by the stockholder or Stockholder Associated Person pursuant to a solicitation of proxies after the filing of an effective Schedule 14A by such stockholder or Stockholder Associated Person under Section 14(a) of the Exchange Act.

Section 12. CONTROL SHARE ACQUISITION ACT. Notwithstanding any other provision of the Charter or these Bylaws, Title 3, Subtitle 7 of the Maryland General Corporation Law, or any successor statute (the “MGCL”), shall not apply to any acquisition by any person of shares of stock of the Corporation. This section may be repealed, in whole or in part, at any time, whether before or after an acquisition of control shares and, upon such repeal, may, to the extent provided by any successor bylaw, apply to any prior or subsequent control share acquisition.

ARTICLE III

DIRECTORS

Section 1. GENERAL POWERS. The business and affairs of the Corporation shall be managed under the direction of its Board of Directors.

 

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Section 2. NUMBER, TENURE AND RESIGNATION. At any regular meeting or at any special meeting called for that purpose, a majority of the entire Board of Directors may establish, increase or decrease the number of directors, provided that the number thereof shall never be less than the minimum number required by the MGCL, nor more than 15, and further provided that the tenure of office of a director shall not be affected by any decrease in the number of directors. Any director of the Corporation may resign at any time by delivering his or her resignation to the Board of Directors, the chairman of the board or the secretary. Any resignation shall take effect immediately upon its receipt or at such later time specified in the resignation. The acceptance of a resignation shall not be necessary to make it effective unless otherwise stated in the resignation.

Section 3. ANNUAL AND REGULAR MEETINGS. An annual meeting of the Board of Directors shall be held immediately after and at the same place as the annual meeting of stockholders, no notice other than this Bylaw being necessary. In the event such meeting is not so held, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors. The Board of Directors may provide, by resolution, the time and place of regular meetings of the Board of Directors without other notice than such resolution.

Section 4. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by or at the request of the chairman of the board, the chief executive officer, the president or a majority of the directors then in office. The person or persons authorized to call special meetings of the Board of Directors may fix the time and place of any special meeting of the Board of Directors called by them. The Board of Directors may provide, by resolution, the time and place of special meetings of the Board of Directors without other notice than such resolution.

Section 5. NOTICE. Notice of any special meeting of the Board of Directors shall be delivered personally or by telephone, electronic mail, facsimile transmission, courier or United States mail to each director at his or her business or residence address. Notice by personal delivery, telephone, electronic mail or facsimile transmission shall be given at least 24 hours prior to the meeting. Notice by United States mail shall be given at least three days prior to the meeting. Notice by courier shall be given at least two days prior to the meeting. Telephone notice shall be deemed to be given when the director or his or her agent is personally given such notice in a telephone call to which the director or his or her agent is a party. Electronic mail notice shall be deemed to be given upon transmission of the message to the electronic mail address given to the Corporation by the director. Facsimile transmission notice shall be deemed to be given upon completion of the transmission of the message to the number given to the Corporation by the director and receipt of a completed answer-back indicating receipt. Notice by United States mail shall be deemed to be given when deposited in the United States mail properly addressed, with postage thereon prepaid. Notice by courier shall be deemed to be given when deposited with or delivered to a courier properly addressed. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Board of Directors need be stated in the notice, unless specifically required by statute or these Bylaws.

Section 6. QUORUM. A majority of the directors shall constitute a quorum for transaction of business at any meeting of the Board of Directors, provided that, if less than a majority of such directors is present at such meeting, a majority of the directors present may adjourn the meeting from time to time without further notice, and provided further that if, pursuant to applicable law, the Charter or these Bylaws, the vote of a majority or other percentage of a particular group of directors is required for action, a quorum must also include a majority or such other percentage of such group.

The directors present at a meeting which has been duly called and at which a quorum has been established may continue to transact business until adjournment, notwithstanding the withdrawal from the meeting of enough directors to leave fewer than required to establish a quorum.

 

11


Section 7. VOTING. The action of a majority of the directors present at a meeting at which a quorum is present shall be the action of the Board of Directors, unless the concurrence of a greater proportion is required for such action by applicable law, the Charter or these Bylaws. If enough directors have withdrawn from a meeting to leave fewer than required to establish a quorum, but the meeting is not adjourned, the action of the majority of that number of directors necessary to constitute a quorum at such meeting shall be the action of the Board of Directors, unless the concurrence of a greater proportion is required for such action by applicable law, the Charter or these Bylaws.

Section 8. ORGANIZATION. At each meeting of the Board of Directors, the chairman of the board or, in the absence of the chairman, the vice chairman of the board or lead director, if any, shall act as chairman of the meeting. In the absence of both the chairman and vice chairman of the board, the chief executive officer or, in the absence of the chief executive officer, the president or, in the absence of the president, a director chosen by a majority of the directors present, shall act as chairman of the meeting. The secretary or, in his or her absence, an assistant secretary of the Corporation, or, in the absence of the secretary and all assistant secretaries, an individual appointed by the chairman of the meeting, shall act as secretary of the meeting.

Section 9. TELEPHONE MEETINGS. Directors may participate in a meeting by means of a conference telephone or other communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting.

Section 10. CONSENT BY DIRECTORS WITHOUT A MEETING. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if a consent in writing or by electronic transmission to such action is given by each director and is filed with the minutes of proceedings of the Board of Directors.

Section 11. VACANCIES. If for any reason any or all of the directors cease to be directors, such event shall not terminate the Corporation or affect these Bylaws or the powers of the remaining directors hereunder. Except as may be provided by the Board of Directors in setting the terms of any class or series of stock, any vacancy on the Board of Directors may be filled only by a majority of the remaining directors, even if the remaining directors do not constitute a quorum. Any director elected to fill a vacancy shall serve for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is elected and qualifies.

Section 12. COMPENSATION. Directors shall not receive any stated salary for their services as directors but, by resolution of the Board of Directors, may receive compensation per year and/or per meeting and/or per visit to real property or other facilities owned or leased by the Corporation and for any service or activity they performed or engaged in as directors. Directors may be reimbursed for expenses of attendance, if any, at each annual, regular or special meeting of the Board of Directors or of any committee thereof and for their expenses, if any, in connection with each property visit and any other service or activity they perform or engage in as directors; but nothing herein contained shall be construed to preclude any directors from serving the Corporation in any other capacity and receiving compensation therefor.

 

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Section 13. RELIANCE. Each director and officer of the Corporation shall, in the performance of his or her duties with respect to the Corporation, be entitled to rely on any information, opinion, report or statement, including any financial statement or other financial data, prepared or presented by an officer or employee of the Corporation whom the director or officer reasonably believes to be reliable and competent in the matters presented, by a lawyer, certified public accountant or other person, as to a matter which the director or officer reasonably believes to be within the person’s professional or expert competence, or, with respect to a director, by a committee of the Board of Directors on which the director does not serve, as to a matter within its designated authority, if the director reasonably believes the committee to merit confidence.

Section 14. RATIFICATION. The Board of Directors or the stockholders may ratify any action or inaction by the Corporation or its officers to the extent that the Board of Directors or the stockholders could have originally authorized the matter, and if so ratified, shall have the same force and effect as if originally duly authorized, and such ratification shall be binding upon the Corporation and its stockholders. Any action or inaction questioned in any stockholders’ derivative proceeding or any other proceeding on the ground of lack of authority, defective or irregular execution, adverse interest of a director, officer or stockholder, non-disclosure, miscomputation, the application of improper principles or practices of accounting or otherwise, may be ratified, before or after judgment, by the Board of Directors or by the stockholders, and such ratification shall constitute a bar to any claim or execution of any judgment in respect of such questioned action or inaction.

Section 15. CERTAIN RIGHTS OF DIRECTORS. Any director, in his or her personal capacity or in a capacity as an affiliate, employee, or agent of any other person, or otherwise, may have business interests and engage in business activities similar to, in addition to or in competition with those of or relating to the Corporation.

Section 16. EMERGENCY PROVISIONS. Notwithstanding any other provision in the Charter or these Bylaws, this Section 16 shall apply during the existence of any catastrophe, or other similar emergency condition, as a result of which a quorum of the Board of Directors under Article III of these Bylaws cannot readily be obtained (an “Emergency”). During any Emergency, unless otherwise provided by the Board of Directors, (a) a meeting of the Board of Directors or a committee thereof may be called by any director or officer by any means feasible under the circumstances; (b) notice of any meeting of the Board of Directors during such an Emergency may be given less than 24 hours prior to the meeting to as many directors and by such means as may be feasible at the time, including publication, television or radio; and (c) the number of directors necessary to constitute a quorum shall be one-third of the entire Board of Directors.

ARTICLE IV

COMMITTEES

Section 1. NUMBER, TENURE AND QUALIFICATIONS. The Board of Directors may appoint from among its members an Executive Committee, an Audit Committee, a Compensation Committee, a Nominating and Corporate Governance Committee and one or more other committees, composed of one or more directors, to serve at the pleasure of the Board of Directors. In the absence of any member of any such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint another director to act in the place of such absent member.

 

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Section 2. POWERS. The Board of Directors may delegate to committees appointed under Section 1 of this Article any of the powers of the Board of Directors, except as prohibited by law. Except as may be otherwise provided by the Board of Directors, any committee may delegate some or all of its power and authority to one or more subcommittees, composed of one or more directors, as the committee deems appropriate in its sole and absolute discretion.

Section 3. MEETINGS. Notice of committee meetings shall be given in the same manner as notice for special meetings of the Board of Directors. A majority of the members of the committee shall constitute a quorum for the transaction of business at any meeting of the committee. The act of a majority of the committee members present at a meeting shall be the act of such committee. The Board of Directors may designate a chairman of any committee, and such chairman or, in the absence of a chairman, any two members of any committee (if there are at least two members of the committee) may fix the time and place of its meeting unless the Board shall otherwise provide.

Section 4. TELEPHONE MEETINGS. Members of a committee of the Board of Directors may participate in a meeting by means of a conference telephone or other communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting.

Section 5. CONSENT BY COMMITTEES WITHOUT A MEETING. Any action required or permitted to be taken at any meeting of a committee of the Board of Directors may be taken without a meeting, if a consent in writing or by electronic transmission to such action is given by each member of the committee and is filed with the minutes of proceedings of such committee.

Section 6. VACANCIES. Subject to the provisions hereof, the Board of Directors shall have the power at any time to change the membership of any committee, to fill any vacancy, to designate an alternate member to replace any absent or disqualified member or to dissolve any such committee.

ARTICLE V

OFFICERS

Section 1. GENERAL PROVISIONS. The officers of the Corporation shall include a president, a secretary and a treasurer and may include a chairman of the board, a vice chairman of the board, a chief executive officer, one or more vice presidents, a chief operating officer, a chief financial officer, one or more assistant secretaries and one or more assistant treasurers. In addition, the Board of Directors may from time to time elect such other officers with such powers and duties as it shall deem necessary or desirable. The officers of the Corporation shall be elected annually by the Board of Directors, except that the chief executive officer or president may from time to time appoint one or more vice presidents, assistant secretaries and assistant treasurers or other officers. Each officer shall serve until his or her successor is elected and qualifies or until his or her death, or his or her resignation or removal in the manner hereinafter provided. Any two or more offices except president and vice president may be held by the same person. Election of an officer or agent shall not of itself create contract rights between the Corporation and such officer or agent.

 

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Section 2. REMOVAL AND RESIGNATION. Any officer or agent of the Corporation may be removed, with or without cause, by the Board of Directors if in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officer of the Corporation may resign at any time by delivering his or her resignation to the Board of Directors, the chairman of the board, the chief executive officer, the president or the secretary. Any resignation shall take effect immediately upon its receipt or at such later time specified in the resignation. The acceptance of a resignation shall not be necessary to make it effective unless otherwise stated in the resignation. Such resignation shall be without prejudice to the contract rights, if any, of the Corporation.

Section 3. VACANCIES. A vacancy in any office may be filled by the Board of Directors for the balance of the term.

Section 4. CHAIRMAN OF THE BOARD. The Board of Directors may designate from among its members a chairman of the board, who shall not, solely by reason of these Bylaws, be an officer of the Corporation. The Board of Directors may designate the chairman of the board as an executive or non-executive chairman. The chairman of the board shall preside over the meetings of the Board of Directors. The chairman of the board shall perform such other duties as may be assigned to him or her by these Bylaws or the Board of Directors.

Section 5. CHIEF EXECUTIVE OFFICER. The Board of Directors may designate a chief executive officer. In the absence of such designation, the chairman of the board shall be the chief executive officer of the Corporation. The chief executive officer shall have general responsibility for implementation of the policies of the Corporation, as determined by the Board of Directors, and for the management of the business and affairs of the Corporation. He or she may execute any deed, mortgage, bond, contract or other instrument, except in cases where the execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation or shall be required by law to be otherwise executed; and in general shall perform all duties incident to the office of chief executive officer and such other duties as may be prescribed by the Board of Directors from time to time.

Section 6. CHIEF OPERATING OFFICER. The Board of Directors may designate a chief operating officer. The chief operating officer shall have the responsibilities and duties as determined by the Board of Directors or the chief executive officer.

Section 7. CHIEF FINANCIAL OFFICER. The Board of Directors may designate a chief financial officer. The chief financial officer shall have the responsibilities and duties as determined by the Board of Directors or the chief executive officer.

Section 8. PRESIDENT. In the absence of a chief executive officer, the president shall in general supervise and control all of the business and affairs of the Corporation. In the absence of a designation of a chief operating officer by the Board of Directors, the president shall be the chief operating officer. He or she may execute any deed, mortgage, bond, contract or other instrument, except in cases where the execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation or shall be required by law to be otherwise executed; and in general shall perform all duties incident to the office of president and such other duties as may be prescribed by the Board of Directors from time to time.

 

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Section 9. VICE PRESIDENTS. In the absence of the president or in the event of a vacancy in such office, the vice president (or in the event there be more than one vice president, the vice presidents in the order designated at the time of their election or, in the absence of any designation, then in the order of their election) shall perform the duties of the president and when so acting shall have all the powers of and be subject to all the restrictions upon the president; and shall perform such other duties as from time to time may be assigned to such vice president by the chief executive officer, the president or the Board of Directors. The Board of Directors may designate one or more vice presidents as executive vice president, senior vice president, or vice president for particular areas of responsibility.

Section 10. SECRETARY. The secretary shall (a) keep the minutes of the proceedings of the stockholders, the Board of Directors and committees of the Board of Directors in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the corporate records and of the seal of the Corporation; (d) keep a register of the post office address of each stockholder which shall be furnished to the secretary by such stockholder; (e) have general charge of the stock transfer books of the Corporation; and (f) in general perform such other duties as from time to time may be assigned to him or her by the chief executive officer, the president or the Board of Directors.

Section 11. TREASURER. The treasurer shall have the custody of the funds and securities of the Corporation, shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation, shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors and in general perform such other duties as from time to time may be assigned to him or her by the chief executive officer, the president or the Board of Directors. In the absence of a designation of a chief financial officer by the Board of Directors, the treasurer shall be the chief financial officer of the Corporation.

The treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the president and Board of Directors, at the regular meetings of the Board of Directors or whenever it may so require, an account of all his or her transactions as treasurer and of the financial condition of the Corporation.

Section 12. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The assistant secretaries and assistant treasurers, in general, shall perform such duties as shall be assigned to them by the secretary or treasurer, respectively, or by the chief executive officer, the president or the Board of Directors.

Section 13. COMPENSATION. The compensation of the officers shall be fixed from time to time by or under the authority of the Board of Directors and no officer shall be prevented from receiving such compensation by reason of the fact that he or she is also a director.

ARTICLE VI

CONTRACTS, CHECKS AND DEPOSITS

Section 1. CONTRACTS. The Board of Directors may authorize any officer or agent to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the Corporation and such authority may be general or confined to specific instances. Any agreement, deed, mortgage, lease or other document shall be valid and binding upon the Corporation when duly authorized or ratified by action of the Board of Directors and executed by an authorized person.

 

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Section 2. CHECKS AND DRAFTS. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or agent of the Corporation in such manner as shall from time to time be determined by the Board of Directors.

Section 3. DEPOSITS. All funds of the Corporation not otherwise employed shall be deposited or invested from time to time to the credit of the Corporation as the Board of Directors, the chief executive officer, the president, the chief financial officer, or any other officer designated by the Board of Directors may determine.

ARTICLE VII

STOCK

Section 1. CERTIFICATES. Except as may be otherwise provided by the Board of Directors, stockholders of the Corporation are not entitled to certificates representing the shares of stock held by them. In the event that the Corporation issues shares of stock represented by certificates, such certificates shall be in such form as prescribed by the Board of Directors or a duly authorized officer, shall contain the statements and information required by the MGCL and shall be signed by the officers of the Corporation in any manner permitted by the MGCL. In the event that the Corporation issues shares of stock without certificates, to the extent then required by the MGCL, the Corporation shall provide to the record holders of such shares a written statement of the information required by the MGCL to be included on stock certificates. There shall be no differences in the rights and obligations of stockholders based on whether or not their shares are represented by certificates.

Section 2. TRANSFERS. All transfers of shares of stock shall be made on the books of the Corporation, by the holder of the shares, in person or by his or her attorney, in such manner as the Board of Directors or any officer of the Corporation may prescribe and, if such shares are certificated, upon surrender of certificates duly endorsed. The issuance of a new certificate upon the transfer of certificated shares is subject to the determination of the Board of Directors that such shares shall no longer be represented by certificates. Upon the transfer of any uncertificated shares, the Corporation shall provide to the record holders of such shares, to the extent then required by the MGCL, a written statement of the information required by the MGCL to be included on stock certificates.

The Corporation shall be entitled to treat the holder of record of any share of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by the laws of the State of Maryland.

Notwithstanding the foregoing, transfers of shares of any class or series of stock will be subject in all respects to the Charter and all of the terms and conditions contained therein.

 

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Section 3. REPLACEMENT CERTIFICATE. Any officer of the Corporation may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, destroyed, stolen or mutilated, upon the making of an affidavit of that fact by the person claiming the certificate to be lost, destroyed, stolen or mutilated; provided, however, if such shares have ceased to be certificated, no new certificate shall be issued unless requested in writing by such stockholder and the Board of Directors has determined that such certificates may be issued. Unless otherwise determined by an officer of the Corporation, the owner of such lost, destroyed, stolen or mutilated certificate or certificates, or his or her legal representative, shall be required, as a condition precedent to the issuance of a new certificate or certificates, to give the Corporation a bond in such sums as it may direct as indemnity against any claim that may be made against the Corporation.

Section 4. FIXING OF RECORD DATE. The Board of Directors may set, in advance, a record date for the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or determining stockholders entitled to receive payment of any dividend or the allotment of any other rights, or in order to make a determination of stockholders for any other proper purpose. Such date, in any case, shall not be prior to the close of business on the day the record date is fixed and shall be not more than 90 days and, in the case of a meeting of stockholders, not less than ten days, before the date on which the meeting or particular action requiring such determination of stockholders of record is to be held or taken.

When a record date for the determination of stockholders entitled to notice of and to vote at any meeting of stockholders has been set as provided in this section, such record date shall continue to apply to the meeting if adjourned or postponed, except if the meeting is adjourned or postponed to a date more than 120 days after the record date originally fixed for the meeting, in which case a new record date for such meeting shall be determined as set forth herein.

Section 5. STOCK LEDGER. The Corporation shall maintain at its principal office or at the office of its counsel, accountants or transfer agent, an original or duplicate stock ledger containing the name and address of each stockholder and the number of shares of each class held by such stockholder.

Section 6. FRACTIONAL STOCK; ISSUANCE OF UNITS. The Board of Directors may authorize the Corporation to issue fractional shares of stock or authorize the issuance of scrip, all on such terms and under such conditions as it may determine. Notwithstanding any other provision of the Charter or these Bylaws, the Board of Directors may authorize the issuance of units consisting of different securities of the Corporation. Any security issued in a unit shall have the same characteristics as any identical securities issued by the Corporation, except that the Board of Directors may provide that for a specified period securities of the Corporation issued in such unit may be transferred on the books of the Corporation only in such unit.

ARTICLE VIII

ACCOUNTING YEAR

The Board of Directors shall have the power, from time to time, to fix the fiscal year of the Corporation by a duly adopted resolution.

 

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ARTICLE IX

DISTRIBUTIONS

Section 1. AUTHORIZATION. Dividends and other distributions upon the stock of the Corporation may be authorized by the Board of Directors, subject to the provisions of law and the Charter. Dividends and other distributions may be paid in cash, property or stock of the Corporation, subject to the provisions of law and the Charter.

Section 2. CONTINGENCIES. Before payment of any dividends or other distributions, there may be set aside out of any assets of the Corporation available for dividends or other distributions such sum or sums as the Board of Directors may from time to time, in its absolute discretion, think proper as a reserve fund for contingencies, for equalizing dividends, for repairing or maintaining any property of the Corporation or for such other purpose as the Board of Directors shall determine, and the Board of Directors may modify or abolish any such reserve.

ARTICLE X

INVESTMENT POLICY

Subject to the provisions of the Charter, the Board of Directors may from time to time adopt, amend, revise or terminate any policy or policies with respect to investments by the Corporation as it shall deem appropriate in its sole discretion.

ARTICLE XI

SEAL

Section 1. SEAL. The Board of Directors may authorize the adoption of a seal by the Corporation. The seal shall contain the name of the Corporation and the year of its incorporation and the words “Incorporated Maryland.” The Board of Directors may authorize one or more duplicate seals and provide for the custody thereof.

Section 2. AFFIXING SEAL. Whenever the Corporation is permitted or required to affix its seal to a document, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a seal to place the word “(SEAL)” adjacent to the signature of the person authorized to execute the document on behalf of the Corporation.

ARTICLE XII

INDEMNIFICATION AND ADVANCE OF EXPENSES

To the maximum extent permitted by Maryland law in effect from time to time, the Corporation shall indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, shall pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any individual who is a present or former director or officer of the Corporation and who is made or threatened to be made a party to, or witness in, the proceeding by reason of his or her service in that capacity or (b) any individual who, while a director or officer of the Corporation and at the request of the Corporation, serves or has served as a director, officer, trustee, member, manager or partner of another corporation, real estate investment trust, limited liability company, partnership, joint venture, trust, employee benefit plan or other

 

19


enterprise and who is made or threatened to be made a party to, or witness in, the proceeding by reason of his or her service in that capacity. The rights to indemnification and advance of expenses provided by the Charter and these Bylaws shall vest immediately upon election of a director or officer. The Corporation may, with the approval of its Board of Directors, provide such indemnification and advance for expenses to an individual who served a predecessor of the Corporation in any of the capacities described in (a) or (b) above and to any employee or agent of the Corporation or a predecessor of the Corporation. The indemnification and payment or reimbursement of expenses provided in these Bylaws shall not be deemed exclusive of or limit in any way other rights to which any person seeking indemnification or payment or reimbursement of expenses may be or may become entitled under any bylaw, resolution, insurance, agreement or otherwise.

Neither the amendment nor repeal of this Article, nor the adoption or amendment of any other provision of the Charter or these Bylaws inconsistent with this Article, shall apply to or affect in any respect the applicability of the preceding paragraph with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption.

ARTICLE XIII

WAIVER OF NOTICE

Whenever any notice of a meeting is required to be given pursuant to the Charter or these Bylaws or pursuant to applicable law, a waiver thereof in writing or by electronic transmission, given by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at nor the purpose of any meeting need be set forth in the waiver of notice of such meeting, unless specifically required by statute. The attendance of any person at any meeting shall constitute a waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting has not been lawfully called or convened.

ARTICLE XIV

EXCLUSIVE FORUM FOR CERTAIN LITIGATION

Unless the Corporation consents in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland, or, if that Court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division, shall be the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of the Corporation other than actions arising under the federal securities laws, (b) any action asserting a claim of breach of any duty owed by any director or officer or other employee of the Corporation to the Corporation or to the stockholders of the Corporation, (c) any action asserting a claim against the Corporation or any director or officer or other employee of the Corporation arising pursuant to any provision of the MGCL, the Charter or these Bylaws, or (d) any action asserting a claim against the Corporation or any director or officer or other employee of the Corporation that is governed by the internal affairs doctrine.

 

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ARTICLE XV

AMENDMENT OF BYLAWS

The Board of Directors shall have the exclusive power to adopt, alter or repeal any provision of these Bylaws and to make new Bylaws.

 

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EX-10.1 5 d759970dex101.htm EX-10.1 EX-10.1

Exhibit 10.1

FORM OF

MANAGEMENT AGREEMENT

BY AND AMONG

NEXPOINT REAL ESTATE FINANCE, INC.

AND

NEXPOINT REAL ESTATE ADVISORS VII, L.P.


TABLE OF CONTENTS

 

        Page
1.  

Definitions

  1
2.  

Appointment

  4
3.  

Duties of the Manager

  4
4.  

Authority of the Manager

  7
5.  

No Partnership or Joint Venture

  7
6.  

Bank Accounts

  7
7.  

Records; Access; Confidentiality

  7
8.  

Limitations on Activities

  8
9.  

Compensation

  8
10.  

Expenses

  9
11.  

Other Services

  9
12.  

Other Activities of the Manager

  9
13.  

Term and Termination

  9
14.  

Payments and Duties Upon Termination

  10
15.  

Limitation of Liability, Exculpation and Indemnification by the Company

  10
16.  

Indemnification by the Manager

  11
17.  

Representations and Warranties

  12
18.  

Notices

  13
19.  

Modification

  14
20.  

Severability

  14
21.  

Governing Law; Waiver of Jury Trial

  14
22.  

Entire Agreement

  14
23.  

No Waiver

  15
24.  

Pronouns and Plurals

  15
25.  

Headings

  15
26.  

Execution in Counterparts

  15

 

 

i


MANAGEMENT AGREEMENT

THIS MANAGEMENT AGREEMENT (this “Agreement”), dated as of                , 2020, is entered into by and among NexPoint Real Estate Finance, Inc., a Maryland corporation (the “Company”) and NexPoint Real Estate Advisors VII, L.P., a Delaware limited partnership (the “Manager”).

RECITALS

A. The Company is a Maryland corporation created in accordance with the Maryland General Corporation Law and intends to elect to qualify as a REIT for U.S. federal income tax purposes.

B. The Company desires to avail itself of the experience, sources of information, advice, assistance and certain facilities of the Manager and its Affiliates and to have the Manager undertake the duties and responsibilities set forth in this Agreement, on behalf of, and subject to the supervision of the Board of Directors of the Company, all as provided in this Agreement.

C. The Manager is willing to render such services, subject to the supervision of the Board of Directors of the Company, on the terms and conditions set forth in this Agreement.

D. The Board of Directors has approved this Agreement.

NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements contained herein, the parties hereto, intending to be legally bound, hereby agree as follows:

1. Definitions. As used in this Agreement, the following terms have the definitions set forth below:

1940 Act” means the Investment Company Act of 1940, as amended.

Affiliate” or “Affiliated” means with respect to any Person, (i) any Person directly or indirectly controlling, controlled by or under common control with such other Person; (ii) any executive officer, director, trustee or general partner of such other Person; and (iii) any legal entity for which such Person acts as an executive officer, director, trustee or general partner. For purposes of this definition, the terms “controls,” “is controlled by,” or “is under common control with” shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of an entity, whether through ownership or voting rights, by contract or otherwise.

Articles of Incorporation” means the Articles of Amendment and Restatement of the Company, as hereafter amended from time to time.

Automatic Renewal Term” has the meaning set forth in Section 13(a).

Board of Directors” or “Board” means the Board of Directors of the Company.

Bylaws” means the bylaws of the Company, as amended and as the same are in effect from time to time.

Cash on Hand” means the Company’s cash on hand, exclusive of the proceeds of any debt financing incurred or to be incurred in connection with the relevant Investment.

Cause Event” means (a) a final judgment by any court or governmental body of competent jurisdiction not stayed or vacated within 30 days that the Manager, any of its agents or any of its assignees has committed a felony or a material violation of applicable securities laws that has a material adverse effect on the business of the Company or the ability of the Manager to perform its duties under the terms of this Agreement, (b) an order for relief in an involuntary bankruptcy case relating to the Manager or the Manager authorizing or filing a voluntary bankruptcy petition, (c) the dissolution of the Manager, or (d) a determination that the Manager has (i) committed fraud against the Company, (ii) misappropriated or embezzled funds of the Company, (iii) acted in a manner constituting bad faith, willful


misconduct, gross negligence or reckless disregard in the performance of its duties under this Agreement, (iv) failed to act, where such failure to act constituted bad faith, willful misconduct, gross negligence or reckless disregard in the performance of its duties under this Agreement, or (v) defaulted in the performance or observance of any material term, condition or covenant contained in this Agreement and such default shall have continued for a period of 30 days after the Company had given written notice to the Manager of such default; provided, however, that if any of the actions or omissions described in this clause (d) are caused by an employee and/or officer of the Manager or one of its Affiliates and the Manager takes all necessary action against such person and cures the damage caused by such actions or omissions within 30 days of such determination, then such event shall not constitute a Cause Event.

Code” means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute thereto. Reference to any provision of the Code shall mean such provision as in effect from time to time, as the same may be amended and any successor provision thereto, as interpreted by any applicable regulations as in effect from time to time.

Core Earnings” means the net income (loss) attributable to the common stockholders of the Company, computed in accordance with GAAP, including realized gains and losses not otherwise included in net income (loss), excluding any unrealized gains or losses or other similar non-cash items that are included in net income (loss) for the applicable reporting period, regardless of whether such items are included in other comprehensive (loss), or in net income (loss) and adding back amortization of stock-based compensation. Net income (loss) attributable to common stockholders may also be adjusted for one-time events pursuant to changes in GAAP and certain material non-cash income or expense items, in each case after discussions between the Manager and the Independent Directors and approved by a majority of the Independent Directors.

Covered Person” has the meaning set forth in Section 15(a).

Director” means a member of the Board of Directors.

Effective Termination Date” has the meaning set forth in Section 14(a).

Election Notice” has the meaning set forth in Section 9(a).

Equity” means (a) the sum of (i) total stockholders’ equity immediately prior to the Offering Date, plus (ii) the net proceeds received by the Company from all issuances of the Company’s common stock in and after the IPO, plus (iii) the Company’s cumulative Core Earnings from and after the Offering Date to the end of the most recently completed calendar quarter, (b) less (i) any distributions to the Stockholders from and after the Offering Date to the end of the most recently completed calendar quarter and (ii) all amounts that the Company or any of its subsidiaries has paid to repurchase the Company’s common stock from and after the Offering Date to the end of the most recently completed calendar quarter. In the Company’s calculation of Equity, the Company will adjust its calculation of Core Earnings to remove the compensation expense relating to awards granted under one or more of its long-term incentive plans that is added back in the calculation of Core Earnings. Additionally, for the avoidance of doubt, Equity will not include the assets contributed to the Company in the Formation Transaction.

Exchange Act” means the Securities Exchange Act of 1934, as amended.

Expenses” has the meaning set forth in Section 10(a).

Formation Transaction” means the series of transactions through which the Company will acquire an initial portfolio of Investments as described in the Registration Statement.

GAAP” means generally accepted accounting principles in the U.S.

Governing Instruments” means, with regard to any entity, the articles of incorporation or certificate of incorporation and bylaws in the case of a corporation, the certificate of limited partnership (if applicable) and the partnership agreement in the case of a general or limited partnership, the certificate of formation and operating agreement in the case of a limited liability company, the trust instrument in the case of a trust, or similar governing documents, in each case as amended.

 

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Independent Director” means a Director who qualifies as an “independent director” under the NYSE listing rules.

Initial Term” has the meaning set forth in Section 13(a).

Investment Guidelines” means the investment guidelines and other investment parameters for Investments, financing activities and other operations as initially disclosed in the Registration Statement, as may be amended, restated, modified, supplemented or waived by the Board of Directors from time to time.

Investments” means any investments by the Company in Real Estate Assets or any other asset.

IPO” means the Company’s initial public offering of Shares pursuant to the Registration Statement.

Joint Ventures” means any joint venture or partnership arrangements (other than between the Company and its operating partnership) in which the Company or any of its subsidiaries is a co-venturer, member or partner, which are established to own Investments.

Loans” means any indebtedness or obligations in respect of borrowed money or evidenced by bonds, notes, debentures, deeds of trust, letters of credit or similar instruments, including mortgages, mezzanine loans and bridge loans.

Management Fee” means an annual fee, payable monthly, in an amount equal to 1.50% of Equity, determined in accordance with Section 9.

NexPoint” means NexPoint Advisors, L.P., a Delaware limited partnership.

NYSE” means the New York Stock Exchange.

Offering” means any public or private offering of equity or debt securities of the Company that is consummated subsequent to the date of this Agreement, excluding Shares offered under any employee benefit plan of the Company.

Offering Date” means the closing of the Company’s IPO.

Offering Expenses” means any and all expenses (other than underwriting discounts and commissions) paid or to be paid by the Company in connection with an Offering, including, without limitation, the Company’s legal, accounting, printing, mailing and filing fees and other documented offering expenses.

Operating Expenses” means all out-of-pocket expenses of the Manager in performing services for the Company, including but not limited to the expenses incurred by the Manager in connection with any provision by the Manager of legal, accounting, financial and due diligence services performed by the Manager that outside professionals or outside consultants would otherwise perform. Operating Expenses also include compensation expense under any long term incentive plan adopted by the Company and approved by Stockholders and the Company’s pro rata share of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Manager required for the Company’s operations. Operating Expenses do not include expenses for the administrative services described on Exhibit A to this Agreement.

Person” means an individual, corporation, partnership, joint venture, association, company (whether of limited liability or otherwise), trust, bank or other entity, or government or any agency or political subdivision of a government.

 

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Real Estate Assets” means any investment by the Company (including, without limitation, reserves for capital expenditures) in Real Estate either directly, through a direct or indirect subsidiary of the Company or through a Joint Venture.

Real Estate” means assets owned from time to time by the Company, either directly, through a direct or indirect subsidiary of the Company or through a Joint Venture, which consists of (a) land only, (b) land, including the buildings located thereon, (c) buildings only, (d) real estate-related securities (including preferred stock), Loans and other real estate-related financings, or (e) such investments the Board or the Manager designate as Real Estate to the extent such investments could be classified as Real Estate related.

Registration Statement” means the Company’s Registration Statement on Form S-11 (No. 333-235698), as amended from time to time.

REIT” means a “real estate investment trust” within the meaning of Sections 856 through 860 of the Code.

SEC” means the Securities and Exchange Commission.

Securities Act” means the Securities Act of 1933, as amended.

Shares” means the shares of the Company’s common stock, par value $0.01 per share.

Stockholders” means the registered holders of the Shares.

Termination Fee” means a termination fee equal to three times the average annual Management Fee earned by the Manager during the two-year period immediately preceding the most recently completed calendar quarter prior to the Effective Termination Date; provided, however, if this Agreement is terminated prior to the two year anniversary of the date of this Agreement, the Management Fee earned during such period will be annualized for purposes of calculating the average annual Management Fee.

VWAP” means volume-weighted average price.

2. Appointment. The Company hereby appoints the Manager to serve as their advisor to perform the services set forth herein on the terms and conditions set forth in this Agreement, and the Manager hereby accepts such appointment. Except as otherwise provided in this Agreement, the Manager hereby agrees to use its commercially reasonable efforts to perform each of the duties set forth herein. The appointment of the Manager shall be exclusive to the Manager, except to the extent that the Manager elects, in its sole and absolute discretion, subject to the terms of this Agreement, to cause the duties of the Manager as set forth herein to be provided by third parties and/or its Affiliates.

3. Duties of the Manager. The Manager, in its capacity as manager of the assets and the day-to-day operations of the Company, at all times will be subject to the supervision of the Board of Directors and will have only such functions and authority as the Board of Directors may delegate to it including, without limitation, the functions and authority identified herein and delegated to the Manager hereby. The Manager will be responsible for the day-to-day operations of the Company and will perform (or cause to be performed through one or more of its Affiliates or subsidiaries) such services and activities relating to the assets and operations of the Company as may be appropriate, including, without limitation:

(a) serve as the Company’s investment and financial advisor;

(b) provide the daily management for the Company and perform and supervise the various administrative functions necessary for the day-to-day management of the operations of the Company, including the administrative services described on Exhibit A to this Agreement;

 

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(c) investigate, select, and, on behalf of the Company, engage and conduct business with such Persons as the Manager deems necessary to the proper performance of its obligations hereunder, including, but not limited to, consultants, accountants, correspondents, lenders, technical advisors, attorneys, brokers, underwriters, corporate fiduciaries, escrow agents, depositaries, custodians, agents for collection, insurers, insurance agents, banks, builders, developers, property owners, real estate management companies, real estate operating companies, securities investment advisors, mortgagors, the registrar and the transfer agent and any and all agents for any of the foregoing, including Affiliates of the Manager, and Persons acting in any other capacity deemed by the Manager necessary or desirable for the performance of any of the foregoing services, including, but not limited to, entering into contracts in the name of the Company with any of the foregoing;

(d) consult with the officers and Directors of the Company and assist the Directors in the formulation and implementation of the Company’s financial policies, and, as necessary, furnish the Board with advice and recommendations with respect to the making of investments consistent with the investment objectives and policies of the Company and in connection with any borrowings proposed to be undertaken by the Company;

(e) subject to the provisions of Section 4 hereof, (i) participate in formulating an investment strategy and asset allocation framework, (ii) locate, analyze and select potential Investments, (iii) structure and negotiate the terms and conditions of transactions pursuant to which acquisitions and dispositions of Investments will be made; (iv) research, identify, review and recommend acquisitions and dispositions of Investments to the Board and make Investments on behalf of the Company in compliance with the investment objectives and policies of the Company; (v) negotiate the terms of and arrange for financing and refinancing and make other changes in the assets or capital structure of, and dispose of, reinvest the proceeds from the sale of, or otherwise deal with, Investments; (vi) negotiate and enter into agreements relating to Real Estate Assets and, to the extent necessary, perform all other operational functions for the maintenance and administration of such Real Estate Assets; (vii) actively oversee and manage Investments for purposes of meeting the Company’s investment objectives and reviewing and analyzing financial information for each of the Investments and the overall portfolio; (viii) select Joint Venture partners, structure and negotiate corresponding agreements and oversee and monitor these relationships; (ix) engage, oversee, supervise and evaluate property managers who perform services for the Company; (x) engage, oversee, supervise and evaluate Persons with whom the Manager contracts to perform certain of the services required to be performed under this Agreement; (xi) manage accounting and other record-keeping functions for the Company, including reviewing and analyzing the capital and operating budgets for the Real Estate Assets and generating an annual budget for the Company; and (xii) recommend various liquidity events to the Board when appropriate;

(f) upon request, but no less than quarterly, provide the Board with periodic reports regarding prospective investments;

(g) negotiate the terms of and make investments in, and dispositions of, Investments within the discretionary limits and authority as granted by the Board;

(h) within the discretionary limits and authority as granted by the Board, negotiate on behalf of the Company with banks or other lenders for Loans to be made to the Company, and negotiate with investment banking firms and broker-dealers or negotiate private sales of Shares or obtain Loans for the Company, but in no event in such a manner so that the Manager shall be acting as broker-dealer or underwriter; provided, further, that any fees and costs payable to third parties incurred by the Manager in connection with the foregoing shall be the responsibility of the Company;

(i) at least quarterly, and at any other time reasonably requested by the Board, obtain reports (which may, but are not required to, be prepared by the Manager or its Affiliates), where appropriate, concerning the value of Investments or contemplated Investments of the Company;

(j) at least quarterly, and at any other time reasonably requested by the Board, make reports to the Board of its performance of services to the Company under this Agreement (including reports with respect to potential conflicts of interest involving the Manager or any of its Affiliates), the composition and characteristics of the Company’s portfolio, and compliance with the Company’s Investment Guidelines and other policies approved from time to time by the Board;

 

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(k) provide the Company with all necessary cash management services;

(l) deliver to, or maintain on behalf of, the Company copies of all appraisals obtained in connection with the investments in any Real Estate Assets as may be required to be obtained by the Board;

(m) notify the Board of all proposed transactions outside of the Manager’s delegated authority and obtain Board approval of same before they are completed;

(n) negotiate and effect any tenancy-in-common (TIC) or other interests in Investments as may be approved by the Board;

(o) perform investor-relations and Stockholder communications functions for the Company;

(p) render such services as may be reasonably determined by the Board of Directors consistent with the terms and conditions herein;

(q) maintain the Company’s accounting and other records and assist the Company in filing all reports required to be filed by it with the SEC, the Internal Revenue Service and other regulatory agencies;

(r) do all things necessary to assure its ability to render the services described in this Agreement;

(s) advise the Company regarding the maintenance of the Company’s qualification as a REIT and monitor the Company’s compliance with the various REIT qualification requirements and other rules set forth in the Code and any applicable Treasury Regulations promulgated under the Code, as amended from time to time, and use its commercially reasonable efforts to cause the Company to qualify as a REIT and to maintain its qualification as a REIT for U.S. federal income tax purposes;

(t) advise the Company regarding the maintenance of their exemptions from the status of an investment company required to register under the 1940 Act, and monitor compliance with the requirements for maintaining such exemptions and using commercially reasonable efforts to cause them to maintain such exemptions from such status;

(u) assist the Company in qualifying to do business in all applicable jurisdictions in which the Company or their subsidiaries do business, and ensure that the Company and its subsidiaries obtain and maintain all applicable licenses;

(v) assist the Company in complying with all regulatory requirements applicable to them with respect to their business activities, including preparing or causing to be prepared all financial statements required under applicable regulations and contractual undertakings and all reports and documents, if any, required under the Exchange Act, the Securities Act or by the NYSE;

(w) if requested by the Company, provide, or cause another qualified third party to provide, such internal audit, compliance and control services as may be required for the Company and its subsidiaries to comply with applicable law (including the Securities Act and the Exchange Act), regulation (including SEC regulations) and the rules and requirements of the NYSE or such other securities exchange on which the Shares are listed, and as otherwise requested by the Board;

(x) handle and resolve on behalf of the Company (including its subsidiaries) all routine claims, disputes or controversies, including all routine litigation, arbitration, settlement or other proceedings or negotiations, in which the Company or its subsidiaries may be involved (other than with the Manager or its Affiliates) or to which they may become subject, subject to such limitations or parameters as may be imposed from time to time by the Board; and

(y) use commercially reasonable efforts to cause the Company and its subsidiaries to comply with all applicable laws.

Notwithstanding the foregoing, the Manager may delegate any of the foregoing duties to any Person so long as the Manager remains responsible for the performance of the duties set forth in this Section 3; provided, however, that the delegation by the Manager of any of the foregoing duties to another Person shall not result in an increased Management Fee or additional expenses payable hereunder.

 

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4. Authority of the Manager.

(a) Pursuant to the terms of this Agreement (including the restrictions included in this Section 4 and in Section 8), and subject to the continuing and exclusive authority of the Board over the management of the Company, the Company, acting on the authority of the Board of Directors, hereby delegates to the Manager the authority to perform the services described in Section 3.

(b) Notwithstanding anything herein to the contrary, the Manager shall obtain the prior approval of the Board, any particular Directors specified by the Board or any committee of the Board, as the case may be, in connection with (i) any Investment for which the portion of the consideration paid out of the Company’s Cash on Hand equals or exceeds $50,000,000, (ii) any investment that is inconsistent with the Company’s publicly disclosed Investment Guidelines as in effect from time to time, or, if none are then publicly disclosed, as otherwise adopted by the Board from time to time, or (iii) any engagement of Affiliated service providers on behalf of the Company, which engagement terms will be negotiated on an arm’s length basis.

(c) If a transaction requires approval by the Independent Directors, the Manager will deliver to the Independent Directors all documents and other information required by them to properly evaluate the proposed transaction.

(d) For the period and on the terms and conditions set forth in this Agreement, the Company and each of its subsidiaries hereby constitutes, appoints and authorizes the Manager as its true and lawful agent and attorney-in-fact, in its name, place and stead, to negotiate, execute, deliver and enter into agreements, instruments and authorizations on their behalf, on such terms and conditions as the Manager, acting in its sole and absolute discretion, deems necessary or appropriate (subject to any limitations imposed by the Board). This power of attorney is deemed to be coupled with an interest.

5. No Partnership or Joint Venture. The parties to this Agreement are not partners or joint venturers with each other and nothing herein shall be construed to make them partners or joint venturers or impose any liability as such on either of them.

6. Bank Accounts. The Manager may establish and maintain one or more bank accounts in its own name for the account of the Company or in the name of the Company and may collect and deposit into any such account or accounts, and disburse from any such account or accounts, any money on behalf of the Company, consistent with the authority granted under Section 4 and in such other circumstances as the Board may approve, provided that no funds shall be commingled with the funds of the Manager; and the Manager shall upon request render appropriate accountings of such collections and payments to the Board and to the auditors of the Company.

7. Records; Access; Confidentiality. The Manager shall maintain appropriate books of accounts and records of all its activities hereunder and make such records available for inspection by the Directors and by counsel, auditors and authorized agents of the Company, at any time and from time to time. The Manager shall at all reasonable times have access to the books and records of the Company. The Manager shall keep confidential any and all information obtained in connection with the services rendered under this Agreement and shall not disclose any such information (or use the same except in furtherance of its duties under this Agreement) to unaffiliated third parties except (a) with the prior written consent of the Board, (b) to legal counsel, accountants or other professional advisors or consultants engaged by the Company, (c) to appraisers, financing sources and others in the ordinary course of the Company’s business, (d) to governmental officials having jurisdiction over the Company (including its subsidiaries), (e) in connection with any governmental or regulatory filings of the Company or of its subsidiaries, or disclosure or presentations to Company investors, (f) as required by law or legal process to which the Manager or any Person to whom disclosure is permitted hereunder is a party, or (g) to the extent such information is otherwise publicly available through the actions of a Person other than the Manager not resulting from the Manager’s violation of this Section 7. The confidentiality provisions of this Section 7 shall survive for a period of one year after the expiration or earlier termination of this Agreement.

 

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8. Limitations on Activities. Notwithstanding anything herein to the contrary, the Manager shall not intentionally or with gross negligence, reckless disregard or bad faith take any action that, would (a) adversely affect the maintenance of the Company’s qualification as a REIT under the Code, unless the Board has determined that the maintenance of the Company’s REIT qualification is not in the best interests of the Company and its Stockholders, (b) subject the Company to regulation under the 1940 Act, (c) be contrary to or inconsistent with the Company’s Investment Guidelines or (d) violate any law, rule, regulation or statement of policy of any governmental body or agency having jurisdiction over the Company or its Shares, or otherwise not be permitted by the Articles of Incorporation or Bylaws, except if such action shall be ordered by the Board, in which case the Manager shall notify promptly the Board of the Manager’s judgment of the potential impact of such action and shall refrain from taking such action until it receives further clarification or instructions from the Board. In such event, the Manager shall have no liability for acting in accordance with the specific instructions of the Board so given.

9. Compensation.

(a) During the term hereof, as the same may be extended from time to time, the Company shall pay the Manager the Management Fee. The Manager will not receive any compensation as calculated hereunder for the period prior to the Offering Date. The Manager shall compute each installment of the Management Fee as promptly as possible after the end of the month with respect to which such installment is payable. The accrued fees will be payable monthly as promptly as possible after the end of each month during which this Agreement is in effect. A copy of the computations made by the Manager to calculate such installment shall thereafter, for informational purposes only, promptly be delivered to the Board. The Management Fee shall be paid in cash unless the Manager elects, in its sole discretion, to receive all or a portion of the Management Fee in Shares; provided, that (i) such election to receive all or a portion of the fee in Shares shall be made by notice to the Board (the “Election Notice”) at the time the Manager delivers to the Board the computation of the Management Fee for such month and (ii) the Manager’s ability to receive Shares in payment of all or a portion of the Management Fee shall be subject to Section 9(c). To the extent that the Manager elects to receive Shares in payment of all or a portion of the Management Fee for any particular month, the number of Shares payable to the Manager for such month shall equal (i) the dollar amount of the portion of the monthly installment of the Management Fee payable in Shares (as set forth in the Election Notice) divided by (ii) the VWAP per Share for the 10 trading days prior to the end of the month for which the Management Fee will be paid. The Management Fee shall be payable independent of the performance of the Company or the Investments.

(b) The Manager may waive a portion of its fees. If this Agreement becomes effective subsequent to the first day of a month or shall terminate before the last day of a month, compensation for such month shall be computed in a manner consistent with the calculation of the fees payable on a monthly basis.

(c) The Manager’s ability to receive Shares in payment of all or a portion of the Management Fee due to the Manager under this Agreement shall be subject to the following: (i) the ownership of such Shares by the Manager shall not violate the limit on ownership of Shares set forth in the Articles of Incorporation or otherwise raise a material risk to the status of the Company as a REIT, after giving effect to any exception from such limit that the Board may grant to the Manager or its Affiliates; and (ii) the Company’s issuance of such Shares to the Manager shall comply with all applicable restrictions under the U.S. federal securities laws and the rules of the NYSE.

(d) The Company agrees to provide reasonable registration rights to the Manager and its Affiliates in a form of registration rights agreement to be mutually agreed.

 

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10. Expenses.

(a) In addition to the compensation paid to the Manager pursuant to Section 9, the Company shall pay directly or reimburse the Manager for all of the documented Operating Expenses and Offering Expenses (together, “Expenses”) paid or incurred by the Manager or its Affiliates in connection with the services it provides to the Company pursuant to this Agreement. Any Expenses payable by the Company or reimbursable to the Manager pursuant to this Agreement shall not be in amounts greater than those which would be payable to outside professionals or consultants engaged to perform such services pursuant to agreements negotiated on an arm’s length basis. Operating Expenses directly paid by the Company together with the reimbursement of Operating Expenses to the Manager, plus Management Fees under Section 9, may not exceed 2.5% of equity book value determined in accordance with GAAP for any calendar year or portion thereof, provided, however, that this limitation will not apply to Offering Expenses, legal, accounting, financial, due diligence and other service fees incurred in connection with extraordinary litigation and mergers and acquisitions and other events outside the Company’s ordinary course of business or any out-of-pocket acquisition or due diligence expenses incurred in connection with the acquisition or disposition of Real Estate Assets.

(b) The Manager shall prepare a statement documenting all Expenses incurred during each month, and shall deliver such statement to the Company within 15 business days after the end of each month. Expenses incurred by the Manager on behalf of the Company and payable pursuant to this Section 10 shall be reimbursed no later than the 15th business day immediately following the date of delivery of such statement of Expenses to the Company.

11. Other Services. Should the Board request that the Manager or any director, officer or employee thereof render services for the Company other than set forth in Section 3, such services shall be separately compensated at such customary rates and in such customary amounts as are agreed upon by the Manager and the Board, including a majority of the Independent Directors, subject to the limitations contained in the Articles of Incorporation, and shall not be deemed to be services pursuant to the terms of this Agreement.

12. Other Activities of the Manager. Except as set forth in this Section 12, nothing herein contained shall prevent the Manager or any of its Affiliates from engaging in or earning fees from other activities, including, without limitation, the rendering of advice to other Persons (including other REITs) and the management of other programs advised, sponsored or organized by NexPoint or its Affiliates; nor shall this Agreement limit or restrict the right of any director, officer, member, partner, employee, or stockholder of the Manager or its Affiliates to engage in or earn fees from any other business or to render services of any kind to any other partnership, corporation, firm, individual, trust or association and earn fees for rendering such services; provided, however, that the Manager must devote sufficient resources to the Company’s business to discharge its obligations to the Company under this Agreement. The Manager may, with respect to any investment in which the Company is a participant, also render advice and service to each and every other participant therein, and earn fees for rendering such advice and service. Specifically, it is contemplated that the Company may enter into Joint Ventures or other similar co-investment arrangements with certain Persons, and pursuant to the agreements governing such Joint Ventures or arrangements, the Manager may be engaged to provide advice and service to such Persons, in which case the Manager will earn fees for rendering such advice and service.

The Board acknowledges that the Manager and its Affiliates are subject to various conflicts of interest, including without limitation, those set forth in the Registration Statement. The Manager shall report to the Board the existence of any condition or circumstance, existing or anticipated, of which it has knowledge, which creates or is reasonably likely to create a conflict of interest between the Manager’s obligations to the Company and its obligations to or its interest in any other partnership, corporation, firm, individual, trust or association.

13. Term and Termination.

(a) Duration. This Agreement shall become effective on the date first set forth above. Unless terminated as herein provided, this Agreement shall remain in full force and effect until the date that is three years after the effective date of this Agreement (the “Initial Term”). Subsequent to the Initial Term, this Agreement shall be deemed to be automatically renewed for an additional one-year period (an “Automatic Renewal Term”), unless the Company or the Manager elects not to renew this Agreement in accordance with Section 9(c) below.

 

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(b) Amendment. No provision of this Agreement may be amended, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the amendment, waiver, discharge or termination is sought. Any amendment of this Agreement shall be approved by either (i) the Company’s Board of Directors or (ii) a vote of the Company’s stockholders.

(c) Termination. Notwithstanding any other provision of this Agreement to the contrary, (i) upon written notice given 180 days’ prior to the expiration of the Initial Term or any Automatic Renewal Term to the Manager, the Company may, without cause, in connection with the expiration of the Initial Term or the then-current Automatic Renewal Term, decline to renew this Agreement, whereupon this Agreement shall not be renewed and extended and this Agreement shall terminate effective on the anniversary date of this Agreement next following the delivery of such notice, (ii) no later than 180 days prior to the expiration of the Initial Term or the then-current Automatic Renewal Term, the Manager may, without cause, deliver written notice to the Company informing it of the Manager’s intention to decline to renew this Agreement, whereupon this Agreement shall not be renewed and extended and this Agreement shall terminate effective on the anniversary date of this Agreement next following the delivery of such notice, (iii) the Company may terminate this Agreement upon the occurrence of a Cause Event by giving written notice to the Manager of the occurrence of a Cause Event, whereupon this Agreement shall terminate 30 days after delivery of such written notice, and (iv) the Manager may terminate this Agreement by giving written notice to the Company in the event that the Company shall default in the performance or observance of any material term, condition or covenant contained in this Agreement and such default shall have continued for a period of 30 days before the Manager had given written notice to the Company of such default, whereupon this Agreement shall terminate 30 days after delivery of such written notice.

14. Payments and Duties Upon Termination.

(a) Amounts Owed. The Company shall pay the Manager the Termination Fee before or on the last day of the Initial Term, the Automatic Renewal Term or the end of the 30-day period, as the case may be (the “Effective Termination Date”) upon termination of this Agreement, provided that the Company is not required to pay the Manager the Termination Fee if this Agreement is terminated by the Company as a result of a Cause Event.

(b) Manager’s Duties. The Manager shall promptly upon termination of this Agreement:

(i) pay over to the Company all money collected and held for the account of the Company pursuant to this Agreement, after deducting any accrued compensation and reimbursement for its expenses to which it is then entitled;

(ii) deliver to the Board a full accounting, including a statement showing all payments collected by it and a statement of all money held by it, covering the period following the date of the last accounting furnished to the Board;

(iii) deliver to the Board all assets, including all Investments, and documents of the Company then in the custody of the Manager; and

(iv) reasonably cooperate with the Company, at the Company’s expense, to provide an orderly management transition.

15. Limitation of Liability, Exculpation and Indemnification by the Company.

(a) Whether or not expressly provided in this Agreement, every provision of this Agreement relating to the conduct or affecting the liability of or affording protection to the Manager or any of its respective Affiliates and their respective partners, members, officers, directors, employees and agents (including parties acting as agents for the execution of transactions) (each, a “Covered Person” and collectively, “Covered Persons”) shall be subject to the provisions of this Section.

 

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(b) To the fullest extent permitted by law, no Covered Person shall be liable to the Company (including but not limited to (i) any act or omission by any Covered Person in connection with the conduct of the business of the Company, that is determined by such Covered Person in good faith to be in or not opposed to the best interests of the Company, (ii) any act or omission by any Covered Person based on the suggestions of any professional advisor of the Company whom such Covered Person believes is authorized to make such suggestions on behalf of the Company, (iii) any act or omission by the Company, or (iv) any mistake, negligence, misconduct or bad faith of any broker or other agent of the Company selected by the Covered Person with reasonable care), unless any act or omission by such Covered Person constitutes bad faith, fraud, willful misfeasance, intentional misconduct, gross negligence or reckless disregard of its duties (as determined by a non-appealable judgment of a court or arbitration proceeding of competent jurisdiction).

(c) A Covered Person may consult with legal counsel or accountants selected by such Covered Person and any act or omission by such Covered Person on behalf of the Company or in furtherance of the business of the Company in good faith in reliance on and in accordance with the advice of such counsel or accountants shall be full justification for the act or omission, and such Covered Person shall be fully protected in so acting or omitting to act if the counsel or accountants were selected with reasonable care.

(d) To the fullest extent permitted by law, the Company shall indemnify and save harmless Covered Persons, from and against any and all claims, liabilities, damages, losses, costs and expenses, including amounts paid in satisfaction of judgments, in compromises and settlements, as fines and penalties and legal or other costs and expenses of investigating or defending against any claim or alleged claim, of any nature whatsoever, known or unknown, liquidated or unliquidated, that are incurred by any Covered Person and arise out of or in connection with the business or investments of the Company, or the performance by the Covered Person of its responsibilities hereunder, provided that the Covered Person shall not be entitled to indemnification hereunder to the extent the Covered Person’s conduct constitutes bad faith, fraud, willful misfeasance, intentional misconduct, gross negligence or reckless disregard of its duties (as determined by a non-appealable judgment of a court or arbitration proceeding of competent jurisdiction). The termination of any proceeding by settlement, judgment, order or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the Covered Person’s conduct constituted bad faith, fraud, willful misfeasance, intentional misconduct, gross negligence or reckless disregard of its duties (as determined by a non-appealable judgment of a court or arbitration proceeding of competent jurisdiction).

(e) Expenses incurred by a Covered Person in defense or settlement of any claim that shall be subject to a right of indemnification hereunder, shall be advanced by the Company prior to the final disposition thereof upon receipt of an undertaking by or on behalf of the Covered Person to repay the amount advanced to the extent that it shall be determined ultimately that the Covered Person is not entitled to be indemnified hereunder.

(f) The right of any Covered Person to the indemnification provided herein shall be cumulative of, and in addition to, any and all rights to which the Covered Person may otherwise be entitled by contract or as a matter of law or equity and shall be extended to the Covered Person’s successors, assigns and legal representatives.

(g) The provisions of this Section are expressly intended to confer benefits upon Covered Persons and such provisions shall remain operative and in full force and effect regardless of the expiration or any termination of this Agreement.

(h) No Covered Person shall be liable hereunder for any settlement of any action or claim effected without its written consent thereto.

16. Indemnification by the Manager.

(a) The Manager shall indemnify and hold harmless the Company and its subsidiaries from all claims, liabilities, damages, losses, costs and expenses, including amounts paid in satisfaction of judgments, in compromises and settlements, as fines and penalties and legal or other costs and expenses of investigating or defending against any claim or alleged claim, of any nature whatsoever,

 

11


known or unknown, liquidated or unliquidated, that are incurred by reason of the Manager’s bad faith, fraud, willful misfeasance, intentional misconduct, gross negligence or reckless disregard of its duties; provided, however, that the Manager shall not be held responsible for any action of the Board in following or declining to follow any written advice or written recommendation given by the Manager.

(b) Notwithstanding anything in this Agreement to the contrary, the aggregate maximum amount that the Manager may be liable to the Company pursuant to this Agreement shall, to the extent not prohibited by law, never exceed the amount of the Management Fees received by the Manager under this Agreement prior to the date that the acts or omissions giving rise to a claim for indemnification or liability shall have occurred. In no event shall the Manager be liable for special, exemplary, punitive, indirect, or consequential loss, or damage of any kind whatsoever, including without limitation lost profits. The foregoing limitations shall not apply to the extent such damages are determined in a final binding non-appealable court or arbitration proceeding to result from the bad faith, fraud, willful misfeasance, intentional misconduct, gross negligence or reckless disregard of its duties as the Manager.

(c) The provisions of this Section are expressly intended to confer benefits upon the Company and its subsidiaries and such provisions shall remain operative and in full force and effect regardless of the expiration or any termination of this Agreement.

17. Representations and Warranties.

(a) The Company hereby makes the following representations and warranties to the Manager, all of which shall survive the execution and delivery of this Agreement:

(i) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Maryland and is qualified to do business and is in good standing in Maryland. The Company has all power and authority required to execute and deliver this Agreement and to perform all its duties and obligations hereunder. The Company has the power and authority and the legal right to own and operate its assets, to lease any property it may operate as lessee and to conduct the business in which it is now engaged and is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business operations, assets or financial condition of the Company and its subsidiaries, if any, taken as a whole.

(ii) The execution, delivery, and performance of this Agreement by the Company have been duly authorized by all necessary action on the part of the Company. No consent of any other Person that has not already been obtained, including stockholders and creditors of the Company, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by the Company in connection with this Agreement or the execution, delivery, performance, validity or enforceability of this Agreement and all obligations required hereunder.

(iii) This Agreement has been, and each instrument or document required hereunder will be, executed and delivered by a duly authorized officer of the Company, and this Agreement constitutes, and each instrument or document required hereunder when executed and delivered hereunder will constitute, a legal, valid, and binding instrument, agreement or document of the Company, enforceable against the Company in accordance with its terms, except as limited by bankruptcy, insolvency, receivership and similar laws from time to time in effect and general principles of equity, including, without limitation, those relating to the availability of specific performance.

(iv) The execution, delivery and performance of this Agreement and the documents or instruments required hereunder will not violate any provision of any existing law or regulation binding on the Company, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Company, or the Governing Instruments of, or any securities issued by the Company or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Company is a party or by which the Company or any of its assets may be bound, the violation of which

 

12


would have a material adverse effect on the business operations, assets or financial condition of the Company and its subsidiaries, if any, taken as a whole, and will not result in, or require, the creation or imposition of any lien on any of the property, assets or revenues of the Company pursuant to the provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking.

(b) The Manager hereby makes the following representations and warranties to the Company, all of which shall survive the execution and delivery of this Agreement:

(i) The Manager is a limited partnership duly formed, validly existing, and in good standing under the laws of the State of Delaware and is qualified to do business and is in good standing in Delaware. The Manager has all power and authority required to execute and deliver this Agreement and to perform all its duties and obligations hereunder, subject only to its qualifying to do business and obtaining all requisite permits and licenses required as a result of or relating to the nature or location of any of the assets or properties of the Company (which it shall do promptly after being required to do so). The Manager has the limited partnership power and authority and the legal right to conduct the business in which it is now engaged and is duly qualified as a foreign partnership and in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business operations, assets or financial condition of the Manager.

(ii) The execution, delivery, and performance of this Agreement by the Manager have been duly authorized by all necessary action on the part of the Manager. No consent of any other Person, including partners and creditors of the Manager, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by the Manager in connection with this Agreement or the execution, delivery, performance, validity or enforceability of this Agreement and all obligations required hereunder.

(iii) This Agreement has been, and each instrument or document required hereunder will be, executed and delivered by a duly authorized officer of the Manager, and this Agreement constitutes, and each instrument or document required hereunder when executed and delivered hereunder will constitute, a legal, valid, and binding instrument, agreement or document of the Manager enforceable against the Manager in accordance with its terms, except as limited by bankruptcy, insolvency, receivership and similar laws from time to time in effect and general principles of equity, including, without limitation, those relating to the availability of specific performance.

(iv) The execution, delivery and performance of this Agreement and the documents or instruments required hereunder will not violate any provision of any existing law or regulation binding on the Manager, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Manager, or the Governing Instruments of, or any securities issued by the Manager or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Manager is a party or by which the Manager or any of its assets may be bound, the violation of which would have a material adverse effect on the business operations, assets or financial condition of the Manager, and will not result in, or require, the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking.

18. Notices. Any notice, report or other communication required or permitted to be given hereunder shall be in writing unless some other method of giving such notice, report or other communication is required by the Articles of Incorporation, the Bylaws, or accepted by the party to whom it is given, and shall be given by being delivered by hand, by courier or overnight carrier or by registered or certified mail to the addresses set forth below:

 

To the Company:    NexPoint Real Estate Finance, Inc.
   300 Crescent Court
   Suite 700
   Dallas, Texas 75201
   Attention: Brian Mitts

 

13


  

with a copy to:

 

  

Winston & Strawn LLP

2121 N. Pearl Street, Suite 900

   Dallas, Texas 75201
   Attention: Charles T. Haag
To the Manager:    NexPoint Real Estate Advisors VII, L.P.
   300 Crescent Court
   Suite 700
   Dallas, Texas 75201
  

Attention: Brian Mitts

 

with a copy to:

 

  

Winston & Strawn LLP

2121 N. Pearl Street, Suite 900

   Dallas, Texas 75201
   Attention: Charles T. Haag

Any party may at any time give notice in writing to the other parties of a change in its address for the purposes of this Section 17.

19. Modification. This Agreement shall not be amended, supplemented, modified, terminated, or discharged, in whole or in part, except by an instrument in writing signed by the parties hereto, or their respective successors or assignees.

20. Severability. The provisions of this Agreement are independent of and severable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part.

21. Governing Law; Waiver of Jury Trial. THE PROVISIONS OF THIS AGREEMENT SHALL BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AS AT THE TIME IN EFFECT, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. THE PARTIES TO THIS AGREEMENT HEREBY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF NEW YORK, INCLUDING ANY APPELLATE COURTS THEREOF. THE PARTIES ACKNOWLEDGE AND AGREE THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND, THEREFORE, EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT TO ANY ACTION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.

22. Entire Agreement. This Agreement contains the entire agreement and understanding among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, inducements and conditions, express or implied, oral or written, of any nature whatsoever with respect to the subject matter hereof. The express terms hereof control and supersede any course of performance or usage of the trade inconsistent with any of the terms hereof.

 

14


23. No Waiver. Neither the failure nor any delay on the part of a party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver.

24. Pronouns and Plurals. Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa.

25. Headings. The titles of Sections and Subsections contained in this Agreement are for convenience only, and they neither form a part of this Agreement nor are they to be used in the construction or interpretation hereof.

26. Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories.

 

15


IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above.

 

NEXPOINT REAL ESTATE FINANCE, INC.
By:  

                 

  Name:   Brian Mitts
  Title:   Chief Financial Officer, Executive VP-
    Finance, Secretary and Treasurer
NEXPOINT REAL ESTATE ADVISORS VII, L.P.
By:  

             

  Name:   Brian Mitts
  Title:   Chief Financial Officer, Executive
    VP-Finance, Secretary and Treasurer

[Signature Page to Management Agreement]


EXHIBIT A

Description of Administration Services.

Manager will perform the following administration services:

 

(i)

Prepare monthly transaction listings;

 

(ii)

Supply various normal and customary portfolio and Company statistical data as requested on an ongoing basis;

 

(iii)

Prepare for execution and file the Company’s Federal and state tax returns: prepare a fiscal tax provision in coordination with the annual audit; prepare an excise tax provision; and prepare all relevant 1099 calculations;

 

(iv)

Coordinate contractual relationships and communications between the Company and its contractual service providers;

 

(v)

Coordinate printing of the Company’s annual shareholder reports;

 

(vi)

Prepare income and capital gain distributions;

 

(vii)

Prepare the quarterly and annual financial statements;

 

(viii)

Monitor the Company’s compliance with the Code and SEC reporting requirements;

 

(ix)

Prepare, coordinate with the Company’s counsel and coordinate the filing with the SEC: quarterly reports on Form 10-Q; annual reports on Form 10-K, and current reports on Form 8-K, in each case based upon information provided by the Company; assist in the preparation of Forms 3, 4 and 5 pursuant to Section 16 of the Exchange Act for the officers and directors of the Company, such filings to be based on information provided by those persons;

 

(x)

Assist in the preparation of notices of meetings of shareholders, coordinate preparation of proxy statements, including obtaining information required to be disclosed by applicable regulations and the engagement of proxy solicitors on behalf of the Company;

 

(xi)

Assist in obtaining directors’ and officers’ errors and omissions insurance policies for the Company, including evaluation of insurance carriers, recommending appropriate coverage levels and evaluating the costs thereof, as such policies are approved by the Company’s Board of Directors;

 

(xii)

Draft agendas and resolutions for quarterly and special board meetings;

 

(xiii)

Coordinate the preparation, assembly and posting of board materials;

 

(xiv)

Attend board meetings and draft minutes thereof;

 

(xv)

Maintain the Company’s calendar to assure compliance with various filing and board approval deadlines;

 

(xvi)

Assist the Company in the handling of SEC examinations and responses thereto;

 

(xvii)

If the chief executive officer or chief financial officer of the Company is required to provide a certification as part of the Company’s Form 10-Q or Form 10-K filing pursuant to regulations promulgated by the SEC, Manager will provide (to such person or entity as agreed between the Company and Manager) a sub-certification in support of certain matters set forth in the

 

A-1


  aforementioned certification, such sub-certification to be in such form and relating to such matters as agreed between the Company and Manager from time to time. Manager shall be required to provide the subcertification only during the term of the Agreement and only if it receives such cooperation as it may request to perform its investigations with respect to the sub-certification. For clarity, the sub-certification is not itself a certification under the Sarbanes-Oxley Act of 2002 or under any other regulatory requirement;

 

(xviii)

Prepare and coordinate the Company’s state notice filings;

 

(xix)

Furnish the Company office space in the offices of Manager, or in such other place or places as may be agreed from time to time, and all necessary office facilities, simple business equipment, supplies, utilities and telephone service for managing the affairs of the Company;

 

(xx)

Perform clerical, bookkeeping and other administrative services not provided by the Company’s other service providers;

 

(xxi)

Determine or oversee the determination of the Company’s Equity in accordance with the Company’s policies as adopted from time to time by the Board of Directors;

 

(xxii)

Oversee the maintenance by the Company’s custodian and transfer agent and dividend disbursing agent of certain books and records of the Company and maintain (or oversee maintenance by such other persons as approved by the Board of Directors) such other books and records required by law or for the proper operation of the Company;

 

(xxiii)

Prepare such information and reports as may be required by any stock exchange or exchanges on which the Company’s shares are listed;

 

(xxiv)

Determine the amounts available for distribution as dividends and distributions to be paid by the Company to its shareholders; calculate, analyze and prepare a detailed income analysis and forecast future earnings for presentation to the Board of Directors; prepare and arrange for dividend notices to shareholders, as applicable, and provide the Company’s dividend disbursing agent and custodian with such information as is required for such parties to effect the payment of dividends and distributions and to implement the Company’s dividend reinvestment plan, if any;

 

(xxv)

Serve as liaison between the Company and each of its service providers;

 

(xxvi)

Assist in monitoring and tracking the daily cash flows of the individual assets of the Company, as well as security position data of portfolio investments; assist in resolving any identified discrepancies with the appropriate third party, including the Company’s custodian, administrative agents and other service providers, through various means including researching available data via agent notices, financial news and data services, and other sources;

 

(xxvii)

Monitor compliance with leverage tests under the Company’s credit facility, if any, and communicate with leverage providers and rating agencies;

 

(xxviii)

Coordinate negotiation and renewal of credit agreements for presentation to the Board of Directors;

 

(xxix)

Coordinate negotiations of agreements with counterparties and the Company’s custodian for derivatives and similar transactions, as applicable;

 

(xxx)

Provide assistance with the closing of Real Estate Asset purchases and dispositions;

 

(xxxi)

Coordinate and oversee the provision of legal services to the Company;

 

(xxxii)

Cooperate with the Company’s independent registered public accounting firm in connection with audits and reviews of the Company’s financial statements, including interviews and other meetings, as necessary;

 

A-2


(xxxiii)

Provide Secretary and any Assistant Secretaries, Treasurer and any Assistant Treasurers and other officers for the Company as requested or required by Maryland law;

 

(xxxiv)

Develop or assist in developing guidelines and procedures to improve overall compliance by the Company;

 

(xxxv)

Determine and monitor expense accruals for the Company;

 

(xxxvi)

Authorize expenditures and approve bills for payment on behalf of the Company;

 

(xxxvii)

Monitor the number of shares of the Company registered and assist in the registration of additional shares, as necessary;

 

(xxxviii)

Exercise or procure the exercise of any rights of the Company with respect to any class action proceedings or other legal action concerning investments of the Company;

 

(xxxix)

Prepare such reports as the Board of Directors of the Company may request from time to time; and

(xl)

Perform such additional administrative duties relating to the administration of the Company as may subsequently be agreed upon in writing between the Company and Manager.

 

A-3

EX-10.2 6 d759970dex102.htm EX-10.2 EX-10.2

Exhibit 10.2

FORM OF

AMENDED AND RESTATED

LIMITED PARTNERSHIP AGREEMENT

OF

NEXPOINT REAL ESTATE FINANCE OPERATING PARTNERSHIP, L.P.

a Delaware limited partnership

THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE PARTNERSHIP AN OPINION OF COUNSEL, IN FORM AND SUBSTANCE SATISFACTORY TO THE PARTNERSHIP, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES OR “BLUE SKY” LAWS.

AMENDED AND RESTATED AS OF             , 2020


TABLE OF CONTENTS

 

         Page  
ARTICLE 1. DEFINED TERMS      1  
ARTICLE 2. ORGANIZATIONAL MATTERS      14  
 

Section 2.1. Continuation

     14  
 

Section 2.2. Name

     14  
 

Section 2.3. Registered Office and Agent; Principal Office

     14  
 

Section 2.4. Power of Attorney

     15  
 

Section 2.5. Term

     16  
 

Section 2.6. Admission of Partners

     16  
ARTICLE 3. PURPOSE      16  
 

Section 3.1. Purpose and Business

     16  
 

Section 3.2. Powers

     17  
 

Section 3.3. Representations and Warranties by the Parties

     17  
 

Section 3.4. Not Publicly Traded

     19  
ARTICLE 4. CAPITAL CONTRIBUTIONS      19  
 

Section 4.1. Capital Contributions of the Partners

     19  
 

Section 4.2. Issuances of Additional Partnership Interests

     20  
 

Section 4.3. Additional Funds

     20  
 

Section 4.4. Preemptive Rights

     21  
 

Section 4.5. No Interest

     21  
 

Section 4.6. LTIP Units

     21  
 

Section 4.7. Conversion of LTIP Units

     24  
ARTICLE 5. DISTRIBUTIONS      25  
 

Section 5.1. Requirement and Characterization of Distributions

     25  
 

Section 5.2. Amounts Withheld

     25  
 

Section 5.3. Distributions Upon Liquidation

     26  
 

Section 5.4. Restricted Distributions

     26  
 

Section 5.5. Compliance with REIT Requirements

     26  
ARTICLE 6. ALLOCATIONS      26  
 

Section 6.1. Allocations For Capital Account Purposes

     26  
ARTICLE 7. MANAGEMENT AND OPERATIONS OF BUSINESS      27  
 

Section 7.1. Management

     27  
 

Section 7.2. Certificate of Limited Partnership

     31  
 

Section 7.3. Restrictions on General Partner Authority

     31  
 

Section 7.4. Reimbursement of the General Partner and the Company

     32  
 

Section 7.5. Outside Activities of the General Partner

     33  
 

Section 7.6. Contracts with Affiliates

     33  
 

Section 7.7. Indemnification

     34  
 

Section 7.8. Liability of the General Partner

     35  
 

Section 7.9. Other Matters Concerning the General Partner

     36  
 

Section 7.10. Title to Partnership Assets

     37  
 

Section 7.11. Reliance by Third Parties

     37  

 

i


TABLE OF CONTENTS

(continued)

 

         Page  
ARTICLE 8. RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS      38  
 

Section 8.1. Limitation of Liability

     38  
 

Section 8.2. Management of Business

     38  
 

Section 8.3. Outside Activities of Limited Partners

     38  
 

Section 8.4. Return of Capital

     39  
 

Section 8.5. Rights of Limited Partners Relating to the Partnership

     39  
 

Section 8.6. Redemption Right

     40  
ARTICLE 9. BOOKS, RECORDS, ACCOUNTING AND REPORTS      42  
 

Section 9.1. Records and Accounting

     42  
 

Section 9.2. Fiscal Year

     42  
 

Section 9.3. Reports

     42  
ARTICLE 10. TAX MATTERS      43  
 

Section 10.1. Preparation of Tax Returns

     43  
 

Section 10.2. Tax Elections

     43  
 

Section 10.3. Partnership Representative

     43  
 

Section 10.4. Withholding

     44  
ARTICLE 11. TRANSFERS AND WITHDRAWALS      45  
 

Section 11.1. Transfer

     45  
 

Section 11.2. Transfer of General Partner Interest

     46  
 

Section 11.3. Limited Partners’ Rights to Transfer

     47  
 

Section 11.4. Substituted Limited Partners

     48  
 

Section 11.5. Assignees

     49  
 

Section 11.6. Drag-Along Rights

     49  
 

Section 11.7. General Provisions

     50  
ARTICLE 12. ADMISSION OF PARTNERS      51  
 

Section 12.1. Admission of Successor General Partner

     51  
 

Section 12.2. Admission of Additional Limited Partners

     51  
 

Section 12.3. Amendment of Agreement and Certificate of Limited Partnership

     52  
ARTICLE 13. DISSOLUTION, LIQUIDATION AND TERMINATION      52  
 

Section 13.1. Dissolution

     52  
 

Section 13.2. Winding Up

     53  
 

Section 13.3. Deficit Capital Account Restoration Obligation

     55  
 

Section 13.4. Deemed Contribution and Distribution

     55  
 

Section 13.5. Rights of Limited Partners

     55  
 

Section 13.6. Notice of Dissolution

     55  
 

Section 13.7. Termination of Partnership and Cancellation of Certificate of Limited Partnership

     55  
 

Section 13.8. Reasonable Time for Winding Up

     56  
 

Section 13.9. Waiver of Partition

     56  
ARTICLE 14. AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS      56  

 

ii


TABLE OF CONTENTS

(continued)

 

         Page  
 

Section 14.1. Amendment of Partnership Agreement

     56  
 

Section 14.2. Meetings of the Partners

     57  
ARTICLE 15. GENERAL PROVISIONS      57  
 

Section 15.1. Addresses and Notice

     57  
 

Section 15.2. Titles and Captions

     58  
 

Section 15.3. Pronouns and Plurals

     58  
 

Section 15.4. Further Action

     58  
 

Section 15.5. Binding Effect

     58  
 

Section 15.6. Creditors

     58  
 

Section 15.7. Waiver

     59  
 

Section 15.8. Counterparts

     59  
 

Section 15.9. Applicable Law; Consent to Jurisdiction; Waiver of Jury Trial

     59  
 

Section 15.10. Invalidity of Provisions

     59  
 

Section 15.11. Entire Agreement

     60  
 

Section 15.12. Legal Counsel Relationships

     60  

 

Exhibit A – Partners’ Contributions and Partnership Interests

   A-1

Exhibit B – Capital Account Maintenance

   B-1

Exhibit C – Special Allocation Rules

   C-1

Exhibit D – Notice of Redemption

   D-1

Exhibit E – Constructive Ownership Definition

   E-1

Exhibit F – Schedule of Partner’s Ownership with Respect to Tenants

   F-1

Exhibit G – Notice of Election by Partner to Convert LTIP Units into Common Units

   G-1

Exhibit H – Notice of Election by Partnership to Force Conversion of LTIP Units into Common Units

   H-1

 

iii


AMENDED AND RESTATED

LIMITED PARTNERSHIP AGREEMENT

OF

NEXPOINT REAL ESTATE FINANCE

OPERATING PARTNERSHIP, L.P.

THIS AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT OF NEXPOINT REAL ESTATE FINANCE OPERATING PARTNERSHIP, L.P. (as now or hereafter amended, restated, modified, supplemented, or replaced, this “Agreement”), dated as of                 , 2020, is entered into by and among NexPoint Real Estate Finance OP GP, LLC, a Delaware limited liability company (the “General Partner”), the Persons (as defined below) whose names are from time to time set forth on Exhibit A attached hereto (as it may be amended from time to time), and the parties to the original agreement of limited partnership of NexPoint Real Estate Finance Operating Partnership, L.P., dated as of June 10, 2019 (the “Prior Agreement”).

WHEREAS, the limited partnership was formed on June 7, 2019 and the Prior Agreement was entered into between Brian Mitts, as general partner (the “Initial General Partner”), and Matthew McGraner, as the sole limited partner (the “Initial Limited Partner”); and

WHEREAS, the General Partner and the Persons (as defined below) that are party hereto from time to time and whose names are set forth on Exhibit A attached hereto (as it may be amended from time to time) desire to: (a) enter into this Amended and Restated Limited Partnership Agreement of NexPoint Real Estate Finance Operating Partnership, L.P. (the “Partnership”); (b) effect the withdrawal of Brian Mitts as the general partner of the Partnership and Matthew McGraner as a limited partner of the Partnership; (c) effect the admission of the General Partner as the general partner of the Partnership; (d) effect the admission of the Persons whose names are set forth on Exhibit A attached hereto as Limited Partners of the Partnership; (e) continue the Partnership on the terms set forth herein; and (f) continue the operation of the Partnership under the name NexPoint Real Estate Finance Operating Partnership, L.P.

NOW THEREFORE, in consideration of the mutual covenants herein contained, and other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:

ARTICLE 1.

DEFINED TERMS

The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement.

 

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704(c) Value” of any Contributed Property means the fair market value of such property or other consideration at the time of contribution, as determined by the General Partner, following the direction and approval of the Board of Directors, using such reasonable method of valuation as it may adopt. Subject to Exhibit B hereof, the General Partner shall, following the direction and approval of the Board of Directors, use such method as it deems reasonable and appropriate to allocate the aggregate of the 704(c) Values of Contributed Properties in a single or integrated transaction among the separate properties on a basis proportional to their respective fair market values.

Act” means the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. §17-101, et seq., as it may be amended from time to time, and any successor to such statute.

Additional Funds” has the meaning set forth in Section 4.3(A).

Additional Limited Partner” means a Person admitted to the Partnership as a Limited Partner pursuant to Section 12.2 hereof and who is shown as such on the books and records of the Partnership.

Adjusted Capital Account” means the Capital Account maintained for each Partner as of the end of each Partnership taxable year (i) increased by any amounts which such Partner is obligated to restore pursuant to any provision of this Agreement or is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5) and (ii) decreased by the items described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital Account is intended to comply with the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.

Adjusted Capital Account Deficit” means, with respect to any Partner, the deficit balance, if any, in such Partner’s Adjusted Capital Account as of the end of the relevant Partnership taxable year.

Adjusted Property” means any property, the Carrying Value of which has been adjusted pursuant to Exhibit B hereof.

Adjustment Event” has the meaning set forth in Section 4.6(A)(1) hereof.

Affiliate” means, with respect to any Person, any Person directly or indirectly controlling, controlled by or under common control with such Person. For purposes of this definition, “control” when used with respect to any Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise, and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

Agreed Value” means (i) in the case of any Contributed Property as of the time of its contribution to the Partnership, the 704(c) Value of such property, reduced by any liabilities either assumed by the Partnership upon such contribution or to which such property is subject when contributed, and (ii) in the case of any property distributed to a Partner by the Partnership, the Partnership’s Carrying Value of such property at the time such property is distributed, reduced by any indebtedness either assumed by such Partner upon such distribution or to which such property is subject at the time of distribution as determined under Section 752 of the Code and the Regulations thereunder.

 

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Agreement” has the meaning set forth in the recitals hereto.

Aggregate Consideration” has the meaning set forth in Section 11.6(C).

Approved Sale” means a Sale of the Partnership which is approved by the Partners holding, collectively, more than 50% of the issued and outstanding Partnership Interests.

Approving Partners” has the meaning set forth in Section 11.6(A).

Assignee” means a Person to whom all or a portion of a Partnership Interest has been transferred in a manner permitted under this Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.5.

Available Cash” means, with respect to any period for which such calculation is being made, all cash balances of the Partnership net of the Partnership’s working capital needs, anticipated capital expenditures, operating expenses, debt service requirements and other necessary reserves including with respect to contingencies or commitments, each as determined by the General Partner, following the direction and approval of the Board of Directors.

Bankruptcy Event” shall mean, with respect to any Person, such Person (a) is insolvent, or is generally unable to pay its debts as they become due, or admits in writing its inability to pay its debts as they become due, or makes a general assignment for the benefit of its creditors or (b) becomes the subject of a bankruptcy or insolvency proceeding, or has had a receiver, conservator, trustee, administrator, custodian, assignee for the benefit of creditors or similar person charged with the reorganization or liquidation of its business appointed for it, or has taken any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any such proceeding or appointment.

Board of Directors” means the Board of Directors of the Company.

Book-Tax Disparities” means, with respect to any item of Contributed Property or Adjusted Property, as of the date of any determination, the difference between the Carrying Value of such Contributed Property or Adjusted Property and the adjusted basis thereof for federal income tax purposes as of such date. A Partner’s share of the Partnership’s Book-Tax Disparities in all of its Contributed Property and Adjusted Property will be reflected by the difference between such Partner’s Capital Account balance as maintained pursuant to Exhibit B and the hypothetical balance of such Partner’s Capital Account computed as if it had been maintained strictly in accordance with federal income tax accounting principles.

 

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Book-Up Target” for a Profits LTIP Unit means (i) initially, the Company Common Unit Economic Balance as determined on the date such Profits LTIP Unit was granted less any Capital Contributions (if any) made by the Partner with respect to such Profits LTIP Unit and (ii) thereafter, the remaining amount, if any, required to be allocated to such Profits LTIP Unit for the Economic Capital Account Balance of the holder of such Profits LTIP Unit, to the extent attributable to such Profits LTIP Unit, to be equal to the Company Common Unit Economic Balance.

Business Day” means any day except a Saturday, Sunday or other day on which commercial banks in New York, New York are authorized or required by law to close.

Capital Account” means the Capital Account maintained for a Partner pursuant to Exhibit B hereof.

Capital Contribution” means, with respect to any Partner, any cash, cash equivalents or the Agreed Value of Contributed Property which such Partner contributes or is deemed to contribute to the Partnership.

Capital LTIP Unit” has the meaning set forth in Section 4.6(A).

Carrying Value” means (i) with respect to a Contributed Property or Adjusted Property, the 704(c) Value of such property, reduced (but not below zero) by all Depreciation with respect to such property charged to the Partners’ Capital Accounts following the contribution of or adjustment with respect to such property; and (ii) with respect to any other Partnership property, the adjusted basis of such property for federal income tax purposes, all as of the time of determination. The Carrying Value of any property shall be adjusted from time to time in accordance with Exhibit B hereof, and to reflect changes, additions or other adjustments to the Carrying Value for dispositions and acquisitions of Partnership properties, as deemed appropriate by the General Partner, following the direction and approval of the Board of Directors.

Cash Amount” means an amount of cash equal to the Value on the Valuation Date of the REIT Shares Amount.

Certificate” means the Certificate of Limited Partnership of the Partnership as filed in the office of the Delaware Secretary of State on June 7, 2019, as amended, restated and/or supplemented from time to time in accordance with the terms hereof and the Act.

Charter” means the Articles of Amendment and Restatement of the Company filed with the State Department of Assessments and Taxation of the State of Maryland on                 , 2020, as amended, restated and/or supplemented from time to time.

Code” means the Internal Revenue Code of 1986, as amended and in effect from time to time, as interpreted by the applicable regulations thereunder. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of future law.

 

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Common Units” means the Partnership Units, other than LTIP Units or any other series of units of Limited Partner Interest issued in the future and designated as preferred or otherwise different from the Common Units, such difference including, but not limited to, with respect to the payment of distributions, including distributions upon liquidation.

Company” means NexPoint Real Estate Finance, Inc., a Maryland corporation.

Company Common Unit Economic Balance” means (i) the Economic Capital Account Balance of the Company but only to the extent attributable to the Company’s ownership of Common Units and computed on a hypothetical basis after taking into account all allocations through the date on which any allocation is made under Section 1(H) of Exhibit C divided by (ii) the number of the Company’s Common Units.

Constructive Ownership” or “Constructively Own” means ownership under the constructive ownership rules described in Exhibit E.

Contributed Property” means each property or other asset, in such form as may be permitted by the Act (but excluding cash), contributed or deemed contributed to the Partnership. Once the Carrying Value of a Contributed Property is adjusted pursuant to Exhibit B hereof, such property shall no longer constitute a Contributed Property for purposes of Exhibit B hereof, but shall be deemed an Adjusted Property for such purposes.

Conversion Date” has the meaning set forth in Section 4.7(B).

Conversion Factor” means 1.0, subject to adjustment as follows: (i) in case the Company shall (A) make a distribution on the outstanding REIT Shares in REIT Shares, (B) subdivide or reclassify the outstanding REIT Shares into a greater number of REIT Shares, or (C) combine or reclassify the outstanding REIT Shares into a smaller number of REIT Shares, the Conversion Factor in effect at the opening of business on the day following the date fixed for the determination of shareholders entitled to receive such distribution or subject to such subdivision, combination or reclassification shall be proportionately adjusted so that a holder of Partnership Units shall be entitled to receive, upon exchange thereof, the number of REIT Shares which the holder would have owned at the opening of business on the day following the date fixed for such determination had such Partnership Units been exchanged immediately prior to such determination; (ii) in case the Partnership shall subdivide or reclassify the outstanding Partnership Units into a greater number of Partnership Units, the Conversion Factor in effect at the opening of business on the day following the date fixed for the determination of Partnership Unit holders subject to such subdivision or reclassification shall be proportionately adjusted so that a holder of Partnership Units shall be entitled to receive, upon exchange thereof, the number of REIT Shares which the holder would have owned at the opening of business on the day following the date fixed for such determination had such Partnership Units been exchanged immediately prior to such determination; (iii) in case the Company (A) shall issue rights or warrants to all holders of REIT Shares entitling them to subscribe for or purchase REIT Shares at a price per

 

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share less than the daily market price per REIT Share on the date fixed for the determination of shareholders entitled to receive such rights or warrants, (B) shall not issue similar rights or warrants to all holders of Partnership Units entitling them to subscribe for or purchase REIT Shares or Partnership Units at a comparable price (determined, in the case of Partnership Units, by reference to the Conversion Factor), and (C) cannot issue such rights or warrants to a Redeeming Partner as otherwise required by the definition of “REIT Shares Amount” set forth in this Article 1, then the Conversion Factor in effect at the opening of business on the day following the date fixed for such determination shall be increased by multiplying such Conversion Factor by a fraction of which the numerator shall be the number of REIT Shares outstanding at the close of business on the date fixed for such determination plus the number of REIT Shares so offered for subscription or purchase, and of which the denominator shall be the number of REIT Shares outstanding at the close of business on the date fixed for such determination plus the number of REIT Shares which the aggregate offering price of the total number of REIT Shares so offered for subscription would purchase at such daily market price per share, such increase to the Conversion Factor to become effective immediately after the opening of business on the day following the date fixed for such determination; and (iv) in case the Company shall, by distribution or otherwise, distribute to all holders of its REIT Shares, (A) capital shares of any class other than its REIT Shares, (B) evidence of its indebtedness or (C) assets (excluding any rights or warrants referred to in clause (iii) above, any cash distribution lawfully paid under the laws of the state of organization of the Company, and any distribution referred to in clause (i) above) and shall not cause a corresponding distribution to be made to all holders of Partnership Units, the Conversion Factor shall be adjusted so that the same shall equal the ratio determined by multiplying the Conversion Factor in effect immediately prior to the close of business on the date fixed for the determination of shareholders entitled to receive such distribution by a fraction of which the numerator shall be the daily market price per REIT Share on the date fixed for such determination, and of which the denominator shall be such daily market price per REIT Share less the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors certified by the Secretary of the Company and delivered to the holders of the Partnership Units) of the portion of the capital shares or evidences of indebtedness or assets so distributed applicable to one REIT Share, such adjustment to become effective immediately prior to the opening of business on the day following the date fixed for the determination of shareholders entitled to receive such distribution.

Conversion Notice” has the meaning set forth in Section 4.7(B) hereof.

Conversion Right” has the meaning set forth in Section 4.7(A) hereof.

Covered Person” has the meaning set forth in Section 7.8(A).

Debt” means, as to any Person, as of any date of determination, (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services, (ii) all amounts owed by such Person to banks or other Persons in respect of reimbursement obligations under letters of credit, surety bonds and other

 

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similar instruments guaranteeing payment or other performance of obligations by such Person, (iii) all indebtedness for borrowed money or for the deferred purchase price of property or services secured by any lien on any property owned by such Person, to the extent attributable to such Person’s interest in such property, even though such Person has not assumed or become liable for the payment thereof, and (iv) obligations of such Person incurred in connection with entering into a lease which, in accordance with GAAP, should be capitalized.

Delaware Courts” has the meaning set forth in Section 15.10(B) hereof.

Depreciation” means, for each taxable year, an amount equal to the federal income tax depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such year, except that if the Carrying Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Carrying Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such year bears to such beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization, or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Carrying Value using any reasonable method selected by the General Partner.

Economic Capital Account Balance”, with respect to a Partner, means an amount equal to such Partner’s Capital Account balance, plus the amount of its share of any Partner Minimum Gain and Partnership Minimum Gain.

Eligible LTIP Unit” has the meaning set forth in Section 4.7(A).

Equity Incentive Plan” means any equity incentive or compensation plan adopted now or in the future by the Company and/or the Partnership.

ERISA” means the Employee Retirement Income Security Act of 1974, as amended and in effect from time to time, as interpreted by the applicable regulations thereunder. Any reference herein to a specific section or Title of ERISA shall be deemed to include a reference to any corresponding provision of future law.

Exchange Act” means the Securities Exchange Act of 1934, as amended.

flow through entity” has the meaning set forth in Section 3.3(D)(3) hereof.

Forced Conversion” has the meaning set forth in Section 4.7(C) hereof.

Forced Conversion Notice” has the meaning set forth in Section 4.7(C) hereof.

GAAP” means U.S. generally accepted accounting principles, applied on a consistent basis.

General Partner” has the meaning set forth in the recitals hereto.

 

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General Partner Interest” means a Partnership Interest held by the General Partner, in its capacity as general partner of the Partnership. A General Partner Interest may be (but is not required to be) expressed as a number of Partnership Units.

Incapacity” or “Incapacitated” means, (i) as to any individual Partner, death, total physical disability or entry by a court of competent jurisdiction adjudicating him incompetent to manage his Person or his estate; (ii) as to any corporation which is a Partner, the filing of a certificate of dissolution, or its equivalent, for the corporation or the revocation of its charter; (iii) as to any partnership or limited liability company which is a Partner, the dissolution and commencement of winding up of the partnership or limited liability company; (iv) as to any estate which is a Partner, the distribution by the fiduciary of the estate’s entire interest in the Partnership; (v) as to any trustee of a trust which is a Partner, the termination of the trust (but not the substitution of a new trustee); or (vi) as to any Partner, the bankruptcy of such Partner. For purposes of this definition, bankruptcy of a Partner shall be deemed to have occurred when (a) the Partner commences a voluntary proceeding seeking liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect; (b) the Partner is adjudged as bankrupt or insolvent, or a final and non-appealable order for relief under any bankruptcy, insolvency or similar law now or hereafter in effect has been entered against the Partner; (c) the Partner executes and delivers a general assignment for the benefit of the Partner’s creditors; (d) the Partner files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the Partner in any proceeding of the nature described in clause (b) above; (e) the Partner seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator for the Partner or for all or any substantial part of the Partner’s properties; (f) any proceeding seeking liquidation, reorganization or other relief of or against such Partner under any bankruptcy, insolvency or other similar law now or hereafter in effect has not been dismissed within 120 days after the commencement thereof; (g) the appointment without the Partner’s consent or acquiescence of a trustee, receiver or liquidator has not been vacated or stayed within 90 days of such appointment; or (h) an appointment referred to in clause (g) which has been stayed is not vacated within 90 days after the expiration of any such stay.

Indemnitee” means (i) any Person made a party to a proceeding by reason of (A) his or its status as the General Partner, or as a trustee, director, officer, shareholder, partner, member, employee, representative or agent of the General Partner or as an officer, employee, representative or agent of the Partnership or as the Partnership Representative, or (B) his, her or its liabilities, pursuant to a loan guarantee or otherwise, for any indebtedness of the Partnership or any Subsidiary of the Partnership (including, without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken assets subject to); and (ii) such other Persons (including Affiliates of the General Partner or the Partnership) as the General Partner may designate from time to time (whether before or after the event giving rise to potential liability) following the direction and approval of the Board of Directors.

Initial Limited Partner” has the meaning set forth in the recitals hereto.

 

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Initial General Partner” has the meaning set forth in the recitals hereto.

Limited Partner” means the Company and any other Person named as a limited partner of the Partnership in Exhibit A attached hereto, as such Exhibit may be amended from time to time, or any Substituted Limited Partner or Additional Limited Partner, in such Person’s capacity as a limited partner of the Partnership. For purposes of this Agreement and the Act, the Limited Partners shall constitute a single class or group of limited partners.

Limited Partner Interest” means a Partnership Interest of a Limited Partner in the Partnership representing a fractional part of the Partnership Interests of all Partners and includes any and all benefits to which the holder of such a Partnership Interest may be entitled, as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Limited Partner Interest may be (but is not required to be) expressed as a number of Partnership Units.

Liquidating Event” has the meaning set forth in Section 13.1.

Liquidating Gains” means any net gain realized in connection with the actual or hypothetical sale of all or substantially all of the assets of the Partnership (including upon the occurrence of any event of liquidation of the Partnership), including but not limited to the net gain realized in connection with an adjustment to the Carrying Value of Partnership assets under Section 1.D of Exhibit B attached hereto.

Liquidating Losses” means any net loss realized in connection with the actual or hypothetical sale of all or substantially all of the assets of the Partnership (including upon the occurrence of any event of liquidation of the Partnership), including but not limited to the net loss realized in connection with an adjustment to the Carrying Value of Partnership assets under Section 1.D of Exhibit B attached hereto.

Liquidator” has the meaning set forth in Section 13.2.

LTIP Unitholder” means a Partner that holds LTIP Units.

LTIP Units” means a Partnership Unit which is designated as an LTIP Unit and which has the rights, preferences and other privileges designated in Section 4.6 and elsewhere in this Agreement in respect of holders of LTIP Units. The allocation of LTIP Units among the Partners shall be set forth on Exhibit A, as it may be amended and/or restated from time to time.

Net Income” means, for any taxable period, the excess, if any, of the Partnership’s items of income and gain for such taxable period over the Partnership’s items of loss and deduction for such taxable period. The items included in the calculation of Net Income shall be determined in accordance with U.S. federal income tax accounting principles, subject to the specific adjustments provided for in Section 1.B of Exhibit B.

 

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Net Loss” means, for any taxable period, the excess, if any, of the Partnership’s items of loss and deduction for such taxable period over the Partnership’s items of income and gain for such taxable period. The items included in the calculation of Net Loss shall be determined in accordance with federal income tax accounting principles, subject to the specific adjustments provided for in Section 1.B of Exhibit B.

Non-Approving Partners” has the meaning set forth in Section 11.6(A).

Nonrecourse Deductions” has the meaning set forth in Regulations Section 1.704-2(b)(1), and the amount of Nonrecourse Deductions for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(c).

Nonrecourse Liability” has the meaning set forth in Regulations Section 1.752-1(a)(2).

Notice of Redemption” means the Notice of Redemption substantially in the form of Exhibit D to this Agreement.

Partner” means a General Partner or a Limited Partner, and “Partners” means the General Partner and the Limited Partners collectively.

Partner Minimum Gain” means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Regulations Section 1.704-2(i)(3).

Partner Nonrecourse Debt” has the meaning set forth in Regulations Section 1.704-2(b)(4).

Partner Nonrecourse Deductions” has the meaning set forth in Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(i)(2).

Partnership” has the meaning set forth in the recitals hereto.

Partnership Interest” means an ownership interest in the Partnership held by either a Partner or LTIP Units, to the extent the General Partner has awarded LTIP Units pursuant to an Equity Incentive Plan, and includes any and all benefits to which the holder of such a partnership interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Partnership Interest may be (but is not required to be) expressed as a number of Partnership Units.

Partnership Minimum Gain” has the meaning set forth in Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in a Partnership Minimum Gain, for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(d).

 

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Partnership Record Date” means the record date established by the General Partner for the distribution of Available Cash pursuant to Section 5.1 hereof, which record date shall be the same as the record date established by the Company for a distribution to its shareholders of some or all of its portion of such distribution.

Partnership Representative” has the meaning set forth in Section 10.3(A).

Partnership Unit” means a fractional, undivided share of the Partnership Interests of all Partners issued pursuant to Sections 4.1 and 4.2 and includes LTIP Units and any other classes or series of Partnership Units established after the date hereof. The number of Partnership Units outstanding and the Percentage Interest in the Partnership represented by such Partnership Units are set forth in Exhibit A attached hereto, as such Exhibit may be amended, restated and/or supplemented from time to time.

Partnership Year” means the fiscal year of the Partnership, which shall be the calendar year.

Percentage Interest” means, as to a Partner, its interest in the Partnership as determined by dividing the Partnership Units owned by such Partner by the total number of Partnership Units then outstanding and as specified in Exhibit A attached hereto, as such Exhibit may be amended from time to time.

Person” means an individual or a real estate investment trust, corporation, partnership, limited liability company, trust, estate, unincorporated organization, association or other entity.

Prior Agreement” has the meaning set forth in the recitals hereto.

Profits LTIP Unit” has the meaning set forth in Section 4.6(A).

Qualified REIT Subsidiary” means a qualified REIT subsidiary of the Company within the meaning of Section 856(i)(2) of the Code.

Recapture Income” means any gain recognized by the Partnership upon the disposition of any property or asset of the Partnership, which gain is characterized as ordinary income because it represents the recapture of deductions previously taken with respect to such property or asset.

Redeeming Partner” has the meaning set forth in Section 8.6(A).

Redemption Right” shall have the meaning set forth in Section 8.6(A).

 

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Regulations” means the Income Tax Regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).

REIT” means a real estate investment trust under Section 856 of the Code.

REIT Shares” means shares of common stock, $0.01 par value per share, of the Company.

REIT Shares Amount” means a number of REIT Shares equal to the product of the number of Partnership Units offered for redemption by a Redeeming Partner, multiplied by the Conversion Factor; provided, that in the event the Company issues to all holders of REIT Shares rights, options, warrants or convertible or exchangeable securities entitling the shareholders to subscribe for or purchase REIT Shares, or any other securities or property (collectively, the “rights”), and the Company can issue such rights to the Redeeming Partner, then the REIT Shares Amount shall also include such rights that a holder of that number of REIT Shares would be entitled to receive.

Residual Gain” or “Residual Loss” means any item of gain or loss, as the case may be, of the Partnership recognized for federal income tax purposes resulting from a sale, exchange or other disposition of Contributed Property or Adjusted Property, to the extent such item of gain or loss is not allocated pursuant to Section 2(B)(1)(a) or 2(B)(2)(a) of Exhibit C to eliminate Book-Tax Disparities.

Sale of the Partnership” means (a) a sale or other disposition of all or substantially all of the assets of the Partnership or a related series of transactions that taken together, result in the sale or other disposition of all or substantially all of the assets of the Partnership, (b) a transaction or series of related transactions in which a Person, or group of related Persons, acquires more than 50% of the outstanding Partnership Units, or (c) the merger or consolidation of the Partnership with or into another Person that is not (i) an Affiliate of the Partnership or (ii) a Partner, in each case in clauses (b) and (c) above, under circumstances in which the holders of a majority of Partnership Units, immediately prior to such transaction, own less than a majority in voting power of the surviving or resulting Person immediately following such transaction.

Securities Act” means the Securities Act of 1933, as amended.

Specified Redemption Date” means the 10th Business Day after receipt by the Partnership of a Notice of Redemption; provided, that if the Company combines its outstanding REIT Shares, no Specified Redemption Date shall occur after the record date of such combination of REIT Shares and prior to the effective date of such combination.

Subsidiary” means, with respect to any Person, any real estate investment trust, corporation, partnership, limited liability company or other entity of which (a) a majority of (i) the voting power of the voting equity securities; or (ii) the outstanding equity interests, is owned, directly or indirectly, by such Person or (b) such Person acts as the general partner, sole member or sole manager.

 

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Substituted Limited Partner” means a Person who is admitted as a Limited Partner to the Partnership pursuant to Section 11.4.

Target Balance” has the meaning set forth in Section 1(H)(1) of Exhibit C attached hereto.

Tenant” means any tenant from which the Company derives rent either directly or indirectly through partnerships or limited liability companies, including the Partnership.

Trading Days” means days on which the primary trading market for REIT Shares, if any, is open for trading.

Transaction” has the meaning set forth in Section 15.12.

transfer”, when used in this Article 11, has the meaning set forth in Section 11.1(A).

Unrealized Gain” attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (i) the fair market value of such property (as determined under Exhibit B hereof) as of such date; over (ii) the Carrying Value of such property (prior to any adjustment to be made pursuant to Exhibit B hereof) as of such date.

Unrealized Loss” attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (i) the Carrying Value of such property (prior to any adjustment to be made pursuant to Exhibit B hereof) as of such date; over (ii) the fair market value of such property (as determined under Exhibit B hereof) as of such date.

Unvested LTIP Units” has the meaning set forth in Section 4.6(C)(1) hereof.

Valuation Date” means the date of receipt by the General Partner of a Notice of Redemption or, if such date is not a Business Day, the first Business Day thereafter.

Value” means, with respect to a REIT Share, the greater of (i) the Company’s most recent net asset value as determined by the Board of Directors and (ii) if the REIT Shares are listed or admitted to trading on any national securities exchange, the volume weighted average price for the 10 consecutive Trading Days immediately preceding the Valuation Date. If the REIT Shares are not listed or admitted to trading on any national securities exchange, the volume weighted average price with respect to a REIT Share will be the volume weighted average price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the General Partner or if no such closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more

 

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than 10 days prior to the date in question) for which prices have been so reported; provided, that if there are no bid and asked prices reported during the 10 days prior to the date in question, the Value of the REIT Shares shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. In the event the REIT Shares Amount includes rights that a holder of REIT Shares would be entitled to receive, then the Value of such rights shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate.

Vested LTIP Units” has the meaning set forth in Section 4.6(C)(1).

Vesting Agreement” means each or any, as the context implies, agreement or instrument entered into by a holder of LTIP Units upon acceptance of an award of LTIP Units under an Equity Incentive Plan.

ARTICLE 2.

ORGANIZATIONAL MATTERS

Section 2.1. Continuation

The Partners hereby continue the Partnership as a limited partnership under and pursuant to the Act. Except as expressly provided herein to the contrary, the rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by the Act. The Partnership Interest of each Partner shall be personal property for all purposes.

Section 2.2. Name

The name of the Partnership heretofore formed and continued hereby shall be NexPoint Real Estate Finance Operating Partnership, L.P. The Partnership’s business may be conducted under any other name or names deemed advisable by the General Partner following the direction and approval of the Board of Directors. The words “Limited Partnership,” “L.P.,” “Ltd.” or similar words or letters shall be included in the Partnership’s name where necessary for the purposes of complying with the laws of any jurisdiction that so requires. The General Partner, following the direction and approval of the Board of Directors, may change the name of the Partnership at any time and from time to time and shall notify the Limited Partners of such change in the next regular communication to the Limited Partners.

Section 2.3. Registered Office and Agent; Principal Office

The address of the registered office of the Partnership in the State of Delaware is 1209 Orange Street, Wilmington, New Castle County, Delaware, 19801 and the registered agent for service of process on the Partnership in the State of Delaware shall be The Corporation Trust Company. The principal office of the Partnership shall be 300 Crescent Court, Suite 700, Dallas, Texas 75201 or such other place as the General Partner, following the direction and approval of the Board of Directors, may from time to time designate by notice to the Limited Partners. The Partnership may maintain offices at such other place or places within or outside the State of Delaware as the General Partner and the Board of Directors deems advisable.

 

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Section 2.4. Power of Attorney

A. Each Limited Partner and each Assignee hereby constitutes and appoints the General Partner, any Liquidator, and authorized officers and attorneys-in-fact of each, and each of those acting singly, in each case with full power of substitution, as its true and lawful agent and attorney-in-fact, with full power and authority in its name, place and stead to execute, swear to, acknowledge, deliver, file and record in the appropriate public offices (a) all certificates, documents and other instruments (including, without limitation, this Agreement and the Certificate and all amendments or restatements thereof) that the General Partner or the Liquidator deems appropriate or necessary to form, qualify or continue the existence or qualification of the Partnership as a limited partnership (or a partnership in which the Limited Partners have limited liability) in the State of Delaware and in all other jurisdictions in which the Partnership may or plans to conduct business or own property; (b) all instruments that the General Partner deems appropriate or necessary to reflect any amendment, change, modification or restatement of this Agreement in accordance with its terms; (c) all conveyances and other instruments or documents that the General Partner or the Liquidator deems appropriate or necessary to reflect the dissolution and winding up of the Partnership pursuant to the terms of this Agreement, including, without limitation, a certificate of cancellation; (d) all instruments relating to the admission, withdrawal, removal or substitution of any Partner pursuant to Articles 11, 12 or 13 hereof or the Capital Contribution of any Partner; and (e) all conveyances and other instruments or documents that the General Partner or the Liquidator deems appropriate or necessary to reflect the distribution or exchange of assets of the Partnership pursuant to the terms of this Agreement. Nothing contained herein shall be construed as authorizing the General Partner or any Liquidator to amend this Agreement except in accordance with Article 14 hereof or as may be otherwise expressly provided for in this Agreement.

B. The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, in recognition of the fact that each of the Partners will be relying upon the power of the General Partner and any Liquidator to act as contemplated by this Agreement in any filing or other action by it on behalf of the Partnership, and it shall survive and not be affected by the subsequent Incapacity of any Limited Partner or Assignee and the transfer of all or any portion of such Limited Partner’s or Assignee’s Partnership Units and shall extend to such Limited Partner’s or Assignee’s heirs, successors, assigns and personal representatives. Each such Limited Partner or Assignee hereby agrees to be bound by any representation made by the General Partner or any Liquidator, acting in good faith pursuant to such power of attorney, and each such Limited Partner or Assignee hereby waives any and all defenses which may be available to contest, negate or disaffirm the action of the General Partner or any Liquidator, taken in good faith under such power of attorney. Each Limited Partner or Assignee shall execute and deliver to the General Partner or the Liquidator, within 15 days after receipt of the General Partner’s or Liquidator’s request therefor, such further designation, powers of attorney and other instruments as the General Partner or the Liquidator, as the case may be, deems necessary to effectuate this Agreement and the purposes of the Partnership.

 

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C. Notwithstanding anything in this Section 2.4, no General Partner, Liquidator, or authorized officer or attorney-in-fact of either, may exercise the power and authority under this Section 2.4 without the prior approval of the Board of Directors.

Section 2.5. Term

The term of the Partnership commenced on the date that the Certificate was filed with the Secretary of State of the State of Delaware and shall continue until dissolved pursuant to the provisions of Article 13 or as otherwise provided by law.

Section 2.6. Admission of Partners

On the date hereof, and upon its execution and delivery of a counterpart to this Agreement, (a) each of the Persons identified as a limited partner of the Partnership on Exhibit A to this Agreement is upon its delivery to the Partnership of its initial Capital Contribution, such initial Capital Contribution specified on Exhibit A of this Agreement pursuant to Section 4.1, hereby admitted to the Partnership as a limited partner of the Partnership, and (b) the General Partner is hereby admitted to the Partnership as general partner of the Partnership. Immediately following the admission of the General Partner as the general partner, the Initial General Partner, by its execution and delivery of a counterpart of this Agreement, shall withdraw and be deemed withdrawn from the Partnership and shall have no further or continuing interest in the Partnership. By execution and delivery of a counterpart of this Agreement, the Initial Limited Partner’s Partnership Units shall be redeemed and the Initial Limited Partner shall have no further or continuing interest in the Partnership. Each Limited Partner being admitted to the Partnership from time to time after the date hereof shall be deemed admitted to the Partnership as a limited partner of the Partnership upon such Limited Partner’s execution and delivery of a counterpart to this Agreement and delivery to the Partnership of its initial Capital Contribution, such initial Capital Contribution specified on Exhibit A of this Agreement pursuant to Section 4.1.

ARTICLE 3.

PURPOSE

Section 3.1. Purpose and Business

The purpose and nature of the business to be conducted by the Partnership is (i) to conduct any business that may be lawfully conducted by a limited partnership formed pursuant to the Act; provided, however, that such business shall be limited to and conducted in such a manner as to permit the Company at all times to qualify as a REIT, unless the Company ceases to qualify as a REIT for reasons other than as a result of the conduct of the business of the Partnership or voluntarily revokes its election to be a

 

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REIT; (ii) to enter into any partnership, joint venture or other similar arrangement to engage in any of the foregoing or to own interests in any entity engaged in any of the foregoing; and (iii) to do anything necessary, convenient or incidental to the foregoing. In connection with the foregoing, and without limiting the Company’s right, in its sole discretion, to cease qualifying as a REIT, the Partners acknowledge that the Company’s current status as a REIT inures to the benefit of all of the Partners and not solely to the General Partner, the Company or their Affiliates.

Section 3.2. Powers

The Partnership shall be empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and business described herein and for the protection and benefit of the Partnership, and shall have, without limitation, any and all of the powers that may be exercised on behalf of the Partnership by the General Partner pursuant to and according to the terms of this Agreement; provided, however, that the Partnership may not, without the General Partner’s consent, following the direction and approval of the Board of Directors, take, or refrain from taking, any action which, in the judgment of the General Partner, following the direction and approval of the Board of Directors, (i) could adversely affect the ability of the Company to qualify and to continue to qualify as a REIT; (ii) could subject the Company to any additional taxes under Section 857 or Section 4981 of the Code or any other related or successor provision of the Code; or (iii) could violate any law or regulation of any governmental body or agency having jurisdiction over the Company, its securities or the Partnership, unless such action (or inaction) under clause (i), clause (ii) or clause (iii) above shall have been specifically consented to by the Company in writing.

Section 3.3. Representations and Warranties by the Parties

A. Each Partner that is an individual represents and warrants to each other Partner that (i) such Partner has the legal capacity to enter into this Agreement and perform such Partner’s obligations hereunder, (ii) the consummation of the transactions contemplated by this Agreement to be performed by such Partner will not result in a breach or violation of, or a default under, any agreement by which such Partner or any of such Partner’s property is or are bound, or any statute, regulation, order or other law to which such Partner is subject, (iii) such Partner is a “United States person” within the meaning of Section 7701(a)(30) of the Code, and (iv) this Agreement is binding upon, and enforceable against, such Partner in accordance with its terms.

B. Each Partner that is not an individual represents and warrants to each other Partner that (i) its execution and delivery of this Agreement and all transactions contemplated by this Agreement to be performed by it have been duly authorized by all necessary action, including without limitation, that of its general partner(s), committee(s), trustee(s), beneficiaries, director(s) and/or shareholder(s), as the case may be, as required, (ii) the consummation of such transactions shall not result in a breach or violation of, or a default under, its certificate of limited partnership, partnership agreement, trust agreement, limited liability company operating agreement, declaration

 

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of trust, charter or bylaws, as the case may be, any agreement by which such Partner or any of such Partner’s properties or any of its partners, beneficiaries, trustees or shareholders, as the case may be, is or are bound, or any statute, regulation, order or other law to which such Partner or any of its partners, trustees, beneficiaries or shareholders, as the case may be, is or are subject, (iii) such Partner is a “United States person” within the meaning of Section 7701(a)(30) of the Code and (iv) this Agreement is binding upon, and enforceable against, such Partner in accordance with its terms.

C. Each Partner represents, warrants and agrees that it has acquired and continues to hold its interest in the Partnership for its own account for investment only and not for the purpose of, or with a view toward, the resale or distribution of all or any part thereof, nor with a view toward selling or otherwise distributing such interest or any part thereof at any particular time or under any predetermined circumstances. Each Partner further represents and warrants that it is a sophisticated investor, able and accustomed to handling sophisticated financial matters for itself, particularly real estate investments, and that it has a sufficiently high net worth that it does not anticipate a need for the funds it has invested in the Partnership in what it understands to be a highly speculative and illiquid investment.

D. Each Partner further represents, warrants, covenants and agrees as follows:

(1) Except as provided in Exhibit F hereto, at any time such Partner actually or Constructively Owns a 25% or greater capital interest or profits interest in the Partnership, it does not and will not, without the approval of the Board of Directors, actually own or Constructively Own (a) with respect to any Tenant that is a corporation, any stock of such Tenant, and (b) with respect to any Tenant that is not a corporation, any interest in either the assets or net profits of such Tenant.

(2) Upon request of the General Partner, it will promptly disclose to the General Partner and the Company the amount of REIT Shares or other capital shares of the Company that it actually owns or Constructively Owns.

(3) Without the approval of the Board of Directors, no Partner shall take any action that would cause the Partnership at any time to have more than 100 partners (including as partners those Persons indirectly owning an interest in the Partnership through a partnership, limited liability company, S corporation or grantor trust (such entity, a “flow through entity”), but only if substantially all of the value of such person’s interest in the flow through entity is attributable to the flow through entity’s interest (direct or indirect) in the Partnership).

E. The representations and warranties contained in this Section 3.3 shall survive the execution and delivery of this Agreement by each Partner and the dissolution and winding up of the Partnership.

 

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F. Each Partner hereby acknowledges that no representations as to potential profit, cash flows, funds from operations or yield, if any, in respect of the Partnership or the Company have been made by any Partner or any employee or representative or Affiliate of any Partner, and that projections and any other information, including, without limitation, financial and descriptive information and documentation, which may have been in any manner submitted to such Partner shall not constitute any representation or warranty of any kind or nature, express or implied.

G. Each Partner understands that if, for any reason, (a) the representations, warranties or agreements set forth in this Section 3.3 are violated, or (b) the Partnership’s actual or Constructive Ownership of REIT Shares or other capital shares of the Company violates the limitations set forth in the Charter, then (x) some or all of the Redemption Rights of the Partners may become non-exercisable, and (y) some or all of the REIT Shares owned by the Partners may be automatically transferred to a trust for the benefit of a charitable beneficiary, as provided in the Charter.

Section 3.4. Not Publicly Traded

The Partners intend for the Partnership to be treated as a partnership for United States federal income tax purposes and no election to the contrary shall be made. The General Partner, on behalf of the Partnership, shall use its best efforts not to take any action which would result in the Partnership being a publicly traded partnership within the meaning of either Section 469(k)(2) or 7704(b) of the Code. Subject to this Section 3.4, it is expressly acknowledged and agreed by the Partners that the General Partner may, following the direction and approval of the Board of Directors, waive or otherwise modify the application with respect to any Partner(s) or Assignee(s) of any provision herein restricting, prohibiting or otherwise relating to (i) the transfer of a Limited Partner Interest or the Partnership Units evidencing the same, (ii) the admission of any Limited Partners and (iii) the Redemption Rights of such Partners, and that such waivers or modifications may be made by the General Partner at any time or from time to time, including, without limitation, concurrently with the issuance of any Partnership Units pursuant to the terms of this Agreement.

ARTICLE 4.

CAPITAL CONTRIBUTIONS

Section 4.1. Capital Contributions of the Partners

At the time of their respective execution of this Agreement, the Partners shall make or shall have made Capital Contributions as set forth in Exhibit A to this Agreement. The Partners shall own Partnership Units of the class or series and in the amounts set forth in Exhibit A and shall have a Percentage Interest in the Partnership as set forth in Exhibit A, which Percentage Interest shall be adjusted in Exhibit A from time to time by the General Partner to the extent necessary to reflect accurately exchanges, redemptions, additional Capital Contributions, the issuance of additional Partnership Units (pursuant to any merger or otherwise), or similar events having an

 

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effect on any Partner’s Percentage Interest. Except as provided in Section 4.2, Section 4.3, and Section 10.4, the Partners shall have no obligation to make any additional Capital Contributions or loans to the Partnership. Each Limited Partner that contributes any Contributed Property shall promptly provide the General Partner and the Board of Directors, upon either of their request, with any information regarding such Contributed Property, including for Partnership tax return reporting purposes.

Section 4.2. Issuances of Additional Partnership Interests

The General Partner is hereby authorized, following the direction and approval of the Board of Directors, to cause the Partnership from time to time to issue to any existing Partner (including the General Partner and the Company) or to any other Person, and to admit such Person as a limited partner in the Partnership, Partnership Units (including, without limitation, Common Units and preferred Partnership Units) or other Partnership Interests, in each case in exchange for the contribution by such Person of property or other assets, in one or more classes, or one or more series of any of such classes, or otherwise with such designations, preferences, redemption and conversion rights and relative, participating, optional or other special rights, powers and duties, including rights, powers and duties senior to Limited Partner Interests, all as shall be determined by the General Partner (following the direction and approval of the Board of Directors) subject to Delaware law, including, without limitation, (i) the allocations of items of Partnership income, gain, loss, deduction and credit to each such class or series of Partnership Interests; (ii) the right of each such class or series of Partnership Interests to share in Partnership distributions; and (iii) the rights of each such class or series of Partnership Interests upon dissolution and liquidation of the Partnership. The issuance and terms of any LTIP Units shall be in accordance with Section 4.6.

Section 4.3. Additional Funds

A. The General Partner may, following the direction and approval of the Board of Directors, reasonably determine from time to time that the Partnership requires additional funds (“Additional Funds”) for the acquisition of additional assets, for the redemption of Partnership Units or for other reasonable purposes. Subject to Section 7.1, Additional Funds may be obtained by the Partnership, at the election of the General Partner (following the direction and approval of the Board of Directors), in any manner provided in, and in accordance with, the terms of this Section 4.3, without the approval of any Limited Partner (unless such approval is required under the terms of this Agreement).

B. Subject to the approval of the Board of Directors contemplated by Section 4.3(A) and the limitations set forth in Section 7.1, the General Partner, on behalf of the Partnership, may obtain any Additional Funds by accepting Capital Contributions from any Partners or other Persons. In connection with any such Capital Contribution, the General Partner is hereby authorized to cause the Partnership from time to time to issue additional Partnership Units (as set forth in Section 4.2 above) in consideration therefor, and the Percentage Interests of the Partners shall be adjusted to reflect the issuance of such additional Partnership Units.

 

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C. Subject to the approval of the Board of Directors contemplated by Section 4.3(A) and the limitations set forth in Section 7.1, the General Partner, on behalf of the Partnership, may obtain any Additional Funds by causing the Partnership to incur Debt upon such terms as the General Partner determines appropriate (following the direction and approval of the Board of Directors of such terms), including making such Debt convertible, redeemable or exchangeable for Partnership Units or REIT Shares; provided, however, that the Partnership shall not incur any such Debt if such Debt is recourse to any Partner (unless the Partner otherwise agrees).

D. Following the direction and approval of the Board of Directors and subject to the limitations set forth in Section 7.1, the General Partner, on behalf of the Partnership, may obtain any Additional Funds by causing the Partnership to incur Debt with the Company; provided, however, that the Partnership shall not incur any such Debt if (a) a breach, violation or default of such Debt would be deemed to occur by virtue of the transfer of any Partnership Interest, or (b) such Debt is recourse to any Partner (unless the Partner otherwise agrees).

Section 4.4. Preemptive Rights

No Person shall have any preemptive, preferential or other similar right with respect to (i) additional Capital Contributions or loans to the Partnership; or (ii) the issuance or sale of any Partnership Units or other Partnership Interests.

Section 4.5. No Interest

No Partner shall be entitled to interest on its Capital Contribution or on such Partner’s Capital Account unless determined by the General Partner following the direction and approval of the Board of Directors.

Section 4.6. LTIP Units

A. Issuance of LTIP Units. The General Partner may, following the direction and approval of the Board of Directors, as contemplated by Section 7.1(a), from time to time issue LTIP Units to Persons who provide services to the Partnership, the General Partner or the Company, for such consideration as the General Partner may determine, following the direction and approval of the Board of Directors, to be appropriate, and admit such Persons as Limited Partners. LTIP Units may be issued as either capital interests for federal income tax purposes (each, a “Capital LTIP Unit”) or profits interests for federal income tax purposes (each, a “Profits LTIP Unit”). Subject to the following provisions of this Section 4.6 and the provisions of Sections 4.7, or as otherwise provided in this Agreement with respect to Profits LTIP Units, LTIP Units shall be treated as Common Units, with all of the rights, privileges and obligations attendant thereto. For purposes of computing the Partners’ Percentage Interests, holders of LTIP Units shall be treated as Common Unit holders and LTIP Units shall be treated as Common Units. In particular, the Partnership shall maintain at all times a one-to-one

 

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correspondence between LTIP Units and Common Units for conversion, distribution and other purposes, including, without limitation, complying with the following procedures:

(1) If an Adjustment Event (as defined below) occurs, then the General Partner shall make a corresponding adjustment to the LTIP Units to maintain a one-for-one conversion and economic equivalence (subject to the economic differences between Profits LTIP Units and Common Units) ratio between Common Units and LTIP Units. The following shall be “Adjustment Events”: (A) the Partnership makes a distribution on all outstanding Common Units in Partnership Units, (B) the Partnership subdivides the outstanding Common Units into a greater number of units or combines the outstanding Common Units into a smaller number of units, or (C) the Partnership issues any Partnership Units in exchange for its outstanding Common Units by way of a reclassification or recapitalization of its Common Units. If more than one Adjustment Event occurs, the adjustment to the LTIP Units need be made only once using a single formula that takes into account each Adjustment Event as if all Adjustment Events occurred simultaneously. For the avoidance of doubt, the following shall not be Adjustment Events: (x) the issuance of Partnership Units in a financing, reorganization, acquisition (through the acquisition of equity interests or assets), merger, or other similar business combination, (y) the issuance of Partnership Units pursuant to any employee benefit or compensation plan or distribution reinvestment plan or (z) the issuance of any Partnership Units to the General Partner in respect of a Capital Contribution to the Partnership. If the Partnership takes an action affecting the Common Units other than actions specifically described above as “Adjustment Events” and in the opinion of the General Partner, following the direction and approval of the Board of Directors, such action would require an adjustment to the LTIP Units to maintain the one-to-one correspondence described above, the General Partner shall have the right to make such adjustment to the LTIP Units, to the extent permitted by law and by any Equity Incentive Plan, in such manner and at such time as the General Partner, following the direction and approval of the Board of Directors, may determine to be appropriate under the circumstances. If an adjustment is made to the LTIP Units, as herein provided, the Partnership shall promptly file in the books and records of the Partnership an officer’s certificate setting forth such adjustment and a brief statement of the facts requiring such adjustment, which certificate shall be conclusive evidence of the correctness of such adjustment absent manifest error. Promptly after filing of such certificate, the Partnership shall mail a notice to each LTIP Unitholder setting forth the adjustment to his or her LTIP Units and the effective date of such adjustment; and

(2) Subject to the approval of the Board of Directors, the LTIP Unitholders shall, when, as and if authorized and declared by the General Partner out of assets legally available for that purpose, be entitled to receive distributions in an amount per LTIP Unit equal to the distributions per Common Unit, paid to holders of Common Units on such Partnership Record Date established by the General Partner with respect to such distribution.

 

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B. Priority. Subject to the provisions of this Section 4.6 and the provisions of Section 4.7 and Section 5.1, the LTIP Units shall rank pari passu with the Common Units as to the payment of regular and special periodic or other distributions and distribution of assets upon liquidation, dissolution or winding up. As to the payment of distributions and as to distribution of assets upon liquidation, dissolution or winding up, any class or series of Partnership Units which by its terms specifies that it shall rank junior to, on parity with, or senior to the Common Units shall also rank junior to, on parity with, or senior to, as the case may be, the LTIP Units. Subject to the terms of any Vesting Agreement, an LTIP Unitholder shall be entitled to transfer his or her LTIP Units to the same extent, and subject to the same restrictions as holders of Common Units are entitled to transfer their Common Units pursuant to Article 11.

C. Special Provisions. LTIP Units shall be subject to the following special provisions:

(1) Vesting Agreements. LTIP Units may, at the direction of the Board of Directors, be issued subject to vesting, forfeiture and additional restrictions on transfer pursuant to the terms of a Vesting Agreement. The terms of any Vesting Agreement may be modified by the General Partner (only with the approval of the Board of Directors), from time to time, subject to any restrictions on amendment imposed by the relevant Vesting Agreement or by the Equity Incentive Plan, if applicable. LTIP Units that have vested under the terms of a Vesting Agreement are referred to as “Vested LTIP Units”; all other LTIP Units shall be treated as “Unvested LTIP Units.”

(2) Forfeiture. Unless otherwise specified in the Vesting Agreement, upon the occurrence of an event specified in a Vesting Agreement that results in either the right of the Partnership to repurchase the LTIP Units at a specified purchase price or in the forfeiture of the LTIP Units, then if the Partnership exercises such right to repurchase or cause the forfeiture of LTIP Units in accordance with the applicable Vesting Agreement, the relevant LTIP Units shall immediately, and without any further action, be treated as cancelled and no longer outstanding for any purpose. Unless otherwise specified in the Vesting Agreement, no consideration or other payment shall be due with respect to any LTIP Units that have been forfeited, other than any distributions declared with respect to a Partnership Record Date prior to the effective date of the forfeiture.

(3) Redemption. The Redemption Right provided to the holders of Common Unit under Section 8.6 shall not apply with respect to Vested LTIP Units unless and until they are converted to Common Units as provided in Section 4.7.

D. Voting. Solely with respect to Vested LTIP Units, LTIP Unitholders shall have the same voting rights as the Limited Partners, with the LTIP Units voting as a single class with the Common Units and having one vote per LTIP Unit.

 

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Section 4.7. Conversion of LTIP Units

A. Conversion Right. An LTIP Unitholder shall have the right (the “Conversion Right”), at his or her option, at any time to convert all or a portion of his or her Vested LTIP Units into Common Units; provided, however, that a holder may not exercise the Conversion Right for less than 1,000 Vested LTIP Units or, if such holder holds less than 1,000 Vested LTIP Units, all of the Vested LTIP Units held by such holder; provided, further, that a holder of a Profits LTIP Unit may not exercise the Conversion Right with respect to such Profits LTIP Unit prior to the date on which the Book-Up Target for such Profits LTIP Unit becomes zero (an LTIP Unit eligible for conversion pursuant to this Section 4.7(a), an “Eligible LTIP Unit”). LTIP Unitholders shall not have the right to convert Unvested LTIP Units into Common Units until they become Vested LTIP Units; provided, however, that when an LTIP Unitholder is notified of the expected occurrence of an event that will cause his or her Unvested LTIP Units to become Vested LTIP Units, such LTIP Unitholder may give the Partnership a Conversion Notice conditioned upon and effective as of the time of vesting and such Conversion Notice, unless subsequently revoked by the LTIP Unitholder, shall be accepted by the Partnership subject to such condition. Following the direction and approval of the Board of Directors, the General Partner shall have the right at any time to cause a conversion of Vested LTIP Units into Common Units. In all cases, the conversion of any LTIP Units into Common Units shall be subject to the conditions and procedures set forth in this Section 4.7.

B. Exercise by an LTIP Unitholder. A holder of Eligible LTIP Units may convert such Eligible LTIP Units into an equal number of fully paid and non-assessable Common Units, giving effect to all adjustments (if any) made pursuant to Section 4.6. In order to exercise his or her Conversion Right, an LTIP Unitholder shall deliver a notice (a “Conversion Notice”) in the form attached as Exhibit G to this Agreement to the Partnership (with a copy to the General Partner) not less than ten nor more than 60 days prior to a date (the “Conversion Date”) specified in such Conversion Notice. A Conversion Notice shall be provided in the manner provided in Section 15.1. Each LTIP Unitholder covenants and agrees with the Partnership that all Eligible LTIP Units to be converted pursuant to this Section 4.7(B) shall be free and clear of all liens and encumbrances. Notwithstanding anything herein to the contrary, a holder of Eligible LTIP Units may deliver a Notice of Redemption pursuant to Section 8.6 relating to those Common Units that will be issued to such holder upon conversion of such Eligible LTIP Units into Common Units in advance of the Conversion Date; provided, however, that the redemption of such Common Units by the Partnership shall in no event take place until after the Conversion Date.

C. Forced Conversion. Subject to the approval of the Board of Directors, the General Partner, on behalf of the Partnership, may cause any number of Eligible LTIP Units held by an LTIP Unitholder to be converted (a “Forced Conversion”) into an equal number of Common Units, giving effect to all adjustments (if any) made pursuant to Section 4.6; provided, however, that the General Partner, on behalf of the Partnership, may not cause Forced Conversion of any LTIP Units that would not at the time be eligible for conversion at the option of such LTIP Unitholder pursuant to Section 4.7(B).

 

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In order to exercise its right of Forced Conversion, the General Partner on behalf of the Partnership, shall deliver a notice (a “Forced Conversion Notice”) in the form attached as Exhibit H to this Agreement to the applicable LTIP Unitholder not less than ten nor more than 60 days prior to the Conversion Date specified in such Forced Conversion Notice. A Forced Conversion Notice shall be provided in the manner provided in Section 15.1.

D. Completion of Conversion. A conversion of Eligible LTIP Units for which the holder thereof has given a Conversion Notice or the General Partner, on behalf of the Partnership, has given a Forced Conversion Notice shall occur automatically after the close of business on the applicable Conversion Date without any action on the part of such LTIP Unitholder, as of which time such LTIP Unitholder shall be credited on the books and records of the Partnership with the issuance as of the opening of business on the next day of the number of Common Units issuable upon such conversion. After the conversion of Eligible LTIP Units as aforesaid, the Partnership shall deliver to such LTIP Unitholder, upon his or her written request, a certificate of the General Partner certifying the number of Common Units and remaining LTIP Units, if any, held by such person immediately after such conversion.

ARTICLE 5.

DISTRIBUTIONS

Section 5.1. Requirement and Characterization of Distributions

The General Partner shall distribute at least quarterly a portion of Available Cash generated by the Partnership during such quarter or shorter period, such portion as determined by the General Partner following the direction and approval of the Board of Directors, to the Partners that are Partners on the Partnership Record Date with respect to such quarter or shorter period in accordance with their Percentage Interests; provided, that in no event may a Partner receive a distribution of Available Cash with respect to a Partnership Unit if such Partner is entitled to receive a distribution out of such Available Cash with respect to a REIT Share for which such Partnership Unit has been exchanged, and any such distribution shall be made to the Company. In accordance with Section 4.6(A), LTIP Unitholders shall be entitled to receive distributions pursuant to this Section 5.1 in an amount per LTIP Unit equal to distributions made per Common Unit.

Section 5.2. Amounts Withheld

All amounts withheld pursuant to the Code or any provisions of any state, local or non-U.S. tax law and Section 10.4 hereof with respect to any allocation, payment or distribution to any Partner or Assignee shall be treated as amounts distributed to such Partner or Assignee pursuant to Section 5.1 for all purposes under this Agreement.

 

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Section 5.3. Distributions Upon Liquidation

Proceeds from a Sale of the Partnership and any other cash received or reductions in reserves made after commencement of the liquidation of the Partnership shall be distributed to the Partners in accordance with Section 13.2.

Section 5.4. Restricted Distributions

Notwithstanding any provision to the contrary contained in this Agreement, the Partnership, and the General Partner on behalf of the Partnership, shall not make a distribution to any Partner on account of its interest in the Partnership if such distribution would violate Section 17-607 of the Act or other applicable law.

Section 5.5. Compliance with REIT Requirements

The General Partner shall make such reasonable efforts, following the direction and approval of the Board of Directors and consistent with the Company’s qualification as a REIT, to cause the Partnership to distribute sufficient amounts to enable the Company, for so long as the Company has determined to qualify as a REIT, to pay stockholder dividends that will (a) satisfy the requirements for qualifying as a REIT under the Code and Regulations (the “REIT Requirements”) and (b) except to the extent otherwise determined by the Company, eliminate any federal income or excise tax liability of the Company.

ARTICLE 6.

ALLOCATIONS

Section 6.1. Allocations For Capital Account Purposes

A. After giving effect to the special allocations set forth in Section 1 of Exhibit C attached hereto for the applicable taxable year or other allocation period, and subject to Section 4 of Exhibit B attached hereto, Net Income for each taxable year or other allocation period shall be allocated to the Partners’ Capital Accounts in the following order of priority:

(1) First, to the General Partner until the cumulative Net Income allocated to the General Partner under this Section 6.1(A)(1) equals the cumulative Net Loss allocated to the General Partner under Section 6.1(B)(2);

(2) Next, to the holders of Common Units and LTIP Units until the cumulative Net Income allocated to such holders under this Section 6.1(A)(2) equals the cumulative Net Loss allocated to such holders under Section 6.1(B)(1) (pro rata in accordance with the excess of such Net Loss over such Net Income for each such holder); and

 

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(3) Thereafter, to the holders of Common Units and LTIP Units pro rata in accordance with their respective Percentage Interests.

B. After giving effect to the special allocations set forth in Section 1 of Exhibit C attached hereto for the applicable taxable year or other allocation period, and subject to Section 4 of Exhibit B attached hereto, Net Loss for each taxable year or other allocation period shall be allocated to the Partners’ Capital Accounts in the following order of priority.

(1) First, to the holders of Common Units and LTIP Units with positive balances in their Economic Capital Account Balances in accordance with such balances until their Economic Capital Account Balances are reduced to zero; and

(2) Thereafter, to the General Partner.

For purposes of determining allocations of Net Loss pursuant to Section 6.1(B)(1), a holder of a Profits LTIP Unit shall be treated as having a separate Economic Capital Account Balance, and for this purpose a separate Capital Account with an appropriate share of Partnership Minimum Gain and Partner Minimum Gain shall be maintained, for each tranche of Profits LTIP Units with a different issuance date that it holds and a separate Capital Account for its Common Units or Capital LTIP Units, if applicable, and the Economic Capital Account Balance of each holder of Common Units or Capital LTIP Units shall not include any Economic Capital Account Balance attributable to other series or classes of Partnership Units.

ARTICLE 7.

MANAGEMENT AND OPERATIONS OF BUSINESS

Section 7.1. Management

A. Except as otherwise expressly provided in this Agreement, all management powers over the business and affairs of the Partnership are and shall be exclusively vested in the General Partner, and no Limited Partner or other Person shall have any right to participate in or exercise control or management power over the business and affairs of the Partnership. The General Partner may be removed, with or without cause by the holders of a majority of the Common Units outstanding, subject to the approval of the Board of Directors. In addition to the powers now or hereafter granted to a general partner of a limited partnership under applicable law or which are granted to the General Partner under any other provision of this Agreement, the General Partner, subject to the terms of this Agreement, shall have full power and authority to do all things deemed necessary, desirable or convenient by it to conduct the business of the Partnership, to exercise all powers set forth in Section 3.2 hereof and to effectuate the purposes set forth in Section 3.1 hereof. Notwithstanding the foregoing, the General Partner shall not do any of the following without the prior approval of the Board of Directors:

(1) the making of any expenditures, the lending or borrowing of money (including, without limitation, making prepayments on loans and borrowing money to permit the Partnership to make distributions to its Partners in such amounts as will permit the Company (so long as the Company desires to maintain its qualification as a REIT) to avoid the payment of any U.S. federal income tax (including, for this purpose, any excise tax pursuant to Section 4981 of the Code)

 

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and to make distributions to its shareholders in amounts sufficient to permit the Company to maintain its REIT status), the assumption or guarantee of, or other contracting for, indebtedness and other liabilities, the issuance of evidence of indebtedness (including the securing of the same by deed, mortgage, deed of trust or other lien or encumbrance on the Partnership’s assets or any assets of its Subsidiaries) and the incurring of any obligations it deems necessary for the conduct of the activities of the Partnership;

(2) the making of tax, regulatory and other filings or elections, or rendering of periodic or other reports to governmental or other agencies having jurisdiction over the business or assets of the Partnership;

(3) the acquisition, disposition, mortgage, pledge, encumbrance, hypothecation or exchange of any assets of the Partnership (including the exercise or grant of any conversion, option, privilege, or subscription right or other right available in connection with any assets at any time held by the Partnership) or the merger or other combination of the Partnership with or into another entity (all of the foregoing subject to any prior approval only to the extent required by Section 7.3 hereof);

(4) the mortgage, pledge, encumbrance or hypothecation of any assets of the Partnership, the use of the assets of the Partnership (including, without limitation, cash on hand) for any purpose consistent with the terms of this Agreement and on any terms that it sees fit, including, without limitation, the financing of the conduct of the operations of the Partnership, the Company or any of the Partnership’s or the Company’s Subsidiaries, the lending of funds to other Persons (including, without limitation, the Subsidiaries of the Partnership and/or the Company) and the repayment of obligations of the Partnership and its Subsidiaries and any other Person in which it has an equity investment, and the making of capital contributions to its Subsidiaries;

(5) the negotiation, execution, delivery and performance of any contracts (including leases), conveyances or other instruments that the General Partner considers useful or necessary or convenient to the conduct of the Partnership’s operations or the implementation of the General Partner’s powers under this Agreement, including, without limitation, contracting with consultants, accountants, legal counsel, other professional advisors and other agents and the payment of their expenses and compensation out of the Partnership’s assets;

(6) the distribution of Partnership cash or other Partnership assets in accordance with this Agreement;

 

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(7) holding, managing, investing and reinvesting cash and other assets of the Partnership;

(8) the amending, restating and/or supplementing of this Agreement or the Certificate;

(9) the establishment of one or more divisions of the Partnership, the selection and dismissal of employees of the Partnership (including, without limitation, employees who may be designated as officers with titles such as “president,” “vice president,” “secretary” and “treasurer” of the Partnership), and agents, outside attorneys, accountants, consultants and contractors of the Partnership, and the determination of their compensation and other terms of employment or hiring;

(10) the formation of, or acquisition of an interest in, and the contribution of property to, any further limited or general partnerships, limited liability companies, real estate investment trusts, corporations, entities that are treated as REITs, “taxable REIT subsidiaries” or as foreign corporations for federal income tax purposes, joint ventures or other relationships that it deems desirable (including, without limitation, the acquisition of interests in, and the contributions of property or the making of loans to, its or the Company’s Subsidiaries and any other Person in which it has an equity investment from time to time or the incurrence of indebtedness on behalf of such Persons or the guarantee of obligations of such Persons and the making of any tax, regulatory or other filing or election with respect to any of the foregoing Persons); provided, that as long as the Company has determined to continue to qualify as a REIT, the Partnership may not engage in any such formation, acquisition or contribution that would cause the Company to fail to qualify as a REIT;

(11) the control of any matters affecting the rights and obligations of the Partnership, including the settlement, compromise, submission to arbitration or any other form of dispute resolution, or abandonment of, any claim, cause of action, liability, Debt or damages, due or owing to or from the Partnership, the commencement or defense of suits, legal proceedings, administrative proceedings, arbitrations or other forms of dispute resolution, and the representation of the Partnership in all suits or legal proceedings, administrative proceedings, arbitrations or other forms of dispute resolution, the incurrence of legal expense, and the indemnification of any Person against liabilities and contingencies to the extent permitted by law;

(12) the undertaking of any action in connection with the Partnership’s direct or indirect investment in any Subsidiary or any other Person (including, without limitation, the contribution or loan of funds by the Partnership to such Persons);

 

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(13) the determination of the fair market value of any Partnership property distributed in kind using such reasonable method of valuation as the General Partner may adopt;

(14) the enforcement of any rights against any Partner pursuant to representations, warranties, covenants and indemnities relating to such Partner’s contribution of property or assets to the Partnership;

(15) the exercise, directly or indirectly, through any attorney-in-fact acting under a general or limited power of attorney, of any right, including the right to vote, appurtenant to any asset or investment held by the Partnership;

(16) the exercise of any of the powers of the General Partner enumerated in this Agreement on behalf of or in connection with any Subsidiary of the Partnership or any other Person in which the Partnership has a direct or indirect interest, or jointly with any such Subsidiary or other Person;

(17) the exercise of any of the powers of the General Partner enumerated in this Agreement on behalf of any Person in which the Partnership does not have an interest pursuant to contractual or other arrangements with such Person;

(18) the making, execution, delivery and performance of any and all deeds, leases, notes, mortgages, deeds of trust, security agreements, conveyances, contracts, guarantees, warranties, indemnities, waivers, releases or legal instruments or agreements in writing necessary, appropriate or convenient, in the judgment of the General Partner, for the accomplishment of any of the powers of the General Partner enumerated in this Agreement;

(19) the issuance of additional Partnership Units and other partnership interests to any Partners or other Persons;

B. Subject to the rights of the Partners and the approval of the Board of Directors as set forth in this Agreement, including, but not limited to, Section 7.1, each of the Limited Partners agrees that the General Partner is authorized to execute, deliver and perform the above-mentioned agreements and transactions on behalf of the Partnership, and otherwise to exercise any power of the General Partner under this Agreement or the Act, without any further act, approval or vote of the Partners, notwithstanding any other provision of this Agreement (except as provided in Section 7.3), the Act or any applicable law, rule or regulation, to the fullest extent permitted under the Act or other applicable law, rule or regulation. The execution, delivery or performance by the General Partner or the Partnership of any agreement authorized or permitted under this Agreement shall not constitute a breach by the General Partner of any duty that the General Partner may owe the Partnership or the Limited Partners or any other Persons under this Agreement or of any duty stated or implied by law or equity.

 

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C. At all times from and after the date hereof, the General Partner, following the direction and approval of the Board of Directors, may cause the Partnership to establish and maintain at any and all times working capital accounts and other cash or similar balances in such amounts as the General Partner, following the direction and approval of the Board of Directors, deems appropriate and reasonable from time to time.

D. In exercising its authority under this Agreement, the General Partner (solely to the extent directed by the Board of Directors, and in all cases in accordance with such direction from the Board of Directors) shall take into account the tax consequences to any Partner of any action taken (or not taken) by it. The General Partner, the Board of Directors and the Partnership shall not be liable to a Limited Partner under any circumstances as a result of an income tax or other tax liability incurred by such Limited Partner as a result of an action (or inaction) by the General Partner taken pursuant to its authority under this Agreement or at the direction of the Board of Directors.

Section 7.2. Certificate of Limited Partnership

The Initial General Partner filed the Certificate with the Secretary of State of the State of Delaware as required by the Act. The General Partner shall use all reasonable efforts to cause to be filed such other certificates or documents as may be reasonable and necessary or appropriate for the formation, continuation, qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware and any other state, or the District of Columbia, in which the Partnership may elect to do business or own property. To the extent that such action is determined by the General Partner to be reasonable and necessary or appropriate or convenient, the General Partner shall file amendments to and restatements of the Certificate and do all of the things to maintain the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) under the laws of the State of Delaware and each other state, or the District of Columbia, in which the Partnership may elect to do business or own property. Subject to the terms of Section 8.5(A)(2) hereof, the General Partner shall not be required, before or after filing, to deliver or mail a copy of the Certificate or any amendment thereto or restatement thereof to any Limited Partner.

Section 7.3. Restrictions on General Partner Authority

The General Partner may not take any action in contravention of an express prohibition or limitation of this Agreement without the written consent of Limited Partners holding a majority of the Percentage Interests held by Limited Partners, or such other percentage of the Limited Partners as may be specifically provided for under a provision of this Agreement.

 

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Section 7.4. Reimbursement of the General Partner and the Company

A. Except as provided in this Section 7.4 and elsewhere in this Agreement (including the provisions of Articles 5 and 6 regarding distributions, payments, and allocations to which it may be entitled), the General Partner shall not be compensated for its services as general partner of the Partnership.

B. The Partnership shall be responsible for and shall pay all expenses relating to the Partnership’s and the General Partner’s organization and the ownership of each of their assets and operations. The General Partner shall be reimbursed on a monthly basis for all expenditures that it reasonably incurs relating to the ownership and operation of, or for the benefit of, the Partnership; provided, that the amount of any such reimbursement shall be reduced by any interest earned by the General Partner with respect to bank accounts or other instruments or accounts held by it on behalf of the Partnership; and provided, further, that the General Partner shall not be reimbursed for any (i) trustees’/directors’ fees, (ii) income tax liabilities or (iii) filing or similar fees in connection with maintaining the General Partner’s continued existence that are incurred by the General Partner, but the Partners acknowledge that all other expenses of the General Partner is deemed to be for the benefit of the Partnership. Such reimbursement shall be in addition to any reimbursement made as a result of indemnification pursuant to Section 7.7 hereof. Included among the expenditures for which the General Partner shall be entitled to reimbursement hereunder shall be any payments of debt service made by the General Partner, in its capacity as General Partner, as guarantor or otherwise, with respect to indebtedness encumbering any property held by the Partnership.

C. In the event that the Company shall elect to purchase from its shareholders REIT Shares for the purpose of delivering such REIT Shares to satisfy an obligation under any distribution reinvestment program adopted by the Company, any employee share purchase plan adopted by the Company, or any similar obligation or arrangement undertaken by the Company in the future, the purchase price paid by the Company for such REIT Shares and any other expenses incurred by the Company in connection with such purchase shall be considered expenses of the Partnership and shall be reimbursed to the Company, subject to the condition that: (i) if such REIT Shares subsequently are sold by the Company, the Company shall pay to the Partnership any proceeds received by the Company for such REIT Shares (which sales proceeds shall include the amount of distributions reinvested under any distribution reinvestment or similar program; provided, that a transfer of REIT Shares for Partnership Units pursuant to Section 8.6 would not be considered a sale for such purposes); and (ii) if such REIT Shares are not retransferred by the Company within 30 days after the purchase thereof, the General Partner shall cause the Partnership to cancel a number of Partnership Units held by the Company equal to the product obtained by multiplying the Conversion Factor by the number of such REIT Shares (in which case such reimbursement shall be treated as a distribution in redemption of Partnership Units held by the Company).

 

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Section 7.5. Outside Activities of the General Partner

The General Partner and any Affiliates of the General Partner shall only conduct the activities contemplated by this Agreement. Notwithstanding the foregoing, the General Partner and any Affiliates of the General Partner may (a) acquire Limited Partner Interests and shall be entitled to exercise all rights of a Limited Partner relating to such Limited Partner Interests and (b) acquire less than 5% of the equity securities of any Person, which securities are listed on any national securities exchange and the General Partner or such Affiliate has no other business relationship, direct or indirect, with the issuer of such securities. For the avoidance of doubt, family members of Affiliates of the General Partner are permitted to own real estate for commercial purposes.

Section 7.6. Contracts with Affiliates

A. The Partnership may lend or contribute funds or other assets to, and borrow funds from, its or the Company’s Subsidiaries or other Persons in which it or the Company has an equity or other interests and such Persons may borrow funds from, and lend or contribute funds or assets to, the Partnership, on terms and conditions established by the General Partner, following the direction and approval of the Board of Directors. The foregoing authority shall not create any right or benefit in favor of any Subsidiary or any other Person.

B. Except as provided in Section 7.5, the Partnership may transfer assets to joint ventures, other partnerships, limited liability companies, real estate investment trusts, corporations or other business entities in which it is or thereby becomes a participant upon such terms and subject to such conditions consistent with this Agreement and applicable law as the General Partner deems appropriate, following the direction and approval of the Board of Directors.

C. Except as expressly permitted by this Agreement, neither the General Partner nor any of its Affiliates shall sell, transfer or convey any property to, or purchase any property from, the Partnership, directly or indirectly, except pursuant to transactions that are determined by the General Partner in good faith to be fair and reasonable following the direction and approval of the Board of Directors.

D. The General Partner, following the direction and approval of the Board of Directors, may propose and adopt, on behalf of the Partnership, employee benefit plans, share option plans, and similar plans funded by the Partnership for the benefit of employees of the General Partner, the Company, the Partnership, Subsidiaries of the Partnership or any Affiliate of any of them in respect of services performed, directly or indirectly, for the benefit of the Partnership, the Company, the General Partner or any Subsidiaries of the Partnership.

 

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E. In connection with the Company’s initial public offering of REIT Shares, the General Partner shall cause the Partnership to contribute the proceeds from the initial public offering of REIT Shares that the Company contributed to the Partnership in exchange for Partnership Units to NREF OP I, L.P. in an amount equal to             % of the net proceeds, NREF OP II, L.P. in an amount equal to             % of the net proceeds and NREF OP IV, L.P. in an amount equal to             % of the net proceeds. The General Partner, following the direction and approval of the Board of Directors, shall cause the Partnership to contribute the proceeds from subsequent offerings of REIT Shares that the Company contributes to the Partnership in exchange for Partnership Units to the Partnership’s Subsidiaries at the discretion of the General Partner, following the direction and approval of the Board of Directors.

Section 7.7. Indemnification

A. To the fullest extent permitted by Delaware law, the Partnership shall indemnify each Indemnitee from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including, without limitation, attorneys’ fees and other legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the operations of the Partnership or the Company as set forth in this Agreement, in which such Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, except to the extent such Indemnitee acted in bad faith, or with gross negligence or willful misconduct. Without limitation, the foregoing indemnity shall extend to any liability of any Indemnitee, pursuant to a loan guaranty or otherwise for any indebtedness of the Partnership or any Subsidiary of the Partnership (including without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken subject to), and the General Partner is hereby authorized and empowered, on behalf of the Partnership, to enter into one or more indemnity agreements consistent with the provisions of this Section 7.7 in favor of any Indemnitee having or potentially having liability for any such indebtedness. Any indemnification pursuant to this Section 7.7 shall be made only out of the assets of the Partnership, and neither the General Partner nor any Limited Partner shall have any obligation to contribute to the capital of the Partnership, or otherwise provide funds, to enable the Partnership to fund its obligations under this Section 7.7.

B. Reasonable expenses incurred by an Indemnitee who is a party to a proceeding shall be paid or reimbursed by the Partnership in advance of the final disposition of the proceeding, upon receipt by the Partnership of an undertaking by or on behalf of the Indemnitee to repay such amount if it shall be determined that the Indemnitee is not entitled to be indemnified as authorized in Section 7.7(A).

C. The indemnification provided by this Section 7.7 shall be in addition to any other rights to which an Indemnitee or any other Person may be entitled under any agreement, pursuant to any vote of the Partners, as a matter of law or otherwise, and shall continue as to an Indemnitee who has ceased to serve in such capacity unless otherwise provided in a written agreement pursuant to which such Indemnitees are indemnified.

 

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D. The Partnership may purchase and maintain insurance, on behalf of the Indemnitees and such other Persons as the General Partner shall determine, against any liability that may be asserted against or expenses that may be incurred by such Person in connection with the Partnership’s activities, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement.

E. For purposes of this Section 7.7, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by it of its duties to the Partnership also imposes duties on, or otherwise involves services by, it to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute fines within the meaning of this Section 7.7; and actions taken or omitted by the Indemnitee with respect to an employee benefit plan in the performance of its duties for a purpose reasonably believed by it to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Partnership.

F. In no event may an Indemnitee subject any of the Partners to personal liability by reason of the indemnification provisions set forth in this Agreement.

G. An Indemnitee shall not be denied indemnification in whole or in part under this Section 7.7 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement.

H. The provisions of this Section 7.7 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons. Any amendment, modification or repeal of this Section 7.7 or any provision hereof shall be prospective only and shall not in any way affect the Partnership’s liability to any Indemnitee under this Section 7.7, as in effect immediately prior to such amendment, modification, or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.

Section 7.8. Liability of the General Partner

A. Notwithstanding anything to the contrary set forth in this Agreement, none of the General Partner, its Affiliates, or any of their respective officers, trustees, directors, shareholders, partners, members, employees, representatives or agents or any officer, employee, representative or agent of the Partnership and its Affiliates (individually, a “Covered Person” and collectively, the “Covered Persons”) shall be liable for monetary damages to the Partnership, any Partners or any Assignees for losses sustained or liabilities incurred as a result of errors in judgment or of any act or omission if the Covered Person’s conduct did not constitute bad faith, gross negligence or willful misconduct.

 

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B. The Limited Partners expressly acknowledge that the General Partner is acting on behalf of the Partnership, the Limited Partners and the Company collectively, that the General Partner is under no obligation to consider the separate interests of the Limited Partners (except as otherwise provided herein) in deciding whether to cause the Partnership to take (or decline to take) any actions. In the event of a conflict between the interests of the Company on the one hand and the Limited Partners on the other, the General Partner shall, consult with the Board of Directors, endeavor in good faith to resolve the conflict in a manner not adverse to either the Company or the Limited Partners; provided, however, that any such conflict that the General Partner in good faith determines cannot be resolved in a manner not adverse to either the Company or the Limited Partners shall be resolved in favor of the Company. The General Partner shall not be liable for monetary damages for losses sustained, liabilities incurred, or benefits not derived by Limited Partners in connection with such decisions; provided, that the General Partner has acted in good faith.

C. Subject to its obligations and duties as General Partner set forth in Section 7.1(A) hereof, the General Partner may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its employees and agents.

D. Any amendment, modification or repeal of this Section 7.8 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the Covered Person’s liability to the Partnership and the Limited Partners under this Section 7.8 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.

E. To the extent that, at law or in equity, a Covered Person has duties (including fiduciary duties) and liabilities relating thereto to the Partnership or to the Partners, any Covered Person acting under this Agreement or otherwise shall not be liable to the Partnership or to any Partner for its good faith reliance on the provisions of this Agreement. The provisions of this Agreement, to the extent that they restrict the duties and liabilities of a Covered Person otherwise existing at law or in equity, are agreed by the Partners to replace such other duties and liabilities of such Covered Person.

Section 7.9. Other Matters Concerning the General Partner

A. The General Partner may rely and shall be protected in acting, or refraining from acting, upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties.

 

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B. The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers, architects, engineers, environmental consultants and other consultants and advisers selected by it, following the direction and approval of the Board of Directors, and any act taken or omitted to be taken in reliance upon the opinion of such Persons as to matters which the General Partner reasonably believes to be within such Person’s professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion.

C. The General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers and duly appointed attorneys-in-fact. Each such attorney shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform each and every act and duty which is permitted or required to be done by the General Partner hereunder.

D. Notwithstanding any other provisions of this Agreement or the Act, any action of the General Partner on behalf of the Partnership or any decision of the General Partner to refrain from acting on behalf of the Partnership, undertaken in the good faith belief that such action or omission is necessary or advisable in order (i) to protect the ability of the Company to continue to qualify as a REIT; (ii) for the Company to otherwise satisfy the REIT Requirements; or (iii) to avoid the Company incurring any taxes under Section 337(d), 857, 1374 or 4981 of the Code, is expressly authorized under this Agreement and is deemed approved by all of the Limited Partners.

Section 7.10. Title to Partnership Assets

Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively, shall have any ownership interest in such Partnership assets or any portion thereof.

Section 7.11. Reliance by Third Parties

Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner has full power and authority, without consent or approval of any other Partner or Person (unless set forth herein), to encumber, sell or otherwise use in any manner any and all assets of the Partnership and to enter into any contracts on behalf of the Partnership, and take any and all actions on behalf of the Partnership and such Person shall be entitled to deal with the General Partner as if the General Partner were the Partnership’s sole party in interest, both legally and beneficially. Each Limited Partner hereby waives any and all defenses or other remedies which may be available against such Person to contest, negate or disaffirm any action of the General Partner in connection with any such dealing. In no event shall any Person dealing with the General Partner or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the General Partner or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the General Partner or its

 

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representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (i) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect; (ii) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership; and (iii) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership.

ARTICLE 8.

RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS

Section 8.1. Limitation of Liability

Each Limited Partner acting in its capacity as such shall have no liability under this Agreement except for liability resulting from: (a) an act or omission on the part of such Limited Partner that was committed in bad faith or was the result of active and deliberate dishonesty; (b) in the case of any criminal proceeding, an act or omission that such Limited Partner had reasonable cause to believe was unlawful; (c) any transaction for which such Limited Partner actually received an improper personal benefit in money, property or services in violation or breach of any provision of this Agreement; or (d) as expressly provided in this Agreement or under the Act.

Section 8.2. Management of Business

No Limited Partner or Assignee (other than the General Partner, any of its Affiliates or any officer, trustee, director, member, employee or agent of the General Partner, the Partnership or any of their Affiliates, in their capacity as such) shall take part in the operation, management or control (within the meaning of the Act) of the Partnership’s business, transact any business in the Partnership’s name or have the power to sign documents for or otherwise bind the Partnership. The transaction of any such business by the General Partner, any of its Affiliates or any officer, trustee, director, member, employee or agent of the General Partner, the Partnership or any of their Affiliates, in their capacity as such, shall not affect, impair or eliminate the limitations on the liability of the Limited Partners or Assignees under this Agreement.

Section 8.3. Outside Activities of Limited Partners

Subject to any agreements entered into by a Limited Partner or its Affiliates with the Partnership or any of its Subsidiaries, any Limited Partner (other than the Company) and any officer, trustee, director, member, employee, agent, trustee, Affiliate or shareholder of any such Limited Partner shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities that are in direct competition with the Partnership or that are enhanced by the activities of the Partnership. Neither the Partnership nor any Partners shall have any rights by virtue of this Agreement in any business ventures of any Limited Partner or Assignee. None of the Limited Partners

 

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(other than the Company) nor any other Person shall have any rights by virtue of this Agreement or the Partnership relationship established hereby in any business ventures of any other Person and such Person shall have no obligation pursuant to this Agreement to offer any interest in any such business ventures to the Partnership, any Limited Partner or any such other Person, even if such opportunity is of a character which, if presented to the Partnership, any Limited Partner or such other Person, could be taken by such Person.

Section 8.4. Return of Capital

Except pursuant to the right of redemption set forth in Section 8.6, no Limited Partner shall be entitled to the withdrawal or return of its Capital Contribution, except to the extent of distributions made pursuant to this Agreement or upon termination of the Partnership as provided herein. Except to the extent provided by Exhibit C hereof or as otherwise expressly provided in this Agreement, no Limited Partner or Assignee shall have priority over any other Limited Partner or Assignee, either as to the return of Capital Contributions or as to profits, losses or distributions.

Section 8.5. Rights of Limited Partners Relating to the Partnership

A. In addition to the other rights provided by this Agreement or by the Act, and except as limited by Section 8.5(C), each Limited Partner shall have the right, for a purpose reasonably related to such Limited Partner’s interest as a limited partner in the Partnership, upon written demand with a statement of the purpose of such demand and at such Limited Partner’s own expense (including such copying and administrative charges as the General Partner may establish from time to time):

(1) to obtain a copy of the Partnership’s federal, state and local income tax returns for each Partnership Year;

(2) to obtain a copy of this Agreement and the Certificate and all amendments thereto, together with executed copies of all powers of attorney pursuant to which this Agreement, the Certificate and all amendments thereto have been executed; and

(3) to obtain true and full information regarding the amount of cash and a description and statement of any other property or services contributed by each Partner and which each Partner has agreed to contribute in the future, and the date on which each became a Partner.

B. The Partnership shall notify each Limited Partner, upon request, of the then current Conversion Factor.

C. Notwithstanding any other provision of this Section 8.5, the General Partner may keep confidential from the Limited Partners (except the Company, including for the avoidance of doubt, its Board of Directors), for such period of time as the General Partner determines, following the direction and approval of the Board of Directors to be reasonable, any information that (i) the General Partner reasonably

 

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believes to be in the nature of trade secrets or other information, the disclosure of which the General Partner in good faith believes is not in the best interests of the Partnership or could damage the Partnership or its business; or (ii) the Partnership is required by law or by agreements with an unaffiliated third party to keep confidential.

Upon written request by any Limited Partner, the General Partner shall cause the ownership of Partnership Interests by such Limited Partner to be evidenced by a certificate in such form as the General Partner may determine with respect to any class of Partnership Interests issued from time to time under this Agreement. The General Partner may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Partnership alleged to have been lost, destroyed, stolen or mutilated, upon the making of an affidavit of that fact by the person claiming the certificate to be lost, destroyed, stolen or mutilated. Unless otherwise determined by the General Partner, the owner of such lost, destroyed, stolen or mutilated certificate or certificates, or his or her legal representative, shall be required, as a condition precedent to the issuance of a new certificate or certificates, to give the Partnership a bond in such sum as the General Partner may direct as indemnity against any claim that may be made against the Partnership.

Section 8.6. Redemption Right

A. Subject to Sections 8.6(B) and 8.6(C) hereof and at any time on or after such date as expressly provided for in any agreement entered into between the Partnership and any Limited Partner, each holder of a Common Unit (if other than the General Partner), including a holder of any LTIP Units that are converted into Common Units, shall have the right (the “Redemption Right”) to require the Partnership to redeem on a Specified Redemption Date all or a portion of the Partnership Units (provided that such Partnership Units constitute Common Units) held by such holder at a redemption price equal to and in the form of the Cash Amount to be paid by the Partnership; provided that the Partnership Units shall have been outstanding for at least one year; provided, further, that the General Partner, following the direction and approval of the Board of Directors, may allow a holder to exercise its Redemption Right prior to the Common Units being outstanding for one year in its discretion. The Redemption Right shall be exercised pursuant to a Notice of Redemption delivered to the Partnership (with a copy to the General Partner) by the holder who is exercising the redemption right (the “Redeeming Partner”); provided, however, that the Partnership shall not be obligated to satisfy such Redemption Right if the Company elects to purchase the Partnership Units subject to the Notice of Redemption pursuant to Section 8.6(B). A holder under this Section 8.6(A) may not exercise the Redemption Right for less than 1,000 Partnership Units at any one time or, if such holder holds less than 1,000 Partnership Units, all of the Partnership Units held by such Partner. The Redeeming Partner shall have no right, with respect to any Partnership Units so redeemed, to receive any distributions paid on or after the Specified Redemption Date. The Assignee of any holder herein may exercise the rights of such Limited Partner pursuant to this Section 8.6(A), and such Limited Partner shall be deemed to have assigned such rights to such Assignee and shall be bound by the exercise of such rights by such Assignee. In connection with any exercise of such rights by an Assignee on behalf of a holder in this Section 8.6(A), the Cash Amount shall be paid by the Partnership directly to such Assignee and not to such holder. Any Partnership Units redeemed by the Partnership pursuant to this Section 8.6(A) shall be cancelled upon such redemption.

 

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B. Notwithstanding the provisions of Section 8.6(A), a Limited Partner that exercises the Redemption Right shall be deemed to have offered to sell the Partnership Units described in the Notice of Redemption to the Company, and the Company may, in its sole and absolute discretion, elect to purchase directly and acquire such Partnership Units by paying to the Redeeming Partner either the Cash Amount or the REIT Shares Amount, as elected by the Company in its sole and absolute discretion, on the Specified Redemption Date, whereupon the Company shall acquire the Partnership Units offered for redemption by the Redeeming Partner and shall be treated for all purposes of this Agreement as the owner of such Partnership Units. If the Company shall elect to exercise its right to purchase Partnership Units under this Section 8.6(B) with respect to a Notice of Redemption, it shall so notify the Redeeming Partner within five Business Days after the receipt by it of such Notice of Redemption. Unless the Company (in its sole and absolute discretion) shall exercise its right to purchase Partnership Units from the Redeeming Partner pursuant to this Section 8.6(B), the Company shall not have any obligation to the Redeeming Partner or the Partnership with respect to the Redeeming Partner’s exercise of the Redemption Right. In the event the Company shall exercise its right to purchase Partnership Units with respect to the exercise of a Redemption Right in the manner described in the first sentence of this Section 8.6(B), the Partnership shall have no obligation to pay any amount to the Redeeming Partner with respect to such Redeeming Partner’s exercise of such Redemption Right, and each of the Redeeming Partner, the Partnership and the Company shall treat the transaction between the Company and the Redeeming Partner, for federal income tax purposes, as a sale of the Redeeming Partner’s Partnership Units to the Company. Each Redeeming Partner agrees to execute such documents as the Company may reasonably require in connection with the issuance of REIT Shares upon exercise of the Redemption Right. In case of any reclassification of the REIT Shares (including, but not limited to, any reclassification upon a consolidation or merger in which the Company is the continuing corporation) into securities other than REIT Shares, for purposes of this Section 8.6(B), the Company (or its successor) may thereafter exercise its right to purchase Partnership Units for the kind and amount of shares of such securities receivable upon such reclassification by a holder of the number of REIT Shares for which such Partnership Units could be purchased pursuant to this Section immediately prior to such reclassification.

C. Notwithstanding the provisions of Section 8.6(A) and Section 8.6(B), a Partner shall not be entitled to exercise the Redemption Right pursuant to Section 8.6(A) to the extent that the delivery of REIT Shares to such Partner on the Specified Redemption Date by the Company pursuant to Section 8.6(B) (regardless of whether or not the Company would in fact exercise its rights under Section 8.6(B)) would (i) be prohibited, as determined in the sole discretion of the Company, under the Charter or (ii) cause the acquisition of REIT Shares by such Partner to be “integrated” with any other distribution of REIT Shares for purposes of complying with the Securities Act.

 

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D. Each Partner covenants and agrees that all Partnership Units delivered for redemption shall be delivered to the Partnership free and clear of all liens; and, notwithstanding anything contained herein to the contrary, the Partnership shall be under no obligation to acquire Partnership Units which are or may be subject to any liens. Each Partner further agrees that, if any state or local property transfer tax is payable as a result of the transfer of its Partnership Units to the Partnership, such Partner shall assume and pay such transfer tax.

ARTICLE 9.

BOOKS, RECORDS, ACCOUNTING AND REPORTS

Section 9.1. Records and Accounting

The General Partner shall keep or cause to be kept at the principal office of the Partnership those records and documents required to be maintained by the Act and other books and records deemed by the General Partner to be appropriate with respect to the Partnership’s business, including, without limitation, all books and records necessary to provide to the Limited Partners any information, lists and copies of documents required to be provided pursuant to Section 9.3 hereof. The books of the Partnership shall be maintained, for financial and tax reporting purposes, on an accrual basis in accordance with GAAP, or such other basis as the General Partner determines to be necessary or appropriate following the direction and approval of the Board of Directors.

Section 9.2. Fiscal Year

The fiscal year of the Partnership shall be the calendar year.

Section 9.3. Reports

A. As soon as practicable, but in no event later than 105 days after the close of each Partnership Year, the General Partner shall cause to be mailed to each Limited Partner as of the close of the Partnership Year, an annual report containing financial statements of the Partnership, or of the Company if such statements are prepared solely on a consolidated basis with the Company, for such Partnership Year, presented in accordance with GAAP, such statements to be audited by a nationally recognized firm of independent public accountants selected by the Company; provided, that if such financial statements of the Company are available on the Securities and Exchange Commission’s website, then this obligation shall be satisfied.

B. As soon as practicable, but in no event later than 105 days after the close of each calendar quarter (except the last calendar quarter of each year), the General Partner shall cause to be mailed to each Limited Partner as of the last day of the calendar quarter, a report containing unaudited financial statements of the Partnership, or of the Company, if such statements are prepared solely on a consolidated basis with the Company, and such other information as may be required by applicable law or regulation, or as the General Partner determines to be appropriate; provided that if such financial statements of the Company are available on the Securities and Exchange Commission’s website, then this obligation shall be satisfied.

 

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C. The Partnership shall also cause to be promptly prepared such reports and/or information as are necessary for the Company to determine its qualification as a REIT and its compliance with the requirements for REITs pursuant to the Code and Regulations.

ARTICLE 10.

TAX MATTERS

Section 10.1. Preparation of Tax Returns

The General Partner, following the direction and approval of the Board of Directors, shall arrange for the preparation and timely filing of all returns of Partnership income, gains, deductions, losses and other items required of the Partnership for federal and state income tax purposes and shall furnish by July 31 of the year immediately following each taxable year, or as soon as reasonably practicable thereafter, the tax information reasonably required by Limited Partners for federal and state income tax reporting purposes.

Section 10.2. Tax Elections

Except as otherwise provided herein, the General Partner, following the direction and approval of the Board of Directors, shall determine whether to make any available election pursuant to the Code. Notwithstanding the above, in making any such tax election the General Partner and the Board of Directors may, but shall be under no obligation to, take into account the tax consequences to the Limited Partners resulting from any such election.

The General Partner can, following the direction and approval of the Board of Directors, elect to use any method permitted by Section 704(c) of the Code and the Regulations thereunder to take into account any variation between the adjusted basis of any property contributed (or deemed contributed) to the Partnership by any Partner after the date hereof and such property’s initial Carrying Value. The General Partner shall have the right, following the direction and approval of the Board of Directors, regarding the exercise of that right, to seek to revoke any tax election it makes (including, without limitation, an election under Section 754 of the Code) upon the General Partner’s determination, following the direction and approval of the Board of Directors, that such revocation is in the best interests of the Partners.

Section 10.3. Partnership Representative

A. The General Partner, or such Person as may alternatively be designated by the General Partner, following the direction and approval of the Board of Directors, shall be the “partnership representative” (within the meaning of Section 6223 of the Code) (the “Partnership Representative”). The taking of any action and the incurring of

 

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any expense by the Partnership Representative in connection with any such proceeding, except to the extent required by law, is a matter of the Partnership Representative, following the direction and approval of the Board of Directors, and the provisions relating to indemnification provisions set forth in Section 7.7 of this Agreement shall be fully applicable to the Partnership Representative in its capacity as such. Each Partner hereby agrees to cooperate with, and to take all reasonable actions requested by the Partnership Representative and the Partnership, to avoid or reduce any tax imposed under Section 6225 of the Code, including (i) taking such actions as may be required to effect the General Partner’s designation as the Partnership Representative, and on behalf of the Partnership, the General Partner’s (or its designee’s) appointment of any “designated individual,” (ii) providing any information or taking such other actions as may be reasonably requested by the Partnership Representative in order to determine whether any “imputed underpayment” (within the meaning of Section 6225 of the Code) may be modified pursuant to Section 6225(c) of the Code, (iii) providing any information or taking such other actions as may be reasonably requested by the Partnership Representative in connection with any election made by the Partnership Representative pursuant to Section 6226 of the Code, and (iv) upon the request of the Partnership Representative, filing any amended U.S. federal income tax return or comply with the alternative procedure described in Section 6225(c)(2)(B) of the Code, and paying any tax due in connection with such tax return in accordance with Section 6225(c)(2) of the Code or any corresponding provision of applicable state or local law. The provisions of this Section 10.3 and a Partner’s obligation to comply with this Section 10.3 shall survive any liquidation and dissolution of the Partnership and the transfer, assignment or liquidation of such Partner’s Partnership Interest (including for the avoidance of doubt through exercise of the Redemption Right).

B. The Partnership Representative shall receive no compensation for its services. All third party costs and expenses incurred by the Partnership Representative in performing its duties as such (including legal and accounting fees and expenses) shall be borne by the Partnership. Nothing herein shall be construed to restrict the Partnership from engaging an accounting and/or law firm to assist the Partnership Representative in discharging its duties hereunder, so long as the compensation paid by the Partnership for such services is reasonable.

Section 10.4. Withholding

Each Limited Partner hereby authorizes the Partnership to withhold from, or pay on behalf of or with respect to, such Limited Partner any amount of federal, state, local, or foreign taxes that the General Partner, following the direction and approval of the Board of Directors, determines that the Partnership is required to withhold or pay with respect to any amount distributable or allocable to such Limited Partner pursuant to this Agreement (or with respect to the grant of LTIP Units), including, without limitation, any taxes required to be withheld or paid by the Partnership pursuant to Section 1441, 1442, 1445, or 1446 of the Code, and any taxes paid by the Partnership with respect to an imputed underpayment. Any amount paid on behalf of or with respect to a Limited Partner shall constitute a loan by the Partnership to such Limited Partner, which loan

 

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shall be repaid by such Limited Partner within 15 days after notice from the General Partner that such payment must be made unless (i) the Partnership withholds such payment from a distribution which would otherwise be made to the Limited Partner, or (ii) the General Partner determines, following the direction and approval of the Board of Directors, that such payment may be satisfied out of the available funds of the Partnership which would, but for such payment, be distributed to the Limited Partner. Any amounts withheld pursuant to the foregoing clause (i) or (ii) shall be treated as having been distributed (or paid) to such Limited Partner. In the event that a Limited Partner fails to pay any amounts owed to the Partnership pursuant to this Section 10.4 when due, the General Partner may, following the direction and approval of the Board of Directors, elect to make the payment to the Partnership on behalf of such defaulting Limited Partner, and in such event shall be deemed to have loaned such amount to such defaulting Limited Partner and shall succeed to all rights and remedies of the Partnership as against such defaulting Limited Partner. Without limitation, in such event the General Partner shall have the right to receive distributions that would otherwise be distributable to such defaulting Limited Partner until such time as such loan, together with all interest thereon, has been paid in full, and any such distributions so received by the General Partner shall be treated as having been distributed to the defaulting Limited Partner and immediately paid by the defaulting Limited Partner to the General Partner in repayment of such loan. Any amounts payable by a Limited Partner hereunder shall bear interest at the lesser of (A) the base rate on corporate loans at large United States money center commercial banks, as published from time to time in The Wall Street Journal, plus four percentage points, or (B) the maximum lawful rate of interest on such obligation, such interest to accrue from the date such amount is due (i.e., 15 days after demand) until such amount is paid in full. Each Limited Partner shall take such actions as the Partnership or the General Partner shall request in order to perfect or enforce the security interest created hereunder. Upon a Limited Partner’s complete withdrawal from the Partnership, such Limited Partner shall be required to restore funds to the Partnership to the extent that the cumulative amount of taxes withheld from or paid on behalf of, or with respect to, such Limited Partner exceeds the sum of such amounts (i) repaid to the Partnership by such Limited Partner, (ii) withheld from distributions to such Limited Partner and (iii) paid by the General Partner on behalf of such Limited Partner.

ARTICLE 11.

TRANSFERS AND WITHDRAWALS

Section 11.1. Transfer

A. The term “transfer,” when used in this Article 11 with respect to a Partnership Unit, shall be deemed to refer to a transaction by which the General Partner purports to assign all or any part of its General Partner Interest to another Person or by which a Limited Partner purports to assign all or any part of its Limited Partner Interest to another Person, and includes a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other disposition by law or otherwise. The term “transfer” when used in this Article 11 does not include (i) any redemption of Partnership Interests by the Partnership from a Limited Partner, (ii) any acquisition of Partnership Units from a Limited Partner by the Company pursuant to Section 8.6, or (iii) any distribution of Partnership Units by a Limited Partner to its beneficial owners.

 

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B. No Partnership Interest shall be transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article 11. Any transfer or purported transfer of a Partnership Interest not made in accordance with this Article 11 shall be null and void.

C. Notwithstanding the other provisions of this Article 11, the Partnership Interests of the Company may be transferred, in whole or in part, at any time or from time to time, to any Person that is, at the time of such transfer, a Qualified REIT Subsidiary. Upon any transfer permitted by this Section 11.1(C), the Company shall be relieved of all its obligations under this Agreement. The provisions of Sections 11.2(B), 11.3, 11.4(A) and 11.5 hereof shall not apply to any transfer permitted by this Section 11.1(C).

Section 11.2. Transfer of General Partner Interest

A. The General Partner may not transfer any of its General Partner Interest or withdraw as General Partner, or transfer any of its Limited Partner Interest, except as provided in Section 11.2(B) or Section 11.2(C) hereof.

B. Except as set forth in Section 11.2(C), the General Partner shall not withdraw from the Partnership and shall not transfer all or any portion of its General Partner Interests in the Partnership (whether by sale, disposition, statutory merger or consolidation, liquidation or otherwise) unless approved by the Board of Directors. Upon any transfer of the General Partner’s Partnership Interest in accordance with the provisions of this Section 11.2(B), the transferee shall become a successor General Partner for all purposes herein, and shall be vested with the powers and rights of the transferor General Partner, and shall be liable for all obligations and responsible for all duties of the General Partner, once such transferee has executed such instruments as may be necessary to effectuate such admission and to confirm the agreement of such transferee to be bound by all the terms and provisions of this Agreement with respect to the Partnership Interest so acquired. It is a condition to any transfer by the General Partner otherwise permitted hereunder that the transferee assumes, by operation of law or express agreement, all of the obligations of the transferor General Partner under this Agreement with respect to such transferred Partnership Interest; provided, such transfer shall not relieve the transferor General Partner of its obligations under this Agreement without the approval of the Board of Directors. In the event that the General Partner withdraws from the Partnership, in violation of this Agreement or otherwise, the remaining Partners may agree in writing to continue the business of the Partnership by selecting a successor General Partner in accordance with the Act.

C. In the event a Bankruptcy Event occurs with respect to the General Partner, the General Partner shall automatically withdraw from the Partnership, in its role as the General Partner, without any action on the part of the General Partner or any other Person, and shall transfer all of its General Partner Interest in the Partnership to the successor general partner selected by the Board of Directors.

 

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Section 11.3. Limited Partners Rights to Transfer

A. Except as provided in Section 11.3(B), no Limited Partner shall transfer all or any portion of its Partnership Interest to any transferee without the approval of the Board of Directors; provided, however, that if a Limited Partner is subject to Incapacity, such Incapacitated Limited Partner may transfer all or any portion of its Partnership Interest.

B. Notwithstanding any other provision of this Article 11, a Limited Partner may transfer all or any portion of its Partnership Interest to any of its Affiliates and such transferee shall be admitted as a Substituted Limited Partner, all without obtaining the approval of the Board of Directors, unless such Affiliate does not qualify as an “accredited investor” as such term is defined in Rule 501(a) of Regulation D.

C. If a Limited Partner is subject to Incapacity, the executor, administrator, trustee, committee, guardian, conservator or receiver of such Limited Partner’s estate shall have all of the rights of a Limited Partner, but not more rights than those enjoyed by other Limited Partners, for the purpose of settling or managing the estate and such power as the Incapacitated Limited Partner possessed to transfer all or any part of his or its interest in the Partnership. The Incapacity of a Limited Partner, in and of itself, shall not dissolve or terminate the Partnership.

D. Without limiting the generality of Section 11.3(B) hereof, the Board of Directors may prohibit any transfer by a Limited Partner of its Partnership Interest if, in the opinion of legal counsel to the Partnership or the Company, such transfer would require filing of a registration statement under the Securities Act or would otherwise violate any federal or state securities laws or regulations applicable to the Partnership or the Partnership Units.

E. No transfer by a Limited Partner of its Partnership Units may be made to any Person if (i) in the opinion of legal counsel for the Partnership or the Company it could result in the Partnership being treated as an association taxable as a corporation or a publicly traded partnership within the meaning of either Section 469(k)(2) or Section 7704(b) of the Code; (ii) such transfer could be treated as effectuated through an “established securities market” or a “secondary market (or the substantial equivalent thereof)” within the meaning of Section 7704 of the Code; (iii) such transfer could cause the Partnership to become, with respect to any employee benefit plan subject to Title I of ERISA or to Section 4975 of the Code, a “party-in-interest” (as defined in Section 3(14) of ERISA) or a “disqualified person” (as defined in Section 4975(c) of the Code); (iv) such transfer could, in the opinion of legal counsel for the Partnership or the Company, cause any portion of the assets of the Partnership to constitute assets of any employee benefit plan pursuant to Department of Labor Regulations Section 2510.3-101; or (v) such transfer could subject the Partnership to be regulated under the Investment Company Act of 1940, as amended, the Investment Advisers Act of 1940, as amended, or the fiduciary responsibility provisions of ERISA.

 

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F. No transfer of any Partnership Units may be made to a lender to the Partnership or any Person who is related (within the meaning of Section 1.752-4(b) of the Regulations) to any lender to the Partnership whose loan constitutes a Nonrecourse Liability, without the approval of the Board of Directors.

G. The General Partner shall keep a register for the Partnership on which the transfer, pledge or release of Partnership Units shall be shown and pursuant to which entries shall be made to effect all transfers, pledges or releases as required by the applicable sections of Article 8 of the Uniform Commercial Code, as amended, in effect in the State of Delaware. The General Partner shall (i) place proper entries in such register clearly showing each transfer and each pledge and grant of security interest and the transfer and assignment pursuant thereto, such entries to be endorsed by the General Partner, and (ii) maintain the register and make the register available for inspection by all of the Partners and their pledgees at all times during the term of this Agreement. Nothing herein shall be deemed a consent to any pledge or transfer otherwise prohibited under this Agreement.

Section 11.4. Substituted Limited Partners

A. No Limited Partner shall have the right to substitute a transferee as a Limited Partner in his or its place except upon approval of the Board of Directors. Following such approval of the Board of Directors, the transferee of the interest of such Limited Partner shall be admitted pursuant to this Section 11.4 as a Substituted Limited Partner. The Board of Directors’ failure or refusal to permit a transferee of any such interests to become a Substituted Limited Partner shall not give rise to any cause of action against the Partnership, any Partner, or the Board of Directors. A Person shall be admitted to the Partnership as a Substituted Limited Partner only upon the aforementioned consent of the Board of Directors and the furnishing to the Partnership of (i) evidence of acceptance in form satisfactory to the General Partner of all of the terms and conditions of this Agreement, including, without limitation, the power of attorney granted in Section 2.4 hereof and (ii) such other documents to effect such Person’s admission as a Substituted Limited Partner. The admission of any Person as a Substituted Limited Partner shall become effective on the date upon which the name of such Person is recorded on the books and records of the Partnership, following the consent of the Board of Directors to such admission.

B. A transferee who has been admitted as a Substituted Limited Partner in accordance with this Article 11 shall have all the rights and powers and be subject to all the restrictions and liabilities of a Limited Partner under this Agreement.

C. Upon the admission of a Substituted Limited Partner, the General Partner shall amend Exhibit A to reflect the name, address, number of Partnership Units and Percentage Interest (as applicable) of such Substituted Limited Partner and to eliminate or adjust, if necessary, the name, address and interest of the predecessor of such Substituted Limited Partner.

 

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Section 11.5. Assignees

If the Board of Directors does not consent to the admission of any permitted transferee as a Substituted Limited Partner, as described in Section 11.4, such transferee shall be considered an Assignee for purposes of this Agreement. An Assignee shall be deemed to have had assigned to it, and shall be entitled to receive distributions from the Partnership and the share of Net Income, Net Losses, Recapture Income, and any other items, gain, loss, deduction and credit of the Partnership attributable to the Partnership Interest assigned to such transferee, but shall not be deemed to be a holder of a Partnership Interest for any other purpose under this Agreement, and shall not be entitled to vote such Partnership Interest in any matter presented to the Limited Partners for a vote (such Partnership Interest being deemed to have been voted on such matter in the same proportion as all other Partnership Interest held by Limited Partners are voted). In the event any such transferee desires to make a further assignment of any such Partnership Interest, such transferee shall be subject to all of the provisions of this Article 11 to the same extent and in the same manner as any Limited Partner desiring to make an assignment of his or its Partnership Interest.

Section 11.6. Drag-Along Rights

A. In the event of an Approved Sale, the Partners who approved the Approved Sale (the “Approving Partners”) have the right to require each other Partner (the “Non-Approving Partners”) to transfer all Partnership Units then held by such Non-Approving Partner, free and clear of all liens, security interests or other restrictions of any kind, in accordance with this Section 11.6.

B. In the event of an Approved Sale, the General Partner shall notify each Non-Approving Partner no more than ten Business Days after the execution and delivery by all of the parties thereto of the definitive agreement entered into with respect to the Approved Sale and, in any event, no later than 20 Business Days prior to the closing date of such Approved Sale, and each Non-Approving Partner will, subject to satisfaction of the conditions in Section 11.6(C), (i) if such transaction requires approval by the Partners, with respect to all Partnership Units that such Partner owns or over which such Partner otherwise exercises voting power, to vote (in person, by proxy or by action by written consent, as applicable) all such Partnership Units in favor of, and adopt, such Approved Sale, and to vote in opposition to any and all other proposals that could reasonably be expected to delay or impair the ability of the Partnership to consummate such Sale of the Partnership, (ii) refrain from exercising any dissenter’s rights or rights of appraisal under applicable law at any time with respect to such Approved Sale, and (iii) if the Approved Sale is structured as a sale of Partnership Units, each Non-Approving Partner will agree to sell the same proportion of Partnership Units beneficially held by such Partner as is being sold by the Approving Partners to the Person(s) to whom the Approving Partners propose to sell their Partnership Units, on the same terms and conditions as the Approving Partners.

 

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C. The obligations of the Partners pursuant to this Section 11.6 with respect to an Approved Sale are subject to the following conditions: (i) the aggregate consideration payable upon consummation of such Approved Sale to all of the Partners (the “Aggregate Consideration”) shall be allocated among the Partners as set forth in Section 5.3, (ii) upon the consummation of the Approved Sale, all of the Partners shall receive the same form of consideration per Partnership Unit of the same class or other equity interest, as allocated pursuant to subsection (i) hereof (except that a member of management may, with such Partner’s consent, receive securities pursuant to a management “rollover” which are not offered to all Partners), and (iii) that any indemnification, escrow, holdback and adjustment obligations undertaken by any Partner shall be pro rata among the Partners in proportion to the consideration to be received by the Partners in such Approved Sale; provided that indemnification obligations that relate solely to a particular Partner, such as indemnification with respect to representations and warranties made by a Partner with respect to such Partner (or such Partner’s ownership of Partnership Units) or covenants made by such Partner, shall be borne only by such Partner and shall not be deemed to reduce the Aggregate Consideration.

D. Subject to the foregoing, each Partner hereby agrees to execute and deliver all related documentation and take such other action in support of the Sale of the Partnership as shall reasonably be requested by the General Partner or the Approving Partners in order to carry out the terms and provision of this Section 11.6 , including without limitation executing and delivering instruments of conveyance and transfer, and any purchase agreement, merger agreement, indemnity agreement, escrow agreement, consent, waiver, governmental filing, share certificates duly endorsed for transfer (free and clear of impermissible liens, claims and encumbrances) and any similar or related documents. Subject to the satisfaction of the conditions in Section 11.6(C), for purposes each Partner (and their respective spouses, if residing in a community property state) hereby appoint the General Partner as their agent and attorney-in-fact to execute any and all documents related in connection with an Approved Sale (including documents granting customary indemnities to a buyer of assets or securities consistent with this Agreement) on their behalf and expressly bind themselves to such document by the General Partner’s execution of such document without further action on their part.

Section 11.7. General Provisions

A. No Limited Partner may withdraw from the Partnership other than as a result of a permitted transfer of all of such Limited Partner’s Partnership Interest in accordance with this Article 11, pursuant to redemption of all of its Partnership Units, or the acquisition thereof by the Company, under Section 8.6.

B. Any Limited Partner who shall transfer all of its Partnership Interest in a transfer permitted pursuant to this Article 11 shall cease to be a Limited Partner upon the admission of all Assignees of such Partnership Interest as Substituted Limited Partners. Similarly, any Limited Partner who shall transfer all of its Partnership Units pursuant to a redemption of all of its Partnership Units, or the acquisition thereof by the Company under Section 8.6 shall cease to be a Limited Partner.

 

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C. Transfers pursuant to this Article 11 may only be made on the first day of a fiscal quarter of the Partnership, unless the General Partner and the Board of Directors otherwise agrees.

D. If any Partnership Interest is transferred or assigned during any quarterly segment of the Partnership’s fiscal year in compliance with the provisions of this Article 11 or redeemed or transferred pursuant to Section 8.6 on any day other than the first day of a Partnership Year, then Net Income, Net Losses, each item thereof and all other items attributable to such interest for such Partnership Year shall be divided and allocated between the transferor Partner and the transferee Partner by taking into account their varying interests during the Partnership Year in accordance with Section 706(d) of the Code, using the interim closing of the books method. All distributions of Available Cash attributable to such Partnership Interest with respect to which the Partnership Record Date is before the date of such transfer, assignment, or redemption shall be made to the transferor Partner or the Redeeming Partner, as the case may be, and in the case of a transfer or assignment other than a redemption, all distributions of Available Cash thereafter attributable to such Partnership Interest shall be made to the transferee Partner.

ARTICLE 12.

ADMISSION OF PARTNERS

Section 12.1. Admission of Successor General Partner

A successor to all of the General Partner Interest pursuant to Section 11.2 hereof who is proposed to be admitted as a successor General Partner shall be admitted to the Partnership as the General Partner, effective immediately prior to such transfer. Any such transferee shall carry on the business of the Partnership without dissolution. In each case, the admission shall be subject to the successor General Partner executing and delivering to the Partnership an acceptance of all of the terms and conditions of this Agreement and such other documents or instruments as may be required to effect the admission. In the case of such admission on any day other than the first day of a Partnership Year, all items attributable to the General Partner Interest for such Partnership Year shall be allocated between the transferring General Partner and such successor as provided in Section 11.6(D) hereof.

Section 12.2. Admission of Additional Limited Partners

A. A Person who makes a Capital Contribution to the Partnership in accordance with this Agreement shall be admitted to the Partnership as an Additional Limited Partner only upon furnishing to the General Partner (i) evidence of acceptance in form satisfactory to the General Partner of all of the terms and conditions of this Agreement, including, without limitation, the power of attorney granted in Section 2.4 hereof and (ii) such other documents or instruments as may be required in the discretion of the General Partner in order to effect such Person’s admission as an Additional Limited Partner, in each case, after approval of the Board of Directors.

 

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B. Notwithstanding anything to the contrary in this Section 12.2, no Person shall be admitted as an Additional Limited Partner without the approval of the Board of Directors. The admission of any Person as an Additional Limited Partner shall become effective on the date upon which the name of such Person is recorded on the books and records of the Partnership, following the approval of the Board of Directors of such admission.

C. If any Additional Limited Partner is admitted to the Partnership on any day other than the first day of a Partnership Year, then Net Income, Net Losses, each item thereof and all other items allocable among Partners and Assignees for such Partnership Year shall be allocated among such Additional Limited Partner and all other Partners and Assignees by taking into account their varying interests during the Partnership Year in accordance with Section 706(d) of the Code, using the interim closing of the books method. All distributions of Available Cash with respect to which the Partnership Record Date is before the date of such admission shall be made solely to Partners and Assignees, other than such Additional Limited Partner, and all distributions of Available Cash thereafter shall be made to all of the Partners and Assignees, including such Additional Limited Partner.

Section 12.3. Amendment of Agreement and Certificate of Limited Partnership

For the admission to the Partnership of any Partner, the General Partner shall take all steps necessary and appropriate under the Act to amend the records of the Partnership and, if necessary, to prepare as soon as practical an amendment of this Agreement (including an amendment of Exhibit A) and, if required by law, shall prepare and file an amendment to the Certificate and may for this purpose exercise the power of attorney granted pursuant to Section 2.4 hereof.

ARTICLE 13.

DISSOLUTION, LIQUIDATION AND TERMINATION

Section 13.1. Dissolution

The Partnership shall not be dissolved by the admission of Substituted Limited Partners or Additional Limited Partners or by the admission of a successor General Partner in accordance with the terms of this Agreement. Upon the withdrawal of the General Partner, any successor General Partner shall continue the business of the Partnership without dissolution. The Partnership shall dissolve, and its affairs shall be wound up, only upon the first to occur of any of the following (“Liquidating Events”):

A. an election to dissolve the Partnership made by the General Partner following the direction and approval of the Board of Directors with the consent of Partners holding a majority of the Percentage Interests of the Limited Partners;

 

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B. entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Act;

C. at any time that there are no limited partners of the Partnership unless the business of the Partnership is continued in accordance with the Act;

D. the sale of all or substantially all of the assets and properties of the Partnership; or

E. any other event sufficient under the Act to cause the dissolution of the Partnership.

Section 13.2. Winding Up

A. Upon the occurrence of a Liquidating Event, the Partnership shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Partners. No Partner shall take any action that is inconsistent with, or not necessary to or appropriate for, the winding up of the Partnership’s business and affairs. The General Partner, or, in the event there is no remaining General Partner, any Person elected by a majority of the Percentage Interests of the Limited Partners (the General Partner or such other Person being referred to herein as the “Liquidator”), shall be responsible for overseeing the winding up and dissolution of the Partnership and shall take full account of the Partnership’s liabilities and property and the Partnership property shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom (which may, to the extent determined by the Liquidator and approved by the Board of Directors, include REIT Shares of the Company) shall be applied and distributed in the following order:

(1) First, in satisfaction of all of the Partnership’s Debts and liabilities to creditors other than the Partners (whether by payment or the making of reasonable provision for payment thereof);

(2) Second, to the payment and discharge of all of the Partnership’s Debts and liabilities to the General Partner (whether by payment or the making of reasonable provision for payment thereof), including, but not limited to, amounts due as reimbursements under Section 7.4;

(3) Third, to the payment and discharge of all of the Partnership’s Debts and liabilities to the other Partners; and

(4) The balance, if any, to the Partners in accordance with their Capital Accounts, after giving effect to all contributions, distributions, and allocations for all periods.

The General Partner shall not receive any additional compensation for any services performed pursuant to this Article 13.

 

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B. Notwithstanding the provisions of Section 13.2(A) hereof which require liquidation of the assets of the Partnership, but subject to the order of priorities set forth therein, if prior to or upon dissolution of the Partnership the Liquidator, following the direction and approval of the Board of Directors, determines that an immediate sale of part or all of the Partnership’s assets would be impractical or would cause undue loss to the Partners, the Liquidator may defer for a reasonable time the liquidation of any assets except those necessary to satisfy liabilities of the Partnership (including to those Partners as creditors) and/or distribute to the Partners, in lieu of cash, as tenants in common and in accordance with the provisions of Section 13.2(A) hereof, undivided interests in such Partnership assets as the Liquidator deems not suitable for liquidation. Any such distributions in kind shall be made only if, in the good faith judgment of the Liquidator, following the direction and approval of the Board of Directors, such distributions in kind are in the best interest of the Partners, and shall be subject to such conditions relating to the disposition and management of such properties as the Liquidator deems reasonable and equitable and to any agreements governing the operation of such properties at such time. The Liquidator shall determine the fair market value of any property distributed in kind using such reasonable method of valuation as it may adopt.

C. In the discretion of the Liquidator, following the direction and approval of the Board of Directors, a pro rata portion of the distributions that would otherwise be made to the Partners pursuant to this Article 13 may be:

(1) distributed to a trust established for the benefit of the General Partner and Limited Partners for the purposes of liquidating Partnership assets, collecting amounts owed to the Partnership, and paying any contingent or unforeseen liabilities or obligations of the Partnership or the General Partner arising out of or in connection with the Partnership. The assets of any such trust shall be distributed to the General Partner and Limited Partners from time to time, in the reasonable discretion of the Liquidator, following the direction and approval of the Board of Directors, in the same proportions as the amount distributed to such trust by the Partnership would otherwise have been distributed to the General Partner and Limited Partners pursuant to this Agreement; or

(2) withheld or escrowed to provide a reasonable reserve for Partnership liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the Partnership; provided, that such withheld or escrowed amounts shall be distributed to the General Partner and Limited Partners in the manner and order of priority set forth in Section 13.2(A) as soon as practicable.

 

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Section 13.3. Deficit Capital Account Restoration Obligation

In the event the Partnership or the General Partner’s interest therein (including its interest if any as a Limited Partner) is “liquidated” within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), distributions shall be made pursuant to this Article 13 to the General Partner and Limited Partners who have positive Capital Accounts in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(3). If any Partner has a deficit balance in its Capital Account (after giving effect to all contributions, distributions and allocations for all taxable years, including the year during which such liquidation occurs), such Partner, if such Partner is a Limited Partner, shall have no obligation to make any contribution to the capital of the Partnership with respect to such deficit, and such deficit shall not be considered a Debt owed to the Partnership or to any other Person for any purpose whatsoever, except to the extent otherwise expressly agreed to by such Limited Partner and the Partnership; provided, however, that such Partner, if such Partner is the General Partner, shall contribute to the capital of the Partnership the amount necessary to restore such deficit balance to zero in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(3).

Section 13.4. Deemed Contribution and Distribution

Notwithstanding any other provision of this Article 13, in the event the Partnership is “liquidated” within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), but no Liquidating Event has occurred, the Partnership’s property shall not be liquidated, the Partnership’s liabilities shall not be paid or discharged, and the Partnership’s affairs shall not be wound up. Instead, for federal income tax purposes and for purposes of maintaining Capital Accounts pursuant to Exhibit B hereto, the Partnership shall be deemed to have contributed all Partnership property and liabilities to a new limited partnership in exchange for an interest in such new limited partnership and, immediately thereafter, the Partnership will be deemed to liquidate by distributing interests in the new limited partnership to the Partners.

Section 13.5. Rights of Limited Partners

Except as otherwise provided in this Agreement, each Limited Partner shall look solely to the assets of the Partnership for the return of its Capital Contributions and shall have no right or power to demand or receive property other than cash from the Partnership. Except as otherwise provided in this Agreement, no Limited Partner shall have priority over any other Partner as to the return of its Capital Contributions, distributions, or allocations.

Section 13.6. Notice of Dissolution

In the event a Liquidating Event occurs, or an event occurs that would result in a dissolution of the Partnership, the General Partner shall, within 30 days thereafter, provide written notice thereof to each of the Partners.

Section 13.7. Termination of Partnership and Cancellation of Certificate of Limited Partnership

Upon the completion of the winding up of the Partnership and liquidation of its assets, as provided in Section 13.2 hereof, the Partnership shall be terminated by filing a certificate of cancellation with the Secretary of State of the State of Delaware, canceling all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than the State of Delaware and taking such other actions as may be necessary to terminate the Partnership.

 

55


Section 13.8. Reasonable Time for Winding Up

A reasonable time shall be allowed for the orderly winding-up of the business and affairs of the Partnership and the liquidation of its assets pursuant to Section 13.2 hereof, in order to minimize any losses otherwise attendant upon such winding up, and the provisions of this Agreement shall remain in effect among the Partners during the period of liquidation.

Section 13.9. Waiver of Partition

No Partner nor any successor-in-interest to a Partner shall have the right while this Agreement remains in effect to have any property of the Partnership partitioned, or to file a complaint or institute any proceeding at law or in equity to have such property of the Partnership partitioned, and each Partner, on behalf of itself and its successors and assigns hereby waives any such right. It is the intention of the Partners that the rights of the parties hereto and their successors-in-interest to Partnership property, as among themselves, shall be governed by the terms of this Agreement, and that the rights of the Partners and their respective successors-in-interest shall be subject to the limitations and restrictions as set forth in this Agreement.

ARTICLE 14.

AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS

Section 14.1. Amendment of Partnership Agreement

A. A proposed amendment shall be adopted and be effective as an amendment hereto if it is approved by the General Partner following the direction and approval of the Board of Directors.

B. Notwithstanding Section 14.1(A) hereof, this Agreement shall not be amended without the consent of each Partner materially adversely affected if such amendment would (i) convert a Limited Partner Interest in the Partnership into a General Partner Interest; (ii) modify the limited liability of a Limited Partner in a manner materially adverse to such Limited Partner; (iii) alter rights of such Partner to receive distributions pursuant to Article 5 or Article 13, or the allocations specified in Article 6 (except as permitted pursuant to Section 4.2 hereof) in a manner materially adverse to such Partner; or (vi) amend this Section 14.1(B); provided, however, that the consent of each Partner materially adversely affected shall not be required for any amendment or action that affects all Partners holding the same class or series of Partnership Units on a uniform or pro rata basis. Any amendment consented to by any Partner shall be effective as to that Partner, notwithstanding the absence of such consent by any other Partner.

 

56


Section 14.2. Meetings of the Partners

A. Meetings of the Partners may be called by the General Partner and shall be called upon the receipt by the General Partner of a written request either by the Limited Partners (other than the Company) holding 20% or more of the Partnership Interests or by the Board of Directors. The request shall state the nature of the business to be transacted. Notice of any such meeting shall be given to all Partners not less than seven days nor more than 30 days prior to the date of such meeting. Partners may vote in person or by proxy at such meeting. Except as otherwise expressly provided in this Agreement, the consent of holders of a majority of the Percentage Interests held by Limited Partners shall control.

B. Any action required or permitted to be taken at a meeting of the Partners may be taken without a meeting if a written consent setting forth the action so taken is signed by a majority of the Percentage Interests of the Partners (or such other percentage as is expressly required by this Agreement). Such consent may be in one instrument or in several instruments, and shall have the same force and effect as a vote of a majority of the Percentage Interests of the Partners (or such other percentage as is expressly required by this Agreement). Such consent shall be filed with the General Partner. An action so taken shall be deemed to have been taken at a meeting held on the effective date so certified.

C. Each Limited Partner may authorize any Person or Persons to act for him by proxy on all matters in which a Limited Partner is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Limited Partner or his or its attorney-in-fact. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Limited Partner executing it, such revocation to be effective upon the Partnership’s receipt of written notice of such revocation from the Limited Partner executing such proxy.

D. Each meeting of the Partners shall be conducted by the General Partner or such other Person as the General Partner may appoint pursuant to such rules for the conduct of the meeting as the General Partner or such other Person deems appropriate. Without limitation, meetings of Partners may be conducted in the same manner as meetings of the shareholders of the Company and may be held at the same time, and as part of, meetings of the shareholders of the Company.

ARTICLE 15.

GENERAL PROVISIONS

Section 15.1. Addresses and Notice

Any notice, demand, request or report required or permitted to be given or made to a Partner or Assignee under this Agreement shall be in writing and shall be deemed given or made when delivered in person or when sent by first class United States mail or by other means of written communication to such Partner or Assignee at the address set forth in Exhibit A or such other address of which such Partner shall notify the General Partner in writing.

 

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Section 15.2. Titles and Captions

All article or section titles or captions in this Agreement are for convenience only. They shall not be deemed part of this Agreement and in no way define, limit, extend or describe the scope or intent of any provisions hereof. Except as specifically provided otherwise, references to “Articles” and “Sections” are to Articles and Sections of this Agreement.

Section 15.3. Pronouns and Plurals

Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neutral forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa.

Section 15.4. Further Action

The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement.

Section 15.5. Binding Effect

This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns.

Section 15.6. Creditors

The provisions of this Agreement are solely for the purpose of defining the interests of the Partners, inter se; and no other Person (i.e., a party who is not a signatory hereto or a permitted successor to such signatory hereto) shall have any right, power, title or interest by way of subrogation or otherwise, in and to the rights, powers, title and provisions of this Agreement; provided, that Indemnitees are intended third-party beneficiaries of Section 7.7. No creditor or other third party having dealings with the Partnership shall have the right to enforce the right or obligation of any Partner to make Capital Contributions or loans to the Partnership or to pursue any other right or remedy hereunder or at law or in equity. None of the rights or obligations of the Partners herein set forth to make Capital Contributions or loans to the Partnership shall be deemed an asset of the Partnership for any purpose by any creditor or other third party, nor may any such rights or obligations be sold, transferred or assigned by the Partnership or pledged or encumbered by the Partnership to secure any Debt or other obligation of the Partnership or any of the Partners.

 

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Section 15.7. Waiver

No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute a waiver of any such breach or any other covenant, duty, agreement or condition.

Section 15.8. Counterparts

This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all of the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affixing his or its signature hereto.

Section 15.9. Applicable Law; Consent to Jurisdiction; Waiver of Jury Trial

This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflict of laws. In the event of a conflict between any provision of this Agreement and any non-mandatory provision of the Act, the provisions of this Agreement shall control and take precedence.

Section 15.10. Invalidity of Provisions

A. If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby.

B. Each Partner and Assignee hereby (i) submits to the exclusive jurisdiction of any state or federal court sitting in the State of Delaware (collectively, the “Delaware Courts”), with respect to any dispute arising out of this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute, (ii) to the fullest extent permitted by law, irrevocably waives, and agrees not to assert by way of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of any of the Delaware Courts, that its property is exempt or immune from attachment or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper, (iii) to the fullest extent permitted by law, agrees that notice or the service of process in any action, suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby shall be properly served or delivered if delivered to such Partner or Assignee at such Partner’s or Assignee’s last known address as set forth in the Partnership’s books and records, and (iv) to the fullest extent permitted by law, irrevocably waives any and all right to trial by jury in any legal proceeding arising out of or related to this Agreement or the transactions contemplated hereby.

 

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Section 15.11. Entire Agreement

This Agreement contains the entire understanding and agreement among the Partners with respect to the subject matter hereof and supersedes the Prior Agreement and any other prior written or oral understandings or agreements among them with respect thereto.

Section 15.12. Legal Counsel Relationships

The Partners acknowledge and agree that Winston & Strawn LLP has only represented the Company in connection with this Agreement and the other transactions related hereto (the “Transactions”). Each Limited Partner, other than the Company, is relying solely on his or its own tax and legal advisors, and not Winston & Strawn LLP, with respect to the tax and other legal aspects of his, her or its investment in the Partnership. Further, except for Winston & Strawn LLP’s representation of the Company with respect to the Transactions, or as may otherwise expressly be agreed in writing by Winston & Strawn LLP, in no event shall an attorney-client relationship exist between Winston & Strawn LLP on the one hand and any other Limited Partner and/or their Affiliates, on the other hand. The Limited Partners further agree and consent that Winston & Strawn LLP shall be permitted to render legal advice and to provide legal services to any Limited Partner or the Partnership from time to time, and each Limited Partner covenants and agrees that such representation of a Limited Partner or the Partnership by such firm from time to time shall not disqualify such firm from providing legal advice and legal services to their respective client Limited Partners or Affiliates in matters related or unrelated to this Agreement.

 

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.

 

GENERAL PARTNER:
NexPoint Real Estate Finance OP GP, LLC
By:  

 

  Name:
  Title:

 

[Signature Page to Amended and Restated Limited Partnership Agreement of

NexPoint Real Estate Finance Operating Partnership, L.P.]


IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.

 

LIMITED PARTNER
NexPoint Real Estate Finance, Inc.
By:  

 

  Name:
  Title:

 

[Signature Page to Amended and Restated Limited Partnership Agreement of

NexPoint Real Estate Finance Operating Partnership, L.P.]


IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.

 

PARTIES TO PRIOR AGREEMENT
INITIAL GENERAL PARTNER:

 

Name: Brian Mitts
INITIAL LIMITED PARTNER:

 

Name: Matthew McGraner

 

[Signature Page to Amended and Restated Limited Partnership Agreement of

NexPoint Real Estate Finance Operating Partnership, L.P.]


EXHIBIT A

PARTNERS’ CONTRIBUTIONS AND PARTNERSHIP INTERESTS+

(As of                 , 2020)

 

Name and Address

of Partner                

   Cash
Contribution
     Agreed Value
of Contributed
Property
     Total
Contribution
     Common
Units
     LTIP
Units
     Percentage
Interest
 

General Partner

                 

NexPoint Real Estate Finance OP GP, LLC

                    %  

Limited Partners

                 

NexPoint Real

Estate Finance, Inc.

300 Crescent Court

Suite 700

Dallas, Texas

75201

     N/A        N/A        N/A              %  
                    %  

 

+

Subject to change as a result of subsequent contributions by the Company

 

A-1


EXHIBIT B

CAPITAL ACCOUNT MAINTENANCE

1. Capital Accounts of the Partners

A. The Partnership shall maintain for each Partner a separate Capital Account in accordance with the rules of Regulations Section 1.704-l(b)(2)(iv). Such Capital Account shall be increased by (i) the amount of all Capital Contributions and any other deemed contributions made by such Partner to the Partnership pursuant to the Agreement; and (ii) all items of Partnership income and gain (including income and gain exempt from tax) computed in accordance with Section 1.B hereof and allocated to such Partner pursuant to Section 6.1(A) of the Agreement and Exhibit C of the Agreement, and decreased by (x) the amount of cash or Agreed Value of all actual and deemed distributions of cash or property made to such Partner pursuant to the Agreement, and (y) all items of Partnership deduction and loss computed in accordance with Section 1.B hereof and allocated to such Partner pursuant to Section 6.1.B of the Agreement and Exhibit C hereof.

B. For purposes of computing the amount of any item of income, gain, deduction or loss (including “Net Income” or “Net Loss”) to be reflected in the Partners’ Capital Accounts, unless otherwise specified in the Agreement, the determination, recognition and classification of any such item shall be the same as its determination, recognition and classification for federal income tax purposes determined in accordance with Section 703(a) of the Code (for this purpose all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a)(1) of the Code shall be included in taxable income or loss), with the following adjustments:

(1) Except as otherwise provided in Regulations Section 1.704-1(b)(2)(iv)(m), the computation of all items of income, gain, loss and deduction shall be made without regard to any election under Section 754 of the Code which may be made by the Partnership; provided, that the amounts of any adjustments to the adjusted bases of the assets of the Partnership made pursuant to Section 734 of the Code as a result of the distribution of property by the Partnership to a Partner (to the extent that such adjustments have not previously been reflected in the Partners’ Capital Accounts) shall be reflected in the Capital Accounts of the Partners in the manner and subject to the limitations prescribed in Regulations Section 1.704-1(b)(2)(iv)(m)(4).

(2) The computation of all items of income, gain, and deduction shall be made without regard to the fact that items described in Sections 705(a)(1)(B) or 705(a)(2)(B) of the Code are not includable in gross income or are neither currently deductible nor capitalized for federal income tax purposes.

(3) Any income, gain or loss attributable to the taxable disposition of any Partnership property shall be determined as if the adjusted basis of such property as of such date of disposition were equal in amount to the Partnership’s Carrying Value with respect to such property as of such date.

 

B-1


(4) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year.

(5) In the event the Carrying Value of any Partnership asset is adjusted pursuant to Section 1.D hereof, the amount of any such adjustment shall be taken into account as gain or loss from the disposition of such asset.

(6) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Net Income or Net Loss pursuant to this definition shall be added to such taxable income or loss.

(7) Notwithstanding any other provision of this Section 1.B, any items that are specially allocated pursuant to Exhibit C of the Agreement shall not be taken into account for purposes of computing Net Income or Net Loss.

The amounts of the items of Partnership income, gain, loss or deduction available to be specially allocated pursuant to Exhibit C of the Agreement shall be determined by applying rules analogous to those set forth in Sections 1.B(1) through 1.B(5) above.

C. Generally, a transferee (including an Assignee) of a Partnership Unit shall succeed to a pro rata portion of the Capital Account of the transferor.

D. (1) Consistent with the provisions of Regulations Section 1.704-1(b)(2)(iv)(f), and as provided in Section 1.D(2), the Carrying Value of all Partnership assets shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as of the times of the adjustments provided in Section 1.D(2) hereof, as if such Unrealized Gain or Unrealized Loss had been recognized on an actual sale of each such property and allocated pursuant to Section 6.1 of the Agreement.

(2) Such adjustments shall be made as of the following times: (a) immediately prior to the acquisition of an additional interest in the Partnership by any new or existing Partner in exchange for more than a de minimis Capital Contribution; (b) immediately prior to the distribution by the Partnership to a Partner of more than a de minimis amount of property as consideration for an interest in the Partnership; (c) in connection with the grant of an interest in the Partnership (other than a de minimis interest), as consideration for the provision of services to or for the benefit of the Partnership by an existing Partner acting in a partner capacity or by a new partner acting in a partner capacity or in anticipation of being a partner; (d) the issuance of any LTIP Units; and (e) immediately prior to the liquidation of the Partnership within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); provided, however, that adjustments pursuant to clauses (a), (b) and (c) above shall be made only if the General Partner determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership.

 

B-2


(3) In accordance with Regulations Section 1.704-1(b)(2)(iv)(e), the Carrying Value of Partnership assets distributed in kind shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as of the time any such asset is distributed.

(4) The Carrying Value of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Section 734(b) or Section 743(b) of the Code, but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) and Section 1.B(1) hereof or Section 1.F of Exhibit C of the Agreement; provided, however, that Carrying Values shall not be adjusted pursuant to this Section 1.D(4) to the extent that an adjustment pursuant to Section 1.D(2) hereof is required in connection with a transaction that would otherwise result in an adjustment pursuant to this Section 1.D(4).

(5) In determining Unrealized Gain or Unrealized Loss for purposes of this Exhibit B, the aggregate cash amount and fair market value of all Partnership assets (including cash or cash equivalents) shall be determined by the General Partner using such reasonable method of valuation as it may adopt, or in the case of a liquidating distribution pursuant to Article 13 of the Agreement, shall be determined and allocated by the Liquidator using such reasonable method of valuation as it may adopt. The General Partner, or the Liquidator, as the case may be, shall allocate such aggregate value among the assets of the Partnership (in such manner as it determines following the direction and approval of the Board of Directors to arrive at a fair market value for individual properties).

If the Carrying Value of an asset has been determined or adjusted pursuant to Section 1.B(2) or Section 1.B(4) of this Exhibit B, such Carrying Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset, for purposes of computing Net Income and Net Loss.

E. The initial Capital Account attributable to a Capital LTIP Unit shall equal the Capital Account attributable to a Common Unit determined immediately following the adjustment to the Carrying Value of Partnership assets pursuant to Section 1.D of this Exhibit B in connection with the issuance of such Capital LTIP Unit. The initial Capital Account attributable to a Profits LTIP Unit shall equal zero.

F. The provisions of the Agreement (including this Exhibit B and other Exhibits to the Agreement) relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-l(b), and shall be interpreted and applied in a manner consistent with such Regulations. In the event the General Partner shall determine that it is prudent to modify (i) the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to

 

B-3


liabilities which are secured by contributed or distributed property or which are assumed by the Partnership, the General Partner, or the Limited Partners) are computed; or (ii) the manner in which items are allocated among the Partners for federal income tax purposes, in order to comply with such Regulations or to comply with Section 704(c) of the Code, the General Partner may make such modification without regard to Article 14 of the Agreement; provided, that it is not likely to have a material effect on the amounts distributable to any Person pursuant to Article 13 of the Agreement upon the dissolution of the Partnership. The General Partner also shall (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Partners and the amount of Partnership capital reflected on the Partnership’s balance sheet, as computed for book purposes, in accordance with Regulations Section 1.704-1(b)(2)(iv)(q); and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause the Agreement not to comply with Regulations Section 1.704-1(b). In addition, the General Partner may adopt and employ such methods and procedures for (i) the maintenance of book and tax capital accounts; (ii) the determination and allocation of adjustments under Sections 704(c), 734 and 743 of the Code; (iii) the determination of Net Income, Net Loss, taxable income, taxable loss and items thereof under the Agreement and pursuant to the Code; (iv) the adoption of reasonable conventions and methods for the valuation of assets and the determination of tax basis; (v) the allocation of asset value and tax basis; and (vi) conventions for the determination of cost recovery, depreciation and amortization deductions, as it determines in its sole discretion are necessary or appropriate to execute the provisions of the Agreement, to comply with federal and state tax laws, and are in the best interest of the Partners.

2. No Interest

No interest shall be paid by the Partnership on Capital Contributions or on balances in Partners’ Capital Accounts.

3. No Withdrawal

No Partner shall be entitled to withdraw any part of his or its Capital Contribution or his or its Capital Account or to receive any distribution from the Partnership, except as provided in Articles 4, 5, 7 and 13 of the Agreement.

4. Special Allocations in Connection with a Liquidating Event

Partners intend that the allocation of Net Income, Net Loss and other items of income, gain, loss, deduction and credit required to be allocated to the Capital Accounts of the Partners pursuant to the Agreement will result in final Capital Account balances that will permit the amount each Partner is entitled to receive upon “liquidation” of the Partnership (within the meaning of Section 1.704-1(b)(2)(ii)(g) of the Treasury Regulations) to equal the amount such Partner would have received if such amount was distributable pro rata in accordance with the Partners’ respective Percentage Interests (other than a holder of Profits LTIP Units with respect to Profits LTIP Units for which the Target Balance has not been achieved without regard to this Section 4 of this Exhibit B).

 

B-4


Accordingly, notwithstanding the provisions of Section 6.1(a) and Section 6.1(b) of the Agreement, in the taxable year of the event precipitating a Liquidating Event and thereafter, appropriate adjustments to allocations of Net Income and Net Losses (and items thereof) to the Partners shall be made to achieve such result to the maximum extent possible; provided, however, in no event shall the balance of the Capital Account balance of a holder of Profits LTIP Units (to the extent attributable to such Profits LTIP Units) for which the Target Balance has not been achieved without regard to this Section 4 of this Exhibit B be increased to an amount excess of the balance that would result without regard to this Section 4 of this Exhibit B.

 

B-5


EXHIBIT C

SPECIAL ALLOCATION RULES; OTHER TAX MATTERS

1. Special Allocation Rules

Notwithstanding any other provision of the Agreement or this Exhibit C, the following special allocations shall be made:

A. Minimum Gain Chargeback. Notwithstanding the provisions of Section 6.1 of the Agreement or any other provisions of this Exhibit C, if there is a net decrease in Partnership Minimum Gain during any Partnership taxable year, then, subject to the exceptions set forth in Regulations Sections 1.704-2(f)(2)-(5), each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner’s share of the net decrease in Partnership Minimum Gain, as determined under Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(f)(6). This Section 1.A is intended to comply with the minimum gain chargeback requirements in Regulations Section 1.704-2(f) and shall be interpreted consistently therewith. Solely for purposes of this Section 1.A, each Partner’s Adjusted Capital Account Deficit shall be determined prior to any other allocations pursuant to Section 6.1 of the Agreement with respect to such Partnership taxable year and without regard to any decrease of Partner Minimum Gain during such Partnership taxable year.

B. Partner Minimum Gain Chargeback. Notwithstanding any other provision of Section 6.1 of the Agreement or any other provisions of this Exhibit C (except Section 1.A hereof), if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any Partnership taxable year, then, subject to the exceptions referred to in Regulations Section 1.704-2(i)(4), each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(5), shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner’s share of the net decrease in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(5). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(i)(4). This Section 1.B is intended to comply with the minimum gain chargeback requirement in such section of the Regulations and shall be interpreted consistently therewith. Solely for purposes of this Section 1.B, each Partner’s Adjusted Capital Account Deficit shall be determined prior to any other allocations pursuant to Section 6.1 of the Agreement or this Exhibit with respect to such Partnership taxable year, other than allocations pursuant to Section 1.A hereof.

 

C-1


C. Qualified Income Offset. In the event any Partner unexpectedly receives any adjustments, allocations or distributions described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), and after giving effect to the allocations required under Sections 1.A and 1.B hereof such Partner has an Adjusted Capital Account Deficit, items of Partnership income and gain (consisting of a pro rata portion of each item of Partnership income, including gross income and gain for the Partnership taxable year) shall be specially allocated to such Partner in an amount and manner sufficient to eliminate, to the extent required by the Regulations, its Adjusted Capital Account Deficit created by such adjustments, allocations or distributions as quickly as possible; provided, that an allocation pursuant to this Section 1.C shall be made only if and to the extent that such Partner would have an Adjusted Capital Account Deficit after all other allocations provided for in Section 6.1 of the Agreement or any other provisions of this Exhibit C have been tentatively made as if this Section 1.C were not in this Agreement. This Section 1.C is intended to constitute a qualified income offset under Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.

D. Nonrecourse Deductions. Nonrecourse Deductions for any Partnership taxable year shall be allocated to the Partners in accordance with their respective Percentage Interests. If the General Partner determines in its good faith discretion that the Partnership’s Nonrecourse Deductions must be allocated in a different ratio to satisfy the safe harbor requirements of the Regulations promulgated under Section 704(b) of the Code, the General Partner is authorized, upon notice to the Limited Partners, to revise the prescribed ratio to the numerically closest ratio for such Partnership taxable year which would satisfy such requirements.

E. Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions for any Partnership taxable year shall be specially allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i).

F. Code Section 754 Adjustments. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Section 734(b) or 743(b) of the Code is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such item of gain or loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such section of the Regulations.

G. Curative Allocations. The allocations set forth in Section 1.A through 1.F of this Exhibit C (the “Regulatory Allocations”) are intended to comply with certain requirements of the Regulations under Section 704(b) of the Code. The Regulatory Allocations may not be consistent with the manner in which the Partners intend to divide Partnership distributions. Accordingly, the General Partner is hereby authorized to

 

C-2


divide other allocations of income, gain, deduction and loss among the Partners so as to prevent the Regulatory Allocations from distorting the manner in which Partnership distributions will be divided among the Partners. In general, the Partners anticipate that, if necessary, this will be accomplished by specially allocating other items of income, gain, loss and deduction among the Partners so that the net amount of the Regulatory Allocations and such special allocations to each person is zero. However, the General Partner will have discretion to accomplish this result in any reasonable manner; provided, however, that no allocation pursuant to this Section 1.G shall cause the Partnership to fail to comply with the requirements of Regulations Sections 1.704-1(b)(2)(ii)(d), -2(e) or -2(i).

H. Profits LTIP Unit Allocations. After giving effect to the special allocations set forth in Section 1.A and Section 1.B of this Exhibit C, and the allocations of Net Income under Section 6.1(a)(1) and Section 6.1(a)(2) (including, for the avoidance of doubt, Liquidating Gains that are a component of Net Income) of the Agreement, and subject to the other provisions of this Exhibit C, but before allocations are made under Section 6.1(a)(3) of the Agreement:

(1) Any remaining Liquidating Gains shall first be allocated among the Partners so as to cause, as nearly as possible, the Economic Capital Account Balances of the Profits LTIP Unit holders, to the extent attributable to their ownership of Profits LTIP Units, to be equal to (i) the Company Common Unit Economic Balance, multiplied by (ii) the number of their Profits LTIP Units (with respect to each Profits LTIP Unit holder, the “Target Balance”); provided that no such Liquidating Gains will be allocated with respect to any particular Profits LTIP Unit unless and to the extent that such Liquidating Gains, when aggregated with other Liquidating Gains realized since the issuance of such Profits LTIP Unit, exceed Liquidating Losses realized since the issuance of such Profits LTIP Unit. Any such allocations shall be made among the Partners in proportion to the aggregate amounts required to be allocated to each Partner under this Section 1.H.1 of this Exhibit C.

(2) After giving effect to the special allocations set forth above, if, due to distributions with respect to Common Units in which the Profits LTIP Units do not participate, forfeitures or otherwise, the Economic Capital Account Balance of any present or former holder of Profits LTIP Units attributable to such holder’s Profits LTIP Units, exceeds the Target Balance, then Liquidating Losses shall be allocated to such holder, or Liquidating Gains shall be allocated to the other Partners, to reduce or eliminate the disparity; provided, however, that if Liquidating Losses or Liquidating Gains are insufficient to completely eliminate all such disparities, such losses or gains shall be allocated among Partners in a manner reasonably determined by the General Partner.

 

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(3) The parties agree that the intent of this Section 1.H of this Exhibit C is

(a) to the extent possible to make the Economic Capital Account Balance associated with each Profits LTIP Unit economically equivalent to the Company Common Unit Economic Balance and (ii) to allow conversion of a Profits LTIP Unit (assuming prior vesting) into a Common Unit when sufficient Liquidating Gains have been allocated to such Profits LTIP Unit pursuant to Section 1.H.1 of this Exhibit C so that either its initial Book-Up Target has been reduced to zero or the parity described in the definition of Target Balance has been achieved. The General Partner, following the direction and approval of the Board of Directors, shall be permitted to interpret this Section 1.H of this Exhibit C or to amend this Agreement to the extent necessary and consistent with this intention.

(b) In the event that Liquidating Gains or Liquidating Losses are allocated under this Section 1.H of this Exhibit C, Net Income allocable under Section 6.1(a)(3) of the Agreement and any Net Loss shall be recomputed without regard to the Liquidating Gains or Liquidating Losses so allocated.

I. Forfeiture Allocations

(1) Subject to Section 1.I(2) of this Exhibit C, if any holder forfeits (or has repurchased at less than fair market value) all or a portion of such holder’s Partnership Units, the Partnership shall make forfeiture allocations to such holder in the manner and to the extent required by proposed Regulations Section 1.704-1(b)(4)(xii) (as such proposed Regulations may be amended or modified, including upon the issuance of temporary or final Treasury Regulations).

(2) If a Profits LTIP Unit holder forfeits any Profits LTIP Units to which Liquidating Gain has previously be allocated pursuant to Section 1.H of this Exhibit C, (i) the portion of such holders Capital Account attributable to such Liquidating Gain allocated to such forfeited Profits LTIP Units shall be re-allocated to such holder’s remaining Profits LTIP Units that were outstanding on the date of the initial allocation of such Liquidating Gain to the extent necessary to cause such holders Economic Capital Account Balance attributable to each such Profits LTIP Unit to equal the Company Common Unit Economic Balance, and (ii) forfeiture allocations shall be made pursuant to Section 1.I(1) of this Exhibit C with respect to the amount of any such Liquidating Gain not re-allocated pursuant to clause (i) above (and the Capital Account attributable to the forfeited Profits LTIP Units that is not so reallocated or reduced to zero through forfeiture allocations shall be reduced to zero).

 

C-4


2. Allocations for Tax Purposes

A. Except as otherwise provided in this Section 2, for federal income tax purposes, each item of income, gain, loss and deduction shall be allocated among the Partners in the same manner as its correlative item of “book” income, gain, loss or deduction is allocated pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit C.

B. In an attempt to eliminate Book-Tax Disparities attributable to a Contributed Property or Adjusted Property, items of income, gain, loss, and deduction shall be allocated for federal income tax purposes among the Partners as follows:

(1)       (a) In the case of a Contributed Property, such items attributable thereto shall be allocated among the Partners, consistent with the principles of Section 704(c) of the Code and the Regulations thereunder, and with the procedures and methods described in Section 10.2 of the Agreement, to take into account the variation between the 704(c) Value of such property and its adjusted basis at the time of contribution; and

 

  (b)

any item of Residual Gain or Residual Loss attributable to a Contributed Property shall be allocated among the Partners in the same manner as its correlative item of “book” gain or loss is allocated pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit C.

(2)       (a)         In the case of an Adjusted Property, such items shall

(1) first, be allocated among the Partners in a manner consistent with the principles of Section 704(c) of the Code and the Regulations thereunder to take into account the Unrealized Gain or Unrealized Loss attributable to such property and the allocations thereof pursuant to this Exhibit B; and

(2) second, in the event such property was originally a Contributed Property, be allocated among the Partners in a manner consistent with Section 2.B(1) of this Exhibit C; and

 

  (b)

any item of Residual Gain or Residual Loss attributable to an Adjusted Property shall be allocated among the Partners in the same manner as its correlative item of “book” gain or loss is allocated pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit C.

 

C-5


C. To the extent that the Treasury Regulations promulgated pursuant to Section 704(c) of the Code permit the Partnership to utilize alternative methods to eliminate the disparities between the Carrying Value of property and its adjusted basis, the General Partner shall have the authority to elect the method to be used by the Partnership and such election shall be binding on all Partners.

3. No Withdrawal

No Partner shall be entitled to withdraw any part of its Capital Contribution or its Capital Account or to receive any distribution from the Partnership, except as provided in Articles 4, 5, 8 and 13 of the Agreement.

 

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EXHIBIT D

NOTICE OF REDEMPTION

The undersigned Limited Partner hereby irrevocably requests NexPoint Real Estate Finance Operating Partnership, L.P., a Delaware limited partnership (the “Partnership”), to redeem                  Partnership Units in the Partnership in accordance with the terms of the Amended and Restated Limited Partnership Agreement of the Partnership and the Redemption Right referred to therein; and the undersigned Limited Partner irrevocably (i) surrenders such Partnership Units and all right, title and interest therein; and (ii) directs that the Cash Amount or REIT Shares Amount (as determined by the Company) deliverable upon exercise of the Redemption Right be delivered to the address specified below, and if REIT Shares are to be delivered, such REIT Shares be registered or placed in the name(s) and at the address(es) specified below. The undersigned hereby represents, warrants, and certifies that the undersigned (a) has marketable and unencumbered title to such Partnership Units, free and clear of the rights or interests of any other person or entity; (b) has the full right, power, and authority to request such redemption and surrender such Partnership Units as provided herein; and (c) has obtained the consent or approval of all persons or entities, if any, having the right to consent or approve such redemption and surrender of Units. The undersigned Limited Partner further agrees that, in the event that any state or local property tax is payable as a result of the transfer of its Partnership Units to the Partnership or the Company, the undersigned Limited Partner shall assume and pay such transfer tax.

Dated:                                 

 

Name of Limited Partner:   

 

   Please Print
  

 

   (Signature of Limited Partner)
  

 

   (Street Address)
  

 

   (City) (State) (Zip Code)
   Signature Guaranteed by:
  

 

If REIT Shares are to be issued, issue to:   
Name:                                                                                     
Please insert social security or identifying number:   

 

 

D-1


EXHIBIT E

CONSTRUCTIVE OWNERSHIP DEFINITION

The term “Constructively Owns” means ownership determined through the application of the constructive ownership rules of Section 318 of the Code, as modified by Section 856(d)(5) of the Code. Generally, as of the date first set forth above, these rules provide the following:

a. an individual is considered as owning the Ownership Interest that is owned, actually or constructively, by or for his spouse, his children, his grandchildren, and his parents;

b. an Ownership Interest that is owned, actually or constructively, by or for a partnership, limited liability company or estate is considered as owned proportionately by its partners or beneficiaries;

c. an Ownership Interest that is owned, actually or constructively, by or for a trust is considered as owned by its beneficiaries in proportion to the actuarial interest of such beneficiaries (provided, however, that in the case of a “grantor trust” the Ownership Interest will be considered as owned by the grantors);

d. if ten (10) percent or more in value of the stock in a corporation is owned, actually or constructively, by or for any person, such person shall be considered as owning the Ownership Interest that is owned, actually or constructively, by or for such corporation in that proportion which the value of the stock which such person so owns bears to the value of all the stock in such corporation;

e. an Ownership Interest that is owned, actually or constructively, by or for a partner or member which actually or constructively owns a 25% or greater capital interest or profits interest in a partnership or limited liability company, or by or to or for a beneficiary of an estate or trust shall be considered as owned by the partnership, limited liability company, estate, or trust (or, in the case of a grantor trust, the grantors);

f. if ten (10) percent or more in value of the stock in a corporation is owned, actually or constructively, by or for any person, such corporation shall be considered as owning the Ownership Interest that is owned, actually or constructively, by or for such person;

g. if any person has an option to acquire an Ownership Interest (including an option to acquire an option or any one of a series of such options), such Ownership Interest shall be considered as owned by such person;

h. an Ownership Interest that is constructively owned by a person by reason of the application of the rules described in paragraphs (a) through (g) above shall, for purposes of applying paragraphs (a) through (g), be considered as actually owned by such person; provided, however, that (i) an Ownership Interest constructively owned by an individual by reason of paragraph (a) shall not be considered as owned by him for

 

E-1


purposes of again applying paragraph (a) in order to make another person the constructive owner of such Ownership Interest, (ii) an Ownership Interest constructively owned by a partnership, estate, trust, or corporation by reason of the application of paragraphs (e) or (f) shall not be considered as owned by it for purposes of applying paragraphs (b), (c), or (d) in order to make another person the constructive owner of such Ownership Interest, (iii) if an Ownership Interest may be considered as owned by an individual under paragraph (a) or (g), it shall be considered as owned by him under paragraph (g), and (iv) for purposes of the above described rules, an S corporation shall be treated as a partnership and any shareholder of the S corporation shall be treated as a partner of such partnership except that this rule shall not apply for purposes of determining whether stock in the S corporation is constructively owned by any person.

i. For purposes of the above summary of the constructive ownership rules, the term “Ownership Interest” means the ownership of stock with respect to a corporation and, with respect to any other type of entity, the ownership of an interest in either its assets or net profits.

 

E-2


EXHIBIT F

SCHEDULE OF PARTNERS’ OWNERSHIP

WITH RESPECT TO TENANTS

NONE


EXHIBIT G

NOTICE OF ELECTION BY PARTNER TO CONVERT

LTIP UNITS INTO COMMON UNITS

The undersigned holder of LTIP Units hereby irrevocably (i) elects to convert __________ LTIP Units in NexPoint Real Estate Finance Operating Partnership, L.P. (the “Partnership”) into Common Units in accordance with the terms of the Amended and Restated Agreement of Limited Partnership of the Partnership, as amended and/or restated from time to time, and (ii) directs that any cash in lieu of Common Units that may be deliverable upon such conversion be delivered to the address specified below. The undersigned hereby represents, warrants, and certifies that the undersigned (a) has title to such LTIP Units, free and clear of the rights or interests of any other person or entity other than the Partnership, (b) has the full right, power, and authority to cause the conversion of such LTIP Units as provided herein, and (c) has obtained the consent to or approval of all persons or entities, if any, having the right to consent or approve such conversion.

Dated: ______________

 

Name of Limited Partner:

 

 

(Signature of Limited Partner)

 

(Street Address)

 

(City)                    (State)                      (Zip Code)
Signature Guaranteed by:

 


EXHIBIT H

NOTICE OF ELECTION BY PARTNERSHIP TO FORCE CONVERSION OF

LTIP UNITS INTO COMMON UNITS

NexPoint Real Estate Finance Operating Partnership, L.P. (the “Partnership”) hereby irrevocably elects to cause the number of LTIP Units held by the holder of LTIP Units set forth below to be converted into Common Units in accordance with the terms of the Amended and Restated Agreement of Limited Partnership of the Partnership, as amended and/or restated from time to time.

 

Name of Holder:

 

Date of this Notice:

 

Number of LTIP Units to be Converted:

 

Please Print Exact Name as Registered with Partnership:

 

EX-10.3 7 d759970dex103.htm EX-10.3 EX-10.3

Exhibit 10.3

FORM OF

AMENDED AND RESTATED

LIMITED PARTNERSHIP AGREEMENT

OF

[SUBSIDIARY PARTNERSHIP]

a Delaware limited partnership

THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS THE TRANSFEROR DELIVERS TO THE PARTNERSHIP AN OPINION OF COUNSEL, IN FORM AND SUBSTANCE SATISFACTORY TO THE PARTNERSHIP, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER OR OTHER DISPOSITION MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES OR “BLUE SKY” LAWS.

AMENDED AND RESTATED AS OF             , 2020

 


TABLE OF CONTENTS

 

         Page  

ARTICLE 1. DEFINED TERMS

     1  

ARTICLE 2. ORGANIZATIONAL MATTERS

     13  

Section 2.1.

  Continuation      13  

Section 2.2.

  Name      13  

Section 2.3.

  Registered Office and Agent; Principal Office      14  

Section 2.4.

  Power of Attorney      14  

Section 2.5.

  Term      15  

Section 2.6.

  Admission of Partners      15  

ARTICLE 3. PURPOSE

     16  

Section 3.1.

  Purpose and Business      16  

Section 3.2.

  Powers      16  

Section 3.3.

  Representations and Warranties by the Parties      16  

Section 3.4.

  Not Publicly Traded      18  

ARTICLE 4. CAPITAL CONTRIBUTIONS

     19  

Section 4.1.

  Capital Contributions of the Partners      19  

Section 4.2.

  Issuances of Additional Partnership Interests      19  

Section 4.3.

  Additional Funds      20  

Section 4.4.

  Preemptive Rights      20  

Section 4.5.

  No Interest      20  

ARTICLE 5. DISTRIBUTIONS

     21  

Section 5.1.

  Requirement and Characterization of Distributions      21  

Section 5.2.

  Amounts Withheld      21  

Section 5.3.

  Distributions Upon Liquidation      21  

Section 5.4.

  Restricted Distributions      21  

Section 5.5.

  Compliance with REIT Requirements      21  

ARTICLE 6. ALLOCATIONS

     22  

Section 6.1.

  Allocations For Capital Account Purposes      22  

ARTICLE 7. MANAGEMENT AND OPERATIONS OF BUSINESS

     23  

Section 7.1.

  Management      23  

Section 7.2.

  Certificate of Limited Partnership      26  

Section 7.3.

  Restrictions on General Partner Authority      27  

Section 7.4.

  Reimbursement of the General Partner and the Company      27  

Section 7.5.

  Outside Activities of the General Partner      27  

Section 7.6.

  Contracts with Affiliates      28  

Section 7.7.

  Indemnification      28  

Section 7.8.

  Liability of the General Partner      30  

Section 7.9.

  Other Matters Concerning the General Partner      31  

Section 7.10.

  Title to Partnership Assets      31  

Section 7.11.

  Reliance by Third Parties      32  

ARTICLE 8. RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS

     32  

Section 8.1.

  Limitation of Liability      32  

 

i


TABLE OF CONTENTS

(continued)

 

         Page  

Section 8.2.

  Management of Business      32  

Section 8.3.

  Outside Activities of Limited Partners      33  

Section 8.4.

  Return of Capital      33  

Section 8.5.

  Rights of Limited Partners Relating to the Partnership      33  

Section 8.6.

  Redemption Right      34  

ARTICLE 9. BOOKS, RECORDS, ACCOUNTING AND REPORTS

     36  

Section 9.1.

  Records and Accounting      36  

Section 9.2.

  Fiscal Year      36  

Section 9.3.

  Reports      37  

ARTICLE 10. TAX MATTERS

     37  

Section 10.1.

  Preparation of Tax Returns      37  

Section 10.2.

  Tax Elections      37  

Section 10.3.

  Partnership Representative      38  

Section 10.4.

  Withholding      39  

ARTICLE 11. TRANSFERS AND WITHDRAWALS

     40  

Section 11.1.

  Transfer      40  

Section 11.2.

  Transfer of General Partner Interest      40  

Section 11.3.

  Limited Partners’ Rights to Transfer      41  

Section 11.4.

  Substituted Limited Partners      42  

Section 11.5.

  Assignees      43  

Section 11.6.

  Drag-Along Rights      43  

Section 11.7.

  General Provisions      45  

ARTICLE 12. ADMISSION OF PARTNERS

     46  

Section 12.1.

  Admission of Successor General Partner      46  

Section 12.2.

  Admission of Additional Limited Partners      46  

Section 12.3.

  Amendment of Agreement and Certificate of Limited Partnership      46  

ARTICLE 13. DISSOLUTION, LIQUIDATION AND TERMINATION

     47  

Section 13.1.

  Dissolution      47  

Section 13.2.

  Winding Up      47  

Section 13.3.

  Deficit Capital Account Restoration Obligation      49  

Section 13.4.

  Deemed Contribution and Distribution      49  

Section 13.5.

  Rights of Limited Partners      50  

Section 13.6.

  Notice of Dissolution      50  

Section 13.7.

  Termination of Partnership and Cancellation of Certificate of Limited Partnership      50  

Section 13.8.

  Reasonable Time for Winding Up      50  

Section 13.9.

  Waiver of Partition      50  

ARTICLE 14. AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS

     51  

Section 14.1.

  Amendment of Partnership Agreement      51  

Section 14.2.

  Meetings of the Partners      51  

 

ii


TABLE OF CONTENTS

(continued)

 

         Page  

ARTICLE 15. GENERAL PROVISIONS

     52  

Section 15.1.

  Addresses and Notice      52  

Section 15.2.

  Titles and Captions      52  

Section 15.3.

  Pronouns and Plurals      52  

Section 15.4.

  Further Action      52  

Section 15.5.

  Binding Effect      53  

Section 15.6.

  Creditors      53  

Section 15.7.

  Waiver      53  

Section 15.8.

  Counterparts      53  

Section 15.9.

  Applicable Law; Consent to Jurisdiction; Waiver of Jury Trial      53  

Section 15.10.

  Invalidity of Provisions      54  

Section 15.11.

  Entire Agreement      54  

Section 15.12.

  Legal Counsel Relationships      54  

 

Exhibit A – Partners’ Contributions and Partnership Interests

     A-1  

Exhibit B – Capital Account Maintenance

     B-1  

Exhibit C – Special Allocation Rules

     C-1  

Exhibit D – Notice of Redemption

     D-1  

Exhibit E – Constructive Ownership Definition

     E-1  

Exhibit F – Schedule of Partner’s Ownership with Respect to Tenants

     F-1  

 

 

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AMENDED AND RESTATED

LIMITED PARTNERSHIP AGREEMENT

OF

THIS AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT OF                  (as now or hereafter amended, restated, modified, supplemented, or replaced, this “Agreement”), dated as of                 , 2020, is entered into by and among NexPoint Real Estate Finance Operating Partnership, L.P., a Delaware limited partnership (the “General Partner”), the Persons (as defined below) whose names are from time to time set forth on Exhibit A attached hereto (as it may be amended from time to time), and the parties to the original agreement of limited partnership of                 , dated as of October 8, 2019 (the “Prior Agreement”).

WHEREAS, the limited partnership was formed on October 8, 2019 and the Prior Agreement was entered into between Brian Mitts, as general partner (the “Initial General Partner”), and Matthew McGraner, as the sole limited partner (the “Initial Limited Partner”); and

WHEREAS, the General Partner and the Persons (as defined below) that are party hereto from time to time and whose names are set forth on Exhibit A attached hereto (as it may be amended from time to time) desire to: (a) enter into this Amended and Restated Limited Partnership Agreement of                  (the “Partnership”); (b) effect the withdrawal of Brian Mitts as the general partner of the Partnership and Matthew McGraner as a limited partner of the Partnership; (c) effect the admission of the General Partner as the general partner of the Partnership; (d) effect the admission of the Persons whose names are set forth on Exhibit A attached hereto as Limited Partners of the Partnership; (e) continue the Partnership on the terms set forth herein; and (f) continue the operation of the Partnership under the name                 .

NOW THEREFORE, in consideration of the mutual covenants herein contained, and other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:

ARTICLE 1.

DEFINED TERMS

The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement.

704(c) Value” of any Contributed Property means the fair market value of such property or other consideration at the time of contribution, as determined by the General Partner, following the direction and approval of the Board of Directors, using such reasonable method of valuation as it may adopt. Subject to Exhibit B hereof, the General Partner shall, following the direction and approval of the Board of Directors, use such method as it deems reasonable and appropriate to allocate the aggregate of the 704(c) Values of Contributed Properties in a single or integrated transaction among the separate properties on a basis proportional to their respective fair market values.

 

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Act” means the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. §17-101, et seq., as it may be amended from time to time, and any successor to such statute.

Additional Funds” has the meaning set forth in Section 4.3(A).

Additional Limited Partner” means a Person admitted to the Partnership as a Limited Partner pursuant to Section 12.2 hereof and who is shown as such on the books and records of the Partnership.

Adjusted Capital Account” means the Capital Account maintained for each Partner as of the end of each Partnership taxable year (i) increased by any amounts which such Partner is obligated to restore pursuant to any provision of this Agreement or is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5) and (ii) decreased by the items described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital Account is intended to comply with the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.

Adjusted Capital Account Deficit” means, with respect to any Partner, the deficit balance, if any, in such Partner’s Adjusted Capital Account as of the end of the relevant Partnership taxable year.

Adjusted Property” means any property, the Carrying Value of which has been adjusted pursuant to Exhibit B hereof.

Adjustment Event” has the meaning set forth in Section 4.6(A)(1) hereof.

Affiliate” means, with respect to any Person, any Person directly or indirectly controlling, controlled by or under common control with such Person. For purposes of this definition, “control” when used with respect to any Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise, and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

Agreed Value” means (i) in the case of any Contributed Property as of the time of its contribution to the Partnership, the 704(c) Value of such property, reduced by any liabilities either assumed by the Partnership upon such contribution or to which such property is subject when contributed, and (ii) in the case of any property distributed to a Partner by the Partnership, the Partnership’s Carrying Value of such property at the time such property is distributed, reduced by any indebtedness either assumed by such Partner upon such distribution or to which such property is subject at the time of distribution as determined under Section 752 of the Code and the Regulations thereunder.

 

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Agreement” has the meaning set forth in the recitals hereto.

Aggregate Consideration” has the meaning set forth in Section 11.6(C).

Approved Sale” means a Sale of the Partnership which is approved by the Partners holding, collectively, more than 50% of the issued and outstanding Partnership Interests, subject to the direction and approval of the Board of Directors.

Approving Partners” has the meaning set forth in Section 11.6(A).

Assignee” means a Person to whom all or a portion of a Partnership Interest has been transferred in a manner permitted under this Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.5.

Available Cash” means, with respect to any period for which such calculation is being made, all cash balances of the Partnership net of the Partnership’s working capital needs, anticipated capital expenditures, operating expenses, debt service requirements and other necessary reserves including with respect to contingencies or commitments, each as determined by the General Partner, following the direction and approval of the Board of Directors.

Bankruptcy Event” shall mean, with respect to any Person, such Person (a) is insolvent, or is generally unable to pay its debts as they become due, or admits in writing its inability to pay its debts as they become due, or makes a general assignment for the benefit of its creditors or (b) becomes the subject of a bankruptcy or insolvency proceeding, or has had a receiver, conservator, trustee, administrator, custodian, assignee for the benefit of creditors or similar person charged with the reorganization or liquidation of its business appointed for it, or has taken any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any such proceeding or appointment.

Board of Directors” means the Board of Directors of the Company.

Book-Tax Disparities” means, with respect to any item of Contributed Property or Adjusted Property, as of the date of any determination, the difference between the Carrying Value of such Contributed Property or Adjusted Property and the adjusted basis thereof for federal income tax purposes as of such date. A Partner’s share of the Partnership’s Book-Tax Disparities in all of its Contributed Property and Adjusted Property will be reflected by the difference between such Partner’s Capital Account balance as maintained pursuant to Exhibit B and the hypothetical balance of such Partner’s Capital Account computed as if it had been maintained strictly in accordance with federal income tax accounting principles.

Business Day” means any day except a Saturday, Sunday or other day on which commercial banks in New York, New York are authorized or required by law to close.

 

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Capital Account” means the Capital Account maintained for a Partner pursuant to Exhibit B hereof.

Capital Contribution” means, with respect to any Partner, any cash, cash equivalents or the Agreed Value of Contributed Property which such Partner contributes or is deemed to contribute to the Partnership.

Carrying Value” means (i) with respect to a Contributed Property or Adjusted Property, the 704(c) Value of such property, reduced (but not below zero) by all Depreciation with respect to such property charged to the Partners’ Capital Accounts following the contribution of or adjustment with respect to such property; and (ii) with respect to any other Partnership property, the adjusted basis of such property for federal income tax purposes, all as of the time of determination. The Carrying Value of any property shall be adjusted from time to time in accordance with Exhibit B hereof, and to reflect changes, additions or other adjustments to the Carrying Value for dispositions and acquisitions of Partnership properties, as deemed appropriate by the General Partner, following the direction and approval of the Board of Directors.

Cash Amount” means an amount of cash equal to the Value on the Valuation Date of the OP Unit Amount.

Certificate” means the Certificate of Limited Partnership of the Partnership as filed in the office of the Delaware Secretary of State on October 8, 2019, as amended, restated and/or supplemented from time to time in accordance with the terms hereof and the Act.

Charter” means the Articles of Amendment and Restatement of the Company filed with the State Department of Assessments and Taxation of the State of Maryland on                 , 2020, as amended, restated and/or supplemented from time to time.

Code” means the Internal Revenue Code of 1986, as amended and in effect from time to time, as interpreted by the applicable regulations thereunder. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of future law.

Common Units” means the Partnership Units, other than any other series of units of Limited Partner Interest issued in the future and designated as preferred or otherwise different from the Common Units, such difference including, but not limited to, with respect to the payment of distributions, including distributions upon liquidation.

Company” means NexPoint Real Estate Finance, Inc., a Maryland corporation.

Company Common Unit Economic Balance” means (i) the Economic Capital Account Balance of the Company but only to the extent attributable to the Company’s ownership of Common Units and computed on a hypothetical basis after taking into account all allocations through the date on which any allocation is made under Section 1(H) of Exhibit C divided by (ii) the number of the Company’s Common Units.

 

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Constructive Ownership” or “Constructively Own” means ownership under the constructive ownership rules described in Exhibit E.

Contributed Property” means each property or other asset, in such form as may be permitted by the Act (but excluding cash), contributed or deemed contributed to the Partnership. Once the Carrying Value of a Contributed Property is adjusted pursuant to Exhibit B hereof, such property shall no longer constitute a Contributed Property for purposes of Exhibit B hereof, but shall be deemed an Adjusted Property for such purposes.

Conversion Factor” means 1.0, subject to adjustment as follows: (i) in case the Company shall (A) make a distribution on the outstanding REIT Shares in REIT Shares, (B) subdivide or reclassify the outstanding REIT Shares into a greater number of REIT Shares, or (C) combine or reclassify the outstanding REIT Shares into a smaller number of REIT Shares, the Conversion Factor in effect at the opening of business on the day following the date fixed for the determination of shareholders entitled to receive such distribution or subject to such subdivision, combination or reclassification shall be proportionately adjusted so that a holder of OP Units shall be entitled to receive, upon exchange thereof, the number of REIT Shares which the holder would have owned at the opening of business on the day following the date fixed for such determination had such OP Units been exchanged in accordance with the limited partnership agreement of the Operating Partnership immediately prior to such determination; (ii) in case the Operating Partnership shall subdivide or reclassify its outstanding OP Units into a greater number of OP Units, the Conversion Factor in effect at the opening of business on the day following the date fixed for the determination of holders of OP Units subject to such subdivision or reclassification shall be proportionately adjusted so that a holder of OP Units shall be entitled to receive, upon exchange thereof, the number of REIT Shares which the holder would have owned at the opening of business on the day following the date fixed for such determination had such OP Units been exchanged in accordance with the limited partnership agreement of the Operating Partnership immediately prior to such determination; (iii) in case the Company (A) shall issue rights or warrants to all holders of REIT Shares entitling them to subscribe for or purchase REIT Shares at a price per share less than the daily market price per REIT Share on the date fixed for the determination of shareholders entitled to receive such rights or warrants, (B) shall not issue similar rights or warrants to all holders of OP Units of the Operating Partnership entitling them to subscribe for or purchase REIT Shares or OP Units at a comparable price (determined, in the case of OP Units, by reference to the Conversion Factor), and (C) cannot issue such rights or warrants to a Redeeming Partner, then the Conversion Factor in effect at the opening of business on the day following the date fixed for such determination shall be increased by multiplying such Conversion Factor by a fraction of which the numerator shall be the number of REIT Shares outstanding at the close of business on the date fixed for such determination plus the number of REIT Shares so offered for subscription or purchase, and of which the denominator shall be the number of REIT Shares outstanding at the close of business on the date fixed for such determination plus the number of REIT Shares which the aggregate offering price of the total number of REIT Shares so offered for subscription would purchase at such daily market price per share, such increase to the

 

5


Conversion Factor to become effective immediately after the opening of business on the day following the date fixed for such determination; and (iv) in case the Company shall, by distribution or otherwise, distribute to all holders of its REIT Shares, (A) capital shares of any class other than its REIT Shares, (B) evidence of its indebtedness or (C) assets (excluding any rights or warrants referred to in clause (iii) above, any cash distribution lawfully paid under the laws of the state of organization of the Company, and any distribution referred to in clause (i) above) and shall not cause a corresponding distribution to be made to all holders of OP Units, the Conversion Factor shall be adjusted so that the same shall equal the ratio determined by multiplying the Conversion Factor in effect immediately prior to the close of business on the date fixed for the determination of shareholders entitled to receive such distribution by a fraction of which the numerator shall be the daily market price per REIT Share on the date fixed for such determination, and of which the denominator shall be such daily market price per REIT Share less the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors certified by the Secretary of the Company and delivered to the holders of OP Units) of the portion of the capital shares or evidences of indebtedness or assets so distributed applicable to one REIT Share, such adjustment to become effective immediately prior to the opening of business on the day following the date fixed for the determination of shareholders entitled to receive such distribution.

Conversion Notice” has the meaning set forth in Section 4.7(B) hereof.

Conversion Right” has the meaning set forth in Section 4.7(A) hereof.

Covered Person” has the meaning set forth in Section 7.8(A).

Debt” means, as to any Person, as of any date of determination, (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services, (ii) all amounts owed by such Person to banks or other Persons in respect of reimbursement obligations under letters of credit, surety bonds and other similar instruments guaranteeing payment or other performance of obligations by such Person, (iii) all indebtedness for borrowed money or for the deferred purchase price of property or services secured by any lien on any property owned by such Person, to the extent attributable to such Person’s interest in such property, even though such Person has not assumed or become liable for the payment thereof, and (iv) obligations of such Person incurred in connection with entering into a lease which, in accordance with GAAP, should be capitalized.

Delaware Courts” has the meaning set forth in Section 15.10(B) hereof.

Depreciation” means, for each taxable year, an amount equal to the federal income tax depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such year, except that if the Carrying Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Carrying Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such year bears to such beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization, or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Carrying Value using any reasonable method selected by the General Partner.

 

6


Economic Capital Account Balance”, with respect to a Partner, means an amount equal to such Partner’s Capital Account balance, plus the amount of its share of any Partner Minimum Gain and Partnership Minimum Gain.

ERISA” means the Employee Retirement Income Security Act of 1974, as amended and in effect from time to time, as interpreted by the applicable regulations thereunder. Any reference herein to a specific section or Title of ERISA shall be deemed to include a reference to any corresponding provision of future law.

Exchange Act” means the Securities Exchange Act of 1934, as amended.

flow through entity” has the meaning set forth in Section 3.3(D)(3) hereof.

GAAP” means U.S. generally accepted accounting principles, applied on a consistent basis.

General Partner” has the meaning set forth in the recitals hereto.

General Partner Interest” means a Partnership Interest held by the General Partner, in its capacity as general partner of the Partnership. A General Partner Interest may be (but is not required to be) expressed as a number of Partnership Units.

Incapacity” or “Incapacitated” means, (i) as to any individual Partner, death, total physical disability or entry by a court of competent jurisdiction adjudicating him incompetent to manage his Person or his estate; (ii) as to any corporation which is a Partner, the filing of a certificate of dissolution, or its equivalent, for the corporation or the revocation of its charter; (iii) as to any partnership or limited liability company which is a Partner, the dissolution and commencement of winding up of the partnership or limited liability company; (iv) as to any estate which is a Partner, the distribution by the fiduciary of the estate’s entire interest in the Partnership; (v) as to any trustee of a trust which is a Partner, the termination of the trust (but not the substitution of a new trustee); or (vi) as to any Partner, the bankruptcy of such Partner. For purposes of this definition, bankruptcy of a Partner shall be deemed to have occurred when (a) the Partner commences a voluntary proceeding seeking liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect; (b) the Partner is adjudged as bankrupt or insolvent, or a final and non-appealable order for relief under any bankruptcy, insolvency or similar law now or hereafter in effect has been entered against the Partner; (c) the Partner executes and delivers a general assignment for the benefit of the Partner’s creditors; (d) the Partner files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the Partner in any proceeding of the nature described in clause (b) above; (e) the Partner seeks, consents to or acquiesces in the appointment of a trustee, receiver

 

7


or liquidator for the Partner or for all or any substantial part of the Partner’s properties; (f) any proceeding seeking liquidation, reorganization or other relief of or against such Partner under any bankruptcy, insolvency or other similar law now or hereafter in effect has not been dismissed within 120 days after the commencement thereof; (g) the appointment without the Partner’s consent or acquiescence of a trustee, receiver or liquidator has not been vacated or stayed within 90 days of such appointment; or (h) an appointment referred to in clause (g) which has been stayed is not vacated within 90 days after the expiration of any such stay.

Indemnitee” means (i) any Person made a party to a proceeding by reason of (A) his or its status as the General Partner, or as a trustee, director, officer, shareholder, partner, member, employee, representative or agent of the General Partner or as an officer, employee, representative or agent of the Partnership or as the Partnership Representative, or (B) his, her or its liabilities, pursuant to a loan guarantee or otherwise, for any indebtedness of the Partnership or any Subsidiary of the Partnership (including, without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken assets subject to); and (ii) such other Persons (including Affiliates of the General Partner or the Partnership) as the General Partner may designate from time to time (whether before or after the event giving rise to potential liability) following the direction and approval of the Board of Directors.

Initial Limited Partner” has the meaning set forth in the recitals hereto.

Initial General Partner” has the meaning set forth in the recitals hereto.

Limited Partner” means any Person named as a limited partner of the Partnership in Exhibit A attached hereto, as such Exhibit may be amended from time to time, or any Substituted Limited Partner or Additional Limited Partner, in such Person’s capacity as a limited partner of the Partnership. For purposes of this Agreement and the Act, the Limited Partners shall constitute a single class or group of limited partners.

Limited Partner Interest” means a Partnership Interest of a Limited Partner in the Partnership representing a fractional part of the Partnership Interests of all Partners and includes any and all benefits to which the holder of such a Partnership Interest may be entitled, as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Limited Partner Interest may be (but is not required to be) expressed as a number of Partnership Units.

Liquidating Event” has the meaning set forth in Section 13.1.

Liquidating Gains” means any net gain realized in connection with the actual or hypothetical sale of all or substantially all of the assets of the Partnership (including upon the occurrence of any event of liquidation of the Partnership), including but not limited to the net gain realized in connection with an adjustment to the Carrying Value of Partnership assets under Section 1.D of Exhibit B attached hereto.

 

8


Liquidating Losses” means any net loss realized in connection with the actual or hypothetical sale of all or substantially all of the assets of the Partnership (including upon the occurrence of any event of liquidation of the Partnership), including but not limited to the net loss realized in connection with an adjustment to the Carrying Value of Partnership assets under Section 1.D of Exhibit B attached hereto.

Liquidator” has the meaning set forth in Section 13.2.

Net Income” means, for any taxable period, the excess, if any, of the Partnership’s items of income and gain for such taxable period over the Partnership’s items of loss and deduction for such taxable period. The items included in the calculation of Net Income shall be determined in accordance with U.S. federal income tax accounting principles, subject to the specific adjustments provided for in Section 1.B of Exhibit B.

Net Loss” means, for any taxable period, the excess, if any, of the Partnership’s items of loss and deduction for such taxable period over the Partnership’s items of income and gain for such taxable period. The items included in the calculation of Net Loss shall be determined in accordance with federal income tax accounting principles, subject to the specific adjustments provided for in Section 1.B of Exhibit B.

Non-Approving Partners” has the meaning set forth in Section 11.6(A).

Nonrecourse Deductions” has the meaning set forth in Regulations Section 1.704-2(b)(1), and the amount of Nonrecourse Deductions for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(c).

Nonrecourse Liability” has the meaning set forth in Regulations Section 1.752-1(a)(2).

Notice of Redemption” means the Notice of Redemption substantially in the form of Exhibit D to this Agreement.

Operating Partnership” means NexPoint Real Estate Finance Operating Partnership, L.P.

OP Units” means common partnership units of the Operating Partnership.

OP Unit Amount” means a number of OP Units equal to the product of (i) the number of Partnership Units offered for redemption by a Redeeming Partner, and (ii) the Conversion Factor; provided that in the event the Operating Partnership issues to all holders of OP Units rights, options, warrants or convertible or exchangeable securities entitling the holders of OP Units to subscribe for or purchase OP Units, or any other securities or property (collectively, the “rights”), and the Operating Partnership can issue such rights to the Redeeming Partner, then the OP Unit Amount shall also include such rights that a holder of that number of OP Units would be entitled to receive.

 

9


Partner” means a General Partner or a Limited Partner, and “Partners” means the General Partner and the Limited Partners collectively.

Partner Minimum Gain” means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Regulations Section 1.704-2(i)(3).

Partner Nonrecourse Debt” has the meaning set forth in Regulations Section 1.704-2(b)(4).

Partner Nonrecourse Deductions” has the meaning set forth in Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(i)(2).

Partnership” has the meaning set forth in the recitals hereto.

Partnership Interest” means an ownership interest in the Partnership held by a Partner and includes any and all benefits to which the holder of such a partnership interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Partnership Interest may be (but is not required to be) expressed as a number of Partnership Units.

Partnership Minimum Gain” has the meaning set forth in Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in a Partnership Minimum Gain, for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(d).

Partnership Record Date” means the record date established by the General Partner for the distribution of Available Cash pursuant to Section 5.1 hereof, which record date shall be the same as the record date established by the Company for a distribution to its shareholders of some or all of its portion of such distribution.

Partnership Representative” has the meaning set forth in Section 10.3(A).

Partnership Unit” means a fractional, undivided share of the Partnership Interests of all Partners issued pursuant to Sections 4.1 and 4.2 and any other classes or series of Partnership Units established after the date hereof. The number of Partnership Units outstanding and the Percentage Interest in the Partnership represented by such Partnership Units are set forth in Exhibit A attached hereto, as such Exhibit may be amended, restated and/or supplemented from time to time.

 

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Partnership Year” means the fiscal year of the Partnership, which shall be the calendar year.

Percentage Interest” means, as to a Partner, its interest in the Partnership as determined by dividing the Partnership Units owned by such Partner by the total number of Partnership Units then outstanding and as specified in Exhibit A attached hereto, as such Exhibit may be amended from time to time.

Person” means an individual or a real estate investment trust, corporation, partnership, limited liability company, trust, estate, unincorporated organization, association or other entity.

Prior Agreement” has the meaning set forth in the recitals hereto.

Qualified REIT Subsidiary” means a qualified REIT subsidiary of the Company within the meaning of Section 856(i)(2) of the Code.

Recapture Income” means any gain recognized by the Partnership upon the disposition of any property or asset of the Partnership, which gain is characterized as ordinary income because it represents the recapture of deductions previously taken with respect to such property or asset.

Redeeming Partner” has the meaning set forth in Section 8.6(A).

Redemption Right” shall have the meaning set forth in Section 8.6(A).

Regulations” means the Income Tax Regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).

REIT” means a real estate investment trust under Section 856 of the Code.

REIT Shares” means shares of common stock, $0.01 par value per share, of the Company.

Residual Gain” or “Residual Loss” means any item of gain or loss, as the case may be, of the Partnership recognized for federal income tax purposes resulting from a sale, exchange or other disposition of Contributed Property or Adjusted Property, to the extent such item of gain or loss is not allocated pursuant to Section 2(B)(1)(a) or 2(B)(2)(a) of Exhibit C to eliminate Book-Tax Disparities.

Sale of the Partnership” means (a) a sale or other disposition of all or substantially all of the assets of the Partnership or a related series of transactions that taken together, result in the sale or other disposition of all or substantially all of the assets of the Partnership, (b) a transaction or series of related transactions in which a Person, or group of related Persons, acquires more than 50% of the outstanding Partnership Units, or (c) the merger or consolidation of the Partnership with or into another Person that is not (i) an Affiliate of the Partnership or (ii) a Partner, in each case in clauses (b) and (c) above, under circumstances in which the holders of a majority of Partnership Units, immediately prior to such transaction, own less than a majority in voting power of the surviving or resulting Person immediately following such transaction.

 

11


Securities Act” means the Securities Act of 1933, as amended.

Specified Redemption Date” means the 10th Business Day after receipt by the Partnership of a Notice of Redemption; provided, that if the Operating Partnership combines its outstanding OP Units, no Specified Redemption Date shall occur after the record date of such combination of OP Units and prior to the effective date of such combination.

Subsidiary” means, with respect to any Person, any real estate investment trust, corporation, partnership, limited liability company or other entity of which (a) a majority of (i) the voting power of the voting equity securities; or (ii) the outstanding equity interests, is owned, directly or indirectly, by such Person or (b) such Person acts as the general partner, sole member or sole manager.

Substituted Limited Partner” means a Person who is admitted as a Limited Partner to the Partnership pursuant to Section 11.4.

Target Balance” has the meaning set forth in Section 1(H)(1) of Exhibit C attached hereto.

Tenant” means any tenant from which the Company derives rent either directly or indirectly through partnerships or limited liability companies, including the Partnership.

Trading Days” means days on which the primary trading market for REIT Shares, if any, is open for trading.

Transaction” has the meaning set forth in Section 15.12.

transfer”, when used in this Article 11, has the meaning set forth in Section 11.1(A).

Unrealized Gain” attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (i) the fair market value of such property (as determined under Exhibit B hereof) as of such date; over (ii) the Carrying Value of such property (prior to any adjustment to be made pursuant to Exhibit B hereof) as of such date.

Unrealized Loss” attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (i) the Carrying Value of such property (prior to any adjustment to be made pursuant to Exhibit B hereof) as of such date; over (ii) the fair market value of such property (as determined under Exhibit B hereof) as of such date.

 

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Valuation Date” means the date of receipt by the General Partner of a Notice of Redemption or, if such date is not a Business Day, the first Business Day thereafter.

Value” means, with respect to an OP Unit, the greater of (i) the Company’s most recent net asset value as determined by the Board of Directors and (ii) if the REIT Shares are listed or admitted to trading on any national securities exchange, the volume weighted average price for the 10 consecutive Trading Days immediately preceding the Valuation Date. If the REIT Shares are not listed or admitted to trading on any national securities exchange, the volume weighted average price with respect to a REIT Share will be the volume weighted average price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the General Partner or if no such closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than 10 days prior to the date in question) for which prices have been so reported; provided, that if there are no bid and asked prices reported during the 10 days prior to the date in question, the Value of the REIT Shares shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. In the event the OP Unit Amount includes rights that a holder of OP Units would be entitled to receive, then the Value of such rights shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate.

ARTICLE 2.

ORGANIZATIONAL MATTERS

Section 2.1. Continuation

The Partners hereby continue the Partnership as a limited partnership under and pursuant to the Act. Except as expressly provided herein to the contrary, the rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by the Act. The Partnership Interest of each Partner shall be personal property for all purposes.

Section 2.2. Name

The name of the Partnership heretofore formed and continued hereby shall be                 . The Partnership’s business may be conducted under any other name or names deemed advisable by the General Partner following the direction and approval of the Board of Directors. The words “Limited Partnership,” “L.P.,” “Ltd.” or similar words or letters shall be included in the Partnership’s name where necessary for the purposes of complying with the laws of any jurisdiction that so requires. The General Partner, following the direction and approval of the Board of Directors, may change the name of the Partnership at any time and from time to time and shall notify the Limited Partners of such change in the next regular communication to the Limited Partners.

 

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Section 2.3. Registered Office and Agent; Principal Office

The address of the registered office of the Partnership in the State of Delaware is 1209 Orange Street, Wilmington, New Castle County, Delaware, 19801 and the registered agent for service of process on the Partnership in the State of Delaware shall be The Corporation Trust Company. The principal office of the Partnership shall be 300 Crescent Court, Suite 700, Dallas, Texas 75201 or such other place as the General Partner, following the direction and approval of the Board of Directors, may from time to time designate by notice to the Limited Partners. The Partnership may maintain offices at such other place or places within or outside the State of Delaware as the General Partner and the Board of Directors deems advisable.

Section 2.4. Power of Attorney

A. Each Limited Partner and each Assignee hereby constitutes and appoints the General Partner, any Liquidator, and authorized officers and attorneys-in-fact of each, and each of those acting singly, in each case with full power of substitution, as its true and lawful agent and attorney-in-fact, with full power and authority in its name, place and stead to execute, swear to, acknowledge, deliver, file and record in the appropriate public offices (a) all certificates, documents and other instruments (including, without limitation, this Agreement and the Certificate and all amendments or restatements thereof) that the General Partner or the Liquidator deems appropriate or necessary to form, qualify or continue the existence or qualification of the Partnership as a limited partnership (or a partnership in which the Limited Partners have limited liability) in the State of Delaware and in all other jurisdictions in which the Partnership may or plans to conduct business or own property; (b) all instruments that the General Partner deems appropriate or necessary to reflect any amendment, change, modification or restatement of this Agreement in accordance with its terms; (c) all conveyances and other instruments or documents that the General Partner or the Liquidator deems appropriate or necessary to reflect the dissolution and winding up of the Partnership pursuant to the terms of this Agreement, including, without limitation, a certificate of cancellation; (d) all instruments relating to the admission, withdrawal, removal or substitution of any Partner pursuant to Articles 11, 12 or 13 hereof or the Capital Contribution of any Partner; and (e) all conveyances and other instruments or documents that the General Partner or the Liquidator deems appropriate or necessary to reflect the distribution or exchange of assets of the Partnership pursuant to the terms of this Agreement. Nothing contained herein shall be construed as authorizing the General Partner or any Liquidator to amend this Agreement except in accordance with Article 14 hereof or as may be otherwise expressly provided for in this Agreement.

 

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B. The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, in recognition of the fact that each of the Partners will be relying upon the power of the General Partner and any Liquidator to act as contemplated by this Agreement in any filing or other action by it on behalf of the Partnership, and it shall survive and not be affected by the subsequent Incapacity of any Limited Partner or Assignee and the transfer of all or any portion of such Limited Partner’s or Assignee’s Partnership Units and shall extend to such Limited Partner’s or Assignee’s heirs, successors, assigns and personal representatives. Each such Limited Partner or Assignee hereby agrees to be bound by any representation made by the General Partner or any Liquidator, acting in good faith pursuant to such power of attorney, and each such Limited Partner or Assignee hereby waives any and all defenses which may be available to contest, negate or disaffirm the action of the General Partner or any Liquidator, taken in good faith under such power of attorney. Each Limited Partner or Assignee shall execute and deliver to the General Partner or the Liquidator, within 15 days after receipt of the General Partner’s or Liquidator’s request therefor, such further designation, powers of attorney and other instruments as the General Partner or the Liquidator, as the case may be, deems necessary to effectuate this Agreement and the purposes of the Partnership.

C. Notwithstanding anything in this Section 2.4, no General Partner, Liquidator, or authorized officer or attorney-in-fact of either, may exercise the power and authority under this Section 2.4 without the prior approval of the Board of Directors.

Section 2.5. Term

The term of the Partnership commenced on the date that the Certificate was filed with the Secretary of State of the State of Delaware and shall continue until dissolved pursuant to the provisions of Article 13 or as otherwise provided by law.

Section 2.6. Admission of Partners

On the date hereof, and upon its execution and delivery of a counterpart to this Agreement, (a) each of the Persons identified as a limited partner of the Partnership on Exhibit A to this Agreement is upon its delivery to the Partnership of its initial Capital Contribution, such initial Capital Contribution specified on Exhibit A of this Agreement pursuant to Section 4.1, hereby admitted to the Partnership as a limited partner of the Partnership, and (b) the General Partner is hereby admitted to the Partnership as general partner of the Partnership. Immediately following the admission of the General Partner as the general partner, the Initial General Partner, by its execution and delivery of a counterpart of this Agreement, shall withdraw and be deemed withdrawn from the Partnership and shall have no further or continuing interest in the Partnership. By execution and delivery of a counterpart of this Agreement, the Initial Limited Partner’s Partnership Units shall be redeemed and the Initial Limited Partner shall have no further or continuing interest in the Partnership. Each Limited Partner being admitted to the Partnership from time to time after the date hereof shall be deemed admitted to the Partnership as a limited partner of the Partnership upon such Limited Partner’s execution and delivery of a counterpart to this Agreement and delivery to the Partnership of its initial Capital Contribution, such initial Capital Contribution specified on Exhibit A of this Agreement pursuant to Section 4.1.

 

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ARTICLE 3.

PURPOSE

Section 3.1. Purpose and Business

The purpose and nature of the business to be conducted by the Partnership is (i) to conduct any business that may be lawfully conducted by a limited partnership formed pursuant to the Act; provided, however, that such business shall be limited to and conducted in such a manner as to permit the Company at all times to qualify as a REIT, unless the Company ceases to qualify as a REIT for reasons other than as a result of the conduct of the business of the Partnership or voluntarily revokes its election to be a REIT; (ii) to enter into any partnership, joint venture or other similar arrangement to engage in any of the foregoing or to own interests in any entity engaged in any of the foregoing; and (iii) to do anything necessary, convenient or incidental to the foregoing. In connection with the foregoing, and without limiting the Company’s right, in its sole discretion, to cease qualifying as a REIT, the Partners acknowledge that the Company’s current status as a REIT inures to the benefit of all of the Partners and not solely to the General Partner, the Company or their Affiliates.

Section 3.2. Powers

The Partnership shall be empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and business described herein and for the protection and benefit of the Partnership, and shall have, without limitation, any and all of the powers that may be exercised on behalf of the Partnership by the General Partner pursuant to and according to the terms of this Agreement; provided, however, that the Partnership may not, without the General Partner’s consent, following the direction and approval of the Board of Directors, take, or refrain from taking, any action which, in the judgment of the General Partner, following the direction and approval of the Board of Directors, (i) could adversely affect the ability of the Company to qualify and to continue to qualify as a REIT; (ii) could subject the Company to any additional taxes under Section 857 or Section 4981 of the Code or any other related or successor provision of the Code; or (iii) could violate any law or regulation of any governmental body or agency having jurisdiction over the Company, its securities or the Partnership, unless such action (or inaction) under clause (i), clause (ii) or clause (iii) above shall have been specifically consented to by the Company in writing.

Section 3.3. Representations and Warranties by the Parties

A. Each Partner that is an individual represents and warrants to each other Partner that (i) such Partner has the legal capacity to enter into this Agreement and perform such Partner’s obligations hereunder, (ii) the consummation of the transactions contemplated by this Agreement to be performed by such Partner will not result in a breach or violation of, or a default under, any agreement by which such Partner or any of such Partner’s property is or are bound, or any statute, regulation, order or other law to which such Partner is subject, (iii) such Partner is a “United States person” within the meaning of Section 7701(a)(30) of the Code, and (iv) this Agreement is binding upon, and enforceable against, such Partner in accordance with its terms.

 

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B. Each Partner that is not an individual represents and warrants to each other Partner that (i) its execution and delivery of this Agreement and all transactions contemplated by this Agreement to be performed by it have been duly authorized by all necessary action, including without limitation, that of its general partner(s), committee(s), trustee(s), beneficiaries, director(s) and/or shareholder(s), as the case may be, as required, (ii) the consummation of such transactions shall not result in a breach or violation of, or a default under, its certificate of limited partnership, partnership agreement, trust agreement, limited liability company operating agreement, declaration of trust, charter or bylaws, as the case may be, any agreement by which such Partner or any of such Partner’s properties or any of its partners, beneficiaries, trustees or shareholders, as the case may be, is or are bound, or any statute, regulation, order or other law to which such Partner or any of its partners, trustees, beneficiaries or shareholders, as the case may be, is or are subject, (iii) such Partner is a “United States person” within the meaning of Section 7701(a)(30) of the Code and (iv) this Agreement is binding upon, and enforceable against, such Partner in accordance with its terms.

C. Each Partner represents, warrants and agrees that it has acquired and continues to hold its interest in the Partnership for its own account for investment only and not for the purpose of, or with a view toward, the resale or distribution of all or any part thereof, nor with a view toward selling or otherwise distributing such interest or any part thereof at any particular time or under any predetermined circumstances. Each Partner further represents and warrants that it is a sophisticated investor, able and accustomed to handling sophisticated financial matters for itself, particularly real estate investments, and that it has a sufficiently high net worth that it does not anticipate a need for the funds it has invested in the Partnership in what it understands to be a highly speculative and illiquid investment.

D. Each Partner further represents, warrants, covenants and agrees as follows:

(1) Except as provided in Exhibit F hereto, at any time such Partner actually or Constructively Owns a 25% or greater capital interest or profits interest in the Partnership, it does not and will not, without the approval of the Board of Directors, actually own or Constructively Own (a) with respect to any Tenant that is a corporation, any stock of such Tenant, and (b) with respect to any Tenant that is not a corporation, any interest in either the assets or net profits of such Tenant.

(2) Upon request of the General Partner, it will promptly disclose to the General Partner and the Company the amount of REIT Shares or other capital shares of the Company that it actually owns or Constructively Owns.

 

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(3) Without the approval of the Board of Directors, no Partner shall take any action that would cause the Partnership at any time to have more than 100 partners (including as partners those Persons indirectly owning an interest in the Partnership through a partnership, limited liability company, S corporation or grantor trust (such entity, a “flow through entity”), but only if substantially all of the value of such person’s interest in the flow through entity is attributable to the flow through entity’s interest (direct or indirect) in the Partnership).

E. The representations and warranties contained in this Section 3.3 shall survive the execution and delivery of this Agreement by each Partner and the dissolution and winding up of the Partnership.

F. Each Partner hereby acknowledges that no representations as to potential profit, cash flows, funds from operations or yield, if any, in respect of the Partnership or the Company have been made by any Partner or any employee or representative or Affiliate of any Partner, and that projections and any other information, including, without limitation, financial and descriptive information and documentation, which may have been in any manner submitted to such Partner shall not constitute any representation or warranty of any kind or nature, express or implied.

G. Each Partner understands that if, for any reason, (a) the representations, warranties or agreements set forth in this Section 3.3 are violated, or (b) the Partnership’s actual or Constructive Ownership of REIT Shares or other capital shares of the Company violates the limitations set forth in the Charter, then (x) some or all of the Redemption Rights of the Partners may become non-exercisable, and (y) some or all of the REIT Shares owned by the Partners may be automatically transferred to a trust for the benefit of a charitable beneficiary, as provided in the Charter.

Section 3.4. Not Publicly Traded

The Partners intend for the Partnership to be treated as a partnership for United States federal income tax purposes and no election to the contrary shall be made. The General Partner, on behalf of the Partnership, shall use its best efforts not to take any action which would result in the Partnership being a publicly traded partnership within the meaning of either Section 469(k)(2) or 7704(b) of the Code. Subject to this Section 3.4, it is expressly acknowledged and agreed by the Partners that the General Partner may, following the direction and approval of the Board of Directors, waive or otherwise modify the application with respect to any Partner(s) or Assignee(s) of any provision herein restricting, prohibiting or otherwise relating to (i) the transfer of a Limited Partner Interest or the Partnership Units evidencing the same, (ii) the admission of any Limited Partners and (iii) the Redemption Rights of such Partners, and that such waivers or modifications may be made by the General Partner at any time or from time to time, including, without limitation, concurrently with the issuance of any Partnership Units pursuant to the terms of this Agreement.

 

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ARTICLE 4.

CAPITAL CONTRIBUTIONS

Section 4.1. Capital Contributions of the Partners

At the time of their respective execution of this Agreement, the Partners shall make or shall have made Capital Contributions as set forth in Exhibit A to this Agreement. The Partners shall own Partnership Units of the class or series and in the amounts set forth in Exhibit A and shall have a Percentage Interest in the Partnership as set forth in Exhibit A, which Percentage Interest shall be adjusted in Exhibit A from time to time by the General Partner to the extent necessary to reflect accurately exchanges, redemptions, additional Capital Contributions, the issuance of additional Partnership Units (pursuant to any merger or otherwise), or similar events having an effect on any Partner’s Percentage Interest. Except as provided in Section 4.2, Section 4.3, and Section 10.4, the Partners shall have no obligation to make any additional Capital Contributions or loans to the Partnership. Each Limited Partner that contributes any Contributed Property shall promptly provide the General Partner and the Board of Directors, upon either of their request, with any information regarding such Contributed Property, including for Partnership tax return reporting purposes.

Section 4.2. Issuances of Additional Partnership Interests

The General Partner is hereby authorized, following the direction and approval of the Board of Directors, to cause the Partnership from time to time to issue to any existing Partner (including the General Partner and the Company) or to any other Person, and to admit such Person as a limited partner in the Partnership, Partnership Units (including, without limitation, Common Units and preferred Partnership Units) or other Partnership Interests, in each case in exchange for the contribution by such Person of property or other assets, in one or more classes, or one or more series of any of such classes, or otherwise with such designations, preferences, redemption and conversion rights and relative, participating, optional or other special rights, powers and duties, including rights, powers and duties senior to Limited Partner Interests, all as shall be determined by the General Partner (following the direction and approval of the Board of Directors) subject to Delaware law, including, without limitation, (i) the allocations of items of Partnership income, gain, loss, deduction and credit to each such class or series of Partnership Interests; (ii) the right of each such class or series of Partnership Interests to share in Partnership distributions; and (iii) the rights of each such class or series of Partnership Interests upon dissolution and liquidation of the Partnership.

 

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Section 4.3. Additional Funds

A. The General Partner may, following the direction and approval of the Board of Directors, reasonably determine from time to time that the Partnership requires additional funds (“Additional Funds”) for the acquisition of additional assets, for the redemption of Partnership Units or for other reasonable purposes. Subject to Section 7.1, Additional Funds may be obtained by the Partnership, at the election of the General Partner (following the direction and approval of the Board of Directors), in any manner provided in, and in accordance with, the terms of this Section 4.3, without the approval of any Limited Partner (unless such approval is required under the terms of this Agreement).

B. Subject to the approval of the Board of Directors contemplated by Section 4.3(A) and the limitations set forth in Section 7.1, the General Partner, on behalf of the Partnership, may obtain any Additional Funds by accepting Capital Contributions from any Partners or other Persons. In connection with any such Capital Contribution, the General Partner is hereby authorized to cause the Partnership from time to time to issue additional Partnership Units (as set forth in Section 4.2 above) in consideration therefor, and the Percentage Interests of the Partners shall be adjusted to reflect the issuance of such additional Partnership Units.

C. Subject to the approval of the Board of Directors contemplated by Section 4.3(A) and the limitations set forth in Section 7.1, the General Partner, on behalf of the Partnership, may obtain any Additional Funds by causing the Partnership to incur Debt upon such terms as the General Partner determines appropriate (following the direction and approval of the Board of Directors of such terms), including making such Debt convertible, redeemable or exchangeable for Partnership Units, OP Units or REIT Shares; provided, however, that the Partnership shall not incur any such Debt if such Debt is recourse to any Partner (unless the Partner otherwise agrees).

D. Following the direction and approval of the Board of Directors and subject to the limitations set forth in Section 7.1, the General Partner, on behalf of the Partnership, may obtain any Additional Funds by causing the Partnership to incur Debt with the Company; provided, however, that the Partnership shall not incur any such Debt if (a) a breach, violation or default of such Debt would be deemed to occur by virtue of the transfer of any Partnership Interest, or (b) such Debt is recourse to any Partner (unless the Partner otherwise agrees).

Section 4.4. Preemptive Rights

No Person shall have any preemptive, preferential or other similar right with respect to (i) additional Capital Contributions or loans to the Partnership; or (ii) the issuance or sale of any Partnership Units or other Partnership Interests.

Section 4.5. No Interest

No Partner shall be entitled to interest on its Capital Contribution or on such Partner’s Capital Account unless determined by the General Partner following the direction and approval of the Board of Directors.

 

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ARTICLE 5.

DISTRIBUTIONS

Section 5.1. Requirement and Characterization of Distributions

The General Partner shall distribute at least quarterly a portion of Available Cash generated by the Partnership during such quarter or shorter period, such portion as determined by the General Partner following the direction and approval of the Board of Directors, to the Partners that are Partners on the Partnership Record Date with respect to such quarter or shorter period in accordance with their Percentage Interests; provided, that in no event may a Partner receive a distribution of Available Cash with respect to a Partnership if such Partner is entitled to receive a distribution out of such Available Cash with respect to an OP Unit or a REIT Share for which such Partnership Unit has been exchanged, and any such distribution shall be made to the Operating Partnership or the Company.

Section 5.2. Amounts Withheld

All amounts withheld pursuant to the Code or any provisions of any state, local or non-U.S. tax law and Section 10.4 hereof with respect to any allocation, payment or distribution to any Partner or Assignee shall be treated as amounts distributed to such Partner or Assignee pursuant to Section 5.1 for all purposes under this Agreement.

Section 5.3. Distributions Upon Liquidation

Proceeds from a Sale of the Partnership and any other cash received or reductions in reserves made after commencement of the liquidation of the Partnership shall be distributed to the Partners in accordance with Section 13.2.

Section 5.4. Restricted Distributions

Notwithstanding any provision to the contrary contained in this Agreement, the Partnership, and the General Partner on behalf of the Partnership, shall not make a distribution to any Partner on account of its interest in the Partnership if such distribution would violate Section 17-607 of the Act or other applicable law.

Section 5.5. Compliance with REIT Requirements

The General Partner shall make such reasonable efforts, following the direction and approval of the Board of Directors and consistent with the Company’s qualification as a REIT, to cause the Partnership to distribute sufficient amounts to enable the Company, for so long as the Company has determined to qualify as a REIT, to pay stockholder dividends that will (a) satisfy the requirements for qualifying as a REIT under the Code and Regulations (the “REIT Requirements”) and (b) except to the extent otherwise determined by the Company, eliminate any federal income or excise tax liability of the Company.

 

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ARTICLE 6.

ALLOCATIONS

Section 6.1. Allocations For Capital Account Purposes

A. After giving effect to the special allocations set forth in Section 1 of Exhibit C attached hereto for the applicable taxable year or other allocation period, and subject to Section 4 of Exhibit B attached hereto, Net Income for each taxable year or other allocation period shall be allocated to the Partners’ Capital Accounts in the following order of priority:

(1) First, to the General Partner until the cumulative Net Income allocated to the General Partner under this Section 6.1(A)(1) equals the cumulative Net Loss allocated to the General Partner under Section 6.1(B)(2);

(2) Next, to the holders of Common Units until the cumulative Net Income allocated to such holders under this Section 6.1(A)(2) equals the cumulative Net Loss allocated to such holders under Section 6.1(B)(1) (pro rata in accordance with the excess of such Net Loss over such Net Income for each such holder); and

(3) Thereafter, to the holders of Common Units pro rata in accordance with their respective Percentage Interests.

B. After giving effect to the special allocations set forth in Section 1 of Exhibit C attached hereto for the applicable taxable year or other allocation period, and subject to Section 4 of Exhibit B attached hereto, Net Loss for each taxable year or other allocation period shall be allocated to the Partners’ Capital Accounts in the following order of priority.

(1) First, to the holders of Common Units with positive balances in their Economic Capital Account Balances in accordance with such balances until their Economic Capital Account Balances are reduced to zero; and

(2) Thereafter, to the General Partner.

 

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ARTICLE 7.

MANAGEMENT AND OPERATIONS OF BUSINESS

Section 7.1. Management

A. Except as otherwise expressly provided in this Agreement, all management powers over the business and affairs of the Partnership are and shall be exclusively vested in the General Partner, and no Limited Partner or other Person shall have any right to participate in or exercise control or management power over the business and affairs of the Partnership. The General Partner may be removed, with or without cause by the holders of a majority of the Common Units outstanding, subject to the approval of the Board of Directors. In addition to the powers now or hereafter granted to a general partner of a limited partnership under applicable law or which are granted to the General Partner under any other provision of this Agreement, the General Partner, subject to the terms of this Agreement, shall have full power and authority to do all things deemed necessary, desirable or convenient by it to conduct the business of the Partnership, to exercise all powers set forth in Section 3.2 hereof and to effectuate the purposes set forth in Section 3.1 hereof. Notwithstanding the foregoing, the General Partner shall not do any of the following without the prior approval of the Board of Directors:

(1) the making of any expenditures, the lending or borrowing of money (including, without limitation, making prepayments on loans and borrowing money to permit the Partnership to make distributions to its Partners in such amounts as will permit the Company (so long as the Company desires to maintain its qualification as a REIT) to avoid the payment of any U.S. federal income tax (including, for this purpose, any excise tax pursuant to Section 4981 of the Code) and to make distributions to its shareholders in amounts sufficient to permit the Company to maintain its REIT status), the assumption or guarantee of, or other contracting for, indebtedness and other liabilities, the issuance of evidence of indebtedness (including the securing of the same by deed, mortgage, deed of trust or other lien or encumbrance on the Partnership’s assets or any assets of its Subsidiaries) and the incurring of any obligations it deems necessary for the conduct of the activities of the Partnership;

(2) the making of tax, regulatory and other filings or elections, or rendering of periodic or other reports to governmental or other agencies having jurisdiction over the business or assets of the Partnership;

(3) the acquisition, disposition, mortgage, pledge, encumbrance, hypothecation or exchange of any assets of the Partnership (including the exercise or grant of any conversion, option, privilege, or subscription right or other right available in connection with any assets at any time held by the Partnership) or the merger or other combination of the Partnership with or into another entity (all of the foregoing subject to any prior approval only to the extent required by Section 7.3 hereof);

(4) the mortgage, pledge, encumbrance or hypothecation of any assets of the Partnership, the use of the assets of the Partnership (including, without limitation, cash on hand) for any purpose consistent with the terms of this Agreement and on any terms that it sees fit, including, without limitation, the financing of the conduct of the operations of the Partnership, the Company or any of the Partnership’s or the Company’s Subsidiaries, the lending of funds to other Persons (including, without limitation, the Subsidiaries of the Partnership and/or the Company) and the repayment of obligations of the Partnership and its Subsidiaries and any other Person in which it has an equity investment, and the making of capital contributions to its Subsidiaries;

 

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(5) the negotiation, execution, delivery and performance of any contracts (including leases), conveyances or other instruments that the General Partner considers useful or necessary or convenient to the conduct of the Partnership’s operations or the implementation of the General Partner’s powers under this Agreement, including, without limitation, contracting with consultants, accountants, legal counsel, other professional advisors and other agents and the payment of their expenses and compensation out of the Partnership’s assets;

(6) the distribution of Partnership cash or other Partnership assets in accordance with this Agreement;

(7) holding, managing, investing and reinvesting cash and other assets of the Partnership;

(8) the amending, restating and/or supplementing of this Agreement or the Certificate;

(9) the establishment of one or more divisions of the Partnership, the selection and dismissal of employees of the Partnership (including, without limitation, employees who may be designated as officers with titles such as “president,” “vice president,” “secretary” and “treasurer” of the Partnership), and agents, outside attorneys, accountants, consultants and contractors of the Partnership, and the determination of their compensation and other terms of employment or hiring;

(10) the formation of, or acquisition of an interest in, and the contribution of property to, any further limited or general partnerships, limited liability companies, real estate investment trusts, corporations, entities that are treated as REITs, “taxable REIT subsidiaries” or as foreign corporations for federal income tax purposes, joint ventures or other relationships that it deems desirable (including, without limitation, the acquisition of interests in, and the contributions of property or the making of loans to, its or the Company’s Subsidiaries and any other Person in which it has an equity investment from time to time or the incurrence of indebtedness on behalf of such Persons or the guarantee of obligations of such Persons and the making of any tax, regulatory or other filing or election with respect to any of the foregoing Persons); provided, that as long as the Company has determined to continue to qualify as a REIT, the Partnership may not engage in any such formation, acquisition or contribution that would cause the Company to fail to qualify as a REIT;

 

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(11) the control of any matters affecting the rights and obligations of the Partnership, including the settlement, compromise, submission to arbitration or any other form of dispute resolution, or abandonment of, any claim, cause of action, liability, Debt or damages, due or owing to or from the Partnership, the commencement or defense of suits, legal proceedings, administrative proceedings, arbitrations or other forms of dispute resolution, and the representation of the Partnership in all suits or legal proceedings, administrative proceedings, arbitrations or other forms of dispute resolution, the incurrence of legal expense, and the indemnification of any Person against liabilities and contingencies to the extent permitted by law;

(12) the undertaking of any action in connection with the Partnership’s direct or indirect investment in any Subsidiary or any other Person (including, without limitation, the contribution or loan of funds by the Partnership to such Persons);

(13) the determination of the fair market value of any Partnership property distributed in kind using such reasonable method of valuation as the General Partner may adopt;

(14) the enforcement of any rights against any Partner pursuant to representations, warranties, covenants and indemnities relating to such Partner’s contribution of property or assets to the Partnership;

(15) the exercise, directly or indirectly, through any attorney-in-fact acting under a general or limited power of attorney, of any right, including the right to vote, appurtenant to any asset or investment held by the Partnership;

(16) the exercise of any of the powers of the General Partner enumerated in this Agreement on behalf of or in connection with any Subsidiary of the Partnership or any other Person in which the Partnership has a direct or indirect interest, or jointly with any such Subsidiary or other Person;

(17) the exercise of any of the powers of the General Partner enumerated in this Agreement on behalf of any Person in which the Partnership does not have an interest pursuant to contractual or other arrangements with such Person;

(18) the making, execution, delivery and performance of any and all deeds, leases, notes, mortgages, deeds of trust, security agreements, conveyances, contracts, guarantees, warranties, indemnities, waivers, releases or legal instruments or agreements in writing necessary, appropriate or convenient, in the judgment of the General Partner, for the accomplishment of any of the powers of the General Partner enumerated in this Agreement;

(19) the issuance of additional Partnership Units and other partnership interests to any Partners or other Persons;

B. Subject to the rights of the Partners and the approval of the Board of Directors as set forth in this Agreement, including, but not limited to, Section 7.1, each of the Limited Partners agrees that the General Partner is authorized to execute, deliver and perform the above-mentioned agreements and transactions on behalf of the

 

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Partnership, and otherwise to exercise any power of the General Partner under this Agreement or the Act, without any further act, approval or vote of the Partners, notwithstanding any other provision of this Agreement (except as provided in Section 7.3), the Act or any applicable law, rule or regulation, to the fullest extent permitted under the Act or other applicable law, rule or regulation. The execution, delivery or performance by the General Partner or the Partnership of any agreement authorized or permitted under this Agreement shall not constitute a breach by the General Partner of any duty that the General Partner may owe the Partnership or the Limited Partners or any other Persons under this Agreement or of any duty stated or implied by law or equity.

C. At all times from and after the date hereof, the General Partner, following the direction and approval of the Board of Directors, may cause the Partnership to establish and maintain at any and all times working capital accounts and other cash or similar balances in such amounts as the General Partner, following the direction and approval of the Board of Directors, deems appropriate and reasonable from time to time.

D. In exercising its authority under this Agreement, the General Partner (solely to the extent directed by the Board of Directors, and in all cases in accordance with such direction from the Board of Directors) shall take into account the tax consequences to any Partner of any action taken (or not taken) by it. The General Partner, the Board of Directors and the Partnership shall not be liable to a Limited Partner under any circumstances as a result of an income tax or other tax liability incurred by such Limited Partner as a result of an action (or inaction) by the General Partner taken pursuant to its authority under this Agreement or at the direction of the Board of Directors.

Section 7.2. Certificate of Limited Partnership

The Initial General Partner filed the Certificate with the Secretary of State of the State of Delaware as required by the Act. The General Partner shall use all reasonable efforts to cause to be filed such other certificates or documents as may be reasonable and necessary or appropriate for the formation, continuation, qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware and any other state, or the District of Columbia, in which the Partnership may elect to do business or own property. To the extent that such action is determined by the General Partner to be reasonable and necessary or appropriate or convenient, the General Partner shall file amendments to and restatements of the Certificate and do all of the things to maintain the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) under the laws of the State of Delaware and each other state, or the District of Columbia, in which the Partnership may elect to do business or own property. Subject to the terms of Section 8.5(A)(2) hereof, the General Partner shall not be required, before or after filing, to deliver or mail a copy of the Certificate or any amendment thereto or restatement thereof to any Limited Partner.

 

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Section 7.3. Restrictions on General Partner Authority

The General Partner may not take any action in contravention of an express prohibition or limitation of this Agreement without the written consent of Limited Partners holding a majority of the Percentage Interests held by Limited Partners, or such other percentage of the Limited Partners as may be specifically provided for under a provision of this Agreement.

Section 7.4. Reimbursement of the General Partner and the Company

A. Except as provided in this Section 7.4 and elsewhere in this Agreement (including the provisions of Articles 5 and 6 regarding distributions, payments, and allocations to which it may be entitled), the General Partner shall not be compensated for its services as general partner of the Partnership.

B. The Partnership shall be responsible for and shall pay all expenses relating to the Partnership’s and the General Partner’s organization and the ownership of each of their assets and operations. The General Partner shall be reimbursed on a monthly basis for all expenditures that it reasonably incurs relating to the ownership and operation of, or for the benefit of, the Partnership; provided, that the amount of any such reimbursement shall be reduced by any interest earned by the General Partner with respect to bank accounts or other instruments or accounts held by it on behalf of the Partnership; and provided, further, that the General Partner shall not be reimbursed for any (i) trustees’/directors’ fees, (ii) income tax liabilities or (iii) filing or similar fees in connection with maintaining the General Partner’s continued existence that are incurred by the General Partner, but the Partners acknowledge that all other expenses of the General Partner is deemed to be for the benefit of the Partnership. Such reimbursement shall be in addition to any reimbursement made as a result of indemnification pursuant to Section 7.7 hereof. Included among the expenditures for which the General Partner shall be entitled to reimbursement hereunder shall be any payments of debt service made by the General Partner, in its capacity as General Partner, as guarantor or otherwise, with respect to indebtedness encumbering any property held by the Partnership.

Section 7.5. Outside Activities of the General Partner

The General Partner and any Affiliates of the General Partner shall only conduct the activities contemplated by this Agreement. Notwithstanding the foregoing, the General Partner and any Affiliates of the General Partner may (a) acquire Limited Partner Interests and shall be entitled to exercise all rights of a Limited Partner relating to such Limited Partner Interests and (b) acquire less than 5% of the equity securities of any Person, which securities are listed on any national securities exchange and the General Partner or such Affiliate has no other business relationship, direct or indirect, with the issuer of such securities. For the avoidance of doubt, family members of Affiliates of the General Partner are permitted to own real estate for commercial purposes.

 

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Section 7.6. Contracts with Affiliates

A. The Partnership may lend or contribute funds or other assets to, and borrow funds from, its or the Company’s Subsidiaries or other Persons in which it or the Company has an equity or other interests and such Persons may borrow funds from, and lend or contribute funds or assets to, the Partnership, on terms and conditions established by the General Partner, following the direction and approval of the Board of Directors. The foregoing authority shall not create any right or benefit in favor of any Subsidiary or any other Person.

B. Except as provided in Section 7.5, the Partnership may transfer assets to joint ventures, other partnerships, limited liability companies, real estate investment trusts, corporations or other business entities in which it is or thereby becomes a participant upon such terms and subject to such conditions consistent with this Agreement and applicable law as the General Partner deems appropriate, following the direction and approval of the Board of Directors.

C. Except as expressly permitted by this Agreement, neither the General Partner nor any of its Affiliates shall sell, transfer or convey any property to, or purchase any property from, the Partnership, directly or indirectly, except pursuant to transactions that are determined by the General Partner in good faith to be fair and reasonable following the direction and approval of the Board of Directors.

Section 7.7. Indemnification

A. To the fullest extent permitted by Delaware law, the Partnership shall indemnify each Indemnitee from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including, without limitation, attorneys’ fees and other legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the operations of the Partnership or the Company as set forth in this Agreement, in which such Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, except to the extent such Indemnitee acted in bad faith, or with gross negligence or willful misconduct. Without limitation, the foregoing indemnity shall extend to any liability of any Indemnitee, pursuant to a loan guaranty or otherwise for any indebtedness of the Partnership or any Subsidiary of the Partnership (including without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken subject to), and the General Partner is hereby authorized and empowered, on behalf of the Partnership, to enter into one or more indemnity agreements consistent with the provisions of this Section 7.7 in favor of any Indemnitee having or potentially having liability for any such indebtedness. Any indemnification pursuant to this Section 7.7 shall be made only out of the assets of the Partnership, and neither the General Partner nor any Limited Partner shall have any obligation to contribute to the capital of the Partnership, or otherwise provide funds, to enable the Partnership to fund its obligations under this Section 7.7.

 

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B. Reasonable expenses incurred by an Indemnitee who is a party to a proceeding shall be paid or reimbursed by the Partnership in advance of the final disposition of the proceeding, upon receipt by the Partnership of an undertaking by or on behalf of the Indemnitee to repay such amount if it shall be determined that the Indemnitee is not entitled to be indemnified as authorized in Section 7.7(A).

C. The indemnification provided by this Section 7.7 shall be in addition to any other rights to which an Indemnitee or any other Person may be entitled under any agreement, pursuant to any vote of the Partners, as a matter of law or otherwise, and shall continue as to an Indemnitee who has ceased to serve in such capacity unless otherwise provided in a written agreement pursuant to which such Indemnitees are indemnified.

D. The Partnership may purchase and maintain insurance, on behalf of the Indemnitees and such other Persons as the General Partner shall determine, against any liability that may be asserted against or expenses that may be incurred by such Person in connection with the Partnership’s activities, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement.

E. For purposes of this Section 7.7, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by it of its duties to the Partnership also imposes duties on, or otherwise involves services by, it to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute fines within the meaning of this Section 7.7; and actions taken or omitted by the Indemnitee with respect to an employee benefit plan in the performance of its duties for a purpose reasonably believed by it to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Partnership.

F. In no event may an Indemnitee subject any of the Partners to personal liability by reason of the indemnification provisions set forth in this Agreement.

G. An Indemnitee shall not be denied indemnification in whole or in part under this Section 7.7 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement.

H. The provisions of this Section 7.7 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons. Any amendment, modification or repeal of this Section 7.7 or any provision hereof shall be prospective only and shall not in any way affect the Partnership’s liability to any Indemnitee under this Section 7.7, as in effect immediately prior to such amendment, modification, or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.

 

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Section 7.8. Liability of the General Partner

A. Notwithstanding anything to the contrary set forth in this Agreement, none of the General Partner, its Affiliates, or any of their respective officers, trustees, directors, shareholders, partners, members, employees, representatives or agents or any officer, employee, representative or agent of the Partnership and its Affiliates (individually, a “Covered Person” and collectively, the “Covered Persons”) shall be liable for monetary damages to the Partnership, any Partners or any Assignees for losses sustained or liabilities incurred as a result of errors in judgment or of any act or omission if the Covered Person’s conduct did not constitute bad faith, gross negligence or willful misconduct.

B. The Limited Partners expressly acknowledge that the General Partner is acting on behalf of the Partnership, the Limited Partners and the Company collectively, that the General Partner is under no obligation to consider the separate interests of the Limited Partners (except as otherwise provided herein) in deciding whether to cause the Partnership to take (or decline to take) any actions. In the event of a conflict between the interests of the Company on the one hand and the Limited Partners on the other, the General Partner shall, consult with the Board of Directors, endeavor in good faith to resolve the conflict in a manner not adverse to either the Company or the Limited Partners; provided, however, that any such conflict that the General Partner in good faith determines cannot be resolved in a manner not adverse to either the Company or the Limited Partners shall be resolved in favor of the Company. The General Partner shall not be liable for monetary damages for losses sustained, liabilities incurred, or benefits not derived by Limited Partners in connection with such decisions; provided, that the General Partner has acted in good faith.

C. Subject to its obligations and duties as General Partner set forth in Section 7.1(A) hereof, the General Partner may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its employees and agents.

D. Any amendment, modification or repeal of this Section 7.8 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the Covered Person’s liability to the Partnership and the Limited Partners under this Section 7.8 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.

E. To the extent that, at law or in equity, a Covered Person has duties (including fiduciary duties) and liabilities relating thereto to the Partnership or to the Partners, any Covered Person acting under this Agreement or otherwise shall not be liable to the Partnership or to any Partner for its good faith reliance on the provisions of this Agreement. The provisions of this Agreement, to the extent that they restrict the duties and liabilities of a Covered Person otherwise existing at law or in equity, are agreed by the Partners to replace such other duties and liabilities of such Covered Person.

 

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Section 7.9. Other Matters Concerning the General Partner

A. The General Partner may rely and shall be protected in acting, or refraining from acting, upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties.

B. The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers, architects, engineers, environmental consultants and other consultants and advisers selected by it, following the direction and approval of the Board of Directors, and any act taken or omitted to be taken in reliance upon the opinion of such Persons as to matters which the General Partner reasonably believes to be within such Person’s professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion.

C. The General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers and duly appointed attorneys-in-fact. Each such attorney shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform each and every act and duty which is permitted or required to be done by the General Partner hereunder.

D. Notwithstanding any other provisions of this Agreement or the Act, any action of the General Partner on behalf of the Partnership or any decision of the General Partner to refrain from acting on behalf of the Partnership, undertaken in the good faith belief that such action or omission is necessary or advisable in order (i) to protect the ability of the Company to continue to qualify as a REIT; (ii) for the Company to otherwise satisfy the REIT Requirements; or (iii) to avoid the Company incurring any taxes under Section 337(d), 857, 1374 or 4981 of the Code, is expressly authorized under this Agreement and is deemed approved by all of the Limited Partners.

Section 7.10. Title to Partnership Assets

Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively, shall have any ownership interest in such Partnership assets or any portion thereof.

 

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Section 7.11. Reliance by Third Parties

Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner has full power and authority, without consent or approval of any other Partner or Person (unless set forth herein), to encumber, sell or otherwise use in any manner any and all assets of the Partnership and to enter into any contracts on behalf of the Partnership, and take any and all actions on behalf of the Partnership and such Person shall be entitled to deal with the General Partner as if the General Partner were the Partnership’s sole party in interest, both legally and beneficially. Each Limited Partner hereby waives any and all defenses or other remedies which may be available against such Person to contest, negate or disaffirm any action of the General Partner in connection with any such dealing. In no event shall any Person dealing with the General Partner or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the General Partner or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the General Partner or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (i) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect; (ii) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership; and (iii) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership.

ARTICLE 8.

RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS

Section 8.1. Limitation of Liability

Each Limited Partner acting in its capacity as such shall have no liability under this Agreement except for liability resulting from: (a) an act or omission on the part of such Limited Partner that was committed in bad faith or was the result of active and deliberate dishonesty; (b) in the case of any criminal proceeding, an act or omission that such Limited Partner had reasonable cause to believe was unlawful; (c) any transaction for which such Limited Partner actually received an improper personal benefit in money, property or services in violation or breach of any provision of this Agreement; or (d) as expressly provided in this Agreement or under the Act.

Section 8.2. Management of Business

No Limited Partner or Assignee (other than the General Partner, any of its Affiliates or any officer, trustee, director, member, employee or agent of the General Partner, the Partnership or any of their Affiliates, in their capacity as such) shall take part in the operation, management or control (within the meaning of the Act) of the Partnership’s business, transact any business in the Partnership’s name or have the

 

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power to sign documents for or otherwise bind the Partnership. The transaction of any such business by the General Partner, any of its Affiliates or any officer, trustee, director, member, employee or agent of the General Partner, the Partnership or any of their Affiliates, in their capacity as such, shall not affect, impair or eliminate the limitations on the liability of the Limited Partners or Assignees under this Agreement.

Section 8.3. Outside Activities of Limited Partners

Subject to any agreements entered into by a Limited Partner or its Affiliates with the Partnership or any of its Subsidiaries, any Limited Partner (other than the Company) and any officer, trustee, director, member, employee, agent, trustee, Affiliate or shareholder of any such Limited Partner shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities that are in direct competition with the Partnership or that are enhanced by the activities of the Partnership. Neither the Partnership nor any Partners shall have any rights by virtue of this Agreement in any business ventures of any Limited Partner or Assignee. None of the Limited Partners (other than the Company) nor any other Person shall have any rights by virtue of this Agreement or the Partnership relationship established hereby in any business ventures of any other Person and such Person shall have no obligation pursuant to this Agreement to offer any interest in any such business ventures to the Partnership, any Limited Partner or any such other Person, even if such opportunity is of a character which, if presented to the Partnership, any Limited Partner or such other Person, could be taken by such Person.

Section 8.4. Return of Capital

Except pursuant to the right of redemption set forth in Section 8.6, no Limited Partner shall be entitled to the withdrawal or return of its Capital Contribution, except to the extent of distributions made pursuant to this Agreement or upon termination of the Partnership as provided herein. Except to the extent provided by Exhibit C hereof or as otherwise expressly provided in this Agreement, no Limited Partner or Assignee shall have priority over any other Limited Partner or Assignee, either as to the return of Capital Contributions or as to profits, losses or distributions.

Section 8.5. Rights of Limited Partners Relating to the Partnership

A. In addition to the other rights provided by this Agreement or by the Act, and except as limited by Section 8.5(C), each Limited Partner shall have the right, for a purpose reasonably related to such Limited Partner’s interest as a limited partner in the Partnership, upon written demand with a statement of the purpose of such demand and at such Limited Partner’s own expense (including such copying and administrative charges as the General Partner may establish from time to time):

(1) to obtain a copy of the Partnership’s federal, state and local income tax returns for each Partnership Year;

 

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(2) to obtain a copy of this Agreement and the Certificate and all amendments thereto, together with executed copies of all powers of attorney pursuant to which this Agreement, the Certificate and all amendments thereto have been executed; and

(3) to obtain true and full information regarding the amount of cash and a description and statement of any other property or services contributed by each Partner and which each Partner has agreed to contribute in the future, and the date on which each became a Partner.

B. The Partnership shall notify each Limited Partner, upon request, of the then current Conversion Factor.

C. Notwithstanding any other provision of this Section 8.5, the General Partner may keep confidential from the Limited Partners for such period of time as the General Partner determines, following the direction and approval of the Board of Directors to be reasonable, any information that (i) the General Partner reasonably believes to be in the nature of trade secrets or other information, the disclosure of which the General Partner in good faith believes is not in the best interests of the Partnership or could damage the Partnership or its business; or (ii) the Partnership is required by law or by agreements with an unaffiliated third party to keep confidential.

Upon written request by any Limited Partner, the General Partner shall cause the ownership of Partnership Interests by such Limited Partner to be evidenced by a certificate in such form as the General Partner may determine with respect to any class of Partnership Interests issued from time to time under this Agreement. The General Partner may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Partnership alleged to have been lost, destroyed, stolen or mutilated, upon the making of an affidavit of that fact by the person claiming the certificate to be lost, destroyed, stolen or mutilated. Unless otherwise determined by the General Partner, the owner of such lost, destroyed, stolen or mutilated certificate or certificates, or his or her legal representative, shall be required, as a condition precedent to the issuance of a new certificate or certificates, to give the Partnership a bond in such sum as the General Partner may direct as indemnity against any claim that may be made against the Partnership.

Section 8.6. Redemption Right

A. Subject to Sections 8.6(B) and 8.6(C) hereof and at any time on or after such date as expressly provided for in any agreement entered into between the Partnership and any Limited Partner, each holder of a Common Unit (if other than the General Partner) shall have the right (the “Redemption Right”) to require the Partnership to redeem on a Specified Redemption Date all or a portion of the Partnership Units (provided that such Partnership Units constitute Common Units) held by such holder at a redemption price equal to and in the form of the Cash Amount to be paid by the Partnership; provided that the Partnership Units shall have been outstanding for at least one year; provided, further, that the General Partner, following the direction and

 

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approval of the Board of Directors, may allow a holder to exercise its Redemption Right prior to the Common Units being outstanding for one year in its discretion. The Redemption Right shall be exercised pursuant to a Notice of Redemption delivered to the Partnership (with a copy to the General Partner) by the holder who is exercising the redemption right (the “Redeeming Partner”); provided, however, that the Partnership shall not be obligated to satisfy such Redemption Right if the Operating Partnership elects to purchase the Partnership Units subject to the Notice of Redemption pursuant to Section 8.6(B). A holder under this Section 8.6(A) may not exercise the Redemption Right for less than 1,000 Partnership Units at any one time or, if such holder holds less than 1,000 Partnership Units, all of the Partnership Units held by such Partner. The Redeeming Partner shall have no right, with respect to any Partnership Units so redeemed, to receive any distributions paid on or after the Specified Redemption Date. The Assignee of any holder herein may exercise the rights of such Limited Partner pursuant to this Section 8.6(A), and such Limited Partner shall be deemed to have assigned such rights to such Assignee and shall be bound by the exercise of such rights by such Assignee. In connection with any exercise of such rights by an Assignee on behalf of a holder in this Section 8.6(A), the Cash Amount shall be paid by the Partnership directly to such Assignee and not to such holder. Any Partnership Units redeemed by the Partnership pursuant to this Section 8.6(A) shall be cancelled upon such redemption.

B. Notwithstanding the provisions of Section 8.6(A), a Limited Partner that exercises the Redemption Right shall be deemed to have offered to sell the Partnership Units described in the Notice of Redemption to the Operating Partnership, and the Operating Partnership may, in its sole and absolute discretion, elect to purchase directly and acquire such Partnership Units by paying to the Redeeming Partner either the Cash Amount or the OP Unit Amount, as elected by the Operating Partnership in its sole and absolute discretion, on the Specified Redemption Date, whereupon the Operating Partnership shall acquire the Partnership Units offered for redemption by the Redeeming Partner and shall be treated for all purposes of this Agreement as the owner of such Partnership Units. If the Operating Partnership shall elect to exercise its right to purchase Partnership Units under this Section 8.6(B) with respect to a Notice of Redemption, it shall so notify the Redeeming Partner within five Business Days after the receipt by it of such Notice of Redemption. Unless the Operating Partnership (in its sole and absolute discretion) shall exercise its right to purchase Partnership Units from the Redeeming Partner pursuant to this Section 8.6(B), the Operating Partnership shall not have any obligation to the Redeeming Partner or the Partnership with respect to the Redeeming Partner’s exercise of the Redemption Right. In the event the Operating Partnership shall exercise its right to purchase Partnership Units with respect to the exercise of a Redemption Right in the manner described in the first sentence of this Section 8.6(B), the Partnership shall have no obligation to pay any amount to the Redeeming Partner with respect to such Redeeming Partner’s exercise of such Redemption Right, and each of the Redeeming Partner, the Partnership and the Operating Partnership shall treat the transaction between the Operating Partnership and the Redeeming Partner, for federal income tax purposes, as a sale of the Redeeming Partner’s Partnership Units to the Operating Partnership. Each Redeeming Partner agrees to execute such documents as the Operating Partnership may reasonably

 

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require in connection with the issuance of OP Units upon exercise of the Redemption Right. In case of any reclassification of OP Units (including, but not limited to, any reclassification upon a consolidation or merger in which the Operating Partnership is the surviving entity) into securities other than OP Units, for purposes of this Section 8.6(B), the Operating Partnership (or its successor) may thereafter exercise its right to purchase Partnership Units for the kind and amount of shares of such securities receivable upon such reclassification by a holder of the number of OP Units for which such Partnership Units could be purchased pursuant to this Section immediately prior to such reclassification.

C. Notwithstanding the provisions of Section 8.6(A) and Section 8.6(B), a Partner shall not be entitled to exercise the Redemption Right pursuant to Section 8.6(A) to the extent that the delivery of OP Units to such Partner on the Specified Redemption Date by the Operating Partnership pursuant to Section 8.6(B) (regardless of whether or not the Operating Partnership would in fact exercise its rights under Section 8.6(B)) would (i) be prohibited, as determined in the sole discretion of the Operating Partnership, by law or any other agreement applicable to the Operating Partnership or (ii) cause the acquisition of OP Units by such Partner to be “integrated” with any other distribution of OP Units for purposes of complying with the Securities Act.

D. Each Partner covenants and agrees that all Partnership Units delivered for redemption shall be delivered to the Partnership free and clear of all liens; and, notwithstanding anything contained herein to the contrary, the Partnership shall be under no obligation to acquire Partnership Units which are or may be subject to any liens. Each Partner further agrees that, if any state or local property transfer tax is payable as a result of the transfer of its Partnership Units to the Partnership, such Partner shall assume and pay such transfer tax.

ARTICLE 9.

BOOKS, RECORDS, ACCOUNTING AND REPORTS

Section 9.1. Records and Accounting

The General Partner shall keep or cause to be kept at the principal office of the Partnership those records and documents required to be maintained by the Act and other books and records deemed by the General Partner to be appropriate with respect to the Partnership’s business, including, without limitation, all books and records necessary to provide to the Limited Partners any information, lists and copies of documents required to be provided pursuant to Section 9.3 hereof. The books of the Partnership shall be maintained, for financial and tax reporting purposes, on an accrual basis in accordance with GAAP, or such other basis as the General Partner determines to be necessary or appropriate following the direction and approval of the Board of Directors.

Section 9.2. Fiscal Year

The fiscal year of the Partnership shall be the calendar year.

 

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Section 9.3. Reports

A. As soon as practicable, but in no event later than 105 days after the close of each Partnership Year, the General Partner shall cause to be mailed to each Limited Partner as of the close of the Partnership Year, an annual report containing financial statements of the Partnership, or of the Company if such statements are prepared solely on a consolidated basis with the Company, for such Partnership Year, presented in accordance with GAAP, such statements to be audited by a nationally recognized firm of independent public accountants selected by the Company; provided, that if such financial statements of the Company are available on the Securities and Exchange Commission’s website, then this obligation shall be satisfied.

B. As soon as practicable, but in no event later than 105 days after the close of each calendar quarter (except the last calendar quarter of each year), the General Partner shall cause to be mailed to each Limited Partner as of the last day of the calendar quarter, a report containing unaudited financial statements of the Partnership, or of the Company, if such statements are prepared solely on a consolidated basis with the Company, and such other information as may be required by applicable law or regulation, or as the General Partner determines to be appropriate; provided that if such financial statements of the Company are available on the Securities and Exchange Commission’s website, then this obligation shall be satisfied.

C. The Partnership shall also cause to be promptly prepared such reports and/or information as are necessary for the Company to determine its qualification as a REIT and its compliance with the requirements for REITs pursuant to the Code and Regulations.

ARTICLE 10.

TAX MATTERS

Section 10.1. Preparation of Tax Returns

The General Partner, following the direction and approval of the Board of Directors, shall arrange for the preparation and timely filing of all returns of Partnership income, gains, deductions, losses and other items required of the Partnership for federal and state income tax purposes and shall furnish by July 31 of the year immediately following each taxable year, or as soon as reasonably practicable thereafter, the tax information reasonably required by Limited Partners for federal and state income tax reporting purposes.

Section 10.2. Tax Elections

Except as otherwise provided herein, the General Partner, following the direction and approval of the Board of Directors, shall determine whether to make any available election pursuant to the Code. Notwithstanding the above, in making any such tax election the General Partner and the Board of Directors may, but shall be under no obligation to, take into account the tax consequences to the Limited Partners resulting from any such election.

 

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The General Partner can, following the direction and approval of the Board of Directors, elect to use any method permitted by Section 704(c) of the Code and the Regulations thereunder to take into account any variation between the adjusted basis of any property contributed (or deemed contributed) to the Partnership by any Partner after the date hereof and such property’s initial Carrying Value. The General Partner shall have the right, following the direction and approval of the Board of Directors, regarding the exercise of that right, to seek to revoke any tax election it makes (including, without limitation, an election under Section 754 of the Code) upon the General Partner’s determination, following the direction and approval of the Board of Directors, that such revocation is in the best interests of the Partners.

Section 10.3. Partnership Representative

A. The General Partner, or such Person as may alternatively be designated by the General Partner, following the direction and approval of the Board of Directors, shall be the “partnership representative” (within the meaning of Section 6223 of the Code) (the “Partnership Representative”). The taking of any action and the incurring of any expense by the Partnership Representative in connection with any such proceeding, except to the extent required by law, is a matter of the Partnership Representative, following the direction and approval of the Board of Directors, and the provisions relating to indemnification provisions set forth in Section 7.7 of this Agreement shall be fully applicable to the Partnership Representative in its capacity as such. Each Partner hereby agrees to cooperate with, and to take all reasonable actions requested by the Partnership Representative and the Partnership, to avoid or reduce any tax imposed under Section 6225 of the Code, including (i) taking such actions as may be required to effect the General Partner’s designation as the Partnership Representative, and on behalf of the Partnership, the General Partner’s (or its designee’s) appointment of any “designated individual,” (ii) providing any information or taking such other actions as may be reasonably requested by the Partnership Representative in order to determine whether any “imputed underpayment” (within the meaning of Section 6225 of the Code) may be modified pursuant to Section 6225(c) of the Code, (iii) providing any information or taking such other actions as may be reasonably requested by the Partnership Representative in connection with any election made by the Partnership Representative pursuant to Section 6226 of the Code, and (iv) upon the request of the Partnership Representative, filing any amended U.S. federal income tax return or comply with the alternative procedure described in Section 6225(c)(2)(B) of the Code, and paying any tax due in connection with such tax return in accordance with Section 6225(c)(2) of the Code or any corresponding provision of applicable state or local law. The provisions of this Section 10.3 and a Partner’s obligation to comply with this Section 10.3 shall survive any liquidation and dissolution of the Partnership and the transfer, assignment or liquidation of such Partner’s Partnership Interest (including for the avoidance of doubt through exercise of the Redemption Right).

 

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B. The Partnership Representative shall receive no compensation for its services. All third party costs and expenses incurred by the Partnership Representative in performing its duties as such (including legal and accounting fees and expenses) shall be borne by the Partnership. Nothing herein shall be construed to restrict the Partnership from engaging an accounting and/or law firm to assist the Partnership Representative in discharging its duties hereunder, so long as the compensation paid by the Partnership for such services is reasonable.

Section 10.4. Withholding

Each Limited Partner hereby authorizes the Partnership to withhold from, or pay on behalf of or with respect to, such Limited Partner any amount of federal, state, local, or foreign taxes that the General Partner, following the direction and approval of the Board of Directors determines that the Partnership is required to withhold or pay with respect to any amount distributable or allocable to such Limited Partner pursuant to this Agreement, including, without limitation, any taxes required to be withheld or paid by the Partnership pursuant to Section 1441, 1442, 1445, or 1446 of the Code, and any taxes paid by the Partnership with respect to an imputed underpayment. Any amount paid on behalf of or with respect to a Limited Partner shall constitute a loan by the Partnership to such Limited Partner, which loan shall be repaid by such Limited Partner within 15 days after notice from the General Partner that such payment must be made unless (i) the Partnership withholds such payment from a distribution which would otherwise be made to the Limited Partner, or (ii) the General Partner determines, following the direction and approval of the Board of Directors, that such payment may be satisfied out of the available funds of the Partnership which would, but for such payment, be distributed to the Limited Partner. Any amounts withheld pursuant to the foregoing clause (i) or (ii) shall be treated as having been distributed (or paid) to such Limited Partner. In the event that a Limited Partner fails to pay any amounts owed to the Partnership pursuant to this Section 10.4 when due, the General Partner may, following the direction and approval of the Board of Directors, elect to make the payment to the Partnership on behalf of such defaulting Limited Partner, and in such event shall be deemed to have loaned such amount to such defaulting Limited Partner and shall succeed to all rights and remedies of the Partnership as against such defaulting Limited Partner. Without limitation, in such event the General Partner shall have the right to receive distributions that would otherwise be distributable to such defaulting Limited Partner until such time as such loan, together with all interest thereon, has been paid in full, and any such distributions so received by the General Partner shall be treated as having been distributed to the defaulting Limited Partner and immediately paid by the defaulting Limited Partner to the General Partner in repayment of such loan. Any amounts payable by a Limited Partner hereunder shall bear interest at the lesser of (A) the base rate on corporate loans at large United States money center commercial banks, as published from time to time in The Wall Street Journal, plus four percentage points, or (B) the maximum lawful rate of interest on such obligation, such interest to accrue from the date such amount is due (i.e., 15 days after demand) until such amount is paid in full. Each Limited Partner shall take such actions as the Partnership or the General Partner shall request in order to perfect or enforce the security interest created hereunder. Upon a Limited Partner’s complete withdrawal from the Partnership, such

 

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Limited Partner shall be required to restore funds to the Partnership to the extent that the cumulative amount of taxes withheld from or paid on behalf of, or with respect to, such Limited Partner exceeds the sum of such amounts (i) repaid to the Partnership by such Limited Partner, (ii) withheld from distributions to such Limited Partner and (iii) paid by the General Partner on behalf of such Limited Partner.

ARTICLE 11.

TRANSFERS AND WITHDRAWALS

Section 11.1. Transfer

A. The term “transfer,” when used in this Article 11 with respect to a Partnership Unit, shall be deemed to refer to a transaction by which the General Partner purports to assign all or any part of its General Partner Interest to another Person or by which a Limited Partner purports to assign all or any part of its Limited Partner Interest to another Person, and includes a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other disposition by law or otherwise. The term “transfer” when used in this Article 11 does not include (i) any redemption of Partnership Interests by the Partnership from a Limited Partner, (ii) any acquisition of Partnership Units from a Limited Partner by the Operating Partnership pursuant to Section 8.6, or (iii) any distribution of Partnership Units by a Limited Partner to its beneficial owners.

B. No Partnership Interest shall be transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article 11. Any transfer or purported transfer of a Partnership Interest not made in accordance with this Article 11 shall be null and void.

C. Notwithstanding the other provisions of this Article 11, the Partnership Interests of the Company may be transferred, in whole or in part, at any time or from time to time, to any Person that is, at the time of such transfer, a Qualified REIT Subsidiary. Upon any transfer permitted by this Section 11.1(C), the Company shall be relieved of all its obligations under this Agreement. The provisions of Sections 11.2(B), 11.3, 11.4(A) and 11.5 hereof shall not apply to any transfer permitted by this Section 11.1(C).

Section 11.2. Transfer of General Partner Interest

A. The General Partner may not transfer any of its General Partner Interest or withdraw as General Partner, or transfer any of its Limited Partner Interest, except as provided in Section 11.2(B) or Section 11.2(C) hereof.

 

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B. Except as set forth in Section 11.2(C), the General Partner shall not withdraw from the Partnership and shall not transfer all or any portion of its Partner Interests in the Partnership (whether by sale, disposition, statutory merger or consolidation, liquidation or otherwise) unless approved by the Board of Directors. Upon any transfer of the General Partner’s Partnership Interest in accordance with the provisions of this Section 11.2(B), the transferee shall become a successor General Partner for all purposes herein, and shall be vested with the powers and rights of the transferor General Partner, and shall be liable for all obligations and responsible for all duties of the General Partner, once such transferee has executed such instruments as may be necessary to effectuate such admission and to confirm the agreement of such transferee to be bound by all the terms and provisions of this Agreement with respect to the Partnership Interest so acquired. It is a condition to any transfer by the General Partner otherwise permitted hereunder that the transferee assumes, by operation of law or express agreement, all of the obligations of the transferor General Partner under this Agreement with respect to such transferred Partnership Interest; provided, such transfer shall not relieve the transferor General Partner of its obligations under this Agreement without the approval of the Board of Directors. In the event that the General Partner withdraws from the Partnership, in violation of this Agreement or otherwise, the remaining Partners may agree in writing to continue the business of the Partnership by selecting a successor General Partner in accordance with the Act.

C. In the event a Bankruptcy Event occurs with respect to the General Partner, the General Partner shall automatically withdraw from the Partnership, in its role as the General Partner, without any action on the part of the General Partner or any other Person, and shall transfer all of its General Partner Interest in the Partnership to the successor general partner selected by the Board of Directors.

Section 11.3. Limited Partners Rights to Transfer

A. Except as provided in Section 11.3(B), no Limited Partner shall transfer all or any portion of its Partnership Interest to any transferee without the approval of the Board of Directors; provided, however, that if a Limited Partner is subject to Incapacity, such Incapacitated Limited Partner may transfer all or any portion of its Partnership Interest.

B. Notwithstanding any other provision of this Article 11, a Limited Partner may transfer all or any portion of its Partnership Interest to any of its Affiliates and such transferee shall be admitted as a Substituted Limited Partner, all without obtaining the approval of the Board of Directors, unless such Affiliate does not qualify as an “accredited investor” as such term is defined in Rule 501(a) of Regulation D.

C. If a Limited Partner is subject to Incapacity, the executor, administrator, trustee, committee, guardian, conservator or receiver of such Limited Partner’s estate shall have all of the rights of a Limited Partner, but not more rights than those enjoyed by other Limited Partners, for the purpose of settling or managing the estate and such power as the Incapacitated Limited Partner possessed to transfer all or any part of his or its interest in the Partnership. The Incapacity of a Limited Partner, in and of itself, shall not dissolve or terminate the Partnership.

D. Without limiting the generality of Section 11.3(B) hereof, the Board of Directors may prohibit any transfer by a Limited Partner of its Partnership Interest if, in the opinion of legal counsel to the Partnership or the Company, such transfer would require filing of a registration statement under the Securities Act or would otherwise violate any federal or state securities laws or regulations applicable to the Partnership or the Partnership Units.

 

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E. No transfer by a Limited Partner of its Partnership Units may be made to any Person if (i) in the opinion of legal counsel for the Partnership or the Company it could result in the Partnership being treated as an association taxable as a corporation or a publicly traded partnership within the meaning of either Section 469(k)(2) or Section 7704(b) of the Code; (ii) such transfer could be treated as effectuated through an “established securities market” or a “secondary market (or the substantial equivalent thereof)” within the meaning of Section 7704 of the Code; (iii) such transfer could cause the Partnership to become, with respect to any employee benefit plan subject to Title I of ERISA or to Section 4975 of the Code, a “party-in-interest” (as defined in Section 3(14) of ERISA) or a “disqualified person” (as defined in Section 4975(c) of the Code); (iv) such transfer could, in the opinion of legal counsel for the Partnership or the Company, cause any portion of the assets of the Partnership to constitute assets of any employee benefit plan pursuant to Department of Labor Regulations Section 2510.3-101; or (v) such transfer could subject the Partnership to be regulated under the Investment Company Act of 1940, as amended, the Investment Advisers Act of 1940, as amended, or the fiduciary responsibility provisions of ERISA.

F. No transfer of any Partnership Units may be made to a lender to the Partnership or any Person who is related (within the meaning of Section 1.752-4(b) of the Regulations) to any lender to the Partnership whose loan constitutes a Nonrecourse Liability, without the approval of the Board of Directors.

G. The General Partner shall keep a register for the Partnership on which the transfer, pledge or release of Partnership Units shall be shown and pursuant to which entries shall be made to effect all transfers, pledges or releases as required by the applicable sections of Article 8 of the Uniform Commercial Code, as amended, in effect in the State of Delaware. The General Partner shall (i) place proper entries in such register clearly showing each transfer and each pledge and grant of security interest and the transfer and assignment pursuant thereto, such entries to be endorsed by the General Partner, and (ii) maintain the register and make the register available for inspection by all of the Partners and their pledgees at all times during the term of this Agreement. Nothing herein shall be deemed a consent to any pledge or transfer otherwise prohibited under this Agreement.

Section 11.4. Substituted Limited Partners

A. No Limited Partner shall have the right to substitute a transferee as a Limited Partner in his or its place except upon approval of the Board of Directors. Following such approval of the Board of Directors, the transferee of the interest of such Limited Partner shall be admitted pursuant to this Section 11.4 as a Substituted Limited Partner. The Board of Directors’ failure or refusal to permit a transferee of any such interests to become a Substituted Limited Partner shall not give rise to any cause of action against the Partnership, any Partner, or the Board of Directors. A Person shall

 

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be admitted to the Partnership as a Substituted Limited Partner only upon the aforementioned consent of the Board of Directors and the furnishing to the Partnership of (i) evidence of acceptance in form satisfactory to the General Partner of all of the terms and conditions of this Agreement, including, without limitation, the power of attorney granted in Section 2.4 hereof and (ii) such other documents to effect such Person’s admission as a Substituted Limited Partner. The admission of any Person as a Substituted Limited Partner shall become effective on the date upon which the name of such Person is recorded on the books and records of the Partnership, following the consent of the Board of Directors to such admission.

B. A transferee who has been admitted as a Substituted Limited Partner in accordance with this Article 11 shall have all the rights and powers and be subject to all the restrictions and liabilities of a Limited Partner under this Agreement.

C. Upon the admission of a Substituted Limited Partner, the General Partner shall amend Exhibit A to reflect the name, address, number of Partnership Units and Percentage Interest (as applicable) of such Substituted Limited Partner and to eliminate or adjust, if necessary, the name, address and interest of the predecessor of such Substituted Limited Partner.

Section 11.5. Assignees

If the Board of Directors does not consent to the admission of any permitted transferee as a Substituted Limited Partner, as described in Section 11.4, such transferee shall be considered an Assignee for purposes of this Agreement. An Assignee shall be deemed to have had assigned to it, and shall be entitled to receive distributions from the Partnership and the share of Net Income, Net Losses, Recapture Income, and any other items, gain, loss, deduction and credit of the Partnership attributable to the Partnership Interest assigned to such transferee, but shall not be deemed to be a holder of a Partnership Interest for any other purpose under this Agreement, and shall not be entitled to vote such Partnership Interest in any matter presented to the Limited Partners for a vote (such Partnership Interest being deemed to have been voted on such matter in the same proportion as all other Partnership Interest held by Limited Partners are voted). In the event any such transferee desires to make a further assignment of any such Partnership Interest, such transferee shall be subject to all of the provisions of this Article 11 to the same extent and in the same manner as any Limited Partner desiring to make an assignment of his or its Partnership Interest.

Section 11.6. Drag-Along Rights

A. In the event of an Approved Sale, the Partners who approved the Approved Sale (the “Approving Partners”) have the right to require each other Partner (the “Non-Approving Partners”) to transfer all Partnership Units then held by such Non-Approving Partner, free and clear of all liens, security interests or other restrictions of any kind, in accordance with this Section 11.6.

 

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B. In the event of an Approved Sale, the General Partner shall notify each Non-Approving Partner no more than 10 Business Days after the execution and delivery by all of the parties thereto of the definitive agreement entered into with respect to the Approved Sale and, in any event, no later than 20 Business Days prior to the closing date of such Approved Sale, and each Non-Approving Partner will, subject to satisfaction of the conditions in Section 11.6(C), (i) if such transaction requires approval by the Partners, with respect to all Partnership Units that such Partner owns or over which such Partner otherwise exercises voting power, to vote (in person, by proxy or by action by written consent, as applicable) all such Partnership Units in favor of, and adopt, such Approved Sale, and to vote in opposition to any and all other proposals that could reasonably be expected to delay or impair the ability of the Partnership to consummate such Sale of the Partnership, (ii) refrain from exercising any dissenter’s rights or rights of appraisal under applicable law at any time with respect to such Approved Sale, and (iii) if the Approved Sale is structured as a sale of Partnership Units, each Non-Approving Partner will agree to sell the same proportion of Partnership Units beneficially held by such Partner as is being sold by the Approving Partners to the Person(s) to whom the Approving Partners propose to sell their Partnership Units, on the same terms and conditions as the Approving Partners.

C. The obligations of the Partners pursuant to this Section 11.6 with respect to an Approved Sale are subject to the following conditions: (i) the aggregate consideration payable upon consummation of such Approved Sale to all of the Partners (the “Aggregate Consideration”) shall be allocated among the Partners as set forth in Section 5.3, (ii) upon the consummation of the Approved Sale, all of the Partners shall receive the same form of consideration per Partnership Unit of the same class or other equity interest, as allocated pursuant to subsection (i) hereof (except that a member of management may, with such Partner’s consent, receive securities pursuant to a management “rollover” which are not offered to all Partners), and (iii) that any indemnification, escrow, holdback and adjustment obligations undertaken by any Partner shall be pro rata among the Partners in proportion to the consideration to be received by the Partners in such Approved Sale; provided that indemnification obligations that relate solely to a particular Partner, such as indemnification with respect to representations and warranties made by a Partner with respect to such Partner (or such Partner’s ownership of Partnership Units) or covenants made by such Partner, shall be borne only by such Partner and shall not be deemed to reduce the Aggregate Consideration.

D. Subject to the foregoing, each Partner hereby agrees to execute and deliver all related documentation and take such other action in support of the Sale of the Partnership as shall reasonably be requested by the General Partner or the Approving Partners in order to carry out the terms and provision of this Section 11.6, including without limitation executing and delivering instruments of conveyance and transfer, and any purchase agreement, merger agreement, indemnity agreement, escrow agreement, consent, waiver, governmental filing, share certificates duly endorsed for transfer (free and clear of impermissible liens, claims and encumbrances) and any similar or related documents. Subject to the satisfaction of the conditions in Section 11.6(C), for purposes each Partner (and their respective spouses, if residing in a community

 

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property state) hereby appoint the General Partner as their agent and attorney-in-fact to execute any and all documents related in connection with an Approved Sale (including documents granting customary indemnities to a buyer of assets or securities consistent with this Agreement) on their behalf and expressly bind themselves to such document by the General Partner’s execution of such document without further action on their part.

Section 11.7. General Provisions

A. No Limited Partner may withdraw from the Partnership other than as a result of a permitted transfer of all of such Limited Partner’s Partnership Interest in accordance with this Article 11, pursuant to redemption of all of its Partnership Units, or the acquisition thereof by the Company, under Section 8.6.

B. Any Limited Partner who shall transfer all of its Partnership Interest in a transfer permitted pursuant to this Article 11 shall cease to be a Limited Partner upon the admission of all Assignees of such Partnership Interest as Substituted Limited Partners. Similarly, any Limited Partner who shall transfer all of its Partnership Units pursuant to a redemption of all of its Partnership Units, or the acquisition thereof by the Company under Section 8.6 shall cease to be a Limited Partner.

C. Transfers pursuant to this Article 11 may only be made on the first day of a fiscal quarter of the Partnership, unless the General Partner and the Board of Directors otherwise agrees.

D. If any Partnership Interest is transferred or assigned during any quarterly segment of the Partnership’s fiscal year in compliance with the provisions of this Article 11 or redeemed or transferred pursuant to Section 8.6 on any day other than the first day of a Partnership Year, then Net Income, Net Losses, each item thereof and all other items attributable to such interest for such Partnership Year shall be divided and allocated between the transferor Partner and the transferee Partner by taking into account their varying interests during the Partnership Year in accordance with Section 706(d) of the Code, using the interim closing of the books method. All distributions of Available Cash attributable to such Partnership Interest with respect to which the Partnership Record Date is before the date of such transfer, assignment, or redemption shall be made to the transferor Partner or the Redeeming Partner, as the case may be, and in the case of a transfer or assignment other than a redemption, all distributions of Available Cash thereafter attributable to such Partnership Interest shall be made to the transferee Partner.

 

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ARTICLE 12.

ADMISSION OF PARTNERS

Section 12.1. Admission of Successor General Partner

A successor to all of the General Partner Interest pursuant to Section 11.2 hereof who is proposed to be admitted as a successor General Partner shall be admitted to the Partnership as the General Partner, effective immediately prior to such transfer. Any such transferee shall carry on the business of the Partnership without dissolution. In each case, the admission shall be subject to the successor General Partner executing and delivering to the Partnership an acceptance of all of the terms and conditions of this Agreement and such other documents or instruments as may be required to effect the admission. In the case of such admission on any day other than the first day of a Partnership Year, all items attributable to the General Partner Interest for such Partnership Year shall be allocated between the transferring General Partner and such successor as provided in Section 11.6(D) hereof.

Section 12.2. Admission of Additional Limited Partners

A. A Person who makes a Capital Contribution to the Partnership in accordance with this Agreement shall be admitted to the Partnership as an Additional Limited Partner only upon furnishing to the General Partner (i) evidence of acceptance in form satisfactory to the General Partner of all of the terms and conditions of this Agreement, including, without limitation, the power of attorney granted in Section 2.4 hereof and (ii) such other documents or instruments as may be required in the discretion of the General Partner in order to effect such Person’s admission as an Additional Limited Partner, in each case, after approval of the Board of Directors.

B. Notwithstanding anything to the contrary in this Section 12.2, no Person shall be admitted as an Additional Limited Partner without the approval of the Board of Directors. The admission of any Person as an Additional Limited Partner shall become effective on the date upon which the name of such Person is recorded on the books and records of the Partnership, following the approval of the Board of Directors of such admission.

C. If any Additional Limited Partner is admitted to the Partnership on any day other than the first day of a Partnership Year, then Net Income, Net Losses, each item thereof and all other items allocable among Partners and Assignees for such Partnership Year shall be allocated among such Additional Limited Partner and all other Partners and Assignees by taking into account their varying interests during the Partnership Year in accordance with Section 706(d) of the Code, using the interim closing of the books method. All distributions of Available Cash with respect to which the Partnership Record Date is before the date of such admission shall be made solely to Partners and Assignees, other than such Additional Limited Partner, and all distributions of Available Cash thereafter shall be made to all of the Partners and Assignees, including such Additional Limited Partner.

Section 12.3. Amendment of Agreement and Certificate of Limited Partnership

For the admission to the Partnership of any Partner, the General Partner shall take all steps necessary and appropriate under the Act to amend the records of the Partnership and, if necessary, to prepare as soon as practical an amendment of this Agreement (including an amendment of Exhibit A) and, if required by law, shall prepare and file an amendment to the Certificate and may for this purpose exercise the power of attorney granted pursuant to Section 2.4 hereof.

 

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ARTICLE 13.

DISSOLUTION, LIQUIDATION AND TERMINATION

Section 13.1. Dissolution

The Partnership shall not be dissolved by the admission of Substituted Limited Partners or Additional Limited Partners or by the admission of a successor General Partner in accordance with the terms of this Agreement. Upon the withdrawal of the General Partner, any successor General Partner shall continue the business of the Partnership without dissolution. The Partnership shall dissolve, and its affairs shall be wound up, only upon the first to occur of any of the following (“Liquidating Events”):

A. an election to dissolve the Partnership made by the General Partner following the direction and approval of the Board of Directors with the consent of Partners holding a majority of the Percentage Interests of the Limited Partners;

B. entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Act;

C. at any time that there are no limited partners of the Partnership unless the business of the Partnership is continued in accordance with the Act;

D. the sale of all or substantially all of the assets and properties of the Partnership; or

E. any other event sufficient under the Act to cause the dissolution of the Partnership.

Section 13.2. Winding Up

A. Upon the occurrence of a Liquidating Event, the Partnership shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Partners. No Partner shall take any action that is inconsistent with, or not necessary to or appropriate for, the winding up of the Partnership’s business and affairs. The General Partner, or, in the event there is no remaining General Partner, any Person elected by a majority of the Percentage Interests of the Limited Partners (the General Partner or such other Person being referred to herein as the “Liquidator”), shall be responsible for overseeing the winding up and dissolution of the Partnership and shall take full account of the Partnership’s liabilities and property and the Partnership property shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom (which may, to the extent determined by the Liquidator and approved by the Board of Directors, include OP Units of the Operating Partnership) shall be applied and distributed in the following order:

(1) First, in satisfaction of all of the Partnership’s Debts and liabilities to creditors other than the Partners (whether by payment or the making of reasonable provision for payment thereof);

 

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(2) Second, to the payment and discharge of all of the Partnership’s Debts and liabilities to the General Partner (whether by payment or the making of reasonable provision for payment thereof), including, but not limited to, amounts due as reimbursements under Section 7.4;

(3) Third, to the payment and discharge of all of the Partnership’s Debts and liabilities to the other Partners; and

(4) The balance, if any, to the Partners in accordance with their Capital Accounts, after giving effect to all contributions, distributions, and allocations for all periods.

The General Partner shall not receive any additional compensation for any services performed pursuant to this Article 13.

B. Notwithstanding the provisions of Section 13.2(A) hereof which require liquidation of the assets of the Partnership, but subject to the order of priorities set forth therein, if prior to or upon dissolution of the Partnership the Liquidator, following the direction and approval of the Board of Directors, determines that an immediate sale of part or all of the Partnership’s assets would be impractical or would cause undue loss to the Partners, the Liquidator may defer for a reasonable time the liquidation of any assets except those necessary to satisfy liabilities of the Partnership (including to those Partners as creditors) and/or distribute to the Partners, in lieu of cash, as tenants in common and in accordance with the provisions of Section 13.2(A) hereof, undivided interests in such Partnership assets as the Liquidator deems not suitable for liquidation. Any such distributions in kind shall be made only if, in the good faith judgment of the Liquidator, following the direction and approval of the Board of Directors, such distributions in kind are in the best interest of the Partners, and shall be subject to such conditions relating to the disposition and management of such properties as the Liquidator deems reasonable and equitable and to any agreements governing the operation of such properties at such time. The Liquidator shall determine the fair market value of any property distributed in kind using such reasonable method of valuation as it may adopt.

C. In the discretion of the Liquidator, following the direction and approval of the Board of Directors, a pro rata portion of the distributions that would otherwise be made to the Partners pursuant to this Article 13 may be:

(1) distributed to a trust established for the benefit of the General Partner and Limited Partners for the purposes of liquidating Partnership assets, collecting amounts owed to the Partnership, and paying any contingent or unforeseen liabilities or obligations of the Partnership or the General Partner arising out of or in connection with the Partnership. The assets of any such trust

 

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shall be distributed to the General Partner and Limited Partners from time to time, in the reasonable discretion of the Liquidator, following the direction and approval of the Board of Directors, in the same proportions as the amount distributed to such trust by the Partnership would otherwise have been distributed to the General Partner and Limited Partners pursuant to this Agreement; or

(2) withheld or escrowed to provide a reasonable reserve for Partnership liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the Partnership; provided, that such withheld or escrowed amounts shall be distributed to the General Partner and Limited Partners in the manner and order of priority set forth in Section 13.2(A) as soon as practicable.

Section 13.3. Deficit Capital Account Restoration Obligation

In the event the Partnership or the General Partner’s interest therein (including its interest if any as a Limited Partner) is “liquidated” within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), distributions shall be made pursuant to this Article 13 to the General Partner and Limited Partners who have positive Capital Accounts in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(3). If any Partner has a deficit balance in its Capital Account (after giving effect to all contributions, distributions and allocations for all taxable years, including the year during which such liquidation occurs), such Partner, if such Partner is a Limited Partner, shall have no obligation to make any contribution to the capital of the Partnership with respect to such deficit, and such deficit shall not be considered a Debt owed to the Partnership or to any other Person for any purpose whatsoever, except to the extent otherwise expressly agreed to by such Limited Partner and the Partnership; provided, however, that such Partner, if such Partner is the General Partner, shall contribute to the capital of the Partnership the amount necessary to restore such deficit balance to zero in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(3).

Section 13.4. Deemed Contribution and Distribution

Notwithstanding any other provision of this Article 13, in the event the Partnership is “liquidated” within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), but no Liquidating Event has occurred, the Partnership’s property shall not be liquidated, the Partnership’s liabilities shall not be paid or discharged, and the Partnership’s affairs shall not be wound up. Instead, for federal income tax purposes and for purposes of maintaining Capital Accounts pursuant to Exhibit B hereto, the Partnership shall be deemed to have contributed all Partnership property and liabilities to a new limited partnership in exchange for an interest in such new limited partnership and, immediately thereafter, the Partnership will be deemed to liquidate by distributing interests in the new limited partnership to the Partners.

 

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Section 13.5. Rights of Limited Partners

Except as otherwise provided in this Agreement, each Limited Partner shall look solely to the assets of the Partnership for the return of its Capital Contributions and shall have no right or power to demand or receive property other than cash from the Partnership. Except as otherwise provided in this Agreement, no Limited Partner shall have priority over any other Partner as to the return of its Capital Contributions, distributions, or allocations.

Section 13.6. Notice of Dissolution

In the event a Liquidating Event occurs, or an event occurs that would result in a dissolution of the Partnership, the General Partner shall, within 30 days thereafter, provide written notice thereof to each of the Partners.

Section 13.7. Termination of Partnership and Cancellation of Certificate of Limited Partnership

Upon the completion of the winding up of the Partnership and liquidation of its assets, as provided in Section 13.2 hereof, the Partnership shall be terminated by filing a certificate of cancellation with the Secretary of State of the State of Delaware, canceling all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than the State of Delaware and taking such other actions as may be necessary to terminate the Partnership.

Section 13.8. Reasonable Time for Winding Up

A reasonable time shall be allowed for the orderly winding-up of the business and affairs of the Partnership and the liquidation of its assets pursuant to Section 13.2 hereof, in order to minimize any losses otherwise attendant upon such winding up, and the provisions of this Agreement shall remain in effect among the Partners during the period of liquidation.

Section 13.9. Waiver of Partition

No Partner nor any successor-in-interest to a Partner shall have the right while this Agreement remains in effect to have any property of the Partnership partitioned, or to file a complaint or institute any proceeding at law or in equity to have such property of the Partnership partitioned, and each Partner, on behalf of itself and its successors and assigns hereby waives any such right. It is the intention of the Partners that the rights of the parties hereto and their successors-in-interest to Partnership property, as among themselves, shall be governed by the terms of this Agreement, and that the rights of the Partners and their respective successors-in-interest shall be subject to the limitations and restrictions as set forth in this Agreement.

 

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ARTICLE 14.

AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS

Section 14.1. Amendment of Partnership Agreement

A. A proposed amendment shall be adopted and be effective as an amendment hereto if it is approved by the General Partner following the direction and approval of the Board of Directors.

B. Notwithstanding Section 14.1(A) hereof, this Agreement shall not be amended without the consent of each Partner materially adversely affected if such amendment would (i) convert a Limited Partner Interest in the Partnership into a General Partner Interest; (ii) modify the limited liability of a Limited Partner in a manner materially adverse to such Limited Partner; (iii) alter rights of such Partner to receive distributions pursuant to Article 5 or Article 13, or the allocations specified in Article 6 (except as permitted pursuant to Section 4.2 hereof) in a manner materially adverse to such Partner; or (vi) amend this Section 14.1(B); provided, however, that the consent of each Partner materially adversely affected shall not be required for any amendment or action that affects all Partners holding the same class or series of Partnership Units on a uniform or pro rata basis. Any amendment consented to by any Partner shall be effective as to that Partner, notwithstanding the absence of such consent by any other Partner.

Section 14.2. Meetings of the Partners

A. Meetings of the Partners may be called by the General Partner and shall be called upon the receipt by the General Partner of a written request either by the Limited Partners holding 20% or more of the Partnership Interests or by the Board of Directors. The request shall state the nature of the business to be transacted. Notice of any such meeting shall be given to all Partners not less than seven days nor more than 30 days prior to the date of such meeting. Partners may vote in person or by proxy at such meeting. Except as otherwise expressly provided in this Agreement, the consent of holders of a majority of the Percentage Interests held by Limited Partners shall control.

B. Any action required or permitted to be taken at a meeting of the Partners may be taken without a meeting if a written consent setting forth the action so taken is signed by a majority of the Percentage Interests of the Partners (or such other percentage as is expressly required by this Agreement). Such consent may be in one instrument or in several instruments, and shall have the same force and effect as a vote of a majority of the Percentage Interests of the Partners (or such other percentage as is expressly required by this Agreement). Such consent shall be filed with the General Partner. An action so taken shall be deemed to have been taken at a meeting held on the effective date so certified.

 

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C. Each Limited Partner may authorize any Person or Persons to act for him by proxy on all matters in which a Limited Partner is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Limited Partner or his or its attorney-in-fact. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Limited Partner executing it, such revocation to be effective upon the Partnership’s receipt of written notice of such revocation from the Limited Partner executing such proxy.

D. Each meeting of the Partners shall be conducted by the General Partner or such other Person as the General Partner may appoint pursuant to such rules for the conduct of the meeting as the General Partner or such other Person deems appropriate. Without limitation, meetings of Partners may be conducted in the same manner as meetings of the shareholders of the Company and may be held at the same time, and as part of, meetings of the shareholders of the Company.

ARTICLE 15.

GENERAL PROVISIONS

Section 15.1. Addresses and Notice

Any notice, demand, request or report required or permitted to be given or made to a Partner or Assignee under this Agreement shall be in writing and shall be deemed given or made when delivered in person or when sent by first class United States mail or by other means of written communication to such Partner or Assignee at the address set forth in Exhibit A or such other address of which such Partner shall notify the General Partner in writing.

Section 15.2. Titles and Captions

All article or section titles or captions in this Agreement are for convenience only. They shall not be deemed part of this Agreement and in no way define, limit, extend or describe the scope or intent of any provisions hereof. Except as specifically provided otherwise, references to “Articles” and “Sections” are to Articles and Sections of this Agreement.

Section 15.3. Pronouns and Plurals

Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neutral forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa.

Section 15.4. Further Action

The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement.

 

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Section 15.5. Binding Effect

This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns.

Section 15.6. Creditors

The provisions of this Agreement are solely for the purpose of defining the interests of the Partners, inter se; and no other Person (i.e., a party who is not a signatory hereto or a permitted successor to such signatory hereto) shall have any right, power, title or interest by way of subrogation or otherwise, in and to the rights, powers, title and provisions of this Agreement; provided, that Indemnitees are intended third-party beneficiaries of Section 7.7. No creditor or other third party having dealings with the Partnership shall have the right to enforce the right or obligation of any Partner to make Capital Contributions or loans to the Partnership or to pursue any other right or remedy hereunder or at law or in equity. None of the rights or obligations of the Partners herein set forth to make Capital Contributions or loans to the Partnership shall be deemed an asset of the Partnership for any purpose by any creditor or other third party, nor may any such rights or obligations be sold, transferred or assigned by the Partnership or pledged or encumbered by the Partnership to secure any Debt or other obligation of the Partnership or any of the Partners.

Section 15.7. Waiver

No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute a waiver of any such breach or any other covenant, duty, agreement or condition.

Section 15.8. Counterparts

This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all of the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affixing his or its signature hereto.

Section 15.9. Applicable Law; Consent to Jurisdiction; Waiver of Jury Trial

This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflict of laws. In the event of a conflict between any provision of this Agreement and any non-mandatory provision of the Act, the provisions of this Agreement shall control and take precedence.

 

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Section 15.10. Invalidity of Provisions

A. If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby.

B. Each Partner and Assignee hereby (i) submits to the exclusive jurisdiction of any state or federal court sitting in the State of Delaware (collectively, the “Delaware Courts”), with respect to any dispute arising out of this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute, (ii) to the fullest extent permitted by law, irrevocably waives, and agrees not to assert by way of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of any of the Delaware Courts, that its property is exempt or immune from attachment or execution, that the action is brought in an inconvenient forum, or that the venue of the action is improper, (iii) to the fullest extent permitted by law, agrees that notice or the service of process in any action, suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby shall be properly served or delivered if delivered to such Partner or Assignee at such Partner’s or Assignee’s last known address as set forth in the Partnership’s books and records, and (iv) to the fullest extent permitted by law, irrevocably waives any and all right to trial by jury in any legal proceeding arising out of or related to this Agreement or the transactions contemplated hereby.

Section 15.11. Entire Agreement

This Agreement contains the entire understanding and agreement among the Partners with respect to the subject matter hereof and supersedes the Prior Agreement and any other prior written or oral understandings or agreements among them with respect thereto.

Section 15.12. Legal Counsel Relationships

The Partners acknowledge and agree that Winston & Strawn LLP has only represented the Company in connection with this Agreement and the other transactions related hereto (the “Transactions”). Each Limited Partner is relying solely on his or its own tax and legal advisors, and not Winston & Strawn LLP, with respect to the tax and other legal aspects of his, her or its investment in the Partnership. Further, except for Winston & Strawn LLP’s representation of the Company with respect to the Transactions, or as may otherwise expressly be agreed in writing by Winston & Strawn LLP, in no event shall an attorney-client relationship exist between Winston & Strawn LLP on the one hand and any other Limited Partner and/or their Affiliates, on the other hand. The Limited Partners further agree and consent that Winston & Strawn LLP shall be permitted to render legal advice and to provide legal services to any Limited Partner or the Partnership from time to time, and each Limited Partner covenants and agrees that such representation of a Limited Partner or the Partnership by such firm from time to time shall not disqualify such firm from providing legal advice and legal services to their respective client Limited Partners or Affiliates in matters related or unrelated to this Agreement.

 

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.

 

GENERAL PARTNER:
NexPoint Real Estate Finance Operating Partnership, L.P.
By:  

 

  Name:
  Title:

[Signature Page to Amended and Restated Limited Partnership Agreement of                    ]


IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.

 

LIMITED PARTNERS
By:  

 

  Name:
  Title:

[Signature Page to Amended and Restated Limited Partnership Agreement of                    ]


IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.

 

PARTIES TO PRIOR AGREEMENT
INITIAL GENERAL PARTNER:

 

Name: Brian Mitts
INITIAL LIMITED PARTNER:

 

Name: Matthew McGraner

[Signature Page to Amended and Restated Limited Partnership Agreement of                    ]


EXHIBIT A

PARTNERS’ CONTRIBUTIONS AND PARTNERSHIP INTERESTS+

(As of                 , 2020)

 

Name and Address

of Partner                

   Cash
Contribution
     Agreed Value
of Contributed
Property
     Total
Contribution
     Common
Units
     LTIP
Units
     Percentage
Interest
 

General Partner

                 

NexPoint Real Estate Finance Operating Partnership, L.P.

                   

Limited Partners

                 
     N/A        N/A        N/A             
                   

 

+

Subject to change as a result of subsequent contributions by the Company

 

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EXHIBIT B

CAPITAL ACCOUNT MAINTENANCE

1. Capital Accounts of the Partners

A. The Partnership shall maintain for each Partner a separate Capital Account in accordance with the rules of Regulations Section 1.704-l(b)(2)(iv). Such Capital Account shall be increased by (i) the amount of all Capital Contributions and any other deemed contributions made by such Partner to the Partnership pursuant to the Agreement; and (ii) all items of Partnership income and gain (including income and gain exempt from tax) computed in accordance with Section 1.B hereof and allocated to such Partner pursuant to Section 6.1(A) of the Agreement and Exhibit C of the Agreement, and decreased by (x) the amount of cash or Agreed Value of all actual and deemed distributions of cash or property made to such Partner pursuant to the Agreement, and (y) all items of Partnership deduction and loss computed in accordance with Section 1.B hereof and allocated to such Partner pursuant to Section 6.1.B of the Agreement and Exhibit C hereof.

B. For purposes of computing the amount of any item of income, gain, deduction or loss (including “Net Income” or “Net Loss”) to be reflected in the Partners’ Capital Accounts, unless otherwise specified in the Agreement, the determination, recognition and classification of any such item shall be the same as its determination, recognition and classification for federal income tax purposes determined in accordance with Section 703(a) of the Code (for this purpose all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a)(1) of the Code shall be included in taxable income or loss), with the following adjustments:

(1) Except as otherwise provided in Regulations Section 1.704-1(b)(2)(iv)(m), the computation of all items of income, gain, loss and deduction shall be made without regard to any election under Section 754 of the Code which may be made by the Partnership; provided, that the amounts of any adjustments to the adjusted bases of the assets of the Partnership made pursuant to Section 734 of the Code as a result of the distribution of property by the Partnership to a Partner (to the extent that such adjustments have not previously been reflected in the Partners’ Capital Accounts) shall be reflected in the Capital Accounts of the Partners in the manner and subject to the limitations prescribed in Regulations Section 1.704-1(b)(2)(iv)(m)(4).

(2) The computation of all items of income, gain, and deduction shall be made without regard to the fact that items described in Sections 705(a)(1)(B) or 705(a)(2)(B) of the Code are not includable in gross income or are neither currently deductible nor capitalized for federal income tax purposes.

(3) Any income, gain or loss attributable to the taxable disposition of any Partnership property shall be determined as if the adjusted basis of such property as of such date of disposition were equal in amount to the Partnership’s Carrying Value with respect to such property as of such date.

 

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(4) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year.

(5) In the event the Carrying Value of any Partnership asset is adjusted pursuant to Section 1.D hereof, the amount of any such adjustment shall be taken into account as gain or loss from the disposition of such asset.

(6) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Net Income or Net Loss pursuant to this definition shall be added to such taxable income or loss.

(7) Notwithstanding any other provision of this Section 1.B, any items that are specially allocated pursuant to Exhibit C of the Agreement shall not be taken into account for purposes of computing Net Income or Net Loss.

The amounts of the items of Partnership income, gain, loss or deduction available to be specially allocated pursuant to Exhibit C of the Agreement shall be determined by applying rules analogous to those set forth in Sections 1.B(1) through 1.B(5) above.

C. Generally, a transferee (including an Assignee) of a Partnership Unit shall succeed to a pro rata portion of the Capital Account of the transferor.

D. (1) Consistent with the provisions of Regulations Section 1.704-1(b)(2)(iv)(f), and as provided in Section 1.D(2), the Carrying Value of all Partnership assets shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as of the times of the adjustments provided in Section 1.D(2) hereof, as if such Unrealized Gain or Unrealized Loss had been recognized on an actual sale of each such property and allocated pursuant to Section 6.1 of the Agreement.

(2) Such adjustments shall be made as of the following times: (a) immediately prior to the acquisition of an additional interest in the Partnership by any new or existing Partner in exchange for more than a de minimis Capital Contribution; (b) immediately prior to the distribution by the Partnership to a Partner of more than a de minimis amount of property as consideration for an interest in the Partnership; (c) in connection with the grant of an interest in the Partnership (other than a de minimis interest), as consideration for the provision of services to or for the benefit of the Partnership by an existing Partner acting in a partner capacity or by a new partner acting in a partner capacity or in anticipation of being a partner; and (d) immediately prior to the liquidation of the Partnership within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); provided, however, that adjustments pursuant to clauses (a), (b) and (c) above shall be made only if the General Partner determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership.

 

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(3) In accordance with Regulations Section 1.704-1(b)(2)(iv)(e), the Carrying Value of Partnership assets distributed in kind shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as of the time any such asset is distributed.

(4) The Carrying Value of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Section 734(b) or Section 743(b) of the Code, but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) and Section 1.B(1) hereof or Section 1.F of Exhibit C of the Agreement; provided, however, that Carrying Values shall not be adjusted pursuant to this Section 1.D(4) to the extent that an adjustment pursuant to Section 1.D(2) hereof is required in connection with a transaction that would otherwise result in an adjustment pursuant to this Section 1.D(4).

(5) In determining Unrealized Gain or Unrealized Loss for purposes of this Exhibit B, the aggregate cash amount and fair market value of all Partnership assets (including cash or cash equivalents) shall be determined by the General Partner using such reasonable method of valuation as it may adopt, or in the case of a liquidating distribution pursuant to Article 13 of the Agreement, shall be determined and allocated by the Liquidator using such reasonable method of valuation as it may adopt. The General Partner, or the Liquidator, as the case may be, shall allocate such aggregate value among the assets of the Partnership (in such manner as it determines following the direction and approval of the Board of Directors to arrive at a fair market value for individual properties).

If the Carrying Value of an asset has been determined or adjusted pursuant to Section 1.B(2) or Section 1.B(4) of this Exhibit B, such Carrying Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset, for purposes of computing Net Income and Net Loss.

E. The provisions of the Agreement (including this Exhibit B and other Exhibits to the Agreement) relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-l(b), and shall be interpreted and applied in a manner consistent with such Regulations. In the event the General Partner shall determine that it is prudent to modify (i) the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed property or which are assumed by the Partnership, the General Partner, or the Limited Partners) are computed; or (ii) the manner in which items are allocated among the Partners for federal income tax purposes, in order to comply with such Regulations or to comply with Section 704(c) of the Code, the General Partner may make such modification without regard to Article 14 of the Agreement; provided, that it is not likely to have a material effect on the amounts

 

B-3


distributable to any Person pursuant to Article 13 of the Agreement upon the dissolution of the Partnership. The General Partner also shall (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Partners and the amount of Partnership capital reflected on the Partnership’s balance sheet, as computed for book purposes, in accordance with Regulations Section 1.704-1(b)(2)(iv)(q); and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause the Agreement not to comply with Regulations Section 1.704-1(b). In addition, the General Partner may adopt and employ such methods and procedures for (i) the maintenance of book and tax capital accounts; (ii) the determination and allocation of adjustments under Sections 704(c), 734 and 743 of the Code; (iii) the determination of Net Income, Net Loss, taxable income, taxable loss and items thereof under the Agreement and pursuant to the Code; (iv) the adoption of reasonable conventions and methods for the valuation of assets and the determination of tax basis; (v) the allocation of asset value and tax basis; and (vi) conventions for the determination of cost recovery, depreciation and amortization deductions, as it determines in its sole discretion are necessary or appropriate to execute the provisions of the Agreement, to comply with federal and state tax laws, and are in the best interest of the Partners.

2. No Interest

No interest shall be paid by the Partnership on Capital Contributions or on balances in Partners’ Capital Accounts.

3. No Withdrawal

No Partner shall be entitled to withdraw any part of his or its Capital Contribution or his or its Capital Account or to receive any distribution from the Partnership, except as provided in Articles 4, 5, 7 and 13 of the Agreement.

4. Special Allocations in Connection with a Liquidating Event

Partners intend that the allocation of Net Income, Net Loss and other items of income, gain, loss, deduction and credit required to be allocated to the Capital Accounts of the Partners pursuant to the Agreement will result in final Capital Account balances that will permit the amount each Partner is entitled to receive upon “liquidation” of the Partnership (within the meaning of Section 1.704-1(b)(2)(ii)(g) of the Treasury Regulations) to equal the amount such Partner would have received if such amount was distributable pro rata in accordance with the Partners’ respective Percentage Interests. Accordingly, notwithstanding the provisions of Section 6.1(a) and Section 6.1(b) of the Agreement, in the taxable year of the event precipitating a Liquidating Event and thereafter, appropriate adjustments to allocations of Net Income and Net Losses (and items thereof) to the Partners shall be made to achieve such result to the maximum extent possible.

 

B-4


EXHIBIT C

SPECIAL ALLOCATION RULES; OTHER TAX MATTERS

1. Special Allocation Rules

Notwithstanding any other provision of the Agreement or this Exhibit C, the following special allocations shall be made:

A. Minimum Gain Chargeback. Notwithstanding the provisions of Section 6.1 of the Agreement or any other provisions of this Exhibit C, if there is a net decrease in Partnership Minimum Gain during any Partnership taxable year, then, subject to the exceptions set forth in Regulations Sections 1.704-2(f)(2)-(5), each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner’s share of the net decrease in Partnership Minimum Gain, as determined under Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(f)(6). This Section 1.A is intended to comply with the minimum gain chargeback requirements in Regulations Section 1.704-2(f) and shall be interpreted consistently therewith. Solely for purposes of this Section 1.A, each Partner’s Adjusted Capital Account Deficit shall be determined prior to any other allocations pursuant to Section 6.1 of the Agreement with respect to such Partnership taxable year and without regard to any decrease of Partner Minimum Gain during such Partnership taxable year.

B. Partner Minimum Gain Chargeback. Notwithstanding any other provision of Section 6.1 of the Agreement or any other provisions of this Exhibit C (except Section 1.A hereof), if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any Partnership taxable year, then, subject to the exceptions referred to in Regulations Section 1.704-2(i)(4), each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(5), shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner’s share of the net decrease in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(5). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(i)(4). This Section 1.B is intended to comply with the minimum gain chargeback requirement in such section of the Regulations and shall be interpreted consistently therewith. Solely for purposes of this Section 1.B, each Partner’s Adjusted Capital Account Deficit shall be determined prior to any other allocations pursuant to Section 6.1 of the Agreement or this Exhibit with respect to such Partnership taxable year, other than allocations pursuant to Section 1.A hereof.

 

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C. Qualified Income Offset. In the event any Partner unexpectedly receives any adjustments, allocations or distributions described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), and after giving effect to the allocations required under Sections 1.A and 1.B hereof such Partner has an Adjusted Capital Account Deficit, items of Partnership income and gain (consisting of a pro rata portion of each item of Partnership income, including gross income and gain for the Partnership taxable year) shall be specially allocated to such Partner in an amount and manner sufficient to eliminate, to the extent required by the Regulations, its Adjusted Capital Account Deficit created by such adjustments, allocations or distributions as quickly as possible; provided, that an allocation pursuant to this Section 1.C shall be made only if and to the extent that such Partner would have an Adjusted Capital Account Deficit after all other allocations provided for in Section 6.1 of the Agreement or any other provisions of this Exhibit C have been tentatively made as if this Section 1.C were not in this Agreement. This Section 1.C is intended to constitute a qualified income offset under Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.

D. Nonrecourse Deductions. Nonrecourse Deductions for any Partnership taxable year shall be allocated to the Partners in accordance with their respective Percentage Interests. If the General Partner determines in its good faith discretion that the Partnership’s Nonrecourse Deductions must be allocated in a different ratio to satisfy the safe harbor requirements of the Regulations promulgated under Section 704(b) of the Code, the General Partner is authorized, upon notice to the Limited Partners, to revise the prescribed ratio to the numerically closest ratio for such Partnership taxable year which would satisfy such requirements.

E. Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions for any Partnership taxable year shall be specially allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i).

F. Code Section 754 Adjustments. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Section 734(b) or 743(b) of the Code is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such item of gain or loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such section of the Regulations.

G. Curative Allocations. The allocations set forth in Section 1.A through 1.F of this Exhibit C (the “Regulatory Allocations”) are intended to comply with certain requirements of the Regulations under Section 704(b) of the Code. The Regulatory Allocations may not be consistent with the manner in which the Partners intend to divide Partnership distributions. Accordingly, the General Partner is hereby authorized to

 

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divide other allocations of income, gain, deduction and loss among the Partners so as to prevent the Regulatory Allocations from distorting the manner in which Partnership distributions will be divided among the Partners. In general, the Partners anticipate that, if necessary, this will be accomplished by specially allocating other items of income, gain, loss and deduction among the Partners so that the net amount of the Regulatory Allocations and such special allocations to each person is zero. However, the General Partner will have discretion to accomplish this result in any reasonable manner; provided, however, that no allocation pursuant to this Section 1.G shall cause the Partnership to fail to comply with the requirements of Regulations Sections 1.704-1(b)(2)(ii)(d), -2(e) or -2(i).

H. Forfeiture Allocations

(1) If any holder forfeits (or has repurchased at less than fair market value) all or a portion of such holder’s Partnership Units, the Partnership shall make forfeiture allocations to such holder in the manner and to the extent required by proposed Regulations Section 1.704-1(b)(4)(xii) (as such proposed Regulations may be amended or modified, including upon the issuance of temporary or final Treasury Regulations).

2. Allocations for Tax Purposes

A. Except as otherwise provided in this Section 2, for federal income tax purposes, each item of income, gain, loss and deduction shall be allocated among the Partners in the same manner as its correlative item of “book” income, gain, loss or deduction is allocated pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit C.

B. In an attempt to eliminate Book-Tax Disparities attributable to a Contributed Property or Adjusted Property, items of income, gain, loss, and deduction shall be allocated for federal income tax purposes among the Partners as follows:

(1) (a) In the case of a Contributed Property, such items attributable thereto shall be allocated among the Partners, consistent with the principles of Section 704(c) of the Code and the Regulations thereunder, and with the procedures and methods described in Section 10.2 of the Agreement, to take into account the variation between the 704(c) Value of such property and its adjusted basis at the time of contribution; and

 

  (b)

any item of Residual Gain or Residual Loss attributable to a Contributed Property shall be allocated among the Partners in the same manner as its correlative item of “book” gain or loss is allocated pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit C.

 

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(2) (a) In the case of an Adjusted Property, such items shall

(1) first, be allocated among the Partners in a manner consistent with the principles of Section 704(c) of the Code and the Regulations thereunder to take into account the Unrealized Gain or Unrealized Loss attributable to such property and the allocations thereof pursuant to this Exhibit B; and

(2) second, in the event such property was originally a Contributed Property, be allocated among the Partners in a manner consistent with Section 2.B(1) of this Exhibit C; and

 

  (b)

any item of Residual Gain or Residual Loss attributable to an Adjusted Property shall be allocated among the Partners in the same manner as its correlative item of “book” gain or loss is allocated pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit C.

C. To the extent that the Treasury Regulations promulgated pursuant to Section 704(c) of the Code permit the Partnership to utilize alternative methods to eliminate the disparities between the Carrying Value of property and its adjusted basis, the General Partner shall have the authority to elect the method to be used by the Partnership and such election shall be binding on all Partners.

3. No Withdrawal

No Partner shall be entitled to withdraw any part of its Capital Contribution or its Capital Account or to receive any distribution from the Partnership, except as provided in Articles 4, 5, 8 and 13 of the Agreement.

 

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EXHIBIT D

NOTICE OF REDEMPTION

The undersigned Limited Partner hereby irrevocably requests                 , a Delaware limited partnership (the “Partnership”), to redeem                  Partnership Units in the Partnership in accordance with the terms of the Amended and Restated Limited Partnership Agreement of the Partnership and the Redemption Right referred to therein; and the undersigned Limited Partner irrevocably (i) surrenders such Partnership Units and all right, title and interest therein; and (ii) directs that the Cash Amount or OP Unit Amount (as determined by the Operating Partnership) deliverable upon exercise of the Redemption Right be delivered to the address specified below, and if OP Units are to be delivered, such OP Units be registered or placed in the name(s) and at the address(es) specified below. The undersigned hereby represents, warrants, and certifies that the undersigned (a) has marketable and unencumbered title to such Partnership Units, free and clear of the rights or interests of any other person or entity; (b) has the full right, power, and authority to request such redemption and surrender such Partnership Units as provided herein; and (c) has obtained the consent or approval of all persons or entities, if any, having the right to consent or approve such redemption and surrender of Units. The undersigned Limited Partner further agrees that, in the event that any state or local property tax is payable as a result of the transfer of its Partnership Units to the Partnership or the Operating Partnership, the undersigned Limited Partner shall assume and pay such transfer tax.

 

Dated:   

 

  
Name of Limited Partner:   

 

      Please Print
     

 

      (Signature of Limited Partner)
     

 

      (Street Address)
     

 

     

(City) (State) (Zip Code)

 

      Signature Guaranteed by:
     

 

If OP Units are to be issued, issue to:   
Name:   

 

  
Please insert social security or identifying number:   

 

 

D-1


EXHIBIT E

CONSTRUCTIVE OWNERSHIP DEFINITION

The term “Constructively Owns” means ownership determined through the application of the constructive ownership rules of Section 318 of the Code, as modified by Section 856(d)(5) of the Code. Generally, as of the date first set forth above, these rules provide the following:

a. an individual is considered as owning the Ownership Interest that is owned, actually or constructively, by or for his spouse, his children, his grandchildren, and his parents;

b. an Ownership Interest that is owned, actually or constructively, by or for a partnership, limited liability company or estate is considered as owned proportionately by its partners or beneficiaries;

c. an Ownership Interest that is owned, actually or constructively, by or for a trust is considered as owned by its beneficiaries in proportion to the actuarial interest of such beneficiaries (provided, however, that in the case of a “grantor trust” the Ownership Interest will be considered as owned by the grantors);

d. if ten (10) percent or more in value of the stock in a corporation is owned, actually or constructively, by or for any person, such person shall be considered as owning the Ownership Interest that is owned, actually or constructively, by or for such corporation in that proportion which the value of the stock which such person so owns bears to the value of all the stock in such corporation;

e. an Ownership Interest that is owned, actually or constructively, by or for a partner or member which actually or constructively owns a 25% or greater capital interest or profits interest in a partnership or limited liability company, or by or to or for a beneficiary of an estate or trust shall be considered as owned by the partnership, limited liability company, estate, or trust (or, in the case of a grantor trust, the grantors);

f. if ten (10) percent or more in value of the stock in a corporation is owned, actually or constructively, by or for any person, such corporation shall be considered as owning the Ownership Interest that is owned, actually or constructively, by or for such person;

g. if any person has an option to acquire an Ownership Interest (including an option to acquire an option or any one of a series of such options), such Ownership Interest shall be considered as owned by such person;

 

E-1


h. an Ownership Interest that is constructively owned by a person by reason of the application of the rules described in paragraphs (a) through (g) above shall, for purposes of applying paragraphs (a) through (g), be considered as actually owned by such person; provided, however, that (i) an Ownership Interest constructively owned by an individual by reason of paragraph (a) shall not be considered as owned by him for purposes of again applying paragraph (a) in order to make another person the constructive owner of such Ownership Interest, (ii) an Ownership Interest constructively owned by a partnership, estate, trust, or corporation by reason of the application of paragraphs (e) or (f) shall not be considered as owned by it for purposes of applying paragraphs (b), (c), or (d) in order to make another person the constructive owner of such Ownership Interest, (iii) if an Ownership Interest may be considered as owned by an individual under paragraph (a) or (g), it shall be considered as owned by him under paragraph (g), and (iv) for purposes of the above described rules, an S corporation shall be treated as a partnership and any shareholder of the S corporation shall be treated as a partner of such partnership except that this rule shall not apply for purposes of determining whether stock in the S corporation is constructively owned by any person.

i. For purposes of the above summary of the constructive ownership rules, the term “Ownership Interest” means the ownership of stock with respect to a corporation and, with respect to any other type of entity, the ownership of an interest in either its assets or net profits.

 

E-2


EXHIBIT F

SCHEDULE OF PARTNERS’ OWNERSHIP

WITH RESPECT TO TENANTS

NONE

EX-10.4 8 d759970dex104.htm EX-10.4 EX-10.4

Exhibit 10.4

 

 

 

LOAN AND SECURITY AGREEMENT

 

 

Dated as of July 12, 2019

 

 

NEXPOINT WLIF I BORROWER, LLC, NEXPOINT WLIF II BORROWER, LLC and

NEXPOINT WLIF III BORROWER, LLC,

as Borrower

and

FEDERAL HOME LOAN MORTGAGE CORPORATION,

as Lender

 

 

 


TABLE OF CONTENTS

 

         Page  

SECTION 1.

  DEFINITIONS AND ACCOUNTING MATTERS      1  

1.01

  Certain Defined Terms      1  

1.02

  Accounting Terms and Determinations      20  

SECTION 2.

  TERMS OF THE LOAN      20  

2.01

  Loan      20  

2.02

  Note      21  

2.03

  Repayment of Loan; Interest      21  

2.04

  Alternative Rate      22  

2.05

  Mandatory Prepayments      23  

2.06

  Optional Prepayments      23  

2.07

  Margin Maintenance      24  

2.08

  Requirements of Law      25  

2.09

  Taxes      26  

2.10

  Intentionally Omitted      27  

2.11

  Release of Lien      27  

SECTION 3.

  PAYMENTS; COMPUTATIONS; CASH MANAGEMENT ARRANGEMENT      28  

3.01

  Payments      28  

3.02

  Computations      28  

3.03

  Cash Management Arrangement      28  

SECTION 4.

  COLLATERAL SECURITY      30  

4.01

  Collateral; Security Interest      30  

4.02

  Further Documentation      31  

4.03

  Changes in Locations, Name, etc.      31  

4.04

  Lender’s Appointment as Attorney-in-Fact      31  

4.05

  Performance by Lender of Borrower’s Obligations      32  

4.06

  Proceeds      33  

4.07

  Remedies      33  

4.08

  Limitation on Duties Regarding Preservation of Collateral      34  

4.09

  Powers Coupled with an Interest      34  

 

-i-


TABLE OF CONTENTS

(continued)

 

         Page  

4.10

  Release of Security Interest      35  

SECTION 5.

  CONDITIONS PRECEDENT      35  

5.01

  Condition Precedent to Initial Transaction      35  

5.02

  Conditions Precedent to all Transactions      35  

SECTION 6.

  REPRESENTATIONS AND WARRANTIES      38  

6.01

  Financial Condition      38  

6.02

  No Change      39  

6.03

  Existence; Compliance with Law; Ownership of Borrower      39  

6.04

  Authorization; Enforceable Obligations      39  

6.05

  No Legal Bar      39  

6.06

  No Material Litigation      40  

6.07

  No Default      40  

6.08

  Collateral; Collateral Security      40  

6.09

  Chief Executive Office      41  

6.10

  Location of Books and Records      41  

6.11

  No Burdensome Restrictions      41  

6.12

  Taxes      41  

6.13

  Margin Regulations      41  

6.14

  Investment Company Act; Other Regulations      41  

6.15

  Special Purpose Entity      42  

6.16

  No Prohibited Persons      42  

6.17

  Borrower Solvent; Fraudulent Conveyance      42  

6.18

  ERISA      42  

6.19

  True and Complete Disclosure      43  

6.20

  Regulatory Status      43  

6.21

  No Reliance      43  

6.22

  Ability to Perform      43  

6.23

  Non-Contravention      43  

6.24

  No Outstanding Judgments      43  

6.25

  No Bankruptcies      43  

 

-ii-


TABLE OF CONTENTS

(continued)

 

         Page  

6.26

  No Real Property      43  

6.27

  Anti-Bribery Laws      44  

6.28

  Insider      44  

6.29

  Anti-Money Laundering Laws      44  

6.30

  No Broker      44  

SECTION 7.

  COVENANTS OF BORROWER      44  

7.01

  Financial Statements      44  

7.02

  Existence, Etc.      45  

7.03

  Notices      46  

7.04

  Further Identification of Collateral      47  

7.05

  Reports      47  

7.06

  Prohibition of Fundamental Changes      48  

7.07

  Limitation on Liens on Collateral      48  

7.08

  Limitation on Sale or Other Disposition of Collateral      48  

7.09

  Limitation on Transactions with Affiliates      48  

7.10

  Special Purpose Entity      48  

7.11

  Limitations on Modifications, Waivers and Extensions of Underlying Loan Documents      48  

7.12

  Prohibited Persons      49  

7.13

  Limitation on Distributions      49  

7.14

  Use of Proceeds      49  

7.15

  ERISA      49  

7.16

  Real Property      49  

7.17

  Independent Manager      49  

7.18

  Preservation of Existence; Licenses      50  

7.19

  Compliance with Organizational Documents      50  

7.20

  Responsibility for Fees and Expenses of Third-Parties      50  

SECTION 8.

  EVENTS OF DEFAULT      50  

SECTION 9.

  REMEDIES UPON DEFAULT      53  

SECTION 10.

  NO DUTY OF LENDER      53  

 

-iii-


TABLE OF CONTENTS

(continued)

 

         Page  

SECTION 11.

  MISCELLANEOUS      55  

11.01

  Waiver      55  

11.02

  Notices      55  

11.03

  Indemnification and Expenses      55  

11.04

  Amendments      56  

11.05

  Successors and Assigns      56  

11.06

  Survival      56  

11.07

  Captions      56  

11.08

  Counterparts      56  

11.09

  GOVERNING LAW; ETC.      57  

11.10

  SUBMISSION TO JURISDICTION; WAIVERS      57  

11.11

  WAIVER OF JURY TRIAL      58  

11.12

  Acknowledgments      58  

11.13

  Hypothecation and Pledge of Collateral      58  

11.14

  Assignments; Participations      58  

11.15

  Servicing      60  

11.16

  Set-Off      60  

11.17

  Joint and Several Obligations      61  

11.18

  Due Diligence      62  

SCHEDULES

 

        

 

SCHEDULE 1

SCHEDULE 2

  

Terms Schedule

Special Purpose Entity (Limited Liability Company)

  SCHEDULE 3    Organizational Chart of Borrower

EXHIBITS

 

        

 

EXHIBIT A

EXHIBIT B

EXHIBIT C

  

[Reserved]

Form of Margin Call

Form of Servicing Instruction Letter

 

-iv-


LOAN AND SECURITY AGREEMENT

LOAN AND SECURITY AGREEMENT, dated as of July 12, 2019, by and between NEXPOINT WLIF I BORROWER, LLC, a Delaware limited liability company, NEXPOINT WLIF II BORROWER, LLC, a Delaware limited liability company and NEXPOINT WLIF III BORROWER, LLC, a Delaware limited liability company (individually and/or collectively, as the context requires, “Borrower”), and FEDERAL HOME LOAN MORTGAGE CORPORATION, a corporation organized and existing under the laws of the United States, and its successors-in-interest as lender (in such capacity, together with its successors and assigns, “Lender”).

RECITALS

Borrower wishes to obtain financing with respect to certain Underlying Loans (hereinafter defined) and Lender has agreed, subject to the terms and conditions of this Loan Agreement (hereinafter defined), to provide such financing to Borrower.

Accordingly, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

SECTION 1. Definitions and Accounting Matters.

1.01 Certain Defined Terms. As used herein, the following terms shall have the following meanings (all terms defined in this Section 1.01 or in other provisions of this Loan Agreement in the singular to have the same meanings when used in the plural and vice versa):

Accepted Servicing Practices” shall mean servicing and administering the Underlying Loans:

(a) (i) in the same manner in which, and with the same care, skill, prudence and diligence with which the Servicer services and administers similar mortgage loans for other third party portfolios, giving due consideration to the customary and usual standards of practice of prudent institutional commercial and multifamily mortgage loan servicers servicing mortgage loans for third parties, which includes, for purposes of this clause (a)(i), Freddie Mac Servicing Practices, and (ii) with the same care, skill, prudence and diligence with which the Servicer services and administers similar commercial and multifamily mortgage loans owned by it, whichever is higher;

(b) with a view to the timely collection of all scheduled payments of principal and interest under the Underlying Loans and, if any Underlying Loan comes into and continues in default and if, in the judgment of the Servicer, no satisfactory arrangements can be made for the collection of the delinquent payments, the maximization of the recovery on the Underlying Loan to the Lender, on a net present value basis; but

(c) without regard to—


(i) any relationship that the Servicer or any Affiliate thereof may have with the Borrower, Lender, Mortgage Loan Seller or any other party to this Loan Agreement;

(ii) the ownership of any subordinate debt by the Servicer or by any Affiliate thereof;

(iii) the right of the Servicer (or any Affiliate thereof) to receive reimbursement of costs, or the sufficiency of any compensation payable to it, or with respect to any particular transaction;

(iv) any potential conflict of interest arising from the ownership, servicing or management for others of any other mortgage loans or mortgaged properties by the Servicer or any Affiliate thereof; or

(v) any debt that the Servicer or any Affiliate thereof has extended to any Borrower or any of its Affiliates.

Advance Date” shall mean, with respect to any Transaction, the date on which Lender advances funds to Borrower pursuant to the terms of this Loan Agreement.

Advance Rate (Purchase Price)” shall mean, with respect to each Underlying Loan, the percentage, set forth as the “Financed Percentage, % to Purchase Price” in the Terms Schedule; provided, that such percentage shall not exceed eighty-five percent (85%).

Advance Rate (UPB)” shall mean, with respect to each Underlying Loan, the percentage, set forth as the “Financed Percentage, % to UPB” in the Terms Schedule

Adjustment Factor” means a factor calculated by Lender upon an Index Conversion Event that Lender determines will, when added to the Alternate Index, cause the Alternate Index to be comparable to the Index being replaced as a result of the Index Conversion Event. In determining the Adjustment Factor, Lender will take into consideration the methods generally accepted by the commercial real estate finance industry or ISDA for calculating an adjustment factor. The Adjustment Factor may be positive, negative or zero.

Adjustment Factor Notice” is defined in Section 2.04(a) hereof.

Affiliate” shall mean, with respect to any Person, any other Person which, directly or indirectly, controls, is controlled by, or is under common control with, such Person. For purposes of this definition, “control” (together with the correlative meanings of “controlled by” and “under common control with”) means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities or other beneficial interests, by contract, or otherwise.

Allocated Loan Amount” shall mean, for each Underlying Loan, the amount set forth as the “Freddie Mac Financing” in the Terms Schedule, as such amount may be reduced from time to time in accordance with Section 2.05, Section 2.06, Section 2.07, and Section 3.03(c)(iv). As of the Advance Date with respect to any Underlying Loan, the Allocated Loan Amount of such Underlying Loan shall be an amount (expressed in Dollars) equal to the product determined by multiplying (a) the Advance Rate (Purchase Price) for such Underlying Loan by (b) the Purchase Price of the Underlying Loan.

 

2


Allocated Prepayment Amount” shall have the meaning set forth in the definition of Prepayment Premium.

ALTA” shall mean American Land Title Association, or any successor thereto.

ALTA Lender’s Title Policy” shall mean an ALTA mortgagee title insurance policy in a form acceptable to Lender in Lender’s good faith business judgment (or, if the Property is in a State which does not permit the issuance of such ALTA policy, such form as shall be permitted in such State and acceptable to Lender in Lender’s good faith business judgment) issued with respect to the applicable Property and insuring the lien of the applicable Mortgage.

ALTA Owner’s Title Policy” shall mean an ALTA owner’s title insurance policy (or, if the Property is in a State which does not permit the issuance of such ALTA policy, such form as shall be permitted in such State) issued with respect to the Property and insuring Borrower’s fee interest in the Property.

Alternate Index” means an alternate, substitute or successor index to the then-current Index selected by Lender taking into consideration any alternate, substitute or successor index to the then-current Index that has been selected, endorsed or recommended by the commercial real estate finance industry or ISDA. The Alternate Index selected by Lender with respect to any portion of the Loan advanced with respect to any Underlying Loan shall be the same as the alternative index with respect to payments being made by the Underlying Borrower with respect to such Underlying Loan

Alternate Index Page” means the applicable page for the Alternate Index on the service selected by Lender which electronically transmits or displays rates for the Alternate Index.

Applicable Margin” shall mean, for each Floating Rate Underlying Loan, the percentage, set forth as the “Margin” in the Terms Schedule, subject to increase or decrease in accordance with Section 2.01 hereof.

Appraisal” shall mean an appraisal prepared in accordance with 12 C.F.R. § 225.64 and conducted in accordance with the standards of the American Appraisal Institute by an Appraiser selected by the Servicer.

Appraiser” shall mean a professional real estate appraiser who is a member in good standing of the Appraisal Institute, and, if the state in which the Underlying Mortgaged Property is located certifies or licenses appraisers, certified or licensed in such state, and in each such case who has a minimum of five years of experience in the subject property type and market. Any appraiser (a) shall have no affiliation with the Mortgage Loan Seller, Lender, Borrower, Underlying Borrower, Servicer or Sub-Servicer, and (b) shall have no direct financial interest in or any material indirect financial interest in the Mortgage Loan Seller, Lender, Borrower, Underlying Borrower, Servicer or Sub-Servicer.

 

3


Assumed Targeted Yield” shall mean an amount equal to (a) for Underlying Loans identified on the Terms Schedule as “Highland - VineBrook Portfolio”, 6.00%; and (b) for all other Underlying Loans, 9.00%, in each case as set forth as the “Assumed Targeted Yield” in the Terms Schedule, and in each case, assuming the timely payment of scheduled payments of interest and principal on the Underlying Loans and that the Underlying Loans will pay off at par during the open prepayment period for such Underlying Loan.

Bankruptcy Action” shall have the meaning set forth on Schedule 2 attached hereto.

Bankruptcy Code” shall mean the United States Bankruptcy Code of 1978, as amended from time to time.

Borrower” shall have the meaning provided in the preamble hereof.

Borrower Principal” shall mean (a) Guarantor, (b) any person or entity that directly or indirectly controls Borrower and the entity(ies) through which that person or entity controls Borrower (if applicable) (“Controlling Party”), (c) any person or entity with a collective equity interest (whether direct or indirect) in Borrower equal to or exceeding twenty five percent (25%) (“Equity Holder”), (d) if Borrower, Guarantor, Controlling Party or Equity Holder is a limited liability company, limited partnership, general partnership, joint venture and/or a trust (other than a real estate investment trust), any one or more of the following: (i) any general partner of a general partnership or a limited partnership, (ii) any managing member or non-member manager of a limited liability company, (iii) any joint venture partner of a joint venture, (iv) the settlor (grantor) of a revocable trust, (v) the trustee of a trust or (vi) any beneficiary with a twenty five percent (25%) or more interest in an irrevocable trust or an Illinois land trust.

Business Day” shall mean any day other than a Saturday, Sunday or any other day on which commercial banks in New York City, the Commonwealth of Virginia and the cities in which the principal offices of Freddie Mac, Borrower, Collection Agent or Custodian are located are authorized or obligated by law or executive order to be closed.

Capital Stock” shall mean any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent equity ownership interests in a Person which is not a corporation, including, without limitation, any and all member or other equivalent interests in any limited liability company, and any and all warrants or options to purchase any of the foregoing.

Change of Control” shall mean the occurrence of any of the following events: (a) any “person” or “group” (within the meaning of Section 13(d) or 14(d) of the Exchange Act) shall become, or obtain rights (whether by means of warrants, options or otherwise) to become, the beneficial owner, directly or indirectly, of 25% or more of the total voting power of all classes of Capital Stock of Guarantor entitled to vote generally in the election of the directors or (b) the Guarantor shall cease to directly own and control, of record and beneficially, 100% of the Capital Stock of Borrower.

Closing Date” shall mean the date upon which the conditions precedent set forth in Section 5.01 shall have been satisfied.

 

4


Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.

Collateral” shall have the meaning set forth in Section 4.01(b) hereof.

Collection Account” shall mean a segregated, non-interest bearing account, in the name of Borrower established at the Collection Agent pursuant to the Collection Account Agreement, and subject to the security interest of Lender.

Collection Account Agreement” shall mean that certain Collection Account Agreement, dated as of the date hereof, by and among the Collection Agent, Lender and Borrower.

Collection Agent” shall mean U.S. Bank National Association.

Contractual Obligation” shall mean as to any Person, any provision of any material agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound or any provision of any security issued by such Person.

Custodial Agreement” shall mean the Custodial Agreement, dated as of the date hereof, by and among the Custodian, Lender and Borrower.

Custodian” shall mean U.S. Bank National Association, or any successor Custodian appointed by Lender with the prior written consent of Borrower (which consent shall not be unreasonably withheld, conditioned or delayed).

Daily Interest Amount” shall mean, for each Underlying Loan, as of any date of determination, an amount equal to the product of (a) the Interest Rate with respect to such Underlying Loan and (b) the Allocated Loan Amount for such Underlying Loan at the close of business on such date of determination.

Default” shall mean an event or condition that with notice or lapse of time or both would become an Event of Default.

Defaulted Loan” shall mean any Underlying Loan (a) that is sixty (60) days or more delinquent in the payment of principal, interest, fees or other amounts payable under the terms of the related Underlying Loan Documents (other than a failure to pay the entire outstanding principal balance of such Underlying Loan on the maturity date thereof), (b) that is delinquent in the payment of the entire outstanding principal balance of such Underlying Loan on the maturity date thereof, (c) as to which a Bankruptcy Action shall have occurred with respect to the related Underlying Borrower or (d) as to which a material non-monetary default (beyond any applicable notice and cure periods) shall have occurred under any related Underlying Loan Document.

Default Rate” shall mean, in respect of the principal amount of the Loan or any other amount under this Loan Agreement, the Note, or any other Loan Document that is not paid when due to Lender (whether at stated maturity, by acceleration, by optional or mandatory prepayment or otherwise), a rate per annum during the period from and including the due date to but excluding the date on which such amount is paid in full equal to 5% per annum plus the Interest Rate otherwise applicable during such period.

 

5


Dollars” and “$” shall mean lawful money of the United States of America.

ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated thereunder. Section references to ERISA are to ERISA, as in effect at the date of this Loan Agreement and, as of the relevant date, any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor.

ERISA Affiliate” shall mean any corporation or trade or business that is a member of any group of organizations (a) described in Section 414(b) or (c) of the Internal Revenue Code of which Borrower is a member and (b) solely for purposes of potential liability under Section 302 of ERISA and Section 412 of the Internal Revenue Code, described in Section 414(m) or (o) of the Internal Revenue Code of which Borrower is a member.

Event of Default” shall have the meaning set forth in Section 8 hereof.

Facility Maturity Date” shall mean the earlier of (a) the Stated Facility Maturity Date and (b) the date upon which Lender declares the Secured Obligations of the Borrower pursuant to this Loan Agreement due and payable after the occurrence of an Event of Default.

Federal Funds Rate” shall mean, for any day, the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for the day of such transactions received by Lender from three (3) federal funds brokers of recognized standing selected by it; provided, that such selected brokers shall be the same brokers as selected for all of Lender’s other borrowers where the Federal Funds Rate is to be applied, to the extent such brokers are available.

Fixed Interest Rate” shall mean a percentage per annum and shall be set forth as the “Facility Interest Rate / Spread” in the Terms Schedule with respect to each Fixed Rate Underlying Loan.

Fixed Rate Transaction” shall mean a Transaction with respect to a Fixed Rate Underlying Loan.

Fixed Rate Underlying Loan” shall mean each Underlying Loan identified as “Fixed” under the heading “Rate Type” in the Terms Schedule.

Floating Rate Transaction” shall mean a Transaction with respect to a Floating Rate Underlying Loan.

Floating Rate Underlying Loan” shall mean each Underlying Loan identified as “Floating” under the heading “Rate Type” in the Terms Schedule.

Freddie Mac” shall mean the Federal Home Loan Mortgage Corporation, a corporation organized and existing under the laws of the United States, and its successors-in-interest.

 

6


Freddie Mac Servicing Practices” shall mean, with regard to the servicing of the Underlying Loans by the Servicer or Sub-Servicer, and only to the extent such practices have been made available in writing or communicated in writing by Freddie Mac to the Servicer, servicing and administering the Underlying Loans in the same manner in which, and with the same care, skill, prudence and diligence with which, Freddie Mac services and administers multifamily mortgage loans owned by it, which shall include, without limitation, servicing and administering the Underlying Loans in accordance with the Guide, any servicing agreement governing the Underlying Loans and any Freddie Mac written policies, procedures or other communications made available in writing by Freddie Mac to the Servicer.

Fund” shall mean NexPoint WLIF I, LLC, a Delaware limited liability company.

Fund Documents” shall mean that certain limited liability company agreement of the Fund, the membership representation certificate attached thereto, the Servicing Agreement and the Purchase and Sale Agreement, as each may be amended, modified, supplemented and/or restated from time to time.

Fund Termination Date” shall mean July 12, 2029.

GAAP” shall mean generally accepted accounting principles as in effect from time to time in the United States of America.

Governing Documents” shall mean as to any Person, as applicable, its articles or certificate of incorporation and by-laws, its partnership agreement, its certificate of formation and operating agreement, and/or the other organizational or governing documents of such Person.

Governmental Authority” shall mean any nation or government, any state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any court or arbitrator having jurisdiction over Borrower or any of its properties or Lender.

Guarantor” shall mean, collectively, HIGHLAND INCOME FUND f/k/a HIGHLAND FLOATING RATE OPPORTUNITIES FUND, NEXPOINT CAPITAL, INC, HIGHLAND GLOBAL ALLOCATION FUND, NEXPOINT STRATEGIC OPPORTUNITIES FUND, and NEXPOINT REAL ESTATE STRATEGIES FUND, and any successor to and/or replacement of any of the foregoing Persons, in each case, pursuant to and in accordance with the applicable terms and conditions of the Loan Documents.

Guarantor Replacement” is defined in Section 2.12 hereof.

Guaranty” shall mean, collectively, the Guaranty of Collection and the Limited Recourse Guaranty.

Guaranty of Collection” shall mean that certain Guaranty of Collection executed by Guarantor and dated as of the date hereof.

 

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Guarantee Obligation” shall mean, as to any Person, any obligation of such Person directly guaranteeing any Indebtedness of any other Person or in any manner providing for the payment of any Indebtedness of any other Person or otherwise protecting the holder of such Indebtedness against loss (whether by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, or to take-or-pay or otherwise); provided that the term “Guarantee Obligation” shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Guarantee Obligation of a Person shall be deemed to be the lower of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing Person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing Person’s maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith.

Guide” shall mean the Freddie Mac Multifamily Seller/Servicer Guide, as amended or supplemented from time to time. To the extent the Freddie Mac Multifamily Seller/Servicer Guide is no longer published by Freddie Mac, either directly or indirectly, “Guide” shall refer to any successor guide as prescribed by Freddie Mac, which shall be provided by Freddie Mac upon request if not otherwise reasonably accessible to the parties to this Loan Agreement; provided, however, that in the event that no successor guide is prescribed by Freddie Mac within ninety (90) days of the date on which the Guide is no longer published by Freddie Mac, all references to the “Guide” in this Loan Agreement shall be disregarded and the Guide shall no longer be applicable. For purposes of this Loan Agreement, the term “Guide” shall not include any forms referenced therein, which forms shall be applicable at the option of the Servicer.

ICE” means Intercontinental Exchange.

Indebtedness” shall mean, for any Person at any date, without duplication, (a) all then outstanding indebtedness of such Person for borrowed money (whether by loan or the issuance and sale of debt securities) or for the deferred purchase price of property or services (other than current trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices), (b) any other then outstanding indebtedness of such Person which is evidenced by a note, bond, debenture or similar instrument, (c) all then outstanding obligations of such Person under financing leases, (d) all then outstanding obligations of such Person in respect of letters of credit, acceptances or similar instruments issued or created for the account of such Person and (e) all then outstanding liabilities secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof.

Indemnified Party” shall have the meaning provided in Section 11.03 hereof.

Independent Manager” shall mean a natural Person who (a) is not at the time of initial appointment and has never been, and will not while serving as Independent Manager be: (i) a stockholder, director, officer, employee, partner, member (other than a “special member” or “springing member”), manager (with the exception of serving as the Independent Manager of Borrower), attorney or counsel of Borrower or any Affiliate or equity owner of any Borrower; (ii) a customer, supplier or other Person who derives any of its purchases or revenues (other than any revenue derived from serving as the Independent Manager of such party) from its activities with

 

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Borrower, or any Affiliate or equity owner of Borrower; (iii) a Person controlling or under common control with any such stockholder, director, officer, employee, partner, member, manager, attorney, counsel, equity owner, customer, supplier or other Person of Borrower or any Affiliate or equity owner of Borrower; or (iv) a member of the immediate family of any such stockholder, director, officer, employee, partner, member, manager, attorney, counsel, equity owner, customer, supplier or other Person of Borrower or any Affiliate or equity owner of Borrower and (b) has (i) prior experience as an independent director or independent manager for a corporation, a trust or limited liability company whose charter documents required the unanimous consent of all independent directors or independent managers thereof before such corporation, trust or limited liability company could consent to the institution of bankruptcy or insolvency proceedings against it or could file a petition seeking relief under any applicable federal or state law relating to bankruptcy and (ii) at least three (3) years of employment experience and who is provided by CT Corporation, Corporation Service Company, National Registered Agents, Inc., Wilmington Trust Company or Stewart Management Company, or if none of these companies is then providing professional independent directors, another nationally recognized company acceptable to Lender, that is not an Affiliate of Borrower and that provides, inter alia, professional independent directors or independent managers in the ordinary course of their respective business to issuers of securitization or structured finance instruments, agreements or securities or lenders originating commercial real estate loans for inclusion in securitization or structured finance instruments, agreements or securities (a “Professional Independent Manager”) and is an employee of such a company or companies at all times during his or her service as an Independent Manager. A natural Person who satisfies the foregoing definition except for being (or having been) the independent director or independent manager of a “special purpose entity” Affiliated with Borrower (provided such Affiliate does not or did not own a direct or indirect equity interest in Borrower) shall not be disqualified from serving as an Independent Manager, provided that such natural Person satisfies all other criteria set forth above and that the fees such individual earns from serving as independent director or independent manager of Affiliates of Borrower or in any given year constitute in the aggregate less than five percent (5%) of such individual’s annual income for that year. A natural Person who satisfies the foregoing definition other than clause (a)(ii) shall not be disqualified from serving as an Independent Manager if such individual is a Professional Independent Manager and such individual complies with the requirements of the previous sentence.

Index” means the LIBOR Index or the Alternate Index, as applicable. Until an Index Conversion Event occurs, the Index will be the LIBOR Index.

Index Conversion Date” shall have the meaning set forth in Section 2.04(b) hereof.

Index Conversion Event” means:

(a) the publication of the then-current Index has been either permanently or indefinitely suspended, or

(b) regardless of the continued existence of the then-current Index, the use of an alternate, substitute or successor index to the then-current Index in mortgages purchased and/or guaranteed by Freddie Mac is required by (i) any regulator of Freddie Mac, (ii) any governmental entity with authority to direct the actions of Freddie Mac, or (iii) applicable law, or

 

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(c) Lender has determined, in its sole discretion, that the then-current Index must be replaced with the Alternate Index as a result of one or more of the following event(s):

(i) The supervisor of the administrator of the then-current Index has announced in a public statement that (A) the publication of the then-current Index will be either permanently or indefinitely suspended, (B) there has been or will be a material change in the methodology of calculating the Index, or (C) it no longer recommends the use of the Index as an index.

(ii) Lender has determined that the use of an alternate, substitute or successor index to the then-current Index has become a generally acceptable market practice in the commercial real estate finance industry regardless of the continued existence of the then-current Index.

(iii) ISDA has announced that it will use an alternate, substitute or successor index to the then-current Index regardless of the continued existence of the then-current Index.

(iv) Any (A) regulator of Freddie Mac or (B) governmental entity with authority to direct the actions of Freddie Mac recommends the use of an alternate, substitute or successor index to the then-current Index in mortgages purchased and/or guaranteed by Freddie Mac regardless of the continued existence of the then-current Index.

An Index Conversion Event may occur more than one time during the term of the Loan. Lender may but is not required to rely on a statement of the supervisor of the administrator of the applicable Index to make its determination that an Index Conversion Event has occurred.

Index Conversion Notice” is defined in Section 2.04(a) hereof.

Index Page” means the LIBOR Index Page or the Alternate Index Page, as applicable.

Index Rate” means, as applicable:

(a) For each Interest Period beginning on the first Interest Period until (but not including) an Index Conversion Date, the rate for the LIBOR Index released most recently preceding the first day of the month in which the Interest Period begins, as the LIBOR Index Rate is displayed on the LIBOR Index Page.

(b) For each Interest Period beginning on an Index Conversion Date until any subsequent Index Conversion Date, the rate for the applicable Alternate Index released most recently preceding the first day of such Interest Period, as such rate is displayed on the applicable Alternate Index Page, plus the applicable Adjustment Factor.

If at any time the Index Rate is less than zero, the Index Rate will be deemed to be zero for all purposes of this Loan Agreement and the Note.

 

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Interest” shall mean, with respect to the Loan as of any Payment Date, an amount equal to the sum of the Daily Interest Amounts for all Underlying Loans for each day during the Interest Period.

Interest Period” shall mean, with respect to any specified Payment Date, the period from and including the first (1st) day of the calendar month immediately preceding such specified Payment Date to but excluding the first (1st) day of the calendar month in which such specified Payment Date occurs. Notwithstanding the foregoing, the first Interest Period shall commence on and include the Closing Date.

Interest Rate” shall mean, for any Interest Period for the related Underlying Loan, a rate per annum equal (a) with respect to any Fixed Rate Underlying Loan, the applicable Fixed Interest Rate with respect to such Underlying Loan, or (b) with respect to any Floating Rate Underlying Loan, (i) the sum of (A) the Index Rate, as determined for such Interest Period plus (B) the Applicable Margin with respect to such Underlying Loan.

Investment Company Act” shall mean the Investment Company Act of 1940, as amended.

ISDA” means the International Swaps and Derivatives Association.

Lender” shall have the meaning provided in the preamble hereof.

LIBOR” means the London Interbank Offered Rate; provided that LIBOR will be deemed to be 2.39800% for the Interest Accrual Period relating to the First Payment Date for the Fund.

LIBOR Index” means ICE’s one (1) month LIBOR for United States Dollar deposits, as such index is displayed on the LIBOR Index Page used to establish the LIBOR Index Rate.

LIBOR Index Rate” means ICE’s rate for the LIBOR Index.

LIBOR Index Page” means one of the following, as determined by Lender:

(a) Bloomberg L.P., page “BBAM”, or such other page for the LIBOR Index as may replace page BBAM on that service.

(b) The applicable page for the LIBOR Index on another service which electronically transmits or displays rates for LIBOR.

(c) Any publication of rates for LIBOR available from ICE.

(d) If ICE ceases to set or publish a LIBOR rate/interest settlement rate, any other publication of rates for LIBOR that Lender determines is appropriate for calculating the Interest Rate.

 

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Lien” shall mean any mortgage, lien, pledge, charge, security interest or similar encumbrance.

Limited Recourse Guaranty” shall mean that certain Limited Recourse Guaranty executed by Guarantor and dated as of the date hereof.

Litigation Threshold” shall mean an amount equal to $500,000.

Loan” shall have the meaning set forth in Section 2.01 hereof.

Loan Agreement” shall mean this Loan and Security Agreement, as the same may be amended, supplemented or otherwise modified from time to time.

Loan Documents” shall mean, collectively, this Loan Agreement, the Note, the Custodial Agreement, the Collection Account Agreement, the Guaranty, the Servicing Instruction Letter, and any and all other documents and agreements now or hereafter evidencing and/or securing the Loan, as each of the foregoing may be amended, modified, supplemented and/or restated from time to time; provided, however, Loan Documents shall not include any of the Underlying Loan Documents.

Mandatory Prepayment” shall have the meaning set forth in Section 2.05(a) hereof.

Mandatory Prepayment Amount” shall have the meaning set forth in Section 2.05(a) hereof.

Margin Call” shall have the meaning set forth in Section 2.07(a) hereof.

Margin Deficit Amount” shall mean (a) with respect to a Margin Deficit Event pursuant to clause (a) of such definition, an amount that, if added to the interest due and payable by the Underlying Borrowers with respect to all Underlying Loans, less any set up fees and ongoing expenses and fees payable by Borrower with respect to such Underlying Loans and any Borrower organizational expenses, would cause such aggregate amount of interest due by the Underlying Borrowers with respect to all Underlying Loans to be equal to twice the amount of Interest payable with respect to the Loan by Borrower pursuant to this Loan Agreement, and (b) with respect to a Margin Deficit Event pursuant to clause (b) of such definition, an amount that, if subtracted from the Allocated Loan Amount, would be sufficient to cause the Advance Rate (UPB) of such Underlying Loan (after deduction of such amount from the Allocated Loan Amount and after application of such Write Down) to be equal to the Advance Rate (UPB) set forth in the Terms Schedule.

Margin Deficit Event” shall mean the occurrence of any of the following: (a) if, as of any Payment Date, the interest due and payable by the Underlying Borrowers with respect to all Underlying Loans, less any set up fees and ongoing expenses and fees payable by Borrower with respect to such Underlying Loans and any Borrower organizational expenses, is less than twice the amount of the Interest due with respect to the Loan by Borrower pursuant to this Loan Agreement as of such Payment Date or (b) with respect to any Underlying Loan, if upon the occurrence of a Write Down with respect to such Underlying Loan, the Allocated Loan Amount of such Underlying Loan divided by the unpaid principal balance of such Underlying Loan is greater than the Advance Rate (UPB) applicable to such Underlying Loan.

 

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Material Adverse Effect” shall mean a material adverse effect on (a) the business, assets or financial condition of the Underlying Mortgaged Property, Borrower, or Guarantor, taken as a whole, (b) the ability of Borrower and/or Guarantor to perform its obligations under any of the Loan Documents to which it is a party, (c) the validity or enforceability of any of the Loan Documents, or (d) the rights and remedies of Lender under any of the Loan Documents.

Maturity Date” shall mean the Facility Maturity Date, or such earlier date on which the final payment of principal of the Note becomes due and payable in accordance with the provisions hereof, by acceleration or by operation of law or otherwise.

Maximum Facility Amount” shall mean NINE HUNDRED NINTY-FIVE MILLION ONE HUNDRED AND FIFTY-SEVEN THOUSAND SIXTY AND 95/100 DOLLARS ($995,157,060.95).

Mortgage Loan Seller” shall mean Freddie Mac.

Multiemployer Plan” shall mean a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been, or were required to have been, made by Borrower or any ERISA Affiliate and that is covered by Title IV of ERISA.

Net Cash Flow” shall mean, with respect to any Underlying Loan at any time, all monies collected from or in respect of such Underlying Loan, including without limitation, payments of interest, principal, repayment, rental or other income, insurance and liquidation proceeds, payments in respect of any associated hedging transaction, and all proceeds from sale or other disposition of the Underlying Mortgaged Property. For the avoidance of doubt, Net Cash Flow shall not include origination fees and expense deposits paid by Underlying Borrower in connection with the origination and closing of the Underlying Loan.

Non-Excluded Taxes” shall have the meaning set forth in Section 2.09(a) hereof.

Non-US Equity Holder” shall have the meaning set forth in Section 5.01(r) hereof.

Note” shall have the meaning set forth in Section 2.02 hereof.

Obligor” shall mean any borrower, guarantor, or other obligor under any Underlying Loan Documents.

Payment Date” shall mean, with respect to any Interest Period, the twenty-fifth (25th) day of the calendar month immediately succeeding such Interest Period, or if such day is not a Business Day, the immediately succeeding Business Day.

Payoff” shall mean, with respect to any Underlying Loan, repayment by the applicable Underlying Borrower (or any other Person) of all outstanding principal thereunder together with all interest accrued thereon to the date of such repayment and any penalty or premium thereon.

 

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Payoff Proceeds” shall mean, with respect to any Underlying Loan, all funds received from the applicable Underlying Borrower (or any other Person) in connection with a Payoff.

Permitted Liens” shall mean, for each Underlying Loan, (a) all Liens and any other encumbrance or charge permitted pursuant to the applicable Underlying Loan Documents, (b) all Liens and any other encumbrance or charge approved by Lender prior to the Closing Date, (c) the Liens, easements, rights of way and other encumbrances or matters identified as title exceptions in the mortgagee title insurance loan policies relating to the applicable Underlying Mortgages and the corresponding title datedowns of such mortgagee title insurance loan policies received and reviewed by Borrower and Lender prior to the Closing Date, (d) Liens and any other encumbrance or charge created or permitted pursuant to the applicable Underlying Loan Documents and the applicable Loan Documents and (e) Liens and any other encumbrance or charge otherwise specifically identified to Lender and approved in writing by Lender in its good faith business judgment, such approval not to be unreasonably withheld, conditioned or delayed.

Permitted Underlying Loan Modification” shall mean any modification, amendment or waiver of any provision of an Underlying Loan which is not a Significant Underlying Loan Modification.

Person” shall mean any individual, corporation, company, voluntary association, partnership, joint venture, limited liability company, trust, unincorporated association, government (or any agency, instrumentality or political subdivision thereof) or any other entity of whatever nature.

Plan” shall mean an employee benefit or other plan established or maintained by Borrower or any ERISA Affiliate during the five year period ended prior to the date of this Loan Agreement or to which Borrower or any ERISA Affiliate makes, is obligated to make or has, within the five year period ended prior to the date of this Loan Agreement, been required to make contributions and that is covered by Title IV of ERISA or Section 302 of ERISA or Section 412 of the Internal Revenue Code, other than a Multiemployer Plan.

Prepayment Premium” shall mean, with respect to any prepayment, an amount equal to the sum of:

(i) to the extent (a) such prepayment is allocated to an Underlying Loan (the “Allocated Prepayment Amount”) that is a Fixed Rate Underlying Loan and (b) a prepayment of such Underlying Loan would be subject to a prepayment charge equal to a fixed percentage pursuant to the Underlying Loan Documents, the product of (w) the unpaid principal balance of such Underlying Loan, (x) the fixed percentage prepayment charge applicable to the Underlying Loan, (y) the percentage of the Loan that is being prepaid and (z) 50%;

(ii) to the extent the Allocated Prepayment Amount (a) relates to a Fixed Rate Underlying Loan and (b) a prepayment of such Underlying Loan would be subject to a yield maintenance charge (the “Yield Maintenance Allocated Prepayment Amount”) pursuant to the Underlying Loan Documents, the greater of (y) the Yield Maintenance Amount and (z) the product of (1) 1.0% and (2) such Yield Maintenance Allocated Prepayment Amount; and

 

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(iii) to the extent the Allocated Prepayment Amount is made with respect to a Floating Rate Underlying Loan, the product of (a) the unpaid principal balance of the related Underlying Loan, (b) 1%, (c) the percentage of the Loan that is being prepaid and (d) 50%.

Prohibited Person” shall have the meaning set forth in Section 6.16 hereof.

Property” shall mean, individually and collectively as the context may require, the Underlying Mortgaged Property and any right or interest in or to property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible, owned by an Underlying Borrower and pledged by the Underlying Borrower pursuant to the applicable Underlying Loan Documents.

Purchase and Sale Agreement” shall mean that certain Purchase and Sale and Agreement, dated as of the date hereof, by and between the Fund and Mortgage Loan Seller.

Purchase Price” shall mean, with respect to each Underlying Loan, the amount set forth as the “Fair Value @ Purchase Price” in the Terms Schedule.

Receipts” shall mean all principal and interest payments and other amounts (excluding any amounts required to fund escrows or reserves pursuant to the Underlying Loan Documents) payable to Borrower with respect to any Underlying Loan pursuant to the applicable Underlying Loan Documents.

Replacement Guaranty” is defined in Section 2.12 hereof.

Requirement of Law” shall mean as to any Person, any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.

Responsible Officer” shall mean, (a) with respect to Collection Agent, any officer or assistant officer in the corporate trust department of the Collection Agent (including, but not limited to, an assistant secretary and/or an assistant treasurer), having direct responsibility for the administration of the Transaction and (b) with respect to any other Person, the president, the chief executive officer, the chief operating officer or, with respect to financial matters, the chief financial officer of such Person; provided, that in the event any such officer is unavailable at any time he or she is required to take any action hereunder, Responsible Officer shall mean any officer authorized to act on such officer’s behalf as demonstrated to Lender to its reasonable satisfaction.

Secured Obligations” shall mean the unpaid principal amount of, and interest on, the Loan, and all other obligations and liabilities of Borrower to Lender, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of or in connection with this Loan Agreement, the Note, and any other Loan Document (but excluding the Underlying Loan Documents) made, delivered or given in connection herewith or therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all reasonable fees and disbursements of counsel to Lender that are required to be paid by Borrower pursuant to the terms hereof or thereof) or otherwise, including, without limitation, all amounts described in

 

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Section 9(c) and Section 9(d) hereof. For purposes hereof, “interest” shall include, without limitation, interest accruing after the maturity of the Loan and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding.

Servicer” shall mean Freddie Mac or any other special servicer or master servicer approved by Lender in its sole and absolute discretion.

Servicing Account” shall mean a segregated, interest bearing account of the master servicer that is subject to the security interest of Lender.

Servicing Agreement” shall mean that certain Servicing Agreement, dated as of the date hereof, by and among the Fund, Borrower, the manager of the Fund and Servicer.

Servicing Instruction Letter” shall mean a letter agreement substantially in the form of Exhibit C attached hereto and otherwise acceptable to Lender.

Servicing Records” shall have the meaning set forth in Section 11.15(b) hereof.

Servicing Rights” shall mean rights of any Person, to administer, service or subservice, the Underlying Loan or to possess related Servicing Records.

Servicing Standard” shall mean

(a) with respect to any Underlying Loan (other than when it is a specially serviced loan), to the extent not inconsistent with applicable law, the terms of this Loan Agreement or the terms of the respective Underlying Loan Documents or any applicable intercreditor or co-lender and/or similar agreement(s), servicing and administering such Underlying Loans in accordance with (i) Freddie Mac Servicing Practices or (ii) to the extent Freddie Mac Servicing Practices do not provide sufficient guidance or Freddie Mac Servicing Practices have not been made available in writing or communicated in writing by Freddie Mac to the Servicer, Accepted Servicing Practices; and

(b) with respect to any Underlying Loan that is a specially serviced loan, to the extent not inconsistent with applicable law, the terms of this Loan Agreement or the terms of the respective Underlying Loan Documents or any applicable intercreditor or co-lender and/or similar agreement(s), servicing and administrating such Underlying Loans in accordance with Accepted Servicing Practices; provided, however, to the extent consistent with applicable law, the terms of this Loan Agreement and the terms of the respective Underlying Loan Documents and any applicable intercreditor or co-lender and/or similar agreement(s), the Servicer may, in its sole discretion, require the Borrower to maintain insurance consistent with either (i) Accepted Servicing Practices or (ii) Freddie Mac Servicing Practices.

In the event of any conflict under clause (a) of this definition (i) between Freddie Mac Servicing Practices and Accepted Servicing Practices, Freddie Mac Servicing Practices shall govern and be applicable and (ii) between Freddie Mac Servicing Practices or Accepted Servicing Practices and the express written terms of this Loan Agreement, the terms of this Loan Agreement shall govern and be applicable.

 

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Significant Underlying Loan Modification” shall mean any modification or amendment of an Underlying Loan which:

(a) reduces the outstanding principal amount of the Underlying Loan other than with respect to a dollar-for-dollar principal payment of such Underlying Loan,

(b) increases the outstanding principal amount of the Underlying Loan other than increases which are derived from protective advances,

(c) modifies the regularly scheduled payments of principal and interest of the Underlying Loan,

(d) changes the frequency of scheduled payments of principal and interest in respect of the Underlying Loan,

(e) subordinates the lien priority of the Underlying Loan or the payment priority of the Underlying Loan other than subordinations required under the then existing terms and conditions of the Underlying Loan, which terms and conditions do not permit any material lender discretion (provided, however, the foregoing shall not preclude the execution and delivery of subordination, nondisturbance and attornment agreements with tenants, subordination to tenant leases, easements, plats of subdivision and condominium declarations and similar instruments which in the commercially reasonable judgment of the applicable Servicer do not materially adversely affect the rights and interest of the holder of the Underlying Loan),

(f) releases any collateral for the Underlying Loan other than releases required under the then existing Underlying Loan Documents, which terms and conditions do not permit any material lender discretion, or immaterial releases in connection with eminent domain or under threat of eminent domain,

(g) waives, amends or modifies any cash management or reserve account requirements of the Underlying Loan other than changes required under the then existing Underlying Loan Documents, which terms and conditions do not provide for any material lender discretion,

(h) waives any due-on-sale or due-on-encumbrance provisions of the Underlying Loan other than waivers required to be given under the then existing Underlying Loan Documents, which terms and conditions do not provide for any material lender discretion,

(i) waives, amends or modifies any guaranty or indemnity provisions or agreements for the Underlying Loan,

(j) waives, amends or modifies any master lease, operating lease or tenancy in common agreement,

(k) waives or reduces any insurance requirements,

 

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(l) approves any material agreements as described in the Underlying Loan Documents,

(m) applies any proceeds, rents, collateral, reserves, or any other collateral held by Borrower when, pursuant to the Underlying Loan Documents, Borrower is permitted to apply any such proceeds, rents, collateral, reserves, or any other collateral held by Borrower in Borrower’s “sole discretion”,

(n) amends or modifies any organizational documents of any special purpose bankruptcy remote entity,

(o) consents to any zoning reclassification of all or any portion of the Underlying Mortgaged Property,

(p) determines that the provisions set forth in the Underlying Loan Agreement regarding the application of insurance proceeds have been satisfied,

(q) consents to or approves a transfer, sale, conveyance, mortgage, grant, pledge, or other transfer or disposition of the Underlying Loan or Underlying Mortgaged Property, except as required or expressly permitted under the Underlying Loan Documents,

(r) any exercise of remedies by Borrower in connection with an event of default by the Underlying Borrower pursuant to the Underlying Loan Documents, including, without limitation, any foreclosure or deed-in-lieu of foreclosure of the Underlying Mortgaged Property,

(s) consents to a modification or amendment of any interest rate cap agreement,

(t) consents to a material alteration, as described in the Underlying Loan Documents,

(u) approves an annual operating budget, as described in the Underlying Loan Documents,

(v) approves the amendment, surrender, termination, cancellation, modification, assignment or extension of the Underlying Loan Documents or an intercreditor agreement, or

(w) enters into and/or approves a deposit account control agreement which does not contain successor and assign language.

Special Purpose Bankruptcy Remote Entity” shall have the meaning set forth on Schedule 2 attached hereto.

Stated Facility Maturity Date” shall mean July 12, 2029.

 

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Subsidiary” shall mean, with respect to any Person, any other Person of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership or other entity (irrespective of whether or not at the time securities or other ownership interests of any other class or classes of such corporation, partnership or other entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person.

Sub-Servicer” shall mean, with respect to an Underlying Loan, the originator of such Underlying Loan or another entity acceptable to Freddie Mac and Borrower with whom the Servicer has entered into a sub-servicing agreement.

Terms Schedule” shall mean the schedule of terms with respect to each Underlying Loan set forth on Schedule 1 hereto.

Title Insurance Policy” shall mean, with respect to the Property, the ALTA Owner’s Title Policy and/or the ALTA Lender’s Title Policy, as applicable.

Transaction” shall mean a Transaction, as specified in Section 2.01(b) hereof.

Trust Receipt” shall have the meaning set forth in the Custodial Agreement.

Underlying Borrower” shall mean the obligor on an Underlying Note and the grantor of the related Underlying Mortgage.

Underlying Loan” or “Underlying Loans” shall mean, individually or collectively, as the context may require, the underlying first priority commercial mortgage loans sold by the Mortgage Loan Seller to Borrower.

Underlying Loan Closing Date” shall mean, with respect to any Underlying Loan, the date on which Borrower purchases the applicable Underlying Loan from Mortgage Loan Seller.

Underlying Loan Documents” shall have the meaning set forth in the Custodial Agreement.

Underlying Loan File” shall have the meaning set forth in the Custodial Agreement.

Underlying Loan Termination Date” shall mean, with respect to any Underlying Loan, the earliest to occur of (a) the Stated Facility Maturity Date, (b) the maturity date of such Underlying Loan (whether scheduled, by acceleration or otherwise), (c) the repayment in full of such Underlying Loan by the related Underlying Borrower or (d) the sale of such Underlying Loan to any Person.

Underlying Mortgage” shall mean, individually or collectively, as the context may require, a mortgage, deed of trust, deed to secure debt or other instrument creating a valid and enforceable first lien on, or first priority ownership interest in, the Underlying Mortgaged Property securing the Underlying Note.

 

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Underlying Mortgaged Property” shall mean, individually or collectively, as the context may require, the mortgaged property securing the Underlying Loan.

Underlying Note” shall mean, individually or collectively, as the context may require, the note or other evidence of indebtedness of Underlying Borrower secured by the Underlying Mortgage.

UCC” shall mean the Uniform Commercial Code as in effect on the date hereof in the State of New York; provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of the security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than New York, “Uniform Commercial Code” shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection.

Write Down” shall mean, with respect to any Underlying Loan, a write down by Lender on its books and records of the unpaid principal balance of any Underlying Loan (regardless as to whether Borrower writes down any unpaid principal balance of any Underlying Loan on its books and records or whether the principal balance of the Underlying Loan is actually reduced).

Yield Maintenance Allocated Prepayment Amount” shall have the meaning set forth in the definition of Prepayment Premium.

Yield Maintenance Amount” shall mean, with respect to a Fixed Rate Underlying Loan, an amount equal to the product of (a) the applicable Yield Maintenance Allocated Prepayment Amount, (b) difference between (i) the sum of the monthly Interest Rate for such Fixed Rate Underlying Loan and the Master Servicing Fee (as defined in the Servicing Agreement) (expressed as a percentage per month) and (ii) the Assumed Reinvestment Rate (as defined in the Underlying Loan Documents for such Fixed Rate Underlying Loan) and (c) the Present Value Factor (as defined in the Underlying Loan Documents for such Fixed Rate Underlying Loan).

1.02 Accounting Terms and Determinations. Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to Lender hereunder shall be prepared, in accordance with GAAP.

SECTION 2. Terms of the Loan.

2.01 Loan.

(a) Subject to the terms and conditions of this Loan Agreement (including, without limitation, Section 5 hereof), Lender shall make a loan to Borrower on the Closing Date (the “Loan”) in the amount of the Maximum Facility Amount. The Lender will target to lend at an Advance Rate (Purchase Price) of eighty percent (80%) (or such lesser Advance Rate (Purchase Price) requested by Borrower) with respect to each Underlying Loan; provided, that based on the characteristics of such Underlying Loan and the obligation to achieve the Assumed Targeted Yield, Lender may, in its sole discretion, offer financing at an Advance Rate (Purchase Price) greater than eighty percent (80%) (but no greater than eighty five percent (85%)) or an Advance Rate (Purchase Price) lower than eighty percent (80%). The Lender will target to lend at a rate based on the characteristics of such Underlying Loan and the obligation to achieve the Assumed Targeted Yield as of the Closing Date.

 

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(b) Subject to the terms and conditions of the Loan Documents, on the Closing Date the parties hereto may enter into transactions in which Lender will advance funds to Borrower secured by Borrower’s right, title and interest in and to the Underlying Loans set forth on the Terms Schedule. Each such transaction shall be referred to herein as a “Transaction” and, unless otherwise agreed in writing, shall be governed by this Loan Agreement, including any supplemental terms or conditions contained in any exhibits identified herein as applicable hereunder. Each financing of an Underlying Loan shall constitute a distinct Transaction. Notwithstanding any provision or agreement herein, this Loan Agreement is not a commitment by Lender to engage in Transactions, but sets forth the requirements under which Lender would consider entering into Transactions from time to time. At no time shall Lender be obligated to finance any Underlying Loan.

(c) Upon the satisfaction of all conditions set forth in Section 5.01 for each Transaction, Lender will advance to Borrower an amount equal to the Allocated Loan Amount for the applicable Underlying Loan to an account of Borrower. This Loan Agreement (including the applicable portion of the Terms Schedule), shall be conclusive evidence of the terms of the Transaction covered thereby.

(d) Amounts borrowed pursuant to any Transaction may not be re-borrowed by Borrower.

2.02 Note. The Loan shall be evidenced by a single promissory note of Borrower (the “Note”), dated the Closing Date, payable to Lender in an amount up to the Maximum Facility Amount (or such lesser amount as shall equal the aggregate unpaid principal amount of the Loan made by Lender to Borrower under this Loan Agreement) and otherwise duly completed. Lender shall have the right to have the Note subdivided, by exchange for promissory notes of lesser denominations or otherwise, as determined by Lender.

2.03 Repayment of Loan; Interest.

(a) Borrower hereby promises to repay in full on the Maturity Date the then aggregate outstanding principal amount of the Loan. For the avoidance of doubt, Borrower shall be required to repay to Lender the principal sum of up to the Maximum Facility Amount or such lesser amount actually advanced by Lender to Borrower pursuant to the terms of this Loan Agreement.

(b) With respect to each Underlying Loan, Borrower hereby promises to repay in full on the applicable Underlying Loan Termination Date for such Underlying Loan, the then outstanding Allocated Loan Amount for such Underlying Loan.

(c) Borrower hereby promises to pay to Lender, on each Payment Date until the date the Loan shall be paid in full, all then accrued and unpaid Interest with respect to the Loan.

 

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(d) In accordance with any payments made by Borrower pursuant to Section 2.03(b) above, Borrower shall indemnify Lender and hold Lender harmless from any actual loss or expense which Lender may sustain or incur arising from (a) the re-employment of funds obtained by Lender to maintain the Loan hereunder for the period from the date of such payment through the following Payment Date had the payments made pursuant to Sections 2.03(b) not occurred or (b) fees payable to terminate the deposits from which such funds were obtained, in either case, which actual loss or expense shall be equal to any amount equal to the excess, as reasonably determined by Lender, of (i) its cost of obtaining funds for the Loan for the period from the date of such payment through the following Payment Date had the payments made pursuant to Section 2.03(b) not occurred over (ii) the amount of interest likely to be realized by Lender in redeploying the funds not utilized by reason of such payment for such period. Lender shall, at the request of Borrower, notify Borrower of an estimate of the approximate amounts of costs to be paid by Borrower in the event of any such payment, such estimate shall not be conclusive and may in no way limit the amount of costs determined at the time that such prepayment is made. This Section 2.03(d) shall survive termination of this Loan Agreement and payment of the Note.

If all or a portion of the principal amount of the Loan, or any interest payable thereon or any other amount payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum equal to the Default Rate, from the date of such non-payment until such amount is paid in full. Notwithstanding the foregoing, interest accruing at the Default Rate shall be payable to Lender on demand.

2.04 Alternate Index. If an Index Conversion Event occurs:

(a) Lender will notify Borrower in writing of the Alternate Index, the Alternate Index Page, and the Index Conversion Date (as defined below) (“Index Conversion Notice”) and of the Adjustment Factor (“Adjustment Factor Notice”) before the first Payment Date following the Index Conversion Date.

(b) Beginning on the date specified in the Index Conversion Notice (“Index Conversion Date”), interest will accrue at the Interest Rate calculated using the Alternate Index, the Alternate Index Page and the Adjustment Factor specified in the applicable Index Conversion Notice and Adjustment Factor Notice, without the necessity of any amendment or other modification of this Loan Agreement or the Note.

(c) The designation or determination by Lender of an Index Conversion Event, the Index Conversion Date, the Alternate Index, the Alternate Index Page, and the Adjustment Factor will be conclusive.    

(d) Lender will determine and designate the Alternate Index, the Alternate Index Page, and the Adjustment Factor only if an Index Conversion Event occurs, and will not re-determine or re-designate another Alternate Index, the Alternate Index Page, or Adjustment Factor unless a subsequent Index Conversion Event occurs.

 

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2.05 Mandatory Prepayments.

(a) If an Underlying Borrower with respect to an Underlying Loan shall prepay (or pay on or after the maturity date of such Underlying Loan) all or any portion of the principal amount of such Underlying Loan (including any scheduled amortization or unscheduled principal payment, liquidation proceeds or other similar proceeds) or the Underlying Loan shall be sold to any Person, on the first Payment Date immediately following the date of such payment by such Underlying Borrower, Borrower shall be required to make a prepayment of the Loan hereunder (each, a “Mandatory Prepayment”) in an amount equal to the sum of (i) lesser of (x) the product of the Advance Rate (UPB) for such Underlying Loan and the amount of such principal payment or prepayment and (y) the amount necessary to reduce the then outstanding Allocated Loan Amount for such Underlying Loan to zero, (ii) all fees and other amounts then due and payable to Custodian pursuant to the Custodial Agreement, Collection Agent pursuant to the Collection Account Agreement and Servicer pursuant to the Servicing Agreement, in each case with respect to such Underlying Loan, (iii) all accrued and unpaid interest on the unpaid principal amount of such Underlying Loan and (iv) all other amounts then due and payable to Lender in connection with such Underlying Loan (the “Mandatory Prepayment Amount”). The obligation of Borrower to pay the Mandatory Prepayment Amount may be satisfied by the application of Receipts pursuant to Section 3.03(c) hereof. In connection with any Mandatory Prepayment required hereunder, the Allocated Loan Amount for the applicable Underlying Loan shall be reduced by an amount equal to the related Mandatory Prepayment Amount. After the reduction in full of the Allocated Loan Amount for the applicable Underlying Loan, any excess amounts shall be applied by Lender in its sole discretion. Upon any Mandatory Prepayment that is allocated to an Underlying Loan that is not in an open prepayment period, Borrower shall pay to Lender the Prepayment Premium with respect to such Mandatory Prepayment.

(b) If any Underlying Loan is a Defaulted Loan, Borrower shall pay to Lender, within two (2) Business Days of demand by Lender, an amount equal to the Allocated Loan Amount for the applicable Underlying Loan (without the payment of any premium or penalty); provided, however, any demand for payment of the Allocated Loan Amount for an applicable Underlying Loan may be waived or revoked by Lender in its sole discretion at any time.

(c) Promptly following the repayment of the Allocated Loan Amount of an applicable Underlying Loan in full, and so long as no Event of Default shall have occurred and be continuing, Lender’s security interest in the related Collateral shall terminate in accordance with Section 4.10.

2.06 Optional Prepayments. Borrower may prepay the Loan, in whole or in part, on any Payment Date, provided that (a) no later than five (5) Business Days prior to such Payment Date, Borrower notifies Lender in writing of its intent to make such prepayment and setting forth the Payment Date, the amount of such prepayment and identifying with particularity the Transaction(s) to be prepaid on such Payment Date, (b) no Default or Event of Default shall have occurred and be continuing both as of the date notice is delivered pursuant to clause (a) above and as of the applicable Prepayment Date, unless such Default or Event of Default is cured by such Prepayment Date, and (c) any Margin Deficit Event is cured contemporaneously with such early prepayment. Any amounts prepaid shall be applied to repay the outstanding principal amount of the Loan (together with accrued and unpaid interest thereon) until paid in full. Provided that no Default, Event of Default, or Margin Deficit Event is continuing, the amount of any prepayment made pursuant to this Section 2.06 shall be allocated to reduce the Allocated Loan Amount for

 

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each Underlying Loan in the amounts specified by Borrower for each such Underlying Loan. If such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with accrued and unpaid interest to such date on the amount prepaid. Partial prepayments shall be in an aggregate principal amount of at least $100,000. Upon any optional prepayment that is allocated to an Underlying Loan that is not in an open prepayment period, Borrower shall pay to Lender the Prepayment Premium with respect to such optional prepayment.

2.07 Margin Maintenance.

(a) If there exists a Margin Deficit Event, Lender may, by notice to Borrower substantially in the form of Exhibit B hereto (a “Margin Call”), require Borrower to (i) with respect to a Margin Deficit Event set forth in clause (a) of such definition, deposit with Lender cash in an amount equal to the Margin Deficit Amount, which cash will be held by Lender as additional Collateral for the Loan; provided, that in lieu of such cash payment (provided that sufficient amounts are then held in the Collection Account to pay such Margin Deficit Amount and all other amounts then due and payable on such Payment Date), Borrower may request on any Payment Date, subject to Lender’s approval in its sole discretion (such approval to be revocable by Lender at any time), that Lender apply amounts in the Collection Account to pay such Margin Deficit Amount pursuant to Section 3.03(c)(v) hereof, or (ii) with respect to a Margin Deficit Event set forth in clause (b) of such definition, make a cash payment in reduction of the Allocated Loan Amount of the applicable Underlying Loan so that after giving effect to such payment, no Margin Deficit Event shall exist; provided, that in lieu of such cash payment (provided that sufficient amounts are then held in the Collection Account to pay such Margin Deficit Amount and all other amounts then due and payable on such Payment Date), Borrower may request on any Payment Date, subject to Lender’s approval in its sole discretion (such approval to be revocable by Lender at any time), that the Lender apply amounts in the Collection Account to pay such Margin Deficit Amount pursuant to Section 3.03(c)(v) hereof. If Borrower deposited with Lender cash in an amount equal to the Margin Deficit Amount pursuant to this Section 2.07(a)(i) above and Borrower subsequently satisfies such Margin Call (without taking into account any amounts held by Lender in the Collection Account), then Lender shall release such cash collateral to Borrower on the next Payment Date.

(b) With respect to any Margin Deficit Event set forth in clause (a) of such definition, if Borrower elects to make a cash deposit pursuant to Section 2.07(a)(i), such cash deposit must be made within thirty (30) days after the date of such Margin Deficit Event. With respect to a Margin Deficit Event set forth in clause (b) of such definition, if a Margin Call is given by Lender under Section 2.07(a) on any Business Day at or prior to 10:00 a.m. (New York City time) and Borrower elects to satisfy such Margin Call by making a cash payment, then Borrower shall cure the related Margin Deficit Event as provided in Section 2.07(a) by no later than 5:00 p.m. (New York City time) on the same Business Day. For the avoidance of doubt, if a Margin Call is given by Lender under Section 2.07(a) on any Business Day after the time set forth above, such Margin Call shall be considered given prior to such time on the immediately following Business Day.

 

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(c) The failure or delay by Lender, on any one or more occasions, to exercise its rights under this Section 2.07 shall not change or alter the terms and conditions or limit or waive the right of Lender to do so at a later date or in any way create additional rights for Borrower.

2.08 Requirements of Law.

(a) If any Requirement of Law or any change in the interpretation or application thereof or compliance by Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof:

(i) shall subject Lender to any tax of any kind whatsoever with respect to this Loan Agreement, the Note, any other Loan Document or the Loan or change the basis of taxation of payments to Lender in respect thereof (excluding Non-Excluded Taxes covered by Section 2.09 hereof and changes in the rate of tax on the overall net income of Lender);

(ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory advance or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances or other extensions of credit by, or any other acquisition of funds by, any office of Lender which is not otherwise included in the determination of the LIBOR hereunder;

(iii) shall impose on Lender any other condition affecting this Loan Agreement or any other Loan Document;

and the result of any of the foregoing is to increase the cost to Lender, by an amount which Lender reasonably deems to be material until the Requirement of Law giving rise to such request ceases to be in effect and applicable to Lender, of making or maintaining the Loan or to reduce any amount receivable hereunder in respect thereof, then, in any such case, Borrower shall, upon receipt of prior written notice of such fact and a reasonably detailed description of the circumstances, within five (5) Business Days pay Lender such additional amount or amounts as will compensate Lender for such increased cost or reduced amount receivable.

(b) If Lender shall have determined in good faith that the adoption of or any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by Lender or any corporation controlling Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof shall have the effect of reducing the rate of return on Lender’s or such corporation’s capital as a consequence of its obligations hereunder by an amount deemed by Lender to be material (taking into consideration Lender’s or such corporation’s policies with respect to capital adequacy), then from time to time, Borrower shall within five (5) Business Days, upon written notice from Lender, pay to Lender such additional amount or amounts as will compensate Lender for such reduction.

(c) If Lender becomes entitled to claim any additional amounts pursuant to this subsection, it shall promptly notify Borrower of the event by reason of which it has become so entitled. A certificate as to any additional amounts payable pursuant to this subsection submitted by Lender to Borrower shall be conclusive in the absence of manifest error.

 

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2.09 Taxes.

(a) All payments made by Borrower under this Loan Agreement and the Note shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding net income taxes and franchise taxes (imposed in lieu of net income taxes) imposed on Lender as a result of a present or former connection between Lender and the jurisdiction of the Governmental Authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from Lender having executed, delivered or performed its obligations or received a payment under, or enforced, this Loan Agreement or the Note). If any such non-excluded taxes, levies, imposts, duties, charges, fees, deductions or withholdings (“Non-Excluded Taxes”) are required to be withheld from any amounts payable to Lender hereunder or under the Note, the amounts so payable to Lender shall be increased to the extent necessary to yield to Lender (after payment of all Non-Excluded Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Loan Agreement; provided, however, that Borrower shall not be required to increase any such amounts payable to any Lender (i) that is not organized under the laws of the United States of America or a state thereof if such Lender fails to comply with the requirements of clause (b) of this Section or (ii) if at the time of the assignment of the Loan or an interest therein to such Lender, amounts payable to such Lender hereunder are subject to United States withholding taxes, except to the extent that the assignor to such Lender was entitled at that time to receive additional amounts under this paragraph with respect to Non-Excluded Taxes. Whenever any Non-Excluded Taxes are payable by Borrower, as promptly as possible thereafter Borrower shall send to Lender, as the case may be, a certified copy of an original official receipt received by Borrower showing payment thereof. If Borrower fails to pay any Non-Excluded Taxes when due to the appropriate taxing authority or fails to remit to Lender the required receipts or other required documentary evidence, Borrower shall indemnify Lender for any incremental taxes, interest or penalties that may become payable by Lender as a result of any such failure. The agreements in this Section shall survive the termination of this Loan Agreement and the payment of the Loan and all other amounts payable hereunder.

(b) If any Lender determines, in the exercise of its good faith business judgment, that it has received a refund of any Non-Excluded Taxes as to which it has been indemnified by Borrower or with respect to which Borrower has paid additional amounts pursuant to this Section 2.09, it shall pay over such refund to Borrower (but only to the extent of indemnity payments made, or additional amounts paid, by Borrower under this Section 2.09 with respect to the Non-Excluded Taxes giving rise to such refund), net of all out-of-pocket expenses of such Lender and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund); provided that Borrower, upon the request of such Lender, agrees to repay the amount paid over to Borrower (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to such Lender in the event such Lender is required to repay such refund to such Governmental Authority. This paragraph shall not be construed to require any Lender to make available its tax returns (or any other information relating to its taxes which it deems confidential) to Borrower or any other Person.

 

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(c) Lender shall deliver to Borrower, and Borrower shall deliver to Lender, a duly executed IRS Form W-9 (or successor thereto) (i) upon execution of this Loan Agreement, (ii) upon request thereafter, (iii) upon a change in circumstances, or (iv) upon learning that any such form previously provided has become obsolete, incorrect, or ineffective.

2.10 Intentionally Omitted.

2.11 Release of Lien. Notwithstanding anything to the contrary contained herein or in any of the other Loan Documents, it is expressly understood and agreed by Lender and Borrower that Borrower may sell or transfer at any time and from time to time an Underlying Loan and obtain the release of Lender’s security interests therein so long as (a) no Default or Event of Default has occurred or is continuing, unless such sale or transfer and payment in full of the Allocated Loan Amount required pursuant to clause (b) below will cure such Default or Event of Default and (b) Borrower pays in full the Allocated Loan Amount with respect to such Underlying Loan plus all other amounts due hereunder relating to such Underlying Loan if such payment is made on a date other than a Payment Date. In the event of any conflict between the foregoing sentence and any other provision of the Loan Documents, the foregoing sentence shall control.

2.12 Replacement Guaranty. At any time during the term of the Loan, Borrower shall have the right to cause a Replacement Guarantor to execute and deliver a replacement guaranty (a “Guarantor Replacement”) in the form of the Guaranty, pursuant to which the Replacement Guarantor shall assume all of the obligations and liabilities of Guarantor under the Guaranty from and after the date of such agreement (as may be modified to reflect that such Replacement Guarantor will have liability under the Guaranty from and after the date of the related Replacement Guaranty (defined below)) or otherwise in form and substance acceptable to Lender (a “Replacement Guaranty”), provided that (a) no Default or Event of Default has occurred and is then continuing, (b) Borrower has provided to Lender not less than thirty (30) days’ prior written notice of Borrower’s request to execute a Guarantor Replacement, which notice shall include (i) certified financial statements of each Replacement Guarantor for the most recent calendar or fiscal year-end, (ii) organizational documents for each Replacement Guarantor, (iii) an organizational chart for each Replacement Guarantor, indicating each person or entity with a collective equity interest (whether direct or indirect) in Borrower equal to or exceeding ten percent (10%), and (iv) such other documents as Lender or its counsel may reasonably request, (c) Replacement Guarantor shall furnish to Lender all documents evidencing Replacement Guarantor’s organization and good standing, and the qualification of the signers to execute the Replacement Guaranty, which documents shall include certified copies of all documents relating to the organization and formation of Replacement Guarantor, (d) Borrower shall deliver to Lender a reaffirmation signed by Borrower, reaffirming each of the representations, warranties and covenants of Borrower pursuant to the Loan Documents, (e) Borrower shall deliver to Lender a certificate of a Responsible Officer of Borrower certifying that each of the representations and warranties set forth in Section 6 of this Agreement are true and correct as of the date of such Guarantor Replacement, (f) Replacement Guarantor shall furnish to Lender a bankruptcy non-consolidation opinion and such other opinions of counsel reasonably satisfactory to Lender with respect to (i) that the substitution of the Replacement Guarantor and the execution of the Replacement Guaranty has been duly authorized, executed and delivered, that the Replacement Guaranty is valid, binding and enforceable against Replacement Guarantor in accordance with its terms, and that the execution of the Replacement Guaranty by Replacement Guarantor does not violate any term or condition of

 

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such Replacement Guarantor’s organizational documents, applicable law, rule or regulation, or any material agreement to which Replacement Guarantor is a party, (ii) that Replacement Guarantor and any entity which is a controlling stockholder, member or general partner of Replacement Guarantor have been duly organized, and are in existence and good standing, and (iii) such other matters as Lender may reasonably request and (g) Borrower shall have paid all reasonable, out-of-pocket costs and expenses of Lender in connection with such Guarantor Replacement. In the event that Borrower replaces Guarantor with a Replacement Guarantor, Borrower shall deliver the financial statements of the Replacement Guarantor as required pursuant to Section 7.01 of this Agreement with respect to the Guarantor. The Replacement Guarantor shall assume all the existing obligations of the Guarantor accruing from and after the Closing Date, including all obligations and liabilities which accrue after the date of such Guarantor Replacement.

SECTION 3. Payments; Computations; Cash Management Arrangement.

3.01 Payments.

(a) Except to the extent otherwise provided herein, all payments of principal, interest and other amounts to be made by Borrower under this Loan Agreement and the Note, shall be made in Dollars, in immediately available funds, without deduction, set-off or counterclaim, and wired to Lender, in accordance with wiring instructions provided by Lender, not later than 1:00 p.m., New York City time, on each Payment Date (and each such payment made after such time on such due date shall be deemed to have been made on the next succeeding Business Day). Borrower acknowledges that it has no rights of withdrawal from the foregoing account, except that Borrower shall be permitted to receive disbursements pursuant to and in accordance with Section 3.03(c) of this Loan Agreement.

(b) Except to the extent otherwise expressly provided herein, if the due date of any payment under this Loan Agreement or the Note would otherwise fall on a day that is not a Business Day, such date shall be extended to the next succeeding Business Day, and interest shall be payable for any principal so extended for the period of such extension.

3.02 Computations. Interest on the Loan shall be computed on the basis of a 360-day year for the actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable.

3.03 Cash Management Arrangement.

(a) The Collection Account shall be established at the Collection Agent, subject to and in accordance with the terms of the Collection Account Agreement and this Loan Agreement, concurrently with the execution and delivery of this Loan Agreement by Borrower and Lender. Lender shall have control over the Collection Account subject to the terms and provisions of the Collection Account Agreement.

(b)

   (i) On the Closing Date and on any date thereafter on which Sub-Servicer commences servicing any Underlying Loan, Servicer shall, pursuant to a sub-servicing agreement with the Sub-Servicer, direct Sub-Servicer, after deducting any applicable servicing fees then due and payable to Sub-Servicer, to pay all amounts payable to Borrower under the Underlying Loans to the Servicing Account no later than the 12th day of each month (or if such day is not a Business Day, the next succeeding Business Day).

 

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(ii) On the Closing Date and on any date thereafter on which any Servicer commences servicing any Underlying Loan which Servicer is not currently a party to a Servicing Instruction Letter, Borrower shall deliver to each Servicer a fully executed Servicing Instruction Letter, instructing each Servicer (or any other party responsible for remitting amounts to Borrower) of the Underlying Loans, after deducting any applicable servicing fees then due and payable to Servicer, to pay all amounts payable to Borrower under the Underlying Loans to the Collection Account no later than one (1) Business Day prior to the Payment Date for each month. If, after delivery of the Servicing Instruction Letter, the addressee(s) of the Servicing Instruction Letter forwards any Receipts with respect to the Underlying Loans to Borrower rather than directly to the Collection Account, Borrower shall (A) deliver an additional irrevocable re-direction letter to such addressee(s) and make other commercially reasonable efforts to cause such addressee(s) to forward such amounts directly to the Collection Account and (B) promptly, but in any event within two (2) Business Days, deposit in the Collection Account any such amounts.

(c) So long as no Event of Default shall have occurred and be continuing, all Receipts received by the Collection Agent in respect of the Underlying Loans shall be remitted on each Payment Date in the following amounts and order of priority:

(i) first, to pay all fees and other amounts then due and payable to Custodian pursuant to the Custodial Agreement, Collection Agent pursuant to the Collection Account Agreement and Servicer pursuant to the Servicing Agreement then due and payable, if any;

(ii) second, to Lender, an amount equal to all accrued and unpaid interest on the unpaid principal amount of the Loan then due and payable;

(iii) third, to the extent any principal payment, liquidation proceeds, or other similar proceeds are received for any Underlying Loan, to Lender to be applied in reduction of the Allocated Loan Amount of such Underlying Loan in an amount equal to the Mandatory Prepayment Amount;

(iv) fourth, to Lender, an amount equal to any unpaid Margin Deficit Amount; and

(v) fifth, to Lender, an amount equal to any other amounts then due and payable to Lender under any Loan Document;

(vi) sixth, the surplus, if any, to Borrower.

(d) If an Event of Default with respect to this Loan Agreement shall have occurred and be continuing, all Receipts received by the Collection Agent in respect of the Underlying Loans shall be held in the Collection Account as cash collateral for the Loan and shall be applied by Lender in such order and priority as Lender shall determine in its sole discretion after payment of the amounts set forth in clause (i) of Section 3.03(c). Upon the cure of all Events of Default (as determined by Lender in its sole discretion exercised in good faith), Lender shall promptly provide Collection Agent with notice that an Event of Default is no longer in existence.

 

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SECTION 4. Collateral Security.

4.01 Collateral; Security Interest.

(a) The Underlying Loan Documents shall be collaterally assigned to Lender as security for the Loan and delivered to Custodian, together with endorsements of the original Underlying Notes in blank and assignments in blank of the Underlying Mortgages in recordable form and other ancillary loan documentation. Pursuant to the Custodial Agreement, Custodian shall hold the Underlying Loan Documents as exclusive bailee and agent for the benefit of Lender pursuant to the terms of the Custodial Agreement.

(b) All of Borrower’s right, title and interest in, to and under each of the following items of property, whether now owned or hereafter acquired, now existing or hereafter created and wherever located, is hereinafter referred to as the “Collateral”:

(i) the Underlying Loans and all proceeds therefrom;

(ii) all Underlying Loan Documents relating to the foregoing, including without limitation all promissory notes, guaranties, and all Servicing Records, Servicing Rights, the Purchase and Sale Agreement, the Servicing Agreement, custodial agreements and any other collateral pledged or otherwise relating to the Underlying Loans, together with all files, documents, letters of credit, instruments, surveys, certificates, correspondence, appraisals, computer programs, computer storage media, accounting records and other books and records relating thereto in Borrower’s possession;

(iii) all other insurance policies and insurance proceeds relating to the Underlying Loans, provided that insurance proceeds and condemnation awards shall be applied in accordance with the terms of the Underlying Loan Documents;

(iv) the Servicing Account and all monies from time to time deposited in the Servicing Account;

(v) the Collection Account and all monies from time to time deposited in the Collection Account;

(vi) all “securities accounts”, as defined in the UCC, relating to any of the foregoing and each “financial asset”, as defined in the UCC, contained therein, including, without limitation, any accounts described in Section 3.03(b);

(vii) all “accounts”, “chattel paper” and “general intangibles” as defined in the UCC relating to or constituting any and all of the foregoing; and

(viii) any and all replacements, substitutions, distributions on or proceeds of any and all of the foregoing.

 

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(c) Borrower hereby assigns, pledges to Lender, and grants a security interest in favor of Lender in, Borrower’s right, title and interest in, to and under the Collateral, whether now owned or hereafter acquired, now existing or hereafter created and wherever located, to secure the Secured Obligations.

4.02 Further Documentation. At any time and from time to time, upon the written request of Lender, and at the sole expense of Borrower, Borrower will promptly and duly execute and deliver, or will promptly cause to be executed and delivered, such further instruments, acknowledgments and documents and take such further action as Lender may reasonably request for the purpose of obtaining or preserving the full benefits of this Loan Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the UCC in effect in any relevant jurisdiction with respect to the Liens created hereby. Borrower also hereby authorizes Lender to file any such financing or continuation statement without the signature of Borrower to the extent permitted by applicable law. Borrower also hereby further authorizes Lender to file such financing statements and continuation statements which may describe the Collateral in the same manner as described herein or may describe the Collateral as “all assets of Borrower, whether now owned or existing or hereafter acquired or created or arising, wherever located, together with all proceeds thereof.”

4.03 Changes in Locations, Name, etc. Borrower shall not change its name, identity or corporate structure (or the equivalent) or change the location where it maintains its records with respect to the Collateral unless it shall have given Lender at least thirty (30) days prior written notice thereof and shall have delivered to Lender all UCC financing statements and amendments thereto as Lender shall reasonably request and taken all other actions reasonably deemed necessary by Lender to continue its perfected status in the Collateral with at least the same priority.

4.04 Lenders Appointment as Attorney-in-Fact.

(a) Borrower hereby irrevocably constitutes and appoints Lender and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of Borrower and in the name of Borrower or in its own name, from time to time in Lender’s discretion, for the purpose of carrying out the terms of this Loan Agreement to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Loan Agreement (including, without limitation, completing any endorsements or assignments of the original Underlying Notes and the Underlying Loan Documents, in each case that were delivered in blank in accordance with this Loan Agreement, and filing any UCC financing statement assignments), and, without limiting the generality of the foregoing, Borrower hereby gives Lender the power and right, on behalf of Borrower, without assent by, but with notice to, Borrower, to do the following:

(i) in the name of Borrower or its own name, or otherwise, to take possession of and endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any mortgage insurance or with respect to any other Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by Lender for the purpose of collecting any and all such moneys due under any such mortgage insurance or with respect to any other Collateral whenever payable;

 

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(ii) to pay or discharge delinquent taxes and Liens levied or placed on or threatened against the Collateral other than Permitted Liens; and

(iii) (A) to direct any party liable for any payment under any Collateral to make payment of any and all moneys due or to become due thereunder directly to Lender or as Lender shall direct; (B) to ask or demand for, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) to sign and endorse any invoices, assignments, verifications, notices and other documents in connection with any of the Collateral; (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against Borrower with respect to any Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described in clause (E) above and, in connection therewith, to give such discharges or releases as Lender may deem appropriate; and (G) after the occurrence and during the continuance of an Event of Default, generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Lender were the absolute owner thereof for all purposes, and to do, at Lender’s option and Borrower’s expense, at any time, and from time to time, all acts and things which Lender deems necessary to protect, preserve or realize upon the Collateral and Lender’s Liens thereon and to effect the intent of this Loan Agreement, all as fully and effectively as Borrower might do.

Borrower hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable.

(b) Borrower also authorizes Lender, at any time and from time to time, to execute, in connection with any sale provided for in Section 4.07 hereof, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral and to file any initial financing statements amendments thereto and continuation statements as authorized by applicable law, as applicable to all or any part of the Collateral.

(c) The powers conferred on Lender are solely to protect Lender’s interests in the Collateral and shall not impose any duty upon Lender to exercise any such powers. Lender shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither Lender nor any of its officers, directors, or employees shall be responsible to Borrower for any act or failure to act hereunder, except for its own or their own gross negligence, bad faith or willful misconduct.

4.05 Performance by Lender of Borrowers Obligations. If Borrower fails to perform or comply with any of its agreements contained in the Loan Documents after the giving of any required notice and the expiration of any applicable cure period, then Lender may itself perform or comply, or otherwise cause performance or compliance, with such agreement. The costs and expenses of Lender incurred in connection with such performance or compliance, together with interest thereon at a rate per annum equal to the Default Rate, shall be payable by Borrower to Lender on demand and shall constitute Secured Obligations.

 

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4.06 Proceeds. If an Event of Default shall occur and be continuing, (a) all proceeds of Collateral received by Borrower consisting of cash, checks and other near-cash items shall be held by Borrower in trust for Lender, segregated from other funds of Borrower, and shall forthwith upon receipt by Borrower be turned over to Collection Agent, to be held in trust by Collection Agent for Lender in the exact form received by Borrower (duly endorsed by Borrower to Lender, if required) and (b) any and all such proceeds received by Lender (whether from Borrower or otherwise) may, in the sole discretion of Lender, but subject to the terms and conditions of the Underlying Loan Documents, be held by Lender as collateral security for, and/or then or at any time thereafter may be applied by Lender against, the Secured Obligations (whether matured or unmatured), such application to be made in accordance with Section 3.03(d). Any balance of such proceeds remaining after the Secured Obligations shall have been paid in full shall be paid over to Borrower or to whomsoever may be lawfully entitled to receive the same. For purposes hereof, proceeds shall include, but not be limited to, all principal and interest payments, all prepayments and payoffs, insurance claims, condemnation awards, sale proceeds, real estate owned rents and any other income and all other amounts received with respect to the Collateral.

4.07 Remedies.

(a) If an Event of Default shall occur and be continuing, Lender may exercise, in addition to all other rights and remedies granted to it in this Loan Agreement, the other Loan Documents, and in any other instrument or agreement (but excluding the Underlying Loan Documents) securing, evidencing or relating to the Secured Obligations, all rights and remedies of a secured party under the UCC. Without limiting the generality of the foregoing, Lender without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon Borrower or any other Person (each and all of which demands, presentments, protests, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell (on a servicing released basis, if applicable, at Lender’s option), lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels or as an entirety at one or more public sales. Lender shall have the right upon any such public sale to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in Borrower, which right or equity is hereby waived or released. Borrower further agrees, at Lender’s request, to the extent not held by the Custodian, to assemble the Collateral and make it available to Lender at places which Lender shall reasonably select, whether at Borrower’s premises or elsewhere. Lender shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of Lender hereunder, including without limitation reasonable attorneys’ fees and disbursements, to the payment in whole or in part of the Secured Obligations, in such order as Lender may elect, and only after such application and after the payment by Lender of any other amount required or permitted by any provision of law, including without limitation Section 9-615 of the UCC, need Lender account for the surplus, if any, to Borrower. To the extent permitted by applicable law, Borrower waives all claims, damages

 

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and demands it may acquire against Lender arising out of the exercise by Lender of any of its rights hereunder, other than those claims, damages and demands arising from the gross negligence or willful misconduct of Lender. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least ten (10) days before such sale or other disposition. Borrower shall remain liable for any deficiency (plus accrued interest thereon as contemplated pursuant to Section 2.03(c) hereof), and Guarantor shall remain liable for a Deficiency (as defined in the Guaranty) pursuant to the Guaranty, if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Secured Obligations and the reasonable fees and disbursements of any attorneys employed by Lender to collect such deficiency.

(b) If an Event of Default shall occur and be continuing, in addition to the remedies provided in Section 4.07(a) hereof and otherwise provided in this Loan Agreement and the other Loan Documents, Lender shall have the right to obtain physical possession of all files of Borrower relating to the Collateral and all documents relating to the Collateral which are then or may thereafter come in to possession of Borrower, the Custodian, or any other third party acting for Borrower and Borrower shall deliver to Lender such assignments as Lender shall reasonably request.

(c) Notwithstanding anything herein to the contrary, Lender hereby acknowledges and agrees that Lender shall only be permitted to sell or otherwise dispose of the Collateral in one or more parcels or as an entirety pursuant to one or more public sales conducted in accordance with the UCC and all other Requirements of Law.

(d) Upon the occurrence and during the continuance of an Event of Default, Lender shall without regard to the adequacy of the security for the Loan, be entitled to the appointment of a receiver by any court having jurisdiction, without notice, to take possession of and protect, collect, manage, liquidate, and sell the Underlying Loans or any portion thereof, collect the payments due with respect to the Underlying Loans or any portion thereof, and do anything that Lender is authorized hereunder to do with respect to the Underlying Loans. Borrower shall pay all reasonable and documented costs and expenses incurred by Lender in connection with the appointment and activities of such receiver.

4.08 Limitation on Duties Regarding Preservation of Collateral. Lender’s duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the UCC or otherwise, shall be to deal with it in the same manner as Lender deals with similar property for its own account. Neither Lender nor any of its directors, officers or employees shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of Borrower or otherwise.

4.09 Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest.

 

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4.10 Release of Security Interest. Upon repayment to Lender of all Secured Obligations and performance of all obligations under the Loan Documents, Lender shall release its security interest in any remaining Collateral; provided that if any payment, or any part thereof, of any of the Secured Obligations is rescinded or must otherwise be restored or returned by Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of Borrower, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or a trustee or similar officer for, Borrower or any substantial part of its Property, or otherwise, this Loan Agreement, all rights hereunder and the Liens created hereby shall continue to be effective, or be reinstated, as though such payments had not been made until such time as such payments have been indefeasibly made. Upon the payment in full of an Underlying Loan, Lender shall release to Borrower the applicable Underlying Loan Documents and execute, acknowledge and deliver to Borrower (at Borrower’s cost and expense) any and all documents, instruments and agreements reasonably necessary to release all security interests in the Underlying Loans and the Underlying Loan Documents.

SECTION 5. Conditions Precedent.

5.01 Condition Precedent to The Transactions. The agreement of Lender to enter into this Loan Agreement and to enter into the Transactions is subject to the satisfaction, on or prior to the Closing Date, of the following conditions precedent:

(a) Loan Agreement. Lender shall have received this Loan Agreement, executed and delivered by a duly authorized officer of Borrower.

(b) Note. Lender shall have received the Note, conforming to the requirements hereof and executed by a duly authorized officer of Borrower.

(c) Guaranty. Lender shall have received the Guaranty, conforming to the requirements hereof and executed by a duly authorized officer of Guarantor.

(d) Custodial Agreement. Lender shall have received the Custodial Agreement, executed and delivered by a duly authorized officer of Borrower and Custodian.

(e) Collection Account Agreement. Lender shall have received the Collection Account Agreement, executed and delivered by a duly authorized officer of the Borrower and the Collection Agent.

(f) Servicing Arrangement. Lender shall have received the Servicing Agreement and the Servicing Instruction Letter, executed and delivered by a duly authorized officer of Borrower and Servicer, as applicable.

(g) Power of Attorney. Lender shall have received from Borrower a duly completed and executed power of attorney.

(h) Filings, Registrations, Recordings. Any documents (including, without limitation, a UCC financing statement for filing in the applicable jurisdiction of Borrower, naming Borrower as “Debtor” and Lender as “Secured Party” and describing as “Collateral” all of the items set forth in the definition of Collateral) required to be filed, registered or recorded in order to create, in favor of Lender, a perfected, first-priority security interest in the Collateral, subject to no Liens other than Permitted Liens, shall have been properly prepared and executed, if necessary, for filing (including the applicable county(ies) if Lender determines such filings are necessary in its sole discretion), registration or recording in each office in each jurisdiction in which such filings, registrations and recordations are required to perfect such first-priority security interest, which shall be delivered to and held by Custodian pursuant to the Custodial Agreement.

 

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(i) Closing Certificates. Lender shall have received a certificate of a duly authorized officer of Borrower, dated as of the date hereof, certifying (A) that attached thereto is a true, complete and correct copy of (i) the organizational documents of Borrower (including the certificate of formation, operating agreement, and certificate of good standing of Borrower) and (ii) resolutions or consents duly adopted by the Board of Directors or partners or members of Borrower authorizing the execution, delivery and performance of this Loan Agreement, the Note and the other Loan Documents to which it is a party, and the borrowings contemplated hereunder, and that such resolutions or consents have not been amended, modified, revoked or rescinded, and (B) as to the incumbency and specimen signature of each officer executing any Loan Documents on behalf of Borrower, and such certificate and the resolutions attached thereto shall be in form and substance reasonably satisfactory to Lender. Lender shall have received a certificate of a duly authorized officer of Guarantor, dated as of the date hereof, certifying that attached thereto is a true, complete and correct copy of the organizational documents of Guarantor (including the certificate of formation, operating agreement, and certificate of good standing of Guarantor) and resolutions or consents duly adopted by such the Board of Directors or partners or members of each of Guarantor authorizing the formation of Borrower and the execution, delivery and performance of this Loan Agreement, the Note and the other Loan Documents by Borrower, and the borrowings contemplated hereunder, and that such organizational documents and resolutions or consents have not been amended, modified, revoked or rescinded, and such certificate, organizational documents, and the resolutions attached thereto shall be in form and substance reasonably satisfactory to Lender.

(j) Good Standing Certificates. With respect to the initial Transaction, Lender shall have received copies of certificates evidencing the good standing of Borrower and Guarantor, dated as of a recent date, from the Secretary of State (or other appropriate authority) of the jurisdiction under which Borrower and Guarantor is organized and of other jurisdiction where the ownership of the Underlying Loan, or the conduct of business, requires Borrower to qualify as a foreign corporation or limited liability company.

(k) Legal Opinions. Lender shall have received legal opinions of counsel to Borrower in form and substance reasonably acceptable to Lender and covering such matters incident to the transactions contemplated by this Loan Agreement as Lender shall reasonably request.

(l) Fees and Expenses. Lender shall have received all fees and expenses required to be paid by Borrower on or prior to the Closing Date pursuant to this Loan Agreement or the other Loan Documents.

(m) Consents, Licenses, Approvals, etc. Lender shall have received copies certified by Borrower of all material consents, licenses, and approvals, if any, required in connection with the execution, delivery and performance by Borrower of, and the validity and enforceability of, the Loan Documents, which consents, licenses, and approvals shall be in full force and effect.

 

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(n) No Default. No Default or Event of Default shall have occurred and be continuing or would result from the transactions contemplated hereby.

(o) Representations and Warranties. Each representation and warranty made by Borrower in Section 6 hereof and elsewhere herein, and in each of the other Loan Documents, shall be true and correct in all material respects on and as of the Closing Date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date).

(p) Additional Matters. All corporate and other proceedings, and all documents, instruments and other legal matters in connection with the transactions contemplated by this Loan Agreement and the other Loan Documents shall be reasonably satisfactory in form and substance to Lender, and Lender shall have received such other documents and legal opinions in respect of any aspect or consequence of the transactions contemplated hereby or thereby as it shall reasonably request.

(q) No Material Adverse Effect. There shall not have occurred one or more events that, in the reasonable judgment of Lender, constitutes or should reasonably be expected to constitute a Material Adverse Effect.

(r) Documents. Lender shall have received the following documents:

(1) organizational charts for Borrower, Guarantor, any other Borrower Principals and any foreign person or entity with a collective equity interest (whether direct or indirect) in Borrower equal to or exceeding ten percent (10%) (a “Non-US Equity Holder”);

(2) completed Freddie Mac Form 1115 for Borrower, Guarantor, any other Borrower Principals and any Non-US Equity Holder, which cannot be dated more than sixty (60) days;

(3) certified financial statements of Borrower, Guarantor and other Borrower Principals for the most recent calendar or fiscal year-end, which cannot be dated more than one hundred eighty (180) days; and

(4) organizational documents for Borrower, Guarantor and other Borrower Principals.

(s) Master Servicer. Freddie Mac shall have been appointed as “Master Servicer” under the Servicing Agreement with respect to all Underlying Loans subject to a Transaction.

(t) Maximum Facility Amount. After giving effect to the consummation of such Transaction, the aggregate sum of the Loan shall not exceed an amount equal to the Maximum Facility Amount.

(u) Intentionally Omitted.

 

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(v) Delivery to Custodian. Lender shall have delivered to Custodian, with respect to each Underlying Loan purchased by Borrower, the Underlying Loan Documents, together with endorsements of the original Underlying Notes in blank and assignments in blank of the Underlying Mortgages in recordable form and other ancillary loan documentation and information required to be delivered in accordance with the procedures and time frames set forth in the Custodial Agreement.

(w) Acknowledgement of Servicer. Lender shall have received from Servicer a written acknowledgement that the Underlying Loan will be serviced in accordance with the Servicing Agreement as of the related Underlying Loan Closing Date.

(x) No Margin Deficit Event. No Margin Deficit Event shall exist unless Lender has agreed to Borrower’s request to pay the Margin Deficit Amount pursuant to Section 3.03(c)(v).

(y) Receipt of Trust Receipt. Lender shall have received from Custodian on each Underlying Loan Closing Date a Trust Receipt, dated the Underlying Loan Closing Date, duly completed and with exceptions acceptable to Lender in its sole discretion in respect of the Underlying Loan to be made on the Underlying Loan Closing Date.

(z) No Change in Law. Lender shall not have determined that the introduction of or a change in any Requirement of Law or in the interpretation or administration of any Requirement of Law has made it unlawful, and no Governmental Authority shall have asserted that it is unlawful, for Lender to make advances under the Loan or to enter into this Loan Agreement or for Borrower to enter into this Loan Agreement.

(aa) Underlying Loan Maturity Date. The maturity date of the Underlying Loan is not later than the Facility Maturity Date or the Fund Termination Date.

(bb) Security Interest. Borrower shall have taken such other action as Lender shall have requested in order to perfect all security interests granted under this Loan Agreement or any other Loan Document in favor of Lender as secured party under the UCC with respect to such Underlying Loan.

(cc) Further Assurances. Lender shall have received all such other and further documents, documentation and legal opinions (including, without limitation, opinions regarding the perfection of Lender’s security interests) as Lender shall require.

SECTION 6. Representations and Warranties. Borrower represents and warrants to Lender as of the Closing Date as follows:

6.01 Financial Condition. All financial data concerning the Borrower, the Guarantor, the Loan, the Underlying Loan and the other Collateral that has been delivered by or on behalf of Borrower or Guarantor to Lender is true, correct and complete in all material respects. All financial data concerning the Borrower and Guarantor has been prepared fairly in accordance with GAAP consistently applied. All financial data concerning the Loan, the Underlying Loan and the other Collateral has been prepared in accordance with standard industry practices. Since the delivery of such data, except as otherwise disclosed in writing to Lender, there has been no change in the financial position of the Borrower, the Guarantor, the Loan, the Underlying Loan and the other Collateral or in the results of operations of Borrower or Guarantor.

 

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6.02 No Change. From and after the date(s) of the financial statements delivered to Lender pursuant to the terms hereof, and except as disclosed therein, there has been no material development or event nor any material prospective development or event, including without limitation on the business, condition (financial or otherwise) or results of operations or prospects of Borrower or Guarantor.

6.03 Existence; Compliance with Law; Ownership of Borrower. Borrower (a) is a Delaware limited liability company duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, (b) has all requisite organizational power and authority to carry on its business as now being or as proposed to be conducted, (c) has all governmental licenses, authorizations, consents and approvals necessary, to hold the Underlying Loans, (d) is duly qualified to do business and is in good standing under the laws of each jurisdiction in which the nature of the business conducted by it makes such qualification necessary, and (e) is in compliance in all material respects with all Requirements of Law and obligations under its Governing Documents. The organizational chart attached hereto as Schedule 3 is complete and accurate and illustrates all Persons who have a direct or indirect ownership interest in Borrower.

6.04 Authorization; Enforceable Obligations.

(a) Borrower has all requisite organizational power and authority, and the legal right, to make, deliver and perform this Loan Agreement, the Note, and the Loan Documents, and to borrow and to grant Liens hereunder, and has taken all necessary action to authorize the borrowings and the granting of Liens on the terms and conditions of this Loan Agreement, the Note and the Loan Documents to which it is a party, and the execution, delivery and performance of this Loan Agreement, the Note and the Loan Documents.

(b) No consent or authorization of, approval by, notice to, filing with or other act by or in respect of, any Governmental Authority or any other Person is required or necessary in connection with the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of this Loan Agreement, the Note, or the Loan Documents, except (i) for filings and recordings in respect of the Liens created pursuant to this Loan Agreement, and (ii) as previously obtained and currently in full force and effect.

(c) Each Loan Document to which Borrower is a party has been duly and validly executed and delivered by Borrower and constitutes, a legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with their terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).

6.05 No Legal Bar. The execution, delivery and performance of this Loan Agreement, the Note, and the Loan Agreement, the borrowings hereunder and the use of the proceeds thereof will not violate any Requirement of Law, any provision of the Governing Documents or Contractual Obligation of Borrower and will not result in, or require, the creation or imposition of any Lien (other than the Liens created hereunder) on any of its or their respective properties or revenues pursuant to any such Requirement of Law or Contractual Obligation.

 

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6.06 No Material Litigation. As of the date hereof for any Transaction, there are no actions, suits, arbitrations, investigations or proceedings of or before any arbitrator or Governmental Authority pending or to Borrower’s knowledge threatened against Borrower or Guarantor or against any of their respective properties or revenues which would (a) question or challenge the validity or enforceability of any of the Loan Documents or any action to be taken in connection with the transactions contemplated thereby, (b) make a claim in the aggregate amount greater than the Litigation Threshold, or (c) which, individually or in the aggregate, could be reasonably likely to have a Material Adverse Effect. There are no such actions, suits, arbitrations, investigations or proceedings against Borrower or Guarantor existing as of the date of this Loan Agreement.

6.07 No Default. Borrower is not in default under or with respect to any of its Contractual Obligations in any material respect. No Default or Event of Default has occurred and is continuing. Neither Borrower nor Guarantor or any of respective Affiliate thereof is in default with respect to any judgment, order, writ, injunction, decree, rule or regulation of any arbitrator or Governmental Authority.

6.08 Collateral; Collateral Security.

(a) Borrower has not assigned, pledged, or otherwise conveyed or encumbered any of the Collateral to any Person other than Lender, and immediately prior to the pledge of such Collateral, Borrower was the sole record and beneficial owner of its Collateral and had good and marketable title thereto, free and clear of all Liens (including any “adverse claim” as defined in Article 8-102(a)(1) of the UCC), in each case except for (i) Liens that have been released or are to be released by Lender simultaneously with the Liens granted in favor of Lender hereunder and (ii) Permitted Liens. None of the Underlying Loans or other Collateral are subject to any right of set-off, any prior sale, transfer or assignment, or any agreement by Borrower to assign, convey or transfer such Underlying Loan and other Collateral, in each case, in whole or in part.

(b) The provisions of the Loan Documents are effective to create in favor of Lender a valid security interest in all right, title and interest of Borrower in, to and under the Collateral.

(c) Upon (i) receipt by Lender of the Underlying Notes and the assignment of the Underlying Loans, endorsed or assigned as appropriate, (ii) the filing (to the extent such interest can be perfected by filing under the UCC) of financing statements on Form UCC-1 naming Lender as “Secured Party” and Borrower as “Debtor”, and describing the Collateral, (iii) the taking of such other actions with respect to the Underlying Loans as Lender shall reasonably deem necessary for perfection of the security interests and Liens granted hereunder (including without limitation, the taking of such actions as may be required to obtain and maintain “control” (as defined in the UCC) over any Collateral constituting uncertificated securities), the security interests and Liens granted hereunder in the Collateral will constitute a fully legal, valid, enforceability, and perfected first-priority security interests of Lender under the UCC (to the extent security interests in such Collateral may be perfected under the UCC by filing or possession of the

 

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instruments referenced above) or applicable state real property law, as the case may be, in all right, title and interest of Borrower in, to and under such Collateral. Upon execution and delivery of the Collection Account Agreement, Lender shall either be the owner of, or have a legal, valid, enforceable and fully perfected first priority security interest in, the Collection Account and all funds at any time credited thereto.

(d) Other than a potential Requested Securitization (as such term is defined in the Purchase and Sale Agreement), there are (i) no outstanding rights, options, warrants or agreements on the part of Borrower for a purchase, sale or issuance, in connection with any Underlying Loan or other Collateral, (ii) no agreements on the part of Borrower to issue, sell or distribute any Underlying Loan or other Collateral and (iii) no obligations on the part of Borrower (contingent or otherwise) to purchase, redeem or otherwise acquire any securities or interest therein.

6.09 Chief Executive Office. As of the Closing Date, Borrower’s chief executive office is located at 300 Crescent Court, Suite 700, Dallas, Texas 75201.

6.10 Location of Books and Records. The location where Borrower keeps its books and records, including all records relating to the Collateral is its chief executive office and/or with Borrower’s servicer.

6.11 No Burdensome Restrictions. No Requirement of Law to which Borrower or its Affiliates is subject or Contractual Obligation of Borrower would reasonably be expected to have a Material Adverse Effect.

6.12 Taxes. Borrower has filed all Federal and state income tax returns and all other material tax returns that are required to be filed by it (subject to the timely filing of any extension thereof) and has paid all taxes due pursuant to such returns or pursuant to any assessment received by it, except for any such taxes or assessments, if any, that are being appropriately contested in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves in conformity with GAAP have been provided. No tax Lien has been filed, and, to the knowledge of Borrower, no claim is being asserted, with respect to any such tax or assessment.

6.13 Margin Regulations. All proceeds of each Transaction shall be used by Borrower for purposes permitted under Borrower’s governing documents, provided that no part of the proceeds of the Loan will be used for “purchasing” or “carrying” any “margin stock” or to extend credit to others for the purpose of “purchasing” or “carrying” any “margin stock” within the respective meanings of each of the quoted terms under, or for any other purpose which violates or would be inconsistent with the provisions of, Regulation T, U or X of the Board of Governors of the Federal Reserve System.

6.14 Investment Company Act; Other Regulations. Borrower is not an “investment company”, or a company “controlled” by an “investment company”, within the meaning of the Investment Company Act. Borrower is not subject to regulation under any Federal or state statute or regulation which limits its ability to incur Indebtedness hereunder. Borrower has been structured so as not to constitute, and is not, a “covered fund” for purposes of Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and is relying upon an exception or exemption from the registration requirements of the Investment Company Act set forth in Section 3(c)(5)(C) of the Investment Company Act.

 

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6.15 Special Purpose Entity. Borrower is and shall at all times continue to be a Special Purpose Bankruptcy Remote Entity.

6.16 No Prohibited Persons. None of Borrower, Guarantor or, to the knowledge of Borrower or Guarantor, any of their respective officers, directors, partners, members, investors, Affiliates or shareholders is an entity or person: (a) that is listed in the Annex to, or is otherwise subject to the provisions of Executive Order 13224 issued on September 24, 2001 (“EO13224”); (b) whose name appears on the United States Treasury Department’s Office of Foreign Assets Control (“OFAC”) most current list of “Specifically Designated National and Blocked Persons” (which list may be published from time to time in various mediums including, but not limited to, the OFAC website, http:www.treas.gov/ofac/t11sdn.pdf); (c) who commits, threatens to commit or supports “terrorism”, as that term is defined in EO 13224; or (d) who is otherwise affiliated with any entity or person listed above (any and all parties or persons described in clauses (a) through (d) above are herein referred to as a “Prohibited Person”). Borrower and Guarantor have made the necessary inquiries to confirm the accuracy of this representation and warranty. Borrower agrees to confirm this representation and warranty in writing on an annual basis if requested by Lender to do so.

6.17 Borrower Solvent; Fraudulent Conveyance. As of the date hereof, the fair value of the assets of Borrower is and shall be greater than the fair value of the liabilities (including, without limitation, contingent liabilities if and to the extent required to be recorded as a liability on the financial statements of Borrower in accordance with GAAP) of Borrower and Borrower is and will remain solvent, is and will be able to pay its debts as they mature and does not and will not have an unreasonably small capital to engage in the business in which it is engaged and proposes to engage. Borrower does not intend to incur, or believe that it has incurred, debts beyond its ability to pay such debts as they mature. Borrower is not contemplating the commencement of insolvency, bankruptcy, liquidation or consolidation proceedings or the appointment of a receiver, liquidator, conservator, trustee or similar official in respect of Borrower or any of its assets and none of the Loan Documents nor any Transaction are entered into in contemplation of insolvency or with intent to hinder, delay or defraud any of Borrower’s creditors. Borrower has adequate capital for the normal obligations foreseeable in a business of its size and character and in light of its contemplated business operations. Borrower has only entered into agreements on terms that would be considered arm’s length and otherwise on terms consistent with other similar agreements with other similarly situated entities.

6.18 ERISA. Neither Borrower nor any ERISA Affiliate of Borrower sponsors, maintains or contributes to any Plans or any Multiemployer Plans. Borrower is not, and is not using, any assets of a “benefit plan investor” as defined in Department of Labor regulation 29 C.F.R Section 2510.3-101, as modified by Section 3(42) of ERISA in connection with any Transaction.

 

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6.19 True and Complete Disclosure. The information, reports, financial statements, exhibits and schedules furnished in writing by Borrower or Guarantor to Lender in connection with the negotiation, preparation or delivery of this Loan Agreement and the other Loan Documents or included herein or therein or delivered pursuant hereto or thereto, do not contain any untrue statement of material fact or omit to state any material fact necessary to make the statements herein or therein not misleading, but excluding any information, reports, financial statements, exhibits and schedules which pertain to the Underlying Loans which is solely based on any information provided to Borrower by Mortgage Loan Seller prior to the Closing Date. There is no fact known to a Responsible Officer of Borrower that, after due inquiry, would reasonably be expected to have a Material Adverse Effect that has not been disclosed herein, in the other Loan Documents or in a report, financial statement, exhibit, schedule, disclosure letter or other writing furnished to Lender for use in connection with the transactions contemplated hereby or thereby.

6.20 Regulatory Status. Borrower is not a “bank holding company” or a direct or indirect subsidiary of a “bank holding company” as defined in the Bank Holding Company Act of 1956, as amended, and Regulation Y thereunder of the Board of Governors of the Federal Reserve System.

6.21 No Reliance. Borrower has made its own independent decisions to enter into the Loan Documents and each Transaction and as to whether such Transaction is appropriate and proper for it based upon its own judgment and upon advice from such advisors (including without limitation, legal counsel and accountants) as it has deemed necessary. Borrower is not relying upon any advice from Lender as to any aspect of the Transactions, including without limitation, the legal, accounting or tax treatment of the Transactions.

6.22 Ability to Perform. Borrower does not believe, nor does it have any reason or cause to believe, that it cannot perform each and every covenant applicable to it contained in the Loan Documents to which it is a party.

6.23 Non-Contravention. Neither the execution and delivery of the Loan Documents, nor consummation by Borrower of the transactions contemplated by the Loan Documents, nor compliance by Borrower with the terms, conditions and provisions of the Loan Documents will conflict with or result in a breach of any of the terms, conditions or provisions of (a) the organizational documents of Borrower, (b) any agreement by which Borrower is bound or to which any assets of Borrower are subject or constitute a default thereunder, or result thereunder in the creation or imposition of any Lien upon any of the assets of Borrower, other than pursuant to the Loan Documents, (c) any judgment or order, writ, injunction, decree or demand of any court applicable to Borrower, or (d) any Requirement of Law.

6.24 No Outstanding Judgments. Except as disclosed in writing to Lender, there are no judgments against Borrower or Guarantor unsatisfied of record or docketed in any court located in the United States of America.

6.25 No Bankruptcies. No Bankruptcy Action has ever occurred with respect to Borrower or Guarantor.

6.26 No Real Property. Borrower has not at any time since its formation held title to any real property.

 

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6.27 Anti-Bribery Laws. No part of the proceeds of any Transaction will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended.

6.28 Insider. Borrower is not an “executive officer,” “director,” or “person who directly or indirectly or acting through or in concert with one or more persons owns, controls, or has the power to vote more than 10% of any class of voting securities” (as those terms are defined in 12 U.S.C. § 375(b) or in regulations promulgated pursuant thereto) of Lender, of a bank holding company of which Lender is a Subsidiary, or of any Subsidiary, of a bank holding company of which Lender is a Subsidiary, of any bank at which Lender maintains a correspondent account or of any lender which maintains a correspondent account with Lender.

6.29 Anti-Money Laundering Laws. Each of Borrower and Guarantor has complied with all applicable anti-money laundering laws and regulations.

6.30 No Broker. Borrower has not dealt with any broker, investment banker, agent, or other Person (other than Lender or an Affiliate of Lender) who may be entitled to any commission or compensation in connection with the sale of any Underlying Loan pursuant to any of the Underlying Loan Documents.

SECTION 7. Covenants of Borrower. Borrower covenants and agrees with Lender that, so long as the Loan is outstanding and until the payment in full of all Secured Obligations:

7.01 Financial Statements. Borrower shall deliver, or cause to be delivered, to Lender:

(a) as soon as available and in any event within sixty (60) days after the end of each of the first three quarterly fiscal periods of each fiscal year of Borrower and Guarantor, the unaudited consolidated balance sheets of Borrower and Guarantor as at the end of such period and the related unaudited consolidated statements of income and of cash flows for Borrower and Guarantor for such period and the portion of the fiscal year through the end of such period, if applicable, setting forth in each case in comparative form the figures for the previous year, accompanied by a certificate of a Responsible Officer of Borrower or Guarantor, as applicable, which certificate shall state that said financial statements fairly present the financial condition and results of operations of Borrower or Guarantor, as applicable, in accordance with GAAP, consistently applied, as at the end of, and for, such period (subject to normal year-end audit adjustments);

(b) as soon as available and in any event within one hundred twenty (120) days after the end of each fiscal year of Borrower and Guarantor, the consolidated balance sheets of Borrower and Guarantor as at the end of such fiscal year and the related consolidated statements of income and retained earnings and of cash flows for Borrower and Guarantor for such year, if applicable, setting forth in each case in comparative form the figures for the previous year, prepared in accordance with GAAP, and certified by Borrower or Guarantor, as applicable,

 

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accompanied by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall not be qualified as to scope of audit or going concern and shall state that said consolidated financial statements fairly and accurately present the consolidated financial condition and results of operations of Borrower or Guarantor, as applicable, in accordance with GAAP, consistently applied, as at the end of, and for, such fiscal year;

(c) promptly and in any event within five (5) Business Days following receipt thereof from the Servicer, copies of property level information made available to Borrower and all other required reports, rent rolls, financial statements, certificates and notices (including, without limitation, any notice of the occurrence of a default or an event of default under the Underlying Loan Documents) required to be delivered to Borrower by the Underlying Borrowers under the Underlying Loan Documents; and

(d) promptly and in any event within ten (10) days following written request therefor by Lender, from time to time such other information regarding the financial condition, operations, or business of Borrower and the Underlying Mortgage Properties in the possession of Borrower (or Borrower’s servicer) as Lender may reasonably request.

7.02 Existence, Etc. Borrower will:

(a) preserve and maintain its legal existence;

(b) preserve and maintain all of its material rights, privileges, licenses and franchises;

(c) comply with the requirements of all applicable Requirements of Law (including, without limitation, the Truth in Lending Act, the Real Estate Settlement Procedures Act and all environmental laws) if failure to comply with such requirements would reasonably be expected (either individually or in the aggregate) to have a Material Adverse Effect;

(d) keep adequate records and books of account, in which complete entries will be made in accordance with GAAP consistently applied;

(e) not move its chief executive office from the address referred to in Section 6.09 or change its jurisdiction of organization from the jurisdiction referred to in Section 6.09 unless it shall have provided Lender thirty (30) days’ prior written notice of such change;

(f) pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its Property prior to the date on which penalties attach thereto;

(g) permit representatives of Lender, during normal business hours, to examine, copy and make extracts from its books and records, to inspect any of its properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by Lender in writing and upon reasonable notice;

 

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(h) not take any action that would directly or indirectly impair or adversely affect Lender’s title to any Collateral;

(i) not create, incur, assume or suffer to exist any Indebtedness or other obligation, secured or unsecured, direct or indirect, absolute or contingent (including guaranteeing any obligation) to the extent the same would cause Borrower to violate the covenants contained in this Loan Agreement or Guarantor to violate the financial covenants contained in the Guaranty;

(j) not permit a Change of Control;

(k) not permit the organizational documents or organizational structure of Borrower to be amended; and

(l) not use any part of the proceeds of any Transaction hereunder for any purpose which violates, or would be inconsistent with, the provisions of Regulation T, U or X of the Board of Governors of the Federal Reserve System.

7.03 Notices. Borrower shall give notice to Lender:

(a) promptly upon Borrower becoming aware of and in any event within five (5) Business Days after, the occurrence of any (i) Default or Event of Default, (ii) Margin Deficit Event, (iii) any Lien or security interest (other than security interests created hereby or by the other Loan Documents) on, or claim asserted against, any of the Collateral, or (iv) any event of default or default under any other material agreement of Borrower where the result of such default or event of default under this clause (iv) would be reasonably expected to have a Material Adverse Effect;

(b) promptly upon, and in any event within five (5) Business Days after, service of process on Borrower or any agent of Borrower for service of process, in respect of any legal or arbitrable proceedings affecting Borrower (i) that questions or challenges the validity or enforceability of any of the Loan Documents or any Underlying Loan Documents, or (ii) would give rise to a liability of Borrower of $250,000 or more;

(c) promptly upon Borrower becoming aware of and in any event within five (5) Business Days thereafter, any default or event of default beyond applicable grace periods under the Underlying Loan Documents related to any Collateral, any Material Adverse Effect any other event or change in circumstances which would reasonably be expected to have a Material Adverse Effect or that are reasonably likely to cause, or have caused, the market value of any Underlying Mortgaged Property to decline;

(d) promptly upon Borrower becoming aware of and in any event within five (5) Business Days thereafter that any Underlying Mortgaged Property has been damaged by waste, fire, earthquake or earth movement, windstorm, flood, tornado or other casualty, or otherwise damaged, in any case so as to materially and adversely affect the value of the related Underlying Loan;

(e) promptly upon Borrower’s (or any servicer acting on behalf of Borrower) receipt of any Payoff Proceeds, and in any event within five (5) Business Day after receipt thereof;

 

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(f) promptly upon Borrower becoming aware of, and in any event within five (5) Business Days after, the commencement or threat of, settlement of, or judgment in, any litigation, action, suit, arbitration, investigation or other legal or arbitrable proceeding against Borrower or Guarantor in an amount greater than the Litigation Threshold;

(g) promptly, and in any event within five (5) Business Days after, if Borrower’s or Guarantor’s audited annual financial statements or the notes thereto or other opinions or conclusions stated therein shall be qualified or limited by reference to the status of Borrower or Guarantor as a “going concern” or a reference of similar import;

(h) not less than fifteen (15) Business Days prior to taking such action, upon the opening of any new chief executive office, or the closing of any such office, of any Borrower or Guarantor and of any change in any Borrower’s or Guarantor’s name or the places where the books and records pertaining to the Underlying Loans are held; and

(i) promptly, and in any event within five (5) Business Days after knowledge thereof, any violation of the representation and warranty contained in Section 6.16 (No Prohibited Persons), Section 6.28 (Anti-Bribery Laws) or Section 6.30 (Anti-Money Laundering Laws).

Each notice pursuant to this Section 7.03 shall be accompanied by a statement of a Responsible Officer of Borrower setting forth details of the occurrence referred to therein and stating what action Borrower or Guarantor has taken or proposes to take with respect thereto.

For the sake of clarity, absent actual knowledge of the Borrower, “becoming aware” shall mean that the Borrower has been advised by the Servicer or any other Person of such condition or circumstance.

7.04 Further Identification of Collateral. Borrower will furnish to Lender from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Lender may reasonably request, all in reasonable detail, to be provided to Lender promptly and in any event within five (5) Business Days following request therefor by Lender directed to the persons to whom notice is to be given pursuant to Section 11.02.

7.05 Reports.

(a) Borrower shall deliver or cause to be delivered to Lender, (i) no later than the last day of each month, the monthly servicing remittance report delivered to Borrower pursuant to the Servicing Agreement setting forth the outstanding principal balance and delinquency status of the Underlying Loans, and all principal, interest and other payments received with respect to the Underlying Loans for the prior month and (ii) promptly after Lender’s request, a report containing such other information as Lender may reasonably request, including, without limitation, balances of, and activity for the prior month in, any and all reserve and escrow accounts maintained by Borrower or any servicer on its behalf with respect to the Underlying Loans.

(b) Promptly and in any event within five (5) Business Days following request therefor by Lender directed to the persons to whom notice is to be given pursuant to Section 11.02, Borrower shall make available at Borrower’s offices to Lender and/or permit Lender to inspect any property, books, valuations, records, audits or other information as Lender may reasonably request.

 

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7.06 Prohibition of Fundamental Changes. Without Lender’s prior written consent, Borrower shall not enter into any transaction of merger or consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation, winding up or dissolution) or convey, transfer, lease, dispose or sell all or substantially all of its assets. Borrower shall not, at any time, have any Subsidiaries.

7.07 Limitation on Liens on Collateral. Borrower will not, nor will it permit or allow any other Person, to create, incur or permit to exist any Lien, security interest or claim on the Collateral, except for Permitted Liens. Borrower will defend the Collateral against, and will take such other action as is necessary to remove any Lien, security interest or claim on or to the Collateral, other than the security interests created under this Loan Agreement and other Permitted Liens, and Borrower will defend the right, title and interest of Lender in and to any of the Collateral against the claims and demands of all Persons whomsoever, other than (a) Persons claiming through Lender and (b) other holders of Permitted Liens. Borrower will not acquire or maintain any right or interest in any Underlying Loan or any Underlying Mortgaged Property that is senior to, or pari passu with, the rights and interests of Lender under this Loan Agreement and the other Loan Documents.

7.08 Limitation on Sale or Other Disposition of Collateral. Except as otherwise permitted hereby, Borrower will not lease, transfer, assign, sell or otherwise dispose of any Collateral without (a) simultaneously paying the Allocated Loan Amount in whole or (b) obtaining the prior written consent of Lender.

7.09 Limitation on Transactions with Affiliates. Other than the Guaranty, Borrower shall not enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate unless such transaction is (a) not otherwise prohibited or otherwise permitted under this Loan Agreement, (b) in the ordinary course of Borrower’s business of owning and managing the Underlying Loans and, if applicable, the Underlying Mortgage Properties and (c) upon fair and reasonable terms no less favorable to Borrower than it would obtain in a comparable arm’s length transaction with a Person which is not an Affiliate.

7.10 Special Purpose Entity. Borrower shall at all times be a Special Purpose Bankruptcy Remote Entity.

7.11 Limitations on Modifications, Waivers and Extensions of Underlying Loan Documents.

(a) Except as otherwise expressly permitted under Section 7.11(b), Borrower shall not, nor shall it permit or allow others to, amend, modify, terminate or waive any provision of any Underlying Loan Document or the Servicing Instruction Letter to which Borrower is a party, without Lender’s prior written consent, which consent shall not be unreasonably withheld or delayed; provided, however, that Lender shall be deemed to have approved any request by Borrower to amend, modify, terminate or waive any provision of any Underlying Loan Document if Lender’s consent is not denied within five (5) Business Days after the later of (i) Servicer’s recommendation and analysis of such Borrower request and (ii) the receipt of all additional documents and information that Lender may reasonably request in connection with such Borrower request.

 

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(b) Notwithstanding the foregoing, so long as no Event of Default exists hereunder, Borrower shall be permitted to make Permitted Underlying Loan Modifications without obtaining Lender’s prior consent.

7.12 Prohibited Persons. Borrower covenants and agrees that none of Borrower, Guarantor or any of their respective Affiliates, officers, directors, partners, investors, shareholders or members will knowingly: (a) conduct any business, nor engage in any transaction or dealing, with any Prohibited Person, including, but not limited to, the making or receiving of any contribution of funds, goods, or services, to or for the benefit of a Prohibited Person; or (b) engage in or conspire to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in EO13224. Borrower further covenants and agrees to deliver (from time to time) to Lender any such certification or other evidence as may be requested by Lender in its sole and absolute discretion, confirming that: (i) none of Borrower, Guarantor or any of their respective Affiliates, officers, directors, partners, investors, shareholders or members is a Prohibited Person; and (ii) none of Borrower, Guarantor or any of their respective Affiliates, officers, directors, partners, investors, shareholders or members has to its knowledge engaged in any business, transaction or dealings with a Prohibited Person, including, but not limited to, the making or receiving of any contribution of funds, goods, or services, to or for the benefit of a Prohibited Person.

7.13 Limitation on Distributions. After the occurrence and during the continuation of any Event of Default, Borrower shall not make distributions to any of its members, nor shall Borrower make any payment on account of, or set apart assets for, a sinking or other analogous fund for the purchase, redemption, defeasance, retirement or other acquisition of any equity or membership interest of Borrower, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of Borrower.

7.14 Use of Proceeds. Borrower will use the proceeds of the Loan solely to acquire the Underlying Loans.

7.15 ERISA. Borrower shall not establish any employee benefit plans or other plans subject to Section 302 of ERISA, Section 412 of the Code, Title IV of ERISA or any other Federal or State Law.

7.16 Real Property. Borrower shall not directly or indirectly acquire or hold title to any real property that is not Collateral.

7.17 Independent Manager. Borrower shall, at all times, have at least one (1) Independent Manager. Borrower’s organizational documents shall provide (a) that Lender be given at least two (2) Business Days prior notice of the removal and/or replacement of any Independent Manager, together with the name and contact information of the replacement

 

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Independent Manager and evidence of the replacement’s satisfaction of the definition of Independent Manager and (b) that any Independent Manager of Borrower shall not have any fiduciary except to Lender and the creditors of Lender with respect to taking of, or otherwise voting on, any Bankruptcy Action; provided, that the foregoing shall not eliminate the implied contractual covenant of good faith and fair dealing.

7.18 Preservation of Existence; Licenses. Borrower shall at all times maintain and preserve its legal existence and all of the rights, privileges, licenses, permits and franchises necessary for the operation of its business (including, without limitation, preservation of all lending licenses held by Borrower and of Borrower’s status as a “qualified transferee” (however denominated) under all documents which govern the Underlying Loan), to protect the validity and enforceability of the Underlying Loan Documents and each Underlying Loan and for its performance under the Underlying Loan Documents.

7.19 Compliance with Organizational Documents. Borrower shall observe, perform and satisfy all the terms, provisions, covenants and conditions required to be observed, performed or satisfied by it, and shall pay when due all costs, fees and expenses required to be paid by it, under its organizational documents.

7.20 Responsibility for Fees and Expenses of Third-Parties. Borrower shall be solely responsible for the fees and expenses of Custodian, Collection Agent and Servicer.

SECTION 8. Events of Default. Each of the following events shall constitute an event of default (an “Event of Default”) hereunder:

(a) Default in the Payment of Principal. Borrower shall default in the payment of principal of the Loan when due (whether at stated maturity, upon acceleration or at mandatory or optional prepayment); or

(b) Default in the Payment of Interest. Borrower shall default in the payment of interest on the Loan when due (whether at stated maturity, upon acceleration or at mandatory or optional prepayment); or

(c) Default in the Payment of Other Amount. Borrower shall default in the payment of any other amount payable by it hereunder or under any other Loan Document, and such default shall have continued unremedied for two (2) Business Days after notice from Lender or Borrower shall fail to cure a Margin Deficit Event within the period specified in Section 2.07; or

(d) Failure of Representation or Warranty. Any representation, warranty or certification made by Borrower herein or by Borrower or Guarantor in any other Loan Document or any certificate furnished to Lender by Borrower or Guarantor pursuant to the provisions thereof shall prove to have been false or misleading in any material respect as of the time made or furnished; or

 

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(e) Default of Covenant. Borrower shall:

(i) fail to comply with the requirements of Section 7 hereof (other than Sections 7.01, 7.02(b), 7.02(d), 7.02(e), 7.02(g), 7.02(k), 7.03(e), 7.04, 7.05, 7.18, or 7.20), Section 11.14(a), or Section 11.15(a) hereof; or

(ii) fail to comply with the requirements of Sections 7.01, 7.02(b), 7.02(d), 7.02(e), 7.02(g), 7.02(k), 7.03(e), 7.04, 7.05, 7.18, or 7.20 and such default shall continue unremedied for a period of ten (10) days after notice thereof from Lender, or

(iii) fail to observe or perform any other covenant, condition or agreement contained in this Loan Agreement or any other Loan Document and such failure to observe or perform shall continue unremedied for a period of ten (10) days after (A) written notice thereof from Lender or (B) Borrower or Guarantor obtains knowledge thereof; or

(f) Guarantor. Guarantor fails to satisfy the financial covenants set forth in Sections 26, 27 or 28 of the Guaranty after the expiration of all notice and cure periods set forth in the Guaranty; or

(g) Cross Default with Other Loan Documents. A default or event of default, after notice and beyond the expiration of applicable grace periods, shall have occurred and be continuing under any other Loan Document which has not been waived by Lender in writing; or

(h) Cross Default of Borrower. Except as set forth in Section 8(i) below, Borrower shall have defaulted or failed to perform under any note, indenture, loan agreement, guaranty, swap agreement or any other contract, agreement or transaction to which it is a party, which default (i) involves the failure to pay a monetary obligation, or (ii) permits the acceleration of the maturity of obligations by any other party to or beneficiary of such note, indenture, loan agreement, guaranty, swap agreement or other contract agreement or transaction; or

(i) Failure to Remit Principal Payment. Borrower fails to remit (or cause to be remitted) to Lender any principal payment, liquidation proceeds or other similar proceeds received with respect to an Underlying Loan for application to the payment of the Allocated Loan Amount for such Underlying Loan; or

(j) Unsatisfied Judgment. One or more judgments or decrees shall be entered against Borrower; or

(k) ERISA. Borrower shall have failed to materially comply with ERISA or any related regulations; or

(l) Borrower Fundamental Changes. Borrower shall consolidate or merge with or into any other entity or convey, transfer, dispose or lease all or substantially all of its properties and assets to any entity or Person except as otherwise permitted pursuant to the Loan Documents; or

(m) Inability to Pay Debts. Borrower shall admit in writing its inability to pay its debts as such debts become due; or

 

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(n) Voluntary Bankruptcy Event. Borrower shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner or liquidator of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Bankruptcy Code, (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up, or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code or (vi) take any corporate or other action for the purpose of effecting any of the foregoing; or

(o) Involuntary Bankruptcy Event. A proceeding or case shall be commenced, without the application or consent of Borrower, in any court of competent jurisdiction, seeking (i) its reorganization, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a receiver, custodian, trustee, examiner, liquidator or the like of Borrower or of all or any substantial part of its property, or (iii) similar relief in respect of Borrower under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of ninety (90) or more days; or an order for relief against Borrower shall be entered in an involuntary case under the Bankruptcy Code; or

(p) Termination of Loan Documents or Underlying Loan Documents. Any other Loan Document or Underlying Loan Documents shall for whatever reason (other than by agreement of the parties thereto) be terminated, cease to be in full force and effect, or shall not be enforceable in accordance with its terms, or any Person (other than Lender) shall contest the validity or enforceability of any Loan Document or Underlying Loan Documents or the validity, perfection or priority of any Lien granted thereunder, or any Person (other than Lender) shall seek to disaffirm, terminate or reduce its obligations under any Loan Document or Underlying Loan Document; or

(q) Change of Control. A Change of Control shall occur; or

(r) Underlying Loan. Borrower shall have foreclosed upon any Underlying Mortgage or delivered a deed in lieu thereof or such Underlying Loan is a Defaulted Loan and Borrower has failed to deliver to Lender the Allocated Loan Amount pursuant to Section 2.05(b) hereof with respect to such Underlying Loan within two (2) Business Days after such event; or

(s) Other Liens. Borrower shall grant, or suffer to exist, any Lien on any Collateral that is not being defended against pursuant to Section 7.07, except the Liens contemplated hereby and Permitted Liens; or Lender shall cease to have a valid, fully perfected and enforceable first priority security interest in the Collateral subject to Permitted Liens; or

(t) Governmental or Regulatory Action. Any governmental, regulatory, or self-regulatory authority shall have taken any action to remove, limit, restrict, suspend or terminate the rights, privileges, or operations of Borrower or Guarantor, which suspension has a Material Adverse Effect as determined by Lender in its sole and absolute discretion; or

 

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(u) Material Adverse Effect. Any condition shall exist that constitutes a Material Adverse Effect as determined by Lender in its sole good faith discretion; or

(v) Fund Documents. A default or an event of default has occurred and is continuing under the Fund Documents.

Lender shall not be deemed to have waived, by reason of making the Loan, any Default that may arise because any such representation or warranty shall have proved to be false or misleading.

Notwithstanding anything to the contrary contained herein or in any of the other Loan Documents, under no circumstances shall a default or event of default under the Underlying Loan Documents, by itself, constitute a Default or Event of Default under this Loan Agreement or any other Loan Document.

SECTION 9. Remedies Upon Default.

(a) Upon the occurrence and during the continuance of one or more Events of Default other than those referred to in Sections 8(n) or (o), and in addition to the remedies provided in Section 4.07 hereof and otherwise provided in this Loan Agreement and the other Loan Documents, Lender may immediately declare the principal amount of the Loan then outstanding under the Note to be immediately due and payable, together with all interest thereon and fees and expenses owing under this Loan Agreement. Upon the occurrence of an Event of Default referred to in Sections 8(n) or (o), and in addition to the remedies provided in Section 4.07 hereof and otherwise provided in this Loan Agreement and the other Loan Documents, such amounts shall immediately and automatically become due and payable without any further action by any Person. Upon such declaration or such automatic acceleration, the balance then outstanding on the Note shall become immediately due and payable, without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by Borrower.

(b) Upon the occurrence and the continuance of one or more Events of Default, and in addition to the remedies provided in Section 4.07 hereof and otherwise provided in this Loan Agreement and the other Loan Documents, Lender shall have the right to obtain physical possession of all Servicing Records and all other files of Borrower relating to the Collateral and all documents relating to the Collateral which are then or may thereafter come in to the possession of Borrower or any third party acting for Borrower and Borrower shall deliver to Lender such assignments as Lender shall request. Borrower shall be responsible for paying any fees of any servicer resulting from the termination of a servicer due to an Event of Default. Lender shall have the right to demand transfer of all Servicing Rights and obligations to a new servicer acceptable to Lender. Lender shall be entitled to specific performance of all agreements of Borrower contained in this Loan Agreement.

(c) Borrower shall be liable to Lender for (i) the amount of all reasonable legal or other expenses, including, without limitation, all actual and reasonable costs and expenses of Lender in connection with the enforcement of this Loan Agreement or any other agreement evidencing the Loan (including, without limitation, all reasonable costs and expenses of every kind incurred in connection with determining any deficiency payable by Borrower pursuant to this

 

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Agreement or by Guarantor pursuant to the Guaranty), whether in action, suit or litigation or bankruptcy, insolvency or other similar proceeding affecting creditors’ rights generally, further including, without limitation, the reasonable fees and expenses of counsel (including the costs of internal counsel of Lender) incurred in connection with or as a result of an Event of Default, (ii) damages in an amount equal to the cost (including all actual and reasonable fees, expenses and commissions) of entering into replacement transactions and entering into or terminating hedge transactions in connection with or as a result of an Event of Default, and (iii) any other actual and reasonable loss, damage, cost or expense directly arising or resulting from the occurrence of an Event of Default in respect of the Loan.

(d) To the extent permitted by applicable law, Borrower shall be liable to Lender for interest on any amounts owing by Borrower hereunder, from the date Borrower becomes liable for such amounts hereunder until such amounts are (i) paid in full by Borrower or (ii) satisfied in full by the exercise of Lender’s rights hereunder. Interest on any sum payable by Borrower under this Section 9 shall be at a rate equal to the Default Rate.

(e) Lender shall have, in addition to its rights and remedies under the Loan Documents (but subject to Section 4.07(c) hereof), all of the rights and remedies provided by applicable federal, state, foreign, and local laws (including, without limitation, the rights and remedies of a secured party under the UCC of the State of New York, to the extent that the UCC is applicable, and the right to offset any mutual debt and claim), in equity, and under any other agreement between Lender, Borrower and Guarantor, as applicable. Without limiting the generality of the foregoing, Lender shall be entitled to set off the proceeds of the liquidation of the Underlying Loans against all of Borrower’s and Guarantor’s obligations to Lender, only if such obligations are then due, without prejudice to Lender’s right to recover any deficiency.

(f) Subject to Section 4.07(c) hereof and the notice and grace periods set forth herein, Lender may exercise any or all of the remedies available to Lender, including, without limitation, the power of sale and the right to credit bid, immediately upon the occurrence of an Event of Default and at any time during the continuance thereof without prior notice to Borrower. Except as expressly provided herein, all rights and remedies arising under the Loan Documents, as amended from time to time, are cumulative and not exclusive of any other rights or remedies which Lender may have. No modification, amendment, extension, discharge, termination or waiver of any provision of this Loan Agreement or of any other Loan Document, nor consent to any departure by Lender therefrom, shall in any event be effective unless the same shall be in writing signed by Lender, and then such waiver or consent shall be effective only in the specific instance, and for the purpose, for which given. Except as otherwise expressly provided herein, no notice to, or demand on Borrower, shall entitle Borrower to any other or future notice or demand in the same, similar or other circumstances. Neither any failure nor any delay on the part of Lender in insisting upon strict performance of any term, condition, covenant or agreement, or exercising any right, power, remedy or privilege hereunder, or under any other Loan Document shall operate as or constitute a waiver thereof, nor shall a single or partial exercise thereof preclude any other future exercise, or the exercise of any other right, power, remedy or privilege.

 

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(g) Lender may, subject to Section 4.07(c) hereof, enforce its rights and remedies hereunder without prior judicial process or hearing, and Borrower hereby expressly waives any defenses Borrower might otherwise have to require Lender to enforce its rights by judicial process. Borrower also waives, subject to Section 4.07(c) hereof, any defense Borrower might otherwise have arising from the use of non-judicial process, disposition of any the Underlying Loans, or from any other election of remedies. Borrower recognizes that non-judicial remedies are consistent with the usages of the trade, are responsive to commercial necessity and are the result of a bargain at arm’s length.

SECTION 10. No Duty of Lender. The powers conferred on Lender hereunder are solely to protect Lender’s interests in the Collateral and shall not impose any duty upon it to exercise any such powers. Lender shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to Borrower for any act or failure to act hereunder.

SECTION 11. Miscellaneous.

11.01 Waiver. No failure on the part of Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under any Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under any Loan Document, preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law.

11.02 Notices. Except as otherwise expressly permitted by this Loan Agreement, all notices, requests and other communications provided for herein (including without limitation any modifications of, or waivers, requests or consents under, this Loan Agreement) shall be given or made in writing (including without limitation by telecopy with confirmation of “good” transmission) delivered to the intended recipient at the “Address for Notices” (specified below its name on the signature pages hereof or thereof); or, as to any party, at such other address as shall be designated by such party in a written notice to each other party. Except as otherwise provided in this Loan Agreement and except for notices given under Section 2 (which shall be effective only on receipt), all such communications shall be deemed to have been duly given when transmitted by telecopy or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid.

11.03 Indemnification and Expenses.

(i) Borrower agrees to hold Lender and each of its officers, directors, agents and employees (each, an “Indemnified Party”) harmless from and indemnify each Indemnified Party against all liabilities, losses, damages, judgments, reasonable costs and expenses of any kind which may be imposed on, incurred by or asserted against such Indemnified Party in any suit, action, claim or proceeding relating to or arising out of this Loan Agreement, the Note, any other Loan Document, or any transaction contemplated hereby or thereby, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Loan Agreement, the Note, any other Loan Document or any transaction contemplated hereby or thereby, except to the extent arising from such Indemnified Party’s gross negligence or willful misconduct or, if Freddie Mac is acting as the Servicer, arising from the negligence of the Servicer. In any suit, proceeding or action brought by Lender in connection with the Underlying Loans for any sum owing thereunder,

 

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or to enforce any provisions of the Underlying Loan Documents, Borrower will save, indemnify and hold Lender harmless from and against all expense, loss or damage suffered by reason of any defense, set-off, counterclaim, recoupment or reduction or liability whatsoever of the account debtor or obligor thereunder, arising out of a breach by Borrower of any obligation of Borrower thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such account debtor or obligor or its successors from Borrower. Borrower also agrees to reimburse Lender as and when billed by Lender for all Lender’s reasonable costs and expenses incurred in connection with the enforcement or the preservation of Lender’s rights under this Loan Agreement, the Note, any other Loan Document or any transaction contemplated hereby or thereby, including without limitation the reasonable fees and disbursements of its counsel (including all reasonable fees and disbursements incurred in any action or proceeding between Borrower and an Indemnified Party or between an Indemnified Party and any third party relating hereto). Borrower hereby acknowledges that, notwithstanding the fact that the Note is secured by the Collateral, the obligations of Borrower under the Note are recourse obligations of Borrower.

(ii) Borrower agrees to pay as and when billed by Lender all reasonable costs and expenses incurred by Lender in connection with the negotiation, preparation and execution of, and any amendment, supplement or modification to, this Loan Agreement, the Note, any other Loan Document or any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including without limitation (a) all the reasonable fees, disbursements and expenses of counsel to Lender, (b) all the inspection and review costs and expenses reasonably incurred by Lender with respect to Collateral under this Loan Agreement, and (c) fees relating to the filing of UCC financing statements.

11.04 Amendments. Except as otherwise expressly provided in this Loan Agreement, any provision of this Loan Agreement may be modified or supplemented only by an instrument in writing signed by Borrower and Lender and any provision of this Loan Agreement may be waived by Lender.

11.05 Successors and Assigns. This Loan Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns.

11.06 Survival. The obligations of Borrower under Section 11.03 hereof shall survive the repayment of the Loan and the termination of this Loan Agreement.

11.07 Captions. The table of contents and captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Loan Agreement.

11.08 Counterparts. This Loan Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Loan Agreement by signing any such counterpart. Delivery of an executed signature page of this Loan Agreement by email or facsimile transmission shall be effective as delivery of a manually executed counterpart hereof.

 

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11.09 GOVERNING LAW; ETC. THIS LOAN AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS LOAN AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK, AND, THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER, WITHOUT REGARD TO THE CONFLICT OF LAWS DOCTRINE APPLIED IN SUCH STATE (OTHER THAN SECTION 5-1401 AND SECTION 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK) SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.

11.10 SUBMISSION TO JURISDICTION; WAIVERS. BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY:

(A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS LOAN AGREEMENT, THE NOTE AND THE OTHER LOAN DOCUMENTS, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE COUNTY OF NEW YORK, BOROUGH OF MANHATTAN, STATE OF NEW YORK, THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF;

(B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND, TO THE EXTENT PERMITTED BY LAW, WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME;

(C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS ADDRESS SET FORTH UNDER ITS SIGNATURE BELOW OR AT SUCH OTHER ADDRESS OF WHICH THE LENDER SHALL HAVE BEEN NOTIFIED; AND

(D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION.

 

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11.11 WAIVER OF JURY TRIAL. EACH OF BORROWER AND LENDER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS LOAN AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.

11.12 Acknowledgments. Borrower hereby acknowledges that:

(a) it has been advised by counsel in the negotiation, execution and delivery of this Loan Agreement, the Note and the other Loan Documents; and

(b) no joint venture exists between Lender and Borrower.

11.13 Hypothecation and Pledge of Collateral. Subject to the rights of Obligors under the Underlying Loan Documents and the rights of Borrower hereunder and in any other Loan Document, and at Lender’s sole cost and expense, Lender shall have free and unrestricted use of its interest in the Loan and the Loan Documents and nothing in this Loan Agreement shall preclude Lender from engaging in repurchase transactions with its interest in the Loan and the Loan Documents or otherwise pledging, repledging, hypothecating, or rehypothecating its interest in the Loan and the Loan Documents. Nothing contained in this Loan Agreement shall obligate Lender or Custodian to segregate any Collateral delivered to Lender or Custodian by Borrower (except with respect to Custodian, as expressly set forth in the Custodial Agreement). In the event of any such repurchase, pledge, repledge, hypothecation or rehypothecation of Lender’s interest in the Loan and the Loan Documents, Lender’s obligations under this Loan Agreement to Borrower shall remain unchanged, Lender shall remain solely responsible for the performance thereof, and Borrower shall continue to deal solely and directly with Lender in connection with Lender’s rights and obligations under this Loan Agreement and the other Loan Documents and Borrower shall not suffer a reduction of rights hereunder or an increase in obligations or expenses as a result thereof.

11.14 Assignments; Participations; Securitization.

(a) Except as otherwise set forth in this Loan Agreement, Borrower may not assign any of its rights or obligations hereunder or under the Note without the prior written consent of Lender in Lender’s sole and absolute discretion. Lender may assign or transfer all or any of its rights or obligations under this Loan Agreement and the other Loan Documents. Lender may furnish any information concerning Borrower or Guarantor in the possession of Lender from time to time to assignees (including prospective assignees), provided, however, that prior to furnishing to assignees (or prospective assignees) any financial information or any of the organizational documents relating to Guarantor, Lender shall enter into a confidentiality agreement in form and substance reasonably acceptable to Borrower. Notwithstanding anything to the contrary contained herein, no assignment by Lender shall increase the amount of Borrower’s obligations or expenses or reduce the rights of Borrower hereunder.

(b) Lender may, in accordance with applicable law, at any time sell to one or more lenders or other entities (“Participants”) participating interests in the Loan or any other interest of Lender hereunder and under the other Loan Documents. Borrower agrees that if amounts outstanding under this Loan Agreement and the Note are due or unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default,

 

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each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Loan Agreement and the Note to the same extent as if the amount of its participating interest were owing directly to it as Lender under this Loan Agreement or the Note; provided, that such Participant shall only be entitled to such right of set-off if it shall have agreed in the agreement pursuant to which it shall have acquired its participating interest to share with the Lender the proceeds thereof. Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.06 and 2.09 to the same extent as if it were Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section; provided, that a Participant shall not be entitled to receive any greater payment under Section 2.06 and 2.09 hereof than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant.

(c) Borrower agrees to cooperate with Lender in connection with any such assignment and/or participation, to execute and deliver such replacement notes, and to enter into such restatements of, and amendments, supplements and other modifications to, this Loan Agreement and the other Loan Documents in order to give effect to such assignment and/or participation. Borrower further agrees to furnish to any Participant identified by Lender to Borrower copies of all reports and certificates to be delivered by Borrower to Lender hereunder, as and when delivered to Lender. Notwithstanding the obligations set forth in this Section 11.14(c), Borrower shall not be obligated to incur either (i) additional obligations or (ii) additional costs or expenses in connection with the fulfillment of such obligations except if the Lender agrees to reimburse such costs and expenses.

(d) Borrower acknowledges that Lender, and each successor to Lender’s interest, may (without prior notice to Borrower or Borrower’s prior consent), securitize the Loan or place the Loan in a trust. Borrower agrees to cooperate with all reasonable requests of Lender in connection with any securitization, including taking the following actions: (i) executing any financing statements or other documents deemed necessary by Lender or its transferee to create, perfect or preserve the rights and interest to be acquired by such transferee; (ii) executing and delivering replacement notes, and entering into such restatements of, and amendments, supplements and other modifications to, this Loan Agreement and the other Loan Documents in order to give effect to such securitization; (iii) providing updated financial information with appropriate verification through auditors’ letters, if required by Lender (if Lender requires that Borrower’s updated financial information be accompanied by appropriate verification through auditors’ letters, then Lender will reimburse Borrower for the costs which Borrower reasonably incurs in connection with obtaining such auditors’ letters); (iv) providing updated information on all litigation proceedings affecting Borrower or Guarantor as required in Section 7.03(f); (v) reviewing information contained in any disclosure documents in connection with such securitization and providing an estoppel certificate, written confirmation of Borrower’s indemnification obligations under this Loan Agreement, and such other information about Borrower or Guarantor as Lender may require for Lender’s offering materials. Notwithstanding the obligations set forth in this Section 11.14(d), Borrower shall not be obligated to incur either (i) additional obligations or (ii) additional costs or expenses in connection with the fulfillment of such obligations except if Lender agrees to reimburse such costs and expenses.

 

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11.15 Servicing.

(a) Borrower covenants to maintain or cause the servicing of the Underlying Loans to be maintained in conformity with (i) applicable law, (ii) the terms of this Loan Agreement, (iii) the terms of the Servicing Agreement, (iv) the terms of the respective Underlying Loans and any related intercreditor agreement, co-lender and/or similar agreement(s) and (v) to the extent consistent with the foregoing, the Servicing Standard. Borrower shall obtain the written consent of Lender prior to appointing any servicer for the Underlying Loans, which consent shall not be unreasonably withheld, conditioned or delayed. Borrower shall provide Lender with written notice at least ten (10) Business Days prior to terminating any servicer, terminating any servicing agreement (including the Servicing Agreement) or removing any Underlying Loan from the serviced loans subject to a servicing agreement. In connection with any such termination or removal, Borrower shall, at least five (5) Business Days prior to such termination or removal, cause a new Servicing Instruction Letter to be delivered which shall instruct any servicer, obligor, lock-box bank, cash management bank, manager or other party responsible for remitting amounts to Borrower under the Underlying Loans to pay all amounts payable to Borrower under the Underlying Loans to the Collection Account.

(b) Borrower agrees that Lender is the collateral assignee of all servicing records, including but not limited to any and all servicing agreements, management agreements, rent rolls, leases, environmental and engineering reports, third-party underlying reports, files, documents, records, legal opinions, estoppels, financial statements, operating statements, data bases, computer tapes, copies of computer tapes, proof of insurance coverage, insurance policies, appraisals, other closing documentation, payment history records, and any other records relating to or evidencing the servicing of the Underlying Loans (but excluding any draft documents, attorney/client communications which are privileged or constitute legal or other due diligence analyses, and documents prepared by Borrower or any of its Affiliates solely for internal communication, credit underwriting or due diligence) (the “Servicing Records”), and Borrower grants Lender a security interest in all of Borrower’s rights relating to the Underlying Loans and all Servicing Records to secure the obligation of Borrower or its designee to service in conformity with this Section and any other obligation of Borrower to Lender. Borrower covenants to safeguard such Servicing Records and, during the existence of an Event of Default, to deliver them promptly to Lender or its designee (including Custodian) at Lender’s request.

11.16 Set-Off. In addition to any rights and remedies of Lender provided by this Loan Agreement and by law, Lender shall have the right, without prior notice to Borrower, any such notice being expressly waived by Borrower to the extent permitted by applicable law, upon the occurrence and during the continuance of an Event of Default, with respect to any amount becoming due and payable by Borrower hereunder (whether at the stated maturity, by acceleration or otherwise) to set-off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by Lender or any Affiliate thereof to or for the credit or the account of Borrower. Lender agrees promptly to notify Borrower after any such set-off and application made by Lender; provided that the failure to give such notice shall not affect the validity of such set-off and application.

 

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11.17 Joint and Several Obligations.

(a) Each Borrower hereby acknowledges and agrees that (i) each Borrower shall be jointly and severally liable to Lender to the maximum extent permitted by Requirements of Law for all Secured Obligations, (ii) the liability of each Borrower with respect to the Secured Obligations (A) shall be absolute and unconditional and shall remain in full force and effect, and be reinstated, until all Secured Obligations shall have been paid, performed and/or satisfied, as applicable, in full, and (B) until such payment, performance and/or satisfaction, as applicable, has occurred, shall not be discharged, affected, modified or impaired on the occurrence from time to time of any event, including any of the following, whether or not with notice to or the consent of any Borrower, (1) the waiver, compromise, settlement, release, termination or amendment (including any extension or postponement of the time for payment, performance, satisfaction, renewal or refinancing) of any of the Secured Obligations (other than a waiver, compromise, settlement, release or termination in full of the Secured Obligations), (2) the failure to give notice to any Borrower of the occurrence of any nonpayment or other default, (3) the failure to make any demand for payment of any amounts owing to Lender by any other Borrower, (4) the release, substitution or exchange by Lender of any Underlying Loan (whether with or without consideration) or the acceptance by Lender of any additional collateral or the availability or claimed availability of any other collateral or source of repayment or any non-perfection or other impairment of collateral, (5) the release of any Person primarily or secondarily liable for all or any part of the Secured Obligations, whether by Lender or in connection with any Bankruptcy Action affecting any Borrower or any other Person who, or any of whose property, shall at the time in question be obligated in respect of the Secured Obligations or any part thereof, or (6) to the extent permitted by Requirements of Law, any other event, occurrence, action or circumstance that would, in the absence of this Section 11.17, result in the release or discharge of any or all Borrowers from the performance or observance of any Secured Obligation, (iii) Lender shall not be required first to initiate any suit or to exhaust its remedies against any Borrower or any other Person to become liable, or against any of the Underlying Loans, in order to enforce the Loan Documents and each Borrower expressly agrees that, notwithstanding the occurrence of any of the foregoing, each Borrower shall be and remain directly and primarily liable for all sums due under any of the Loan Documents, (iv) when making any demand hereunder against any Borrower, Lender may, but shall be under no obligation to, make a similar demand on any other Borrower, and any failure by Lender to make any such demand or to collect any payments from any other Borrower, or any release of any such other Borrower shall not relieve any Borrower in a respect of which a demand or collection is not made or Borrowers not so released of their obligations or liabilities hereunder, and shall not impair or affect the rights and remedies, express or implied, or as a matter of law, of Lender against Borrowers, and (v) on disposition by Lender of any Underlying Loan, each Borrower shall be and shall remain jointly and severally liable for any deficiency to the extent set forth in this Agreement and the other Loan Documents.

(b) In furtherance of the foregoing, each Borrower waives (i) any and all notices of the creation, renewal, extension or accrual of any amounts at any time owing to Lender by any other Borrower under the Loan Documents, (ii) any and all notices of or proof of reliance by Lender upon any Borrower or acceptance of the obligations of any Borrower under this Section 11.17, and all such amounts, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon the obligations of Borrowers under this Section 11.17, (iii) diligence, presentment, protest, demand for payment and notice of nonpayment or other default to or upon any Borrower with respect to any amounts at any time owing to Lender by any Borrower under the Loan Documents, other than such notices as are expressly required to be given under this Agreement or any of the other Loan Documents.

 

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(c) To the extent any Borrower (a “Paying Borrower”) shall have paid more than its proportionate share of any payment made hereunder, such Paying Borrower hereby waives (i) any right to subrogation or set-off that it may acquire on account of such payment against any other Borrower or any collateral security or guarantee and (ii) the right to seek contribution or reimbursement from any other Borrower in respect such payment, in each case, until all Secured Obligations are paid in full. If any amount shall be paid to any Paying Borrower on account of such subrogation rights at any time when any Secured Obligations are outstanding, amount shall be held by Paying Borrower in trust for Lender, segregated from other funds of Paying Borrower, and shall, forthwith upon receipt by Paying Borrower, be turned over to Lender in the exact form received by Paying Borrower (duly indorsed by the Paying Borrower to Lender, if required), to be applied against amounts owing to Lender by Borrowers under the Loan Documents, whether matured or unmatured, in such order as Lender may determine.

(d) With respect to any matter under the Loan Documents for which (i) any consent or approval of Borrower is required, (ii) any notice to, or from, Borrower is required or (iii) any other undertaking is made by Borrower, unless otherwise specified with respect to such consent, approval, notice or undertaking, such action by (or notice to) any Borrower shall be sufficient for all such purpose.

11.18 Due Diligence.

(a) Borrower acknowledges that Lender has the right to perform continuing due diligence reviews with respect to the Underlying Loans, the Borrower, the Guarantor and Servicer for purposes of verifying compliance with the representations, warranties and specifications made hereunder, or otherwise. Borrower agrees that upon reasonable prior notice (unless an Event of Default has occurred and is continuing, in which case no prior notice shall be required), Borrower shall provide (or shall cause its Affiliates, Guarantor, or Servicer, as applicable, to provide) reasonable access to Lender and any of its agents, representatives or permitted assigns to the offices of Borrower, such other Affiliates, Guarantor, or Servicer, as the case may be, during normal business hours and permit them to examine, inspect, and make copies and extracts of the Underlying Loan Files, Servicing Records and any and all documents, records, agreements, instruments or information relating to such Underlying Loans in the possession or under the control of such party.

(b) Borrower agrees that it shall, promptly upon reasonable request of Lender, deliver (or shall cause to be delivered) to Lender and any of its agents, representatives or permitted assigns copies of any documents permitted to be reviewed by Lender in accordance with Section 11.18(a).

(c) Borrower agrees to make available (or to cause any other Affiliate, Guarantor, or Servicer, as applicable, to make available) to Lender and any of its agents, representatives or permitted assigns (i) in person at the time of any inspection pursuant to Section 11.18(a) or (ii) upon prior written notice (unless an Event of Default has occurred and is continuing, in which case no prior notice shall be required and there shall be no limitation on

 

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frequency), by phone, as applicable, a knowledgeable financial or accounting officer or asset manager, as applicable, of Borrower, such other Affiliate, Guarantor, or Servicer, as the case may be, for the purpose of answering questions about any of the foregoing Persons, or any other matters relating to the Underlying Loan Documents or any Transaction that Lender wishes to discuss with such Person.

(d) Without limiting the generality of the foregoing, Borrower acknowledges that Lender may enter into Transactions with Borrower based solely upon the information provided by Borrower to Lender and the representations, warranties and covenants contained herein, and that Lender, at its option, has the right at any time to conduct a partial or complete due diligence review on some or all of the Underlying Loan Documents. Lender may underwrite such Underlying Loan Documents itself or engage a third-party underwriter to perform such underwriting. Borrower agrees to cooperate with Lender and any third party underwriter in connection with such underwriting, including, but not limited to, providing Lender and any third party underwriter with access to any and all documents, records, agreements, instruments or information relating to such Underlying Loans in the possession, or under the control, of Borrower, Guarantor, or any Affiliate thereof.

(e) Borrower agrees to reimburse Lender on demand for any and all costs and expenses (including, without limitation, the fees and expenses of counsel) incurred by Lender in connection with its due diligence activities pursuant to this Section 11.18.

[SIGNATURE PAGES FOLLOW]

 

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IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to be duly executed and delivered as of the day and year first above written.

 

BORROWER:

NEXPOINT WLIF I BORROWER, LLC

NEXPOINT WLIF II BORROWER, LLC

NEXPOINT WLIF III BORROWER, LLC,

each, a Delaware limited liability company

By:

  /s/ Brian Mitts
  Name: Brian Mitts
  Title: Authorized Signatory

Address for Notices:

NEXPOINT WLIF I BORROWER, LLC

NEXPOINT WLIF II BORROWER, LLC

NEXPOINT WLIF III BORROWER, LLC

300 Crescent Court, Suite 700

Dallas, Texas 75201

Attn: Matt McGraner

 

[Signature Page to Loan and Security Agreement]


LENDER:

FEDERAL HOME LOAN MORTGAGE CORPORATION, a corporation organized and existing under the laws of the United States

By:

 

/s/ Robert Koontz

Name: Robert Koontz

Title: Senior Vice President –

          Multifamily Capital Markets

Address for Notices:

Federal Home Loan Mortgage Corporation
1551 Park Run Drive

McLean, Virginia 22102-3110

Attn: Robert Koontz

With a copy to:

Dechert LLP
1095 Avenue of the Americas

New York, New York 10036-6797

Attn: Laura Swihart

Facsimile: (212) 698-3644

 

[Signature Page to Loan and Security Agreement]

EX-10.5 9 d759970dex105.htm EX-10.5 EX-10.5

Exhibit 10.5

FORM OF

NEXPOINT REAL ESTATE FINANCE, INC.

2020 LONG TERM INCENTIVE PLAN

1. Purpose. The purpose of this 2020 Long Term Incentive Plan is to enable the Company and its Affiliates and Subsidiaries to attract and retain directors, officers and other key employees and advisors and to provide to such persons incentives and rewards for performance.

2. Definitions. As used in this Plan:

(a) “Affiliate” means any corporation, partnership, joint venture or other entity, directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with the Company as determined by the Committee or the Board, as applicable, in its discretion. For purposes of this Plan, “Affiliate” includes the Manager and the Operating Partnership.

(b) “Appreciation Right” means a right granted pursuant to Section 5 of this Plan, and will include Tandem Appreciation Rights and Free-Standing Appreciation Rights.

(c) “Award Agreement” means an agreement, certificate, resolution or other type or form of writing or other evidence approved by the Committee that sets forth the terms and conditions of the awards granted under the Plan. An Award Agreement may be in an electronic medium, may be limited to notation on the books and records of the Company and, unless otherwise determined by the Committee, need not be signed by a representative of the Company or a Participant.

(d) “Base Price” means the price to be used as the basis for determining the Spread upon the exercise of a Free-Standing Appreciation Right or a Tandem Appreciation Right.

(e) “Board” means the Board of Directors of the Company.

(f) “Cash Incentive Award” means a cash award granted pursuant to Section 8 of this Plan.

(g) “Change in Control” has the meaning set forth in Section 13 of this Plan.

(h) “Code” means the Internal Revenue Code of 1986, as amended from time to time.

(i) “Committee” means a committee of the Board designated by the Board to administer the Plan pursuant to Section 11 of this Plan consisting solely of no fewer than two non-employee Directors (within the meaning of Rule 16b-3 promulgated under the Exchange Act) and, to the extent of any delegation by the Committee to a subcommittee pursuant to Section 11 of this Plan, such subcommittee.

(j) “Company” means NexPoint Real Estate Finance, Inc., a Maryland corporation, and its successors.


(k) “Date of Grant” means the date specified by the Committee on which a grant of Option Rights, Appreciation Rights, Performance Shares, Performance Units, Profits Interest Units, Cash Incentive Awards, or other awards contemplated by Section 10 of this Plan, or a grant or sale of Restricted Stock, Restricted Stock Units, or other awards contemplated by Section 10 of this Plan, will become effective (which date will not be earlier than the date on which the Committee takes action with respect thereto).

(l) “Director” means a member of the Board.

(m) “Effective Date” means the date this Plan is approved by the Shareholders of the Company.

(n) “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, as such law, rules and regulations may be amended from time to time.

(o) “Free-Standing Appreciation Right” means an Appreciation Right granted pursuant to Section 5 of this Plan that is not granted in tandem with an Option Right.

(p) “Incentive Stock Option” means an Option Right that is intended to qualify as an “incentive stock option” under Section 422 of the Code or any successor provision.

(q) “Management Objectives” means the measurable performance objective or objectives established pursuant to this Plan for Participants who have received grants of Performance Shares, Performance Units, Profits Interest Units or Cash Incentive Awards or, when so determined by the Committee, Option Rights, Appreciation Rights, Restricted Stock, Restricted Stock Units, dividend equivalents or other awards pursuant to this Plan. Management Objectives may be described in terms of Company-wide objectives or objectives that are related to the performance of the individual Participant or of one or more of the Subsidiaries, Affiliates, divisions, departments, regions, functions or other organizational units within the Company or its Subsidiaries. The Management Objectives may be made relative to the performance of other companies or subsidiaries, divisions, departments, regions, functions or other organizational units within such other companies, and may be made relative to an index or one or more of the performance objectives themselves. The Committee may grant awards subject to Management Objectives which may be based on one or more, or a combination, of the following metrics (including relative or growth achievement regarding such metrics):

(i) Profits (e.g., operating income, EBIT, EBT, net income, earnings per share, residual or economic earnings, economic profit – these profitability metrics could be measured before certain specified special items and/or subject to GAAP definition);

(ii) Cash Flow (e.g., EBITDA, free cash flow, free cash flow with or without specific capital expenditure target or range, including or excluding divestments and/or acquisitions, total cash flow, cash flow in excess of cost of capital or residual cash flow or cash flow return on investment);

(iii) Returns (e.g., profits or cash flow returns on: assets, invested capital, net capital employed, and equity; total shareholder return; stock price appreciation);

(iv) Profit Margins (e.g., profits divided by revenues, gross margins and material margins divided by revenues);

 

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(v) Liquidity Measures (e.g., debt-to-capital, debt-to-EBITDA, total debt ratio); and

(vi) REIT Operating Metrics (e.g., core earnings, cash available for distributions, adjusted cash available for distributions, funds from operations, net operating income, book value per share).

(r) “Manager” means NexPoint Real Estate Advisors VII, L.P., or any subsequent external manager to the Company hired to perform similar services.

(s) “Market Value per Share” means, as of any particular date, the closing price of a Share as reported for that date on the New York Stock Exchange or, if the Shares are not then listed on the New York Stock Exchange, on any other national securities exchange on which the Shares are listed, or if there are no sales on such date, on the next preceding trading day during which a sale occurred. If there is no regular public trading market for the Shares, then the Market Value per Share shall be the fair market value as determined in good faith by the Committee. The Committee is authorized to adopt another fair market value pricing method provided such method is stated in the Award Agreement and is in compliance with the fair market value pricing rules set forth in Section 409A of the Code.

(t) “Operating Partnership” means NexPoint Real Estate Finance Operating Partnership, L.P., a Delaware limited partnership.

(u) “OP Interests” means limited partnership interests in the Operating Partnership that may be exchanged or redeemed for Shares on a one-for-one basis, or any profits interest in the Operating Partnership that may be exchanged or converted into such limited partnership interests.

(v) “Optionee” means the optionee named in an Award Agreement evidencing an outstanding Option Right.

(w) “Option Price” means the purchase price payable on exercise of an Option Right.

(x) “Option Right” means the right to purchase Shares upon exercise of an option granted pursuant to Section 4 of this Plan.

(y) “Participant” means a person who is selected by the Committee to receive benefits under this Plan and who is at the time (i) an officer or other key employee of the Company or any Affiliate or Subsidiary, including a person who has agreed to commence serving in such capacity within 90 days of the Date of Grant, (ii) a person who provides services to the Company or any Affiliate or Subsidiary that are equivalent to those typically provided by an employee (provided that such person satisfies the Form S-8 definition of an “employee”), or (iii) a non-employee Director.

(z) “Partnership Agreement” means the Amended and Restated Limited Partnership Agreement of the Operating Partnership, as amended from time to time.

(aa) “Performance Period” means, in respect of a Cash Incentive Award, Performance Share or Performance Unit, a period of time established pursuant to Section 8 of this Plan within which the Management Objectives relating to such Cash Incentive Award, Performance Share or Performance Unit are to be achieved.

 

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(bb) “Performance Share” means a bookkeeping entry that records the equivalent of one Share awarded pursuant to Section 8 of this Plan.

(cc) “Performance Unit” means a bookkeeping entry awarded pursuant to Section 8 of this Plan that records a unit equivalent to $1.00 or such other value as is determined by the Committee.

(dd) “Person” means any individual, entity or group, within the meaning of Section 3(a)(9) of the Exchange Act as used in Section 13(d)(3) or 14(d)(2) of the Exchange Act.

(ee) “Plan” means this NexPoint Real Estate Finance, Inc. 2020 Long Term Incentive Plan.

(ff) “Profits Interest Units” means, to the extent authorized by the Partnership Agreement, a unit of the Operating Partnership that is granted pursuant to Section 9 of this Plan and is intended to constitute a “profits interest” within the meaning of the Code.

(gg) “Restricted Stock” means Shares granted or sold pursuant to Section 6 of this Plan as to which neither the substantial risk of forfeiture nor the prohibition on transfers has expired.

(hh) “Restricted Stock Units” means an award made pursuant to Section 7 of this Plan of the right to receive Shares, cash or a combination thereof at the end of a specified period.

(ii) “Restriction Period” means the period of time during which Restricted Stock Units are subject to restrictions, as provided in Section 7 of this Plan.

(jj) “Shareholder” means an individual or entity that owns one or more Shares.

(kk) “Shares” means the shares of common stock, par value $0.01 per share, of the Company or any security into which such common stock may be changed by reason of any transaction or event of the type referred to in Section 12 of this Plan.

(ll) “Spread” means the excess of the Market Value per Share on the date when an Option Right or Appreciation Right is exercised over the Option Price or Base Price provided for in the related Option Right or Appreciation Right, respectively.

(mm) “Subsidiary” means a corporation, company or other entity (i) more than 50 percent of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are, or (ii) which does not have outstanding shares or securities (as may be the case in a partnership, joint venture, limited liability company, or unincorporated association), but more than 50 percent of whose ownership interest representing the right generally to make decisions for such other entity is, now or hereafter, owned or controlled, directly or indirectly, by the Company; provided, however, that for purposes of determining whether any person may be a Participant for purposes of any grant of Incentive Stock Options, “Subsidiary” means any corporation (as defined in Treasury Regulation §1.421-1(i)) in which at the time the Company owns or controls, directly or indirectly, more than 50 percent of the total combined Voting Power represented by all classes of stock issued by such corporation.

(nn) “Tandem Appreciation Right” means an Appreciation Right granted pursuant to Section 5 of this Plan that is granted in tandem with an Option Right.

 

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(oo) “Voting Power” means at any time, the combined voting power of the then-outstanding securities entitled to vote generally in the election of Directors in the case of the Company, or members of the board of directors or similar body in the case of another entity.

3. Shares Available Under the Plan.

(a) Maximum Shares Available Under Plan.

(i) Subject to adjustment as provided in Section 12 of this Plan and the share counting rules set forth in Section 3(b) of this Plan, the number of Shares available under the Plan for awards of (A) Option Rights or Appreciation Rights, (B) Restricted Stock, (C) Restricted Stock Units, (D) Performance Shares or Performance Units, (E) Profits Interest Units, (F) awards contemplated by Section 10 of this Plan, or (G) dividend equivalents paid with respect to awards made under the Plan will not exceed in the aggregate,             Shares. Such shares will be shares of original issuance.

(ii) The aggregate number of Shares available for issuance or transfer under Section 3(a)(i) of this Plan will be reduced by one Share for every one Share subject to an award granted under this Plan.

(b) Share Counting Rules.

(i) If any award granted under this Plan is cancelled or forfeited, expires or is settled for cash (in whole or in part), the Shares subject to such award will, to the extent of such cancellation, forfeiture, expiration, or cash settlement, again be available under Section 3(a)(i) above.

(ii) Subject to Section 12 hereof, each Profits Interest Unit issued pursuant to an Award Agreement shall count as one Share for purposes of calculating the aggregate number of Shares available for issuance under this Plan as set forth in Section 3(a)(i) above.

(iii) Notwithstanding anything to the contrary contained herein: (A) Shares withheld by the Company, tendered or otherwise used in payment of the Option Price of an Option Right will not be added back to the aggregate number of Shares available under Section 3(a)(i) above; (B) Shares withheld by the Company or otherwise used to satisfy a tax withholding obligation will not be added (or added back, as applicable) to the aggregate number of Shares available under Section 3(a)(i) above; (C) Shares subject to an Appreciation Right that are not actually issued in connection with its settlement of Shares on exercise thereof will not be added back to the aggregate number of Shares available under Section 3(a)(i) above; and (D) Shares reacquired by the Company on the open market or otherwise using cash proceeds from the exercise of Option Rights will not be added back to the aggregate number of Shares available under Section 3(a)(i) above. If, under this Plan, a Participant has elected to give up the right to receive compensation in exchange for Shares based on fair market value, such Shares will not count against the aggregate limit under Section 3(a)(i) above.

(c) Limit on Incentive Stock Options. Notwithstanding anything in this Section 3 or elsewhere in this Plan to the contrary, and subject to adjustment as provided in Section 12 of this Plan, the aggregate number of Shares actually issued or transferred by the Company upon the exercise of Incentive Stock Options will not exceed             Shares.

 

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(d) Individual Participant Limits. Notwithstanding anything in this Section 3 or elsewhere in this Plan to the contrary, and subject to adjustment as provided in Section 12 of this Plan, no non-employee Director will be granted, in any period of one calendar year, awards under the Plan having an aggregate maximum value as of their respective Dates of Grant in excess of            .

(e) Notwithstanding anything in this Plan to the contrary, up to 5% of the maximum number of Shares available for awards under this Plan as provided for in Section 3(a) of this Plan, as may be adjusted under Section 12 of this Plan, may be used for awards granted under Section 4 through Section 10 of this Plan that do not at the Date of Grant comply with the applicable one-year minimum vesting requirements set forth in such sections of this Plan.

4. Option Rights. The Committee may, from time to time and upon such terms and conditions as it may determine, authorize the granting to Participants of Option Rights. Each such grant may utilize any or all of the authorizations, and will be subject to all of the requirements, contained in the following provisions:

(a) Each grant will specify the number of Shares to which it pertains subject to the limitations set forth in Section 3 of this Plan.

(b) Each grant will specify an Option Price per share, which (except with respect to awards under Section 23 of this Plan) may not be less than the Market Value per Share on the Date of Grant.

(c) Each grant will specify whether the Option Price will be payable (i) in cash or by check acceptable to the Company or by wire transfer of immediately available funds, (ii) by the actual or constructive transfer to the Company of Shares owned by the Optionee (or other consideration authorized pursuant to Section 4(d) of this Plan) having a value at the time of exercise equal to the total Option Price, (iii) subject to any conditions or limitations established by the Committee, the Company’s withholding of Shares otherwise issuable upon exercise of an Option Right pursuant to a “net exercise” arrangement, (iv) by a combination of such methods of payment, or (v) by such other methods as may be approved by the Committee.

(d) To the extent permitted by law, any grant may provide for deferred payment of the Option Price from the proceeds of sale through a bank or broker on a date satisfactory to the Company of some or all of the Shares to which such exercise relates.

(e) Successive grants may be made to the same Participant whether or not any Option Rights previously granted to such Participant remain unexercised.

(f) Each grant will specify the period or periods of continuous service by the Optionee with the Company or any Subsidiary that is necessary before the Option Rights or installments thereof will become exercisable; provided, that, except as otherwise described in this subsection, no grant of Option Rights may become exercisable sooner than after one year. A grant of Option Rights may provide for the earlier exercise of such Option Rights, including in the event of the retirement, death or disability of a Participant or in the event of a Change in Control only where either (i) within a specified period the Participant’s service is involuntarily terminated for reasons other than for cause or the Participant terminates his or her employment or service for good reason or (ii) such Option Rights are not assumed or converted into replacement awards in a manner described in the Award Agreement.

 

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(g) Any grant of Option Rights may specify Management Objectives that must be achieved as a condition to the exercise of such rights.

(h) Option Rights granted under this Plan may be (i) options, including, without limitation, Incentive Stock Options, that are intended to qualify under particular provisions of the Code, (ii) options that are not intended to qualify, or (iii) combinations of the foregoing. Incentive Stock Options may only be granted to Participants who meet the definition of “employees” under Section 3401(c) of the Code.

(i) The exercise of an Option Right will result in the cancellation on a share-for-share basis of any Tandem Appreciation Right authorized under Section 5 of this Plan.

(j) No Option Right will be exercisable more than 10 years from the Date of Grant; provided, that, in the case of Incentive Stock Options granted to 10% Shareholders, no such Option Right shall be exercisable more than 5 years from the Date of Grant.

(k) Option Rights granted under this Plan may not provide for any dividends or dividend equivalents thereon.

(l) Each grant of Option Rights will be evidenced by an Award Agreement. Each Award Agreement will be subject to this Plan and will contain such terms and provisions, consistent with this Plan, as the Committee may approve.

5. Appreciation Rights.

(a) The Committee may, from time to time and upon such terms and conditions as it may determine, authorize the granting (i) to any Optionee, of Tandem Appreciation Rights in respect of Option Rights granted hereunder, and (ii) to any Participant, of Free-Standing Appreciation Rights. A Tandem Appreciation Right will be a right of the Optionee, exercisable by surrender of the related Option Right, to receive from the Company an amount determined by the Committee, which will be expressed as a percentage of the Spread (not exceeding 100 percent) at the time of exercise. Tandem Appreciation Rights may be granted at any time prior to the exercise or termination of the related Option Rights; provided, however, that a Tandem Appreciation Right awarded in relation to an Incentive Stock Option must be granted concurrently with such Incentive Stock Option. A Free-Standing Appreciation Right will be a right of the Participant to receive from the Company an amount determined by the Committee, which will be expressed as a percentage of the Spread (not exceeding 100 percent) at the time of exercise.

(b) Each grant of Appreciation Rights may utilize any or all of the authorizations, and will be subject to all of the requirements, contained in the following provisions:

(i) Each grant may specify that the amount payable on exercise of an Appreciation Right will be paid by the Company in cash, Shares or any combination thereof.

(ii) Any grant may specify that the amount payable on exercise of an Appreciation Right may not exceed a maximum specified by the Committee at the Date of Grant.

(iii) Any grant may specify waiting periods before exercise and permissible exercise dates or periods.

 

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(iv) Each grant may specify the period or periods of continuous service by the Participant with the Company or any Subsidiary that is necessary before the Appreciation Rights or installments thereof will become exercisable; provided, that, except as otherwise described in this subsection, no grant of Appreciation Rights may become exercisable sooner than after one year. A grant of Appreciation Rights may provide for the earlier exercise of such Appreciation Rights, including in the event of the retirement, death or disability of a Participant or in the event of a Change in Control only where either (A) within a specified period the Participant’s service is involuntarily terminated for reasons other than for cause or the Participant terminates his or her employment or service for good reason or (B) such Appreciation Rights are not assumed or converted into replacement awards in a manner described in the Award Agreement.

(v) Any grant of Appreciation Rights may specify Management Objectives that must be achieved as a condition of the exercise of such Appreciation Rights.

(vi) Each grant of Appreciation Rights will be evidenced by an Award Agreement, which Award Agreement will describe such Appreciation Rights, identify the related Option Rights (if applicable), and contain such other terms and provisions, consistent with this Plan, as the Committee may approve.

(c) Any grant of Tandem Appreciation Rights will provide that such Tandem Appreciation Rights may be exercised only at a time when the related Option Right is also exercisable and at a time when the Spread is positive, and by surrender of the related Option Right for cancellation. Successive grants of Tandem Appreciation Rights may be made to the same Participant regardless of whether any Tandem Appreciation Rights previously granted to the Participant remain unexercised.

(d) Appreciation Rights granted under this Plan may not provide for any dividends or dividend equivalents thereon.

(e) Regarding Free-Standing Appreciation Rights only:

(i) Each grant will specify in respect of each Free-Standing Appreciation Right a Base Price, which (except with respect to awards under Section 23 of this Plan) may not be less than the Market Value per Share on the Date of Grant;

(ii) Successive grants may be made to the same Participant regardless of whether any Free-Standing Appreciation Rights previously granted to the Participant remain unexercised; and

(iii) No Free-Standing Appreciation Right granted under this Plan may be exercised more than 10 years from the Date of Grant.

6. Restricted Stock. The Committee may, from time to time and upon such terms and conditions as it may determine, authorize the grant or sale of Restricted Stock to Participants. Each such grant or sale may utilize any or all of the authorizations, and will be subject to all of the requirements, contained in the following provisions:

(a) Each such grant or sale will constitute an immediate transfer of the ownership of Shares to the Participant in consideration of the performance of services, entitling such Participant to voting, dividend and other ownership rights, but subject to the substantial risk of forfeiture and restrictions on transfer hereinafter referred to.

 

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(b) Each such grant or sale may be made without additional consideration or in consideration of a payment by such Participant that is less than the Market Value per Share at the Date of Grant.

(c) Each such grant or sale will provide that the Restricted Stock covered by such grant or sale will be subject to a “substantial risk of forfeiture” within the meaning of Section 83 of the Code for a period to be determined by the Committee at the Date of Grant or until achievement of Management Objectives referred to in subparagraph (e) below. If the elimination of restrictions is based only on the passage of time rather than the achievement of Management Objectives, the period of time will be no shorter than one year.

(d) Each such grant or sale will provide that during or after the period for which such substantial risk of forfeiture is to continue, the transferability of the Restricted Stock will be prohibited or restricted in the manner and to the extent prescribed by the Committee at the Date of Grant (which restrictions may include, without limitation, rights of repurchase or first refusal in the Company or provisions subjecting the Restricted Stock to a continuing substantial risk of forfeiture in the hands of any transferee).

(e) Any grant of Restricted Stock may specify Management Objectives that, if achieved, will result in termination or early termination of the restrictions applicable to such Restricted Stock; provided, however, that notwithstanding subparagraph (c) above, restrictions relating to Restricted Stock that vest upon the achievement of Management Objectives may not terminate sooner than after one year.

(f) Notwithstanding anything to the contrary contained in this Plan (including minimum vesting requirements), any grant or sale of Restricted Stock may provide for the earlier termination of restrictions on such Restricted Stock, including in the event of the retirement, death or disability of a Participant or in the event of a Change in Control only where either (i) within a specified period the Participant’s service is involuntarily terminated for reasons other than for cause or the Participant terminates his or her employment or service for good reason or (ii) such Restricted Stock is not assumed or converted into replacement awards in a manner described in the Award Agreement.

(g) Any such grant or sale of Restricted Stock may require that any or all dividends or other distributions paid thereon during the period of such restrictions be automatically deferred and reinvested in additional Restricted Stock, which may be subject to the same restrictions as the underlying award; provided, however, that dividends or other distributions on Restricted Stock with restrictions that lapse as a result of the achievement of Management Objectives will be deferred until and paid contingent upon the achievement of the applicable Management Objectives.

(h) Each grant or sale of Restricted Stock will be evidenced by an Award Agreement and will contain such terms and provisions, consistent with this Plan, as the Committee may approve. Unless otherwise directed by the Committee, (i) all certificates representing Restricted Stock will be held in custody by the Company until all restrictions thereon will have lapsed, together with a stock power or powers executed by the Participant in whose name such certificates are registered, endorsed in blank and covering such shares or (ii) all Restricted Stock will be held at the Company’s transfer agent in book entry form with appropriate restrictions relating to the transfer of such Restricted Stock.

 

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7. Restricted Stock Units. The Committee may, from time to time and upon such terms and conditions as it may determine, authorize the granting or sale of Restricted Stock Units to Participants. Each such grant or sale may utilize any or all of the authorizations, and will be subject to all of the requirements, contained in the following provisions:

(a) Each such grant or sale will constitute the agreement by the Company to deliver Shares or cash, or a combination thereof, to the Participant in the future in consideration of the performance of services, but subject to the fulfillment of such conditions (which may include the achievement of Management Objectives) during the Restriction Period as the Committee may specify.

(b) If a grant of Restricted Stock Units specifies that the Restriction Period will terminate only upon the achievement of Management Objectives or that the Restricted Stock Units will be earned based on the achievement of Management Objectives, then, notwithstanding anything to the contrary contained in subparagraph (d) below, the applicable Restriction Period may not be a period of less than one year.

(c) Each such grant or sale may be made without additional consideration or in consideration of a payment by such Participant that is less than the Market Value per Share at the Date of Grant.

(d) If the Restriction Period lapses only by the passage of time rather than the achievement of Management Objectives as provided in subparagraph (b) above, each such grant or sale will be subject to a Restriction Period of not less than one year.

(e) Notwithstanding anything to the contrary contained in this Plan (including minimum vesting requirements), any grant or sale of Restricted Stock Units may provide for the earlier lapse or other modification of the Restriction Period, including in the event of the retirement, death or disability of a Participant or in the event of a Change in Control only where either (i) within a specified period the Participant’s service is involuntarily terminated for reasons other than for cause or the Participant terminates his or her employment or service for good reason or (ii) such Restricted Stock Units are not assumed or converted into replacement awards in a manner described in the Award Agreement.

(f) During the Restriction Period, the Participant will have no right to transfer any rights under his or her award and will have no rights of ownership in the Shares deliverable upon payment of the Restricted Stock Units and will have no right to vote them, but the Committee may, at or after the Date of Grant, authorize the payment of dividend equivalents on such Restricted Stock Units on either a current or deferred or contingent basis, either in cash or in additional Shares; provided, however, that dividend equivalents or other distributions on Shares underlying Restricted Stock Units with restrictions that lapse as a result of the achievement of Management Objectives will be deferred until and paid contingent upon the achievement of the applicable Management Objectives.

(g) Each grant or sale of Restricted Stock Units will specify the time and manner of payment of the Restricted Stock Units that have been earned. Each grant or sale will specify that the amount payable with respect thereto will be paid by the Company in Shares or cash, or a combination thereof.

 

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(h) Each grant or sale of Restricted Stock Units will be evidenced by an Award Agreement and will contain such terms and provisions, consistent with this Plan, as the Committee may approve.

8. Cash Incentive Awards, Performance Shares and Performance Units. The Committee may, from time to time and upon such terms and conditions as it may determine, authorize the granting of Cash Incentive Awards, Performance Shares and Performance Units. Each such grant may utilize any or all of the authorizations, and will be subject to all of the requirements, contained in the following provisions:

(a) Each grant will specify the number or amount of Performance Shares or Performance Units, or amount payable with respect to Cash Incentive Awards, to which it pertains, which number or amount may be subject to adjustment to reflect changes in compensation or other factors.

(b) The Performance Period with respect to each Cash Incentive Award, Performance Share or Performance Unit will be such period of time (with respect to each Performance Share or Performance Unit not less than one year) as will be determined by the Committee at the time of grant, which may be subject to earlier lapse or other modification, including in the event of the retirement, death or disability of a Participant or in the event of a Change in Control only where either (i) within a specified period the Participant’s service is involuntarily terminated for reasons other than for cause or the Participant terminates his or her employment or service for good reason or (ii) such Cash Incentive Awards, Performance Shares or Performance Units are not assumed or converted into replacement awards in a manner described in the Award Agreement.

(c) Each grant of Cash Incentive Awards, Performance Shares or Performance Units will specify Management Objectives which, if achieved, will result in payment or early payment of the award, and each grant may specify in respect of such specified Management Objectives a minimum acceptable level or levels of achievement and may set forth a formula for determining the number of Performance Shares or Performance Units, or amount payable with respect to Cash Incentive Awards, that will be earned if performance is at or above the minimum or threshold level or levels, or is at or above the target level or levels, but falls short of maximum achievement of the specified Management Objectives.

(d) Each grant will specify the time and manner of payment of Cash Incentive Awards, Performance Shares or Performance Units that have been earned. Any grant may specify that the amount payable with respect thereto may be paid by the Company in cash, in Shares, in Restricted Stock or Restricted Stock Units or in any combination thereof.

(e) Any grant of Cash Incentive Awards, Performance Shares or Performance Units may specify that the amount payable or the number of Shares, shares of Restricted Stock or Restricted Stock Units with respect thereto may not exceed a maximum specified by the Committee at the Date of Grant.

(f) The Committee may, at the Date of Grant of Performance Shares, provide for the payment of dividend equivalents to the holder thereof either in cash or in additional Shares, subject in all cases to deferral and payment on a contingent basis based on the Participant’s earning of the Performance Shares with respect to which such dividend equivalents are paid.

 

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(g) Each grant of Cash Incentive Awards, Performance Shares or Performance Units will be evidenced by an Award Agreement and will contain such other terms and provisions, consistent with this Plan, as the Committee may approve.

9. Profits Interest Units. The Committee may, from time to time and upon such terms and condition as it may determine, authorize the granting of Profits Interest Units. Each such grant may utilize any or all of the authorizations, and will be subject to all of the requirements, contained in the following provisions:

(a) Each grant will specify the number of Profits Interest Units to which it pertains, subject to the limitations set forth in Section 3 of this Plan.

(b) Profits Interest Units may only be issued to a Participant for the performance of services to or for the benefit of the Operating Partnership (i) in the Participant’s capacity as a partner of the Operating Partnership, (ii) in anticipation of the Participant becoming a partner of the Operating Partnership (to the extent not already a partner), or (iii) as otherwise determined by the Committee, provided that the Profits Interest Units are intended to constitute “profits interests” within the meaning of the Code, including, to the extent applicable, Revenue Procedure 93-27, 1993-2 C.B. 343 and Revenue Procedure 2001-43, 2001-2 C.B. 191.

(c) Any grant of Profits Interest Units may specify Management Objectives that must be achieved as a condition to the vesting of such Profits Interest Units. Upon vesting, such Profits Interest Units shall become nonforfeitable, except for events that constitute cause.

(d) Each grant will specify the period or periods of continuous employment or service by the Participant with the Company or any Subsidiary that is necessary before the Profits Interest Units or installments thereof will vest; provided no grant of Profits Interest Units may become exercisable sooner than after one year.

(e) Notwithstanding anything to the contrary contained in this Plan (including minimum vesting requirements), any grant of Profits Interest Units may provide for the earlier vesting of such Profits Interest Units, including in the event of the retirement, death or disability of a Participant or in the event of a Change in Control only where either (i) within a specified period the Participant’s service is involuntarily terminated for reasons other than for cause or the Participant terminates his or her employment or service for good reason or (ii) such Profits Interest Units are not assumed or converted into replacement awards in a manner described in the Award Agreement.

(f) Each grant of Profits Interest Units will be evidenced by an Award Agreement. Each Award Agreement will be subject to this Plan and will contain such terms and provisions, consistent with this Plan, as the Committee may approve.

10. Other Awards.

(a) Subject to applicable law and the applicable limits set forth in Section 3 of this Plan, the Committee may grant to any Participant Shares or such other awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Shares or factors that may influence the value of such shares, including, without limitation, convertible or exchangeable debt securities, other rights convertible or exchangeable

 

12


into Shares, purchase rights for Shares, awards with value and payment contingent upon performance of the Company or specified Subsidiaries, Affiliates or other business units thereof or any other factors designated by the Committee, awards valued by reference to the book value of the Shares or the value of securities of, or the performance of specified Subsidiaries or Affiliates or other business units of the Company, and awards that are membership interests in a Subsidiary or Operating Partnership, and OP Interests. The Committee will determine the terms and conditions of such awards. Shares delivered pursuant to an award in the nature of a purchase right granted under this Section 10 will be purchased for such consideration, paid for at such time, by such methods, and in such forms, including, without limitation, Shares, other awards, notes or other property, as the Committee determines.

(b) Cash awards, as an element of or supplement to any other award granted under this Plan, may also be granted pursuant to this Section 10.

(c) The Committee may grant Shares as a bonus, or may grant other awards in lieu of obligations of the Company or a Subsidiary to pay cash or deliver other property under this Plan or under other plans or compensatory arrangements, subject to such terms as will be determined by the Committee in a manner that complies with Section 409A of the Code.

(d) If the earning or vesting of, or elimination of restrictions applicable to, an award granted under this Section 10 is based only on the passage of time rather than the achievement of Management Objectives, the period of time shall be no shorter than one year. If the earning or vesting of, or elimination of restrictions applicable to, awards granted under this Section 10 is based on the achievement of Management Objectives, the earning, vesting or restriction period may not terminate sooner than after one year.

(e) Notwithstanding anything to the contrary contained in this Plan (including minimum vesting requirements), any grant of an award under this Section 10 may provide for the earning or vesting of, or earlier elimination of restrictions applicable to, such award, including in the event of the retirement, death or disability of a Participant or in the event of a Change in Control only where either (i) within a specified period the Participant’s service is involuntarily terminated for reasons other than for cause or the Participant terminates his or her employment or service for good reason or (ii) such awards are not assumed or converted into replacement awards in a manner described in the Award Agreement.

11. Administration of this Plan.

(a) This Plan will be administered by the Committee. The Committee may from time to time delegate all or any part of its authority under this Plan to a subcommittee thereof. To the extent of any such delegation, references in this Plan to the Committee will be deemed to be references to such subcommittee.

(b) The interpretation and construction by the Committee of any provision of this Plan or of any Award Agreement (or related documents) and any determination by the Committee pursuant to any provision of this Plan or of any such agreement, notification or document will be final and conclusive. No member of the Committee shall be liable for any such action or determination made in good faith. In addition, the Committee is authorized to take any action it determines in its sole discretion to be appropriate subject only to the express limitations contained in this Plan, and no authorization in any provision of this Plan is intended or may be deemed to constitute a limitation on the authority of the Committee.

 

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(c) To the extent permitted by law, the Committee may delegate to one or more of its members or to one or more officers of the Company, or to one or more agents or advisors, such administrative duties or powers as it may deem advisable, and the Committee, the subcommittee, or any person to whom duties or powers have been delegated as aforesaid, may employ one or more persons to render advice with respect to any responsibility the Committee, the subcommittee or such person may have under the Plan. The Committee may, by resolution, authorize one or more officers of the Company to do one or both of the following on the same basis as the Committee: (i) designate employees to be recipients of awards under this Plan; and (ii) determine the size of any such awards; provided, however, that (A) the Committee will not delegate such responsibilities to any such officer for awards granted to an employee who is an officer, Director, or more than 10% Beneficial Owner (as defined in Section 12 below) of any class of the Company’s equity securities that is registered pursuant to Section 12 of the Exchange Act, as determined by the Committee in accordance with Section 16 of the Exchange Act; (B) the resolution providing for such authorization sets forth the total number of Shares such officer(s) may grant; and (C) the officer(s) will report periodically to the Committee regarding the nature and scope of the awards granted pursuant to the authority delegated.

12. Adjustments. The Committee shall make or provide for such adjustments in the numbers of Shares covered by outstanding Option Rights, Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units and Profits Interest Units granted hereunder and, if applicable, in the number of Shares covered by other awards granted pursuant to Section 10 hereof, in the Option Price and Base Price provided in outstanding Option Rights and Appreciation Rights, respectively, in the kind of shares covered thereby, in Cash Incentive Awards, and in other award terms, as the Committee, in its sole discretion, exercised in good faith, shall determine is equitably required to prevent dilution or enlargement of the rights of Participants or Optionees that otherwise would result from (a) any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, (b) any merger, consolidation, spin-off, split-off, spin-out, split-up, reorganization, partial or complete liquidation or other distribution of assets, issuance of rights or warrants to purchase securities, or (c) any other corporate transaction or event having an effect similar to any of the foregoing. Moreover, in the event of any such transaction or event or in the event of a Change in Control, the Committee may provide in substitution for any or all outstanding awards under this Plan such alternative consideration (including cash), if any, as it, in good faith, may determine to be equitable in the circumstances and shall require in connection therewith the surrender of all awards so replaced in a manner that complies with Section 409A of the Code. In addition, for each Option Right or Appreciation Right with an Option Price or Base Price, respectively, greater than the consideration offered in connection with any such transaction or event or Change in Control, the Committee may in its discretion elect to cancel such Option Right or Appreciation Right without any payment to the person holding such Option Right or Appreciation Right. The Committee shall also make or provide for such adjustments in the numbers of shares specified in Section 3 of this Plan as the Committee in its sole discretion, exercised in good faith, shall determine is appropriate to reflect any transaction or event described in this Section 12; provided, however, that any such adjustment to the number specified in Section 3(c) will be made only if and to the extent that such adjustment would not cause any Option Right intended to qualify as an Incentive Stock Option to fail to so qualify.

 

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13. Change in Control. For purposes of this Plan, except as may be otherwise prescribed by the Committee in an Award Agreement made under this Plan, a “Change in Control” will be deemed to have occurred upon the occurrence (after the Effective Date) of any of the following events:

(i) individuals who, on the Effective Date, constitute the Board (the “Incumbent Directors”) cease for any reason to constitute at least a majority of such Board, provided that any person becoming a Director after the Effective Date and whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Directors then on the Board shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a Director of the Company as a result of an actual or threatened election contest with respect to the election or removal of Directors (“Election Contest”) or other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board (“Proxy Contest”), including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest, shall be deemed an Incumbent Director;

(ii) any Person becomes a Beneficial Owner (as such term is defined in the Rule 13d-3 of the General Rules and Regulations under the Exchange Act), directly or indirectly, of either (A) 35% or more of the then-outstanding shares of common stock of the Company (“Company Common Stock”) or (B) securities of the Company representing 35% or more of the combined Voting Power of the Company’s then outstanding securities eligible to vote for the election of directors (the “Company Voting Securities”); provided, however, that for purposes of this subsection (ii), the following acquisitions of Company Common Stock or Company Voting Securities shall not constitute a Change in Control: (w) an acquisition directly from the Company, (x) an acquisition by the Company or a Subsidiary, (y) an acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary, or (z) an acquisition pursuant to a Non-Qualifying Transaction (as defined in subsection (iii) below);

(iii) the consummation of a reorganization, merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or a Subsidiary (a “Reorganization”), or the sale or other disposition of all or substantially all of the Company’s assets (a “Sale”) or the acquisition of assets or stock of another corporation or other entity (an “Acquisition”), unless immediately following such Reorganization, Sale or Acquisition: (A) all or substantially all of the individuals and entities who were the Beneficial Owners, respectively, of the outstanding Company Common Stock and outstanding Company Voting Securities immediately prior to such Reorganization, Sale or Acquisition beneficially own, directly or indirectly, more than 35% of, respectively, the then outstanding shares of common stock and the combined Voting Power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the entity resulting from such Reorganization, Sale or Acquisition (including, without limitation, an entity which as a result of such transaction owns the Company or all or substantially all of the Company’s assets or stock either directly or through one or more subsidiaries) (the “Surviving Entity”) in substantially the same proportions as their ownership, immediately prior to such Reorganization, Sale or Acquisition, of the outstanding Company Common Stock and the outstanding Company Voting Securities, as the case may be, and (B) no Person (other than (x) the Company or any Subsidiary, (y) the Surviving Entity or its ultimate parent entity, or (z) any employee benefit plan (or related trust) sponsored or maintained by any of the foregoing) is the Beneficial Owner, directly or indirectly, of 35% or more of the total common stock or 35% or more of the total Voting Power of the outstanding voting securities eligible to elect directors of the Surviving Entity, and (C) at least a majority of the members of the board of directors of the Surviving Entity were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Reorganization, Sale or Acquisition (any Reorganization, Sale or Acquisition which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a “Non-Qualifying Transaction”);

 

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(iv) approval by the Shareholders of the Company of a complete liquidation or dissolution of the Company; or

(v) termination of the Manager.

14. Detrimental Activity and Recapture Provisions. Any Award Agreement may provide for the cancellation or forfeiture of an award or the forfeiture and repayment to the Company of any gain related to an award, or other provisions intended to have a similar effect, upon such terms and conditions as may be determined by the Committee from time to time, if a Participant, either (a) during employment or other service with the Company or a Subsidiary, or (b) within a specified period after termination of such employment or service, shall engage in any detrimental activity. In addition, notwithstanding anything in this Plan to the contrary, any Award Agreement may also provide for the cancellation or forfeiture of an award or the forfeiture and repayment to the Company of any gain related to an award, or other provisions intended to have a similar effect, upon such terms and conditions as may be required by the Committee or under Section 10D of the Exchange Act and any applicable rules or regulations promulgated by the Securities and Exchange Commission or any national securities exchange or national securities association on which the Shares may be traded.

15. Non U.S. Participants. In order to facilitate the making of any grant or combination of grants under this Plan, the Committee may provide for such special terms for awards to Participants who are foreign nationals or who are employed by the Company or any Subsidiary outside of the United States of America or who provide services to the Company or any Subsidiary under an agreement with a foreign nation or agency, as the Committee may consider necessary or appropriate to accommodate differences in local law, tax policy or custom. Moreover, the Committee may approve such supplements to or amendments, restatements or alternative versions of this Plan (including, without limitation, sub-plans) as it may consider necessary or appropriate for such purposes, without thereby affecting the terms of this Plan as in effect for any other purpose, and the secretary or other appropriate officer of the Company may certify any such document as having been approved and adopted in the same manner as this Plan. No such special terms, supplements, amendments or restatements, however, will include any provisions that are inconsistent with the terms of this Plan as then in effect unless this Plan could have been amended to eliminate such inconsistency without further approval by the Shareholders.

16. Transferability.

(a) Except as otherwise determined by the Committee, no Option Right, Appreciation Right, Restricted Stock, Restricted Stock Unit, Performance Share, Performance Unit, Profits Interest Unit, Cash Incentive Award, award contemplated by Section 10 of this Plan or dividend equivalents paid with respect to awards made under this Plan will be transferable by the Participant except (i) if it is made by the Participant for no consideration to Immediate Family Members or to a bona fide trust, partnership or other entity controlled by and for the benefit of one or more Immediate Family Members (“Immediate Family Members” mean the Participant’s spouse, children, stepchildren, parents, stepparents, siblings (including half brothers and sisters), in-laws, and other individuals who have a relationship to the Participant arising because of legal adoption; however, no transfer may be made to the extent that transferability would cause Form S-8 or any successor form thereto not to be able to register Shares related to an award) or (ii) by

 

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will or the laws of descent and distribution. In no event will any such award granted under the Plan be transferred for value. Except as otherwise determined by the Committee, Option Rights and Appreciation Rights will be exercisable during the Participant’s lifetime only by him or her or, in the event of the Participant’s legal incapacity to do so, by his or her guardian or legal representative acting on behalf of the Participant in a fiduciary capacity under state law or court supervision.

(b) The Committee may specify at the Date of Grant that part or all of the Shares that are (i) to be issued or transferred by the Company upon the exercise of Option Rights or Appreciation Rights, upon the termination of the Restriction Period applicable to Restricted Stock Units or upon payment under any grant of Performance Shares, Performance Units or Profits Interest Units or (ii) no longer subject to the substantial risk of forfeiture and restrictions on transfer referred to in Section 6 of this Plan, will be subject to further restrictions on transfer.

17. Withholding Taxes. To the extent that the Company is required to withhold federal, state, local or foreign taxes in connection with any payment made or benefit realized by a Participant or other person under this Plan, and the amounts available to the Company for such withholding are insufficient, it will be a condition to the receipt of such payment or the realization of such benefit that the Participant or such other person make arrangements satisfactory to the Company for payment of the balance of such taxes required to be withheld, which arrangements (in the discretion of the Committee) may include relinquishment of a portion of such benefit. If a Participant’s benefit is to be received in the form of Shares, and such Participant fails to make arrangements for the payment of tax, then, unless otherwise determined by the Committee, the Company will withhold Shares having a value equal to the amount required to be withheld. Notwithstanding the foregoing, when a Participant is required to pay the Company an amount required to be withheld under applicable income and employment tax laws, the Participant may elect, unless otherwise determined by the Committee, to satisfy the obligation, in whole or in part, by having withheld, from the Shares required to be delivered to the Participant, Shares having a value equal to the amount required to be withheld or by delivering to the Company other Shares held by such Participant. The Shares used for tax withholding will be valued at an amount equal to the market value of such Shares on the date the benefit is to be included in Participant’s income. In no event will the market value of the Shares to be withheld and delivered pursuant to this Section to satisfy applicable withholding taxes in connection with the benefit exceed the minimum amount of taxes required to be withheld, unless (i) an additional amount can be withheld and not result in adverse accounting consequences and (ii) is permitted by the Committee. Participants will also make such arrangements as the Company may require for the payment of any withholding tax obligation that may arise in connection with the disposition of Shares acquired upon the exercise of Option Rights.

18. Compliance with Section 409A of the Code.

(a) To the extent applicable, it is intended that this Plan and any grants made hereunder comply with the provisions of Section 409A of the Code, so that the income inclusion provisions of Section 409A(a)(1) of the Code do not apply to the Participants. This Plan and any grants made hereunder will be administered in a manner consistent with this intent. Any reference in this Plan to Section 409A of the Code will also include any regulations or any other formal guidance promulgated with respect to such Section by the U.S. Department of the Treasury or the Internal Revenue Service.

 

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(b) Neither a Participant nor any of a Participant’s creditors or beneficiaries will have the right to subject any deferred compensation (within the meaning of Section 409A of the Code) payable under this Plan and grants hereunder to any anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment or garnishment. Except as permitted under Section 409A of the Code, any deferred compensation (within the meaning of Section 409A of the Code) payable to a Participant or for a Participant’s benefit under this Plan and grants hereunder may not be reduced by, or offset against, any amount owing by a Participant to the Company or any of its Subsidiaries.

(c) If, at the time of a Participant’s separation from service (within the meaning of Section 409A of the Code), (i) the Participant will be a specified employee (within the meaning of Section 409A of the Code and using the identification methodology selected by the Company from time to time) and (ii) the Company makes a good faith determination that an amount payable hereunder constitutes deferred compensation (within the meaning of Section 409A of the Code) the payment of which is required to be delayed pursuant to the six-month delay rule set forth in Section 409A of the Code in order to avoid taxes or penalties under Section 409A of the Code, then the Company will not pay such amount on the otherwise scheduled payment date but will instead pay it, without interest, on the fifth business day of the seventh month after such separation from service.

(d) Solely with respect to any award that constitutes nonqualified deferred compensation subject to Section 409A of the Code and that is payable on account of a Change of Control (including any installments or stream of payments that are accelerated on account of a Change of Control), a Change of Control shall occur only if such event also constitutes a “change in the ownership,” “change in effective control,” and/or a “change in the ownership of a substantial portion of assets” of the Company as those terms are defined under Treasury Regulation §1.409A-3(i)(5), but only to the extent necessary to establish a time and form of payment that complies with Section 409A of the Code, without altering the definition of Change of Control for any other purposes in respect of such award.

(e) Notwithstanding any provision of this Plan and grants hereunder to the contrary, in light of the uncertainty with respect to the proper application of Section 409A of the Code, the Company reserves the right to make amendments to this Plan and grants hereunder as the Company deems necessary or desirable to avoid the imposition of taxes or penalties under Section 409A of the Code. In any case, a Participant will be solely responsible and liable for the satisfaction of all taxes and penalties that may be imposed on a Participant or for a Participant’s account in connection with this Plan and grants hereunder (including any taxes and penalties under Section 409A of the Code), and neither the Company nor any of its Affiliates will have any obligation to indemnify or otherwise hold a Participant harmless from any or all of such taxes or penalties.

19. Amendments.

(a) The Board may at any time and from time to time amend this Plan in whole or in part; provided, however, that if an amendment to this Plan (i) would materially increase the benefits accruing to Participants under this Plan, (ii) would materially increase the number of securities which may be issued under this Plan, (iii) would materially modify the requirements for participation in this Plan, or (iv) must otherwise be approved by the Shareholders in order to comply with applicable law or the rules of the New York Stock Exchange or, if the Shares are not traded on the New York Stock Exchange, the principal national securities exchange upon which the Shares are traded or quoted, then, such amendment will be subject to Shareholder approval and will not be effective unless and until such approval has been obtained.

 

18


(b) Except in connection with a corporate transaction or event described in Section 12 of this Plan or in connection with a Change in Control, the terms of outstanding awards may not be amended to reduce the Option Price of outstanding Option Rights or the Base Price of outstanding Appreciation Rights, or cancel outstanding “underwater” Option Rights or Appreciation Rights in exchange for cash, other awards or Option Rights or Appreciation Rights with an Option Price or Base Price, as applicable, that is less than the Option Price of the original Option Rights or Base Price of the original Appreciation Rights, as applicable, without Shareholder approval. This Section 19(b) is intended to prohibit the repricing of “underwater” Option Rights and Appreciation Rights and will not be construed to prohibit the adjustments provided for in Section 12 of this Plan. Notwithstanding any provision of this Plan to the contrary, this Section 19(b) may not be amended without approval by the Shareholders.

(c) If permitted by Section 409A of the Code, but subject to the paragraph that follows, notwithstanding the Plan’s minimum vesting requirements, and including in the case of termination of employment by reason of death, disability or retirement, or in the case of unforeseeable emergency or other special circumstances or in the event of a Change in Control, to the extent a Participant holds an Option Right or Appreciation Right not immediately exercisable in full, or any Restricted Stock as to which the substantial risk of forfeiture or the prohibition or restriction on transfer has not lapsed, or any Restricted Stock Units as to which the Restriction Period has not been completed, or any Cash Incentive Awards, Performance Shares, Performance Units or Profits Interest Units which have not been fully earned, or any other awards made pursuant to Section 10 subject to any vesting schedule or transfer restriction, or who holds Shares subject to any transfer restriction imposed pursuant to Section 16(b) of this Plan, the Committee may, in its sole discretion, accelerate the time at which such Option Right, Appreciation Right or other award may be exercised or the time at which such substantial risk of forfeiture or prohibition or restriction on transfer will lapse or the time when such Restriction Period will end or the time at which such Cash Incentive Awards, Performance Shares, Performance Units or Profits Interest Units will be deemed to have been fully earned or the time when such transfer restriction will terminate or may waive any other limitation or requirement under any such award.

(d) Subject to Section 19(b) hereof, the Committee may amend the terms of any award theretofore granted under this Plan prospectively or retroactively. Subject to Section 12 above, no such amendment will impair the rights of any Participant without his or her consent. The Board may, in its discretion, terminate this Plan at any time. Termination of this Plan will not affect the rights of Participants or their successors under any awards outstanding hereunder and not exercised in full on the date of termination.

20. Governing Law. This Plan and all grants and awards and actions taken hereunder will be governed by and construed in accordance with the internal substantive laws of the State of Maryland.

21. Effective Date/Termination. This Plan will be effective as of the Effective Date. No grant will be made under this Plan after the tenth anniversary of the Effective Date, but all grants made on or prior to such date will continue in effect thereafter subject to the terms thereof and of this Plan.

 

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22. Miscellaneous Provisions.

(a) The Company will not be required to issue any fractional Shares pursuant to this Plan. The Committee may provide for the elimination of fractions or for the settlement of fractions in cash.

(b) This Plan will not confer upon any Participant any right with respect to continuance of employment or other service with the Company or any Subsidiary, nor will it interfere in any way with any right the Company or any Subsidiary would otherwise have to terminate such Participant’s employment or other service at any time.

(c) Except with respect to Section 22(e), to the extent that any provision of this Plan would prevent any Option Right that was intended to qualify as an Incentive Stock Option from qualifying as such, that provision will be null and void with respect to such Option Right. Such provision, however, will remain in effect for other Option Rights and there will be no further effect on any provision of this Plan.

(d) No award under this Plan may be exercised by the holder thereof if such exercise, and the receipt of cash or stock thereunder, would be, in the opinion of counsel selected by the Company, contrary to law or the regulations of any duly constituted authority having jurisdiction over this Plan.

(e) Absence on leave approved by a duly constituted officer of the Company or any of its Subsidiaries will not be considered interruption or termination of service of any employee for any purposes of this Plan or awards granted hereunder.

(f) No Participant will have any rights as a shareholder with respect to any shares subject to awards granted to him or her under this Plan prior to the date as of which he or she is actually recorded as the holder of such shares upon the stock records of the Company.

(g) The Committee may condition the grant of any award or combination of awards authorized under this Plan on the surrender or deferral by the Participant of his or her right to receive a cash bonus or other compensation otherwise payable by the Company or a Subsidiary to the Participant.

(h) Except with respect to Option Rights and Appreciation Rights, the Committee may permit Participants to elect to defer the issuance of Shares under the Plan pursuant to such rules, procedures or programs as it may establish for purposes of this Plan and which are intended to comply with the requirements of Section 409A of the Code. The Committee also may provide that deferred issuances and settlements include the payment or crediting of dividend equivalents or interest on the deferral amounts.

(i) If any provision of this Plan is or becomes invalid, illegal or unenforceable in any jurisdiction, or would disqualify this Plan or any award under any law deemed applicable by the Committee, such provision will be construed or deemed amended or limited in scope to conform to applicable laws or, in the discretion of the Committee, it will be stricken and the remainder of this Plan will remain in full force and effect.

 

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23. Stock-Based Awards in Substitution for Option Rights or Awards Granted by Other Company. Notwithstanding anything in this Plan to the contrary:

(a) Awards may be granted under this Plan in substitution for or in conversion of, or in connection with an assumption of, stock options, stock appreciation rights, restricted stock, restricted stock units or other stock or stock-based awards held by awardees of an entity engaging in a corporate acquisition or merger transaction with the Company or any Subsidiary. Any conversion, substitution or assumption will be effective as of the close of the merger or acquisition, and, to the extent applicable, will be conducted in a manner that complies with Section 409A of the Code. The awards so granted may reflect the original terms of the awards being assumed or substituted or converted for and need not comply with other specific terms of this Plan, and may account for Shares substituted for the securities covered by the original awards and the number of shares subject to the original awards, as well as any exercise or purchase prices applicable to the original awards, adjusted to account for differences in stock prices in connection with the transaction.

(b) In the event that a company acquired by the Company or any Subsidiary or with which the Company or any Subsidiary merges has shares available under a pre-existing plan previously approved by Shareholders and not adopted in contemplation of such acquisition or merger, the shares available for grant pursuant to the terms of such plan (as adjusted, to the extent appropriate, to reflect such acquisition or merger) may be used for awards made after such acquisition or merger under the Plan; provided, however, that awards using such available shares may not be made after the date awards or grants could have been made under the terms of the pre-existing plan absent the acquisition or merger, and may only be made to individuals who were not employees or directors of the Company or any Subsidiary prior to such acquisition or merger. Any operation of this Plan in connection with such available shares shall comply with the rules of the applicable national securities exchange on which the Shares are listed.

(c) Any Shares that are issued or transferred by, or that are subject to any awards that are granted by, or become obligations of, the Company under Sections 23(a) or 23(b) above will not reduce the Shares available for issuance or transfer under the Plan or otherwise count against the limits contained in Section 3 of the Plan. In addition, no Shares that are issued or transferred by, or that are subject to any awards that are granted by, or become obligations of, the Company under Sections 23(a) or 23(b) above will be added to the aggregate limit contained in Section 3(a)(i) of the Plan.

24. REIT Status. This Plan shall be interpreted and construed in a manner consistent with the Company’s status as a REIT. No award shall be granted or awarded, and with respect to any award granted under this Plan, such award shall not vest, be exercisable or be settled: (i) to the extent that the grant, vesting, exercise or settlement could cause the Participant or any other person to be in violation of the share ownership limit or any other limitation on ownership or transfer prescribed by the Company’s charter, or (ii) if, in the discretion of the Committee, the grant, vesting, exercise or settlement of the award could impair the Company’s status as a REIT.

[Remainder Intentionally Left Blank]

 

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The foregoing is hereby acknowledged as being the 2020 Long Term Incentive Plan as adopted by the Board on                     , 2020, and by the Shareholders on                     , 2020.

 

NEXPOINT REAL ESTATE FINANCE, INC.
By:  

 

  Name:
  Title:

 

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EX-10.6 10 d759970dex106.htm EX-10.6 EX-10.6

Exhibit 10.6

FORM OF INDEMNIFICATION AGREEMENT

THIS INDEMNIFICATION AGREEMENT (“Agreement”) is made and entered into as of the ___ day of __________, 20    , by and between NexPoint Real Estate Finance, Inc., a Maryland corporation (the “Company”), and ________________________ (“Indemnitee”).

WHEREAS, at the request of the Company, Indemnitee currently serves as [a director] [and] [an officer] of the Company and may, therefore, be subjected to claims, suits or proceedings arising as a result of such service;

WHEREAS, as an inducement to Indemnitee to serve or continue to serve in such capacity, the Company has agreed to indemnify Indemnitee and to advance expenses and costs incurred by Indemnitee in connection with any such claims, suits or proceedings, to the maximum extent permitted by law; and

WHEREAS, the parties by this Agreement desire to set forth their agreement regarding indemnification and advance of expenses.

NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows:

Section 1. Definitions. For purposes of this Agreement:

(a) “Board of Directors” means the board of directors of the Company.

(b) “Bylaws” means the bylaws of the Company, as the same may be amended from time to time.

(c) “Change in Control” means a change in control of the Company occurring after the Effective Date of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), whether or not the Company is then subject to such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred if, after the Effective Date, (i) any “person” (as such term is used in Sections 3(a)(9), 13(d) and 14(d) of the Exchange Act), other than a Permitted Holder, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 15% or more of the combined voting power of all of the Company’s then-outstanding securities entitled to vote generally in the election of directors without the prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such person’s attaining such percentage interest; (ii) there occurs a proxy contest, or the Company is a party to a merger, conversion, consolidation, sale of assets, plan of liquidation or other reorganization not approved by at least two-thirds of the members of the Board of Directors then in office, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; or (iii) at any time, a majority of the members of the Board of Directors are not individuals (A) who were directors as of the Effective Date or (B) whose election by the Board of Directors or nomination for election by the Company’s stockholders was approved by the affirmative vote of at least two-thirds of the directors then in office who were directors as of the Effective Date or whose election or nomination for election was previously so approved.


(d) “Charter” means the corporate charter of the Company, as the same may be amended or supplemented from time to time.

(e) “Corporate Status” means the status of a person as a present or former director, officer, employee or agent of the Company or as a director, trustee, officer, partner, manager, managing member, fiduciary, employee or agent, or as the “partnership representative” for all federal income tax purposes set forth in the Internal Revenue Code of 1986, as amended (the “Code”), of any other foreign or domestic corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise in each case where such person is or was serving in such capacity at the request of the Company. As a clarification and without limiting the circumstances in which Indemnitee may be serving at the request of the Company, service by Indemnitee shall be deemed to be at the request of the Company: (i) if Indemnitee serves or served as a director, trustee, officer, partner, manager, managing member, fiduciary, employee or agent, or as the “partnership representative” for all federal income tax purposes set forth in the Code, of any corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise (1) of which a majority of the voting power or equity interest is or was at the time of service owned directly or indirectly by the Company or (2) the management of which is or was at the time of service controlled directly or indirectly by the Company; (ii) if, as a result of or in connection with Indemnitee’s service to the Company or any of its affiliated entities, Indemnitee is or was subject to duties by, or required to perform services for, an employee benefit plan or its participants or beneficiaries, including as a deemed fiduciary thereof; or (iii) if such service is at the express written request of the Company.

(f) “Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification and/or advance of Expenses is sought by Indemnitee.

(g) “Effective Date” means the date set forth in the first paragraph of this Agreement.

(h) “Expenses” means any and all reasonable and out-of-pocket attorneys’ fees and costs, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, federal, state, local or foreign taxes imposed on Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement, ERISA excise taxes and penalties and any other disbursements or expenses incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in or otherwise participating in a Proceeding. Expenses shall also include Expenses incurred in connection with any appeal resulting from any Proceeding, including, without limitation, the premium, security for and other costs relating to any cost bond, supersedeas bond or other appeal bond or its equivalent.

(i) “Independent Counsel” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning Indemnitee under this Agreement or of other indemnitees under similar indemnification agreements), or (ii) any other party to or participant or witness in the Proceeding giving rise to a claim for indemnification or advance of Expenses hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.

 

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(j) “Permitted Holder” means any “person” (as such term is used in Sections 3(a)(9), 13(d) and 14(d) of the Exchange Act) that, as of the Effective Date, is the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 15% or more of the combined voting power of all of the Company’s then-outstanding securities entitled to vote generally in the election of directors until such time as such person no longer owns 15% or more of the combined voting power of all of the Company’s then-outstanding securities entitled to vote generally in the election of directors.

(k) “Proceeding” means any threatened, pending or completed action, suit, claim arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought by or in the right of the Company or otherwise and whether of a civil (including intentional or unintentional tort claims), criminal, administrative or investigative (formal or informal) nature, including any appeal therefrom, except one pending or completed on or before the Effective Date, unless otherwise specifically agreed in writing by the Company and Indemnitee. If Indemnitee reasonably believes that a given situation may lead to or culminate in the institution of a Proceeding, such situation shall also be considered a Proceeding.

Section 2. Services by Indemnitee. Indemnitee [will serve][serves] in the capacity or capacities set forth in the first WHEREAS clause above. However, this Agreement shall not impose any independent obligation on Indemnitee or the Company to continue Indemnitee’s service to the Company. This Agreement shall not be deemed an employment contract between the Company (or any other entity) and Indemnitee.

Section 3. General. The Company shall indemnify, and advance Expenses to, Indemnitee (a) as provided in this Agreement and (b) otherwise to the maximum extent permitted by Maryland law in effect on the Effective Date and as amended from time to time; provided, however, that no change in Maryland law shall have the effect of reducing the benefits available to Indemnitee hereunder based on Maryland law as in effect on the Effective Date. The rights of Indemnitee provided in this Section 3 shall include, without limitation, the rights set forth in the other sections of this Agreement, including any additional indemnification permitted by the Maryland General Corporation Law (the “MGCL”), including, without limitation, Section 2-418 of the MGCL.

Section 4. Standard for Indemnification. If, by reason of Indemnitee’s Corporate Status, Indemnitee is, or is threatened to be, made a party to any Proceeding, the Company shall indemnify Indemnitee against all judgments, penalties, fines, taxes and interest and amounts paid in settlement (collectively, “Liabilities”) and all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with any such Proceeding unless it is established that (a) the act or omission of Indemnitee was material to the matter giving rise to the Proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty, (b) Indemnitee actually received an improper personal benefit in money, property or services or (c) in the case of any criminal Proceeding, Indemnitee had reasonable cause to believe that Indemnitee’s conduct was unlawful.

 

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Section 5. Certain Limits on Indemnification. Notwithstanding any other provision of this Agreement (other than Section 6), Indemnitee shall not be entitled to:

(a) indemnification hereunder if the Proceeding was one by or in the right of the Company and Indemnitee is adjudged, in a final adjudication of the Proceeding not subject to further appeal, to be liable to the Company;

(b) indemnification hereunder if Indemnitee is adjudged, in a final adjudication of the Proceeding not subject to further appeal, to be liable on the basis that personal benefit was improperly received in any Proceeding charging improper personal benefit to Indemnitee, whether or not involving action in the Indemnitee’s Corporate Status;

(c) indemnification or advance of Expenses hereunder if the Proceeding was brought by Indemnitee, unless: (i) the Proceeding was brought to enforce indemnification under this Agreement, and then only to the extent in accordance with and as authorized by Section 12 of this Agreement, or (ii) the Company’s Charter or Bylaws, a resolution of the stockholders entitled to vote generally in the election of directors or of the Board of Directors or an agreement approved by the Board of Directors to which the Company is a party expressly provide otherwise; or

(d) indemnification or advance of Expenses hereunder with respect to any settlement or judgment for insider trading or for disgorgement of profits pursuant to Section 16(b) of the Exchange Act.

Section 6. Court-Ordered Indemnification. Notwithstanding any other provision of this Agreement, a court of appropriate jurisdiction, upon application of Indemnitee and such notice as the court shall require, may order indemnification of Indemnitee by the Company in the following circumstances:

(a) if such court determines that Indemnitee is entitled to reimbursement under Section 2-418(d)(1) of the MGCL, the court shall order indemnification, in which case Indemnitee shall be entitled to recover the Expenses of securing such reimbursement; or

(b) if such court determines that Indemnitee is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not Indemnitee (i) has met the standards of conduct set forth in Section 2-418(b) of the MGCL or (ii) has been adjudged liable for receipt of an improper personal benefit under Section 2-418(c) of the MGCL, the court may order such indemnification as the court shall deem proper without regard to any limitation on such court-ordered indemnification contemplated by Section 2-418(d)(2)(ii) of the MGCL.

Section 7. Indemnification for Expenses of an Indemnitee Who is Wholly or Partially Successful. Notwithstanding any other provision of this Agreement, and without limiting any such provision, to the extent that Indemnitee was or is, by reason of Indemnitee’s Corporate Status, made a party to (or otherwise becomes a participant in) any Proceeding and is successful, on the merits or otherwise, in the defense of such Proceeding, the Company shall indemnify Indemnitee for all Expenses and Liabilities actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee under this Section 7 for all Expenses and Liabilities actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with each such claim, issue or matter, allocated on a reasonable and proportionate basis. For purposes of this Section 7 and, without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.

 

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Section 8. Advance of Expenses for Indemnitee. If, by reason of Indemnitee’s Corporate Status, Indemnitee is, or is threatened to be, made a party to any Proceeding, the Company shall, without requiring a preliminary determination of Indemnitee’s ultimate entitlement to indemnification hereunder, advance all Expenses incurred by or on behalf of Indemnitee in connection with such Proceeding. The Company shall make such advance within ten days after the receipt by the Company of a statement or statements requesting such advance from time to time, whether prior to or after final disposition of such Proceeding and may be in the form of, in the reasonable discretion of Indemnitee (but without duplication), (a) payment of such Expenses directly to third parties on behalf of Indemnitee, (b) advance of funds to Indemnitee in an amount sufficient to pay such Expenses or (c) reimbursement to Indemnitee for Indemnitee’s payment of such Expenses. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by a written affirmation by Indemnitee and a written undertaking by or on behalf of Indemnitee, in substantially the form attached hereto as Exhibit A or in such form as may be required under applicable law as in effect at the time of the execution thereof. To the extent that Expenses advanced to Indemnitee do not relate to a specific claim, issue or matter in the Proceeding, such Expenses shall be allocated on a reasonable and proportionate basis. The undertaking required by this Section 8 shall be an unlimited general obligation by or on behalf of Indemnitee and shall be accepted without reference to Indemnitee’s financial ability to repay such advanced Expenses and without any requirement to post security therefor.

Section 9. Indemnification and Advance of Expenses as a Witness or Other Participant. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is or may be, by reason of Indemnitee’s Corporate Status, made a witness or otherwise asked to participate in any Proceeding, whether instituted by the Company or any other person, and to which Indemnitee is not a party, Indemnitee shall be advanced and indemnified against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith within ten days after the receipt by the Company of a statement or statements requesting any such advance or indemnification from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee. In connection with any such advance of Expenses, the Company may require Indemnitee to provide an undertaking and affirmation substantially in the form attached hereto as Exhibit A.

Section 10. Procedure for Determination of Entitlement to Indemnification.

(a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. Indemnitee may submit one or more such requests from time to time and at such time(s) as Indemnitee deems appropriate in Indemnitee’s sole discretion. The officer of the Company receiving any such request from Indemnitee shall, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification.

(b) Upon written request by Indemnitee for indemnification pursuant to Section 10(a) above, a determination, if required by applicable law, with respect to Indemnitee’s entitlement thereto shall promptly be made in the specific case: (i) if a Change in Control has occurred, by Independent Counsel, in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee, which Independent Counsel shall be selected by the Indemnitee and approved by the Board of Directors in accordance with Section 2-418(e)(2)(ii) of

 

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the MGCL, which approval shall not be unreasonably withheld or delayed; or (ii) if a Change in Control has not occurred, (A) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors or, if such a quorum cannot be obtained, then by a majority vote of a committee of the Board of Directors consisting solely of one or more Disinterested Directors designated by a majority vote of the Board of Directors (which may include Disinterested Directors and directors who are parties to the Proceeding) to make the determination, (B) if Independent Counsel has been selected by the Board of Directors in accordance with Section 2-418(e)(2)(ii) of the MGCL and approved by the Indemnitee, which approval shall not be unreasonably withheld or delayed, by Independent Counsel, in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee or (C) if so directed by a majority of the members of the Board of Directors, by the stockholders of the Company. If it is so determined that Indemnitee is entitled to indemnification, the Company shall make payment to Indemnitee within ten days after such determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary or appropriate to such determination in the discretion of the Board of Directors or Independent Counsel if retained pursuant to clause (ii)(B) of this Section 10(b). Any Expenses incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee’s entitlement to indemnification) and the Company shall indemnify and hold Indemnitee harmless therefrom.

(c) The Company shall pay the reasonable fees and expenses of Independent Counsel, if one is appointed.

Section 11. Presumptions and Effect of Certain Proceedings.

(a) In making any determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 10(a) of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making of any determination contrary to that presumption.

(b) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, upon a plea of nolo contendere or its equivalent, or entry of an order of probation prior to judgment, does not create a presumption that Indemnitee did not meet the requisite standard of conduct described herein for indemnification.

(c) The knowledge and/or actions, or failure to act, of any other director, officer, employee or agent of the Company or any other director, trustee, officer, partner, manager, managing member, fiduciary, employee or agent of any other foreign or domestic corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise shall not be imputed to Indemnitee for purposes of determining any other right to indemnification under this Agreement.

 

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(d) For purposes of any determination of whether any act or omission of Indemnitee met the requisite standard of conduct described herein for indemnification, each act of Indemnitee shall be deemed to have met such standard if Indemnitee’s action is based on the records or books of accounts of the Company, including financial statements, or on information supplied to Indemnitee by the officers of the Company in the course of their duties, or on the advice of legal counsel for the Company or on information or records given or reports made to the Company by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Company, provided that in each instance, such reliance is in accordance with Section 2-405.1(d) of the MGCL. The provisions of this Section 11(d) shall not be deemed to be exclusive or to limit in any way the other circumstances in which Indemnitee may be deemed to have met the applicable standard of conduct set forth in this Agreement or under applicable law.

Section 12. Remedies of Indemnitee.

(a) If (i) a determination is made pursuant to Section 10(b) of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advance of Expenses is not timely made pursuant to Sections 8 or 9 of this Agreement, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 10(b) of this Agreement within 60 days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to Sections 7 or 9 of this Agreement within ten days after receipt by the Company of a written request therefor, or (v) payment of indemnification pursuant to any other section of this Agreement or the Charter or Bylaws of the Company is not made within ten days after a determination has been made that Indemnitee is entitled to indemnification, Indemnitee shall be entitled to an adjudication in an appropriate court located in the State of Maryland, or in any other court of competent jurisdiction, of Indemnitee’s entitlement to indemnification or advance of Expenses. Alternatively, Indemnitee, at Indemnitee’s option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Indemnitee shall commence a proceeding seeking an adjudication or an award in arbitration within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 12(a); provided, however, that the foregoing clause shall not apply to a proceeding brought by Indemnitee to enforce Indemnitee’s rights under Section 7 of this Agreement. Except as set forth herein, the provisions of Maryland law (without regard to its conflicts of laws rules) shall apply to any such arbitration. The Company shall not oppose Indemnitee’s right to seek any such adjudication or award in arbitration.

(b) In any judicial proceeding or arbitration commenced pursuant to this Section 12, Indemnitee shall be presumed to be entitled to indemnification or advance of Expenses, as the case may be, under this Agreement and the Company shall have the burden of proving that Indemnitee is not entitled to indemnification or advance of Expenses, as the case may be. If Indemnitee commences a judicial proceeding or arbitration pursuant to this Section 12, Indemnitee shall not be required to reimburse the Company for any advances pursuant to Section 8 of this Agreement until a final determination is made with respect to Indemnitee’s entitlement to indemnification (as to which all rights of appeal have been exhausted or lapsed). The Company shall, to the fullest extent not prohibited by law, be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 12 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all of the provisions of this Agreement.

 

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(c) If a determination shall have been made pursuant to Section 10(b) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 12, absent a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification that was not disclosed in connection with the determination.

(d) In the event that Indemnitee is successful in seeking, pursuant to this Section 12, a judicial adjudication of or an award in arbitration to enforce Indemnitee’s rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company for, any and all Expenses actually and reasonably incurred by Indemnitee in such judicial adjudication or arbitration. If it shall be determined in such judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advance of Expenses sought, the Expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated.

(e) Interest shall be paid by the Company to Indemnitee at the maximum rate allowed to be charged for judgments under the Courts and Judicial Proceedings Article of the Annotated Code of Maryland for amounts which the Company pays or is obligated to pay for the period (i) commencing with either the tenth day after the date on which the Company was requested to advance Expenses in accordance with Sections 8 or 9 of this Agreement or the 60th day after the date on which the Company was requested to make the determination of entitlement to indemnification under Section 10(b) of this Agreement, as applicable, and (ii) ending on the date such payment is made to Indemnitee by the Company.

Section 13. Defense of the Underlying Proceeding.

(a) Indemnitee shall notify the Company promptly in writing upon being served with any summons, citation, subpoena, complaint, indictment, request or other document relating to any Proceeding which may result in the right to indemnification or the advance of Expenses hereunder and shall include with such notice a description of the nature of the Proceeding and a summary of the facts underlying the Proceeding. The failure to give any such notice shall not disqualify Indemnitee from the right, or otherwise affect in any manner any right of Indemnitee, to indemnification or the advance of Expenses under this Agreement unless the Company’s ability to defend in such Proceeding or to obtain proceeds under any insurance policy is materially and adversely prejudiced thereby, and then only to the extent the Company is thereby actually so prejudiced.

(b) Subject to the provisions of the last sentence of this Section 13(b) and of Section 13(c) below, the Company shall have the right to defend Indemnitee in any Proceeding which may give rise to indemnification hereunder; provided, however, that the Company shall notify Indemnitee of any such decision to defend within 15 calendar days following receipt of notice of any such Proceeding under Section 13(a) above. The Company shall not, without the prior written consent of Indemnitee, which shall not be unreasonably withheld or delayed, consent to the entry of any judgment against Indemnitee or enter into any settlement or compromise which (i) includes an admission of fault of Indemnitee, (ii) does not include, as an unconditional term thereof, the full release of Indemnitee from all liability in respect of such Proceeding, which release shall be in form and substance reasonably satisfactory to Indemnitee or (iii) would impose any Expense, Liability or limitation on Indemnitee. This Section 13(b) shall not apply to a Proceeding brought by Indemnitee under Section 12 of this Agreement.

 

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(c) Notwithstanding the provisions of Section 13(b) above, if in a Proceeding to which Indemnitee is a party by reason of Indemnitee’s Corporate Status, (i) Indemnitee reasonably concludes, based upon an opinion of counsel approved by the Company, which approval shall not be unreasonably withheld or delayed, that Indemnitee may have separate defenses or counterclaims to assert with respect to any issue which may not be consistent with other defendants in such Proceeding, (ii) Indemnitee reasonably concludes, based upon an opinion of counsel approved by the Company, which approval shall not be unreasonably withheld or delayed, that an actual or apparent conflict of interest or potential conflict of interest exists between Indemnitee and the Company, or (iii) if the Company fails to assume the defense of such Proceeding in a timely manner, Indemnitee shall be entitled to be represented by separate legal counsel of Indemnitee’s choice, subject to the prior approval of the Company, which approval shall not be unreasonably withheld or delayed, at the expense of the Company. In addition, if the Company fails to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any Proceeding to deny or to recover from Indemnitee the benefits intended to be provided to Indemnitee hereunder, Indemnitee shall have the right to retain counsel of Indemnitee’s choice, subject to the prior approval of the Company, which approval shall not be unreasonably withheld or delayed, at the expense of the Company (subject to Section 12(d) of this Agreement), to represent Indemnitee in connection with any such matter.

Section 14. Primacy of Company’s Obligations.

(a) The rights of indemnification and advance of Expenses as provided by this Agreement shall be in addition to any other rights Indemnitee may have against the Company at any time under applicable law, the Charter or Bylaws of the Company, any agreement or a resolution of the stockholders entitled to vote generally in the election of directors or of the Board of Directors, or otherwise (collectively, “Other Indemnity Provisions”); provided, however, that (i) to the extent that Indemnitee otherwise would have any greater right to indemnification under any Other Indemnity Provision, Indemnitee will be deemed to have such greater right thereunder and (b) to the extent that any change is made to any Other Indemnity Provision that permits any greater right to indemnification than that provided under this Agreement as of the date hereof, Indemnitee will be deemed to have such greater right thereunder. Unless consented to in writing by Indemnitee, no amendment, alteration or repeal of the Charter or Bylaws of the Company, this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement or any Other Indemnity Provision in respect of any action taken or omitted by such Indemnitee in Indemnitee’s Corporate Status prior to such amendment, alteration or repeal, regardless of whether a claim with respect to such action or inaction is raised prior or subsequent to such amendment, alteration or repeal.

(b) The Company hereby acknowledges that Indemnitee may have rights to indemnification provided by certain third parties (“Other Indemnitor(s)”). The Company agrees with Indemnitee that the Company is the indemnitor of first resort of Indemnitee with respect to matters for which indemnification is provided under this Agreement and that the Company will be obligated to make all payments due to or for the benefit of Indemnitee under this Agreement without regard to any rights that Indemnitee may have against the Other Indemnitor(s). The Company hereby waives any equitable rights to contribution or indemnification from the Other Indemnitor in respect of any amounts paid to Indemnitee hereunder. The Company further agrees that no payment of Expenses by the Other Indemnitor to or for the benefit of Indemnitee shall affect the obligations of the Company hereunder, and that the Company shall be obligated to repay the Other Indemnitor for all amounts so paid or reimbursed to the extent that the Company has an obligation to indemnify Indemnitee for such Expenses hereunder.

 

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Section 15. Subrogation. Except as set forth in Section 14(b) of this Agreement (which, in all events, shall supersede this Section 15 to the extent of any conflict), in the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.

Section 16. Insurance.

(a) The Company will use its reasonable best efforts to acquire directors and officers liability insurance, on terms and conditions deemed appropriate by the Board of Directors, with the advice of counsel, covering Indemnitee for any claim made against Indemnitee by reason of Indemnitee’s Corporate Status and covering the Company for any indemnification or advance of Expenses made by the Company to Indemnitee for any claims made against Indemnitee by reason of Indemnitee’s Corporate Status. In the event of a Change in Control, the Company shall maintain in force any and all directors and officers liability insurance policies that were maintained by the Company immediately prior to the Change in Control for a period of six years with the insurance carrier or carriers and through the insurance broker in place at the time of the Change in Control; provided, however, (i) if the carriers will not offer the same policy and an expiring policy needs to be replaced, a policy substantially comparable in scope and amount shall be obtained and (ii) if any replacement insurance carrier is necessary to obtain a policy substantially comparable in scope and amount, such insurance carrier shall have an AM Best rating that is the same or better than the AM Best rating of the existing insurance carrier; provided, further, however, in no event shall the Company be required to expend in the aggregate in excess of 300% of the annual premium or premiums paid by the Company for directors and officers liability insurance in effect on the date of the Change in Control. In the event that 300% of the annual premium paid by the Company for such existing directors and officers liability insurance is insufficient for such coverage, the Company shall spend up to that amount to purchase such lesser coverage as may be obtained with such amount.

(b) Without in any way limiting any other obligation under this Agreement, the Company shall indemnify Indemnitee for any payment by Indemnitee which would otherwise be indemnifiable hereunder arising out of the amount of any deductible or retention and the amount of any excess of the aggregate of all Liabilities and Expenses incurred by Indemnitee in connection with a Proceeding over the coverage of any insurance referred to in Section 16(a). The purchase, establishment and maintenance of any such insurance shall not in any way limit or affect the rights or obligations of the Company or Indemnitee under this Agreement except as expressly provided herein, and the execution and delivery of this Agreement by the Company and the Indemnitee shall not in any way limit or affect the rights or obligations of the Company under any such insurance policies. If, at the time the Company receives notice from any source of a Proceeding to which Indemnitee is a party or a participant (as a witness or otherwise), the Company has director and officer liability insurance in effect, the Company shall give prompt notice of such Proceeding to the insurers in accordance with the procedures set forth in the respective policies.

(c) The Indemnitee shall cooperate with the Company or any insurance carrier of the Company with respect to any Proceeding.

 

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Section 17. Coordination of Payments. The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable or payable or reimbursable as Expenses hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise, provided that the foregoing shall in no way limit the obligations of the Company pursuant to Section 14(b).

Section 18. Contribution. If the indemnification provided in this Agreement is unavailable in whole or in part and may not be paid to Indemnitee for any reason, other than for failure to satisfy the standard of conduct set forth in Section 4 or due to the provisions of Section 5, then, in respect to any Proceeding in which the Company is jointly liable with Indemnitee (or would be joined in such Proceeding), to the fullest extent permissible under applicable law, the Company, in lieu of indemnifying and holding harmless Indemnitee, shall pay, in the first instance, the entire amount incurred by Indemnitee, whether for Expenses or Liabilities, in connection with any Proceeding without requiring Indemnitee to contribute to such payment, and the Company hereby waives and relinquishes any right of contribution it may have at any time against Indemnitee.

Section 19. Reports to Stockholders. To the extent required by the MGCL, the Company shall report in writing to its stockholders the payment of any amounts for indemnification of, or advance of Expenses to, Indemnitee under this Agreement arising out of a Proceeding by or in the right of the Company with the notice of the meeting of stockholders of the Company next following the date of the payment of any such indemnification or advance of Expenses or prior to such meeting.

Section 20. Duration of Agreement; Binding Effect.

(a) This Agreement shall continue until and terminate on the later of (i) the date that Indemnitee shall have ceased to serve as a director, officer, employee or agent of the Company or as a director, trustee, officer, partner, manager, managing member, fiduciary, employee or agent of any other foreign or domestic corporation, real estate investment trust, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise that such person is or was serving in such capacity at the request of the Company and (ii) the date that Indemnitee is no longer subject to any actual or possible Proceeding (including any rights of appeal thereto and any Proceeding commenced by Indemnitee pursuant to Section 12 of this Agreement).

(b) The indemnification and advance of Expenses provided by, or granted pursuant to, this Agreement shall be binding upon and be enforceable by the parties hereto and their respective successors and assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), shall continue as to an Indemnitee who has ceased to be a director, officer, employee or agent of the Company or a director, trustee, officer, partner, manager, managing member, fiduciary, employee or agent of any other foreign or domestic corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise that such person is or was serving in such capacity at the request of the Company, and shall inure to the benefit of Indemnitee and Indemnitee’s spouse, assigns, heirs, devisees, executors and administrators and other legal representatives.

(c) The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all, substantially all or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place.

 

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(d) The Company and Indemnitee agree that a monetary remedy for breach of this Agreement, at some later date, may be inadequate, impracticable and difficult to prove, and further agree that such breach may cause Indemnitee irreparable harm. Accordingly, the parties hereto agree that Indemnitee may enforce this Agreement by seeking injunctive relief and/or specific performance hereof, without any necessity of showing actual damage or irreparable harm and that by seeking injunctive relief and/or specific performance, Indemnitee shall not be precluded from seeking or obtaining any other relief to which Indemnitee may be entitled. Indemnitee shall further be entitled to such specific performance and injunctive relief, including temporary restraining orders, preliminary injunctions and permanent injunctions, without the necessity of posting bonds or other undertakings in connection therewith. The Company acknowledges that, in the absence of a waiver, a bond or undertaking may be required of Indemnitee by a court, and the Company hereby waives any such requirement of such a bond or undertaking.

Section 21. Severability. If any provision or provisions of this Agreement shall be held to be invalid, void, illegal or otherwise unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any Section, paragraph or sentence of this Agreement containing any such provision held to be invalid, illegal or unenforceable that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; (b) such provision or provisions shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section, paragraph or sentence of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby.

Section 22. Identical Counterparts. This Agreement may be executed in one or more counterparts (delivery of which may be by facsimile, or via e-mail as a portable document format (.pdf) or other electronic format), each of which will be deemed to be an original, and it will not be necessary in making proof of this Agreement or the terms of this Agreement to produce or account for more than one such counterpart. One such counterpart signed by the party against whom enforceability is sought shall be sufficient to evidence the existence of this Agreement.

Section 23. Headings. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

Section 24. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor, unless otherwise expressly stated, shall such waiver constitute a continuing waiver.

 

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Section 25. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, on the day of such delivery, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed:

 

  (a)

If to Indemnitee, to the address set forth on the signature page hereto.

 

  (b)

If to the Company, to:

NexPoint Real Estate Finance, Inc.

300 Crescent Court, Suite 700

Dallas, Texas 75201

Attention: Chief Financial Officer

or to such other address as may have been furnished in writing to Indemnitee by the Company or to the Company by Indemnitee, as the case may be.

Section 26. Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Maryland, without regard to its conflicts of laws rules.

[Signature Page Follows]

 

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

 

COMPANY:
NEXPOINT REAL ESTATE FINANCE, INC.
By:  

 

Name:  
Title:  
INDEMNITEE

 

Name:  
Address:  


EXHIBIT A

AFFIRMATION AND UNDERTAKING TO REPAY EXPENSES ADVANCED

 

To:

The Board of Directors of NexPoint Real Estate Finance, Inc.

 

Re:

Affirmation and Undertaking

Ladies and Gentlemen:

This Affirmation and Undertaking is being provided pursuant to that certain Indemnification Agreement dated the _____ day of ______________, 20____, by and between NexPoint Real Estate Finance, Inc., a Maryland corporation (the “Company”), and the undersigned Indemnitee (the “Indemnification Agreement”), pursuant to which I am entitled to advance of Expenses in connection with [Description of Proceeding] (the “Proceeding”).

Terms used herein and not otherwise defined shall have the meanings specified in the Indemnification Agreement.

I am subject to the Proceeding by reason of my Corporate Status or by reason of alleged actions or omissions by me in such capacity. I hereby affirm my good faith belief that at all times, insofar as I was involved as [a director] [and] [an officer] of the Company, in any of the facts or events giving rise to the Proceeding, I (1) did not act with bad faith or active or deliberate dishonesty, (2) did not receive any improper personal benefit in money, property or services and (3) in the case of any criminal proceeding, had no reasonable cause to believe that any act or omission by me was unlawful.

In consideration of the advance by the Company for Expenses incurred by me in connection with the Proceeding (the “Advanced Expenses”), I hereby agree that if, in connection with the Proceeding, it is established that (1) an act or omission by me was material to the matter giving rise to the Proceeding and (a) was committed in bad faith or (b) was the result of active and deliberate dishonesty, or (2) I actually received an improper personal benefit in money, property or services or (3) in the case of any criminal proceeding, I had reasonable cause to believe that the act or omission was unlawful, then I shall promptly reimburse the portion of the Advanced Expenses relating to the claims, issues or matters in the Proceeding as to which the foregoing findings have been established.

IN WITNESS WHEREOF, I have executed this Affirmation and Undertaking on this ___ day of ____________________, 20____.

 

Name:_____________________________
EX-10.7 11 d759970dex107.htm EX-10.7 EX-10.7

Exhibit 10.7

FORM OF

REGISTRATION RIGHTS AGREEMENT

THIS REGISTRATION RIGHTS AGREEMENT, dated as of                 , 2020, is entered into by and between NexPoint Real Estate Finance, Inc., a Maryland corporation (“NREF”) and NexPoint Real Estate Advisors VII, L.P., a Delaware limited partnership (the “Manager”).

In consideration of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by each party hereto, the parties agree as follows:

ARTICLE I

DEFINITIONS

Section 1.1 Definitions. As used in this Agreement, the terms set forth below have the following meanings:

Affiliate” of any Person means any other Person directly or indirectly controlling or controlled by or under common control with such Person. For the purposes of this definition, “control” when used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

Agreement” means this Registration Rights Agreement, as it may be amended, supplemented or restated from time to time.

Business Day” means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in Dallas, Texas or New York, New York are authorized or required by law, regulation or executive order to close.

Charter” means the Articles of Amendment and Restatement of NREF as filed with the State Department of Assessments and Taxation of the State of Maryland on                 , 2020, as the same may be amended, modified or restated from time to time.

Commission” means the Securities and Exchange Commission.

Confidential Information” shall have the meaning set forth in Section 2.9 of this Agreement.

Demand Registration” shall have the meaning set forth in Section 2.1(b) of this Agreement.

Effective Date” means the date of the Management Agreement.

Exchange Act” means the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder.

Holder” means any Initial Holder who is the owner of any Registrable Security, any Affiliates of the Initial Holder who are the owners of any Registrable Securities or any assignee or transferee of such Initial Holder or any of its Affiliates (x) to the extent permitted under the Charter and (y) provided such assignee or transferee agrees in writing to be bound by all the provisions hereof.

Indemnified Party” has the meaning set forth in Section 2.6 of this Agreement.

Indemnifying Party” has the meaning set forth in Section 2.6 of this Agreement.


Initial Holder” means the Manager.

Inspector” has the meaning set forth in Section 2.2(g) of this Agreement.

Management Agreement” means the Management Agreement, dated as of                 , 2020, by and among NREF and the Manager, as the same may be amended, modified or restated from time to time.

Manager” has the meaning set forth in the introductory paragraph of this Agreement.

Notice and Questionnaire” means a written notice, substantially in the form attached as Exhibit A, delivered by a Holder to NREF (i) notifying NREF of such Holder’s desire to include Registrable Securities in a registration statement, (ii) containing all information about such Holder required to be included in such registration statement in accordance with applicable law, including Item 507 of Regulation S-K promulgated under the Securities Act, as amended from time to time, or any similar successor rule thereto, and (iii) pursuant to which such Holder agrees to bound by the terms and conditions hereof.

NREF” has the meaning set forth in the introductory paragraph of this Agreement.

NREF Common Stock” means the common stock of NREF, par value $0.01 per share.

Person” means an individual or a corporation, partnership, limited liability company, association, trust, or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.

Piggyback Registration” shall have the meaning set forth in Section 2.1(a) of this Agreement.

Records” has the meaning set forth in Section 2.2(g) of this Agreement.

Registrable Securities” means (i) shares of NREF Common Stock at any time beneficially owned by the Manager which are issuable or issued as compensation for the Manager’s services under the Management Agreement and any additional shares of NREF Common Stock issued as a dividend, distribution or exchange for, or in respect of such shares and (ii) all shares owned by the Initial Holder and Affiliates of the Initial Holder, including NexPoint Advisors, L.P. and its Affiliates, until the earlier to occur of:

(i) a registration statement covering such shares has been declared effective by the Commission and such shares have been disposed of pursuant to such effective registration statement;

(ii) such shares have been publicly sold under Rule 144;

(iii) all such shares held by such Person may be sold in one transaction pursuant to Rule 144; or

(iv) such shares have been otherwise transferred in a transaction that constitutes a sale thereof under the Securities Act, NREF has delivered a new certificate or other evidence of ownership for such shares not bearing the Securities Act restricted stock legend and such shares may be resold or otherwise transferred by such transferee without subsequent registration under the Securities Act;

provided, however, that “Registrable Securities” for purposes of the indemnification obligations contained in Sections 2.4 and 2.5 shall mean all shares that are registered on an applicable registration statement, notwithstanding that such shares may not otherwise be “Registrable Securities” by operation of clause (iii) above.

 

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Registration Expenses” has the meaning set forth in Section 2.3 of this Agreement.

Rule 144” means Rule 144 promulgated under the Securities Act or any similar successor rule thereto that may be promulgated by the Commission.

Securities Act” means the Securities Act of 1933 and the rules and regulations promulgated thereunder.

Selling Holder” means a Holder who is selling Registrable Securities pursuant to a registration statement under the Securities Act.

Suspension Notice” means any written notice delivered by NREF pursuant to Section 2.9 with respect to the suspension of rights under a registration statement or any prospectus contained therein.

ARTICLE II

REGISTRATION RIGHTS

Section 2.1 Registration.

(a) Piggyback Registration. If NREF proposes to file a registration statement (or a prospectus supplement pursuant to a then-existing shelf registration statement) under the Securities Act with respect to a proposed underwritten equity offering by NREF for its own account or for the account of any of its respective securityholders of any class of security other than a registration statement on Form S-4 or S-8 (or any substitute form that may be adopted by the Commission) filed in connection with an exchange offer, an offering of securities solely to NREF’s existing securityholders or the adoption of a long term incentive plan, then NREF shall give written notice of such proposed filing to the Holders of Registrable Securities as soon as practicable (but in no event less than 10 days before the anticipated filing date of the applicable preliminary prospectus or, if applicable, prospectus supplement; provided that in the case of a “bought deal” or an offering in which there is no (or very limited) marketing, such notice shall be given at least seven days before pricing, and such notice shall offer such Holders the opportunity to register such number of shares of Registrable Securities as each such Holder may request (a “Piggyback Registration”). NREF shall use commercially reasonable efforts to cause the managing underwriter or underwriters of a proposed underwritten offering to permit the Registrable Securities requested to be included in a Piggyback Registration to be included on the same terms and conditions as any similar securities of NREF included therein.

(b) Demand Registration.

(i) Request for Registration. Commencing on or after the date that is one year after the Effective Date, Holders of Registrable Securities may make a written request for registration under the Securities Act of all or part of their Registrable Securities (a “Demand Registration”); provided, that NREF shall not be obligated to effect more than one Demand Registration in any twelve month period and not more than two such Demand Registrations during the initial term of the Management Agreement (if such Management Agreement is extended, the Holders will be entitled to one additional Demand Registration per year that the Management Agreement is extended); and provided, further, that Holders making such written request shall propose the sale of at least 100,000 shares of Registrable Securities (such number to be adjusted successively in the event NREF effects any stock split, stock consideration or recapitalization after the date hereof) or such lesser number of Registrable Securities if such lesser number is all of the Registrable Securities owned by the Holders. Any such request will specify the number of shares of Registrable Securities proposed to be sold and will also specify the intended method of disposition thereof. Within 10 days after receipt of such request, NREF will give written notice of

 

3


such registration request to all other Holders of Registrable Securities and include in such registration all such Registrable Securities with respect to which NREF has received written requests for inclusion therein within 10 Business Days after the receipt by the applicable Holder of NREF’s notice. Each such request will also specify the number of shares of Registrable Securities to be registered and the intended method of disposition thereof.

(ii) Effective Demand Registration. A registration will not count as a Demand Registration until it has become effective and has remained effective and available for at least 180 days (or such shorter period in which all Registrable Securities included in such registration have been sold).

(iii) Priority on Demand Registrations. If the Holders of a majority of shares of the Registrable Securities to be registered in a Demand Registration so elect by written notice to NREF, the offering of such Registrable Securities pursuant to such Demand Registration shall be in the form of an underwritten offering. NREF shall select the book-running managing underwriter in connection with any such Demand Registration; provided that such managing underwriter must be reasonably satisfactory to the Holders of a majority of the shares of the Registrable Securities included in such offering. NREF may select any additional investment banks and managers to be used in connection with the offering; provided that such additional investment bankers and managers must be reasonably satisfactory to the Holders of a majority of the shares of the Registrable Securities included in such offering. To the extent 25% or more of the Registrable Securities so requested to be registered are excluded from the offering in accordance with Section 2.1(c), the Holders of such Registrable Securities shall have the right to one additional Demand Registration under this Section in such twelve-month period with respect to the Registrable Securities.

(c) Reduction of Offering. Notwithstanding anything contained herein, if the managing underwriter or underwriters of an offering described in Section 2.1(a) or (b) deliver a written opinion to NREF and the Holders of the Registrable Securities included in such offering that (i) the size of the offering that the Holders, NREF and/or such other persons intend to make or (ii) the kind of securities that NREF and/or such other Persons intend to include in such offering, in each case, are such that the success of the offering would be materially and adversely affected by inclusion of the Registrable Securities requested to be included, then:

(i) if the size of the offering is the basis of such underwriter’s opinion, the amount of securities to be offered for the accounts of Holders shall be reduced pro rata (according to the number of Registrable Securities proposed for inclusion in the offering) to the extent necessary to reduce the total amount of securities to be included in such offering to the amount recommended by such managing underwriter or underwriters; provided that, in the case of a Piggyback Registration, if securities are being offered for the account of other Persons as well as NREF, then with respect to the Registrable Securities intended to be offered by Holders, the proportion by which the amount of such class of securities intended to be offered by Holders is reduced shall not exceed the proportion by which the amount of such class of securities intended to be offered by such other Persons is reduced, if NREF has the right to reduce such other Person’s allocation; and

(ii) if the combination of securities to be offered is the basis of such underwriter’s opinion, (x) the Registrable Securities to be included in such offering shall be reduced as described in clause (i) above (subject to the proviso in clause (i)) or (y) if the actions described in clause (x) would, in the judgment of the managing underwriter, be insufficient to substantially eliminate the adverse effect that inclusion of the Registrable Securities requested to be included would have on such offering, such Registrable Securities will be excluded from such offering.

(d) Selling Holders Become Party to Agreement. Each Holder acknowledges that by participating in its registration rights pursuant to this Agreement, such Holder will be deemed a party to this Agreement and will be bound by its terms, notwithstanding such Holder’s failure to deliver a Notice and Questionnaire; provided, that any Holder that has not delivered a duly completed and executed Notice and Questionnaire shall not be entitled to be named as a Selling Holder in, or have the Registrable Securities held by it covered by, a registration statement.

 

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Section 2.2 Registration Procedures; Filings; Information. Subject to Section 2.9 hereof, in connection with any requests that Registrable Securities be registered pursuant to Section 2.1(b) hereof, NREF will use its commercially reasonable efforts to effect the registration of the Registrable Securities covered thereby in accordance with the intended method of disposition thereof as promptly as reasonably practicable. In connection with any such request:

(a) NREF will, as expeditiously as reasonably possible, prepare and file with the Commission a registration statement on any form for which NREF then qualifies or which counsel for NREF shall deem appropriate and which form shall be available for the sale of the Registrable Securities to be registered thereunder in accordance with the intended method of distribution thereof; provided that if NREF shall furnish to the Holders making a request for a Demand Registration pursuant to Section 2.1(b) a certificate signed by either its Chairman or President stating that in his or her good faith judgment it would be significantly disadvantageous to NREF or its shareholders for such a registration statement to be filed as expeditiously as reasonably possible, NREF shall have a period of not more than 180 days within which to file such registration statement measured from the date of receipt of the request.

(b) NREF will, if requested, prior to filing a registration statement or prospectus or any amendment or supplement thereto, furnish to each Selling Holder and each underwriter, if any, of the Registrable Securities covered by such registration statement copies of such registration statement, prospectus, amendment or supplement as proposed to be filed, and thereafter furnish to such Selling Holder or underwriter, if any, such number of conformed copies of such registration statement, each amendment or supplement thereto (in each case including all exhibits thereto and documents incorporated by reference therein), the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such Selling Holder or underwriter may reasonably request to facilitate the disposition of the Registrable Securities owned by such Selling Holder.

(c) After the filing of a registration statement, NREF will promptly notify each Selling Holder of Registrable Securities covered by such registration statement of any stop order issued or threatened by the Commission and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered.

(d) NREF will use its commercially reasonable efforts to (i) register or qualify the Registrable Securities under such other securities or “blue sky” laws of such jurisdictions in the United States (where an exemption does not apply) as any Selling Holder or managing underwriter or underwriters, if any, reasonably (in light of such Selling Holder’s intended plan of distribution) requests and (ii) cause such Registrable Securities to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of NREF and do any and all other acts and things that may be reasonably necessary or advisable to enable such Selling Holder to consummate the disposition of the Registrable Securities owned by such Selling Holder; provided that NREF will not be required to (A) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this paragraph (d), (B) subject itself to taxation in any such jurisdiction or (C) consent to general service of process in any such jurisdiction.

(e) NREF will immediately notify each Selling Holder of such Registrable Securities, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of (i) NREF’s receipt of any notification of the suspension of the qualification of any Registrable Securities covered by a registration statement for sale in any jurisdiction; or (ii) the occurrence of an event requiring the preparation of a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and promptly make available to each Selling Holder any such supplement or amendment.

 

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(f) NREF will enter into customary agreements (including an underwriting agreement, if any, in customary form) and take such other actions as are reasonably required to expedite or facilitate the disposition of such Registrable Securities pursuant to a Demand Registration.

(g) NREF will make available for inspection by any Selling Holder of such Registrable Securities, any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other professional retained by any Selling Holder or underwriter (collectively, the “Inspectors”), all financial and other records, pertinent corporate documents and documents relating to the investments of NREF (collectively, the “Records”) as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause NREF’s directors and/or officers and the employees of the Manager to supply all information reasonably requested by any Inspectors in connection with such registration statement. Records which NREF determines, in good faith, to be confidential and which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in such registration statement or (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction. Each Selling Holder of such Registrable Securities agrees that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of NREF unless and until such is made generally available to the public. Each Selling Holder of such Registrable Securities further agrees that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give written notice to NREF and allow NREF, at its expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential.

(h) NREF will furnish to each Selling Holder and to each underwriter, if any, a signed counterpart, addressed to such Selling Holder or underwriter, of (i) an opinion or opinions of counsel to NREF and (ii) if eligible under applicable auditing standards, a comfort letter or comfort letters from NREF’s independent public accountants, each in customary form and covering such matters of the type customarily covered by opinions or comfort letters, as the case may be, as the Holders of a majority of the Registrable Securities included in such offering or the managing underwriter or underwriters therefor reasonably requests.

(i) NREF will otherwise use its commercially reasonable efforts to comply with all applicable rules and regulations of the Commission, and make available to its securityholders, as soon as reasonably practicable, an earnings statement covering a period of 12 months, beginning within three months after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 of the Commission promulgated thereunder (or any successor rule or regulation hereafter adopted by the Commission).

(j) NREF will use its commercially reasonable efforts to cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by NREF are then listed.

(k) In addition to the Notice and Questionnaire, NREF may require each Selling Holder of Registrable Securities to promptly furnish in writing to NREF such information regarding such Selling Holder, the Registrable Securities held by it and the intended method of distribution of the Registrable Securities as NREF may from time to time reasonably request and such other information as may be legally required in connection with such registration. No Holder may include Registrable Securities in any registration statement pursuant to this Agreement unless and until such Holder has furnished to NREF such information. Each holder further agrees to furnish as soon as reasonably practicable to NREF all information required to be disclosed to make information previously furnished to NREF by such Holder not materially misleading.

(l) Each Selling Holder agrees that, upon receipt of any notice from NREF of the happening of any event of the kind described in Section 2.2(c) or 2.2(e) or upon receipt of a Suspension Notice, such Selling Holder will discontinue disposition of Registrable Securities pursuant to a registration statement covering such Registrable Securities until such Selling Holder’s receipt of written notice from NREF that

 

6


such disposition may be made and, in the case of clause (ii) of Section 2.2(e) or, if applicable, Section 2.9, copies of any supplemented or amended prospectus contemplated by clause (ii) of Section 2.2(e) or, if applicable, prepared under Section 2.9, and, if so directed by NREF, such Selling Holder will deliver to NREF all copies, other than permanent file copies then in such Selling Holder’s possession, of the most recent prospectus covering such Registrable Securities at the time of receipt of such notice. Each Selling Holder of Registrable Securities agrees that it will immediately notify NREF at any time when a prospectus relating to the registration of such Registrable Securities is required to be delivered under the Securities Act of the happening of an event as a result of which information previously furnished by such Selling Holder to NREF in writing for inclusion in such prospectus contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made.

Section 2.3 Registration Expenses. In connection with any registration statement required to be filed hereunder, NREF shall pay the following registration expenses incurred in connection with the registration hereunder (the “Registration Expenses”): (i) all fees and expenses of compliance with securities or “blue sky” laws (including registration and filing fees and reasonable fees and disbursements of counsel in connection with blue sky qualifications of the Registrable Securities), (ii) printing expenses, (iii) the fees and expenses incurred in connection with the listing of the Registrable Securities, (iv) reasonable fees and disbursements of counsel for NREF and customary fees and expenses for independent certified public accountants retained by NREF (including the expenses of any comfort letters or costs associated with the delivery by independent certified public accountants of a comfort letter or comfort letters requested pursuant to Section 2.2(h) hereof), and (v) the reasonable fees and expenses of any special experts retained by NREF in connection with such registration. NREF shall have no obligation to pay any fees, discounts or commissions attributable to the sale of Registrable Securities, any out-of-pocket expenses of the Holders (or the agents who manage their accounts), or any transfer taxes relating to the registration or sale of the Registrable Securities.

Section 2.4 Indemnification by NREF. NREF agrees to indemnify and hold harmless each Selling Holder of Registrable Securities, its officers, directors and agents, and each Person, if any, who controls such Selling Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities that arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus relating to the Registrable Securities (as amended or supplemented if NREF shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or that arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except insofar as such losses, claims, damages or liabilities arise out of or are based upon any such untrue statement or omission or alleged untrue statement or omission included in reliance upon and in conformity with information furnished in writing to NREF by such Selling Holder or on such Selling Holder’s behalf expressly for inclusion therein. The indemnity provided for in this Section 2.4 shall remain in full force and effect regardless of any investigation made by or on behalf of any Selling Holder.

Section 2.5 Indemnification by Holders of Registrable Securities. Each Selling Holder agrees, severally but not jointly, to indemnify and hold harmless NREF, its officers, directors and agents and each Person, if any, who controls NREF within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from NREF to such Selling Holder, but only with respect to information relating to such Selling Holder included in reliance upon and in conformity with information furnished in writing by such Selling Holder or on such Selling Holder’s behalf expressly for use in any registration statement or prospectus relating to the Registrable Securities, or any amendment or supplement thereto, or any preliminary prospectus.

In case any action or proceeding shall be brought against NREF or its officers, directors or agents or any such controlling person, in respect of which indemnity may be sought against such Selling Holder, such Selling Holder shall have the rights and duties given to NREF, and NREF or its officers, directors or agents or such controlling person shall have the rights and duties given to such Selling Holder, by Section 2.4.

 

7


The obligations of any Selling Holder pursuant to this Section 2.5 will be limited to an amount equal to the net proceeds to such Selling Holder (after deducting any discounts and commissions) from the disposition pursuant to such registration.

Section 2.6 Conduct of Indemnification Proceedings. In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to Section 2.4 or 2.5, such person (an “Indemnified Party”) shall promptly notify the person against whom such indemnity may be sought (an “Indemnifying Party”) in writing and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Party, and shall assume the payment of all reasonable fees and expenses; provided, however, that the failure of any Indemnified Party to give such notice will not relieve such Indemnifying Party of any obligations under this Article II, except to the extent such Indemnifying Party is materially prejudiced by such failure. In any such proceeding, any Indemnified Party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless (i) the Indemnifying Party and the Indemnified Party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the Indemnified Party and the Indemnifying Party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the Indemnifying Party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) at any time for all such Indemnified Parties, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Indemnified Parties, such firm shall be designated in writing by (i) in the case of Persons indemnified pursuant to Section 2.4 hereof, the Selling Holders which owned a majority of the Registrable Securities sold under the applicable registration statement and (ii) in the case of Persons indemnified pursuant to Section 2.5, NREF. The Indemnifying Party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent, or if there be a final judgment for the plaintiff, the Indemnifying Party shall indemnify and hold harmless such Indemnified Parties from and against any loss or liability (to the extent stated above) by reason of such settlement or judgment. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending or threatened proceeding in respect of which any Indemnified Party is or could have been a party and indemnity could have been sought hereunder by such Indemnified Party, unless such settlement includes an unconditional release of such Indemnified Party from all liability arising out of such proceeding.

Section 2.7 Contribution. If the indemnification provided for in Section 2.4 or 2.5 hereof is unavailable to an Indemnified Party or insufficient in respect of any losses, claims, damages or liabilities referred to herein, then each such Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities between NREF on the one hand and each Selling Holder on the other, in such proportion as is appropriate to reflect the relative fault of NREF and each Selling Holder in connection with such statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of NREF on the one hand and of each Selling Holder on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

NREF and the Selling Holders agree that it would not be just and equitable if contribution pursuant to this Section 2.7 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages or liabilities referred to in the immediately preceding paragraph shall be deemed to include,

 

8


subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 2.7, no Selling Holder shall be required to contribute any amount in excess of the amount by which the net proceeds from the sale of the securities of such Selling Holder to the public exceeds the amount of any damages which such Selling Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Selling Holder’s obligations to contribute pursuant to this Section 2.7 are several in proportion to the net proceeds of the offering received by such Selling Holder bears to the total net proceeds of the offering received by all the Selling Holders and not joint.

Section 2.8 Rule 144. NREF covenants that it will (a) make and keep public information regarding NREF available as those terms are defined in Rule 144, (b) file in a timely manner any reports and documents required to be filed by it under the Securities Act and the Exchange Act, (c) furnish to any Holder forthwith upon request (i) a written statement by NREF as to its compliance with the reporting requirements of Rule 144 (at any time more than 90 days after the Effective Date), the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), and (ii) a copy of the most recent annual or quarterly report of NREF and such other reports and documents so filed by NREF, and (d) take such further action as any Holder may reasonably request, all to the extent required from time to time to enable Holders to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144.

Section 2.9 Suspension of Use of Registration Statement.

(a) If the Board of Directors of NREF determines in its good faith judgment that the filing of a registration statement under Section 2.1 or the use of any related prospectus would be materially detrimental to NREF because such action would require the disclosure of material information that NREF has a bona fide business purpose for preserving as confidential or the disclosure of which would impede NREF’s ability to consummate a significant transaction (“Confidential Information”), and that NREF is not otherwise required by applicable securities laws or regulations to disclose, upon written notice of such determination by NREF to the Holders, the rights of the Holders to offer, sell or distribute any Registrable Securities pursuant to a registration statement or to require NREF to take action with respect to the registration or sale of any Registrable Securities pursuant to a registration statement shall be suspended until the earlier of (i) the date upon which NREF notifies the Holders in writing that suspension of such rights for the grounds set forth in this Section 2.9(a) is no longer necessary and (ii) 180 days; provided, however, no such 180-day period shall be successive with respect to the same Confidential Information. NREF agrees to give the notice under (i) above as promptly as reasonably practicable following the date that such suspension of rights is no longer necessary.

(b) If all reports required to be filed by NREF pursuant to the Exchange Act have not been filed by the required date without regard to any extension, or if the consummation of any business combination or acquisition of real property by NREF has occurred or is probable for purposes of Rule 3-05, Rule 3-14 or Article 11 of Regulation S-X promulgated under the Securities Act or any successor rule, upon written notice thereof by NREF to the Holders, the rights of the Holders to offer, sell or distribute any Registrable Securities pursuant to a registration statement or to require NREF to take action with respect to the registration or sale of any Registrable Securities pursuant to a registration statement shall be suspended until the date on which NREF has filed such reports or obtained and filed the financial information required by Rule 3-05, Rule 3-14 or Article 11 of Regulation S-X to be included or incorporated by reference, as applicable, in a registration statement, and NREF shall notify the Holders as promptly as reasonably practicable when such suspension is no longer required.

Section 2.10 Additional Shares. NREF, at its option, may register under a registration statement and include in any filings with any state securities commissions filed pursuant to this Agreement any number of unissued shares of NREF Common Stock or any shares of NREF Common Stock owned by any other stockholder or stockholders of NREF.

 

9


Section 2.11 Holdback Agreements; Restrictions on Public Sale by Holder of Registrable Securities. To the extent not inconsistent with applicable law, each Holder whose securities are included in a registration statement agrees not to effect any sale or distribution of the issue being registered or a similar security of NREF, or any securities convertible into or exchangeable or exercisable for such securities, including a sale pursuant to Rule 144, during the 14 days prior to, and during the 90-day period beginning on, the effective date of such registration statement (except as part of such registration), if and to the extent requested in writing by NREF in the case of a non-underwritten public offering or if and to the extent requested in writing by the managing underwriter or underwriters in the case of an underwritten public offering.

ARTICLE III

MISCELLANEOUS

Section 3.1 Remedies. In addition to being entitled to exercise all rights provided herein and granted by law, including recovery of damages, the Holders shall be entitled to specific performance of the rights under this Agreement. NREF agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate.

Section 3.2 Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, in each case without the written consent of NREF and the Holders of a majority of the Registrable Securities; provided, however, that the effect of any such amendment will be that the consenting Holders will not be treated more favorably than all other Holders (without regard to any differences in effect that such amendment or waiver may have on the Holders due to the differing amounts of Registrable Shares held by such Holders). No failure or delay by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon any breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition.

Section 3.3 Notices. All notices and other communications in connection with this Agreement shall be made in writing by hand delivery, registered first-class mail or air courier guaranteeing overnight delivery:

(i)   if to NREF:

NexPoint Real Estate Finance, Inc.

300 Crescent Court, Suite 700

Dallas, TX 75201

Attention: Corporate Secretary

with a copy to:

Charlie Haag

Winston & Strawn LLP

2121 North Pearl Street, Suite 900

Dallas, TX 75201

(ii)   if to any Holder, initially to the address indicated in such Holder’s Notice and Questionnaire or, if no Notice and Questionnaire has been delivered, to such other address as any Holder shall have specified in writing.

All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; when received if deposited in the mail, postage prepaid, if mailed; and on the next Business Day, if timely delivered to an air courier guaranteeing overnight delivery.

 

10


Section 3.4 Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of each of the parties. Any Holder may assign its rights under this Agreement without the consent of NREF in connection with a transfer of such Holder’s Registrable Securities; provided, that the Holder satisfies all applicable transfer provisions for the Registrable Securities, and notifies NREF of such proposed transfer and assignment and the transferee or assignee of such rights assumes in writing the obligations of such Holder under this Agreement.

Section 3.5 Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Each party shall become bound by this Agreement immediately upon affixing its signature hereto.

Section 3.6 Governing Law . This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York without regard to the choice of law provisions thereof.

Section 3.7 Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby.

Section 3.8 Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted by NREF with respect to the Registrable Securities. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter.

Section 3.9 Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

Section 3.10 No Third Party Beneficiaries. Nothing express or implied herein is intended or shall be construed to confer upon any person or entity, other than the parties hereto and their respective successors and assigns, any rights, remedies or other benefits under or by reason of this Agreement.

Section 3.11 Termination. The obligations of the parties hereunder shall terminate (i) with respect to a Holder when it no longer holds Registrable Securities, and (ii) with respect to NREF when there are no longer any Registrable Securities; except, in each case, for any obligations under Sections 2.3, 2.4, 2.5, 2.6 and 2.7 and Article III that, by their terms, are intended to survive for a specific period of time.

[Signature Page Follows]

 

11


IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.

 

NEXPOINT REAL ESTATE FINANCE, INC.

By:

   
 

Name: Brian Mitts

 

Title: Chief Financial Officer, Executive VP-Finance,

 

Secretary and Treasurer

NEXPOINT REAL ESTATE ADVISORS VII, L.P.

By:

   
 

Name: Brian Mitts

 

Title: Chief Financial Officer, Executive VP-Finance,

 

Secretary and Treasurer

[Signature Page to Registration Rights Agreement]


Exhibit A

Form of Notice and Questionnaire

The undersigned holder of shares of common stock, par value $0.01 per share (“Common Stock”), of NexPoint Real Estate Finance, Inc. (the “Company”) (the “Registrable Securities”), understands that the Company has filed or intends to file with the Securities and Exchange Commission (the “Commission”) one or more registration statements for the registration and sale of the Registrable Securities in accordance with the terms of the Registration Rights Agreement (the “Registration Rights Agreement”), dated                 , 2020, among the Company and the holders listed on the signature page thereto. A copy of the Registration Rights Agreement is available from the Company upon request at the address set forth below. All capitalized terms not otherwise defined herein shall have the meanings set forth in the Registration Rights Agreement.

Each owner of Registrable Securities is entitled to the benefits of the Registration Rights Agreement. In order to sell or otherwise dispose of any Registrable Securities pursuant to a registration statement, a beneficial owner of Registrable Securities generally will be required to be named as a selling security holder in a prospectus, deliver a prospectus to purchasers of Registrable Securities and be bound by those provisions of the Registration Rights Agreement applicable to such Holder (including certain indemnification provisions as described below). To be included in the registration statement, this Notice and Questionnaire must be completed, executed and delivered to the Company at the address set forth herein on or prior to the tenth business day before the effectiveness of the registration statement. We will give notice of the filing and effectiveness of the initial registration statement by issuing a press release and/or by mailing a notice to the Holders at their addresses set forth in the register of the registrar.

Owners that do not complete this Notice and Questionnaire and deliver it to the Company as provided below will not be named as selling security holders in the prospectus and therefore will not be permitted to sell any Registrable Securities pursuant to the registration statement. Owners are encouraged to complete and deliver this Notice and Questionnaire prior to the effectiveness of the initial registration statement so that such beneficial owners may be named as selling security holders in the related prospectus at the time of effectiveness.

Certain legal consequences arise from being named as selling security holders in a registration statement and the related prospectus. Accordingly, Holders of Registrable Securities are advised to consult their own securities law counsel regarding the consequences of being named or not being named as a selling security holder in a registration statement and the related prospectus.

NOTICE

The undersigned owner (the “Selling Security Holder”) of Registrable Securities hereby elects to include in the prospectus forming a part of a registration statement the Registrable Securities beneficially owned by it and listed below in Item 3 (unless otherwise specified under Item 3). The undersigned, by signing and returning this Notice and Questionnaire, understands that it will be bound by the terms and conditions of this Notice and Questionnaire and the Registration Rights Agreement.

Pursuant to the Registration Rights Agreement, the undersigned has agreed to indemnify and hold harmless the Company and its directors, officers and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against certain losses arising in connection with statements concerning the undersigned made in a registration statement or the related prospectus in reliance upon the information provided in this Notice and Questionnaire.


The undersigned hereby provides the following information to the Company and represents and warrants to the Company that such information is accurate and complete:

QUESTIONNAIRE

 

1.

(a) Full Legal Name of Selling Security Holder:

(b) Full Legal Name of registered holder (if not the same as (a) above) through which Registrable Securities listed in Item (3) below are held:

(c) Full Legal Name of DTC Participant (if applicable and if not the same as (b) above) through which Registrable Securities listed in Item (3) below are held:

(d) List below the individual or individuals who exercise voting and/or dispositive powers with respect to the Registrable Securities listed in Item (3) below:

 

2.

Address for Notices to Selling Security Holder:

Telephone:

E-mail address:

Contact Person:

 

3.

Beneficial Ownership of Registrable Securities:

Type and number of Registrable Securities beneficially owned: __________________________.

Type and number of Registrable Securities to be included in a registration statement: ________.

 

4.

Beneficial Ownership of Securities of the Company Owned by the Selling Security Holder:

Except as set forth below in this Item (4), the undersigned is not the beneficial or registered owner of any securities of the Company, other than the Registrable Securities listed above in Item (3).

Type and amount of other securities beneficially owned by the Selling Security Holder: _______.

 

5.

Relationship with the Company

Except as set forth below, neither the undersigned nor any of its affiliates, officers, directors or principal equity holders (5% or more) has held any position or office or has had any other material relationship with the Company (or its predecessors or affiliates) during the past three years.

State any exceptions here:

 

6.

Plan of Distribution

Discuss the plan of distribution below:


ACKNOWLEDGEMENTS

The undersigned acknowledges that it understands its obligation to comply with the provisions of the Securities Exchange Act of 1934 and the rules thereunder relating to stock manipulation, particularly Regulation M thereunder (or any successor rules or regulations), in connection with any offering of Registrable Securities pursuant to the Registration Rights Agreement. The undersigned agrees that neither it nor any person acting on its behalf will engage in any transaction in violation of such provisions.

The Selling Security Holder hereby acknowledges its obligations under the Registration Rights Agreement to indemnify and hold harmless certain persons set forth therein. Pursuant to the Registration Rights Agreement, NREF has agreed under certain circumstances to indemnify the Selling Security Holders against certain liabilities.

In accordance with the undersigned’s obligation under the Registration Rights Agreement to provide such information as may be required by law for inclusion in a registration statement, the undersigned agrees to promptly notify NREF of any inaccuracies or changes in the information provided herein that may occur subsequent to the date hereof at any time while the registration statement remains effective. All notices hereunder and pursuant to the Registration Rights Agreement shall be made in writing at the address set forth below.

In the event that the undersigned transfers all or any portion of the Registrable Securities listed in Item 3 above after the date on which such information is provided to NREF, the undersigned agrees to notify the transferee(s) at the time of transfer of its rights and obligations under this Notice and Questionnaire and the Registration Rights Agreement.

By signing this Notice and Questionnaire, the undersigned consents to the disclosure of the information contained herein in its answers to Items (1) through (6) above and the inclusion of such information in a registration statement and the related prospectus. The undersigned understands that such information will be relied upon by the Company in connection with the preparation or amendment of a registration statement and the related prospectus.

Once this Notice and Questionnaire is executed by the Selling Security Holder and received by the Company, the terms of this Notice and Questionnaire and the representations and warranties contained herein shall be binding on, shall inure to the benefit of and shall be enforceable by the respective successors, heirs, personal representatives and assigns of the Company and the Selling Security Holder with respect to the Registrable Securities beneficially owned by such Selling Security Holder and listed in Item 3 above.

This Notice and Questionnaire shall be governed by, and construed in accordance with, the laws of the State of New York.

IN WITNESS WHEREOF, the undersigned, by authority duly given, has caused this Notice and Questionnaire to be executed and delivered either in person or by its duly authorized agent.

 

Holder:

By:

   

Name:

   

Title:

   

Dated:

   


Please return the completed and executed Notice and Questionnaire to:

NexPoint Real Estate Finance, Inc.

300 Crescent Court, Suite 700

Dallas, TX 75201

Tel: (972) 628-4100

Attention: Corporate Secretary

EX-21.1 12 d759970dex211.htm EX-21.1 EX-21.1

Exhibit 21.1

List of Subsidiaries of the Registrant

 

Subsidiary

  

Jurisdiction of Organization

NexPoint Real Estate Finance Operating Partnership, L.P.

   Delaware

NREF OP I, L.P.

   Delaware

NREF OP I Holdco, LLC

   Delaware

NREF OP I Subholdco, LLC

   Delaware

NexPoint WLIF I Borrower, LLC

   Delaware

NREF OP II, L.P.

   Delaware

NREF OP II Holdco, LLC

   Delaware

NREF OP II SubHoldco, LLC

   Delaware

NexPoint WLIF II Borrower, LLC

   Delaware

NREF OP IV, L.P.

   Delaware

NREF OP IV REIT Sub, LLC

   Delaware

NREF OP IV REIT Sub TRS, LLC

   Delaware
EX-23.3 13 d759970dex233.htm EX-23.3 EX-23.3

Exhibit 23.3

Consent of Independent Registered Public Accounting Firm

Management and Stockholder

NexPoint Real Estate Finance, Inc.:

We consent to the use of our report included herein and to the reference to our firm under the heading “Experts” in the prospectus.

/s/ KPMG LLP

Dallas, Texas

January 27, 2020

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