| Risk Factors In addition to the other information in this document, you should consider carefully the following risk factors in evaluating an investment in our securities |
| Any of these risks or the occurrence of any one or more of the uncertainties described below could have a material adverse effect on our financial condition and the performance of our business |
| For purposes of these risk factors, the terms “we,” “our” and “us” refer to the Company and its consolidated subsidiaries, unless the context indicates otherwise |
| We may suffer a loss if the value of real property or other assets securing our loans deteriorates |
| The majority of our loans are secured by real property and are fully or substantially non-recourse |
| In the event of a default by a borrower on a non-recourse loan, we will only have recourse to the real estate-related assets (including escrowed funds and reserves) collateralizing the loan |
| For this purpose, we consider loans made to special purpose entities formed solely for the purpose of holding and financing particular assets to be non-recourse loans |
| We sometimes also make loan investments, often referred to as “mezzanine loans,” that are secured by equity interests in the borrowing entities |
| There can be no assurance that the value of the assets securing our loans will not deteriorate over time due to factors beyond our control, including acts or omissions by owners or managers of the assets |
| Mezzanine loans are subject to the additional risk that other lenders may be directly secured by the real estate assets of the borrowing entity |
| As of December 31, 2005, 86dtta96prca of our loans were non-recourse, based upon the gross carrying value of our loan assets |
| Any losses we may suffer on such loans could have a material adverse affect on our financial performance, the prices of our securities and our ability to pay dividends We may suffer a loss if a borrower or guarantor defaults on recourse obligations under our loans |
| We sometimes obtain individual or corporate guarantees from borrowers or their affiliates, which guarantees are not secured |
| In cases where guarantees are not fully or partially secured, we typically rely on financial covenants from borrowers and guarantors which are designed to require the borrower or guarantor to maintain certain levels of creditworthiness |
| Where we do not have recourse to specific collateral pledged to satisfy such guarantees or recourse loans, we will only have recourse as an unsecured creditor to the general assets of the borrower or guarantor, some or all of which may be pledged to satisfy other lenders |
| There can be no assurance that a borrower or guarantor will comply with its financial covenants, or that sufficient assets will be available to pay amounts owed to us under our loans and guarantees |
| We may suffer a loss in the event of a default or bankruptcy of a borrower, particularly in cases where the borrower has incurred debt that is senior to our loan |
| If a borrower defaults on our loan and the mortgaged real estate or other borrower assets collateralizing our loan are insufficient to satisfy our loan, we may suffer a loss of principal or interest |
| In the event of a borrower bankruptcy, we may not have full recourse to the assets of the borrower, or the assets of the borrower may not be sufficient to satisfy our loan |
| In addition, certain of our loans are subordinate to other debt of the borrower |
| If a borrower defaults on our loan or on debt senior to our loan, or in the event of a borrower bankruptcy, our loan will be satisfied only after the senior debt |
| Bankruptcy and borrower litigation can significantly increase the time needed for us to acquire underlying collateral in the event of a default, during which time the collateral may decline in value |
| In addition, there are significant costs and delays associated with the foreclosure process |
| 15 ______________________________________________________________________ Our reserves for losses may prove inadequate, which could have a material adverse effect on us |
| We maintain and regularly evaluate financial reserves to protect against potential future losses |
| While we have in many of our loans asset-specific credit protection, including cash reserve accounts, cash deposits and letters of credit which we require that our borrowers fund and/or post at the closing of a transaction in accounts in which we have a security interest, such protections may not be sufficient to protect against all losses |
| As of December 31, 2005, accumulated loan loss reserves and other asset-specific credit protection represented an aggregate of approximately 6prca of the gross book value of our loans |
| We cannot be certain that our reserves will be adequate over time to protect against potential future losses because of unanticipated adverse changes in the economy or events adversely affecting specific assets, borrowers, industries in which our borrowers operate or markets in which our borrowers or their properties are located |
| If our reserves for credit losses prove inadequate, we could suffer losses which could have a material adverse affect on our financial performance, the market prices of our securities and our ability to pay dividends |
| We are subject to the risk that provisions of our loan agreements may be unenforceable |
| Our rights and obligations with respect to our loans are governed by written loan agreements and related documentation |
| It is possible that a court could determine that one or more provisions of a loan agreement are unenforceable, such as a loan prepayment provision or the provisions governing our security interest in the underlying collateral |
| If this were to happen with respect to a material asset or group of assets, our financial performance, the market prices of our securities and our ability to pay dividends could be materially adversely affected |
| We are subject to the risks associated with loan participations and intercreditor arrangements, such as less than full control rights |
| Some of our assets are participating interests in loans in which we share the rights, obligations and benefits of the loan with other participating lenders |
| Some of our assets are interests in subordinated loans which are subject to intercreditor arrangements with senior lenders |
| Where debt senior to our loans exists, the presence of intercreditor arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies (through “standstill” periods) and control decisions made in bankruptcy proceedings relating to borrowers |
| Similarly, a majority of the participating lenders, or the senior lenders, may be able to take actions to which we object but to which we will be bound |
| We may be adversely affected by such lack of full control |
| Prepayments of our loans, particularly during periods of low interest rates, may reduce our recurring income and we also may not receive prepayment penalties |
| Borrowers may seek to prepay our loans, particularly during periods when interest rates are low |
| If loans repay before their maturity, we may not be able to reinvest the proceeds quickly or we may be forced to reinvest the proceeds in lower-yielding assets |
| Accordingly, prepayments of our assets may reduce the amount of our recurring income and could adversely affect our financial performance |
| Many of our loans provide that the borrower must pay us a prepayment penalty if the loan is repaid before a specified date |
| This is often referred to as a “lock-out period |
| ” While prepayment penalties provide us with financial compensation, they represent one-time payments as opposed to recurring income |
| After the end of the lock-out period, the borrower may prepay the loan without penalty prior to its maturity |
| As of December 31, 2005, 41dtta57prca of our lending portfolio consisted of loans open to prepayment without penalty |
| Increases in interest rates during the term of a loan may adversely impact a borrower’s ability to repay a loan at maturity or to prepay a loan |
| If interest rates increase during the term of our loan, a borrower may not be able to obtain the necessary funds to repay our loan at maturity through refinancing |
| Borrowers may also not be able to 16 ______________________________________________________________________ obtain refinancing proceeds that would enable them to prepay our loans |
| Increasing interest rates may hinder a borrower’s ability to refinance our loan because the borrower or the underlying property cannot satisfy the debt service coverage requirements necessary to obtain new financing or because the value of the property has decreased |
| If borrowers prepay fewer loans during periods of rising interest rates, we will not be able to reinvest prepayment proceeds in assets with higher interest rates |
| As a result, our financial performance, the market prices of our securities and our ability to pay dividends could be materially adversely affected |
| We may experience losses if the creditworthiness of our tenants deteriorates and they are unable to meet their obligations under our leases |
| We own the properties leased to the tenants of our CTL assets and we receive rents from the tenants during the terms of our leases |
| A tenant’s ability to pay rent is determined by the creditworthiness of the tenant |
| If a tenant’s credit deteriorates, the tenant may default on its obligations under our lease and the tenant may also become bankrupt |
| The bankruptcy or insolvency or other failure to pay of our tenants is likely to adversely affect the income produced by our CTL assets |
| If a tenant defaults, we may experience delays and incur substantial costs in enforcing our rights as landlord |
| If a tenant files for bankruptcy, we may not be able to evict the tenant solely because of such bankruptcy or failure to pay |
| A court, however, may authorize a tenant to reject and terminate its lease with us |
| In such a case, our claim against the tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent owed under the lease |
| In addition, certain amounts paid to us within 90 days prior to the tenant’s bankruptcy filing could be required to be returned to the tenant’s bankruptcy estate |
| In other circumstances, where a tenant’s financial condition has become impaired, we may agree to partially or wholly terminate the lease in advance of the termination date in consideration for a lease termination fee that is likely less than the agreed rental amount |
| Without regard to the manner in which the lease termination occurs, we are likely to incur additional costs in the form of tenant improvements and leasing commissions in our efforts to lease the space to a new tenant |
| In any of the foregoing circumstances, our financial performance, the market prices of our securities and our ability to pay dividends could be materially adversely affected |
| We may be unable to renew leases or relet space on similar terms, or at all, as leases expire or are terminated, or may expend significant capital in our efforts to relet space As of December 31, 2005, the percentage of our revenues (based on annualized GAAP operating lease income for leases in place at December 31, 2005, as a percentage of annualized total revenue for the quarter ended December 31, 2005) that are subject to expiring leases during each year from 2006 through 2010 is as follows: 2006 2dtta6 % 2007 4dtta1 % 2008 1dtta2 % 2009 0dtta8 % 2010 1dtta7 % Lease expirations, lease defaults and lease terminations may result in reduced revenues if the lease payments received from replacement corporate tenants are less than the lease payments received from the expiring, defaulting or terminating corporate tenants |
| Lease defaults by one or more significant corporate tenants, lease terminations by corporate tenants following events of casualty or takings by eminent domain, or the failure of corporate tenants under expiring leases to elect to renew their leases, could cause us to 17 ______________________________________________________________________ experience long periods of vacancy with no revenue from a facility |
| In addition, if we need to re-lease a corporate facility, we may need to make significant tenant improvements, including conversions of single tenant buildings to multi-tenant buildings |
| The loss of revenue from expiring, defaulted or terminated leases, and the costs of capital improvements could materially adversely affect our financial performance, the market prices of our securities and our ability to pay dividends |
| Our properties face significant competition which may impede our ability to retain tenants or re-let space when existing tenants vacate |
| We face significant competition from other owners, operators and developers of office properties, many of which own properties similar to ours in the markets in which we operate |
| Such competition may affect our ability to attract and retain tenants and reduce the rents we are able to charge |
| These competing properties may have vacancy rates higher than our properties, which may result in their owners being willing to rent space at lower rental rates than we or in their owners providing greater tenant improvement allowances or other leasing concessions |
| This combination of circumstances could adversely affect our financial performance, the market prices of our securities and our ability to pay dividends |
| Our ownership interests in corporate facilities are illiquid, hindering our ability to mitigate a loss |
| Since our ownership interests in corporate facilities are illiquid, we may lack the necessary flexibility to vary our investment strategy promptly to respond to changes in market conditions |
| This could have a material adverse effect on our financial performance, the market prices of our securities and our ability to pay dividends |
| We Compete With a Variety of Financing Sources for our Customers |
| Our markets are highly competitive |
| Our competitors include finance companies, other REITs, commercial banks and thrift institutions, investment banks and hedge funds |
| Competition from both traditional competitors and new market entrants has intensified in recent years due to a strong economy, growing marketplace liquidity and increasing recognition of the attractiveness of the commercial real estate finance markets |
| In addition, the rapid expansion of the securitization markets is dramatically reducing the difficulty in obtaining access to capital, which is the principal barrier to entry into these markets |
| This trend is further intensifying competition in certain market segments, including increasing competition from specialized securitization lenders which offer aggressive pricing terms |
| Our competitors seek to compete aggressively on the basis of transaction pricing, terms and structure and we may lose market share to the extent we are unwilling to match our competitors’ pricing, terms and structure in order to maintain interest margins and/or credit standards |
| To the extent that we match competitors’ pricing, terms or structure, we may experience decreased interest margins and/or increased risk of credit losses, which could have a material adverse effect on our financial performance, the market prices of our securities and our ability to pay dividends |
| As of December 31, 2005, the average size of our lending investments was dlra28dtta5 million and the average size of our CTL investments was dlra28dtta6 million |
| Of our annualized revenues for the quarter ended December 31, 2005, 18dtta9prca were derived from our five largest borrowers or corporate customers, collectively |
| No single loan or CTL investment represents more than 5dtta0prca of our annualized revenues for the fiscal quarter ended December 31, 2005 |
| While our asset base is diversified by product line, asset type, obligor, property type and geographic location, it is possible that if we suffer losses on a portion of our larger assets, our financial performance, the market prices of our securities and our ability to pay dividends could be materially adversely affected |
| Our success is dependent upon the general economic conditions in the geographic areas in which a substantial number of our investments are located |
| Adverse changes in national economic conditions or in the economic conditions of the regions in which we conduct substantial business likely would have an adverse effect on real estate values and, accordingly, our financial performance, the market prices of our securities and our ability to pay dividends business |
| In a recession or under other adverse economic conditions, non-earning assets and write-downs are likely to increase as debtors fail to meet their payment obligations |
| Although we maintain reserves for credit losses and an allowance for doubtful accounts in amounts that we believe are sufficient to provide adequate protection against potential write-downs in our portfolio, these amounts could prove to be insufficient |
| A recession or downturn could contribute to a downgrading of our credit ratings |
| A ratings downgrade likely would increase our funding costs, and could decrease our net investment income, limit our access to the capital markets or result in a decision by the lenders under our existing bank credit facilities not to extend such credit facilities after their expiration |
| Such results could have a material adverse effect on our financial performance, the market prices of our securities and our ability to pay dividends An earthquake or terrorist act could adversely affect our business Approximately 28prca of the gross carrying value of our assets as of December 31, 2005, were located in the West and Northwest United States, which are high risk geographical areas for earthquakes |
| In addition, a significant number of properties collateralizing our loans are located in New York City and other major urban areas which have, in recent years, been high risk geographical areas for terrorism and threats of terrorism |
| Future earthquakes or acts of terrorism could adversely impact the demand for, and value of, our assets and could also directly impact the value of our assets through damage, destruction or loss, and could thereafter materially impact the availability or cost of insurance to protect against these events |
| Any earthquake or terrorist attack, whether or not insured, could have a material adverse effect on our financial performance, the market prices of our securities and our ability to pay dividends |
| Uninsured losses or losses in excess of our insurance coverage could adversely affect our financial condition and our cash flows Although we believe our CTL assets and the properties collateralizing our loan assets are adequately covered by insurance, we cannot predict at this time if we or our borrowers will be able to obtain appropriate coverage at a reasonable cost in the future, or if we will be able to continue to pass along all of the costs of insurance to our tenants |
| In response to the uncertainty in the insurance market following the terrorist attacks of September 11, 2001, the Terrorism Risk Insurance Act of 2002 (“TRIA”) was enacted in November 2002, which established the Terrorism Risk Insurance Program to mandate that insurance carriers offer insurance covering physical damage from terrorist incidents certified by the US government as foreign terrorist acts |
| Under the Terrorism Risk Insurance Program, the federal government shares in the risk of loss associated with certain future terrorist acts |
| The Terrorism Risk Insurance Program was scheduled to expire on December 31, 2005 |
| However, on December 22, 2005, the Terrorism Risk Insurance Extension Act of 2005 (the “Extension Act”) was enacted, which extended the duration of the Terrorism Risk Insurance Program until December 31, 2007, while expanding the private sector role and reducing the amount of coverage that the US government is required to provide for insured losses under the program |
| While the underlying structure of TRIA was left intact, the Extension Act makes some adjustments, including increasing the current insurer deductible from 15prca of direct earned premiums to 17dtta5prca for 2006, and to 20prca of such premiums in 2007 |
| The federal share in the aggregate in any 19 ______________________________________________________________________ program year may not exceed dlra100 billion (the insurers will not be liable for any amount that exceeds this cap) |
| Under the Extension Act, losses incurred as a result of an act of terrorism are required to exceed dlra5dtta0 million before the program is triggered and compensation is paid under the program, but that amount increases to dlra50dtta0 million on April 1, 2006, and to dlra100dtta0 million in 2007 |
| As a result, unless we and our borrowers obtain separate coverage for events that do not meet that threshold (which coverage may not be required by the respective loan documents and may not otherwise be obtainable), such events would not be covered |
| In addition, the recently enacted legislation may subsequently result in increased premiums charged by insurance carriers for terrorism insurance |
| We are highly dependent on information systems, and systems failures could significantly disrupt our business |
| As a financial services firm, our business is highly dependent on communications and information systems |
| Any failure or interruption of our systems could cause delays or other problems in our activities, which could have a material adverse effect on our financial performance, the market prices of our securities and our ability to pay dividends |
| We Face a Risk of Liability Under Environmental Laws |
| Under various US federal, state and local environmental laws, ordinances and regulations, a current or previous owner of real estate (including, in certain circumstances, a secured lender that succeeds to ownership or control of a property) may become liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, under or in its property |
| Those laws typically impose cleanup responsibility and liability without regard to whether the owner or control party knew of or was responsible for the release or presence of such hazardous or toxic substances |
| The costs of investigation, remediation or removal of those substances may be substantial |
| The owner or control party of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site |
| Certain environmental laws also impose liability in connection with the handling of or exposure to asbestos-containing materials, pursuant to which third parties may seek recovery from owners of real properties for personal injuries associated with asbestos-containing materials |
| Absent succeeding to ownership or control of real property, a secured lender is not likely to be subject to any of these forms of environmental liability |
| Additionally, under our CTL assets we require our tenants to undertake the obligation for environmental compliance and indemnify us from liability with respect thereto |
| There can be no assurance that our tenants will have sufficient resources to satisfy their obligations to us |
| Strategic Investments Involve Risks |
| We have made and expect to continue to make strategic investments in complementary businesses |
| Strategic investments may involve the incurrence of additional debt and contingent liabilities |
| In addition, we may incur expenses from these investments, or they may require substantial investments of additional capital, before they begin generating anticipated returns |
| Strategic transactions involve risks, including: · Difficulties in assimilating the operations, products, technology, information systems and personnel of the acquired business |
| · Potentially dilutive issuances of equity securities and the incurrence of additional debt in connection with future acquisitions |
| · Diverting management’s attention from other business concerns |
| · Difficulties in maintaining uniform standards, controls, procedures and policies |
| 20 ______________________________________________________________________ · Losing key employees or customers of the acquired business |
| These factors could have a material adverse effect on our financial performance, the market prices of our securities and our ability to pay dividends |
| Because We Must Distribute a Portion of Our Income, We Will Continue to Need Additional Debt and/or Equity Capital to Grow |
| We generally must distribute at least 90prca of our net taxable income to our stockholders to maintain our REIT status |
| As a result, those earnings will not be available to fund investment activities |
| We have historically funded our investments by borrowing from financial institutions and raising capital in the public and private capital markets |
| We expect to continue to fund our investments this way |
| If we fail to obtain funds from these sources, it could limit our ability to grow, which could have a material adverse effect on the value of our common stock |
| Our taxable income has historically been lower than the cash flow generated by our business activities, primarily because our taxable income is reduced by non-cash expenses, such as depreciation, depletion and amortization |
| As a result, our dividend payout ratio as a percentage of our adjusted earnings (see Item 7: “Adjusted Earnings”) has generally been lower than our payout ratio as a percentage of net taxable income |
| Our Growth is Dependent on Leverage, Which May Create Other Risks |
| Our success is dependent, in part, upon our ability to use of leverage on our balance sheet |
| Our ability to obtain the leverage necessary for execution of our business plan will ultimately depend upon our ability to maintain interest coverage ratios meeting market underwriting standards that will vary according to lenders’ assessments of our creditworthiness and the terms of the borrowings |
| As of December 31, 2005, our debt-to-book equity plus accumulated depreciation, depletion and loan loss reserves ratio was 2dtta1x and our total carrying value of debt obligations outstanding was approximately dlra5dtta9 billion |
| Our charter does not limit the amount of indebtedness which we may incur |
| Our Board of Directors has overall responsibility for our financing strategy |
| Stockholder approval is not required for changes to our financing strategy |
| If our Board of Directors decided to increase our leverage, it could lead to reduced or negative cash flow and reduced liquidity |
| The percentage of leverage used will vary depending on our estimate of the stability of our cash flow |
| To the extent that changes in market conditions cause the cost of such financing to increase relative to the income that can be derived from the assets originated, we may reduce the amount of our leverage |
| Leverage creates an opportunity for increased net income, but at the same time creates risks |
| For example, leveraging magnifies changes in our net worth |
| We will incur leverage only when there is an expectation that it will enhance returns, although there can be no assurance that our use of leverage will prove to be beneficial |
| Moreover, there can be no assurance that we will be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets or a financial loss if we are required to liquidate assets at a commercially inopportune time |
| We and our subsidiaries are parties to agreements and debt instruments that restrict future indebtedness and the payment of dividends, including indirect restrictions (through, for example, covenants requiring the maintenance of specified levels of net worth and earnings to debt service ratios) and direct restrictions |
| As a result, in the event of a deterioration in our financial condition, these agreements or debt instruments could restrict our ability to pay dividends |
| Moreover, if we fail to pay dividends as required by the Code whether as a result of restrictive covenants in our debt instruments or otherwise, we may lose our qualification as a REIT For more information regarding the consequences of loss of REIT qualification, please read the risk factor entitled “We May Be Subject to Adverse Consequences if We Fail to Qualify as a REIT” 21 ______________________________________________________________________ We Utilize Interest Rate Hedging Arrangements Which May Adversely Affect Our Borrowing Cost and Expose Us to Other Risks |
| We have variable rate lending assets and variable rate debt obligations |
| These assets and liabilities create a natural hedge against changes in variable interest rates |
| This means that as interest rates increase, we earn more on our variable rate lending assets and pay more on our variable rate debt obligations and, conversely, as interest rates decrease, we earn less on our variable rate lending assets and pay less on our variable rate debt obligations |
| When our variable rate debt obligations exceed our variable rate lending assets, we utilize derivative instruments to limit the impact of changing interest rates on our net income |
| We do not use derivative instruments to hedge assets or for speculative purposes |
| The derivative instruments we use are typically in the form of interest rate swaps and interest rate caps |
| Interest rate swaps effectively change variable rate debt obligations to fixed rate debt obligations or fixed rate debt obligations to variable rate debt obligations |
| Interest rate caps effectively limit the maximum interest rate on variable rate debt obligations |
| The primary risks from our use of derivative instruments is the risk that a counterparty to a hedging arrangement could default on its obligation and the risk that we may have to pay certain costs, such as transaction fees or breakage costs, if a hedging arrangement is terminated by us |
| As a matter of policy, we enter into hedging arrangements with counterparties that are large, creditworthy financial institutions typically rated at least “A” and “A2” by S&P and Moody’s Investors Service, respectively |
| Our hedging strategy is monitored by our Audit Committee on behalf of our Board of Directors and may be changed by the Board of Directors without stockholder approval |
| Developing an effective strategy for dealing with movements in interest rates is complex and no strategy can completely insulate us from risks associated with such fluctuations |
| There can be no assurance that our hedging activities will have the desired beneficial impact on our results of operations or financial condition |
| Our quarterly operating results could fluctuate; therefore, you should not rely on past quarterly results to be indicative of our performance in future quarters |
| Factors that could cause quarterly operating results to fluctuate include, among others, variations in our investment origination volume, variations in the timing of prepayments, the degree to which we encounter competition in our markets and general economic conditions |
| Generally, to maintain our qualification as a REIT under the Code, not more than 50prca in value of our outstanding shares of stock may be owned, directly or indirectly, by five or fewer individuals at any time during the last half of our taxable year |
| The Code defines “individuals” for purposes of the requirement described in the preceding sentence to include some types of entities |
| Under our charter, no person may own more than 9dtta8prca of our outstanding shares of stock, with some exceptions |
| The restrictions on transferability and ownership may delay, deter or prevent a change in control or other transaction that might involve a premium price or otherwise be in the best interest of the security holders |
| Our charter authorizes our Board of Directors: 1 |
| To cause us to issue additional authorized but unissued shares of common or preferred stock |
| To classify or reclassify, in one or more series, any of our unissued preferred shares |
| To set the preferences, rights and other terms of any classified or reclassified securities that we issue |
| Our charter provides that our primary purpose is to invest in a diversified portfolio of debt and debtlike interests in real estate and real estate related assets, although it does not set forth specific percentages of the types of investments we may make |
| Our Board of Directors determines our investment policies, as well as our financing and conflicts of interest policies |
| Our Board of Directors can amend, revise or eliminate these policies at any time and from time to time at its discretion without a vote of the stockholders, except as otherwise required by our charter |
| A change in these policies could adversely affect our financial condition or results of operations or the market price of our common stock |
| We May Be Subject to Adverse Consequences Should We Fail to Qualify as a REIT We intend to operate so as to qualify as a REIT for US federal income tax purposes |
| We have received an opinion of our legal counsel, Clifford Chance US LLP, that based on the assumptions and representations described in “Certain US Federal Income Tax Consequences,” our existing legal organization and our actual and proposed method of operation, enable us to satisfy the requirements for qualification as a REIT under the Code |
| Investors should be aware, however, that opinions of counsel are not binding on the Internal Revenue Service or any court |
| The opinion only represents the view of our counsel based on their review and analysis of existing law, some aspects of which include no controlling precedents |
| Furthermore, both the validity of the opinion and our qualification as a REIT will depend on our continuing ability to meet various requirements concerning, among other things, the ownership of our outstanding stock, the nature of our assets, the sources of our income and the amount of our distributions to our stockholders |
| If we were to fail to qualify as a REIT for any taxable year, we would not be allowed a deduction for distributions to our stockholders in computing our taxable income and we would be subject to US federal income tax, including any applicable minimum tax, on our taxable income with respect to any such taxable year at regular corporate rates |
| Unless entitled to relief under certain Code provisions, we also would be disqualified from treatment as a REIT for the four subsequent taxable years following the year during which qualification was lost |
| As a result, cash available for distribution would be reduced for each of the years involved |
| Furthermore, it is possible that future economic, market, legal, tax or other considerations may cause the Board of Directors to revoke our REIT election |
| To qualify as a REIT, we generally must distribute to our stockholders at least 90prca of our net income each year, excluding net capital gains, and we will be subject to regular US federal corporate income taxes to the extent that we distribute less than 100prca of our net taxable income each year |
| In addition, we will be subject to a 4prca nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85prca of our ordinary income, 95prca of our capital gain net income and 100prca of our undistributed income from prior years |
| In order to qualify as a REIT and avoid the payment of income and excise taxes, we may need to borrow funds on a short-term, or possibly long-term, basis to meet the REIT distribution requirements even if the prevailing market conditions are not favorable for these borrowings |
| These borrowing needs could result from, among other things, a difference in timing between the actual receipt of cash and inclusion of income for US federal income tax purposes, the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments |
| Dividends Payable by REITs Do Not Qualify for Reduced Tax Rates |
| The maximum US federal income tax rate for dividends payable by domestic corporations to individual US stockholders is 15prca through 2008 |
| Dividends payable by REITs, however, are generally not eligible for the reduced rates |
| As a result, the more favorable rates applicable to regular corporate 23 ______________________________________________________________________ dividends could cause stockholders who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock |
| The rules dealing with US federal income taxation are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the US Treasury Department |
| Changes to tax laws (which may have retroactive application) could adversely affect our stockholders or us |
| It cannot be predicted whether, when, in what forms, or with what effective dates, the tax laws applicable to our stockholders or us will be changed |
| We Will Pay Some Taxes |
| Even if we qualify as a REIT for US federal income tax purposes, we will be required to pay some US federal, state, local, and foreign taxes on our income and property |
| In addition, our “taxable REIT subsidiaries” are fully taxable corporations, and there are limitations on the ability of taxable REIT subsidiaries to make interest payments to affiliated REITs |
| In addition, we will be subject to a 100prca penalty tax to the extent economic arrangements among our tenants, our taxable REIT subsidiary and us are not comparable to similar arrangements among unrelated parties |
| We will also be subject to a 100prca tax to the extent we derive income from the sale of assets to customers in the ordinary course of business |
| To the extent that we or our taxable REIT subsidiary are required to pay US federal, state, local or foreign taxes, we will have less cash available for distribution to stockholders |
| Certain Financing Activities May Subject Us to US Federal Income Tax and Increase the Tax Liability of Our Stockholders |
| Although we do not intend to invest a material portion of our assets in real estate mortgage investment conduits, or “REMICs,” certain taxable income produced by REMIC residual interests may cause our stockholders to suffer adverse tax consequences |
| Although the law on the matter is unclear, we might be taxable at the highest corporate income tax rate on a portion of the income arising from a taxable mortgage pool that is allocable to the percentage of our shares held by “disqualified organizations,” which are generally certain cooperatives, governmental entities and tax-exempt organizations that are exempt from unrelated business taxable income |
| We believe that disqualified organizations own our shares |
| Because this tax would be imposed on us, all of our investors, including investors that are not disqualified organizations, would bear a portion of the tax cost associated with the classification of us or a portion of our assets as a taxable mortgage pool |
| In addition, if we realize “excess inclusion income” and allocate it to stockholders, this income cannot be offset by net operating losses of our stockholders |
| In addition, if the stockholder is a tax-exempt entity and not a disqualified organization, then the excess inclusion income would be fully taxable as unrelated business taxable income under Section 512 of the Code |
| If the stockholder is a foreign person, it would be subject to US federal income tax withholding on the excess inclusion income and would not be able to reduce such withholding tax pursuant to any otherwise applicable income tax treaty |
| The amount of dividends we distribute to our common stockholders in a given quarter may not correspond to our taxable income for such quarter |
| Consequently, a portion of the dividends we distribute may be deemed a return of capital for US federal income tax purposes, and will not be taxable but will 24 ______________________________________________________________________ reduce stockholders’ basis in its common stock |
| For the year ended December 31, 2005, the percentage of our dividend payments made to common stockholders that was treated as a return of capital was 21dtta08prca |