424B5
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-146819
CALCULATION OF REGISTRATION FEE
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Proposed Maximum |
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Registration Fee(1) |
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Common Stock
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$112,875,000
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$4,435.99 |
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(1) Calculated in accordance with Rule 457(r) under the Securities Act of 1933, as amended. The
total registration fee due for this offering is $4,435.99.
PROSPECTUS SUPPLEMENT
(To Prospectus Dated November 5, 2007)
Up to 12,500,000 Shares of Common Stock
We
have entered into a sales agreement with Cantor Fitzgerald & Co.
relating to shares of our
common stock offered by this prospectus supplement and the accompanying prospectus. In accordance
with the terms of the sales agreement, we may offer and sell up to 12,500,000 shares of our common
stock from time to time through Cantor Fitzgerald & Co., as our agent for the offer and sale of the
shares of common stock.
Our common stock is listed on the New York Stock Exchange under the symbol MFA. The last
reported sale price of our common stock on the New York Stock
Exchange on January 4, 2008 was $9.03 per share.
Sales
of shares of our common stock, if any, under this prospectus supplement and the accompanying
prospectus may be made in negotiated transactions or transactions that are deemed to be at the
market offerings as defined in Rule 415 under the Securities Act of 1933, as amended (or the
Securities Act), including sales made directly on the New York Stock Exchange or sales made to or
through a market maker other than on an exchange.
Cantor Fitzgerald & Co. will be entitled to compensation of up to 2.5% of the gross sales
price per share for any shares of common stock sold under the sales agreement. In connection with
the sale of the shares of common stock on our behalf, Cantor Fitzgerald & Co. may be deemed to be
an underwriter within the meaning of the Securities Act and the compensation of Cantor Fitzgerald
& Co. may be deemed to be underwriting commissions or discounts.
Investing in our common stock involves certain risks. Before buying any shares, you should
read the discussion of material risks of investing in our common stock under the caption Risk
Factors on page S-2 of this prospectus supplement and beginning on page 5 of our annual report
on Form 10-K for the fiscal year ended December 31, 2006, which is incorporated by reference into
the accompanying prospectus, and in our periodic reports and other information that we file from
time to time with the Securities and Exchange Commission (or SEC).
Neither
the SEC nor any state securities commission has
approved or disapproved of these securities or passed upon the adequacy or accuracy of this
prospectus supplement or the accompanying prospectus. Any representation to the contrary is a
criminal offense.
Cantor Fitzgerald & Co.
The date of this prospectus supplement is January 7, 2008.
TABLE OF CONTENTS
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Prospectus Supplement
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S-1
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S-1
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S-2
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S-2
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S-2
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S-3
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S-3
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Prospectus
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ABOUT THIS PROSPECTUS SUPPLEMENT
The following information is qualified in its entirety by the more detailed information and
financial statements and notes thereto appearing elsewhere in the accompanying prospectus or
incorporated by reference into the accompanying prospectus. We encourage you to read this
prospectus supplement and the accompanying prospectus, as well as the information which is
incorporated by reference into the accompanying prospectus, in their entireties. All references to
we, our, us or the company in this prospectus supplement and the accompanying prospectus
mean MFA Mortgage Investments, Inc.
You should rely only on the information contained in, or incorporated by reference into, this
prospectus supplement and the accompanying prospectus. We have not,
and Cantor Fitzgerald & Co. has not,
authorized any other person to provide you with different information. If anyone provides you with
different or inconsistent information, you should not rely on it. We
are not, and Cantor Fitzgerald & Co. is not, making an offer to sell these securities in any jurisdiction where the offer or sale is
not permitted. You should assume that the information appearing in this prospectus supplement, the
accompanying prospectus and the documents incorporated therein by reference is accurate only as of
its respective date or dates or on the date or dates which are specified in these documents. Our
business, financial condition, results of operations and prospects may have changed since those
dates.
FORWARD-LOOKING STATEMENTS
This prospectus supplement and the accompanying prospectus contain or incorporate by reference
certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,
as amended (or the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as
amended. When used, statements which are not historical in nature, including
those containing words such as anticipate, estimate, should, expect, believe, intend
and similar expressions, are intended to identify forward-looking statements and, as such, may
involve known and unknown risks, uncertainties and assumptions.
These forward-looking statements are subject to various risks and uncertainties, including,
but not limited to, those relating to:
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changes in interest rates and the market value of our mortgage-backed securities (or
MBS); |
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changes in the prepayment rates on the mortgage loans securing our MBS; |
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our ability to use borrowings to finance our assets; |
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changes in government regulations affecting our business; |
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our ability to maintain our qualification as a REIT for federal income tax purposes; and |
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risks associated with investing in real estate assets, including changes in business
conditions and the general economy. |
These and other risks, uncertainties and factors, including those identified in this
prospectus supplement, in our annual report on Form 10-K for the fiscal year ended December 31,
2006, which is incorporated by reference into the accompanying prospectus, and in our periodic
reports and other information that we file from time to time with the Securities and Exchange
Commission (or SEC), could cause our actual results to differ materially from those projected in
any forward-looking statements we make. All forward-looking statements speak only as of the date
they are made and we do not undertake, and specifically disclaim, any obligation to update or
revise any forward-looking statements to reflect events or circumstances occurring after the date
of such statements.
S-1
RISK FACTORS
An investment in our common stock involves risks. You should carefully consider, among other
factors, the risk described below, the risks referred to in the section of this prospectus
supplement entitled Forward-Looking Statements and the
risks described under Risk Factors in
our annual report on Form 10-K for the fiscal year ended December 31, 2006, which is incorporated
by reference into the accompanying prospectus, and in our periodic reports and other information
that we file from time to time with the SEC.
Adverse developments involving major financial institutions or involving one of our lenders
could result in a rapid reduction in our ability to borrow and adversely affect our business and
profitability.
Although as of September 30, 2007 we had amounts outstanding under repurchase agreements with
14 separate lenders and continue to develop new relationships with additional lenders, recent
turmoil in the financial markets as it relates to major financial institutions has raised concerns
that a material adverse development involving one or more major financial institutions could result
in our lenders reducing our access to funds available under our repurchase agreements. Because all
of our repurchase agreements are uncommitted, such a disruption could cause our lenders to
determine to reduce or terminate our access to future borrowings, which could adversely affect our
business and profitability.
USE OF PROCEEDS
We intend to use the net proceeds from any sales of shares of common stock offered by this
prospectus supplement and the accompanying prospectus to acquire additional MBS consistent with our
investment policy and for general corporate purposes, which may include, among other things, the
repayment of our repurchase agreements.
PLAN OF DISTRIBUTION
Upon written instructions from us, Cantor Fitzgerald & Co. will use its commercially
reasonable efforts consistent with its sales and trading practices to solicit offers to purchase
shares of our common stock under the terms and subject to the conditions set forth in the sales
agreement. Cantor Fitzgerald & Co.s solicitation will continue until we instruct Cantor Fitzgerald
& Co. to suspend the solicitations and offers. We will instruct Cantor Fitzgerald & Co. as to the
amount of common stock to be sold by Cantor Fitzgerald & Co. We may instruct Cantor Fitzgerald &
Co. not to sell common stock if the sales cannot be effected at or above the price designated by us
in any instruction. We or Cantor Fitzgerald & Co. may suspend the offering of common stock upon
proper notice and subject to other conditions.
Cantor Fitzgerald & Co. will provide written confirmation to us no later than the opening of
the trading day on the New York Stock Exchange following the trading day in which shares of our
common stock are sold under the sales agreement. Each confirmation will include the number of
shares sold on the preceding day, the net proceeds to us and the compensation payable by us to
Cantor Fitzgerald & Co. in connection with the sales.
We will pay Cantor Fitzgerald & Co. commissions for its services in acting as agent in the
sale of common stock. Cantor Fitzgerald & Co. will be entitled to compensation of up to 2.5% of the
gross sales price per share for any shares of common stock sold under the sales agreement. We
estimate that the total expenses for the offering, excluding compensation payable to Cantor
Fitzgerald & Co. under the terms of the sales agreement, will be
approximately $250,000.
Settlement for sales of common stock will occur on the third business day following the date
on which any sales are made, or on some other date that is agreed upon by us and Cantor Fitzgerald
& Co. in connection with a particular transaction, in return for payment of the net proceeds to us.
There is no arrangement for funds to be received in an escrow, trust or similar arrangement.
In connection with the sale of the common stock on our behalf, Cantor Fitzgerald & Co. may,
and will with respect to sales effected in an at the market offering, be deemed to be an
underwriter within the meaning of the Securities Act, and
the compensation of Cantor
S-2
Fitzgerald & Co. may be deemed to be
underwriting commissions or discounts. We have agreed to provide indemnification and contribution
to Cantor Fitzgerald & Co. against certain civil liabilities, including liabilities under the
Securities Act. We have also agreed to reimburse Cantor Fitzgerald & Co. for other specified
expenses.
The offering of shares of our common stock pursuant to the sales agreement will terminate upon
the earlier of (1) the sale of all common stock subject to the agreement, whether by Cantor
Fitzgerald & Co. or any other agent pursuant to an at the market offering or (2) termination of
the sales agreement. The sales agreement may be terminated by us in our sole discretion at any time
by giving notice to Cantor Fitzgerald & Co. Cantor Fitzgerald & Co. may terminate the sales
agreement under the circumstances specified in the sales agreement and in its sole discretion at
any time following a period of twelve months from the date of the sales agreement by giving notice
to us.
In
no event will the maximum discount to be received by any FINRA member in connection with
this offering exceed 10%. The maximum reimbursement to any FINRA member for bona fide due diligence
expenses incurred in connection with this offering will not exceed 0.5%.
LEGAL MATTERS
The validity of the securities offered pursuant to this prospectus supplement will be passed
upon for us by Clifford Chance US LLP, New York, New York. Certain legal matters in connection with
this offering will be passed upon for Cantor Fitzgerald & Co. by DLA Piper US LLP, New York, New
York.
EXPERTS
Ernst & Young LLP, independent registered public accounting firm, has audited our consolidated
financial statements included in our annual report on Form 10-K for the fiscal year ended December
31, 2006 and managements assessment on the effectiveness of internal control over financial
reporting as of December 31, 2006, as set forth in their reports which are incorporated by
reference into the accompanying prospectus and the registration statement. Our financial statements
and managements assessment are incorporated by reference in reliance on Ernst & Young LLPs
reports, given on their authority as experts in accounting and auditing.
S-3
PROSPECTUS
MFA
MORTGAGE INVESTMENTS, INC.
Common
Stock
Preferred Stock
Depositary Shares
and
Warrants
We may from time to time offer our common stock, preferred stock
(which we may issue in one or more series), depositary shares
representing shares of our preferred stock or warrants entitling
the holders to purchase our common stock, preferred stock or
depositary shares. We will determine when we sell securities,
the amounts of securities we will sell and the prices and other
terms on which we will sell them. We may sell securities to or
through underwriters, through agents or directly to purchasers.
We will describe in a prospectus supplement, which we will
deliver with this prospectus, the terms of particular securities
which we offer in the future. We may describe the terms of those
securities in a term sheet which will precede the prospectus
supplement.
In each prospectus supplement, we will include the following
information:
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The names of the underwriters or agents, if any, through which
we will sell the securities.
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The proposed amount of securities, if any, which the
underwriters will purchase.
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The compensation, if any, of those underwriters or agents.
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The initial public offering price of the securities.
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Information about securities exchanges, electronic
communications networks or automated quotation systems on which
the securities will be listed or traded.
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Any other material information about the offering and sale of
the securities.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE
SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
November 5,
2007
TABLE OF
CONTENTS
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This prospectus is part of a shelf registration statement. Under
this shelf registration statement, we may sell any combination
of our common stock, preferred stock, depositary shares
representing shares of our preferred stock or warrants entitling
the holders to purchase our common stock, preferred stock or
depositary shares in one or more offerings. This prospectus
provides you with a general description of the securities we may
offer. Each time we sell securities, we will provide a
prospectus supplement that will contain specific information
about the terms of that offering. The prospectus supplement may
add, update or change information contained in this prospectus.
Before you buy any of our securities, it is important for you to
consider the information contained in this prospectus and any
prospectus supplement together with additional information
described under the heading Incorporation of Certain
Documents By Reference.
FORWARD-LOOKING
STATEMENTS
This prospectus contains or incorporates by reference certain
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (or
the Securities Act), and Section 21E of the Securities
Exchange Act of 1934, as amended (or the Exchange Act). When
used, statements which are not historical in nature, including
those containing words such as anticipate,
estimate, should, expect,
believe, intend and similar expressions,
are intended to identify forward-looking statements and, as
such, may involve known and unknown risks, uncertainties and
assumptions.
These forward-looking statements are subject to various risks
and uncertainties, including, but not limited to, those relating
to:
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changes in interest rates and the market value of our
mortgage-backed securities (or MBS);
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changes in the prepayment rates on the mortgage loans securing
our MBS;
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our ability to use borrowings to finance our assets;
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changes in government regulations affecting our business;
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our ability to maintain our qualification as a real estate
investment trust (or a REIT) for U.S. federal income tax
purposes; and
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risks associated with investing in real estate, including
changes in business conditions and the general economy.
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These and other risks, uncertainties and factors, including
those identified in our annual report on
Form 10-K
for the fiscal year ended December 31, 2006 and any
subsequent report incorporated in this registration statement by
reference, or which may be discussed in a prospectus supplement,
could cause our actual results to differ materially from those
projected in any forward-looking statements we make. All
forward-looking statements speak only as of the date they are
made and we do not undertake, and specifically disclaim, any
obligation to update or revise any forward-looking statements to
reflect events or circumstances occurring after the date of such
statements.
MFA
MORTGAGE INVESTMENTS, INC.
We are a self-advised REIT primarily engaged in the business of
investing, on a leveraged basis, in hybrid and adjustable-rate
MBS which are primarily secured by pools of hybrid and
adjustable-rate mortgage loans on single family residences. Our
assets consist primarily of MBS issued or guaranteed by a
federally chartered corporation, such as Fannie Mae or Freddie
Mac, or an agency of the U.S. government, such as Ginnie
Mae (or, collectively, Agency MBS), non-Agency MBS rated AAA by
at least one nationally recognized rating agency, MBS-related
receivables and cash.
Our principal executive offices are located at 350 Park Avenue,
21st Floor, New York, New York 10022, and our telephone
number is
212-207-6400.
Our website is www.mfa-reit.com. The information
on our website is not, and should not be interpreted to be, part
of this prospectus.
1
RATIOS
OF EARNINGS TO FIXED CHARGES
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Six Months
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Ended
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June 30,
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Years Ended December 31,
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2007
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2006
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2005
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2004
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2003
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2002
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Ratio of earnings to fixed charges and preferred stock
dividends(1)
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1.10
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0.98
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0.99
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1.80
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1.99
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1.87
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Ratio of earnings to fixed charges(2)
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1.13
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1.03
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1.04
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1.87
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1.99
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1.87
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The ratios of earnings to fixed charges and preferred stock
dividends were computed by dividing earnings by the sum of fixed
charges and preferred stock dividends. For this purpose,
earnings consist of net income from continuing operations and
fixed charges. Fixed charges consist of our interest expense. We
did not have any preferred stock outstanding prior to the
initial issuance of our 8.50% Series A Cumulative
Redeemable preferred stock on April 27, 2004. |
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The ratios of earnings to fixed charges were computed by
dividing earnings by the sum of fixed charges. |
Except as may be set forth in a particular prospectus
supplement, we will add the net proceeds from sales of
securities to our general corporate funds, which we may use for
new investments, to repay indebtedness or for other general
corporate purposes.
DESCRIPTION
OF COMMON STOCK AND PREFERRED STOCK
Our charter provides that we may issue up to 500 million
shares of capital stock, all with a par value of $0.01 per
share. As of October 19, 2007, 370 million of these
authorized shares were classified as common stock,
5 million shares were classified as preferred stock and
125 million shares were classified as excess stock. As of
October 19, 2007, we had 104,641,121 shares of common
stock, 3,840,000 shares of 8.50% Series A Cumulative
Redeemable preferred stock and no shares of excess stock
outstanding.
Pursuant to our charter, the board of directors of our company
(or our board) is authorized to classify and reclassify any
unissued shares of our capital stock, to provide for the
issuance of shares in other classes or series (including
preferred stock in one or more series), to establish the number
of shares in each class or series and to fix the preferences,
conversion and other rights, voting powers, restrictions,
limitations as to distributions, qualifications and terms and
conditions of redemption of each class or series.
The statements below describing our common stock are in all
respects subject to, and qualified in their entirety by
reference to, our charter and bylaws.
Common
Stock
All shares of our common stock offered hereby will be validly
issued, fully paid and non-assessable. Holders of our common
stock will be entitled to receive distributions on their shares
of common stock if, as and when our board authorizes and we
declare distributions out of legally available funds. However,
rights to distributions may be subordinated to the rights of
holders of our preferred stock, when preferred stock is issued
and outstanding, or subject to the provisions of our charter
regarding excess stock. See Restrictions on
Ownership and Transfer below. In the event of our
liquidation, dissolution or winding up, each outstanding share
of our common stock will entitle its holder to a proportionate
share of the assets that remain after we pay our liabilities and
any preferential distributions owed to preferred stockholders.
Holders of our common stock are entitled to one vote for each
share on all matters submitted to a vote of the common
stockholders. There is no cumulative voting in the election of
directors.
2
Holders of shares of our common stock have no preference,
conversion, sinking fund, redemption, appraisal or exchange
rights or any preemptive rights to subscribe for any of our
securities. All shares of our common stock have equal dividend,
distribution, liquidation and other rights.
We may be dissolved if our board, by resolution adopted by a
majority of the entire board, declares the dissolution advisable
and directs that the proposed dissolution be submitted for
consideration at either an annual or special meeting of
stockholders. Dissolution will occur once it is approved by the
affirmative vote of the holders of a majority of the total
number of shares of all classes outstanding and entitled to vote
on the matter.
Our charter grants our board the power to authorize the issuance
of additional authorized but unissued shares of common stock and
preferred stock. Our board may also classify or reclassify
unissued shares of common stock or preferred stock and authorize
their issuance.
We believe that these powers of our board provide increased
flexibility in structuring possible future financings and
acquisitions and in meeting other needs which might arise.
Although our board does not intend to do so at the present time,
it could authorize the issuance of a class or series that could
delay, defer or prevent a change of control or other transaction
that might involve a premium price for the common stock or
otherwise be in the best interest of our stockholders.
Preferred
Stock
We may issue preferred stock in one or more classes or series
with any rights and preferences which may be authorized by our
board. The preferred stock, when issued, will be validly issued,
fully paid and non-assessable. Because our board has the power
to establish the preferences, powers and rights of each series
of preferred stock, our board may afford the holders of any
series of preferred stock preferences, powers and rights, voting
or otherwise, senior to the rights of the holders of our common
stock.
On October 19, 2007, there were 3,840,000 shares of
our 8.50% Series A Cumulative Redeemable preferred stock
outstanding. A description of our 8.50% Series A Cumulative
Redeemable preferred stock is set forth in our
Articles Supplementary, dated April 22, 2004, filed on
Form 8-A
with the U.S. Securities and Exchange Commission (or the
SEC) on April 23, 2004, and is incorporated herein by
reference.
The rights, preferences, privileges and restrictions of each
series of preferred stock will be fixed by the articles
supplementary relating to such series. We will distribute a
prospectus supplement with regard to each series of preferred
stock. The prospectus supplement, relating to each such series,
will specify the terms of the preferred stock, as follows:
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the title and stated par value of the preferred stock;
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the number of shares offered, the liquidation preference per
share and the offering price per share of the preferred stock;
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the dividend rate(s), period(s) and payment date(s) or method(s)
of calculation applicable to the preferred stock;
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the date from which dividends on the preferred stock will
accumulate, if applicable;
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the voting rights, if applicable, of the preferred stock;
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the provision for a sinking fund, if any, for the preferred
stock;
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the provision for or any restriction on redemption or
repurchase, if applicable, of the preferred stock;
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any listing of the preferred stock on any securities exchange;
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the terms and provisions, if any, upon which the preferred stock
will be convertible into common stock, including the conversion
price (or manner of calculation) and conversion period;
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a discussion of certain material U.S. federal income tax
considerations applicable to the preferred stock;
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the relative ranking and preferences of the preferred stock as
to dividend rights and rights upon the liquidation, dissolution
or
winding-up
of our affairs;
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any limitation on issuance of any series of preferred stock
ranking senior to or on a parity with the series of preferred
stock as to dividend rights and rights upon the liquidation,
dissolution or
winding-up
of our affairs;
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any limitations on direct or beneficial ownership and
restrictions on transfer of the preferred stock, in each case as
may be appropriate to preserve our qualification as a
REIT; and
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any other specific terms, preference rights, limitations or
restrictions of the preferred stock.
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Restrictions
on Ownership and Transfer
In order for us to qualify as a REIT, our stock must be
beneficially owned by 100 or more persons for at least
335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year. Also, not more
than 50% of the number or value of the outstanding shares of our
stock may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Internal Revenue Code of 1986, as
amended (or the Code), to include certain exempt entities)
during the last half of a taxable year.
Our charter provides that, subject to certain exceptions, no
stockholder or group (as defined in
Section 13(d)(3) of the Exchange Act) may own, or be deemed
to own by virtue of the attribution provisions of the Code, more
than 9.8% of the number or value of the outstanding shares of
our capital stock (or the Ownership Limit). Our board may waive
the Ownership Limit if it is presented with evidence
satisfactory to it that the waiver will not jeopardize our
qualification as a REIT. As a condition to any such waiver, our
board may require opinions of counsel satisfactory to it and
must receive an undertaking from the applicant with respect to
preserving our REIT qualification. The Ownership Limit will not
apply if our board determines that it is no longer in our best
interests to continue to qualify as a REIT.
If shares of common stock
and/or
preferred stock in excess of the Ownership Limit, or shares
which would cause us to be beneficially owned by fewer than
100 persons or cause us to become closely held
under Section 856(h) of the Code, are issued or transferred
to any person, the issuance or transfer shall be void as to the
number of shares in excess of the Ownership Limit and the
intended transferee will acquire no rights to such shares of
common stock
and/or
preferred stock. Shares issued or transferred that would cause
any stockholder (or a Prohibited Owner) to own more than the
Ownership Limit or cause us to become closely held
under Section 856(h) of the Code will constitute shares of
excess stock. All excess stock will be automatically
transferred, without action by the Prohibited Owner, to a trust
for the exclusive benefit of one or more charitable
beneficiaries that we select, and the Prohibited Owner will not
acquire any rights in the shares of excess stock. Such automatic
transfer shall be deemed to be effective as of the close of
business on the day prior to the date of the transfer causing a
violation. The trustee of the trust shall be appointed by us and
must be independent of us and the Prohibited Owner. The
Prohibited Owner shall have no right to receive dividends or
other distributions with respect to, or be entitled to vote, any
excess stock held in the trust. Any dividend or other
distribution paid prior to the discovery by us that excess stock
has been transferred to the trust must be paid by the recipient
of the dividend or distribution to the trustee upon demand for
the benefit of the charitable beneficiary, and any dividend or
other distribution authorized but unpaid shall be paid when due
to the trust. The trust shall have all dividend and voting
rights with respect to the shares of excess stock held in the
trust, which rights shall be exercised for the exclusive benefit
of the charitable beneficiary. Any dividend or distribution so
paid to the trust shall be held in trust for the charitable
beneficiary.
Within 20 days of receipt of our notice that excess stock
has been transferred to the trust, the trustee will sell the
excess stock 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 our charter. Upon such sale,
any interest of the charitable beneficiary in the excess stock
sold shall terminate and the trustee shall distribute the net
proceeds of the sale to the Prohibited Owner and to the
charitable beneficiary as follows. The Prohibited Owner shall
receive the lesser of (a) the price paid by the Prohibited
Owner for the excess stock or, if the Prohibited Owner did not
give value for the excess stock in connection with the event
causing the excess stock to be held in the trust (e.g., a gift,
devise or other such transaction), the Market Price (as defined
in our charter) of the excess stock on the day of the event
causing the excess stock to be held in the trust, and
(b) the price per share received by the trustee from the
sale or other disposition of the excess stock held in the trust.
Any net sale proceeds in excess of the amount payable to the
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Prohibited Owner shall be paid immediately to the charitable
beneficiary. If, prior to our discovery that excess stock has
been transferred to the trust, the excess stock is sold by a
Prohibited Owner, then the excess stock shall be deemed to have
been sold on behalf of the trust and, to the extent that the
Prohibited Owner received an amount for the excess stock that
exceeds the amount that such Prohibited Owner was entitled to
receive pursuant to the aforementioned requirement, the excess
shall be paid to the trustee upon demand.
The Ownership Limit provision will not be automatically removed
even if the REIT provisions of the Code are changed so as to no
longer contain any ownership concentration limitation or if the
ownership concentration is increased. Any change in the
Ownership Limit would require an amendment to our charter. Such
an amendment will require the affirmative vote of holders owning
a majority of the outstanding common stock and any other class
of capital stock with such voting rights. In addition to
preserving our qualification as a REIT, the Ownership Limit may
have the effect of precluding an acquisition of control of our
company without the approval of our board.
All certificates representing shares of our common stock or
preferred stock will refer to the restrictions described above.
All persons who own, directly or by virtue of the attribution
provisions of the Code, 5% or more of the number or value of our
outstanding shares (or such other percentage at the time
prescribed by the Code or the regulations promulgated
thereunder) must file a written statement with us containing the
information specified in our charter within 30 days after
January 1 of each year. In addition, each stockholder shall upon
demand be required to disclose to us in writing such information
with respect to the direct, indirect and constructive ownership
of shares as our board deems necessary to determine our
qualification as a REIT and to ensure compliance with the
Ownership Limit.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock and
preferred stock is BNY Mellon Shareowner Services, 480
Washington Boulevard, Jersey City, NJ
07310-1900.
Its telephone number is
866-249-2610
and its website is
www.bnymellon.com/shareowner/isd.
5
DESCRIPTION
OF DEPOSITARY SHARES
We may issue depositary receipts representing interests in
shares of particular series of preferred stock which are called
depositary shares. We will deposit the preferred stock of a
series which is the subject of depositary shares with a
depositary, which will hold that preferred stock for the benefit
of the holders of the depositary shares, in accordance with a
deposit agreement between the depositary and us. The holders of
depositary shares will be entitled to all the rights and
preferences of the preferred stock to which the depositary
shares relate, including dividend, voting, conversion,
redemption and liquidation rights, to the extent of their
interests in that preferred stock.
While the deposit agreement relating to a particular series of
preferred stock may have provisions applicable solely to that
series of preferred stock, all deposit agreements relating to
preferred stock we issue will include the following provisions:
Dividends and Other Distributions. Each time
we pay a cash dividend or make any other type of cash
distribution with regard to preferred stock of a series, the
depositary will distribute to the holder of record of each
depositary share relating to that series of preferred stock an
amount equal to the dividend or other distribution per
depositary share the depositary receives. If there is a
distribution of property other than cash, the depositary either
will distribute the property to the holders of depositary shares
in proportion to the depositary shares held by each of them, or
the depositary will, if we approve, sell the property and
distribute the net proceeds to the holders of the depositary
shares in proportion to the depositary shares held by them.
Withdrawal of Preferred Stock. A holder of
depositary shares will be entitled to receive, upon surrender of
depositary receipts representing depositary shares, the number
of whole or fractional shares of the applicable series of
preferred stock, and any money or other property, to which the
depositary shares relate.
Redemption of Depositary Shares. Whenever we
redeem shares of preferred stock held by a depositary, the
depositary will be required to redeem, on the same redemption
date, depositary shares constituting, in total, the number of
shares of preferred stock held by the depositary which we
redeem, subject to the depositarys receiving the
redemption price of those shares of preferred stock. If fewer
than all the depositary shares relating to a series are to be
redeemed, the depositary shares to be redeemed will be selected
by lot or by another method we determine to be equitable.
Voting. Any time we send a notice of meeting
or other materials relating to a meeting to the holders of a
series of preferred stock to which depositary shares relate, we
will provide the depositary with sufficient copies of those
materials so they can be sent to all holders of record of the
applicable depositary shares, and the depositary will send those
materials to the holders of record of the depositary shares on
the record date for the meeting. The depositary will solicit
voting instructions from holders of depositary shares and will
vote or not vote the preferred stock to which the depositary
shares relate in accordance with those instructions.
Liquidation Preference. Upon our liquidation,
dissolution or winding up, the holder of each depositary share
will be entitled to what the holder of the depositary share
would have received if the holder had owned the number of shares
(or fraction of a share) of preferred stock which is represented
by the depositary share.
Conversion. If shares of a series of preferred
stock are convertible into common stock or other of our
securities or property, holders of depositary shares relating to
that series of preferred stock will, if they surrender
depositary receipts representing depositary shares and
appropriate instructions to convert them, receive the shares of
common stock or other securities or property into which the
number of shares (or fractions of shares) of preferred stock to
which the depositary shares relate could at the time be
converted.
Amendment and Termination of a Deposit
Agreement. We and the depositary may amend a
deposit agreement, except that an amendment which materially and
adversely affects the rights of holders of depositary shares, or
would be materially and adversely inconsistent with the rights
granted to the holders of the preferred stock to which they
relate, must be approved by holders of at least two-thirds of
the outstanding depositary shares. No amendment will impair the
right of a holder of depositary shares to surrender the
depositary receipts evidencing those depositary shares and
receive the preferred stock to which they relate, except as
required to comply with law. We may terminate a deposit
agreement with the consent of holders of a
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majority of the depositary shares to which it relates. Upon
termination of a deposit agreement, the depositary will make the
whole or fractional shares of preferred stock to which the
depositary shares issued under the deposit agreement relate
available to the holders of those depositary shares. A deposit
agreement will automatically terminate if:
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All outstanding depositary shares to which it relates have been
redeemed or converted; or
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The depositary has made a final distribution to the holders of
the depositary shares issued under the deposit agreement upon
our liquidation, dissolution or winding up.
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Miscellaneous. There will be provisions:
(1) requiring the depositary to forward to holders of
record of depositary shares any reports or communications from
us which the depositary receives with respect to the preferred
stock to which the depositary shares relate; (2) regarding
compensation of the depositary; (3) regarding resignation
of the depositary; (4) limiting our liability and the
liability of the depositary under the deposit agreement (usually
to failure to act in good faith, gross negligence or willful
misconduct); and (5) indemnifying the depositary against
certain possible liabilities.
7
Each issue of warrants will be the subject of a warrant
agreement which will contain the terms of the warrants. We will
distribute a prospectus supplement with regard to each issue of
warrants. Each prospectus supplement will describe, as to the
warrants to which it relates:
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The securities which may be purchased by exercising the warrants
(which may be common stock, preferred stock, depositary shares
or units consisting of two or more of those types of securities);
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The exercise price of the warrants (which may be wholly or
partly payable in cash or wholly or partly payable with other
types of consideration);
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The period during which the warrants may be exercised;
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Any provision adjusting the securities which may be purchased on
exercise of the warrants and the exercise price of the warrants
in order to prevent dilution or otherwise;
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The place or places where warrants can be presented for exercise
or for registration of transfer or exchange; and
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Any other material terms of the warrants.
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CERTAIN
PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND
BYLAWS
The following description of the terms of our stock and of
certain provisions of Maryland law is only a summary. This
summary is not complete and is qualified by the provisions of
our charter and bylaws, and the Maryland General Corporation
Law. See Incorporation Of Certain Documents By
Reference.
Classification
of Our Board
Our bylaws provide that the number of directors may be
established by our board but may not be fewer than three nor
more than fifteen. Any vacancy will be filled, at any regular
meeting or at any special meeting called for that purpose, by a
majority of the remaining directors, except that a vacancy
resulting from an increase in the number of directors must be
filled by a majority of the entire board. Any director elected
to fill a vacancy by the Board would stand for election at the
next annual meeting.
Pursuant to our charter, our board is divided into three classes
of directors. Directors of each class serve for three-year terms
and each year one class of directors will be elected by the
stockholders. The number of directors in each class and the
expiration of the current term of each class term is as follows:
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Class I
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2 Directors
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Expires 2008
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Class II
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2 Directors
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Expires 2009
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Class III
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3 Directors
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Expires 2010
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We believe that the classification of our board helps to assure
the continuity and stability of our business strategies and
policies as determined by our board. Common stockholders have no
right to cumulative voting in the election of directors.
The classified board provision of our charter could have the
effect of making the replacement of incumbent directors more
time-consuming and difficult. At least two annual meetings of
stockholders, instead of one, will generally be required to
effect a change in a majority of our board. Thus, the classified
board provision could increase the likelihood that incumbent
directors will retain their positions. The staggered terms of
directors may delay, defer or prevent a tender offer or an
attempt to change control of our company, even though the tender
offer or change in control might be in the best interest of the
stockholders.
Removal
of Directors
Our charter provides that a director may be removed only for
cause and only by the affirmative vote of at least 80% of the
votes entitled to be cast in the election of directors. This
provision, when coupled with the provision in
8
our bylaws authorizing our board to fill vacant directorships,
precludes stockholders from removing incumbent directors except
for cause and by a substantial affirmative vote and filling the
vacancies created by the removal with their own nominees.
Business
Combinations
Under Maryland law, business combinations between a
Maryland corporation and an interested stockholder or an
affiliate of an interested stockholder are prohibited for five
years after the most recent date on which the interested
stockholder becomes an interested stockholder. These business
combinations include a merger, consolidation, share exchange,
or, in circumstances specified in the statute, an asset transfer
or issuance or reclassification of equity securities. An
interested stockholder is defined as:
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any person who beneficially owns ten percent or more of the
voting power of the corporations shares; or
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an affiliate or associate of the corporation who, at any time
within the two-year period prior to the date in question, was
the beneficial owner of ten percent or more of the voting power
of the then outstanding voting stock of the corporation.
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A person is not an interested stockholder under the statute if
the board of directors approved in advance the transaction by
which he or she otherwise would have become an interested
stockholder. However, in approving a transaction, the 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.
After the five-year prohibition, any business combination
between the Maryland corporation and an interested stockholder
generally must be recommended by the board of directors of the
corporation and approved by the affirmative vote of at least:
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80% of the votes entitled to be cast by holders of outstanding
shares of voting stock of the corporation; and
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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.
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These super-majority vote requirements do not apply if the
corporations common stockholders receive a minimum price,
as defined under Maryland law, for their shares in the form of
cash or other consideration in the same form as previously paid
by the interested stockholder for its shares.
The business combination statute may discourage others from
trying to acquire control of us and increase the difficulty of
consummating any offer.
Control
Share Acquisitions
Maryland law provides that control shares of a Maryland
corporation acquired in a control share acquisition have no
voting rights except to the extent approved by a vote of
two-thirds of the votes entitled to be cast on the matter.
Shares owned by the acquiror, by officers or by directors who
are employees of the corporation are excluded from shares
entitled to vote on the matter. Control shares are voting shares
of stock which, if aggregated with all other shares of stock
owned by the acquiror or in respect of which the acquiror is
able to exercise or direct the exercise of voting power (except
solely by virtue of a revocable proxy), would entitle the
acquiror to exercise voting power in electing directors within
one of the following ranges of voting power:
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one-tenth or more but less than one-third;
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one-third or more but less than a majority; or
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a majority or more of all voting power.
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Control shares do not include shares the acquiring person is
then entitled to vote as a result of having previously obtained
stockholder approval. A control share acquisition means the
acquisition of control shares, subject to certain exceptions.
9
A person who has made or proposes to make a control share
acquisition may compel the board of directors of the corporation
to call a special meeting of stockholders to be held within
50 days of demand to consider the voting rights of the
shares. The right to compel the calling of a special meeting is
subject to the satisfaction of certain conditions, including an
undertaking to pay the expenses of the meeting. 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 the corporation may redeem for
fair value any or all of the control shares, except those for
which voting rights have previously been approved. The right of
the corporation to redeem control shares is subject to certain
conditions and limitations. Fair value is 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
acquiror or of any meeting of stockholders at which the voting
rights of the shares are considered and not approved. If voting
rights for control shares are approved at a stockholders meeting
and the acquiror 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 appraisal rights may not be less than the highest
price per share paid by the acquiror in the control share
acquisition.
The control share acquisition statute does not apply (a) to
shares acquired in a merger, consolidation or share exchange if
the corporation is a party to the transaction, or (b) to
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 America First
Companies, L.L.C., any of its present or future affiliates and
associates or any person acting in concert or as part of a group
with any of the foregoing persons. There can be no assurance
that this provision will not be amended or eliminated at any
time in the future.
Amendment
to Our Charter
Our charter may be amended only by the affirmative vote of the
holders of not less than a majority of all of the votes entitled
to be cast on the matter; provided, however, that certain
amendments related to our board, indemnification, exculpation,
advance notice of stockholder proposals and the charter
amendment section require the affirmative vote of not less than
80% of all the votes entitled to be cast on such matters.
Dissolution
of Our Company
The dissolution of our company must be approved by the
affirmative vote of the holders of not less than a majority of
all of the votes entitled to be cast on the matter.
Advance
Notice of Director Nominations and New Business
Our charter and bylaws provide that with respect to an annual
meeting of stockholders, nominations of individuals for election
to our board and the proposal of business to be considered by
stockholders may be made only (i) pursuant to our notice of
the meeting, (ii) by our board or (iii) by a
stockholder who has complied with the advance notice procedures
of the bylaws. With respect to special meetings of stockholders,
proposals of business to be considered by stockholders may be
made only (i) pursuant to our notice of the meeting,
(ii) by our board or (iii) by a stockholder who has
complied with the advance notice provisions of the bylaws.
Anti-takeover
Effect of Certain Provisions of Maryland Law and of Our Charter
and Bylaws
The business combination provisions and the control share
acquisition provisions of Maryland law, the provisions of our
charter on classification of our board and removal of directors
and the advance notice provisions of our bylaws could delay,
defer or prevent a transaction or a change in control of our
company that might involve a premium price for holders of common
stock or otherwise be in their best interest.
10
MATERIAL
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material U.S. federal
income tax considerations relating to our qualification and
taxation as a REIT and the acquisition, holding, and disposition
of our capital stock. For purposes of this section, references
to we, our, us or our
company mean only MFA Mortgage Investments, Inc. and not
our subsidiaries or other lower-tier entities, except as
otherwise indicated. This summary is based upon the Internal
Revenue Code, the regulations promulgated by the
U.S. Treasury Department (or the Treasury regulations),
current administrative interpretations and practices of the
Internal Revenue Service (or IRS) (including administrative
interpretations and practices expressed in private letter
rulings which are binding on the IRS only with respect to the
particular taxpayers who requested and received those rulings)
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. No advance ruling has been or will be sought from the IRS
regarding any matter discussed in this summary. The summary is
also based upon the assumption that the operation of our
company, and of its subsidiaries and other lower-tier and
affiliated entities, will, in each case, be in accordance with
its 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 stockholder in light of its investment
or tax circumstances or to stockholders subject to special tax
rules, such as:
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U.S. expatriates;
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persons who mark-to-market our capital stock;
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subchapter S corporations;
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U.S. stockholders (as defined below) whose functional
currency is not the U.S. dollar;
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financial institutions;
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insurance companies;
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broker-dealers;
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regulated investment companies (or RICs);
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trusts and estates;
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holders who receive our capital stock through the exercise of
employee stock options or otherwise as compensation;
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persons holding our capital stock as part of a
straddle, hedge, conversion
transaction, synthetic security or other
integrated investment;
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persons subject to the alternative minimum tax provisions of the
Internal Revenue Code;
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persons holding their interest through a partnership or similar
pass-through entity;
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persons holding a 10% or more (by vote or value) beneficial
interest in us; and, except to the extent discussed below:
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tax-exempt organizations; and
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non-U.S. stockholders
(as defined below).
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This summary assumes that stockholders will hold our capital
stock as capital assets, which generally means as property held
for investment.
THE U.S. FEDERAL INCOME TAX TREATMENT OF HOLDERS OF OUR
CAPITAL STOCK DEPENDS IN SOME INSTANCES ON DETERMINATIONS OF
FACT AND INTERPRETATIONS OF COMPLEX PROVISIONS OF
U.S. FEDERAL INCOME TAX LAW FOR WHICH NO CLEAR PRECEDENT OR
AUTHORITY MAY BE AVAILABLE. IN ADDITION, THE TAX CONSEQUENCES OF
HOLDING OUR CAPITAL STOCK TO ANY PARTICULAR STOCKHOLDER WILL
DEPEND ON THE STOCKHOLDERS PARTICULAR TAX
11
CIRCUMSTANCES. YOU ARE URGED TO CONSULT YOUR TAX ADVISOR
REGARDING THE U.S. FEDERAL, STATE, LOCAL, AND FOREIGN
INCOME AND OTHER TAX CONSEQUENCES TO YOU, IN LIGHT OF YOUR
PARTICULAR INVESTMENT OR TAX CIRCUMSTANCES, OF ACQUIRING,
HOLDING, AND DISPOSING OF OUR CAPITAL STOCK.
Taxation
of Our Company General
We have elected to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code, commencing with our
taxable year ended December 31, 1998. We believe that we
have been organized and operated in a manner that allows us to
qualify for taxation as a REIT under the Internal Revenue Code,
and we intend to continue to be organized and operate in such a
manner.
In the opinion of Clifford Chance US LLP, our counsel,
commencing with our taxable year ended December 31, 1998,
we have been organized and operated in conformity with the
requirements for qualification and taxation as a REIT under the
Code and our proposed method of operation will enable us to
continue to so qualify. Clifford Chance US LLPs opinion
relies, with respect to all taxable periods beginning prior to
January 1, 2002, solely on an opinion issued by Kutak Rock
LLP, which previously served as our counsel. It must be
emphasized that Clifford Chance US LLPs opinion is based
and conditioned upon certain assumptions and representations
made by us as to factual matters (including our representations
concerning our income and properties and the past, present, and
future conduct of our business operations as set forth in this
prospectus and factual certificates provided by our management).
The opinion is expressed as of the date of this prospectus and
Clifford Chance US LLP has no obligation to advise of any
subsequent change in the matters stated, represented or assumed
or any subsequent change in the applicable law. Moreover, our
qualification and taxation as a REIT depends upon our ability to
meet, through actual annual operating results, distribution
levels and diversity of stock ownership, the various
requirements imposed under the Internal Revenue Code as
discussed below, the results of which will not be reviewed by
Clifford Chance US LLP. Accordingly, no assurance can be given
that the actual results of our operation for any one taxable
year have satisfied or will satisfy such requirements. See
Failure to Qualify. An opinion of
counsel is not binding on the IRS, and no assurance can be given
that the IRS will not challenge our qualification as a REIT.
Taxation
of REITs in General
As indicated above, qualification and taxation as a REIT depends
upon our ability to meet, on a continuing basis, various
qualification requirements imposed upon REITs by the Internal
Revenue Code. The material qualification requirements are
summarized below, under Requirements for
Qualification as a REIT. While we believe that we have
operated and intend to continue to operate so that we qualify as
a REIT, no assurance can be given that the IRS will not
challenge our qualification as a REIT 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, we will generally be
entitled to a deduction for dividends that we pay and,
therefore, will not be subject to U.S. federal corporate
income tax on our net income that is currently distributed to
our stockholders. This treatment substantially eliminates the
double taxation at the corporate and stockholder
levels that results generally from investment in a corporation.
Rather, income generated by a REIT generally is taxed only at
the stockholder level, upon a distribution of dividends by the
REIT.
For tax years through 2010, stockholders who are individual
U.S. stockholders (as defined below) are generally taxed on
corporate dividends at a maximum rate of 15% (the same as
long-term capital gains), thereby substantially reducing, though
not completely eliminating, the double taxation that has
historically applied to corporate dividends. With limited
exceptions, however, dividends received by individual
U.S. stockholders from us or from other entities that are
taxed as REITs will continue to be taxed at rates applicable to
ordinary income, which will be as high as 35% through 2010.
Net operating losses, foreign tax credits and other tax
attributes of a REIT generally do not pass through to the
stockholders of the REIT, subject to special rules for certain
items, such as capital gains, recognized by REITs. See
Taxation of Taxable
U.S. Stockholders.
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Even if we qualify for taxation as a REIT, however, we will be
subject to U.S. federal income taxation as follows:
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We will be taxed at regular corporate rates on any undistributed
income, including undistributed net capital gains.
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We may be subject to the alternative minimum tax on
our items of tax preference, if any.
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If we have net income from prohibited transactions, which are,
in general, sales or other dispositions of 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.
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If we elect to treat property that we acquire in connection with
a foreclosure of a mortgage loan or from certain leasehold
terminations as foreclosure property, we may thereby
avoid (a) the 100% tax on gain from a resale of that
property (if the sale would otherwise constitute a prohibited
transaction) and (b) the inclusion of any income from such
property not qualifying for purposes of the REIT gross income
tests discussed below, but the income from the sale or operation
of the property may be subject to corporate income tax at the
highest applicable rate (currently 35%).
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If we fail to satisfy the 75% gross income test or the 95% gross
income test, as discussed below, but nonetheless maintain our
qualification as a REIT because other requirements are met, we
will be subject to a 100% tax on an amount equal to (a) the
greater of (1) the amount by which we fail the 75% gross
income test or (2) the amount by which we fail the 95%
gross income test, as the case may be, multiplied by (b) a
fraction intended to reflect our profitability.
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If we fail to satisfy any of the REIT asset tests, as described
below, other than a failure of the 5% or 10% REIT asset tests
that do not exceed a statutory de minimis amount as described
more fully below, but our failure is due to reasonable cause and
not due to willful neglect and we nonetheless maintain our REIT
qualification because of specified cure provisions, we will be
required to pay a tax equal to the greater of $50,000 or the
highest corporate tax rate (currently 35%) of the net income
generated by the nonqualifying assets during the period in which
we failed to satisfy the asset tests.
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If we fail to satisfy any provision of the Internal Revenue Code
that would result in our failure to qualify as a REIT (other
than a gross income or asset test requirement) and the violation
is due to reasonable cause, we may retain our REIT qualification
but we will be required to pay a penalty of $50,000 for each
such failure.
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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
(or the required distribution), we will be subject to a 4%
excise tax on the excess of the required distribution over the
sum of (1) the amounts actually distributed (taking into
account excess distributions from prior years), plus
(2) retained amounts on which income tax is paid at the
corporate level.
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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 our stockholders, as
described below in Requirements for
Qualification as a REIT.
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A 100% excise tax may be imposed on some items of income and
expense that are directly or constructively paid between us and
any taxable REIT subsidiaries (or TRSs) we may own if and to the
extent that the IRS successfully adjusts the reported amounts of
these items.
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If we acquire appreciated assets from a corporation that is not
a REIT in a transaction in which the adjusted tax basis of the
assets in our hands is determined by reference to the adjusted
tax basis of the assets in the hands of the non-REIT
corporation, we will be subject to tax on such appreciation at
the highest corporate income tax rate then applicable if we
subsequently recognize gain on a disposition of any such assets
during the
10-year
period following their acquisition from the non-REIT
corporation. The results described in this paragraph assume that
the non-REIT corporation will not elect, in lieu of this
treatment, to be subject to an immediate tax when the asset is
acquired by us.
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We will generally be subject to tax on the portion of any excess
inclusion income derived from an investment in residual
interests in real estate mortgage investment conduits (or
REMICs) to the extent our stock is held by specified tax-exempt
organizations not subject to tax on unrelated business taxable
income. To the extent that we own a REMIC residual interest
through a TRS, we will not be subject to this tax. For a
discussion of excess inclusion income, see
Excess Inclusion Income.
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We may elect to retain and pay income tax on our net long-term
capital gain. In that case, a stockholder would include its
proportionate share of our undistributed long-term capital gain
(to the extent we make a timely designation of such gain to the
stockholder) in its income, would be deemed to have paid the tax
that we paid on such gain, and would be allowed a credit for its
proportionate share of the tax deemed to have been paid, and an
adjustment would be made to increase the stockholders
basis in our capital stock.
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We may have subsidiaries or own interests in other lower-tier
entities that are subchapter C corporations, the earnings of
which could be subject to U.S. federal corporate income tax.
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In addition, we may be subject to a variety of taxes other than
U.S. federal income tax, including payroll taxes and state,
local, and foreign income, franchise property and other taxes.
We could also be subject to tax in situations and on
transactions not presently contemplated.
Requirements
for Qualification as a REIT
The Internal Revenue 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
the special Internal Revenue Code provisions applicable to REITs;
(4) that is neither a financial institution nor an
insurance company subject to specific provisions of the Internal
Revenue Code;
(5) the beneficial ownership of which is held by 100 or
more persons during at least 335 days of a taxable year of
12 months, or during a proportionate part of a taxable year
of less than 12 months;
(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 Internal Revenue Code to include specified
entities);
(7) which meets other tests described below, including with
respect to the nature of its income and assets and the amount of
its distributions; and
(8) that makes an election to be a REIT for the current
taxable year or has made such an election for a previous taxable
year that has not been terminated or revoked.
The Internal Revenue Code provides that conditions
(1) through (4) must be met during the entire year.
Conditions (5) and (6) do not apply to the first
taxable year for which an election is made to be taxed as a REIT.
We believe that we currently satisfy conditions (1) through
(8) above. In addition, our charter provides for
restrictions regarding ownership and transfer of our capital
stock. These restrictions are intended to assist us in
satisfying the share ownership requirements described in
(5) and (6) above. To maintain compliance with the
share ownership requirements, we are generally required to
maintain records regarding the actual ownership of our shares.
To do so, we must demand written statements each year from the
record holders of significant percentages of our stock, in which
the record holders are to disclose the actual owners of the
shares (i.e., the persons required to include in gross income
the dividends paid by us). A list of those persons failing or
refusing to comply with this demand must be maintained as part
of our records. Failure by us to comply with these
record-keeping requirements could subject us to monetary
penalties. If we satisfy these requirements and have no reason
to know that condition (6) is not satisfied, we will be
deemed to have satisfied such condition. A stockholder that
fails or refuses to comply with
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the demand is required by Treasury regulations to submit a
statement with its tax return disclosing the actual ownership of
the 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 satisfy
this requirement.
Effect of
Subsidiary Entities
Ownership
of Partnership Interests
In the case of a REIT that is a partner in a partnership,
Treasury regulations provide that the REIT is deemed to own its
proportionate share of the partnerships assets and to earn
its proportionate share of the partnerships gross income
based on its pro rata share of capital interests in the
partnership for purposes of the asset and gross income tests
applicable to REITs, as described below. However, solely for
purposes of the 10% value test, described below, the
determination of a REITs interest in partnership assets
will be based on the REITs proportionate interest in any
securities issued by the partnership, excluding for these
purposes, certain excluded securities as described in the
Internal Revenue Code. In addition, the assets and gross income
of the partnership generally are deemed to retain the same
character in the hands of the REIT. Thus, our proportionate
share of the assets and items of income of partnerships in which
we own an equity interest is treated as assets and items of
income of our company for purposes of applying the REIT
requirements described below. Consequently, to the extent that
we directly or indirectly hold a preferred or other equity
interest in a partnership, the partnerships assets and
operations may affect our ability to qualify as a REIT, even
though we may have no control or only limited influence over the
partnership.
Disregarded
Subsidiaries
If a REIT owns a corporate subsidiary that is a qualified
REIT subsidiary, that subsidiary is disregarded for
U.S. federal income tax purposes, and all assets,
liabilities and items of income, deduction and credit of the
subsidiary are treated as assets, liabilities and items of
income, deduction and credit of the REIT itself, including for
purposes of the gross income and asset tests applicable to
REITs, as summarized below. A qualified REIT subsidiary is any
corporation, other than a TRS, that is wholly-owned by a REIT,
by other disregarded subsidiaries or by a combination of the
two. Single member limited liability companies that are
wholly-owned by a REIT are also generally disregarded as
separate entities for U.S. federal income tax purposes,
including for purposes of the REIT gross income and asset tests.
Disregarded subsidiaries, along with partnerships in which we
hold an equity interest, are sometimes referred to herein as
pass-through subsidiaries.
In the event that a disregarded subsidiary ceases to be
wholly-owned by us (for example, if any equity interest in the
subsidiary is acquired by a person other than us or another
disregarded subsidiary of us), the subsidiarys separate
existence would no longer be disregarded for U.S. federal
income tax purposes. Instead, it 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 tests applicable to REITs,
including the requirement that REITs generally may not own,
directly or indirectly, more than 10% of the value or voting
power of the outstanding securities of another corporation. See
Asset Tests and Gross
Income Tests.
Taxable
REIT Subsidiaries
A REIT, in general, may jointly elect with a subsidiary
corporation, whether or not wholly-owned, to treat the
subsidiary corporation as a TRS. The separate existence of a TRS
or other taxable corporation, unlike a disregarded subsidiary as
discussed above, is not ignored for U.S. federal income tax
purposes. Accordingly, such an entity would generally be subject
to corporate income tax on its earnings, which may reduce the
cash flow generated by us and our subsidiaries in the aggregate
and our ability to make distributions to our stockholders. A
TRSs ability to derive income from lodging and health care
related properties is subject to certain limitations under the
Internal Revenue Code.
A REIT is not treated 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 the subsidiary
is an asset in the hands of the REIT, and
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the REIT generally recognizes as income the dividends, if any,
that it receives from the subsidiary. This treatment can affect
the gross income and asset test calculations that apply to the
REIT, as described below. Because a parent REIT does not include
the assets and income of such subsidiary corporations in
determining the parents compliance with the REIT
requirements, such entities may be used by the parent REIT to
undertake indirectly activities that the REIT rules might
otherwise preclude it from doing directly or through
pass-through subsidiaries or render commercially unfeasible (for
example, activities that give rise to certain categories of
income such as non-qualifying hedging income or inventory
sales). If dividends are paid to us by one or more TRSs we may
own then a portion of the dividends that we distribute to
stockholders who are taxed at individual rates generally will be
eligible for taxation at preferential qualified dividend income
tax rates rather than at ordinary income rates. See
Taxation of Taxable
U.S. Stockholders and Annual
Distribution Requirements.
Certain restrictions imposed on TRSs are intended to ensure that
such entities will be subject to appropriate levels of
U.S. federal income taxation. First, a TRS may not deduct
interest payments made in any year to an affiliated REIT to the
extent that such payments exceed, generally, 50% of the
TRSs adjusted taxable income for that year (although the
TRS may carry forward to, and deduct in, a succeeding year the
disallowed interest amount if the 50% test is satisfied in that
year). In addition, if amounts are paid to a REIT or deducted by
a TRS due to transactions between a REIT, its tenants
and/or the
TRS, that exceed the amount that would be paid to or deducted by
a party in an arms-length transaction, the REIT generally
will be subject to an excise tax equal to 100% of such excess.
We had made a TRS election with respect to our ownership
interest in Retirement Centers Corporation (or RCC), which
election was effective, for U.S. federal income tax
purposes, as of March 30, 2002. During the time RCC was our
TRS, we and RCC engaged in certain transactions pursuant to
which RCC made interest and other payments to us. We believe
that such transactions were entered into at arms length.
However, no assurance can be given that any such payments would
not result in the limitation on interest deductions or 100%
excise tax provisions being applicable to us and RCC. We,
together with RCC, revoked RCCs election to be a TRS on
January 2, 2003. As a result, effective January 2,
2003, RCC became a qualified REIT subsidiary.
Gross
Income Tests
In order to maintain our qualification as a REIT, we annually
must satisfy two gross income tests. 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, must be derived from investments relating to
real property or mortgages on real property, including
rents from real property, dividends received from
and gains from the disposition of other Shares of REITs,
interest income derived from mortgage loans secured by real
property (including certain types of MBS), and gains from the
sale of real estate assets, as well as income from certain kinds
of temporary investments. Second, at least 95% of our gross
income in each taxable year, excluding gross income from
prohibited transactions, must be derived from some combination
of income that qualifies under the 75% income test described
above, as well as other dividends, interest, and gain from the
sale or disposition of stock or securities, which need not have
any relation to real property.
For purposes of the 75% and 95% gross income tests, a REIT is
deemed to have earned a proportionate share of the income earned
by any partnership, or any limited liability company treated as
a partnership for U.S. federal income tax purposes, in
which it owns an interest, which share is determined by
reference to its capital interest in such entity, and is deemed
to have earned the income earned by any qualified REIT
subsidiary.
Interest
Income
Interest income constitutes qualifying mortgage interest for
purposes of the 75% gross income test to the extent that the
obligation 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 the highest
principal amount of the loan outstanding during a taxable year
exceeds the fair market value of the real property on the date
that we acquired the mortgage loan, the interest income will be
apportioned between the real property and the other property,
and our income from the arrangement will qualify for purposes of
the 75% gross income test only to the extent that the
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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%
gross 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 (or 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 property
is not inventory or dealer property in the hands of the borrower
or us.
To the extent that we derive interest income from a loan where
all or a portion of the amount of interest 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 the net income or profits of any
person. This limitation does not apply, however, to a mortgage
loan where the borrower derives substantially all of its income
from the property from the leasing of substantially all of its
interest in the property to tenants, to the extent that the
rental income derived by the borrower would qualify as rents
from real property had it been earned directly by us.
Any amount includible in our gross income with respect to a
regular or residual interest in a REMIC generally is treated as
interest on an obligation secured by a mortgage on real
property. If, however, less than 95% of the assets of a REMIC
consists of real estate assets (determined as if we held such
assets), we will be treated as receiving directly our
proportionate share of the income of the REMIC.
We believe that the interest, original issue discount, and
market discount income that we receive from our mortgage related
securities generally will be qualifying income for purposes of
both gross income tests. However, to the extent that we own
non-REMIC collateralized mortgage obligations or other debt
instruments secured by mortgage loans (rather than by real
property) or secured by non-real estate assets, or debt
securities that are not secured by mortgages on real property or
interests in real property, the interest income received with
respect to such securities generally will be qualifying income
for purposes of the 95% gross income test, but not the 75% gross
income test. In addition, the loan amount of a mortgage loan
that we own may exceed the value of the real property securing
the loan. In that case, a portion of the income from the loan
will be qualifying income for purposes of the 95% gross income
test, but not the 75% gross income test.
Dividend
Income
We may indirectly receive distributions from TRSs or other
corporations that are not REITs or qualified REIT subsidiaries.
These distributions will be classified 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 under the 75% gross income test. Any dividends received by
us from a REIT will be qualifying income in our hands for
purposes of both the 95% and 75% gross income tests.
Foreign Investments. To the extent that we
hold or acquire foreign investments, such as CMBS denominated in
foreign currencies, such investments may generate foreign
currency gains and losses. Foreign currency gains are generally
treated as income that does not qualify under the 95% or 75%
gross income tests. However, under recent IRS guidance, if
foreign currency gain is recognized with respect to income which
otherwise qualifies for purposes of the 95% or 75% gross income
tests, then such foreign currency gain will also qualify for
either the 95% or 75% gross income tests, respectively. No
assurance can be given that any foreign currency gains
recognized by us directly or through pass-through subsidiaries
will not adversely affect our ability to satisfy the REIT
qualification requirements.
Hedging
Transactions
We 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 swaps, caps, options, futures
contracts, forward rate agreements or similar financial
instruments. For our taxable years ended prior to
January 1, 2005, to the extent that we entered into hedging
transactions to reduce our interest rate risk on indebtedness
incurred to acquire or carry real estate assets, any income or
gain from such hedging transactions should be qualifying income
for purposes of the 95% gross income test, but not the 75% gross
income test. For taxable years commencing with our taxable year
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ended December 31, 2005, except to the extent provided by
Treasury regulations, any income from a hedging transaction we
enter into in the normal course of our business primarily to
manage risk of interest rate or price changes or currency
fluctuations with respect to borrowings made or to be made, or
ordinary obligations incurred or to be incurred, to acquire or
carry real estate assets, which is clearly identified as
specified in Treasury regulations before the close of the day on
which it was acquired, originated, or entered into, including
gain from the sale or disposition of such a transaction, will
not constitute gross income for purposes of the 95% gross income
test (and will generally constitute non-qualifying income for
purposes of the 75% gross income test). 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 both of the 75% and 95% gross income
tests. We intend to structure any hedging transactions in a
manner that does not jeopardize our qualification as a REIT.
Rents
from Real Property
To the extent that we own real property or interests therein,
rents we receive qualify as rents from real property
in satisfying the gross income tests described above, only if
several conditions are met, including the following. If rent
attributable to personal property leased in connection with real
property is greater than 15% of the total rent received under
any particular lease, then all of the rent attributable to such
personal property will not qualify as rents from real property.
The determination of whether an item of personal property
constitutes real or personal property under the REIT provisions
of the Internal Revenue Code is subject to both legal and
factual considerations and is therefore subject to different
interpretations.
In addition, in order for rents received by us to qualify as
rents from real property, the rent must not be based
in whole or in part on the income or profits of any person.
However, an amount will not be excluded from rents from real
property solely by being based on a fixed percentage or
percentages of sales or if it is based on the net income of a
tenant which derives substantially all of its income with
respect to such property from subleasing of substantially all of
such property, to the extent that the rents paid by the
subtenants would qualify as rents from real property, if earned
directly by us. Moreover, for rents received to qualify as
rents from real property, we generally must not
operate or manage the property or furnish or render certain
services to the tenants of such property, other than through an
independent contractor who is adequately compensated
and from which we derive no income or through a TRS. We are
permitted, however, to perform services that are usually
or customarily rendered in connection with the rental of
space for occupancy only and are not otherwise considered
rendered to the occupant of the property. In addition, we may
directly or indirectly provide non-customary services to tenants
of our properties without disqualifying all of the rent from the
property if the payment for such services does not exceed 1% of
the total gross income from the property. In such a case, only
the amounts for non-customary services are not treated as rents
from real property and the provision of the services does not
disqualify the related rent.
Rental income will qualify as rents from real property only to
the extent that we do not directly or constructively own,
(1) in the case of any tenant which is a corporation, stock
possessing 10% or more of the total combined voting power of all
classes of stock entitled to vote, or 10% or more of the total
value of shares of all classes of stock of such tenant, or
(2) in the case of any tenant which is not a corporation,
an interest of 10% or more in the assets or net profits of such
tenant.
Failure
to Satisfy the Gross Income Tests
We intend to monitor our sources of income, including any
non-qualifying income received by us, so as to ensure our
compliance with the gross income tests. 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 the year if we are
entitled to relief under applicable provisions of the Internal
Revenue Code. These relief provisions will generally be
available if the failure of our company to meet these tests was
due to reasonable cause and not due to willful neglect and,
following the identification of such failure, we set forth a
description of each item of our gross income that satisfies the
gross income tests in a schedule for the taxable year filed in
accordance with the Treasury regulation. 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
involving us, we will not qualify as a REIT. As discussed above
under Taxation of REITs in General, even
where these relief provisions apply, a tax would be imposed upon
the profit attributable to the amount by which we fail to
satisfy the particular gross income test.
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Asset
Tests
We, at the close of each calendar quarter, must also satisfy
four 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,
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,
stock of other corporations that qualify as REITs and certain
kinds of MBS and mortgage loans. Regular or residual interest in
REMICs are generally treated as a real estate asset. If,
however, less than 95% of the assets of a REMIC consists of real
estate assets (determined as if we held such assets), we will be
treated as owning our proportionate share of the assets of the
REMIC. 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 issuers securities owned by
us may not exceed 5% of the value of our gross assets. Third, we
may not own more than 10% of any one issuers outstanding
securities, as measured by either voting power or value. Fourth,
the aggregate value of all securities of TRSs held by us may not
exceed 20% of the value of our gross assets.
The 5% and 10% asset tests do not apply to securities of TRSs
and qualified REIT subsidiaries. The 10% value test does not
apply to certain straight debt and other excluded
securities, as described in the Internal Revenue Code, including
but not limited to any loan to an individual or an estate, any
obligation to pay rents from real property and any security
issued by a REIT. In addition, (a) a REITs interest
as a partner in a partnership is not considered a security for
purposes of applying the 10% value test; (b) any debt
instrument issued by a partnership (other than straight debt or
other excluded security) will not be considered a security
issued by the partnership if at least 75% of the
partnerships gross income is derived from sources that
would qualify for the 75% REIT gross income test; and
(c) any debt instrument issued by a partnership (other than
straight debt or other excluded security) will not be considered
a security issued by the partnership to the extent of the
REITs interest as a partner in the partnership.
For purposes of the 10% value test, straight debt
means a written unconditional promise to pay on demand on a
specified date a sum certain in money if (i) the debt is
not convertible, directly or indirectly, into stock,
(ii) the interest rate and interest payment dates are not
contingent on profits, the borrowers discretion, or
similar factors other than certain contingencies relating to the
timing and amount of principal and interest payments, as
described in the Internal Revenue Code and (iii) in the
case of an issuer which is a corporation or a partnership,
securities that otherwise would be considered straight debt will
not be so considered if we, and any of our controlled
taxable REIT subsidiaries as defined in the Internal
Revenue Code, hold any securities of the corporate or
partnership issuer which: (a) are not straight debt or
other excluded securities (prior to the application of this
rule), and (b) have an aggregate value greater than 1% of
the issuers outstanding securities (including, for the
purposes of a partnership issuer, our interest as a partner in
the partnership).
We currently own 100% of RCC. RCC elected to be taxed as a REIT
for its taxable year ended December 31, 2001 and jointly
elected, together with us, to be treated as a TRS effective as
of March 30, 2002. On January 2, 2003, we, together
with RCC, revoked RCCs election to be treated as a TRS. As
a result, effective January 2, 2003, RCC became a qualified
REIT subsidiary. We believe that RCC met all of the requirements
for taxation as a REIT with respect to its taxable year ended
December 31, 2001 and as a TRS commencing as of
March 30, 2002 through January 2, 2003; however, the
sections of the Code that relate to qualification as a REIT are
highly technical and complex and there are certain requirements
that must be met in order for RCC to have qualified as a TRS
effective March 30, 2002. Since RCC was and we believe has
been subject to taxation as a REIT or a TRS, as the case may be,
at the close of each quarter of our taxable years beginning with
our taxable year ended December 31, 2001, until such time
RCC became a qualified REIT subsidiary, we believe that our
ownership interest in RCC did not cause us to fail to satisfy
the 10% value test. In addition, we believe that we have at all
times prior to October 1, 2002 owned less than 10% of the
voting securities of RCC. No assurance, however, can be given
that RCC in fact qualified as a REIT for its taxable year ended
December 31, 2001 or as a TRS as of March 30, 2002,
that the non-voting preferred stock of RCC owned by us would not
be deemed to be voting stock for purposes of the
asset tests or, as a result of any of the foregoing, that we
have qualified or will continue to qualify as a REIT.
After initially meeting the asset tests at the close of any
quarter, we will not lose our qualification as a REIT for
failure to satisfy the asset tests at the end of a later quarter
solely by reason of changes in asset values. If we fail to
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satisfy the asset tests because we acquire securities during a
quarter, we can cure this failure by disposing of sufficient
non-qualifying assets within 30 days after the close of
that quarter. If we fail the 5% asset test, or the 10% vote or
value asset tests at the end of any quarter and such failure is
not cured within 30 days thereafter, we may dispose of
sufficient assets (generally within six months after the last
day of the quarter in which our identification of the failure to
satisfy these asset tests occurred) to cure such a violation
that does not exceed the lesser of 1% of our assets at the end
of the relevant quarter or $10,000,000. If we fail any of the
other asset tests or our failure of the 5% and 10% asset tests
is in excess of the de minimis amount described above, as long
as such failure was due to reasonable cause and not willful
neglect, we are permitted to avoid disqualification as a REIT,
after the
30-day cure
period, by taking steps including the disposition of sufficient
assets to meet the asset test (generally within six months after
the last day of the quarter in which our identification of the
failure to satisfy the REIT asset test occurred) and paying a
tax equal to the greater of $50,000 or the highest corporate
income tax rate (currently 35%) of the net income generated by
the non-qualifying assets during the period in which we failed
to satisfy the asset test.
We expect that the assets and mortgage related securities that
we own generally will be qualifying assets for purposes of the
75% asset test. We believe that our holdings of securities and
other assets will be structured in a manner that will comply
with the foregoing REIT asset requirements and intend to monitor
compliance on an ongoing basis. Moreover, values of some assets
may not be susceptible to a precise determination and are
subject to change in the future. Furthermore, the proper
classification of an instrument as debt or equity for
U.S. federal income tax purposes may be uncertain in some
circumstances, which could affect the application of the REIT
asset tests. Accordingly, there can be no assurance that the IRS
will not contend that our interests in subsidiaries or in the
securities of other issuers (including REIT issuers) cause a
violation of the REIT asset tests.
In addition, we have entered into and we intend to continue to
enter into repurchase agreements under which we nominally sell
certain of our assets to a counterparty and simultaneously enter
into an agreement to repurchase the sold assets. We believe that
we have been and will continue to be treated for
U.S. federal income tax purposes as the owner of the assets
that are the subject of any such agreement notwithstanding that
we may transfer record ownership of the assets to the
counterparty during the term of the agreement. It is possible,
however, that the IRS could assert that we did not own the
assets during the term of the repurchase agreement, in which
case we could fail to qualify as a REIT.
Annual
Distribution Requirements
In order to qualify as a REIT, we are required to distribute
dividends, other than capital gain dividends, to our
stockholders in an amount at least equal to:
(a) the sum of:
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90% of our REIT taxable income (computed without
regard to our deduction for dividends paid and our net capital
gains); and
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90% of the net income (after tax), if any, from foreclosure
property (as described below); minus
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(b) the sum of specified items of non-cash income that
exceeds a percentage of our income.
These distributions must be paid in the taxable year to which
they relate or in the following taxable year if such
distributions are declared in October, November or December of
the taxable year, are payable to stockholders of record on a
specified date in any such month and are actually paid before
the end of January of the following year. Such distributions are
treated as both paid by us and received by each stockholder on
December 31 of the year in which they are declared. In addition,
at our election, a distribution for a taxable year may be
declared before we timely file our tax return for the year and
be paid with or before the first regular dividend payment after
such declaration, provided that such payment is made during the
12-month
period following the close of such taxable year. These
distributions are taxable to our stockholders in the year in
which paid, even though the distributions relate to our prior
taxable year for purposes of the 90% distribution requirement.
In order for distributions to be counted towards our
distribution requirement and to give rise to a tax deduction by
us, they must not be preferential dividends. A
dividend is not a preferential dividend if it is pro rata among
all
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outstanding shares of stock within a particular class and is in
accordance with the preferences among different classes of stock
as set forth in the organizational documents.
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 ordinary corporate tax rates on the
retained portion. In addition, 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 to have our
stockholders include their proportionate share of such
undistributed long-term capital gains in income and receive a
corresponding credit for their proportionate share of the tax
paid by us. Our stockholders would then increase the adjusted
basis of their stock in us by the difference between the
designated amounts included in their long-term capital gains and
the tax deemed paid with respect to their proportionate shares.
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 will be subject to a 4% excise tax on the excess of
such required distribution over the sum of (x) the amounts
actually distributed (taking into account excess distributions
from prior periods) and (y) the amounts of income retained
on which we have paid corporate income tax. We intend to make
timely distributions so that we are not subject to the 4% excise
tax.
It is possible that we, from time to time, may not have
sufficient cash to meet the distribution requirements due to
timing differences between (a) the actual receipt of cash
and (b) the inclusion of items in income by us for
U.S. federal income tax purposes. In the event that such
timing differences occur, in order to meet the distribution
requirements, it might be necessary to arrange for short-term,
or possibly long-term, borrowings or to pay dividends in the
form of taxable in-kind distributions of property.
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 dividends paid for the earlier
year. In this case, we may be able to avoid losing our
qualification as a REIT or being taxed on amounts distributed as
deficiency dividends. However, we will be required to pay
interest and a penalty based on the amount of any deduction
taken for deficiency dividends.
Recordkeeping
Requirements
We are required to maintain records and request on an annual
basis information from specified stockholders. These
requirements are designed to assist us in determining the actual
ownership of our outstanding stock and maintaining our
qualifications as a REIT.
Excess
Inclusion Income
If we acquire a residual interest in a REMIC, we may realize
excess inclusion income. If we are deemed to have issued debt
obligations having two or more maturities, the payments on which
correspond to payments on mortgage loans owned by us, such
arrangement will be treated as a taxable mortgage pool for
U.S. federal income tax purposes and, as a result, we may
also realize excess inclusion income. If all or a portion of our
company is treated as a taxable mortgage pool or we own a
residual interest in a REMIC, our qualification as a REIT
generally should not be impaired; however, a portion of our REIT
taxable income may be characterized as excess inclusion income
and allocated to our stockholders. Any excess inclusion income:
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could not be offset by net operating losses of a stockholder;
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in the case of a stockholder that is a REIT, a RIC, a common
trust fund or other pass-through entity, would be considered
excess inclusion income of such entity and such entity will be
subject to tax at the highest corporate tax rate on any excess
inclusion income allocated to their owners that are disqualified
organizations;
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would be subject to tax as unrelated business taxable income to
a tax-exempt holder;
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would be subject to the application of the U.S. federal
income tax withholding (without reduction pursuant to any
otherwise applicable income tax treaty) with respect to amounts
allocable to
non-U.S. stockholders; and
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would be taxable (at the highest corporate tax rates) to us,
rather than our stockholders, to the extent allocable to our
stock held in record name by disqualified organizations
(generally, tax-exempt entities not subject to unrelated
business income tax, including governmental organizations).
Nominees or other broker/dealers who hold our stock on behalf of
disqualified organizations are subject to this tax on the
portion of our excess inclusion income allocable to the capital
stock held on behalf of disqualified organizations.
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The manner in which excess inclusion income would be allocated
among shares of different classes of stock is not clear under
the current law. Tax-exempt investors, RIC or REIT investors,
foreign investors, and taxpayers with net operating losses
should consult with their tax advisors with respect to excessive
inclusion income.
Prohibited
Transactions
Net income derived 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) that is held primarily for sale to
customers, in the ordinary course of a trade or business by a
REIT, by a lower-tier partnership in which the REIT holds an
equity interest or by a borrower that has issued a shared
appreciation mortgage or similar debt instrument to the REIT. We
intend to conduct our operations so that no asset owned by us or
our pass-through subsidiaries will be held for sale to
customers, and that a sale of any assets owned by us directly or
through a pass-through subsidiary will not be in the ordinary
course of business. However, 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 particular
asset in which we hold a direct or indirect interest will not be
treated as property held for sale to customers or that certain
safe-harbor provisions of the Internal Revenue Code that prevent
such treatment will apply. The 100% tax will not apply to gains
from the sale of property that is held through a TRS or other
taxable corporation, although such income will be subject to tax
in the hands of the corporation at regular corporate income tax
rates.
Foreclosure
Property
Foreclosure property is real property and any personal property
incident to such real property (1) that is acquired by a
REIT as a result of the REIT having bid on the property at
foreclosure or having otherwise reduced the property to
ownership or possession by agreement or process of law after
there was a default (or default was imminent) on a lease of the
property or a mortgage loan held by the REIT and secured by the
property, (2) for which the related loan or lease was
acquired by the REIT at a time when default was not imminent or
anticipated and (3) for which such REIT makes a proper
election to treat the property as foreclosure property. REITs
generally are subject to tax at the maximum corporate rate
(currently 35%) 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 in the
hands of the selling REIT. We do not anticipate that we will
receive any income from foreclosure property that is not
qualifying income for purposes of the 75% gross income test,
but, if we do receive any such income, we intend to elect to
treat the related property as foreclosure property.
Failure
to Qualify
In the event that we violate a provision of the Internal Revenue
Code that would result in our failure to qualify as a REIT,
specified relief provisions will be available to us to avoid
such disqualification if (1) the violation is due to
reasonable cause and not due to willful neglect, (2) we pay
a penalty of $50,000 for each failure to satisfy the provision
and (3) the violation does not include a violation under
the gross income or asset tests described above (for which other
specified relief provisions are available). This cure provision
reduces the instances that could lead to our disqualification as
a REIT for violations due to reasonable cause. If we fail to
qualify for taxation as a REIT in any taxable year and none of
the relief provisions of the Internal Revenue Code apply, we
will be subject to tax, including any applicable alternative
minimum tax, on our taxable income at regular corporate rates.
Distributions to our stockholders in any year in which we are
not a REIT will not be deductible by us, nor will they be
required to be made. In this situation, to the extent of current
and accumulated earnings and profits, and, subject to
limitations of
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the Internal Revenue Code, distributions to our stockholders
will generally be taxable in the case of our stockholders who
are individual U.S. stockholders (as defined below), at a
maximum rate of 15%, and dividends in the hands of our corporate
U.S. stockholders may be eligible for the dividends
received deduction. Unless we are entitled to relief under the
specific statutory provisions, we will also be disqualified from
re-electing to be taxed as a REIT for the four taxable years
following a year during which qualification was lost. It is not
possible to state whether, in all circumstances, we will be
entitled to statutory relief.
Taxation
of Taxable U.S. Stockholders
This section summarizes the taxation of U.S. stockholders
that are not tax-exempt organizations. For these purposes, a
U.S. stockholder is a beneficial owner of our capital stock
that for U.S. federal income tax purposes is:
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a citizen or resident of the U.S.;
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a corporation (including an entity treated as a corporation for
U.S. federal income tax purposes) created or organized in
or under the laws of the U.S. or of a political subdivision
thereof (including the District of Columbia);
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an estate whose income is subject to U.S. federal income
taxation regardless of its source; or
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any trust if (1) a U.S. court is able to exercise
primary supervision over the administration of such trust and
one or more U.S. persons have the authority to control all
substantial decisions of the trust or (2) it has a valid
election in place to be treated as a U.S. person.
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If an entity or arrangement treated as a partnership for
U.S. federal income tax purposes holds our stock, the
U.S. federal income tax treatment of a partner generally
will depend upon the status of the partner and the activities of
the partnership. A partner of a partnership holding our capital
stock should consult its own tax advisor regarding the
U.S. federal income tax consequences to the partner of the
acquisition, ownership and disposition of our stock by the
partnership.
Distributions
Provided that we qualify as a REIT, distributions made to our
taxable U.S. stockholders out of our current and
accumulated earnings and profits, and not designated as capital
gain dividends, will generally be taken into account by them as
ordinary dividend income and will not be eligible for the
dividends received deduction for corporations. In determining
the extent to which a distribution with respect to our capital
stock constitutes a dividend for U.S. federal income tax
purposes, our earnings and profits will be allocated first to
distributions with respect to our preferred stock, if any, and
then to our common stock. Dividends received from REITs are
generally not eligible to be taxed at the preferential qualified
dividend income rates applicable to individual
U.S. stockholders who receive dividends from taxable
subchapter C corporations.
In addition, distributions from us that are designated as
capital gain dividends will be taxed to U.S. stockholders
as long-term capital gains, to the extent that they do not
exceed the actual net capital gain of our company for the
taxable year, without regard to the period for which the
U.S. stockholder has held its stock. To the extent that we
elect under the applicable provisions of the Internal Revenue
Code to retain our net capital gains, U.S. stockholders
will be treated as having received, for U.S. federal income
tax purposes, our undistributed capital gains as well as a
corresponding credit for taxes paid by us on such retained
capital gains. U.S. stockholders will increase their
adjusted tax basis in our capital stock by the difference
between their allocable share of such retained capital gain and
their share of the tax paid by us. Corporate
U.S. stockholders may be required to treat up to 20% of
some capital gain dividends as ordinary income. Long-term
capital gains are generally taxable at maximum federal rates of
15% (through 2010) in the case of U.S. stockholders
who are individuals, and 35% for corporations. Capital gains
attributable to the sale of depreciable real property held for
more than 12 months are subject to a 25% maximum
U.S. federal income tax rate for individual
U.S. stockholders who are individuals, to the extent of
previously claimed depreciation deductions.
Distributions in excess of our current and accumulated earnings
and profits will not be taxable to a U.S. stockholder to
the extent that they do not exceed the adjusted tax basis of the
U.S. stockholders shares in
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respect of which the distributions were made, but rather will
reduce the adjusted tax basis of these shares. To the extent
that such distributions exceed the adjusted tax basis of an
individual U.S. stockholders shares, they will be
included in income as long-term capital gain, or short-term
capital gain if the shares have been held for one year or less.
In addition, any dividend declared by us in October, November or
December of any year and payable to a U.S. stockholder of
record on a specified date in any such month will be treated as
both paid by us and received by the U.S. stockholder on
December 31 of such year, provided that the dividend is actually
paid by us before the end of January of the following calendar
year.
With respect to U.S. stockholders who are taxed at the
rates applicable to individuals, we may elect to designate a
portion of our distributions paid to such U.S. stockholders
as qualified dividend income. A portion of a
distribution that is properly designated as qualified dividend
income is taxable to non-corporate U.S. stockholders as
capital gain, provided that the U.S. stockholder has held
the capital stock with respect to which the distribution is made
for more than 60 days during the
121-day
period beginning on the date that is 60 days before the
date on which such capital stock became ex-dividend with respect
to the relevant distribution. The maximum amount of our
distributions eligible to be designated as qualified dividend
income for a taxable year is equal to the sum of:
(a) the qualified dividend income received by us during
such taxable year from non-REIT C corporations (including any
TRS in which we may own an interest);
(b) the excess of any undistributed REIT
taxable income recognized during the immediately preceding year
over the U.S. federal income tax paid by us with respect to
such undistributed REIT taxable income; and
(c) the excess of any income recognized during the
immediately preceding year attributable to the sale of a
built-in-gain
asset that was acquired in a carry-over basis transaction from a
non-REIT C corporation over the U.S. federal income tax
paid by us with respect to such built-in gain.
Generally, dividends that we receive will be treated as
qualified dividend income for purposes of (a) above if the
dividends are received from a domestic C corporation (other than
a REIT or a RIC), any TRS we may form, or a qualifying
foreign corporation and specified holding period
requirements and other requirements are met.
To the extent that we have available net operating losses and
capital losses carried forward from prior tax years, such losses
may reduce the amount of distributions that must be made in
order to comply with the REIT distribution requirements. See
Taxation of Our Company and
Annual Distribution Requirements. Such
losses, however, are not passed through to
U.S. stockholders and do not offset income of
U.S. stockholders from other sources, nor do they affect
the character of any distributions that are actually made by us,
which are generally subject to tax in the hands of
U.S. stockholders to the extent that we have current or
accumulated earnings and profits.
Dispositions
of Our Capital Stock
In general, a U.S. stockholder will realize gain or loss
upon the sale, redemption or other taxable disposition of our
capital stock in an amount equal to the difference between the
sum of the fair market value of any property and the amount of
cash received in such disposition and the
U.S. stockholders adjusted tax basis in the capital
stock at the time of the disposition. In general, a
U.S. stockholders adjusted tax basis will equal the
U.S. stockholders acquisition cost, increased by the
excess of net capital gains deemed distributed to the
U.S. stockholder (discussed above) less tax deemed paid on
it and reduced by returns of capital. In general, capital gains
recognized by individuals and other non-corporate
U.S. stockholders upon the sale or disposition of shares of
our capital stock will be subject to a maximum U.S. federal
income tax rate of 15% for taxable years through 2010, if our
capital stock is held for more than 12 months, and will be
taxed at ordinary income rates (of up to 35% through
2010) if our capital stock is held for 12 months or
less. Gains recognized by U.S. stockholders that are
corporations are subject to U.S. federal income tax at a
maximum rate of 35%, whether or not classified as long-term
capital gains. The IRS has the authority to prescribe, but has
not yet prescribed, regulations that would apply a capital gain
tax rate of 25% (which is generally higher than the long-term
capital gain tax rates for non-corporate holders) to a portion
of capital gain realized by a non-corporate holder on the sale
of REIT stock or depositary shares that would correspond to the
REITs unrecaptured Section 1250 gain.
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Holders are advised to consult with their tax advisors with
respect to their capital gain tax liability. Capital losses
recognized by a U.S. stockholder upon the disposition of
our capital stock held for more than one year at the time of
disposition will be considered long-term capital losses, and are
generally available only to offset capital gain income of the
U.S. stockholder but not ordinary income (except in the
case of individuals, who may offset up to $3,000 of ordinary
income each year). In addition, any loss upon a sale or exchange
of shares of our capital stock by a U.S. stockholder who
has held the shares for six months or less, after applying
holding period rules, will be treated as a long-term capital
loss to the extent of distributions received from us that were
required to be treated by the U.S. stockholder as long-term
capital gain.
Passive
Activity Losses and Investment Interest
Limitations
Distributions made by us and gain arising from the sale or
exchange by a U.S. stockholder of our capital stock will
not be treated as passive activity income. As a result,
U.S. stockholders will not be able to apply any
passive losses against income or gain relating to
our capital stock. Distributions made by us, to the extent they
do not constitute a return of capital, generally will be treated
as investment income for purposes of computing the investment
interest limitation. A U.S. stockholder that elects to
treat capital gain dividends, capital gains from the disposition
of stock or qualified dividend income as investment income for
purposes of the investment interest limitation will be taxed at
ordinary income rates on such amounts.
Taxation
of Tax-Exempt U.S. Stockholders
U.S. tax-exempt entities, including qualified employee
pension and profit sharing trusts and individual retirement
accounts, generally are exempt from U.S. federal income
taxation. However, they are subject to taxation on their
unrelated business taxable income, which we refer to in this
prospectus as UBTI. While many investments in real estate may
generate UBTI, the IRS has ruled that dividend distributions
from a REIT to a tax-exempt entity do not constitute UBTI. Based
on that ruling, and provided that (1) a tax-exempt
U.S. stockholder has not held our capital stock as
debt financed property within the meaning of the
Internal Revenue Code (i.e., where the acquisition or holding of
the property is financed through a borrowing by the tax-exempt
stockholder), (2) our capital stock is not otherwise used
in an unrelated trade or business and (3) we do not hold an
asset that gives rise to excess inclusion income
(see Effect of Subsidiary Entities, and
Excess Inclusion Income), distributions
from us and income from the sale of our capital stock generally
should not give rise to UBTI to a tax-exempt
U.S. stockholder.
Tax-exempt U.S. 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
Internal Revenue Code, respectively, are subject to different
UBTI rules, which generally will require them to characterize
distributions from us as UBTI.
In certain circumstances, a pension trust (1) that is
described in Section 401(a) of the Internal Revenue Code,
(2) is tax exempt under Section 501(a) of the Internal
Revenue Code, and (3) that owns more than 10% of our 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 our stock, or
(B) a group of pension trusts, each individually holding
more than 10% of the value of our stock, collectively owns more
than 50% of such stock; and (2) we would not have qualified
as a REIT but for the fact that Section 856(h)(3) of the
Internal Revenue Code provides that stock owned by such trusts
shall be treated, for purposes of the requirement that not more
than 50% of the value of the outstanding stock of a REIT is
owned, directly or indirectly, by five or fewer
individuals (as defined in the Internal Revenue Code
to include certain entities), as owned by the beneficiaries of
such trusts. Certain restrictions on ownership and transfer of
our stock should generally prevent a tax-exempt entity from
owning more than 10% of the value of our stock, or us from
becoming a pension-held REIT.
Tax-exempt U.S. stockholders are urged to consult their tax
advisors regarding the U.S. federal, state, local and
foreign tax consequences of owning our stock.
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Taxation
of Non-U.S.
Stockholders
The following is a summary of certain U.S. federal income
tax consequences of the acquisition, ownership and disposition
of our capital stock applicable to
non-U.S. stockholders
of our capital stock. For purposes of this summary, a
non-U.S. stockholder
is a beneficial owner of our capital stock that is not a
U.S. stockholder or an entity that is treated as a
partnership for U.S. federal income tax purposes. The
discussion is based on current law and is for general
information only. It addresses only selective and not all
aspects of U.S. federal income taxation.
Ordinary
Dividends
The portion of dividends received by
non-U.S. stockholders
payable out of our earnings and profits that are not
attributable to gains from sales or exchanges of U.S. real
property interests and which are not effectively connected with
a U.S. trade or business of the
non-U.S. stockholder
will generally be subject to U.S. federal withholding tax
at the rate of 30%, unless reduced or eliminated by an
applicable income tax treaty. Under some treaties, however,
lower rates generally applicable to dividends do not apply to
dividends from REITs. In addition, any portion of the dividends
paid to
non-U.S. stockholders
that are treated as excess inclusion income will not be eligible
for exemption from the 30% withholding tax or a reduced treaty
rate.
In general,
non-U.S. stockholders
will not be considered to be engaged in a U.S. trade or
business solely as a result of their ownership of our stock. In
cases where the dividend income from a
non-U.S. stockholders
investment in our capital stock is, or is treated as,
effectively connected with the
non-U.S. stockholders
conduct of a U.S. trade or business, the
non-U.S. stockholder
generally will be subject to U.S. federal income tax at
graduated rates, in the same manner as U.S. stockholders
are taxed with respect to such dividends, and may also be
subject to the 30% branch profits tax on the income after the
application of the income tax in the case of a
non-U.S. stockholder
that is a corporation.
Non-Dividend
Distributions
Unless (A) our capital stock constitutes a U.S. real
property interest (or USRPI) or (B) either (1) if the
non-U.S. stockholders
investment in our capital stock is effectively connected with a
U.S. trade or business conducted by such
non-U.S. stockholder
(in which case the
non-U.S. stockholder
will be subject to the same treatment as U.S. stockholders
with respect to such gain) or (2) if the
non-U.S. stockholder
is a nonresident alien individual who was present in the
U.S. for 183 days or more during the taxable year and
has a tax home in the U.S. (in which case the
non-U.S. stockholder
will be subject to a 30% tax on the individuals net
capital gain for the year), distributions by us which are not
dividends out of our earnings and profits will not be subject to
U.S. federal income tax. If it cannot be determined at the
time at which a distribution is made whether or not the
distribution will exceed current and accumulated earnings and
profits, the distribution will be subject to withholding at the
rate applicable to dividends. However, the
non-U.S. stockholder
may seek a refund from the IRS of any amounts withheld if it is
subsequently determined that the distribution was, in fact, in
excess of our current and accumulated earnings and profits. If
our capital stock constitutes a USRPI, as described below,
distributions by us in excess of the sum of our earnings and
profits plus the
non-U.S. stockholders
adjusted tax basis in our capital stock will be taxed under the
Foreign Investment in Real Property Tax Act of 1980 (or FIRPTA)
at the rate of tax, including any applicable capital gains
rates, that would apply to a U.S. stockholder of the same
type (e.g., an individual or a corporation, as the case may be),
and the collection of the tax will be enforced by a refundable
withholding at a rate of 10% of the amount by which the
distribution exceeds the stockholders share of our
earnings and profits.
Capital
Gain Dividends
Under FIRPTA, a distribution made by us to a
non-U.S. stockholder,
to the extent attributable to gains from dispositions of USRPIs
held by us directly or through pass-through subsidiaries (or
USRPI capital gains), will be considered effectively connected
with a U.S. trade or business of the
non-U.S. stockholder
and will be subject to U.S. federal income tax at the rates
applicable to U.S. stockholders, without regard to whether
the distribution is designated as a capital gain dividend. In
addition, we will be required to withhold tax equal to 35% of
the amount of capital gain dividends to the extent the dividends
constitute USRPI capital gains. Distributions subject to FIRPTA
may also be subject to a 30% branch profits tax in the hands of
a
non-U.S. holder
that is a corporation. However, the
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35% withholding tax will not apply to any capital gain dividend
with respect to any class of our stock which is regularly traded
on an established securities market located in the U.S. if
the
non-U.S. stockholder
did not own more than 5% of such class of stock at any time
during the taxable year. Instead any capital gain dividend will
be treated as a distribution subject to the rules discussed
above under Taxation of
Non-U.S. Stockholders
Ordinary Dividends. Also, the branch profits tax will not
apply to such a distribution. A distribution is not a USRPI
capital gain if we held the underlying asset solely as a
creditor, although the holding of a shared appreciation mortgage
loan would not be solely as a creditor. Capital gain dividends
received by a
non-U.S. stockholder
from a REIT that are not USRPI capital gains are generally not
subject to U.S. federal income or withholding tax, unless
either (1) if the
non-U.S. stockholders
investment in our capital stock is effectively connected with a
U.S. trade or business conducted by such
non-U.S. stockholder
(in which case the
non-U.S. stockholder
will be subject to the same treatment as U.S. stockholders
with respect to such gain) or (2) if the
non-U.S. stockholder
is a nonresident alien individual who was present in the
U.S. for 183 days or more during the taxable year and
has a tax home in the U.S. (in which case the
non-U.S. stockholder
will be subject to a 30% tax on the individuals net
capital gain for the year).
Dispositions
of Our Capital Stock
Unless our capital stock constitutes a USRPI, a sale of the
stock by a
non-U.S. stockholder
generally will not be subject to U.S. federal income
taxation under FIRPTA. The stock will not be treated as a USRPI
if less than 50% of our assets throughout a prescribed testing
period consist of interests in real property located within the
U.S., excluding, for this purpose, interests in real property
solely in a capacity as a creditor. We do not expect that more
than 50% of our assets will consist of interests in real
property located in the U.S.
In addition, our capital stock will not constitute a USRPI if we
are a domestically controlled REIT. A domestically
controlled REIT is a REIT in which, at all times during a
specified testing period, less than 50% in value of its
outstanding stock is held directly or indirectly by
non-U.S. stockholders.
We believe we are, and we expect to continue to be, a
domestically controlled REIT and, therefore, the sale of our
capital stock should not be subject to taxation under FIRPTA.
However, because our stock is widely held, we cannot assure our
investors that we are or will remain a domestically controlled
REIT. Even if we do not qualify as a domestically controlled
REIT, a
non-U.S. stockholders
sale of our capital stock nonetheless will generally not be
subject to tax under FIRPTA as a sale of a USRPI, provided that
(a) our capital stock owned is of a class that is
regularly traded, as defined by the applicable
Treasury regulation, on an established securities market, and
(b) the selling
non-U.S. stockholder
owned, actually or constructively, 5% or less of our outstanding
stock of that class at all times during a specified testing
period.
If gain on the sale of our capital stock were subject to
taxation under FIRPTA, the
non-U.S. stockholder
would be subject to the same treatment as a
U.S. stockholder with respect to such gain, subject to
applicable alternative minimum tax and a special alternative
minimum tax in the case of non-resident alien individuals, and
the purchaser of the stock could be required to withhold 10% of
the purchase price and remit such amount to the IRS.
Gain from the sale of our capital stock that would not otherwise
be subject to FIRPTA will nonetheless be taxable in the
U.S. to a
non-U.S. stockholder
in two cases: (a) if the
non-U.S. stockholders
investment in our capital stock is effectively connected with a
U.S. trade or business conducted by such
non-U.S. stockholder,
the
non-U.S. stockholder
will be subject to the same treatment as a U.S. stockholder
with respect to such gain, or (b) if the
non-U.S. stockholder
is a nonresident alien individual who was present in the
U.S. for 183 days or more during the taxable year and
has a tax home in the U.S., the nonresident alien
individual will be subject to a 30% tax on the individuals
capital gain.
Backup
Withholding and Information Reporting
We will report to our U.S. stockholders and the IRS the
amount of dividends paid during each calendar year and the
amount of any tax withheld. Under the backup withholding rules,
a U.S. stockholder may be subject to backup withholding
with respect to dividends paid unless the holder is a
corporation or comes within other exempt categories and, when
required, demonstrates this fact or provides a taxpayer
identification number or social security number, certifies as to
no loss of exemption from backup withholding and otherwise
complies with applicable
27
requirements of the backup withholding rules. A
U.S. stockholder that does not provide his or her correct
taxpayer identification number or social security number may
also be subject to penalties imposed by the IRS. Backup
withholding is not an additional tax. In addition, we may be
required to withhold a portion of capital gain distribution to
any U.S. stockholder who fails to certify their non-foreign
status.
We must report annually to the IRS and to each
non-U.S. stockholder
the amount of dividends paid to such holder and the tax withheld
with respect to such dividends, regardless of whether
withholding was required. Copies of the information returns
reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the
non-U.S. stockholder
resides under the provisions of an applicable income tax treaty.
A
non-U.S. stockholder
may be subject to backup withholding unless applicable
certification requirements are met.
Payment of the proceeds of a sale of our capital stock within
the U.S. is subject to both backup withholding and
information reporting unless the beneficial owner certifies
under penalties of perjury that it is a
non-U.S. stockholder
(and the payor does not have actual knowledge or reason to know
that the beneficial owner is a U.S. person) or the holder
otherwise establishes an exemption. Payment of the proceeds of a
sale of our capital stock conducted through certain
U.S. related financial intermediaries is subject to
information reporting (but not backup withholding) unless the
financial intermediary has documentary evidence in its records
that the beneficial owner is a
non-U.S. stockholder
and specified conditions are met or an exemption is otherwise
established.
Any amounts withheld under the backup withholding rules may be
allowed as a refund or a credit against such holders
U.S. federal income tax liability provided the required
information is furnished to the IRS.
State,
Local and Foreign Taxes
We and our stockholders may be subject to state, local or
foreign taxation in various jurisdictions, including those in
which it or they transact business, own property or reside. We
own interests in properties located in several jurisdictions,
and may be required to file tax returns in certain of those
jurisdictions. The state, local or foreign tax treatment of our
company and our stockholders may not conform to the
U.S. federal income tax treatment discussed above. Any
foreign taxes incurred by us would not pass through to
stockholders as a credit against their U.S. federal income
tax liability. Prospective stockholders should consult their tax
advisors regarding the application and effect of state, local
and foreign income and other tax laws on an investment in our
companys capital stock.
We may sell the securities offered by this prospectus to one or
more underwriters for public offering and sale by them or we may
sell the securities to investors directly or through agents. Any
underwriter or agent involved in the offer and sale of the
securities will be named in the applicable prospectus supplement.
Underwriters may offer and sell the securities at a fixed price
or prices, which may be changed, related to the prevailing
market prices at the time of sale or at negotiated prices. We
also may, from time to time, authorize underwriters acting as
agents to offer and sell the securities to purchasers upon the
terms and conditions set forth in the applicable prospectus
supplement. In connection with the sale of securities,
underwriters may be deemed to have received compensation from us
in the form of underwriting discounts or commissions and may
also receive commissions from purchasers of securities for whom
they may act as agent. Underwriters may sell securities to or
through dealers and the dealers may receive compensation in the
form of discounts, concessions or commissions from the
underwriters
and/or
commissions from the purchasers for whom they may act as agent.
Securities may also be sold in one or more of the following
transactions: (a) block transactions (which may involve
crosses) in which a broker-dealer may sell all or a portion of
the securities as agent but may position and resell all or a
portion of the block as principal to facilitate the transaction;
(b) purchases by a broker-dealer as principal and resale by
the broker-dealer for its own account pursuant to a prospectus
supplement; (c) a special offering, an exchange
distribution or a secondary distribution in accordance with
applicable New York Stock Exchange or other stock exchange
rules; (d) ordinary brokerage transactions and transactions
in which a broker-dealer solicits purchasers; (e) sales
at the market to or through a market maker or into
an existing trading market, on an exchange or otherwise, for
shares; and (f) sales in other ways not involving market
makers or established
28
trading markets, including direct sales to purchasers.
Broker-dealers may also receive compensation from purchasers of
these securities which is not expected to exceed that customary
in the types of transactions involved.
Any underwriting compensation paid by us to underwriters or
agents in connection with the offering of securities, and any
discounts, concessions or commissions allowed by underwriters to
participating dealers, will be set forth in the applicable
prospectus supplement. Underwriters, dealers and agents
participating in the distribution of the securities may be
deemed to be underwriters, and any discounts and commissions
received by them and any profit realized by them on resale of
the securities may be deemed to be underwriting discounts and
commissions, under the Securities Act. Underwriters, dealers and
agents may be entitled, under agreements entered into with us,
to indemnification against and contribution toward civil
liabilities, including liabilities under the Securities Act.
Any securities issued hereunder (other than capital stock) will
be new issues of securities with no established trading market.
Any underwriters or agents to or through whom such securities
are sold by us for public offering and sale may make a market in
such securities, but such underwriters or agents will not be
obligated to do so and may discontinue any market making at any
time without notice. We cannot assure you as to the liquidity of
the trading market for any such securities.
In connection with the offering of the securities described in
this prospectus and an accompanying prospectus supplement,
certain underwriters and selling group members and their
respective affiliates, may engage in transactions that
stabilize, maintain or otherwise affect the market price of the
security being offered. These transactions may include
stabilization transactions effected in accordance with
Rule 104 of Regulation M promulgated by the SEC
pursuant to which these persons may bid for or purchase
securities for the purpose of stabilizing their market price.
The underwriters in an offering of these securities may also
create a short position for their account by selling
more equity securities in connection with the offering than they
are committed to purchase from us. In that case, the
underwriters could cover all or a portion of the short position
by either purchasing the securities in the open market following
completion of the offering or by exercising any over-allotment
option granted to them by us. In addition, the managing
underwriter may impose penalty bids under
contractual arrangements with other underwriters, which means
that they can reclaim from an underwriter (or any selling group
member participating in the offering) for the account of the
other underwriters, the selling concession for the securities
that is distributed in the offering but subsequently purchased
for the account of the underwriters in the open market. Any of
the transactions described in this paragraph or comparable
transactions that are described in any accompanying prospectus
supplement may result in the maintenance of the price of our
securities at a level above that which might otherwise prevail
in the open market. None of the transactions described in this
paragraph or in an accompanying prospectus supplement are
required to be taken by any underwriters and, if they are
undertaken, may be discontinued at any time.
Any underwriters and their affiliates may be customers of,
engage in transactions with and perform services for us and our
subsidiaries in the ordinary course of business.
Clifford Chance US LLP, New York, New York, will pass upon the
validity of the securities we are offering by this prospectus.
If the validity of any securities is also passed upon by counsel
for the underwriters of an offering of those securities, that
counsel will be named in the prospectus supplement relating to
that offering.
Ernst & Young LLP, independent registered public
accounting firm, has audited our consolidated financial
statements included in our annual report on
Form 10-K
for the year ended December 31, 2006 and managements
assessment of the effectiveness of internal control over
financial reporting as of December 31, 2006, as set forth
in their reports which are incorporated by reference in this
registration statement. Our financial statements and
managements assessment are incorporated by reference in
reliance on Ernst & Young LLPs reports, given on
their authority as experts in accounting and auditing.
29
INCORPORATION
OF CERTAIN DOCUMENTS BY REFERENCE
We are incorporating by reference in this prospectus the
following documents which we have previously filed with the SEC
under the File Number 1-13991:
(1) Our Annual Report on
Form 10-K
for fiscal year ended December 31, 2006.
(2) Our Quarterly Reports on
Form 10-Q
for the quarters ended March 31, 2007, June 30, 2007
and September 30, 2007.
(3) Our Definitive Proxy Statement dated April 9, 2007.
(4) Our Current Reports on
Form 8-K
dated September 6, 2007, October 2, 2007 and
October 22, 2007.
(5) The description of the shares of capital stock
contained in the Registration Statement on
Form 8-A
filed on March 26, 1998, including all amendments and
reports filed for the purpose of updating such description.
(6) The description of the shares of our 8.50%
Series A Cumulative Redeemable preferred stock contained on
Form 8-A
filed on April 23, 2004.
Whenever after the date of this prospectus we file reports or
documents under Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act those reports and documents will be deemed to be
part of this prospectus from the time they are filed. If
anything in a report or document we file after the date of this
prospectus changes anything in it, this prospectus will be
deemed to be changed by that subsequently filed report or
document beginning on the date the report or document is filed.
We will provide to each person to whom a copy of this prospectus
is delivered a copy of any or all of the information that has
been incorporated by reference in this prospectus, but not
delivered with this prospectus. We will provide this information
at no cost to the requestor upon written or oral request
addressed to MFA Mortgage Investments, Inc., 350 Park Avenue,
21st Floor,
New York, New York 10022, attention: Investor Relations
Department (Telephone:
212-207-6400).
We file annual, quarterly and current reports, proxy statements
and other materials with the SEC. The public may read and copy
any materials we file with the SEC at the SECs Public
Reference Room at 100 F Street, N.E., Washington, D.C.
20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains a website that contains reports, proxy and
information statements and other information regarding issuers
(including us) that file electronically with the SEC. The
address of that website is
http://www.sec.gov.
Reports, proxy statements and other information we file also can
be inspected at the offices of the New York Stock Exchange,
20 Broad Street, New York, New York 10005.
30