Creditors take control as Office Properties Income Trust (OPI) exits Chapter 11
Office Properties Income Trust has emerged from Chapter 11 with a new capital structure, new board and rewritten governance documents. On June 17, 2026, its reorganization plan became effective, cancelling all 73,943,439 old common shares, which received no recovery, and issuing 21,953,577 shares of new common equity and new warrants.
The company issued $420 million of 10.000% senior secured exit notes due 2031 and $385 million of new 8.375% senior secured notes due 2029, amended its secured credit facility, and terminated its $125 million DIP facility through equity conversions. Certain former noteholders and DIP lenders now own about 67% of the reorganized equity, and a largely reconstituted board, including Helix Partners and Redwood Capital designees, took office. The declaration of trust and bylaws were amended to change removal rights, board designation rights and shareholder mechanics, while a new five-year management package with RMR includes fixed fees and equity-based compensation.
Positive
- Company successfully emerges from Chapter 11, implementing a confirmed reorganization plan that exchanges legacy debt for new secured notes, equity and warrants and permanently waives credit agreement defaults.
- Capital structure is simplified and DIP financing is eliminated, with the $125 million DIP facility fully satisfied and terminated through equity issuances and all old senior note indentures cancelled.
Negative
- Existing common equity is fully wiped out; 73,943,439 old common shares were cancelled on the effective date, received no distribution and are stated to have no value.
- Reorganized entity carries substantial high-cost secured debt, including $420 million of 10.000% secured exit notes due 2031, $385 million of 8.375% secured notes due 2029 and a credit facility margin rising to 750 basis points.
- Control shifts to former creditors, with certain holders of old September 2029 senior secured notes and DIP claims owning approximately 67% of the new equity and gaining significant board designation and governance rights.
Insights
OPI exits Chapter 11 with heavy secured debt and legacy equity wiped out.
Office Properties Income Trust has completed its Chapter 11 reorganization. All prior common equity was cancelled with no distribution, while new common shares and warrants were issued primarily to former unsecured and secured noteholders and DIP lenders, who now control the company.
The new balance sheet relies on sizeable secured obligations: $420 million 10.000% secured exit notes due 2031, $385 million 8.375% secured notes due 2029, and an amended credit facility with a $325 million revolver and $100 million term loan bearing SOFR plus up to 750 basis points. This implies a high ongoing interest burden.
Governance and control have shifted toward creditor-affiliated investors through board designation rights and new charter/bylaw provisions, while a five-year management package with RMR includes fixed fees and equity awards. For future filings, investors can review how the new owners manage leverage, asset sales, and REIT distribution requirements under the tax constraints described in the REIT tax discussion.
8-K Event Classification
Key Figures
Key Terms
Chapter 11 Cases regulatory
2029 Secured Exit Notes financial
Reorganized Common Equity financial
New Warrants financial
Preemptive Rights Agreement financial
Section 382 of the IRC tax
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
CURRENT REPORT
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In this Current Report on Form 8-K (this “Current Report”), the terms the “Company,” “we,” “us,” and “our” refer to Office Properties Income Trust.
Introductory Note
As previously reported, on October 30, 2025, the Company and its debtor affiliates (collectively, the “Debtors”, and upon effectiveness of the Plan (as defined below), the “Reorganized Debtors”) each commenced with the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”) a voluntary case (collectively, the “Chapter 11 Cases”) under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”). The Chapter 11 Cases were jointly administered under the caption In re Office Properties Income Trust, et al., Case No. 25-90530.
As previously reported, on April 21, 2026, the Debtors filed the Fourth Amended Joint Chapter 11 Plan of Reorganization of Office Properties Income Trust and Its Debtor Affiliates (as may be amended, modified, or supplemented in accordance with its terms, the “Plan”). On April 22, 2026, the Bankruptcy Court entered the Order Confirming Fourth Amended Joint Chapter 11 Plan of Reorganization of Office Properties Income Trust and Its Debtor Affiliates (the “Confirmation Order”), confirming the Plan. A summary of the material terms of the Plan and related matters is contained in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on April 28, 2026.
On June 17, 2026 (the “Effective Date”), the Plan became effective and the Debtors emerged from chapter 11 protection. The following is a summary of the material transactions consummated on or about the Effective Date in connection with the Plan. This summary is qualified in its entirety by reference to the full text of the Plan, the Confirmation Order, and the other documents referenced herein and filed as exhibits to this Current Report.
Item 1.01. Entry into a Material Definitive Agreement.
2029 Secured Exit Notes
On the Effective Date, the Company issued senior secured notes in an aggregate principal amount of $420 million (the “2029 Secured Exit Notes”) pursuant to an indenture (the “2029 Secured Exit Notes Indenture”) by and among the Company, as issuer, certain of the Company’s subsidiaries, as guarantors, and U.S. Bank Trust Company, National Association, as trustee and collateral agent. The 2029 Secured Exit Notes bear interest at a rate of 10.000% per annum, payable semi-annually in arrears on March 31 and September 30 of each year, and mature on June 17, 2031. The 2029 Secured Exit Notes are secured by (a) first lien security interests in the properties which secured our previously outstanding 9.000% Senior Secured Notes due September 2029 (the “Old September 2029 Senior Secured Notes”) on a first lien basis, our previously unencumbered properties and certain other properties, (b) second lien security interests in the properties which secured the Old September 2029 Senior Secured Notes on a second lien basis, (c) first lien security interests in the equity interests of the entities which secured the Old September 2029 Senior Secured Notes on a first lien basis, certain entities that previously guaranteed our previously outstanding 8.000% senior priority guaranteed unsecured notes due 2030 (the “Old 2030 Priority Guaranteed Notes”) and certain other subsidiaries of the Company that did not previously secure or guarantee any debt obligations, and (d) second lien security interests in the equity interests of the entities which secured the Old September 2029 Senior Secured Notes on a second lien basis. The 2029 Secured Exit Notes are guaranteed by (i) the Company’s subsidiaries that own the properties and entities which secure the 2029 Secured Exit Notes, (ii) the Company's subsidiaries whose equity interests secure the 2029 Secured Exit Notes, and (iii) certain other subsidiaries of the Company.
The 2029 Secured Exit Notes were issued in exchange for allowed claims relating to the Old September 2029 Senior Secured Notes, pursuant to which holders of such claims received their pro rata share of $300 million in 2029 Secured Exit Notes, plus their pro rata share of $120 million in additional 2029 Secured Exit Notes and $98 million of newly issued common shares of beneficial interest, $.01 par value per share, of the Company (the “Reorganized Common Equity”), or a combination thereof.
The foregoing description of the 2029 Secured Exit Notes and the 2029 Secured Exit Notes Indenture does not purport to be complete and is qualified in its entirety by reference to the full text of the 2029 Secured Exit Notes Indenture, a copy of which is attached as Exhibit 4.1 to this Current Report and is incorporated herein by reference.
New 2027 Senior Secured Notes
On the Effective Date, Office Properties Income Intermediate Holdco II Trust (the “New 2027 SPV”), a newly formed bankruptcy-remote special purpose vehicle and a direct, wholly owned subsidiary of Office Properties Income Intermediate Holdco I Trust (the “New 2027 Holdco”), which is a direct, wholly owned subsidiary of the Company, issued new senior secured notes in an aggregate principal amount of $385 million (which amount is intended to be reduced by required, deferred principal payments of $50 million in the aggregate (the “Deferred Payments”)) pursuant to an indenture (the “New 2027 Senior Secured Notes Indenture”) by and among the New 2027 SPV, as issuer, the Company, as limited parent guarantor, the New 2027 Holdco and certain other subsidiaries of the Company, as guarantors, and UMB Bank, N.A., as trustee and collateral agent, in accordance with the terms of the settlement with an ad hoc group of holders of the Company’s previously outstanding 3.250% Senior Secured Notes due 2027 (the “Old 2027 Senior Secured Notes”). The New 2027 Senior Secured Notes bear interest at a rate of 8.375% per annum, payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year, and mature on December 31, 2029.
The New 2027 Senior Secured Notes are secured by first lien security interests in substantially the same collateral that previously secured the Old 2027 Senior Secured Notes and certain capital improvement and reserve accounts. The New 2027 Senior Secured Notes are guaranteed by (i) the Company, solely with respect to (1) the $50 million of Deferred Payments and (2) any funds removed from the New 2027 SPV in contravention of that certain settlement among the Debtors, the ad hoc group of holders of the Old 2027 Senior Secured Notes and an ad hoc group of holders of the Old September 2029 Senior Secured Notes, (ii) the New 2027 Holdco, and (iii) the Company’s subsidiaries that own the properties securing the New 2027 Senior Secured Notes.
The New 2027 Senior Secured Notes were issued in exchange for an aggregate amount equal to $385 million, plus accrued and unpaid interest, fees, costs, and other charges comprising the allowed claims relating to the Old 2027 Senior Secured Notes.
The foregoing description of the New 2027 Senior Secured Notes and the New 2027 Senior Secured Notes Indenture does not purport to be complete and is qualified in its entirety by reference to the full text of the New 2027 Senior Secured Notes Indenture, a copy of which is attached as Exhibit 4.2 to this Current Report and is incorporated herein by reference.
Amended RMR Management Agreements
On the Effective Date, the Company entered into (a) a Third Amended and Restated Business Management Agreement (the “Amended Business Management Agreement”) and (b) a Third Amended and Restated Property Management Agreement (the “Amended Property Management Agreement” and, together with the Amended Business Management Agreement, the “Amended RMR Management Agreements”), each with The RMR Group LLC (“RMR”). The initial term of each Amended RMR Management Agreement will be five years, and the Company will pay RMR (i) an annual fee under the Amended Business Management Agreement of $14 million for the first two years, and (ii) a 3% property management fee and 5% construction supervision fee under the Amended Property Management Agreement, consistent with the Company’s prior property management agreement with RMR. In addition, the Amended Business Management Agreement provides for (i) the issuance to RMR of common shares equal to 2% of the Reorganized Common Equity on the Effective Date (the “Initial Equity Compensation”) and (ii) the issuance to RMR of common shares equal to up to 8% of the Reorganized Common Equity upon the satisfaction of certain financial and/or performance metrics to be determined by the Company’s board of trustees. The Amended RMR Property Management Agreement also contains certain customary major decisions requiring the approval of a majority of the Company’s board of trustees.
The foregoing description of the Amended RMR Management Agreements does not purport to be complete and is qualified in its entirety by reference to the full text of the Amended RMR Management Agreements, copies of which are attached as Exhibits 10.1 and 10.2 to this Current Report and are incorporated herein by reference.
Amendment to the Secured Credit Facility
On the Effective Date, the Company and certain of the Reorganized Debtors entered into the Waiver and Amendment No. 1 to the Second Amended and Restated Credit Agreement (the “Credit Agreement Amendment”), with the lenders party thereto, and Wilmington Savings Fund Society, FSB, as administrative agent (the “Credit Agreement”). Pursuant to the Credit Agreement Amendment, (a) all of the defaults under the Credit Agreement arising out of the Chapter 11 Cases and related matters were permanently waived, (b) interest payable on borrowings under the Credit Agreement is at a rate of the secured overnight financing rate plus a margin of 550 basis points prior to and including December 31, 2026 and 750 basis points from and after January 1, 2027, and (c) the Credit Agreement was ratified and confirmed and remains in full force and effect. The Credit Agreement continues to consist of (a) a $325 million secured revolving credit facility, all of which remains outstanding and (b) a $100 million secured term loan. The obligations under the Credit Agreement continue to be secured by the same collateral as it was prior to the commencement of the Chapter 11 Cases.
The foregoing description of the Credit Agreement Amendment does not purport to be complete and is qualified in its entirety by reference to the full text of the Credit Agreement Amendment, a copy of which is attached as Exhibit 10.3 to this Current Report and is incorporated herein by reference.
Preemptive Rights Agreement
On the Effective Date, the Company entered into a Preemptive Rights Agreement (the “Preemptive Rights Agreement”) with certain holders of allowed claims in respect of the Company’s previously outstanding unsecured notes who received more than 1% of the Reorganized Common Equity (the “Preemptive Rights Shareholders”). Pursuant to the Preemptive Rights Agreement, the Company granted customary preemptive rights to the Preemptive Rights Shareholders with respect to (a) any issuance by the Company of equity securities in an offering not registered under the Securities Act of 1933, as amended (the “Securities Act”), or (b) any issuance of debt securities or other indebtedness to certain former holders of the Old September 2029 Senior Secured Notes, subject to certain exceptions, for so long as such Preemptive Rights Shareholder continues to hold at least 1.0% of the outstanding the Company’s outstanding common shares.
The foregoing description of the Preemptive Rights Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Preemptive Rights Agreement, a copy of which is attached as Exhibit 10.4 to this Current Report and is incorporated herein by reference.
Item 1.02. Termination of a Material Definitive Agreement.
DIP Credit Agreement
On the Effective Date, the Amended and Restated Secured Debtor-in-Possession Term Loan Credit Agreement (the “DIP Credit Agreement”), by and among the Company, as borrower, the guarantors party thereto, Acquiom Agency Services LLC, as administrative agent and collateral agent (the “DIP Agent”), and the lenders from time to time party thereto (the “DIP Lenders”), which provided for a $125 million secured debtor-in-possession term loan facility (the “DIP Facility”), was terminated in connection with the Company’s emergence from chapter 11 protection.
On the Effective Date, the claims by the DIP Lenders or the DIP Agent were allowed in an aggregate amount equal to the outstanding principal amount of the loans under the DIP Facility, plus all accrued and unpaid interest, fees, costs, and other charges through the Effective Date. Claims of the DIP Lenders (excluding claims related to DIP fees (“DIP Fee Claims”)) were satisfied through the issuance of shares of Reorganized Common Equity (the “DIP Equity Distribution”) at a conversion price of $12.60 per share. DIP Fee Claims (consisting of an anchor capital commitment fee, an exit fee and an upfront fee) were satisfied through (1) in respect of the anchor capital commitment fee and exit fee, a distribution of Reorganized Common Equity at a conversion price of $20.00 per share, and (2) in respect of the upfront fee, a distribution of Reorganized Common Equity at a conversion price of $12.60 per share.
All obligations under the DIP Credit Agreement and the DIP Facility have been satisfied, discharged, and terminated in full as of the Effective Date.
Old Common Shares
On the Effective Date, by operation of the Plan, all agreements, instruments, and other documents evidencing the Company’s common shares of beneficial interest, $.01 par value per share (the “Old Common Shares”), issued and outstanding immediately prior to the Effective Date, and any rights of any holder in respect thereof, were deemed cancelled, discharged and of no force or effect.
Senior Notes Indentures
On the Effective Date, by operation of the Plan, all obligations under each of the Company’s previously outstanding (i) Old 2027 Senior Secured Notes, (ii) Old September 2029 Senior Secured Notes, (iii) 2.650% senior unsecured notes due 2026, (iv) 2.400% senior unsecured notes due 2027, (v) the Old 2030 Priority Guaranteed Notes, (vi) 3.450% senior unsecured notes due 2031 and (vii) 6.375% senior unsecured notes due 2050 (collectively, the “Old Senior Notes”), in each case under the indentures governing the Old Senior Notes with U.S. Bank, National Association or the successor trustee thereto, were cancelled.
Item 1.03. Bankruptcy or Receivership.
The information set forth in the Introductory Note and Items 1.01, 1.02, 3.02 and 3.03 of this Current Report is incorporated herein by reference.
Information regarding the assets and liabilities of the Company as of the most recent practicable date prior to confirmation is included in the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2026, filed with the SEC on May 22, 2026, which is incorporated herein by reference.
Item 2.03. Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
The information set forth in Item 1.01 of this Current Report relating to the 2029 Secured Exit Notes and the New 2027 Senior Secured Notes is incorporated herein by reference.
Item 3.02. Unregistered Sales of Equity Securities.
Reorganized Common Equity
On the Effective Date, all previously issued and outstanding Old Common Shares were cancelled and the Company issued the Reorganized Common Equity pursuant to the Plan as follows:
| (a) | to holders of the Old September 2029 Senior Secured Notes; |
| (b) | to holders of DIP Claims; |
| (c) | to holders of claims in respect of the Company’s previously outstanding senior unsecured notes; |
| (d) | to holders of the Old 2030 Priority Guaranteed Notes; |
| (e) | to RMR pursuant to the Amended Business Management Agreement; and |
| (f) | to holders of claims in respect of the Company’s previously outstanding senior unsecured notes who to holders of claims in respect of the Company’s previously outstanding senior unsecured notes who exercised their rights to acquire an aggregate amount of $35 million of Reorganized Common Equity. |
The Reorganized Common Equity was issued without registration under the Securities Act in reliance upon section 1145(a) of the Bankruptcy Code (and in the case of (e) above, section 4(a)(2) of the Securities Act). Such shares may be resold without registration under the Securities Act by the recipients thereof pursuant to the exemption provided by section 4(a)(1) of the Securities Act, unless the holder is an “underwriter” as defined in section 1145(b) of the Bankruptcy Code or an “affiliate” of the Company as defined in Rule 144(a)(1) under the Securities Act.
The aggregate number of shares of Reorganized Common Equity issued on the Effective Date was 21,953,577.
New Warrants
On the Effective Date, the Company issued warrants (the “New Warrants”) to holders of claims in respect of the Company’s previously outstanding senior unsecured notes pursuant to a warrant agreement (the “New Warrants Agreement”). The New Warrants are exercisable for an amount of common equity of the Company equal to 5.0% of the Reorganized Common Equity outstanding as of the Effective Date (after taking into account the Reorganized Common Equity issued or issuable as a result of the Initial Equity Compensation or the exercise of the New Warrants). The New Warrants have an exercise price of $25.00 per share and are exercisable within seven years from the Effective Date.
The New Warrants and the shares of Reorganized Common Equity issuable upon exercise thereof were issued without registration under the Securities Act in reliance upon section 1145(a) of the Bankruptcy Code.
The foregoing description of the New Warrants and the New Warrants Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the New Warrants Agreement, a copy of which is attached as Exhibit 4.3 to this Current Report and is incorporated herein by reference.
Item 3.03. Material Modification to Rights of Security Holders.
Cancellation of Existing Equity Interests
On the Effective Date, pursuant to the Plan, all Old Common Shares were cancelled, released, discharged, and extinguished and are of no further force or effect. The Company had 73,943,439 Old Common Shares issued and outstanding as of October 30, 2025. Holders of Old Common Shares did not receive any distribution on account of such interests and such interests have no value.
Cancellation of Old Senior Notes
The information set forth in Items 1.02 of this Current Report with respect to the Senior Notes Indentures is incorporated herein by reference. On the Effective Date, pursuant to the Plan, all agreements, instruments, notes, certificates, and other documents evidencing any Old Senior Notes were deemed cancelled, discharged, and of no further force or effect.
Item 5.01. Changes in Control of Registrant.
The information set forth in the Introductory Note and Items 1.03, 3.02, 3.03 and 5.02 of this Current Report is incorporated herein by reference.
Upon the effectiveness of the Plan on the Effective Date, all Old Common Shares were cancelled. As a result of the transactions effected under the Plan, immediately following the Effective Date, certain holders of the Old September 2029 Senior Secured Notes and DIP Claims hold approximately 67% of the Reorganized Common Equity, accounting for dilution on account of the Initial Equity Compensation to RMR under the Amended Business Management Agreement.
Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers.
Departure of Trustees
On the Effective Date, Yael Duffy, Donna D. Fraiche, Barbara D. Gilmore, William A. Lamkin, Timothy R. Pohl, Adam D. Portnoy, Jeffrey P. Somers and Mark A. Talley resigned as trustees of the Company. None of the trustees resigned as a result of any disagreement with the Company on any matter relating to its operations, policies or practices.
Election of Trustees
Effective as of the Effective Date, Jonathan Heller, Jonathan Kolatch, William A. Lamkin, Adam D. Portnoy and Irvin Schlussel (each, a “New Trustee”) were elected as members of the board of trustees of the Company. William A. Lamkin and Adam D. Portnoy are the only trustees that served on the board of trustees prior to emergence. Effective as of the Effective Date, the board of trustees appointed: (i) Jonathan Kolatch, William A. Lamkin and Irvin Schlussel to serve on the Audit Committee; (ii) Jonathan Kolatch and Irvin Schlussel to serve on the Compensation Committee; and (iii) Jonathan Kolatch and Irvin Schlussel to serve on the Nominating and Governance Committee.
Mr. Heller is the founder and the Chief Executive Officer of Helix Partners Management LP (“Helix Partners”), a multi-billion dollar, opportunistic, credit-focused investment manager that invests flexibly across the capital structure. Prior to founding Helix Partners in December 2022, during his tenure at Canyon Partners, Mr. Heller was Chairman of the Board of CBL & Associates Properties, Inc. (NYSE: CBL), a real estate investment trust owning and operating shopping malls and other retail properties, where he led a successful post-reorganization debt restructuring. At Canyon Partners, Mr. Heller was a Partner and Senior Portfolio Manager responsible for the firm’s investments in companies across a wide range of industries, including financial institutions, technology, retail and consumer. Mr. Heller also has significant experience in various asset classes, including stressed and distressed corporate debt, equities, municipal fixed income, real estate securities, and structured products. Prior to joining Canyon Partners in 2008, Mr. Heller was a Senior Vice President at Cerberus Capital Management, L.P. (“Cerberus”) from 2004 to 2008. Prior to Cerberus, Mr. Heller founded a hedge fund of funds, Double Arrow Capital Management. Mr. Heller began his career in 1996 as an accountant at PricewaterhouseCoopers. Mr. Heller is a graduate of Yeshiva University in New York City (B.S., Accounting) and is a Certified Public Accountant.
Mr. Kolatch currently runs his family office, Jasper Lake, LLC. Mr. Kolatch founded Redwood Capital Management, LLC (“Redwood”) in 2000 after a long career at Goldman Sachs, and served as Chief Executive Officer and Chief Information Officer at Redwood until his retirement in 2020. Redwood is a hedge fund specializing in stressed and distressed credit. Prior to founding Redwood, Mr. Kolatch worked at Goldman Sachs from 1982 to 1999 and became a Partner in 1994. From 1997 to 1999, Mr. Kolatch was head of the Goldman Sachs’ Credit Arbitrage Group which was a proprietary trading group focusing on distressed securities, high yield bonds, leveraged loans, and emerging market debt. Prior to that, Mr. Kolatch was head of the high yield trading desk and head of distressed bond trading from 1992 through 1996. From 1985 to 1992, he held various positions within the High Yield Group, including sales, trading, and head of Corporate Bond Research. Mr. Kolatch graduated summa cum laude from Columbia College in 1978. He received an M.B.A. from Harvard Business School in 1982.
Mr. Schlussel is the Chief Investment Officer at a private family office, where he oversees asset allocation and direct investments, since April 2021. Previously, from April 2016 to March 2021, he served as Managing Director of Inglesea Capital, the family office of the late Andrew Fredman, former Managing Partner of Fir Tree Partners. At Inglesea Capital, he led all public and private investments, including real estate and related opportunities. Mr. Schlussel currently serves as a board observer at Chicago Bridge & Iron. His career has focused primarily on corporate reorganizations, distressed debt, and event-driven investment strategies. Earlier in his career, he held finance roles as an analyst at UBS and Paloma Partners. Mr. Schlussel graduated with honors from the Wharton School of the University of Pennsylvania in 2003, earning a Bachelor of Science in Economics with a concentration in finance.
Mr. Lamkin is an Independent Trustee on the Board of Trustees of Seven Hills Realty Trust. He previously served on the Board of Trustees of Tremont Mortgage Trust from 2020 until it merged with Seven Hills Realty Trust in September 2021, and on the Board of Trustees of Select Income REIT from 2012 until it merged with a wholly owned subsidiary of the Company in December 2018. From 2003 to 2019, Mr. Lamkin was a Partner in Ackrell Capital LLC, a San Francisco based investment bank, and served on the board of Ackrell SPAC Partners I Co. from 2020 to 2022. Prior to 2003, he worked as a financial consultant and an investment banker, including serving as a Senior Vice President in the investment banking division of ABN AMRO. Before entering the financial services industry, Mr. Lamkin was a practicing attorney. Mr. Lamkin brings to the Company’s board of trustees extensive experience in, and knowledge of, the commercial real estate and investment banking industries, with demonstrated management ability and experience in capital raising and strategic business transactions. Mr. Lamkin has professional training, skills, and expertise in finance and legal matters.
Mr. Portnoy is the Chair of the Board of Directors, a Managing Director, and the President and Chief Executive Officer of The RMR Group Inc. (“RMR Inc.”), the President and Chief Executive Officer of RMR, and the sole trustee, an officer, and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc. As of the date hereof, he also serves as the Chair of the Board of Trustees and a Managing Trustee of each of the following companies managed by RMR: Diversified Healthcare Trust, Industrial Logistics Properties Trust, Service Properties Trust, and Seven Hills Realty Trust, and he is the sole director of AlerisLife Inc., Sonesta International Hotels Corporation, and Tremont Realty Capital LLC, an SEC registered investment adviser. Prior to joining RMR in 2003, Mr. Portnoy held various positions in the finance industry and public sector, including working as a banker at Donaldson, Lufkin & Jenrette and ABN AMRO, working in private equity at the International Finance Corporation (a member of The World Bank Group) and DLJ Merchant Banking Partners, and serving as Chief Executive Officer of a telecommunications company. Mr. Portnoy currently serves as Chair of the Board of Directors of the Pioneer Institute, as a member of the executive committee of the Board of Directors of the Greater Boston Chamber of Commerce, as Co-Chair of the Board of Directors of the Massachusetts Opportunity Alliance, Inc., as a member of the Board of Directors of the Massachusetts High Technology Council, Inc., and as the Honorary Consul General of the Republic of Bulgaria to the Commonwealth of Massachusetts. Mr. Portnoy graduated with a Bachelor’s degree in Public Policy from Occidental College in 1993.
For their services as trustees of the Company, each New Trustee will be entitled to an annual cash compensation of $120,000. Pursuant to our Amended Bylaws (as defined in Item 5.03), Mr. Portnoy was designated as the Manager Trustee, Mr. Heller was designated as a Helix Partners Trustee, Mr. Kolatch was designed as a Redwood Capital Trustee and Mr. Schlussel was designated as the Unsecured Creditor Trustee (as such terms are defined in Item 5.03). Except as provided in the preceding sentence, there is no arrangement or understanding between each New Trustee and any other person pursuant to which such New Trustee was selected as a trustee of the Company.
As discussed above, Mr. Portnoy is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., the chair of the board of directors, a managing director and the president and chief executive officer of RMR Inc. and an officer and employee of RMR, the Company’s business and property manager. Except as provided in the preceding sentence, there are no transactions, relationships or agreements between each New Trustee and the Company that would require disclosure pursuant to Item 404(a) of Regulation S-K promulgated under the Securities Exchange Act of 1934, as amended. None of the New Trustees has a family relationship with any member of the board of trustees or executive officer of the Company.
In connection with their election as trustees, we entered into an indemnification agreement with each New Trustee, which agreement is on substantially the same terms as the indemnification agreements we have entered with our prior trustees and our executive officers. We have previously filed a form of indemnification agreement as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2025, which form is incorporated herein by reference.
The officers of the Company immediately before the Effective Date continue to serve as the officers of the Company as of the Effective Date.
Item 5.03. Amendments to Articles of Incorporation or Bylaws.
On the Effective Date, pursuant to the Plan, the Company amended and restated its Declaration of Trust (the “Amended Charter”) and Bylaws (the “Amended Bylaws”). The Amended Charter and Amended Bylaws are similar in all material respects to the Company’s prior declaration of trust and bylaws, with the following material changes:
Removal of Trustees. The Amended Charter now provides that a trustee may be removed at any time with or without cause by the affirmative vote of the holders of not less than two-thirds of the shares then outstanding and entitled to vote and that no Trustee may be removed by the board of trustees without cause before June 17, 2027.
Corporate Opportunities. The Amended Charter includes a new provision to the effect that neither the shareholders of the Company or any of their Related Persons or Related Funds, nor any Non-Employee Trustee of the Company or his or her Related Persons (each as defined in the Amended Charter), shall have any duty to refrain from (x) engaging in a corporate opportunity in the same or similar business activities or lines of business as the Company or any of its Related Persons is engaged or proposes to engage, (y) making investments in any kind of property in which the Company makes or may make investments or (z) otherwise competing with the Company or any of its Related Persons, and provides that, to the fullest extent permitted by the Maryland law, no such person shall (A) be deemed to have acted in bad faith or in a manner inconsistent with the best interests of the Company or its shareholders or to have acted in a manner inconsistent with or opposed to any fiduciary duty to the Company or its shareholders or (B) be liable to the Company or its shareholders for breach of any fiduciary duty, in each case, by reason of any such activities. The Amended Charter further provides that, to the fullest extent permitted by law, any person purchasing or otherwise acquiring any interest in shares of the Company shall be deemed to have notice of and to have consented to these provisions.
Amendments. The Amended Charter now provides that any amendment thereto shall be (a) adopted by a majority of the trustees then in office and (b) approved by the affirmative vote of not less than a majority of the shares then outstanding and entitled to vote thereon. The Amended Bylaws further provide that, except as otherwise provided therein, an amendment thereto (a) shall be adopted by a resolution of a majority of the trustees then in office, or (b) shall be approved by the affirmative vote of the holders of not less than a majority of the shares then outstanding and entitled to vote thereon for all provisions. From the effective date of the Amended Bylaws until the Company’s annual meeting of shareholders in 2028, any amendment to the provisions thereof governing the selection of trustees, the transfer restrictions and amendments to the Amended Bylaws shall only be adopted by a majority of the trustees then in office (including, in the case of an amendment to the provisions governing the selection of trustees, the affirmative vote of (w) a majority of the trustees appointed by Helix Partners, if such amendment would reasonably be expected to result in the removal from office of, or otherwise adversely affect the rights or protections of, one or more of the trustees appointed by Helix Partners, (x) all of the trustees appointed by Redwood, if such amendment would reasonably be expected to result in the removal from office of, or otherwise adversely affect the rights or protections of, one or more of the trustees appointed by Redwood, and (y) the Manager Trustee (as defined below), if such amendment would reasonably be expected to result in the removal from office of, or otherwise adversely affect the rights or protections of, the Manager Trustee.
Special Meetings. The Amended Bylaws now provide that special meetings of shareholders may be called by shareholders holding greater than 50% of the votes entitled to be cast at such meeting.
Shareholder Actions by Written Consent. The Amended Bylaws now provide that shareholders may take any action by unanimous written consent without a meeting.
Number of Trustees and Board Composition. The Amended Bylaws provide that the number of trustees shall be up to seven until increased or decreased by the board of trustees. From the effective date of the Amended Bylaws, the board of trustees will include: (i) up to three trustees initially designated for appointment by Helix Partners, with such designation right consisting of (a) up to three trustees so long as Helix Partners and its affiliates beneficially own 15% or more of the Company’s outstanding common shares, (b) up to two trustees so long as Helix Partners and its affiliates beneficially own 10% or more of the Company’s outstanding common shares, and (c) up to one trustee so long as Helix Partners and its affiliates beneficially own 5% or more of the Company’s outstanding common shares (each, a “Helix Partners Trustee”); (ii) up to two trustees who are initially designated for appointment by Redwood, with such designation right consisting of (a) up to two trustees so long as Redwood and its affiliates beneficially own 10% or more of the Company’s outstanding common shares and (b) up to one trustee so long as Redwood and its affiliates beneficially own 5% or more of the Company’s outstanding common shares (each a “Redwood Capital Trustee”); (iii) until the Company annual meeting of shareholders in 2028, provided that Amended Business Management Agreement remains in effect, one trustee that is an employee, officer or director of RMR (the “Manager Trustee”) and (iv) until the one-year anniversary of the Effective Date, one trustee initially designated for appointment by the Official Committee of Unsecured Creditors (the “Unsecured Creditor Trustee”). Upon the designation and election by the board of trustees of each of the seven members of the board of trustees pursuant to the preceding sentence, any trustee that is not a Helix Partners Trustee, a Redwood Capital Trustee, the Manager Trustee or the Unsecured Creditor Trustee shall immediately resign from office. The Manager Trustee shall resign from the board of trustees if the Amended Business Management Agreement is terminated, if the Manager Trustee becomes a director or officer of another publicly traded office properties real estate investment trust or if for any other reason the Manager Trustee ceases to satisfy the conditions to qualification for nomination under the Amended Bylaws, and thereafter RMR shall not have any right to appoint a replacement trustee.
For more information regarding the Amended Charter and the Amended Bylaws, see the Company’s Registration Statement on Form 8-A filed with the SEC on June 17, 2026.
Item 8.01. Other Matters.
The Company is filing as Exhibit 99.1 (which is incorporated by reference herein) a description of the material United States federal income tax considerations relating to the Company’s qualification and taxation as a real estate investment trust for United States federal income tax purposes and the acquisition, ownership and disposition of the Company’s Reorganized Common Equity. This description contained in Exhibit 99.1 replaces and supersedes prior descriptions of the federal income tax treatment of the Company and its shareholders to the extent they are inconsistent with the description contained in this Current Report and any reference to a prior description shall be deemed to be a reference to this description.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits
| Exhibit No. | Description of Exhibit |
| 3.1 | Articles of Amendment and Restatement of Office Properties Income Trust, dated June 17, 2026. (Incorporated by reference to the Company’s Registration Statement on Form 8-A filed on June 17, 2026, File No. 001-34364.) |
| 3.2 | Fourth Amended and Restated Bylaws of Office Properties Income Trust, adopted June 17, 2026. (Incorporated by reference to the Company’s Registration Statement on Form 8-A filed on June 17, 2026, File No. 001-34364.) |
| 4.1 | Indenture, dated as of June 17, 2026, among Office Properties Income Trust, certain subsidiary guarantors party thereto, and U.S. Bank Trust Company, National Association, as trustee and collateral agent, relating to the 10.000% Senior Secured Notes due 2031. (Filed herewith.) |
| 4.2 | Indenture, dated as of June 17, 2026, among Office Properties Income Intermediate Holdco II Trust, Office Properties Income Trust, Office Properties Income Intermediate Holdco I Trust, certain subsidiary guarantors party thereto, and UMB Bank, N.A., as trustee and collateral agent, relating to the 8.375% Senior Secured Limited OPI Guaranteed Notes due 2029. (Filed herewith.) |
| 4.3 | Warrant Agreement, dated as of June 17, 2026, between Office Properties Income Trust and CSC Delaware Trust Company, as warrant agent (including forms of Warrant). (Filed herewith.) |
| 8.1 | Opinion of Sullivan & Worcester LLP as to certain tax matters. (Filed herewith.) |
| 10.1 | Third Amended and Restated Business Management Agreement, dated as of June 17, 2026, between Office Properties Income Trust and The RMR Group LLC. (Filed herewith.) |
| 10.2 | Third Amended and Restated Property Management Agreement, dated as of June 17, 2026, between Office Properties Income Trust and The RMR Group LLC. (Filed herewith.) |
| 10.3 | Waiver and Amendment No. 1 to the Second Amended and Restated Credit Agreement, dated as of June 17, 2026, among OPI WF Borrower LLC, Office Properties Income Trust, OPI WF Holding LLC, the lenders party thereto, and Wilmington Savings Fund Society, FSB, as administrative agent. (Filed herewith.) |
| 10.4 | Preemptive Rights Agreement, dated as of June 17, 2026, by and among Office Properties Income Trust and certain of its shareholders. (Filed herewith.) |
| 23.1 | Consent of Sullivan & Worcester LLP (contained in Exhibit 8.1). |
| 99.1 | Material United States Federal Income Tax Considerations. (Filed herewith.) |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| OFFICE PROPERTIES INCOME TRUST | ||
| By: | /s/ Brian E. Donley | |
|
Name: Title: |
Brian E. Donley Chief Financial Officer and Treasurer | |
Dated: June 23, 2026
Exhibit 99.1
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material United States federal income tax considerations is based on existing law and is limited to investors who own our shares or the warrants we have issued pursuant to the Fourth Amended Joint Chapter 11 Plan of Reorganization of Office Properties Income Trust and Its Debtor Affiliates, as filed on April 21, 2026 with the United States Bankruptcy Court for the Southern District of Texas, or the Plan, as applicable, as investment assets rather than as inventory or as property used in a trade or business. Holders of both our shares and warrants should apply this summary separately to each type of interest except as otherwise provided in this summary. The summary does not discuss all of the particular tax considerations that might be relevant to you if you are subject to special rules under federal income tax law, for example if you are:
| · | a bank, insurance company or other financial institution; |
| · | a regulated investment company or real estate investment trust, the latter hereinafter referred to as a REIT; |
| · | a subchapter S corporation; |
| · | a broker, dealer or trader in securities or foreign currencies; |
| · | a person who marks-to-market our shares or warrants, as applicable, for U.S. federal income tax purposes; |
| · | a U.S. holder (as defined below) that has a functional currency other than the U.S. dollar; |
| · | a person who acquires or owns our shares or warrants, as applicable, in connection with employment or other performance of services; |
| · | a person subject to alternative minimum tax; |
| · | a person who acquires or owns our shares or warrants, as applicable, as part of a straddle, hedging transaction, constructive sale transaction, constructive ownership transaction or conversion transaction, or as part of a “synthetic security” or other integrated financial transaction; |
| · | a person who owns 10% or more (by vote or value, directly or constructively under the Internal Revenue Code of 1986, as amended, or the IRC) of any class of our shares; |
| · | a U.S. expatriate; |
| · | a non-U.S. holder (as defined below) whose investment in our shares or warrants, as applicable, is effectively connected with the conduct of a trade or business in the United States; |
| · | a nonresident alien individual present in the United States for 183 days or more during an applicable taxable year; |
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| · | a “qualified shareholder” (as defined in Section 897(k)(3)(A) of the IRC); |
| · | a “qualified foreign pension fund” (as defined in Section 897(l)(2) of the IRC) or any entity wholly owned by one or more qualified foreign pension funds; |
| · | a non-U.S. holder that is a passive foreign investment company or controlled foreign corporation; |
| · | a person subject to special tax accounting rules as a result of their use of applicable financial statements (within the meaning of Section 451(b)(3) of the IRC); |
| · | a person that acquires our shares or warrants, as applicable, pursuant to the Plan; or |
| · | except as specifically described in the following summary, a trust, estate, tax-exempt entity, governmental organization or foreign person. |
The sections of the IRC that govern the federal income tax qualification and treatment of a REIT and its shareholders are complex. This presentation is a summary of applicable IRC provisions, related rules and regulations, and administrative and judicial interpretations, all of which are subject to change, possibly with retroactive effect. Future legislative, judicial or administrative actions or decisions could also affect the accuracy of statements made in this summary. We have not received a ruling from the U.S. Internal Revenue Service, or the IRS, with respect to any matter described in this summary, and we cannot be sure that the IRS or a court will agree with all of the statements made in this summary. The IRS could, for example, take a different position from that described in this summary with respect to our acquisitions, operations, valuations, restructurings or other matters, which, if a court agreed, could result in significant tax liabilities for applicable parties. In addition, this summary is not exhaustive of all possible tax considerations and does not discuss any estate, gift, state, local or foreign tax considerations. For all these reasons, we urge you and any holder of or prospective acquiror of our shares or warrants, as applicable, to consult with a tax advisor about the federal income tax and other tax consequences of the acquisition, ownership and disposition of our shares or warrants. Our intentions and beliefs described in this summary are based upon our understanding of applicable laws and regulations that are in effect as of the date of this Current Report on Form 8-K. If new laws or regulations are enacted which impact us directly or indirectly, we may change our intentions or beliefs.
Your federal income tax consequences generally will differ depending on whether or not you are a “U.S. holder.” For purposes of this summary, a “U.S. holder” is a beneficial owner of our shares or warrants, as applicable, that is:
| · | an individual who is a citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the substantial presence residency test under the federal income tax laws; |
| · | an entity treated as a corporation for federal income tax purposes that is created or organized in or under the laws of the United States, any state thereof or the District of Columbia; |
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| · | an estate the income of which is subject to federal income taxation regardless of its source; or |
| · | a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or, to the extent provided in Treasury regulations, a trust in existence on August 20, 1996 that has elected to be treated as a domestic trust; |
whose status as a U.S. holder is not overridden by an applicable tax treaty. Conversely, a “non-U.S. holder” is a beneficial owner of our shares or warrants, as applicable, that is not an entity (or other arrangement) treated as a partnership for federal income tax purposes and is not a U.S. holder. References in this summary to a “shareholder” refer particularly to a holder of our shares.
If any entity (or other arrangement) treated as a partnership for federal income tax purposes holds our shares or warrants, as applicable, the tax treatment of a partner in the partnership generally will depend upon the tax status of the partner and the activities of the partnership. Any entity (or other arrangement) treated as a partnership for federal income tax purposes that is a holder of our shares or warrants, as applicable, and the partners in such a partnership (as determined for federal income tax purposes) are urged to consult their own tax advisors about the federal income tax consequences and other tax consequences of the acquisition, ownership and disposition of our shares or warrants.
Bankruptcy Reorganization
As anticipated in the discussion under “Business─Chapter 11 Bankruptcy Proceedings” in Part I, Item 1 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2025, or our Annual Report, we have emerged from a bankruptcy reorganization under chapter 11 of title 11, or Chapter 11, of the United States Code. The reorganization has given rise to a number of material federal income tax issues for us, which may in turn affect our shareholders.
One effect of the reorganization is a material reduction in our outstanding liabilities by us issuing our shares, our warrants and in some cases new issuances of our debt in exchange for the existing liabilities of many classes of claimants. The aggregate value of the common shares, warrants and new debt we issued was materially less than the balance of the liabilities extinguished in the exchanges. In general, relief of liabilities for less than our adjusted issue price for such liabilities would result in our recognizing gross income from cancellation of debt, or COD. However, because the COD income arose in the context of a bankruptcy reorganization, we are allowed to exclude the COD income from our gross income in exchange for reductions in tax attributes that could give rise to future tax benefits. Given our circumstances, the COD income would in general first reduce our accumulated net operating losses, or NOLs, dollar for dollar, and any remaining COD income not offset by the reduction of NOLs would be applied to reduce the basis of our assets dollar for dollar. We may elect instead to offset the COD income first against the basis of our depreciable assets, with any remaining COD income then reducing our NOLs, in each case dollar for dollar.
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With the consummation of the Plan, our shares that were outstanding prior to the reorganization have been cancelled, and the new owners of our shares have for the most part received those shares by surrendering debt claims against us. The resulting change in our share ownership constitutes an “ownership change” for purposes of Section 382 of the IRC. At the time of the ownership change, we believe that the aggregate tax basis of our assets far exceeded their aggregate value, which is a “Net Unrealized Built-In Loss”, or NUBIL.
Section 382 of the IRC generally requires that an ownership change result in a severe restriction on our ability to offset our income with existing beneficial tax attributes, such as our accumulated NOLs. We expect to continue our historic real estate leasing business for at least two years following our emergence from bankruptcy, but if we do not, IRC Section 382 also has provisions that would effectively strip us of our beneficial tax attributes altogether. In addition, for a five-year period following the ownership change, to the extent of our NUBIL, any recognized losses from the disposition of property or any depreciation deductions attributable to the NUBIL would be currently disallowed and instead added to our balance of existing beneficial tax attributes, causing only a relatively small portion of those losses and deductions to be deductible in each of our tax years. Such limitations would cause such losses and depreciation generally not to be available to offset our ordinary income or gains from dispositions of property. A likely result is that we would be required to report substantially more taxable income. Such an increase in our taxable income would put a material strain on our ability to meet our obligation to distribute most of our taxable income in order to maintain qualification for taxation as a REIT.
In general, IRC Section 382 limits annual use of beneficial tax attributes to a dollar figure which is the product of the aggregate value of the corporation’s shares as of the ownership change multiplied by an applicable interest rate at the time of the ownership change which is determined by the IRS. The standard rule for a corporation in bankruptcy is that the value of the corporation is determined after the reduction of liabilities as a result of the bankruptcy reorganization, that is, the value is increased by the amount of liabilities relieved. However, we believe that the specific circumstances of our bankruptcy reorganization may allow us to qualify for an exception to the general effects of an IRC Section 382 ownership change described above. The exception would exempt us from the limitations on deductions, losses and depreciation resulting from the ownership change at the cost of reduction of a relatively small amount of tax attributes (generally interest expense deductions attributable to debt that was surrendered in exchange for our shares). This exception is dependent upon many factual determinations and interpretations of rules for which there is little guidance. If the IRS successfully challenged our qualification for the exception, then we would be subject to the general limitations on losses and deductions described above. Even if we do qualify for the exception, if we were to undergo another IRC Section 382 ownership change in the two-year period following our emergence from bankruptcy, then our accumulated beneficial tax attributes and any resulting NUBIL-related losses and deductions would effectively be eliminated, not just limited. Our bylaws contain restrictions on transfer intended to avoid such a subsequent ownership change, but we cannot be sure that they will be effective to prevent one from happening. Any IRC Section 382 ownership change not eligible for an exemption from the effects of IRC Section 382 would increase our taxable income and thereby increase our income distribution requirements to maintain our REIT taxation status.
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We will likely not be able to make final determinations regarding the amounts of our COD income, the particular reductions to our beneficial tax attributes and our qualification for an exemption from the limitations imposed by an IRC Section 382 ownership change until we file our federal income tax return for our 2026 tax year.
Taxation as a REIT
We have elected to be taxed as a REIT under Sections 856 through 860 of the IRC, commencing with our 2009 taxable year. Our REIT election, assuming continuing compliance with the then applicable qualification tests, has continued and will continue in effect for subsequent taxable years. Although we cannot be sure, we believe that from and after our 2009 taxable year we have been organized and have operated, and will continue to be organized and to operate, in a manner that qualified us and will continue to qualify us to be taxed as a REIT under the IRC.
As a REIT, we generally are not subject to federal income tax on our net income distributed as dividends to our shareholders. Distributions to our shareholders generally are included in our shareholders’ income as dividends to the extent of our available current or accumulated earnings and profits. Our dividends are not generally entitled to the preferential tax rates on qualified dividend income, but a portion of our dividends may be treated as capital gain dividends or as qualified dividend income, all as explained below. In addition, pursuant to the deduction-without-outlay mechanism of Section 199A of the IRC, our noncorporate U.S. shareholders that meet specified holding period requirements are generally eligible for lower effective tax rates on our dividends that are not treated as capital gain dividends or as qualified dividend income. No portion of any of our dividends is eligible for the dividends received deduction for corporate shareholders. Distributions in excess of our current or accumulated earnings and profits generally are treated for federal income tax purposes as returns of capital to the extent of a recipient shareholder’s basis in our shares, and will reduce this basis. Our current or accumulated earnings and profits are generally allocated first to distributions made on our preferred shares, of which there are none outstanding at this time, and thereafter to distributions made on our common shares. To the extent that such distributions exceed the basis of a U.S. shareholder’s shares, the U.S. shareholder generally must include such distributions in income as long-term capital gain, or short-term capital gain if the shares have been held for one year or less. For all these purposes, our distributions include cash distributions, any in kind distributions of property that we might make, and deemed or constructive distributions resulting from capital market activities (such as some redemptions), as described below.
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Our counsel, Sullivan & Worcester LLP, is of the opinion that we have been organized and have qualified for taxation as a REIT under the IRC for our 2009 through 2025 taxable years, and that our current and anticipated investments and plan of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT under the IRC. Our counsel’s opinions are conditioned upon the assumption that our leases, our declaration of trust, and all other legal documents to which we have been or are a party (in their current form and as they may be modified by the Plan) have been and will be complied with by all parties to those documents, upon the accuracy and completeness of the factual matters described in our Annual Report and upon representations made by us to our counsel as to certain factual matters relating to our organization and operations and our expected manner of operation. If this assumption or a description or representation is inaccurate or incomplete, our counsel’s opinions may be adversely affected and may not be relied upon. The opinions of our counsel are based upon the law as it exists today, but the law may change in the future, possibly with retroactive effect. Given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our circumstances, neither Sullivan & Worcester LLP nor we can be sure that we will qualify as or be taxed as a REIT for any particular year. Any opinion of Sullivan & Worcester LLP as to our qualification or taxation as a REIT will be expressed as of the date issued. Our counsel will have no obligation to advise us or our shareholders of any subsequent change in the matters stated, represented or assumed, or of any subsequent change in the applicable law. Also, the opinions of our counsel are not binding on either the IRS or a court, and either could take a position different from that expressed by our counsel.
Our continued qualification and taxation as a REIT will depend upon our compliance with various qualification tests imposed under the IRC and summarized below. While we believe that we have satisfied and will satisfy these tests, our counsel does not review compliance with these tests on a continuing basis. If we fail to qualify for taxation as a REIT in any year, then we will be subject to federal income taxation as if we were a corporation taxed under subchapter C of the IRC, or a C corporation, and our shareholders will be taxed like shareholders of a regular C corporation, meaning that federal income tax generally will be applied at both the corporate and shareholder levels. In this event, we could be subject to significant tax liabilities, and the amount of cash available for distribution to our shareholders could be reduced or eliminated.
If we continue to qualify for taxation as a REIT and meet the tests described below, then we generally will not pay federal income tax on amounts that we distribute to our shareholders. However, even if we continue to qualify for taxation as a REIT, we may still be subject to federal tax in the following circumstances, as described below:
| · | We will be taxed at regular corporate income tax rates on any undistributed “real estate investment trust taxable income,” including our undistributed ordinary income and net capital gains, if any. We may elect to retain and pay income tax on our net capital gain, as well as on certain amounts attributable to COD income, if any. In addition, if we so elect by making a timely designation to our shareholders, a shareholder would be taxed on its proportionate share of our undistributed capital gain and would generally be expected to receive a credit or refund for its proportionate share of the federal corporate income tax we paid on our retained net capital gain. |
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| · | If we have net income from the disposition of “foreclosure property,” as described in Section 856(e) of the IRC, that is held primarily for sale to customers in the ordinary course of a trade or business or other nonqualifying income from foreclosure property, we will be subject to tax on this income at the highest regular corporate income tax rate. |
| · | If we have net income from “prohibited transactions,” that is, dispositions at a gain of inventory or property held primarily for sale to customers in the ordinary course of a trade or business other than dispositions of foreclosure property and other than dispositions excepted by statutory safe harbors, we will be subject to tax on this income at a 100% rate. |
| · | If we fail to satisfy the 75% gross income test or the 95% gross income test discussed below, due to reasonable cause and not due to willful neglect, but nonetheless maintain our qualification for taxation as a REIT because of specified cure provisions, we will be subject to tax at a 100% rate on the greater of the amount by which we fail the 75% gross income test or the 95% gross income test, with adjustments, multiplied by a fraction intended to reflect our profitability for the taxable year. |
| · | If we fail to satisfy any of the REIT asset tests described below (other than a de minimis failure of the 5% or 10% asset tests) due to reasonable cause and not due to willful neglect, but nonetheless maintain our qualification for taxation as a REIT because of specified cure provisions, we will be subject to a tax equal to the greater of $50,000 or the highest regular corporate income tax rate multiplied by the net income generated by the nonqualifying assets that caused us to fail the test. |
| · | If we fail to satisfy any provision of the IRC that would result in our failure to qualify for taxation as a REIT (other than violations of the REIT gross income tests or violations of the REIT asset tests described below) due to reasonable cause and not due to willful neglect, we may retain our qualification for taxation as a REIT but will be subject to a penalty of $50,000 for each failure. |
| · | If we fail to distribute for any calendar year at least the sum of 85% of our REIT ordinary income for that year, 95% of our REIT capital gain net income for that year and any undistributed taxable income from prior periods, we will be subject to a 4% nondeductible excise tax on the excess of the required distribution over the amounts actually distributed. |
| · | If we acquire a REIT asset where our adjusted tax basis in the asset is determined by reference to the adjusted tax basis of the asset in the hands of a C corporation, under specified circumstances we may be subject to federal income taxation on all or part of the built-in gain (calculated as of the date the property ceased being owned by the C corporation) on such asset. We generally do not expect to sell assets if doing so would result in the imposition of a material built-in gains tax liability; but if and when we do sell assets that may have associated built-in gains tax exposure, then we expect to make appropriate provision for the associated tax liabilities on our financial statements. |
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| · | If we acquire a corporation in a transaction where we succeed to its tax attributes, to preserve our qualification for taxation as a REIT we must generally distribute all of the C corporation earnings and profits inherited in that acquisition, if any, no later than the end of our taxable year in which the acquisition occurs. However, if we fail to do so, relief provisions would allow us to maintain our qualification for taxation as a REIT provided we distribute any subsequently discovered C corporation earnings and profits and pay an interest charge in respect of the period of delayed distribution. |
| · | Our subsidiaries that are C corporations, including our “taxable REIT subsidiaries,” as defined in Section 856(l) of the IRC, or TRSs, generally will be required to pay federal corporate income tax on their earnings, and a 100% tax may be imposed on any transaction between us and one of our TRSs that does not reflect arm’s length terms. |
If we fail to qualify for taxation as a REIT in any year, then we will be subject to federal income tax in the same manner as a regular C corporation. Further, as a regular C corporation, distributions to our shareholders will not be deductible by us, nor will distributions be required under the IRC. Also, to the extent of our current and accumulated earnings and profits, all distributions to our shareholders will generally be taxable as ordinary dividends potentially eligible for the preferential tax rates discussed below under the heading “Taxation of Taxable U.S. Shareholders” and, subject to limitations in the IRC, will be potentially eligible for the dividends received deduction for corporate shareholders. Finally, we will generally be disqualified from taxation as a REIT for the four taxable years following the taxable year in which the termination of our REIT status is effective. Our failure to qualify for taxation as a REIT for even one year could result in us reducing or eliminating distributions to our shareholders, or in us incurring substantial indebtedness or liquidating substantial investments in order to pay the resulting corporate-level income taxes. Relief provisions under the IRC may allow us to continue to qualify for taxation as a REIT even if we fail to comply with various REIT requirements, all as discussed in more detail below. However, it is impossible to state whether in any particular circumstance we would be entitled to the benefit of these relief provisions.
REIT Qualification Requirements
General Requirements. Section 856(a) of the IRC 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, but for Sections 856 through 859 of the IRC, as a domestic C corporation; |
| (4) | that is not a financial institution or an insurance company subject to special provisions of the IRC; |
| (5) | the beneficial ownership of which is held by 100 or more persons; |
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| (6) | that is not “closely held,” meaning that during the last half of each taxable year, not more than 50% in value of the outstanding shares are owned, directly or indirectly, by five or fewer “individuals” (as defined in the IRC to include specified tax-exempt entities); and |
| (7) | that meets other tests regarding the nature of its income and assets and the amount of its distributions, all as described below. |
Section 856(b) of the IRC provides that conditions (1) through (4) must be met during the entire taxable year and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. Although we cannot be sure, we believe that we have met conditions (1) through (7) during each of the requisite periods ending on or before the close of our most recently completed taxable year, and that we will continue to meet these conditions in our current and future taxable years. To help comply with condition (6), our declaration of trust restricts transfers of our shares that would otherwise result in concentrated ownership positions. These restrictions, however, do not ensure that we have previously satisfied, and may not ensure that we will in all cases be able to continue to satisfy, the share ownership requirements described in condition (6). If we comply with applicable Treasury regulations to ascertain the ownership of our outstanding shares and do not know, or by exercising reasonable diligence would not have known, that we failed condition (6), then we will be treated as having met condition (6). Accordingly, we have complied and will continue to comply with these regulations, including by requesting annually from holders of significant percentages of our shares information regarding the ownership of our shares. Under our declaration of trust, our shareholders are required to respond to these requests for information. A shareholder that fails or refuses to comply with the request is required by Treasury regulations to submit a statement with its federal income tax return disclosing its actual ownership of our shares and other information.
For purposes of condition (6), an “individual” generally includes a natural person, a supplemental unemployment compensation benefit plan, a private foundation, or a portion of a trust permanently set aside or used exclusively for charitable purposes, but does not include a qualified pension plan or profit-sharing trust. As a result, REIT shares owned by an entity that is not an “individual” are considered to be owned by the direct and indirect owners of the entity that are individuals (as so defined), rather than to be owned by the entity itself. Similarly, REIT shares held by a qualified pension plan or profit-sharing trust are treated as held directly by the individual beneficiaries in proportion to their actuarial interests in such plan or trust. Consequently, five or fewer such trusts could own more than 50% of the interests in an entity without jeopardizing that entity’s qualification for taxation as a REIT.
The IRC provides that we will not automatically fail to qualify for taxation as a REIT if we do not meet conditions (1) through (6), provided we can establish that such failure was due to reasonable cause and not due to willful neglect. Each such excused failure will result in the imposition of a $50,000 penalty instead of REIT disqualification. This relief provision may apply to a failure of the applicable conditions even if the failure first occurred in a year prior to the taxable year in which the failure was discovered.
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Our Wholly Owned Subsidiaries and Our Investments Through Partnerships. Except in respect of a TRS as discussed below, Section 856(i) of the IRC provides that any corporation, 100% of whose stock is held by a REIT and its disregarded subsidiaries, is a qualified REIT subsidiary and shall not be treated as a separate corporation for U.S. federal income tax purposes. The assets, liabilities and items of income, deduction and credit of a qualified REIT subsidiary are treated as the REIT’s. We believe that each of our direct and indirect wholly owned subsidiaries, other than the TRSs discussed below (and entities whose equity is owned in whole or in part by such TRSs), will be either a qualified REIT subsidiary within the meaning of Section 856(i)(2) of the IRC or a noncorporate entity that for federal income tax purposes is not treated as separate from its owner under Treasury regulations issued under Section 7701 of the IRC, each such entity referred to as a QRS. Thus, in applying all of the REIT qualification requirements described in this summary, all assets, liabilities and items of income, deduction and credit of our QRSs are treated as ours, and our investment in the stock and other securities of such QRSs will be disregarded.
We have invested and may in the future invest in real estate through one or more entities that are treated as partnerships for federal income tax purposes. In the case of a REIT that is a partner in a partnership, Treasury regulations under the IRC provide that, for purposes of the REIT qualification requirements regarding income and assets described below, the REIT is generally deemed to own its proportionate share, based on respective capital interests (including any preferred equity interests in the partnership), of the income and assets of the partnership (except that for purposes of the 10% value test, described below, the REIT’s proportionate share of the partnership’s assets is based on its proportionate interest in the equity and specified debt securities issued by the partnership). In addition, for these purposes, the character of the assets and items of gross income of the partnership generally remains the same in the hands of the REIT. In contrast, for purposes of the distribution requirements discussed below, we must take into account as a partner our share of the partnership’s income as determined under the general federal income tax rules governing partners and partnerships under Subchapter K of the IRC.
Subsidiary REITs. We have in the past invested in real estate through entities that were intended to qualify for taxation as REITs, and we may in the future form or acquire additional entities that are intended to qualify for taxation as REITs. When a subsidiary qualifies for taxation as a REIT separate and apart from its REIT parent, the subsidiary’s shares are qualifying real estate assets for purposes of the REIT parent’s 75% asset test described below. However, failure of the subsidiary to separately satisfy the various REIT qualification requirements described in this summary or that are otherwise applicable (and failure to qualify for the applicable relief provisions) would generally result in (a) the subsidiary being subject to regular U.S. corporate income tax, as described above, and (b) the REIT parent’s ownership in the subsidiary (i) ceasing to be qualifying real estate assets for purposes of the 75% asset test and (ii) becoming subject to the 5% asset test, the 10% vote test and the 10% value test, each as described below, generally applicable to a REIT’s ownership in corporations other than REITs and TRSs. In such a situation, the REIT parent’s own qualification and taxation as a REIT could be jeopardized on account of the subsidiary’s failure cascading up to the REIT parent, all as described below under the heading “─Asset Tests”. We have made and expect to make protective TRS elections with respect to any subsidiary REIT that we form or acquire and may implement other protective arrangements intended to avoid a cascading REIT failure if any of our intended subsidiary REITs were not to qualify for taxation as a REIT, but we cannot be sure that such protective elections or other arrangements will be effective to avoid or mitigate the resulting adverse consequences to us.
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Taxable REIT Subsidiaries. As a REIT, we are permitted to own any or all of the securities of a TRS, provided that no more than 20% (25% with respect to taxable years beginning after December 31, 2025) of the total value of our assets, at the close of each quarter, is comprised of our investments in the stock or other securities of our TRSs. Very generally, a TRS is a subsidiary corporation other than a REIT in which a REIT directly or indirectly holds stock and that has made a joint election with such REIT to be treated as a TRS. A TRS is taxed as a regular C corporation, separate and apart from any affiliated REIT. Our ownership of stock and other securities in our TRSs is exempt from the 5% asset test, the 10% vote test and the 10% value test discussed below. Among other requirements, a TRS of ours must:
| (1) | not directly or indirectly operate or manage a lodging facility or a health care facility; and |
| (2) | not directly or indirectly provide to any person, under a franchise, license or otherwise, rights to any brand name under which any lodging facility or health care facility is operated, except that in limited circumstances a subfranchise, sublicense or similar right may be granted to an independent contractor to operate or manage a lodging facility or a health care facility. |
In addition, any corporation (other than a REIT and other than a QRS) in which a TRS directly or indirectly owns more than 35% of the voting power or value of the outstanding securities is automatically a TRS (excluding, for this purpose, certain “straight debt” securities). Subject to the discussion below, we believe that we and each of our TRSs have complied with, and will continue to comply with, the requirements for TRS status at all times during which the subsidiary’s TRS election is intended to be in effect, and we believe that the same will be true for any TRS that we later form or acquire.
As discussed below, TRSs can perform services for our tenants without disqualifying the rents we receive from those tenants under the 75% gross income test or the 95% gross income test discussed below. Moreover, because our TRSs are taxed as C corporations that are separate from us, their assets, liabilities and items of income, deduction and credit generally are not imputed to us for purposes of the REIT qualification requirements described in this summary. Therefore, our TRSs may generally conduct activities that would be treated as prohibited transactions or would give rise to nonqualified income if conducted by us directly. Additionally, while a REIT is generally limited in its ability to earn qualifying rental income from a TRS, a REIT can earn qualifying rental income from the lease of a qualified lodging facility to a TRS if an eligible independent contractor operates the property, as discussed more fully below.
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Restrictions and sanctions are imposed on TRSs and their affiliated REITs to ensure that the TRSs will be subject to an appropriate level of federal income taxation. For example, if a TRS pays interest, rent or other amounts to its affiliated REIT in an amount that exceeds what an unrelated third party would have paid in an arm’s length transaction, then the REIT generally will be subject to an excise tax equal to 100% of the excessive portion of the payment. Further, if in comparison to an arm’s length transaction, a third-party tenant has overpaid rent to the REIT in exchange for underpaying the TRS for services rendered, and if the REIT has not adequately compensated the TRS for services provided to or on behalf of the third-party tenant, then the REIT may be subject to an excise tax equal to 100% of the undercompensation to the TRS. A safe harbor exception to this excise tax applies if the TRS has been compensated at a rate at least equal to 150% of its direct cost in furnishing or rendering the service. Finally, the 100% excise tax also applies to the underpricing of services provided by a TRS to its affiliated REIT in contexts where the services are unrelated to services for REIT tenants. We cannot be sure that arrangements involving our TRSs will not result in the imposition of one or more of these restrictions or sanctions, but we do not believe that we or our TRSs are or will be subject to these impositions.
Income Tests. We must satisfy two gross income tests annually to maintain our qualification for taxation as a REIT. First, at least 75% of our gross income for each taxable year must be derived from investments relating to real property, including “rents from real property” within the meaning of Section 856(d) of the IRC, interest and gain from mortgages on real property or on interests in real property, income and gain from foreclosure property, gain from the sale or other disposition of real property (including specified ancillary personal property treated as real property under the IRC), or dividends on and gain from the sale or disposition of shares in other REITs (but excluding in all cases any gains subject to the 100% tax on prohibited transactions). When we receive new capital in exchange for our shares or in a public offering of our five-year or longer debt instruments, income attributable to the temporary investment of this new capital in stock or a debt instrument, if received or accrued within one year of our receipt of the new capital, is generally also qualifying income under the 75% gross income test. Second, at least 95% of our gross income for each taxable year must consist of income that is qualifying income for purposes of the 75% gross income test, other types of interest and dividends, gain from the sale or disposition of stock or securities, or any combination of these. Gross income from our sale of property that we hold primarily for sale to customers in the ordinary course of business, income and gain from specified “hedging transactions” that are clearly and timely identified as such, and income from the repurchase or discharge of indebtedness is excluded from both the numerator and the denominator in both gross income tests. In addition, specified foreign currency gains will be excluded from gross income for purposes of one or both of the gross income tests.
In order to qualify as “rents from real property” within the meaning of Section 856(d) of the IRC, several requirements must be met:
| · | The amount of rent received generally must not be based on the income or profits of any person, but may be based on a fixed percentage or percentages of receipts or sales. |
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| · | Rents generally do not qualify if the REIT owns 10% or more by vote or value of stock of the tenant (or 10% or more of the interests in the assets or net profits of the tenant, if the tenant is not a corporation), whether directly or after application of attribution rules. We generally do not intend to lease property to any party if rents from that property would not qualify as “rents from real property,” but application of the 10% ownership rule is dependent upon complex attribution rules and circumstances that may be beyond our control. Our declaration of trust generally disallows transfers or purported acquisitions, directly or by attribution, of our shares to the extent necessary to maintain our qualification for taxation as a REIT under the IRC. Nevertheless, we cannot be sure that these restrictions will be effective to prevent our qualification for taxation as a REIT from being jeopardized under the 10% affiliated tenant rule. Furthermore, we cannot be sure that we will be able to monitor and enforce these restrictions, nor will our shareholders necessarily be aware of ownership of our shares attributed to them under the IRC’s attribution rules. |
| · | There is a limited exception to the above prohibition on earning “rents from real property” from a 10% affiliated tenant where the tenant is a TRS. If at least 90% of the leased space of a property is leased to tenants other than TRSs and 10% affiliated tenants, and if the TRS’s rent to the REIT for space at that property is substantially comparable to the rents paid by nonaffiliated tenants for comparable space at the property, then otherwise qualifying rents paid by the TRS to the REIT will not be disqualified on account of the rule prohibiting 10% affiliated tenants. |
| · | There is an additional exception to the above prohibition on earning “rents from real property” from a 10% affiliated tenant. For this additional exception to apply, a real property interest in a “qualified lodging facility” must be leased by the REIT to its TRS, and the property must be operated on behalf of the TRS by a person who is an “eligible independent contractor,” all as described in Sections 856(d)(8)-(9) of the IRC. As described below, we believe our lease with our applicable TRS has satisfied and will continue to satisfy these requirements. |
| · | In order for rents to qualify, a REIT generally must not manage the property or furnish or render services to the tenants of the property, except through an independent contractor from whom it derives no income or through one of its TRSs. There is an exception to this rule permitting a REIT to perform customary management and tenant services of the sort that a tax-exempt organization could perform without being considered in receipt of “unrelated business taxable income” as defined in Section 512(b)(3) of the IRC, or UBTI. In addition, a de minimis amount of noncustomary services provided to tenants will not disqualify income as “rents from real property” as long as the value of the impermissible tenant services does not exceed 1% of the gross income from the property. |
| · | If rent attributable to personal property leased in connection with a lease of real property is 15% or less of the total rent received under the lease, then the rent attributable to personal property will qualify as “rents from real property;” if this 15% threshold is exceeded, then the rent attributable to personal property will not so qualify. The portion of rental income treated as attributable to personal property is determined according to the ratio of the fair market value of the personal property to the total fair market value of the real and personal property that is rented. |
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| · | In addition, “rents from real property” includes both charges we receive for services customarily rendered in connection with the rental of comparable real property in the same geographic area, even if the charges are separately stated, as well as charges we receive for services provided by our TRSs when the charges are not separately stated. Whether separately stated charges received by a REIT for services that are not geographically customary and provided by a TRS are included in “rents from real property” has not been addressed clearly by the IRS in published authorities; however, our counsel, Sullivan & Worcester LLP, is of the opinion that, although the matter is not free from doubt, “rents from real property” also includes charges we receive for services provided by our TRSs when the charges are separately stated, even if the services are not geographically customary. Accordingly, we believe that our revenues from TRS-provided services, whether the charges are separately stated or not, qualify as “rents from real property” because the services satisfy the geographically customary standard, because the services have been provided by a TRS, or for both reasons. |
We believe that all or substantially all of our rents and related service charges have qualified and will continue to qualify as “rents from real property” for purposes of Section 856 of the IRC.
Absent the “foreclosure property” rules of Section 856(e) of the IRC, a REIT’s receipt of active, nonrental gross income from a property would not qualify under the 75% and 95% gross income tests. But as foreclosure property, the active, nonrental gross income from the property would so qualify. Foreclosure property is generally any real property, including interests in real property, and any personal property incident to such real property:
| · | that is acquired by a REIT as a result of the REIT having bid on such property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law, after there was a default or when default was imminent on a lease of such property or on indebtedness that such property secured; |
| · | for which any related loan acquired by the REIT was acquired at a time when the default was not imminent or anticipated; and |
| · | for which the REIT makes a proper election to treat the property as foreclosure property. |
Any gain that a REIT recognizes on the sale of foreclosure property held as inventory or primarily for sale to customers, plus any income it receives from foreclosure property that would not otherwise qualify under the 75% gross income test in the absence of foreclosure property treatment, reduced by expenses directly connected with the production of those items of income, would be subject to federal income tax at the highest regular corporate income tax rate under the foreclosure property income tax rules of Section 857(b)(4) of the IRC. Thus, if a REIT should lease foreclosure property in exchange for rent that qualifies as “rents from real property” as described above, then that rental income is not subject to the foreclosure property income tax.
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Property generally ceases to be foreclosure property at the end of the third taxable year following the taxable year in which the REIT acquired the property, or longer if an extension is obtained from the IRS. However, this grace period terminates and foreclosure property ceases to be foreclosure property on the first day:
| · | on which a lease is entered into for the property that, by its terms, will give rise to income that does not qualify for purposes of the 75% gross income test (disregarding income from foreclosure property), or any nonqualified income under the 75% gross income test is received or accrued by the REIT, directly or indirectly, pursuant to a lease entered into on or after such day; |
| · | on which any construction takes place on the property, other than completion of a building or any other improvement where more than 10% of the construction was completed before default became imminent and other than specifically exempted forms of maintenance or deferred maintenance; or |
| · | which is more than 90 days after the day on which the REIT acquired the property and the property is used in a trade or business which is conducted by the REIT, other than through an independent contractor from whom the REIT itself does not derive or receive any income or a TRS. |
Other than sales of foreclosure property, any gain that we realize on the sale of property held as inventory or other property held primarily for sale to customers in the ordinary course of a trade or business, together known as dealer gains, may be treated as income from a prohibited transaction that is subject to a penalty tax at a 100% rate. The 100% tax does not apply to gains from the sale of property that is held through a TRS, although such income will be subject to tax in the hands of the TRS at regular corporate income tax rates; we may therefore utilize our TRSs in transactions in which we might otherwise recognize dealer gains. Whether property is held as inventory or primarily for sale to customers in the ordinary course of a trade or business is a question of fact that depends on all the facts and circumstances surrounding each particular transaction. Sections 857(b)(6)(C) and (E) of the IRC provide safe harbors pursuant to which limited sales of real property held for at least two years and meeting specified additional requirements will not be treated as prohibited transactions. However, compliance with the safe harbors is not always achievable in practice. We attempt to structure our activities to avoid transactions that are prohibited transactions, or otherwise conduct such activities through TRSs; but, we cannot be sure whether or not the IRS might successfully assert that we are subject to the 100% penalty tax with respect to any particular transaction. Gains subject to the 100% penalty tax are excluded from the 75% and 95% gross income tests, whereas real property gains that are not dealer gains or that are exempted from the 100% penalty tax on account of the safe harbors are considered qualifying gross income for purposes of the 75% and 95% gross income tests.
We believe that any gain that we have recognized, or will recognize, in connection with our disposition of assets and other transactions, including through any partnerships, will generally qualify as income that satisfies the 75% and 95% gross income tests, and will not be dealer gains or subject to the 100% penalty tax. This is because our general intent has been and is to: (a) own our assets for investment (including through joint ventures) with a view to long-term income production and capital appreciation; (b) engage in the business of developing, owning, leasing and managing our existing properties and acquiring, developing, owning, leasing and managing new properties; and (c) make occasional dispositions of our assets consistent with our long-term investment objectives.
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If we fail to satisfy one or both of the 75% gross income test or the 95% gross income test in any taxable year, we may nevertheless qualify for taxation as a REIT for that year if we satisfy the following requirements: (a) our failure to meet the test is due to reasonable cause and not due to willful neglect; and (b) after we identify the failure, we file a schedule describing each item of our gross income included in the 75% gross income test or the 95% gross income test for that taxable year. Even if this relief provision does apply, a 100% tax is imposed upon the greater of the amount by which we failed the 75% gross income test or the amount by which we failed the 95% gross income test, with adjustments, multiplied by a fraction intended to reflect our profitability for the taxable year. This relief provision may apply to a failure of the applicable income tests even if the failure first occurred in a year prior to the taxable year in which the failure was discovered.
Based on the discussion above, we believe that we have satisfied, and will continue to satisfy, the 75% and 95% gross income tests outlined above on a continuing basis beginning with our first taxable year as a REIT.
Asset Tests. At the close of each calendar quarter of each taxable year, we must also satisfy the following asset percentage tests in order to qualify for taxation as a REIT for federal income tax purposes:
| · | At least 75% of the value of our total assets must consist of “real estate assets,” defined as real property (including interests in real property and interests in mortgages on real property or on interests in real property), ancillary personal property to the extent that rents attributable to such personal property are treated as rents from real property in accordance with the rules described above, cash and cash items, shares in other REITs, debt instruments issued by “publicly offered REITs” as defined in Section 562(c)(2) of the IRC, government securities and temporary investments of new capital (that is, any stock or debt instrument that we hold that is attributable to any amount received by us (a) in exchange for our shares or (b) in a public offering of our five-year or longer debt instruments, but in each case only for the one-year period commencing with our receipt of the new capital). |
| · | Not more than 25% of the value of our total assets may be represented by securities other than those securities that count favorably toward the preceding 75% asset test. |
| · | Of the investments included in the preceding 25% asset class, the value of any one non-REIT issuer’s securities that we own may not exceed 5% of the value of our total assets. In addition, we may not own more than 10% of the vote or value of any one non-REIT issuer’s outstanding securities, unless the securities are “straight debt” securities or otherwise excepted as discussed below. Our stock and other securities in a TRS are exempted from these 5% and 10% asset tests. |
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| · | Not more than 20% (25% with respect to taxable years beginning after December 31, 2025) of the value of our total assets may be represented by stock or other securities of our TRSs. |
| · | Not more than 25% of the value of our total assets may be represented by “nonqualified publicly offered REIT debt instruments” as defined in Section 856(c)(5)(L)(ii) of the IRC. |
Our counsel, Sullivan & Worcester LLP, is of the opinion that, although the matter is not free from doubt, our investments in the equity or debt of a TRS of ours, to the extent that and during the period in which they qualify as temporary investments of new capital, will be treated as real estate assets, and not as securities, for purposes of the above REIT asset tests.
The above REIT asset tests must be satisfied at the close of each calendar quarter of each taxable year as a REIT. After a REIT meets the asset tests at the close of any quarter, it will not lose its qualification for taxation as a REIT in any subsequent quarter solely because of fluctuations in the values of its assets. This grandfathering rule may be of limited benefit to a REIT such as us that makes periodic acquisitions of both qualifying and nonqualifying REIT assets. When a failure to satisfy the above asset tests results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient nonqualifying assets within thirty days after the close of that quarter.
In addition, if we fail the 5% asset test, the 10% vote test or the 10% value test at the close of any quarter and we do not cure such failure within thirty days after the close of that quarter, that failure will nevertheless be excused if (a) the failure is de minimis and (b) within six months after the last day of the quarter in which we identify the failure, we either dispose of the assets causing the failure or otherwise satisfy the 5% asset test, the 10% vote test and the 10% value test. For purposes of this relief provision, the failure will be de minimis if the value of the assets causing the failure does not exceed the lesser of (a) 1% of the total value of our assets at the end of the relevant quarter or (b) $10,000,000. If our failure is not de minimis, or if any of the other REIT asset tests have been violated, we may nevertheless qualify for taxation as a REIT if (a) we provide the IRS with a description of each asset causing the failure, (b) the failure was due to reasonable cause and not willful neglect, (c) we pay a tax equal to the greater of (1) $50,000 or (2) the highest regular corporate income tax rate imposed on the net income generated by the assets causing the failure during the period of the failure, and (d) within six months after the last day of the quarter in which we identify the failure, we either dispose of the assets causing the failure or otherwise satisfy all of the REIT asset tests. These relief provisions may apply to a failure of the applicable asset tests even if the failure first occurred in a year prior to the taxable year in which the failure was discovered.
The IRC also provides an excepted securities safe harbor to the 10% value test that includes among other items (a) “straight debt” securities, (b) specified rental agreements in which payment is to be made in subsequent years, (c) any obligation to pay “rents from real property,” (d) securities issued by governmental entities that are not dependent in whole or in part on the profits of or payments from a nongovernmental entity, and (e) any security issued by another REIT. In addition, any debt instrument issued by an entity classified as a partnership for federal income tax purposes, and not otherwise excepted from the definition of a security for purposes of the above safe harbor, will not be treated as a security for purposes of the 10% value test if at least 75% of the partnership’s gross income, excluding income from prohibited transactions, is qualifying income for purposes of the 75% gross income test.
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We have maintained and will continue to maintain records of the value of our assets to document our compliance with the above asset tests and intend to take actions as may be required to cure any failure to satisfy the tests within thirty days after the close of any quarter or within the six month periods described above.
Based on the discussion above, we believe that we have satisfied, and will continue to satisfy, the REIT asset tests outlined above on a continuing basis beginning with our first taxable year as a REIT.
Annual Distribution Requirements. In order to qualify for taxation as a REIT under the IRC, we are required to make annual distributions other than capital gain dividends to our shareholders in an amount at least equal to the excess of:
| (1) | the sum of 90% of our “real estate investment trust taxable income” and 90% of our net income after tax, if any, from property received in foreclosure, over |
| (2) | the amount by which our noncash income (e.g., COD income, imputed rental income or income from transactions inadvertently failing to qualify as like-kind exchanges) exceeds 5% of our “real estate investment trust taxable income.” |
For these purposes, our “real estate investment trust taxable income” is as defined under Section 857 of the IRC and is computed without regard to the dividends paid deduction and our net capital gain and will generally be reduced by specified corporate-level income taxes that we pay (e.g., taxes on built-in gains or foreclosure property income).
Beginning with the calendar taxable year 2018, the IRC generally limits the deductibility of net interest expense paid or accrued on debt properly allocable to a trade or business to 30% of “adjusted taxable income,” subject to specified exceptions. For calendar taxable years 2018 through 2021 and beginning with the calendar taxable year 2025, adjusted taxable income was (and is) an amount roughly equivalent to earnings before interest, taxes, depreciation and amortization; adjusted taxable income for calendar taxable years 2022 through 2024 was an amount roughly equivalent to earnings before interest and taxes (i.e., an amount after depreciation and amortization). For taxable years beginning after December 31, 2025, the interest deduction limitation generally is calculated prior to the application of any interest capitalization provisions under the IRC. Any deduction in excess of the limitation is carried forward and may be used in a subsequent year, subject to that year’s 30% limitation. Provided a taxpayer makes an election (which is irrevocable), the limitation on the deductibility of net interest expense does not apply to a trade or business involving real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage, within the meaning of Section 469(c)(7)(C) of the IRC. Treasury regulations provide that a real property trade or business includes a trade or business conducted by a REIT. We have made an election to be treated as a real property trade or business and accordingly do not expect the foregoing interest deduction limitations to apply to us or to the calculation of our “real estate investment trust taxable income”, but the interest deduction limitations could apply to our subsidiary partnerships or subsidiary REITs, if any, that are not eligible for or otherwise do not make the election for electing real property trades or businesses. Distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before we timely file our federal income tax return for the earlier taxable year and if paid on or before the first regular distribution payment after that declaration. If a dividend is declared in October, November or December to shareholders of record during one of those months and is paid during the following January, then for federal income tax purposes such dividend will be treated as having been both paid and received on December 31 of the prior taxable year to the extent of any undistributed earnings and profits.
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The 90% distribution requirements may be waived by the IRS if a REIT establishes that it failed to meet them by reason of distributions previously made to meet the requirements of the 4% excise tax discussed below. To the extent that we do not distribute all of our net capital gain and all of our “real estate investment trust taxable income,” as adjusted, we will be subject to federal income tax at regular corporate income tax rates on undistributed amounts. In addition, we will be subject to a 4% nondeductible excise tax to the extent we fail within a calendar year to make required distributions to our shareholders of 85% of our ordinary income and 95% of our capital gain net income plus the excess, if any, of the “grossed up required distribution” for the preceding calendar year over the amount treated as distributed for that preceding calendar year. For this purpose, the term “grossed up required distribution” for any calendar year is the sum of our taxable income for the calendar year without regard to the deduction for dividends paid and all amounts from earlier years that are not treated as having been distributed under the provision. We will be treated as having sufficient earnings and profits to treat as a dividend any distribution by us up to the amount required to be distributed in order to avoid imposition of the 4% excise tax.
If we do not have enough cash or other liquid assets to meet our distribution requirements, or if we so choose, we may find it necessary or desirable to arrange for new debt or equity financing to provide funds for required distributions in order to maintain our qualification for taxation as a REIT. We cannot be sure that financing would be available for these purposes on favorable terms, or at all.
We may be able to rectify a failure to pay sufficient dividends for any year by paying “deficiency dividends” to shareholders in a later year. These deficiency dividends may be included in our deduction for dividends paid for the earlier year, but an interest charge would be imposed upon us for the delay in distribution. While the payment of a deficiency dividend will apply to a prior year for purposes of our REIT distribution requirements and our dividends paid deduction, it will be treated as an additional distribution to the shareholders receiving it in the year such dividend is paid.
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In addition to the other distribution requirements above, to preserve our qualification for taxation as a REIT we are required to timely distribute all C corporation earnings and profits that we inherit from acquired corporations, as described below.
We may elect to retain, rather than distribute, some or all of our net capital gain and certain of our COD income, if any, and pay income tax on such retained amounts. In addition, if we so elect by making a timely designation to our shareholders, our shareholders would include their proportionate share of such undistributed capital gain in their taxable income, and they would receive a corresponding credit for their share of the federal corporate income tax that we pay thereon. Our shareholders would then increase the adjusted tax basis of their shares by the difference between (a) the amount of capital gain dividends that we designated and that they included in their taxable income, and (b) the tax that we paid on their behalf with respect to that capital gain.
Acquisitions of C Corporations
We may in the future engage in transactions where we acquire all of the outstanding stock of a C corporation. Upon these acquisitions, except to the extent we make an applicable TRS election, each of our acquired entities and their various wholly-owned corporate and noncorporate subsidiaries will become our QRSs. Thus, after such acquisitions, all assets, liabilities and items of income, deduction and credit of the acquired and then disregarded entities will be treated as ours for purposes of the various REIT qualification tests described above. In addition, we generally will be treated as the successor to the acquired (and then disregarded) entities’ federal income tax attributes, such as those entities’ (a) adjusted tax bases in their assets and their depreciation schedules; and (b) earnings and profits for federal income tax purposes, if any. The carryover of these attributes creates REIT implications such as built-in gains tax exposure and additional distribution requirements, as described below. However, when we make an election under Section 338(g) of the IRC with respect to corporations that we acquire, we generally will not be subject to such attribute carryovers in respect of attributes existing prior to such election.
Built-in Gains from C Corporations. Notwithstanding our qualification and taxation as a REIT, under specified circumstances we may be subject to corporate income taxation if we acquire a REIT asset where our adjusted tax basis in the asset is determined by reference to the adjusted tax basis of the asset as owned by a C corporation. For instance, we may be subject to federal income taxation on all or part of the built-in gain that was present on the last date an asset was owned by a C corporation, if we succeed to a carryover tax basis in that asset directly or indirectly from such C corporation and if we sell the asset during the five year period beginning on the day the asset ceased being owned by such C corporation. To the extent of our income and gains in a taxable year that are subject to the built-in gains tax, net of any taxes paid on such income and gains with respect to that taxable year, our taxable dividends paid in the following year will be potentially eligible for taxation to noncorporate U.S. shareholders at the preferential tax rates for “qualified dividends” as described below under the heading “─Taxation of Taxable U.S. Shareholders”. We generally do not expect to sell assets if doing so would result in the imposition of a material built-in gains tax liability; but if and when we do sell assets that may have associated built-in gains tax exposure, then we expect to make appropriate provision for the associated tax liabilities on our financial statements.
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Earnings and Profits. Following a corporate acquisition, we must generally distribute all of the C corporation earnings and profits inherited in that transaction, if any, no later than the end of our taxable year in which the transaction occurs, in order to preserve our qualification for taxation as a REIT. However, if we fail to do so, relief provisions would allow us to maintain our qualification for taxation as a REIT, provided we distribute any subsequently discovered C corporation earnings and profits and pay an interest charge in respect of the period of delayed distribution. C corporation earnings and profits that we inherit are, in general, specially allocated under a priority rule to the earliest possible distributions following the event causing the inheritance, and only then is the balance of our earnings and profits for the taxable year allocated among our distributions to the extent not already treated as a distribution of C corporation earnings and profits under the priority rule. The distribution of these C corporation earnings and profits is potentially eligible for taxation to noncorporate U.S. shareholders at the preferential tax rates for “qualified dividends” as described below under the heading “─Taxation of Taxable U.S. Shareholders”.
Depreciation and Federal Income Tax Treatment of Leases
Our initial tax bases in our assets will generally be our acquisition cost. We will generally depreciate our depreciable real property on a straight-line basis over forty years and our personal property over the applicable shorter periods. These depreciation schedules, and our initial tax bases, may vary for properties that we acquire through tax-free or carryover basis acquisitions, or that are the subject of cost segregation analyses.
We are entitled to depreciation deductions from our properties only if we are treated for federal income tax purposes as the owner of the properties. This means that the leases of our properties must be classified for U.S. federal income tax purposes as true leases, rather than as sales or financing arrangements, and we believe this to be the case.
Distributions to our Shareholders
As described above, we expect to make distributions to our shareholders from time to time. These distributions may include cash distributions, in kind distributions of property, and deemed or constructive distributions resulting from capital market activities. The U.S. federal income tax treatment of our distributions will vary based on the status of the recipient shareholder as more fully described below under the headings “─Taxation of Taxable U.S. Shareholders,” “─Taxation of Tax-Exempt U.S. Shareholders,” and “─Taxation of Non-U.S. Shareholders.”
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Section 302 of the IRC treats a redemption of our shares for cash only as a distribution under Section 301 of the IRC, and hence taxable as a dividend to the extent of our available current or accumulated earnings and profits, unless the redemption satisfies one of the tests set forth in Section 302(b) of the IRC enabling the redemption to be treated as a sale or exchange of the shares. The redemption for cash only will be treated as a sale or exchange if it (a) is “substantially disproportionate” with respect to the surrendering shareholder’s ownership in us, (b) results in a “complete termination” of the surrendering shareholder’s entire share interest in us, or (c) is “not essentially equivalent to a dividend” with respect to the surrendering shareholder, all within the meaning of Section 302(b) of the IRC. In determining whether any of these tests have been met, a shareholder must generally take into account shares considered to be owned by such shareholder by reason of constructive ownership rules set forth in the IRC (including ownership of our warrants, which are treated as shares under the constructive ownership rules), as well as shares actually owned by such shareholder. In addition, if a redemption is treated as a distribution under the preceding tests, then a shareholder’s tax basis in the redeemed shares generally will be transferred to the shareholder’s remaining shares in us, if any, and if such shareholder owns no other shares in us, such basis generally may be transferred to a related person or may be lost entirely. Because the determination as to whether a shareholder will satisfy any of the tests of Section 302(b) of the IRC depends upon the facts and circumstances at the time that our shares are redeemed, we urge you to consult your own tax advisor to determine the particular tax treatment of any redemption.
If the exercise price of our warrants is adjusted or in some circumstances not adjusted as a result of certain events affecting our shares, the adjustment or lack of adjustment may result in the deemed payment of a taxable dividend to a shareholder. Shareholders should consult their tax advisors regarding the proper treatment for shareholders of any adjustment or lack of adjustment to the exercise price of our warrants.
Taxation of Taxable U.S. Shareholders
For noncorporate U.S. shareholders, to the extent that their total adjusted income does not exceed applicable thresholds, the maximum federal income tax rate for long-term capital gains and most corporate dividends is generally 15%. For those noncorporate U.S. shareholders whose total adjusted income exceeds the applicable thresholds, the maximum federal income tax rate for long-term capital gains and most corporate dividends is generally 20%. However, because we are not generally subject to federal income tax on the portion of our “real estate investment trust taxable income” distributed to our shareholders, dividends on our shares generally are not eligible for these preferential tax rates, except that any distribution of C corporation earnings and profits and taxed built-in gain items will potentially be eligible for these preferential tax rates. As a result, our ordinary dividends generally are taxed at the higher federal income tax rates applicable to ordinary income (subject to the lower effective tax rates applicable to qualified REIT dividends via the deduction-without-outlay mechanism of Section 199A of the IRC, which is generally available to our noncorporate U.S. shareholders that meet specified holding period requirements). To summarize, the preferential federal income tax rates for long-term capital gains and for qualified dividends generally apply to:
| (1) | long-term capital gains, if any, recognized on the disposition of our shares; |
| (2) | our distributions designated as long-term capital gain dividends (except to the extent attributable to real estate depreciation recapture, in which case the distributions are subject to a maximum 25% federal income tax rate); |
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| (3) | our dividends attributable to dividend income, if any, received by us from C corporations such as TRSs; |
| (4) | our dividends attributable to earnings and profits that we inherit from C corporations; and |
| (5) | our dividends to the extent attributable to income upon which we have paid federal corporate income tax (such as taxes on foreclosure property income or on built-in gains), net of the corporate income taxes thereon. |
As long as we qualify for taxation as a REIT, a distribution to our U.S. shareholders that we do not designate as a capital gain dividend generally will be treated as an ordinary income dividend to the extent of our available current or accumulated earnings and profits (subject to the lower effective tax rates applicable to qualified REIT dividends via the deduction-without-outlay mechanism of Section 199A of the IRC, which is generally available to our noncorporate U.S. shareholders that meet specified holding period requirements). Distributions made out of our current or accumulated earnings and profits that we properly designate as capital gain dividends generally will be taxed as long-term capital gains, as discussed below, to the extent they do not exceed our actual net capital gain for the taxable year. However, corporate shareholders may be required to treat up to 20% of any capital gain dividend as ordinary income under Section 291 of the IRC.
If for any taxable year we designate capital gain dividends for our shareholders, then a portion of the capital gain dividends we designate will be allocated to the holders of a particular class of shares on a percentage basis equal to the ratio of the amount of the total dividends paid or made available for the year to the holders of that class of shares to the total dividends paid or made available for the year to holders of all outstanding classes of our shares. We will similarly designate the portion of any dividend that is to be taxed to noncorporate U.S. shareholders at preferential maximum rates (including any qualified dividend income and any capital gains attributable to real estate depreciation recapture that are subject to a maximum 25% federal income tax rate) so that the designations will be proportionate among all outstanding classes of our shares.
We may elect to retain and pay income taxes on some or all of our net capital gain. In addition, if we so elect by making a timely designation to our shareholders:
| (1) | each of our U.S. shareholders will be taxed on its designated proportionate share of our retained net capital gains as though that amount were distributed and designated as a capital gain dividend; |
| (2) | each of our U.S. shareholders will receive a credit or refund for its designated proportionate share of the tax that we pay; |
| (3) | each of our U.S. shareholders will increase its adjusted basis in our shares by the excess of the amount of its proportionate share of these retained net capital gains over the U.S. shareholder’s proportionate share of the tax that we pay; and |
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| (4) | both we and our corporate shareholders will make commensurate adjustments in our respective earnings and profits for federal income tax purposes. |
Distributions in excess of our current or accumulated earnings and profits will not be taxable to a U.S. shareholder to the extent that they do not exceed the shareholder’s adjusted tax basis in our shares, but will reduce the shareholder’s basis in such shares. To the extent that these excess distributions exceed a U.S. shareholder’s adjusted basis in such shares, they will be included in income as capital gain, with long-term gain generally taxed to noncorporate U.S. shareholders at preferential maximum rates. No U.S. shareholder may include on its federal income tax return any of our net operating losses or any of our capital losses. In addition, no portion of any of our dividends is eligible for the dividends received deduction for corporate shareholders.
If a dividend is declared in October, November or December to shareholders of record during one of those months and is paid during the following January, then for federal income tax purposes the dividend will be treated as having been both paid and received on December 31 of the prior taxable year.
A U.S. shareholder will generally recognize gain or loss equal to the difference between the amount realized and the shareholder’s adjusted basis in our shares that are sold or exchanged. This gain or loss will generally be capital gain or loss, and will be long-term capital gain or loss if the shareholder’s holding period in our shares exceeds one year. In addition, any loss upon a sale or exchange of our shares held for six months or less will generally be treated as a long-term capital loss to the extent of any long-term capital gain dividends we paid on such shares during the holding period.
U.S. shareholders who are individuals, estates or trusts are generally required to pay a 3.8% Medicare tax on their net investment income (including dividends on our shares (without regard to any deduction allowed by Section 199A of the IRC) and gains from the sale or other disposition of our shares), or in the case of estates and trusts on their net investment income that is not distributed, in each case to the extent that their total adjusted income exceeds applicable thresholds. U.S. shareholders are urged to consult their tax advisors regarding the application of the 3.8% Medicare tax.
If a U.S. shareholder recognizes a loss upon a disposition of our shares in an amount that exceeds a prescribed threshold, it is possible that the provisions of Treasury regulations involving “reportable transactions” could apply, with a resulting requirement to separately disclose the loss-generating transaction to the IRS. These Treasury regulations are written quite broadly, and apply to many routine and simple transactions. A reportable transaction currently includes, among other things, a sale or exchange of our shares resulting in a tax loss in excess of (a) $10 million in any single year or $20 million in a prescribed combination of taxable years in the case of our shares held by a C corporation or by a partnership with only C corporation partners or (b) $2 million in any single year or $4 million in a prescribed combination of taxable years in the case of our shares held by any other partnership or an S corporation, trust or individual, including losses that flow through pass through entities to individuals. A taxpayer discloses a reportable transaction by filing IRS Form 8886 with its federal income tax return and, in the first year of filing, a copy of IRS Form 8886 must be sent to the IRS’s Office of Tax Shelter Analysis. The annual maximum penalty for failing to disclose a reportable transaction is generally $10,000 in the case of a natural person and $50,000 in any other case.
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Noncorporate U.S. shareholders who borrow funds to finance their acquisition of our shares could be limited in the amount of deductions allowed for the interest paid on the indebtedness incurred. Under Section 163(d) of the IRC, interest paid or accrued on indebtedness incurred or continued to purchase or carry property held for investment is generally deductible only to the extent of the investor’s net investment income. A U.S. shareholder’s net investment income will include ordinary income dividend distributions received from us and, only if an appropriate election is made by the shareholder, capital gain dividend distributions and qualified dividends received from us; however, distributions treated as a nontaxable return of the shareholder’s basis will not enter into the computation of net investment income.
Taxation of Tax-Exempt U.S. Shareholders
The rules governing the federal income taxation of tax-exempt entities are complex, and the following discussion is intended only as a summary of material considerations of an investment in our shares relevant to such investors. If you are a tax-exempt shareholder, we urge you to consult your own tax advisor to determine the impact of federal, state, local and foreign tax laws, including any tax return filing and other reporting requirements, with respect to your acquisition of or investment in our shares.
We expect that shareholders that are tax-exempt pension plans, individual retirement accounts or other qualifying tax-exempt entities, and that receive (a) distributions from us, or (b) proceeds from the sale of our shares, should not have such amounts treated as UBTI, provided in each case (x) that the shareholder has not financed its acquisition of our shares with “acquisition indebtedness” within the meaning of the IRC, (y) that the shares are not otherwise used in an unrelated trade or business of the tax-exempt entity, and (z) that, consistent with our present intent, we do not hold a residual interest in a real estate mortgage investment conduit or otherwise hold mortgage assets or conduct mortgage securitization activities that generate “excess inclusion” income.
Taxation of Non-U.S. Shareholders
The rules governing the U.S. federal income taxation of non-U.S. shareholders are complex, and the following discussion is intended only as a summary of material considerations of an investment in our shares relevant to such investors. If you are a non-U.S. shareholder, we urge you to consult your own tax advisor to determine the impact of U.S. federal, state, local and foreign tax laws, including any tax return filing and other reporting requirements, with respect to your acquisition of or investment in our shares.
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We expect that a non-U.S. shareholder’s receipt of (a) distributions from us, and (b) proceeds from the sale of our shares, will not be treated as income effectively connected with a U.S. trade or business and a non-U.S. shareholder will therefore not be subject to the often higher federal tax and withholding rates, branch profits taxes and increased reporting and filing requirements that apply to income effectively connected with a U.S. trade or business. This expectation and a number of the determinations below are predicated on our shares being regularly traded on an established securities market in the United States. Based on an analysis of applicable Treasury regulations, we believe that our shares have continued to be regularly traded on an established securities market in the United States, even after the October 2025 delisting of our shares from The Nasdaq Stock Market LLC, or Nasdaq, and the commencement of trading of our shares on over-the-counter markets established by OTC Markets Group Inc., including at various times on its “Pink Limited Information Market” and its “Expert Market.” Also, starting on June 18, 2026, our shares are again listed on Nasdaq. Accordingly, we believe that prior to, during the pendency of, and subsequent to our bankruptcy reorganization our shares have continued to be regularly traded on an established securities market in the United States. However, we cannot be sure that the IRS or a court will agree or that our shares will in the future continue to be regularly traded on an established securities market in the United States.
Distributions. A distribution by us to a non-U.S. shareholder that is not designated as a capital gain dividend will be treated as an ordinary income dividend to the extent that it is made out of our current or accumulated earnings and profits. A distribution of this type will generally be subject to U.S. federal income tax and withholding at the rate of 30%, or at a lower rate if the non-U.S. shareholder has in the manner prescribed by the IRS demonstrated to the applicable withholding agent its entitlement to benefits under a tax treaty. Because we cannot determine our current and accumulated earnings and profits until the end of the taxable year, withholding at the statutory rate of 30% or applicable lower treaty rate will generally be imposed on the gross amount of any distribution to a non-U.S. shareholder that we make and do not designate as a capital gain dividend. Notwithstanding this potential withholding on distributions in excess of our current and accumulated earnings and profits, these excess portions of distributions are a nontaxable return of capital to the extent that they do not exceed the non-U.S. shareholder’s adjusted basis in our shares, and the nontaxable return of capital will reduce the adjusted basis in these shares. To the extent that distributions in excess of our current and accumulated earnings and profits exceed the non-U.S. shareholder’s adjusted basis in our shares, the distributions will give rise to U.S. federal income tax liability only in the unlikely event that the non-U.S. shareholder would otherwise be subject to tax on any gain from the sale or exchange of these shares, as discussed below under the heading “─Dispositions of Our Shares.” A non-U.S. shareholder may seek a refund from the IRS of amounts withheld on distributions to it in excess of such shareholder’s allocable share of our current and accumulated earnings and profits.
For so long as a class of our shares is regularly traded on an established securities market in the United States, capital gain dividends that we declare and pay to a non-U.S. shareholder on those shares, as well as dividends to such a non-U.S. shareholder on those shares attributable to our sale or exchange of “United States real property interests” within the meaning of Section 897 of the IRC, or USRPIs, will not be subject to withholding as though those amounts were effectively connected with a U.S. trade or business, and non-U.S. shareholders will not be required to file U.S. federal income tax returns or pay branch profits tax in respect of these dividends. Instead, these dividends will generally be treated as ordinary dividends and subject to withholding in the manner described above.
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Tax treaties may reduce the withholding obligations on our distributions. Under some treaties, however, rates below 30% that are applicable to ordinary income dividends from U.S. corporations may not apply to ordinary income dividends from a REIT or may apply only if the REIT meets specified additional conditions. A non-U.S. shareholder must generally use an applicable IRS Form W-8, or substantially similar form, to claim tax treaty benefits. If the amount of tax withheld with respect to a distribution to a non-U.S. shareholder exceeds the shareholder’s U.S. federal income tax liability with respect to the distribution, the non-U.S. shareholder may file for a refund of the excess from the IRS. Treasury regulations also provide special rules to determine whether, for purposes of determining the applicability of a tax treaty, our distributions to a non-U.S. shareholder that is an entity should be treated as paid to the entity or to those owning an interest in that entity, and whether the entity or its owners are entitled to benefits under the tax treaty.
If, contrary to our expectation, a class of our shares was not regularly traded on an established securities market in the United States and we made a distribution on those shares that was attributable to gain from the sale or exchange of a USRPI, then a non-U.S. shareholder holding those shares would be taxed as if the distribution was gain effectively connected with a trade or business in the United States conducted by the non-U.S. shareholder. In addition, the applicable withholding agent would be required to withhold from a distribution to such a non-U.S. shareholder, and remit to the IRS, up to 21% of the maximum amount of any distribution that was or could have been designated as a capital gain dividend. The non-U.S. shareholder also would generally be subject to the same treatment as a U.S. shareholder with respect to the distribution (subject to any applicable alternative minimum tax and a special alternative minimum tax in the case of a nonresident alien individual), would be subject to fulsome U.S. federal income tax return reporting requirements, and, in the case of a corporate non-U.S. shareholder, may owe the up to 30% branch profits tax under Section 884 of the IRC (or lower applicable tax treaty rate) in respect of these amounts.
Although the law is not entirely clear on the matter, it appears that amounts designated by us as undistributed capital gain in respect of our shares that are held by non-U.S. shareholders generally should be treated in the same manner as actual distributions by us of capital gain dividends. Under this approach, the non-U.S. shareholder would be able to offset as a credit against its resulting U.S. federal income tax liability its proportionate share of the tax paid by us on the undistributed capital gain treated as distributed to the non-U.S. shareholder, and receive from the IRS a refund to the extent its proportionate share of the tax paid by us were to exceed the non-U.S. shareholder’s actual U.S. federal income tax liability on such deemed distribution. If we were to designate any portion of our net capital gain as undistributed capital gain, a non-U.S. shareholder should consult its tax advisors regarding taxation of such undistributed capital gain.
Dispositions of Our Shares. If as expected our shares are not USRPIs, then a non-U.S. shareholder’s gain on the sale of these shares generally will not be subject to U.S. federal income taxation or withholding. We expect that our shares will not be USRPIs because one or both of the following exemptions will be available at all times.
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First, for so long as a class of our shares is regularly traded on an established securities market in the United States, a non-U.S. shareholder’s gain on the sale of those shares will not be subject to U.S. federal income taxation as a sale of a USRPI. Second, our shares will not constitute USRPIs if we are a “domestically controlled” REIT. We will be a “domestically controlled” REIT if less than 50% of the value of our shares (including any future class of shares that we may issue) is held, directly or indirectly, by non-U.S. shareholders at all times during the preceding five years, after applying specified presumptions regarding the ownership of our shares as described in Section 897(h)(4)(E) of the IRC. For these purposes, we believe that the statutory ownership presumptions apply to validate our status as a “domestically controlled” REIT. Accordingly, we believe that we are and will remain a “domestically controlled” REIT.
If, contrary to our expectation, a gain on the sale of our shares is subject to U.S. federal income taxation (for example, because neither of the above exemptions were then available, i.e., that class of our shares were not then regularly traded on an established securities market in the United States and we were not a “domestically controlled” REIT), then (a) a non-U.S. shareholder would generally be subject to the same treatment as a U.S. shareholder with respect to its gain (subject to any applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals), (b) the non-U.S. shareholder would also be subject to fulsome U.S. federal income tax return reporting requirements, and (c) a purchaser of that class of our shares from the non-U.S. shareholder may be required to withhold 15% of the purchase price paid to the non-U.S. shareholder and to remit the withheld amount to the IRS.
Taxation of Holders of Our Warrants
A holder of our warrants, whether a U.S. holder, tax-exempt entity or non-U.S. holder, is not expected to recognize income, gain or loss upon exercise of a warrant by paying its exercise price to acquire our shares. A holder’s tax basis in one of our shares received upon such exercise would be equal to the sum of (1) the holder’s tax basis in the warrant exchanged therefor and (2) the exercise price of such warrant. A holder’s holding period in a share received upon exercise would commence on the day after the holder exercises the warrant. Although not free from doubt, it is possible that a holder’s exercise of warrants on a cashless basis to acquire our shares may not be treated as a sale or disposition of the warrants. Otherwise, upon a sale or disposition of our warrants other than by exercise, (i) if you are a U.S. holder, you would generally recognize gain or loss; (ii) if you are a U.S. tax-exempt entity holder, you would generally not recognize gain or loss (subject to similar exceptions as for a tax-exempt U.S. shareholder’s disposition of our shares); and (iii) if you are a non-U.S. holder, because we believe that no position in our warrants would ever have a value in excess of 5% of the value of our shares, we anticipate that you would not be subject to U.S. federal income tax on gain, provided our shares are regularly traded on an established securities market (we cannot be sure whether this is or will continue to be the case). A non-U.S. holder may also not be taxable on gain on the sale or disposition of a warrant other than by exercise if we are a “domestically controlled” REIT, as discussed above under “Taxation of Non-U.S. Shareholders─Dispositions of Our Shares.” If a warrant expired without being exercised, a U.S. holder should recognize a capital loss in an amount equal to such holder’s tax basis in the warrant. Any recognized gain or loss on the disposition of a warrant other than by exercise or loss on expiration would be long-term capital gain or loss if the holder’s holding period in the warrant were more than one year at the time of disposition or expiration, else it would be short-term capital gain or loss. The deductibility of capital losses is subject to limitations.
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If the exercise price of a warrant is adjusted or in some circumstances not adjusted as a result of certain events affecting our shares, the adjustment or lack of adjustment may result in the deemed payment of a taxable dividend to a holder. Similarly, the receipt of an actual distribution with respect to a warrant as a result of an event affecting our shares may constitute in whole or in part a taxable dividend to a holder. A deemed dividend would generally give rise to a U.S. federal withholding tax liability for any warrants held by non-U.S. holders. Holders should consult their tax advisors regarding the proper treatment of any adjustments to the exercise price of our warrants.
Information Reporting, Backup Withholding, and Foreign Account Withholding
Information reporting, backup withholding, and foreign account withholding may apply to distributions or proceeds paid to our holders under the circumstances discussed below. If a holder is subject to backup or other U.S. federal income tax withholding, then the applicable withholding agent will be required to withhold the appropriate amount with respect to a deemed or constructive distribution or a distribution in kind even though there is insufficient cash from which to satisfy the withholding obligation. To satisfy this withholding obligation, the applicable withholding agent may collect the amount of U.S. federal income tax required to be withheld by reducing to cash for remittance to the IRS a sufficient portion of the property that the holder would otherwise receive or own, and the holder may bear brokerage or other costs for this withholding procedure.
Amounts withheld under backup withholding are generally not an additional tax and may be refunded by the IRS or credited against the holder’s federal income tax liability, provided that such holder timely files for a refund or credit with the IRS. A U.S. holder may be subject to backup withholding when it receives distributions on our shares or warrants, as applicable, or proceeds upon the sale, exchange, redemption, retirement or other disposition of our shares or warrants, as applicable, unless the U.S. holder properly executes, or has previously properly executed, under penalties of perjury an IRS Form W-9 or substantially similar form that:
| · | provides the U.S. holder’s correct taxpayer identification number; |
| · | certifies that the U.S. holder is exempt from backup withholding because (a) it comes within an enumerated exempt category, (b) it has not been notified by the IRS that it is subject to backup withholding, or (c) it has been notified by the IRS that it is no longer subject to backup withholding; and |
| · | certifies that it is a U.S. citizen or other U.S. person. |
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If the U.S. holder has not provided and does not provide its correct taxpayer identification number and appropriate certifications on an IRS Form W-9 or substantially similar form, it may be subject to penalties imposed by the IRS, and the applicable withholding agent may have to withhold a portion of any distributions or proceeds paid to such U.S. holder. Unless the U.S. holder has established on a properly executed IRS Form W-9 or substantially similar form that it comes within an enumerated exempt category, distributions or proceeds on our shares paid to it during the calendar year, and the amount of tax withheld, if any, will be reported to it and to the IRS.
Distributions on our shares or warrants, as applicable, to a non-U.S. holder during each calendar year and the amount of tax withheld, if any, will generally be reported to the non-U.S. holder and to the IRS. This information reporting requirement applies regardless of whether the non-U.S. holder is subject to withholding on distributions on our shares or warrants, as applicable, or whether the withholding was reduced or eliminated by an applicable tax treaty. Also, distributions paid to a non-U.S. holder on our shares or warrants, as applicable, will generally be subject to backup withholding, unless the non-U.S. holder properly certifies to the applicable withholding agent its non-U.S. holder status on an applicable IRS Form W-8 or substantially similar form. Information reporting and backup withholding will not apply to proceeds a non-U.S. holder receives upon the sale, exchange, redemption, retirement or other disposition of our shares or warrants, as applicable, if the non-U.S. holder properly certifies to the applicable withholding agent its non-U.S. holder status on an applicable IRS Form W-8 or substantially similar form. Even without having executed an applicable IRS Form W-8 or substantially similar form, however, in some cases information reporting and backup withholding will not apply to proceeds that a non-U.S. holder receives upon the sale, exchange, redemption, retirement or other disposition of our shares or warrants, as applicable, if the non-U.S. holder receives those proceeds through a broker’s foreign office.
Non-U.S. financial institutions and other non-U.S. entities are subject to diligence and reporting requirements for purposes of identifying accounts and investments held directly or indirectly by U.S. persons. The failure to comply with these additional information reporting, certification and other requirements could result in a 30% U.S. withholding tax on applicable payments to non-U.S. persons, notwithstanding any otherwise applicable provisions of an income tax treaty. In particular, a payee that is a foreign financial institution that is subject to the diligence and reporting requirements described above must enter into an agreement with the U.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by “specified United States persons” or “United States owned foreign entities” (each as defined in the IRC and administrative guidance thereunder), annually report information about such accounts, and withhold 30% on applicable payments to noncompliant foreign financial institutions and account holders. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States with respect to these requirements may be subject to different rules. The foregoing withholding regime generally applies to payments of dividends on our shares. In general, to avoid withholding, any non-U.S. intermediary through which a holder owns our shares or warrants, as applicable, must establish its compliance with the foregoing regime, and a non-U.S. holder must provide specified documentation (usually an applicable IRS Form W-8) containing information about its identity, its status, and if required, its direct and indirect U.S. owners. Non-U.S. holders and holders who hold our shares or warrants, as applicable, through a non-U.S. intermediary are encouraged to consult their own tax advisors regarding foreign account tax compliance.
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Other Tax Considerations
Our tax treatment and that of our shareholders and warrant holders may be modified by legislative, judicial or administrative actions at any time, which actions may have retroactive effect. The rules dealing with federal income taxation are constantly under review by the U.S. Congress, the IRS and the U.S. Department of the Treasury, and statutory changes, new regulations, revisions to existing regulations and revised interpretations of established concepts are issued frequently. Likewise, the rules regarding taxes other than U.S. federal income taxes may also be modified. No prediction can be made as to the likelihood of passage of new tax legislation or other provisions, or the direct or indirect effect on us, our shareholders and our warrant holders. Revisions to tax laws and interpretations of these laws could adversely affect our ability to qualify and be taxed as a REIT, as well as the tax or other consequences of an investment in our shares or warrants, as applicable. We and our holders may also be subject to taxation by state, local or other jurisdictions, including those in which we or our holders transact business or reside. These tax consequences may not be comparable to the U.S. federal income tax consequences discussed above.
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ERISA PLANS, KEOGH PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS
General Fiduciary Obligations
The Employee Retirement Income Security Act of 1974, as amended, or ERISA, the IRC and similar provisions to those described below under applicable foreign or state law, individually and collectively, impose certain duties on persons who are fiduciaries of any employee benefit plan subject to Title I of ERISA, or an ERISA Plan, or an individual retirement account or annuity, or an IRA, a Roth IRA, a tax-favored account (such as an Archer MSA, Coverdell education savings account or health savings account), a Keogh plan or other qualified retirement plan not subject to Title I of ERISA, each a Non-ERISA Plan. Under ERISA and the IRC, any person who exercises any discretionary authority or control over the administration of, or the management or disposition of the assets of, an ERISA Plan or Non-ERISA Plan, or who renders investment advice for a fee or other compensation to an ERISA Plan or Non-ERISA Plan, is generally considered to be a fiduciary of the ERISA Plan or Non-ERISA Plan.
Fiduciaries of an ERISA Plan must consider whether:
| · | their investment in our shares or other securities satisfies the diversification requirements of ERISA; |
| · | the investment is prudent in light of possible limitations on the marketability of our shares; |
| · | they have authority to acquire our shares or other securities under the applicable governing instrument and Title I of ERISA; and |
| · | the investment is otherwise consistent with their fiduciary responsibilities. |
Fiduciaries of an ERISA Plan may incur personal liability for any loss suffered by the ERISA Plan on account of a violation of their fiduciary responsibilities. In addition, these fiduciaries may be subject to a civil penalty of up to 20% of any amount recovered by the ERISA Plan on account of a violation. Fiduciaries of any Non-ERISA Plan should consider that the Non-ERISA Plan may only make investments that are authorized by the appropriate governing instrument and applicable law.
Fiduciaries considering an investment in our securities should consult their own legal advisors if they have any concern as to whether the investment is consistent with the foregoing criteria or is otherwise appropriate. The sale of our securities to an ERISA Plan or Non-ERISA Plan is in no respect a representation by us or any underwriter of the securities that the investment meets all relevant legal requirements with respect to investments by the arrangements generally or any particular arrangement, or that the investment is appropriate for arrangements generally or any particular arrangement.
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Prohibited Transactions
Fiduciaries of ERISA Plans and persons making the investment decision for Non-ERISA Plans should consider the application of the prohibited transaction provisions of ERISA and the IRC in making their investment decision. Sales and other transactions between an ERISA Plan or a Non-ERISA Plan and disqualified persons or parties in interest, as applicable, are prohibited transactions and result in adverse consequences absent an exemption. The particular facts concerning the sponsorship, operations and other investments of an ERISA Plan or Non-ERISA Plan may cause a wide range of persons to be treated as disqualified persons or parties in interest with respect to it. A non-exempt prohibited transaction, in addition to imposing potential personal liability upon ERISA Plan fiduciaries, may also result in the imposition of an excise tax under the IRC or a penalty under ERISA upon the disqualified person or party in interest. If the disqualified person who engages in the transaction is the individual on behalf of whom an IRA, Roth IRA or other tax-favored account is maintained (or their beneficiary), the IRA, Roth IRA or other tax-favored account may lose its tax-exempt status and its assets may be deemed to have been distributed to the individual in a taxable distribution on account of the non-exempt prohibited transaction, but no excise tax will be imposed. Fiduciaries considering an investment in our securities should consult their own legal advisors as to whether the ownership of our securities involves a non-exempt prohibited transaction.
“Plan Assets” Considerations
The U.S. Department of Labor has issued a regulation defining “plan assets.” The regulation, as subsequently modified by ERISA, generally provides that when an ERISA Plan or a Non-ERISA Plan otherwise subject to Title I of ERISA and/or Section 4975 of the IRC acquires an equity interest in an entity that is neither a “publicly offered security” nor a security issued by an investment company registered under the Investment Company Act of 1940, as amended, the assets of the ERISA Plan or Non-ERISA Plan include both the equity interest and an undivided interest in each of the underlying assets of the entity, unless it is established either that the entity is an operating company or that equity participation in the entity by benefit plan investors is not significant. We are not an investment company registered under the Investment Company Act of 1940, as amended.
Each class of our equity (that is, our common shares and any other class of equity that we may issue) must be analyzed separately to ascertain whether it is a publicly offered security. The regulation defines a publicly offered security as a security that is “widely held,” “freely transferable” and either part of a class of securities registered under the Exchange Act, or sold under an effective registration statement under the Securities Act of 1933, as amended, or the Securities Act, provided the securities are registered under the Exchange Act within 120 days after the end of the fiscal year of the issuer during which the offering occurred. Each class of our outstanding equity has been registered under the Exchange Act within the necessary time frame to satisfy the foregoing condition.
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The regulation provides that a security is “widely held” only if it is part of a class of securities that is owned by 100 or more investors independent of the issuer and of one another. However, a security will not fail to be “widely held” because the number of independent investors falls below 100 subsequent to the initial public offering as a result of events beyond the issuer’s control. Although we cannot be sure, we believe our common shares have been and will remain widely held, and we expect the same to be true of any future class of equity that we may issue.
The regulation provides that whether a security is “freely transferable” is a factual question to be determined on the basis of all relevant facts and circumstances. The regulation further provides that, where a security is part of an offering in which the minimum investment is $10,000 or less, some restrictions on transfer ordinarily will not, alone or in combination, affect a finding that the securities are freely transferable. The restrictions on transfer enumerated in the regulation as not affecting that finding include any restriction on or prohibition against any transfer or assignment that would result in a termination or reclassification for federal or state tax purposes, or would otherwise violate any state or federal law or court order. Additionally, limitations or restrictions on the transfer or assignment of a security that are created or imposed by persons other than the issuer of a security or persons acting for or on behalf of the issuer will ordinarily not prevent the security from being considered freely transferable.
We believe that the restrictions imposed under our declaration of trust and bylaws on the transfer of our common shares do not result in the failure of our shares to be “freely transferable.” In addition, we do not expect or intend to impose in the future, or to permit any person to impose on our behalf, on common shares owned by an ERISA Plan or Non-ERISA Plan, any limitations or restrictions on transfer that would not be among the enumerated permissible limitations or restrictions in the regulation and that would otherwise result in the failure of our common shares to be “freely transferable”. Assuming that each class of our common shares will be “widely held” and that no facts and circumstances exist that prevent common shares owned by an ERISA Plan or Non-ERISA Plan from being “freely transferable” for purposes of the regulation, our counsel, Sullivan & Worcester LLP, is of the opinion that under the regulation each class of our currently outstanding equity is publicly offered and our assets will not be deemed to be “plan assets” of any ERISA Plan or Non-ERISA Plan that acquires our equity in a public offering. This opinion is conditioned upon certain assumptions and representations, as discussed above under the heading “Material United States Federal Income Tax Considerations—Taxation as a REIT.” Also, the opinion of our counsel is not binding on either the Department of Labor or a court, and either could take a position different from that expressed by our counsel.
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