| AMERICAN MORTGAGE ACCEPTANCE CO Item 1A Risk Factors 7 ITEM 1A RISK FACTORS An investment in our common shares involves a number of risks |
| Before making an investment decision, you should carefully consider all of the risks described in this document |
| If any of the risks discussed actually occur, our business, financial condition and results of operations, and the value of your investment, could be materially adversely affected |
| For convenience, we have grouped these risk factors as follows: 1 |
| Risks related to our investments 2 |
| Risks related to our Advisor 3 |
| Risks related to our debt obligations 4 |
| Risks related to our classification as a REIT and not as an investment company 5 |
| Risks related to our common shares and our shareholders 1 |
| RISKS RELATED TO OUR INVESTMENTS MORTGAGE INVESTMENTS THAT ARE NOT UNITED STATES GOVERNMENT INSURED AND NON-INVESTMENT GRADE MORTGAGE ASSETS INVOLVE RISK OF LOSS GENERAL We intend to continue to originate and acquire uninsured and non-investment grade mortgage loans and mortgage assets as part of our investment strategy |
| Such loans and assets may include first mortgage loans, mezzanine loans, construction loans, bridge loans, subordinated interests in first mortgage loans and CMBS While holding such interests, we will be subject to risks of borrower defaults, bankruptcies, fraud and losses and special hazard losses that are not covered by standard hazard insurance |
| In the event of any default under mortgage loans we hold, we will bear the risk of loss of principal and non-payment of interest and fees to the extent of any deficiency between the value of the mortgage collateral and the principal amount of the mortgage loan |
| LIMITED RECOURSE LOANS MAY LIMIT OUR RECOVERY TO THE VALUE OF THE MORTGAGED PROPERTY Our loans are generally non-recourse, although some may have limited recourse provisions for a short period |
| In addition, limited recourse against the borrower may be further limited by applicable provisions of the laws of the jurisdictions in which the mortgaged properties are located or by the selection of remedies and the impact of those laws on that selection |
| With respect to our non-recourse mortgage loans, in the event of a borrower default, the value of the specific mortgaged property and other assets, if any, pledged to secure the relevant mortgage loan, may be less than the amount owed under the mortgage loan |
| As to those mortgage loans that provide for recourse against the borrower and its assets generally, there can be no assurance that such recourse will provide a recovery in respect of a defaulted mortgage loan greater than the liquidation value of the mortgaged property securing that mortgage loan |
| In addition, investment in subordinated interests in mortgage loans do not provide us with foreclosure remedies upon default |
| COMPETITION IN ACQUIRING DESIRABLE INVESTMENTS MAY LIMIT THEIR AVAILABILITY WHICH COULD, IN TURN, NEGATIVELY AFFECT OUR ABILITY TO GENERATE NET INCOME We compete for loan investments with numerous public and private real estate investment vehicles, such as mortgage banks, pension funds, REITs, institutional investors and individuals |
| Mortgages, mezzanine loans, subordinated interests in CMBS and other investments are often obtained through a competitive bidding process |
| In addition, competitors may seek to establish relationships with the financial institutions and other firms from which we intend to purchase such assets |
| Many of our competitors are larger than us, may have access to greater capital resources and other resources, and may have other advantages over us and our Advisor in conducting certain business and providing certain services |
| Competition may result in higher prices for mortgage assets, lower yields and a 7 narrower spread of yields over our borrowing costs |
| There can be no assurance that we will achieve investment results that will allow any specified level of cash distribution |
| INTEREST RATE FLUCTUATIONS WILL AFFECT THE VALUE OF OUR ASSETS AND OUR ABILITY TO GENERATE NET INCOME Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control |
| Interest rate fluctuations can adversely affect our net income in many ways and present a variety of risks, including the risk of a mismatch between asset yields and borrowing rates |
| Interest rate mismatch could occur between asset yields and borrowing rates resulting in decreased yield |
| Our operating results will depend in large part on differences between the income from our assets (net of credit losses) and our borrowing costs |
| We fund the origination and acquisition of a significant portion of our assets with borrowings which have interest rates that reset relatively rapidly, such as monthly or quarterly |
| We anticipate that, in most cases, the income from our fixed-rate assets will respond more slowly to interest rate fluctuations than the cost of our borrowings, creating a mismatch between asset yields and borrowing rates |
| In addition, in periods of declining market rates, income from our variable rate investments would decline |
| Consequently, changes in interest rates, particularly short-term interest rates, may influence our net income and could result in operating losses |
| Our operating results depend to a significant degree on differences between the income from our assets and our borrowing costs |
| Due to the fixed returns generated by most of our assets, interest rate fluctuations may influence our net income |
| See also Item 7A, QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK PREPAYMENT RATES MAY NEGATIVELY AFFECT THE VALUE OF OUR INVESTMENTS The value of our investments may be affected by prepayment rates |
| Prepayment rates are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control, and consequently, such prepayment rates cannot be predicted with certainty |
| To the extent we originate mortgage loans, we expect that such mortgage loans will have a measure of protection from prepayment in the form of prepayment lock-out periods or prepayment penalties |
| However, such protection may not be available with respect to investments which we acquire, but do not originate |
| If general interest rates decline as well, the proceeds of such prepayments received during such periods are likely to be reinvested by us in assets yielding less than the yields on the investments that were prepaid |
| In addition, the market value of mortgage investments may, because of the risk of prepayment, benefit less from declining interest rates than from other fixed-income securities |
| Conversely, in periods of rising interest rates, prepayments on mortgages generally decrease, in which case we would not have the prepayment proceeds available to invest in assets with higher yields |
| Under certain interest rate and prepayment scenarios we may fail to recoup fully our cost of acquisition of certain investments |
| WE MAY NOT ACCURATELY ASSESS INVESTMENT YIELDS, WHICH MAY NEGATIVELY AFFECT OUR EARNINGS Before making any investment, our Advisor will consider the expected yield of the investment and the factors that may influence the yield actually obtained on such investment |
| These considerations will affect our or our Advisorapstas decision whether to purchase such an investment and the price offered for such an investment |
| No assurances can be given that we or our Advisor will make an accurate assessment of the yield to be produced by an investment |
| Many factors beyond our and our Advisorapstas control are likely to influence the yield on the investments, including, but not limited to, competitive conditions in the local real estate market, local and general economic conditions and the quality of management of the underlying property |
| Our Advisorapstas inability to accurately assess investment yields may result in our purchasing assets that do not perform as well as expected, which may negatively affect our earnings |
| THERE ARE RISKS ASSOCIATED WITH INVESTMENTS SECURED BY REAL ESTATE, WHICH MAY NEGATIVELY AFFECT OUR EARNINGS We derive most of our income by investing, directly and indirectly, in debt secured by residential or commercial properties |
| Such investments subject us to various types and degrees of risk that could adversely affect the value of our investments and our ability to generate revenue and net income |
| 8 Multifamily and commercial property values and net operating income derived from such properties are subject to volatility and may be affected adversely by a number of factors, including, but not limited to: o national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); o local real estate conditions (such as an oversupply of housing, retail, industrial, office or other commercial space); o stability of controlling entity of our borrower and managing agent of the borrowerapstas property; o construction quality, age and design; o demographic factors; o retroactive changes to building or similar codes; and o increases in operating expenses (such as energy costs) |
| Other risks include, but are not limited to, the following: o If a mortgage loan is called due to construction not being completed as required in the mortgage loan documents, we may choose to expend additional capital in order to preserve our investment; o occupancy and rent levels may be affected by construction of additional housing units and national, regional and local politics, including current or future rent stabilization and rent control laws and agreements; o the federal LIHTC Program and city, state and federal housing subsidy or similar programs which apply to some of the properties impose rent limitations that could adversely affect the ability to increase rents to generate the funds necessary to maintain the properties securing our investments in proper condition, which is particularly important during periods of rapid inflation or declining market value of such properties; o if a loan defaults, the value of the property securing the loan (plus, for properties that are financed through the LIHTC Program, the value of the credits) may be less than the unamortized principal amount of the loan; o an owner or operator of real property may become liable for the costs of removal of certain hazardous substances released on its property without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances |
| The presence of hazardous substances may adversely affect an ownerapstas ability to operate the property; o certain underlying properties may be required to comply with the Americans with Disabilities Act, and must comply with fire and safety regulations, building codes, and other land use regulations |
| Compliance with such requirements may require property operators to make substantial capital expenditures; and o loans to finance condominium conversions may be adversely impacted if interest rate increases or market forces diminish investor demand for condominium units |
| These conditions and events may increase the possibility that a property operator may be unable to meet its obligations to us or otherwise expose us to losses, thereby affecting our net income |
| We manage these risks through diligent and comprehensive underwriting, asset management and ongoing monitoring of loan and property performance |
| We may also obtain construction completion guarantees, personal recourse agreements and/or operating deficit guarantees |
| In other cases, we may decide to forego certain types of available security if we determine that the security is not necessary or is too expensive to obtain in relation to the risks covered |
| From time to time, through the foreclosure process, we may also take title to properties as a result of loan defaults by borrowers |
| Excluding properties that we have legally sold and for which we have recovered a large portion of the investment we made upon foreclosure, as of December 31, 2005, the aggregate carrying value was approximately dlra18dtta4 million |
| CHANGES IN MORTGAGE LOAN PROGRAMS COULD ADVERSELY AFFECT US We could be hindered in making investments by adverse changes in the FHA insurance, Ginnie Mae or Fannie Mae guarantee programs or rules or regulations relating to them |
| Generally, once a mortgage has been endorsed for insurance or guaranteed, subsequent amendments to the rules or regulations would not apply 9 THERE ARE RISKS ASSOCIATED WITH OUR INVESTMENT IN ARCAP, WHICH MAY NEGATIVELY AFFECT OUR EARNINGS We have invested indirectly in subordinated CMBS through our ownership of a membership interest in ARCap |
| ARCap manages funds that invest in subordinated CMBS that include "e first loss "e and non-investment grade subordinated interests |
| A first loss security is the most subordinate class in a structure and accordingly is the first to bear the loss upon a default, on restructuring or liquidation of the underlying collateral and the last to receive payment of interest and principal |
| Such classes are subject to special risks, including a greater risk of loss of principal and non-payment of interest than more senior, rated classes |
| The market values of subordinated interests in CMBS and other subordinated securities tend to be more sensitive to changes in economic conditions than more senior, rated classes |
| As a result of these and other factors, subordinated interests generally are not actively traded and may not provide holders with liquidity of investment |
| In addition, our ability to transfer our membership interest in ARCap is limited by the terms of ARCapapstas operating agreement |
| PARTICIPATING INTERESTS IN MORTGAGES MAY NOT BE REALIZED In connection with the acquisition and origination of mortgages, we have obtained and may continue to obtain participating interests that may entitle us to payments based upon a propertyapstas cash flow, profits or any increase in the value of the property that would be realized upon a refinancing or sale of the property |
| As the operation of a particular property is subject to numerous variables and risks, there can be no assurance that a participating interest will result in additional payments to us |
| GEOGRAPHIC CONCENTRATION AND THE CREDIT QUALITY OF BORROWERS MAY RESULT IN LOSSES We have not established any limit upon the geographic concentration of properties securing our investments or the credit quality of borrowers of uninsured investments |
| As a result, properties securing our investments may be overly concentrated in certain geographic areas and the underlying borrowers of our uninsured investments may have low credit quality |
| We may experience losses due to geographic concentration or low credit quality |
| As of December 31, 2005, 36dtta7prca of our portfolio was comprised of investments in mortgage loans, notes receivable, revenue bonds and real estate owned |
| Of this group of assets, 62dtta4prca were secured by properties in Texas |
| We had no borrowers exceeding 10prca of our portfolio of investments in mortgage loans, notes receivable and revenue bonds other than John Loder and Richard Nathan who are the creditors of 11dtta4prca and 10dtta5prca, respectively, in these categories |
| THERE ARE RISKS ASSOCIATED WITH OUR CONTEMPLATED CDO TRANSACTIONS We would be exposed to additional risks if we finance a portion of our investment portfolio through a CDO transaction |
| Risks associated with financing investments through a CDO include the following: WE MAY NOT BE ABLE TO ACQUIRE ELIGIBLE INVESTMENTS FOR A CDO ISSUANCE, OR MAY NOT BE ABLE TO ISSUE CDO SECURITIES ON ATTRACTIVE TERMS, WHICH MAY REQUIRE US TO UTILIZE MORE COSTLY FINANCING FOR OUR INVESTMENTS, OR TO LIQUIDATE THE INVESTMENTS We intend to capitalize on opportunities to finance certain of our investments on a non-recourse, long-term basis, such as through the issuance of CDOs |
| During the period that we are acquiring these investments, we intend to finance our purchases through a warehouse facility |
| We will use this facility to finance our acquisition of investments until we have accumulated a sufficient quantity of them, at which time we may refinance these lines through a securitization, such as a CDO issuance, or other types of long-term financing |
| As a result, we are subject to the risk that we will not be able to acquire a sufficient amount of eligible investments to maximize the efficiency of a CDO issuance |
| In addition, conditions in the capital markets may make the issuance of CDOs less attractive to us when we do have a sufficient pool of collateral |
| If we are unable to issue a CDO to finance these investments, we may be required to utilize other forms of potentially less attractive financing, or otherwise to liquidate the collateral |
| 10 WE MAY NOT BE ABLE TO FIND SUITABLE REPLACEMENT INVESTMENTS IN COLLATERALIZED DEBT OBLIGATIONS WITH REINVESTMENT PERIODS Some CDOs have periods where principal proceeds received from assets securing the obligation can be reinvested for a defined period of time, commonly referred to as a reinvestment period |
| Our ability to find suitable investments during any reinvestment period that meet the criteria set forth in the CDO documentation and by rating agencies may determine the success of our CDO investments |
| Our potential inability to find suitable investments may, among other things: o cause interest deficiencies; o cause hyper-amortization of the senior CDO liabilities; and o cause us to reduce the life of our CDOs and accelerate the amortization of certain fees and expenses |
| THE USE OF CDO FINANCINGS WITH OVER-COLLATERALIZATION AND INTEREST COVERAGE REQUIREMENTS MAY HAVE A NEGATIVE IMPACT ON OUR CASH FLOW The terms of CDOs will generally provide that the principal amount of investments must exceed the principal balance of the related bonds by a certain amount and that interest income exceed interest expense by a certain amount |
| We anticipate that the CDO terms will provide that, if certain delinquencies and/or losses or other factors cause a decline in collateral or cash flow levels, the cash flow otherwise payable on our investment may be redirected to repay classes of CDOs senior to ours until the issuer or the collateral is in compliance with the terms of the governing documents |
| Other tests (based on delinquency levels or other criteria) may restrict our ability to receive net income from assets pledged to secure CDOs |
| We cannot assure you that the performance tests will be satisfied |
| Nor can we assure you, in advance of completing negotiations with the rating agencies or other key transaction parties as to the actual terms of the delinquency tests, over-collateralization and interest coverage terms, cash flow release mechanisms or other significant factors upon which net income to us will be calculated |
| Failure to obtain favorable terms with regard to these matters may adversely affect the availability of net income to us |
| If our investments fail to perform as anticipated, our over-collateralization, interest coverage or other credit enhancement expense associated with our CDO financings will increase |
| WE MAY BE REQUIRED TO REPURCHASE LOANS THAT WE HAVE SOLD OR TO INDEMNIFY HOLDERS OF OUR CDOS If any of the loans we originate or acquire and sell or securitize through CDOs do not comply with representations and warranties that we make about certain characteristics of the loans, the borrowers and the underlying properties, we may be required to repurchase those loans or replace them with substitute loans |
| In addition, in the case of loans that we have sold instead of retained, we may be required to indemnify persons for losses or expenses incurred as a result of a breach of a representation or warranty |
| Repurchased loans typically require a significant allocation of working capital to carry on our books, and our ability to borrow against such assets is limited |
| Any significant repurchases or indemnification payments could adversely affect our financial condition and operating results |
| We have entered into an advisory agreement with our Advisor under which it provides us with all of the services necessary for our operations |
| We are dependent on our Advisor for the management and administration of our business and investments |
| The results of our operations will be dependent upon the availability of, and our Advisorapstas ability to identify and capitalize on, investment opportunities |
| The agreement may be terminated (i) without cause by our Advisor or 11 (ii) with or without cause by a majority of our independent trustees |
| The Advisor can terminate the agreement without penalty, but we are subject to a penalty, except in certain instances, for termination or non-renewal |
| Termination would be effective upon 60 days prior written notice to the non-terminating party |
| If our Advisor terminates our agreement, we may not be able to find an adequate replacement advisor |
| CONFLICTS OF INTEREST COULD ARISE AMONG US AND OR RELATED PARTIES WITH RESPECT TO INVESTMENT OPPORTUNITIES Our Advisor has subcontracted its obligation to provide services under the advisory agreement to CharterMac Capital, and there are risks involved with this arrangement |
| Under our advisory agreement, the Advisor and CharterMac Capital are permitted to act as advisor to other entities having investment policies similar to ours, including other REITs |
| Generally, in conflict situations with non-affiliated entities, our Advisor must present an investment opportunity to us if the opportunity is within our investment objectives and policies, the opportunity is of a character that could be taken by us, and we have the financial resources to take advantage of the opportunity |
| Additionally, CharterMac, the parent of the Advisor and CharterMac Capital, has in the past, and may in the future, invest in first mortgage loans, including taxable first mortgage revenue bonds or other investments that are similar to those in which we invest |
| To the extent that these existing entities, as well as affiliated entities which may be formed by affiliates of our Advisor in the future, have funds available for investment at the same time as we do and a potentially suitable investment is offered to us or the affiliated entities, our Advisor will review the affiliated entities &apos and our investment portfolios and will determine whether or not the investment should be made by one of the affiliated entities or by us based upon factors such as the amount of funds available for investment, yield and portfolio diversification |
| If the making of a mortgage loan or other mortgage investment appears equally appropriate for us and these affiliated entities, the mortgage loan or other mortgage investment will either be made by a joint venture between two or more of such entities (which may include us), or will be allocated to one of such entities on a basis of rotation with the initial order of priority determined by the dates of formation of the entities |
| In addition, Stephen M Ross is the principal owner of The Related Companies, LP ( "e TRCLP "e ), as well as the Chairman and an indirect owner of a 15dtta9prca economic interest in CharterMac |
| Jeff Blau, our Chief Executive Officer, is also employed by TRCLP and has an ownership interest in CharterMac |
| TRCLP may engage in businesses which compete with our Company |
| In connection with CharterMacapstas acquisition of CharterMac Capital in November 2003, CharterMac and TRCLP entered into an agreement which prohibited TRCLP and its affiliates from competing with any business currently engaged in by CharterMac Capital other than in specified areas, including originating mezzanine loans to multifamily housing properties similar to those which secure our loans |
| There can be no assurance that we and TRCLP and its affiliates would not directly compete for similar products and opportunities in these areas in the future |
| CONFLICTS OF INTEREST COULD ARISE IN TRANSACTIONS WHERE WE LEND TO OR BORROW FROM AFFILIATES OF OUR ADVISOR Every transaction entered into between us and an affiliate of our Advisor raises a potential conflict of interest |
| In addition to the initial determination to invest in mortgage investments secured by properties owned by an affiliate of our Advisor, such conflicts of interest with respect to these mortgage investments include, among others, decisions regarding: o whether to waive defaults of such affiliate; o whether to foreclose on a loan; and o whether to permit additional financing on the properties securing our investments other than financing provided by us |
| We have invested in, and may in the future invest in, mortgage investments secured by properties in which either direct or indirect affiliates of our Advisor own equity interests in the borrower |
| Our declaration of trust requires that any transaction between our Advisor or any of its affiliates and us be approved by a majority of our trustees, including a majority of the independent trustees, not otherwise interested in the transaction, as being fair and reasonable and on terms not less favorable to us than those available from unaffiliated third parties |
| As of December 31, 2005, we had four notes 12 receivable with a total carrying value of approximately dlra13dtta7 million, one first mortgage with a total carrying value of approximately dlra771cmam000, and seven multifamily housing first mortgage bonds with a total carrying value of approximately dlra6dtta6 million to borrowers that are affiliates of our Advisor, which represents 1dtta7prca of our total assets |
| In June 2004, we entered into a revolving credit facility with CharterMac, which provides up to dlra20dtta0 million in borrowings and bears interest at LIBOR plus 300 basis points |
| This facility was extended through June 30, 2006 and contains customary restrictions and covenants that are similar to our warehouse debt facility with an unaffiliated lender |
| As of December 31, 2005, there was no outstanding balance on this facility |
| RISKS RELATED TO OUR DEBT OBLIGATIONS SHORT-TERM REPURCHASE AGREEMENTS INVOLVE RISK OF LOSS We finance, and expect to continue to finance, a portion of our investments through collateralized borrowing in the form of repurchase agreements, which involve us selling assets concurrently with our agreement to repurchase them at a later date and at a fixed price |
| During the repurchase agreement period, we continue to receive principal and interest payments on the assets |
| Our ability to achieve our investment objectives depends on our ability to borrow money in sufficient amounts and on favorable terms and our ability to renew or replace these short-term borrowings on a continuous basis as they mature |
| If we are not able to renew or replace maturing borrowings, we would be forced to sell some of our assets under possibly adverse market conditions, which may adversely affect our profitability |
| As of December 31, 2005, we had borrowings of approximately dlra209dtta1 million outstanding under the repurchase facilities, all of which typically have 30-day settlement terms |
| A DECLINE IN THE MARKET VALUE OF OUR ASSETS MAY RESULT IN MARGIN CALLS THAT MAY FORCE US TO SELL ASSETS UNDER ADVERSE MARKET CONDITIONS Repurchase agreements involve the risk that the market value of the securities sold by us may decline and that we will be required to post additional collateral, reduce the amount borrowed or suffer forced sales of the collateral |
| If forced sales were made at prices lower than the carrying value of the collateral, we would experience additional losses |
| If we are forced to liquidate our assets to repay borrowings, there can be no assurance that we will be able to maintain compliance with the REIT asset and source of income requirements |
| OUR USE OF REPURCHASE AGREEMENTS TO BORROW MONEY MAY GIVE OUR LENDERS GREATER RIGHTS IN THE EVENT OF BANKRUPTCY Our repurchase agreements require us to pledge certain of our assets to the lender to secure our obligations thereunder |
| Borrowings made under repurchase agreements may qualify for special treatment under the US Bankruptcy Code, which may make it difficult for us to recover our pledged assets if a lender files for bankruptcy |
| In addition, if we were to file for bankruptcy, lenders under our repurchase agreements may be able to avoid the automatic stay provisions of the US Bankruptcy Code and take possession of, and liquidate, the assets we pledged under these agreements without delay |
| HEDGING TRANSACTIONS CAN LIMIT GAINS AND INCREASE EXPOSURE TO LOSSES Hedging involves risk and hedging activities may not have the desired beneficial impact on our results of operations or financial condition |
| Moreover, no hedging activity can completely insulate us from the risks associated with changes in interest rates and prepayment rates |
| We intend generally to hedge as much of the interest rate risk as our Advisor determines is in our best interests given the cost of such hedging transactions |
| REIT provisions of the Code may limit our ability to hedge our assets and related borrowings |
| Any limitation on our use of hedging techniques may result in greater interest rate risk |
| 13 4 |
| RISKS RELATED TO OUR CLASSIFICATION AS A REIT AND NOT AS AN INVESTMENT COMPANY POTENTIAL LOSS OF OUR REIT STATUS SUBJECTS US AND OUR SHAREHOLDERS TO RISKS Potential loss of our REIT status subjects us and our shareholders to a number of risks including the following: FAILURE TO QUALIFY AS A REIT WOULD HAVE ADVERSE TAX CONSEQUENCES FOR US In order to maintain our REIT status we must meet a number of requirements |
| These requirements are highly technical and complex and often require an analysis of various factual matters and circumstances that may not be totally within our control |
| Even a technical or inadvertent mistake could jeopardize our REIT status |
| Furthermore, Congress and the IRS may make changes to the tax laws and regulations, and the courts may issue new rulings, that make it more difficult or impossible for us to remain qualified as a REIT If we fail to qualify as a REIT, we would be subject to federal and state income taxes at regular corporate rates |
| Therefore, we would have less money available for investments and for distributions to our shareholders |
| AS A REIT, OUR INCOME CAN ONLY COME FROM LIMITED TYPES OF SOURCES To qualify as a REIT, at least 75prca of our gross income must come from qualified real estate sources and at least 95prca of our gross income must come from qualified real estate sources and certain other sources that are itemized in the REIT tax laws |
| Therefore, we may have to forego opportunities to invest in potentially profitable businesses or assets because they would produce income that could jeopardize our status as a REIT WE HAVE CERTAIN DISTRIBUTION REQUIREMENTS As a REIT, we must distribute to shareholders at least 90prca of our REIT taxable income (excluding capital gains) |
| The required distribution limits the amount we have available for other business purposes, including amounts to fund our growth |
| Also, it is possible that because of the differences between the time we actually receive revenue or pay expenses and the period we report those items for distribution purposes, we may have to borrow funds on a short-term basis to meet the 90prca distribution requirement |
| WE ARE ALSO SUBJECT TO OTHER TAX LIABILITIES As a REIT, we may be subject to certain federal, state and local taxes on our income and property |
| LIQUIDATION OF COLLATERAL MAY JEOPARDIZE OUR REIT STATUS To continue to qualify as a REIT, we must comply with requirements regarding our assets and our sources of income |
| If we are compelled to liquidate our mortgage investments to satisfy our obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our status as a REIT LOSS OF INVESTMENT COMPANY ACT EXEMPTION WOULD ADVERSELY AFFECT US We intend to conduct our business so as not to become regulated as an investment company under the Investment Company Act of 1940, as amended (the "e Investment Company Act "e ) |
| If we fail to qualify for this exemption, we would be regulated as an investment company and our business would be materially adversely affected |
| Investment company regulations would prevent us from conducting our business as described in this document by, among other restrictions, reducing our ability to borrow |
| Under the current interpretation of SEC staff, in order to qualify for this exemption, we must maintain at least 55prca of our assets directly in these qualifying real estate interests |
| Mortgage-backed securities that do not represent all the certificates issued with respect to an underlying pool of mortgages may be treated as securities separate from the underlying mortgage loans and, thus, may not qualify for purposes of the 55prca requirement |
| Therefore, our ownership of these mortgage-backed securities is limited by the provisions of the Investment Company Act |
| In meeting the 55prca requirement, we treat as qualifying interests, mortgage-backed securities issued with respect to an underlying pool as to which we hold all issued certificates |
| If the SEC or its staff adopts a contrary interpretation, we could be required to sell a substantial amount of our mortgage-backed securities under potentially adverse market conditions |
| Further, in order to insure that we at all times qualify for the exemption from the Investment Company Act, we may be precluded from acquiring mortgage-backed securities whose yield is somewhat higher than the yield on those that could be purchased in a manner consistent with the exemption |
| The net effect of these factors may be to lower our net income |
| 14 5 |
| RISKS RELATED TO OUR COMMON SHARES AND OUR SHAREHOLDERS RESTRICTIONS ON SHARE ACCUMULATION IN REITS COULD DISCOURAGE A CHANGE OF CONTROL OF OUR COMPANY In order for us to qualify as a REIT, not more than 50prca of the number or value of our outstanding shares may be owned, directly or indirectly, by five or fewer individuals during the last half of a taxable year or during a proportionate part of a shorter taxable year |
| In order to prevent five or fewer individuals from acquiring more than 50prca of our outstanding shares and a resulting failure to qualify as a REIT, our declaration of trust provides that, no person may own, or be deemed to own by virtue of the attribution provisions of the Code, more than 9dtta8prca of the outstanding shares |
| The shares most recently acquired by a person that are in excess of the 9dtta8prca limit will not have any voting rights and will be deemed to have been offered for sale to us for a period subsequent to the acquisition |
| Any person who acquires shares in excess of the 9dtta8prca limit is obliged to immediately give written notice to us and provide us with any information we may request in order to determine the effect of the acquisition on our status as a REIT While these restrictions are designed to prevent any five individuals from owning more than 50prca of our shares, preserving our status as a REIT, they also discourage a change in control of our company |
| These restrictions may also deter tender offers that may be attractive to shareholders or limit the opportunity for shareholders to receive a premium for their shares if an investor makes purchases of shares to acquire a block of shares |
| SUPERMAJORITY VOTING REQUIREMENTS FOR ACQUISITIONS AND MERGERS COULD DISCOURAGE A CHANGE OF CONTROL OF OUR COMPANY Our declaration of trust requires that 80prca of our shareholders and all of our independent trustees approve exchange offers, mergers, consolidations or similar transactions involving us in which our shareholders receive securities in a surviving entity having materially different investment objectives and policies, or that is anticipated to provide significantly greater compensation to management, except for transactions affected because of changes in applicable law, or to preserve tax advantages for a majority in interest of our shareholders |
| These restrictions may also deter tender offers that may be attractive to shareholders or limit the opportunity for shareholders to receive a premium for their shares if an investor makes purchases of shares to acquire a block of shares |
| ISSUANCES OF LARGE AMOUNTS OF OUR COMMON SHARES COULD CAUSE OUR SHARE PRICE TO DECLINE Our declaration of trust permits our trustees to issue an unlimited number of shares (subject to SEC registration requirements and the consent of shareholders if required pursuant to the rules of the American Stock Exchange) |
| The issuance of common shares could cause dilution of our existing common shares and a decrease in the market price of our common shares |
| OUR SHAREHOLDERS MAY HAVE PERSONAL LIABILITY FOR OUR ACTS AND OBLIGATIONS It is possible that certain states may not recognize the limited liability of shareholders, although our declaration of trust provides that our shareholders shall not be subject to any personal liability for our acts or obligations |
| In certain states, our shareholders may be held personally liable for contract claims where the underlying agreement does not specifically exclude shareholder liability |
| Our shareholders may also be held personally liable for other claims against us, such as tort claims, claims for taxes and certain statutory liability |
| Upon payment of any such liability, however, the shareholder will, in the absence of willful misconduct on the shareholderapstas part, be entitled to reimbursement from our general assets, to the extent such assets are sufficient to satisfy the claim |