As
filed with the Securities and Exchange Commission on November 2,
2009
Registration
No. 333-145949
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
n
PRE-EFFECTIVE
AMENDMENT NO. 1 TO
POST-EFFECTIVE
AMENDMENT NO. 6 TO
FORM
S-11
FOR
REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF
SECURITIES OF CERTAIN REAL ESTATE COMPANIES
n
AMERICAN
REALTY CAPITAL TRUST, INC.
(Exact
Name of Registrant as Specified in Its Governing Instruments)
106
York Road
Jenkintown,
Pennsylvania 19046
(215)
887-2189
(Address,
Including Zip Code and Telephone Number, Including Area Code, of Registrant's
Principal Executive Offices)
Nicholas
S. Schorsch
AMERICAN
REALTY CAPITAL TRUST, INC.
106
York Road
Jenkintown,
Pennsylvania 19046
(215)
887-2189
(Name and
Address, Including Zip Code and Telephone Number, Including Area Code, of Agent
for Service)
n
With a Copy to:
Peter
M. Fass, Esq.
Proskauer
Rose LLP
1585
Broadway
New
York, New York 10036-8299
(212)
969-3000
n
Approximate Date of Commencement of
Proposed Sale to Public: As soon as practicable after the registration
statement becomes effective.
If any of
the securities being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act, check the
following box þ
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o
If this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering: o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering: o
If
delivery of the prospectus is expected to be made pursuant to Rule 434, check,
the following box: o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one)
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Large
accelerated filer
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o
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Accelerated
filer
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o
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Non-accelerated
filer
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þ
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(Do
not check if a smaller reporting company)
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Smaller
reporting company
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o
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This
Post-Effective Amendment No. 6 consists of the following:
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Registrant’s
final form of Prospectus dated November [__],
2009.
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Part
II, included herewith.
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Signatures,
included herewith.
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AMERICAN
REALTY CAPITAL
AMERICAN
REALTY CAPITAL TRUST, INC.
Maximum
Offering of 150,000,000 Shares of Common Stock
American
Realty Capital Trust, Inc. is a Maryland corporation that qualifies as a real
estate investment trust, or REIT. We will invest primarily in freestanding,
single-tenant retail properties net leased to investment grade and other
creditworthy tenants.
We are
offering up to 150,000,000 shares of our common stock, $0.01 par value per
share, in our primary offering for $10.00 per share, with discounts available
for certain categories of purchasers. We also are offering up to 25,000,000
shares pursuant to our distribution reinvestment plan at a purchase price equal
to the higher of $9.50 per share or 95% of the estimated value of a share of our
common stock. We will offer these shares until January 25, 2011 which is three
years after the effective date of this offering. We reserve the right to
reallocate the shares of our common stock we are offering between the primary
offering and the distribution reinvestment plan. We are registering options to
purchase 1,000,000 shares of common stock, as well as the 1,000,000 shares of
common stock issuable upon exercise of such options pursuant to our stock option
plan for our independent directors.
See
“Risk Factors” for a description of some of the risks you should consider before
buying shares of our common stock. These risks include the
following:
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We
may be considered a “blind pool” because we own a limited number of
investments and have not identified most of the investments we will make
with proceeds from this offering. You will be unable to evaluate the
economic merit of our future investments before we make them and there may
be a substantial delay in receiving a return, if any, on your
investment.
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There
are substantial conflicts among us and our sponsor, advisor, dealer
manager and property manager, such as the fact that our principal
executive officers own a majority interest in our advisor, our
dealer-manager and our property manager, and our advisor and other
affiliated entities may compete with us and acquire properties suitable to
our investment objectives.
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No
public market currently exists, and one may never exist, for shares of our
common stock. If you are able to sell your shares, you would likely have
to sell them at a substantial
discount.
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Until
we generate operating cash flow sufficient to pay distributions to our
stockholders, we may make distributions from the proceeds of this offering
or from borrowings in anticipation of future cash flow, which may
constitute a return of capital, reduce the amount of capital we ultimately
invest in properties and negatively impact the value of your
investment. Until we generate operating cash flow sufficient to
pay distributions to stockholders, our Advisor may waive the reimbursement
of certain expenses and payment of certain
fees.
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If
we fail to qualify, or maintain the requirements, to be taxed as a REIT,
it would reduce the amount of income available for distribution and limit
our ability to make distributions to our
stockholders.
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You
may not own more than 9.8% in value of the outstanding shares of our stock
or more than 9.8% in value or number of shares (whichever is more
restrictive) of any class or series of our outstanding shares of
stock.
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We
may incur substantial debt, which could hinder our ability to pay
distributions to our stockholders or could decrease the value of your
investment in the event that income on, or the value of, the property
securing the debt falls, but we will not incur debt to the extent it will
restrict our ability to qualify as a
REIT.
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We
are dependent on our advisor to select investments and conduct our
operations. Adverse changes in the financial condition of our advisor or
our relationship with our advisor could adversely affect
us.
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We
will pay substantial fees and expenses to our advisor, its affiliates and
participating broker-dealers, which payments increase the risk that you
will not earn a profit on your
investment.
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This
is a “best efforts” offering and we might not sell all of the shares being
offered.
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We
are not yet a REIT and may be unable to qualify as a
REIT.
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These
are speculative securities and this investment involves a high degree of risk.
You should purchase these securities only if you can afford a complete loss of
your investment.
Neither
the Securities and Exchange Commission, the Attorney General of the State of New
York nor any other state securities regulator has approved or disapproved of our
common stock, determined if this prospectus is truthful or complete or passed on
or endorsed the merits of this offering. Any representation to the contrary is a
criminal offense.
The
use of projections in this offering is prohibited. Any representation to the
contrary, and any predictions, written or oral, as to the amount or certainty of
any future benefit or tax consequence that may flow from an investment in this
program is not permitted. All proceeds from this offering are funds held in
trust until subscriptions are accepted and funds are released.
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Price
to Public
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Selling
Commissions
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Dealer
Manager
Fee
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Net
Proceeds
(Before
Expenses)
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Primary
Offering
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Per
Share
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$
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10.00
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$
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0.70
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$
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0.30
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$
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9.00
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Total
Maximum
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$
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1,500,000,000
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$
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105,000,000
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$
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45,000,000
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$
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1,350,000,000
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Distribution
Reinvestment Plan
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Per
Share
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$
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9.50
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$
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—
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$
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—
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$
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9.50
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Total
Maximum
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$
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237,500,000
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$
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—
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$
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—
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$
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237,500,000
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The
dealer manager of this offering, Realty Capital Securities, LLC, is a member
firm of the Financial Industry Regulatory Authority (FINRA), is our affiliate
and will offer the shares on a best efforts basis. The minimum investment amount
generally is $1,000. See the “Plan of Distribution” section of this
prospectus for a description of compensation that may be received by our dealer
manger and other broker-dealers in this offering. As of July 1, 2009
we have sold the minimum of 4,500,000 shares of our common stock necessary to
release all subscribers’ funds from escrow. All subscription payments
have been released to us. As of October 20, 2009, we have
sold 10,118,192 shares of our common stock.
November
__, 2009
SUITABILITY
STANDARDS
An
investment in our common stock involves significant risk and is only suitable
for persons who have adequate financial means, desire a relatively long-term
investment and who will not need immediate liquidity from their investment.
Initially, we will not have a public market for our common stock, and we cannot
assure you that one will develop, which means that it may be difficult for you
to sell your shares. This investment is not suitable for persons who require
immediate liquidity or guaranteed income, or who seek a short-term
investment.
In
consideration of these factors, we have established suitability standards for
initial stockholders and subsequent purchasers of shares from our stockholders.
These suitability standards require that a purchaser of shares have, excluding
the value of a purchaser’s home, furnishings and automobiles,
either:
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a
net worth of at least $250,000; or
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a
gross annual income of at least $70,000 and a net worth of at least
$70,000.
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The
minimum purchase is 100 shares ($1,000), except in certain states as described
below. Purchases in amounts above the $1,000 minimum and all subsequent
purchases may be made in whole or fractional shares, again subject to the
limitations described below for certain states. You may not transfer fewer
shares than the minimum purchase requirement. In addition, you may not transfer,
fractionalize or subdivide your shares so as to retain less than the number of
shares required for the minimum purchase. In order to satisfy the minimum
purchase requirements for retirement plans, unless otherwise prohibited by state
law, a husband and wife may jointly contribute funds from their separate IRAs,
and jointly meet suitability standards, provided that each such contribution is
made in increments of $100.00 or ten (10) whole shares. You should note that an
investment in shares of our company will not, in itself, create a retirement
plan and that, in order to create a retirement plan, you must comply with all
applicable provisions of the Internal Revenue Code.
The
minimum purchase for Maine, New York, Tennessee and North Carolina residents is
250 shares ($2,500), except for IRAs which must purchase a minimum of 100 shares
($1,000). The minimum purchase for Minnesota residents is 250 shares ($2,500),
except for IRAs and other qualified retirement plans which must purchase a
minimum of 200 shares ($2,000). Following an initial subscription for at least
the required minimum investment, any investor may make additional purchases in
increments of at least 100 shares ($1,000), except for purchases made by
residents of Maine and Minnesota, whose additional investments must meet their
state’s minimum investment amount, and purchases of shares pursuant to our
distribution reinvestment plan and automatic purchase plan, which may be in
lesser amounts.
Several
states have established suitability requirements that are more stringent than
the standards that we have established and described above. Shares will be sold
only to investors in these states who meet the special suitability standards set
forth below:
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Kentucky — Investors
must have either (a) a net worth of $250,000 or (b) a gross annual income
of at least $70,000 and a net worth of at least $70,000, with the amount
invested in this offering not to exceed 10% of the Kentucky investor’s
liquid net worth.
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Massachusetts,
Ohio, Iowa, Pennsylvania and Oregon — Investors must have either
(a) a minimum net worth of at least $250,000 or (b) an annual gross income
of at least $70,000 and a net worth of at least $70,000. The investor’s
maximum investment in the issuer and its affiliates cannot exceed 10% of
the Massachusetts, Ohio, Iowa, Pennsylvania or Oregon resident’s net
worth.
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Michigan
— Investors must have either (a) a minimum net worth of at least $250,000
or (b) an annual gross income of at least $70,000 and a net worth of at
least $70,000. The maximum investment in the issuer and its
affiliates cannot exceed 10% of the Michigan resident’s net
worth.
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Tennessee — In
addition to the suitability requirements described above, investors’
maximum investment in our shares and our affiliates shall not exceed 10%
of the resident’s net worth.
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Kansas — In
addition to the suitability requirements described above, it is
recommended that investors should invest no more than 10% of their liquid
net worth in our shares and securities of other real estate investment
trusts. “Liquid net worth” is defined as that portion of net
worth (total assets minus total liabilities) that is comprised of cash,
cash equivalents and readily marketable
securities.
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Missouri
— In addition to the suitability requirements described above, no
more than ten percent (10%) of any one (1) Missouri investor's liquid net
worth shall be invested in the securities registered by us for this
offering with the Securities
Division.
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California — In
addition to the suitability requirements described above, investors’
maximum investment in our shares will be limited to 10% of the
investor's net worth (exclusive of home, home furnishings and
automobile).
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Alabama
and Mississippi — In addition to the suitability standards
above, shares will only be sold to Alabama and Mississippi residents that
represent that they have a liquid net worth of at least 10 times the
amount of their investment in this real estate investment program and
other similar programs.
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In all
states listed above, net worth is to be determined excluding the value of a
purchaser’s home, furnishings and automobiles.
Each
sponsor, participating broker-dealer, authorized representative or any other
person selling shares on our behalf is required to:
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make
every reasonable effort to determine that the purchase of shares is a
suitable and appropriate investment for each investor based on information
provided by such investor to the broker-dealer, including such investor’s
age, investment objectives, income, net worth, financial situation and
other investments held by such investor;
and
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maintain
records for at least six years of the information used to determine that
an investment in the shares is suitable and appropriate for each
investor.
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In making
this determination, your participating broker-dealer, authorized representative
or other person selling shares on our behalf will, based on a review of the
information provided by you in the subscription agreement (Appendix A), consider
whether you:
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meet
the minimum income and net worth standards established in your
state;
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can
reasonably benefit from an investment in our common stock based on your
overall investment objectives and portfolio
structure;
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are
able to bear the economic risk of the investment based on your overall
financial situation; and
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have
an apparent understanding of:
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the
fundamental risks of an investment in our common
stock;
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the
risk that you may lose your entire
investment;
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the
lack of liquidity of our common
stock;
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the
restrictions on transferability of our common
stock;
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the
background and qualifications of our advisor;
and
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the
tax consequences of an investment in our common
stock.
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In the
case of sales to fiduciary accounts, the suitability standards must be met by
the fiduciary account, by the person who directly or indirectly supplied the
funds for the purchase of the shares or by the beneficiary of the account. Given
the long-term nature of an investment in our shares, our investment objectives
and the relative illiquidity of our shares, our suitability standards are
intended to help ensure that shares of our common stock are an appropriate
investment for those of you who become investors.
In order
to ensure adherence to the suitability standards above, requisite criteria must
be met, as set forth in the Subscription Agreement in the form attached hereto
as Appendix A. In addition, our advisor and dealer manager must make every
reasonable effort to determine that the purchase of our shares (including the
purchase of our shares through the automatic purchase plan) is a suitable and
appropriate investment for an investor. In making this determination, our
advisor and dealer manager will rely on relevant information provided by the
investor, including information as to the investor’s age, investment objectives,
investment experience, income, net worth, financial situation, other
investments, and any other pertinent information. Executed Subscription
Agreements will be maintained in our records for six years.
RESTRICTIONS
IMPOSED BY THE USA PATRIOT ACT AND RELATED ACTS
In
accordance with the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001, as amended (the
USA PATRIOT Act), the units offered hereby may not be offered, sold, transferred
or delivered, directly or indirectly, to any “Prohibited Partner,’’ which means
anyone who is:
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a
“designated national,’’ “specially designated national,’’ “specially
designated terrorist,’’ “specially designated global terrorist,’’ “foreign
terrorist organization,’’ or “blocked person’’ within the definitions set
forth in the Foreign Assets Control Regulations of the U.S. Treasury
Department;
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acting
on behalf of, or an entity owned or controlled by, any government against
whom the U.S. maintains economic sanctions or embargoes under the
Regulations of the U.S. Treasury
Department;
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within
the scope of Executive Order 13224 — Blocking Property and
Prohibiting Transactions with Persons who Commit, Threaten to Commit, or
Support Terrorism, effective September 24,
2001;
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subject
to additional restrictions imposed by the following statutes or
regulations and executive orders issued thereunder: the Trading with the
Enemy Act, the Iraq Sanctions Act, the National Emergencies Act, the
Antiterrorism and Effective Death Penalty Act of 1996, the International
Emergency Economic Powers Act, the United Nations Participation Act, the
International Security and Development Cooperation Act, the Nuclear
Proliferation Prevention Act of 1994, the Foreign Narcotics Kingpin
Designation Act, the Iran and Libya Sanctions Act of 1996, the Cuban
Democracy Act, the Cuban Liberty and Democratic Solidarity Act and the
Foreign Operations, Export Financing and Related Programs Appropriation
Act or any other law of similar import as to any non-U.S. country, as each
such act or law has been or may be amended, adjusted, modified or reviewed
from time to time; or
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designated
or blocked, associated or involved in terrorism, or subject to
restrictions under laws, regulations, or executive orders as may apply in
the future similar to those set forth
above.
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AMERICAN
REALTY CAPITAL TRUST, INC.
SUITABILITY
STANDARDS
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i
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RESTRICTIONS
IMPOSED BY THE USA PATRIOT ACT AND RELATED ACTS
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ii
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QUESTIONS
AND ANSWERS ABOUT THIS OFFERING
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vii
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PROSPECTUS
SUMMARY
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1
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Status
of the Offering
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1
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American
Realty Capital Trust, Inc.
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1
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REIT
Status
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1
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Advisor
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1
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Management
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1
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Operating
Partnership
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2
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Summary
Risk Factors
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2
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Description
of Investments
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3
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Estimated
Use of Proceeds of This Offering
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4
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Investment
Objectives
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4
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Conflicts
of Interest
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4
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Prior
Offering
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6
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Terms
of The Offering
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6
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Compensation
to Advisor and its Affiliates
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6
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Status
of Fees Paid and Deferred
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8
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Distributions
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8
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Listing
or Liquidation
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9
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Distribution
Reinvestment Plan
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9
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Share
Repurchase Program
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9
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Description
of Shares
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10
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RISK
FACTORS
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12
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Risks
Related to an Investment in American Realty Capital Trust,
Inc.
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12
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Risks
Related to Conflicts of Interest
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14
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Risks
Related to This Offering and Our Corporate Structure
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17
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General
Risks Related to Investments in Real Estate
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22
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Risks
Associated with Debt Financing
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29
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Federal
Income Tax Risks
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30
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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
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33
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ESTIMATED
USE OF PROCEEDS
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34
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MANAGEMENT
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36
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General
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36
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Committees
of the Board of Directors
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37
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Audit
Committee
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37
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Executive
Officers and Directors
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37
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Compensation
of Directors
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40
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Stock
Option Plan
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41
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Compliance
with the American Jobs Creation Act
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41
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Limited
Liability and Indemnification of Directors, Officers, Employees and Other
Agents
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42
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The
Advisor
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44
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The
Advisory Agreement
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44
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Affiliated
Companies
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46
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Investment
Decisions
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49
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Certain
Relationships and Related Transactions
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49
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MANAGEMENT
COMPENSATION
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52
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STOCK
OWNERSHIP
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58
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CONFLICTS
OF INTEREST
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59
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Interests
in Other Real Estate Programs
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Other
Activities of American Realty Capital Advisors, LLC and Its
Affiliates
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59
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Competition
in Acquiring, Leasing and Operating of Properties
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Affiliated
Dealer Manager
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60
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Affiliated
Property Manager
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60
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Lack
of Separate Representation
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60
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Joint
Ventures with Affiliates of American Realty Capital Advisors,
LLC
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60
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Receipt
of Fees and Other Compensation by American Realty Capital Advisors, LLC
and Its Affiliates
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61
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Certain
Conflict Resolution Procedures
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61
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INVESTMENT
OBJECTIVES AND POLICIES
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63
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General
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63
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American
Realty Capital’s Business Plan
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64
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Acquisition
and Investment Policies
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65
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Making
Loans and Investments in Mortgages
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75
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Acquisition
of Properties from Affiliates
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77
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Section
1031 Exchange Program
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78
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Disposition
Policies
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79
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Investment
Limitations
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79
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Change
in Investment Objectives and Limitations
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80
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Real
Property Investments
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80
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Potential
Property Investments
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98
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Other
Policies
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100
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PLAN
OF OPERATION
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101
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General
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101
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Liquidity
and Capital Resources
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102
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Results
of Operations
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102
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Inflation
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103
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SELECTED
FINANCIAL DATA
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104
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
OPERATIONS
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105
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Overview
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105
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Application
of Critical Accounting Policies
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105
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Funds
from Operations
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106
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Liquidity
and Capital Resources
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107
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Election
as a REIT
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108
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Inflation
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108
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Related-Party
Transactions and Agreements
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108
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Conflicts
of Interest
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108
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Impact
of Recent Accounting Pronouncements
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108
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Off
Balance Sheet Arrangements
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110
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PRIOR
PERFORMANCE SUMMARY
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111
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Introduction
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111
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Three-Year
Summary of Operations of AFR
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114
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Three-Year
Summary of Funds Raised by AFR
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115
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Three-Year
Summary of Acquisitions by AFR
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115
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Three-Year
Summary of Sales by AFR
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117
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Three-Year
Summary of AFR Dividends
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117
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Adverse
Business Developments and Conditions
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118
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FEDERAL
INCOME TAX CONSIDERATIONS
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119
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General
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119
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Opinion
of Counsel
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119
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Taxation
of the Company
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119
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Requirements
for Qualification as a REIT
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120
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Failure
to Qualify as a REIT
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124
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Sale-Leaseback
Transactions
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124
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Taxation
of U.S. Stockholders
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124
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Treatment
of Tax-Exempt Stockholders
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126
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Special
Tax Considerations for Non-U.S. Stockholders
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127
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Statement
of Stock Ownership
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128
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State
and Local Taxation
|
128
|
Tax
Aspects of Our Operating Partnership
|
128
|
INVESTMENT
BY TAX-EXEMPT ENTITIES AND ERISA CONSIDERATIONS
|
132
|
General
|
132
|
Minimum
and Other Distribution Requirements — Plan
Liquidity
|
132
|
Annual
or More Frequent Valuation Requirement
|
133
|
Fiduciary
Obligations — Prohibited Transactions
|
133
|
Plan
Assets — Definition
|
134
|
Plan
Assets — Registered Investment Company Exception
|
134
|
Publicly
Offered Securities Exemption
|
134
|
Plan
Assets — Operating Company Exception
|
134
|
Plan
Assets — Not Significant Investment Exception
|
135
|
Consequences
of Holding Plan Assets
|
135
|
Prohibited
Transactions
|
136
|
Prohibited
Transactions — Consequences
|
136
|
Reporting
|
136
|
DESCRIPTION
OF SHARES
|
137
|
Common
Stock
|
137
|
Preferred
Stock
|
138
|
Meetings
and Special Voting Requirements
|
138
|
Restrictions
on Ownership and Transfer
|
139
|
Automatic
Purchase Plan
|
140
|
Distribution
Policy and Distributions
|
141
|
Stockholder
Liability
|
142
|
Business
Combinations
|
142
|
Control
Share Acquisitions
|
143
|
Subtitle
8
|
144
|
Advance
Notice of Director Nominations and New Business
|
144
|
Share
Repurchase Program
|
144
|
Restrictions
on Roll-up Transactions
|
146
|
SUMMARY
OF DISTRIBUTION REINVESTMENT PLAN
|
148
|
Investment
of Distributions
|
148
|
Election
to Participate or Terminate Participation
|
148
|
Excluded
Distributions
|
149
|
Federal
Income Tax Considerations
|
149
|
Amendment
and Termination
|
150
|
OUR
OPERATING PARTNERSHIP AGREEMENT
|
151
|
General
|
151
|
Capital
Contributions
|
151
|
Operations
|
151
|
Exchange
Rights
|
153
|
Amendments
to the Partnership Agreement
|
153
|
Termination
of the Partnership
|
153
|
Transferability
of Interests
|
153
|
PLAN
OF DISTRIBUTION
|
155
|
The
Offering
|
155
|
Realty
Capital Securities, LLC
|
155
|
Compensation
We Will Pay for the Sale of Our Shares
|
155
|
Shares
Purchased by Affiliates
|
157
|
Volume
Discounts
|
157
|
Subscription
Process
|
159
|
Minimum
Offering
|
159
|
Status
of the Offering
|
160
|
HOW
TO SUBSCRIBE
|
161
|
SUPPLEMENTAL
SALES MATERIAL
|
161
|
LEGAL
MATTERS
|
161
|
EXPERTS
|
161
|
WHERE
YOU CAN FIND MORE INFORMATION
|
162
|
APPENDIX
A: SUBSCRIPTION AGREEMENT
|
A-1
|
APPENDIX
B: DISTRIBUTION REINVESTMENT PLAN
|
B-1
|
APPENDIX
C: PRIOR PERFORMANCE OF AMERICAN FINANCIAL REALTY TRUST
|
C-1
|
APPENDIX
C-2: RESULTS OF NICHOLAS S. SCHORSCH’S COMPLETED PROGRAMS
(unaudited)
|
C-2-1
|
QUESTIONS
AND ANSWERS ABOUT THIS OFFERING
Below we
have provided some of the more frequently asked questions and answers relating
to an offering of this type. Please see “Prospectus Summary” and the remainder
of this prospectus for more detailed information about this
offering.
A:
|
In general, a real estate
investment trust (“REIT”) is a company
that:
|
|
•
|
pays distributions to investors
of at least 90% of its taxable
income;
|
|
•
|
avoids the “double taxation”
treatment of income that generally results from investments in a
corporation because a REIT generally is not subject to federal corporate
income taxes on its net income, provided certain income tax requirements
are satisfied; and
|
|
•
|
combines the capital of many
investors to acquire a large-scale diversified real estate portfolio under
professional management.
|
Q:
|
How do you differentiate yourself
from your competitors who offer non-traded public REIT shares or real
estate limited partnership
units?
|
A:
|
We intend to focus on acquiring a
diversified portfolio of freestanding, single-tenant retail and commercial
properties that are net leased to investment grade and other creditworthy
tenants. The net leases with our tenants allow us to pass through all
operating and capital expenses items directly to our tenant. The tenant is
billed directly for all expense items and capital costs and the tenant
pays such costs directly to the provider without having to go through us.
Multi-tenant retail and commercial properties, unlike our net lease
properties, are subject to much greater volatility in operating results
due to unexpected increases in operating costs or unforeseen capital and
repair expenses. Our leases allow us to pass through these costs to the
tenant.
|
We intend
to build a portfolio where 50% or more of our distributions are from rents
guaranteed by investment grade tenants. We believe that in addition to simply
having investment grade tenants in your portfolio, the majority of the
properties must be tenanted by investment grade (S&P rated BBB- or better)
companies in order to maximize the investors’ risk-adjusted return. While we
intend to pay distributions equivalent to those of our competitors, we believe
that the risk-adjusted returns on our portfolio are superior to those of our
competitors due to the high concentration of investment grade tenants, the
duration of our leases, i.e., 15 years and greater, and the net lease structure
of these leases.
Additionally,
since we acquire long term leases with minimum, non-cancellable lease terms of
ten or more years, the majority of which will be fifteen years or greater, we
are less subject to vacancy risk and tenant turnover than our competitors who
invest in multi-tenant properties. This allows us to better withstand periods of
economic uncertainty versus properties with a number of short term leases. Our
individual investments also tend to be smaller because we buy freestanding
single-tenant properties versus multi-tenant properties such as malls, shopping
centers and office buildings. This allows us to achieve much greater
diversification by geography, tenant mix and property type. By achieving such
diversification, we are less likely to be negatively affected by economic
downturns in local markets.
Q:
|
Generally, what are the terms of
your leases?
|
A:
|
We will seek to acquire
properties that have leases with investment grade and other creditworthy
tenants. We expect that our leases generally will be triple-net leases,
which means that the tenant is responsible for all costs and expenses
related to the use and operation of the property, including, but not
limited to, the cost of maintenance, repairs, property taxes and
insurance, utilities and all other operating and capital costs. In certain
of these leases, we will be responsible for the repair and/or replacement
of specific structural and load bearing components of a property, such as
the roof or structure of the building. We expect that our leases generally
will have terms of ten or more years, oftentimes with multiple renewal
options. We may, however, enter into leases that have a shorter
term.
|
Q:
|
How will you determine
creditworthiness of prospective tenants and select potential
investments?
|
A:
|
We will determine
creditworthiness pursuant to various methods, including reviewing
financial data and other information about the tenant. In addition, we may
use an industry credit rating service to determine the creditworthiness of
potential tenants and any personal guarantor or corporate guarantor of
each potential tenant. We will compare the reports produced by these
services to the relevant financial and other data collected from these
parties before consummating a lease transaction. Such relevant data from
potential tenants and guarantors include income and cash flow statements
and balance sheets for current and prior periods, net worth or cash flow
of guarantors, and business plans and other data we deem
relevant.
|
Our
Advisor considers relevant real property and financial factors in selecting
properties, including condition and location of the property, its
income-producing capacity and the prospects for its long-term appreciation.
Acquisitions or originations of loans are evaluated for the quality of income,
and the quality of the borrower and the security for the loan or the nature and
possibility of the acquisition of the underlying real estate asset. Investments
in other real estate-related securities will adhere to similar principles. In
addition, we consider the impact of each investment as it relates to our
portfolio as a whole.
Q:
|
What is the experience of your
officers and directors both in real estate in general and with net leased
assets in particular?
|
A:
|
Nicholas S. Schorsch, our
chairman and chief executive officer, founded and formerly served as
President, CEO and Vice-Chairman of American Financial Realty Trust since
its inception as a REIT in September 2002 until August 2006. American
Financial Realty Trust is a publicly traded REIT listed on the NYSE that
invests exclusively in office, bank branches and other operationally
critical real estate assets that are net leased to tenants in the
financial service industry such as banks and insurance companies. Through
American Financial Resource Group and its successor corporation, now
American Financial Realty Trust, Mr. Schorsch has executed in excess of
1,000 acquisitions, both in acquiring businesses and real estate
properties with transactional value of approximately $5 billion. In 2003,
Mr. Schorsch received an Entrepreneur of the Year award from Ernst &
Young.
|
William
M. Kahane, our President, Chief Operating Officer and Treasurer, began his
career as a real estate lawyer practicing in the public and private sectors from
1974-1979. From 1981-1992 Mr. Kahane worked at Morgan Stanley & Co.,
specializing in real estate, becoming a Managing Director in 1989. In 1992, Mr.
Kahane left Morgan Stanley to establish a real estate advisory and asset sales
business known as Milestone Partners which continues to operate today. Mr.
Kahane is currently a Managing Director of GF Capital Management & Advisors
LLC, a New York based merchant banking firm, where he directs the company’s real
estate investments. GF Capital offers comprehensive wealth management services
through its subsidiary TAG Associates LLC, a leading multi-client family office
and portfolio management services company with approximately $5 billion of
assets under management.
Peter M.
Budko, our Executive Vice President and Chief Investment Officer, founded and
formerly served as Managing Director and Group Head of the Structured Asset
Finance Group, a division of Wachovia Capital Markets, LLC from 1997-2006. The
Structured Asset Finance Group structures and invests in real estate that is net
leased to corporate tenants. While at Wachovia, Mr. Budko acquired over $5
billion of net leased real estate assets. From 1987-1997, Mr. Budko worked in
the Corporate Real Estate Finance Group at NationsBank Capital Market
(predecessor to Bank of America Securities) becoming head of the group in
1990.
Brian S.
Block has served as Executive Vice President and Chief Financial Officer since
September 2007. He is also Executive Vice President and Chief Financial Officer
of American Realty Capital, LLC and American Realty Capital Properties, LLC. Mr.
Block is responsible for the accounting, finance and reporting functions at ARC.
He has extensive experience in SEC reporting requirements as well as REIT tax
compliance matters. Mr. Block has been instrumental in developing ARC’s
infrastructure and positioning the organization for growth. Mr. Block began his
career in public accounting at Ernst & Young and Arthur Andersen from 1994
to 2000. Subsequently, Mr. Block was the Chief Financial Officer of a venture
capital-backed technology company for several years prior to joining AFRT in
2002. While at AFRT, Mr. Block served as Chief Accounting Officer from 2003 to
2007 and oversaw the financial, administrative and reporting functions of the
organization. He is a certified public accountant and is a member of the AICPA
and PICPA. Mr. Block serves on the REIT Committee of the Investment Program
Association.
Michael
Weil, our Executive Vice President and Secretary, was formerly the Senior Vice
President of Sales and Leasing for American Financial Realty Trust, where he was
responsible for the disposition and leasing activity for a 33 million square
foot portfolio. Under the direction of Mr. Weil, his department was the sole
contributor in the increase of occupancy and portfolio revenue through the sales
of over 200 properties and the leasing of over 2.2 million square feet,
averaging 325,000 square feet of newly executed leases per quarter.
Please
also see herein the section “Adverse Business Developments and
Conditions.”
Q:
|
What is your environmental review
policy?
|
A:
|
We generally will not purchase
any property unless and until we also obtain what is generally referred to
as a “Phase I” environmental site assessment and are generally satisfied
with the environmental status of the property. However, we may purchase a
property without obtaining such assessment if our advisor determines it is
not warranted. A Phase I environmental site assessment basically consists
of a visual survey of the building and the property in an attempt to
identify areas of potential environmental concerns. In addition, a visual
survey of neighboring properties is conducted to assess surface conditions
or activities that may have an adverse environmental impact on the
property. Furthermore, local governmental agency personnel are contacted
who perform a regulatory agency file search in an attempt to determine any
known environmental concerns in the immediate vicinity of the property. A
Phase I environmental site assessment does not generally include any
sampling or testing of soil, ground water or building materials from the
property, and may not reveal all environmental hazards on a property. We
expect that in most cases we will request, but will not always obtain, a
representation from the seller that, to its knowledge, the property is not
contaminated with hazardous materials. Additionally, many of our leases
contain clauses that require a tenant to reimburse and indemnify us for
any environmental contamination occurring at the
property.
|
Q:
|
Do you expect to enter into joint
ventures?
|
A:
|
Possibly. We may enter into joint
ventures on property types that meet our overall investment strategy and
return criteria that would otherwise not be available to us because the
current owners may be reluctant to sell a 100% interest in their property.
We may also enter into a joint venture with a third party who has control
over a particular investment opportunity but does not have sufficient
equity capital to complete the transaction. We may enter into joint
ventures with our affiliates or with third parties. Generally, we will
only enter into a joint venture in which we will control the decisions of
the joint venture. If we do enter into joint ventures, we may assume
liabilities related to the joint venture that exceed the percentage of our
investment in the joint
venture.
|
Q:
|
Will distributions be taxable as
ordinary income?
|
A:
|
Yes and no. Generally,
distributions that you receive, including distributions that are
reinvested pursuant to our distribution reinvestment plan, will be taxed
as ordinary income to the extent the distribution is from current or
accumulated earnings and profits. We expect that some portion of your
distributions may not be subject to tax in the year received because
depreciation expense reduces taxable income but does not reduce cash
available for distribution. The portion of your distribution that is not
subject to tax immediately is considered a return of capital for tax
purposes and will reduce the tax basis of your investment. This defers a
portion of your tax until your investment is sold or we are liquidated, at
which time you will be taxed at capital gains rates. However, because each
investor’s tax considerations are different, we recommend that you consult
with your tax advisor. You also should review the section of this
prospectus entitled “Federal Income Tax
Considerations.”
|
Q:
|
How does a best efforts offering
work?
|
A:
|
When shares are offered to the
public on a “best efforts” basis, the brokers participating in the
offering are only required to use their best efforts to sell the shares
and have no firm commitment or obligation to purchase any of the shares.
Therefore, we may not sell all of the shares that we are
offering.
|
Q:
|
What will you do with the money
raised in this offering before you invest the proceeds in real
estate?
|
A:
|
Until we invest the net proceeds
of this offering in real estate, we may use a portion of the proceeds to
fund distributions and we may invest in short-term, highly liquid or other
authorized investments, such as money market mutual funds, certificates of
deposit, commercial paper, interest-bearing government securities and
other short-term investments. We may not be able to invest the proceeds in
real estate promptly and such short-term investments will not earn as high
of a return as we expect to earn on our real estate
investments.
|
A:
|
UPREIT stands for “Umbrella
Partnership Real Estate Investment Trust.” We use an UPREIT structure
because a sale of property directly to a REIT generally is a taxable
transaction to the selling property owner. In an UPREIT structure, a
seller of a property that desires to defer taxable gain on the sale of its
property may transfer the property to the UPREIT in exchange for limited
partnership units in the UPREIT and defer taxation of gain until the
seller later exchanges its UPREIT units on a one-for-one basis for REIT
shares. If the REIT shares are publicly traded, at the time of the
exchange of units for shares, the former property owner will achieve
liquidity for its investment. Using an UPREIT structure may give us an
advantage in acquiring desired properties from persons who may not
otherwise sell their properties because of unfavorable tax
results.
|
A:
|
Generally, you may buy shares
pursuant to this prospectus provided that you have either (a) a net worth
of at least $70,000 and a gross annual income of at least $70,000, or (b)
a net worth of at least $250,000. For this purpose, net worth does not
include your home, home furnishings and automobiles. Residents of certain
states may have a different standard. You should carefully read the more
detailed description under “Suitability Standards” immediately following
the cover page of this
prospectus.
|
Q:
|
Who should buy
shares?
|
A:
|
An investment in our shares may
be appropriate for you if you meet the minimum suitability standards
mentioned above, seek to diversify your personal portfolio with a
finite-life real estate-based investment, which among its benefits hedges
against inflation and the volatility of the stock market, seek to receive
current income, seek to preserve capital, wish to obtain the benefits of
potential long-term capital appreciation, and are able to hold your
investment for a time period consistent with our liquidity plans. Persons
who require immediate liquidity or guaranteed income, or who seek a
short-term investment, are not appropriate investors for us, as our shares
will not meet those needs.
|
Q:
|
May I make an investment through
my IRA, SEP or other tax-deferred
account?
|
A:
|
Yes. You may make an investment
through your individual retirement account (“IRA”), a simplified employee
pension (“SEP”) plan or other tax-deferred account. In making these
investment decisions, you should consider, at a minimum, (a) whether the
investment is in accordance with the documents and instruments governing
your IRA, plan or other account, (b) whether the investment satisfies the
fiduciary requirements associated with your IRA, plan or other account,
(c) whether the investment will generate unrelated business taxable income
(“UBTI”) to your IRA, plan or other account, (d) whether there is
sufficient liquidity for such investment under your IRA, plan or other
account, (e) the need to value the assets of your IRA, plan or other
account annually or more frequently, and (f) whether the investment would
constitute a prohibited transaction under applicable
law.
|
Q:
|
Is there any minimum investment
required?
|
A:
|
Yes. Generally, you must invest
at least $1,000. Investors who already own our shares can make additional
purchases for less than the minimum investment. You should carefully read
the more detailed description of the minimum investment requirements
appearing under “Suitability Standards” immediately following the cover
page of this prospectus.
|
Q:
|
What type of reports on my
investment will I receive?
|
A:
|
We will provide you with periodic
updates on the performance of your investment with us,
including:
|
|
•
|
following our commencement of
distributions to stockholders, four quarterly or 12 monthly distribution
reports;
|
|
•
|
three quarterly financial reports
only by written request;
|
|
•
|
an annual Form 1099; if
applicable and
|
|
•
|
supplements to the prospectus
during the offering period, via mailings or website
access.
|
We will
provide this information to you via one or more of the following methods, in our
discretion and with your consent, if necessary:
|
•
|
U.S. mail or other
courier;
|
|
•
|
electronic delivery;
or
|
|
•
|
posting, or providing a link, on
our affiliated website, which is www.americanrealtycap.com.
|
Q:
|
When will I get my detailed tax
information?
|
A:
|
If applicable your Form 1099 tax
information will be placed in the mail by January 31 of each
year.
|
Q:
|
How do I subscribe for
shares?
|
A:
|
If you choose to purchase shares
in this offering and you are not already a stockholder, you will need to
complete and sign a subscription agreement, like the one contained in this
prospectus as Appendix A, for a specific number of shares and pay for the
shares at the time you
subscribe.
|
Q:
|
Who is the transfer
agent?
|
A:
|
The
name and address of our transfer agent
is:
|
DST
Systems, Inc.
430 W 7th
St
Kansas
City, MO 64105-1407
Phone
(866) 771-2088
Fax (877)
694-1113
To ensure
that any account changes are made promptly and accurately, all changes including
your address, ownership type and distribution mailing address should be directed
to the transfer agent.
|
|
Q:
|
Who
can help answer my questions?
|
|
|
A:
|
If
you have more questions about the offering or if you would like additional
copies of this prospectus, you should contact your registered
representative or contact:
|
Realty
Capital Securities, LLC
Three
Copley Place
Suite
3300
Boston,
MA 02116
1-877-373-3522
www.americanrealtycap.com
This
prospectus summary highlights material information contained elsewhere in this
prospectus. Because it is a summary, it may not contain all of the information
that is important to you. To understand this offering fully, you should read the
entire prospectus carefully, including the “Risk Factors” section and the
financial statements, before making a decision to invest in our common
stock.
Status
of the Offering
We
commenced our initial public offering of 150,000,000 shares of common stock on
January 25, 2008. As of October 20, 2009, we had issued 10,118,192 shares of
common stock, including 339,077 shares issued in connection with an acquisition
in March 2008. Total gross proceeds from these issuances were $99.5
million. As of October 20, 2009, the aggregate value of all share
issuances and subscriptions outstanding was $101.1 million based on a per share
value of $10.00 (or $9.50 per share for shares issued under the DRIP). We will
offer these shares until January 25, 2011, provided that the offering will be
terminated if all of the shares are sold before then. As of July 1, 2009, we
have sold the minimum of 4,500,000 shares of our common stock required to
release the remaining subscription funds from escrow, and all subscription
payments have been released to us.
American
Realty Capital Trust, Inc. is a Maryland corporation, incorporated on August 17,
2007 that qualifies as a REIT. We expect to use the net proceeds from this
offering to acquire and operate a portfolio of commercial real estate primarily
consisting of freestanding, single-tenant properties net leased to investment
grade and other creditworthy tenants located throughout the United States and
Commonwealth of Puerto Rico. Because we have invested in a limited number of
properties and have not yet identified any specific additional properties to
purchase, other than as described in the “Investment Objectives and Policies”
section herein, we may be considered to be a blind pool.
Our
corporate offices are located at 106 York Road, Jenkintown, PA 19046. Our
telephone number is 215-887-2189. Our fax number is 215-887-2585, and the e-mail
address of our investor relations department is investorservices@americanrealtycap.com.
Our
executive offices are located at 405 Park Avenue, New York, New York 10022. Our
telephone number is 212-415-6500 and our fax number is
212-421-5799.
|
·
|
Our
regional sales offices are located at Three Copley Place, Suite 3300,
Boston, MA 02116. Our telephone number is 877-373-2522 and our fax number
is 857-350-9597.
|
Additional
information about us and our affiliates may be obtained at www.americanrealtycap.com,
but the contents of that site are not incorporated by reference in or otherwise
a part of this prospectus.
If we
qualify as a REIT, we generally will not be subject to federal income tax on
income that we distribute to our stockholders. Under the Internal Revenue Code,
a REIT is subject to numerous organizational and operational requirements,
including a requirement that it distribute at least 90% of its annual taxable
income to its stockholders. If we fail to qualify for taxation as a REIT in any
year, our income will be taxed at regular corporate rates, and we may be
precluded from qualifying for treatment as a REIT for the four-year period
following our failure to qualify. Even if we qualify as a REIT for federal
income tax purposes, we may still be subject to state and local taxes on our
income and property and to federal income and excise taxes on our undistributed
income.
American
Realty Capital Advisors, LLC, a Delaware limited liability company, is our
advisor and is responsible for managing our affairs on a day-to-day basis and
for identifying and making acquisitions on our behalf.
We
operate under the direction of our board of directors, the members of which are
accountable to us and our stockholders as fiduciaries. Currently, we have five
directors, Nicholas S. Schorsch, William M. Kahane, Leslie D. Michelson, William
G. Stanley and Robert H. Burns. Each of the latter three is independent of
American Realty Capital Advisors, LLC. Each of our executive officers and two of
our directors are affiliated with American Realty Capital Advisors, LLC. Our
charter, which requires that a majority of our directors be independent of us,
our sponsor, American Realty Capital Advisors, LLC, or any of our or their
affiliates, provides that our independent directors will be responsible for
reviewing the performance of American Realty Capital Advisors, LLC and must
approve other matters set forth in our charter. See the “Conflicts of
Interest — Certain Conflict Resolution Procedures” section of this
prospectus. Our directors will be elected annually by the
stockholders.
Operating
Partnership
We expect
to own substantially all of our real estate properties through American Realty
Capital Operating Partnership, L.P., our operating partnership. We may, however,
own properties directly, through subsidiaries of American Realty Capital
Operating Partnership, L.P. or through other entities. We are the sole general
partner of American Realty Capital Operating Partnership, L.P. and American
Realty Capital Advisors, LLC is the initial limited partner of American Realty
Capital Operating Partnership, L.P. Our ownership of properties in American
Realty Capital Operating Partnership, L.P. is referred to as an “UPREIT.” This
UPREIT structure may enable sellers of properties to transfer their properties
to American Realty Capital Operating Partnership, L.P. in exchange for limited
partnership units of American Realty Capital Operating Partnership, L.P. and
defer potential gain recognition for tax purposes with respect to such transfers
of properties. The holders of units in American Realty Capital Operating
Partnership, L.P. may have their units redeemed for cash or, at our option,
shares of our common stock. At present, we have no plans to acquire any specific
properties in exchange for units of American Realty Capital Operating
Partnership, L.P.
Following
are some of the risks relating to your investment:
|
·
|
Our
advisor and its affiliates will face conflicts of interest, including
significant conflicts among us and our advisor, since (a) our principal
executive officers own a majority interest in our advisor, our dealer
manager and our property manager, (b) our advisor and other affiliated
entities may compete with us and acquire properties suitable to our
investment objectives, and (c) our advisor’s compensation arrangements
with us and other American Realty Capital-sponsored programs may provide
incentives that are not aligned with the interests of our
stockholders.
|
|
·
|
This
may be considered a blind pool offering since we own a limited number of
properties and, other than as described in the “Investment Objectives and
Policies” section herein, we have not identified any specific additional
properties to acquire with the proceeds of this offering. As a result, you
will be unable to evaluate the economic merit of all of our future
investments prior to our making them and there may be a substantial delay
in receiving a return, if any, on your
investment.
|
|
·
|
Our
charter generally prohibits you from acquiring or owning, directly or
indirectly, more than 9.8% in value of the outstanding shares of our stock
or more than 9.8% of the number or value (whichever is more restrictive)
of any class or series of our outstanding shares of stock and contains
additional restrictions on the ownership and transfer of our shares.
Therefore, your ability to control the direction of our company will be
limited.
|
|
·
|
No
public market currently exists for shares of our common stock and one may
never exist. If you are able to sell your shares, you would likely have to
sell them at a substantial discount from their public offering
price.
|
|
·
|
This
is a best efforts offering and we might not sell all of the shares being
offered. If we raise substantially less than the maximum offering, we may
not be able to invest in a diverse portfolio of properties, and the value
of your investment may vary more widely with the performance of specific
properties. There is a greater risk that you will lose money in your
investment if we cannot diversify our portfolio of investments by
geographic location, tenant mix and property type. Given the relatively
small size of our expected individual real estate investments, we could
expect to acquire a diverse portfolio by purchasing at least $45,000,000
in real estate assets. We anticipate that the average acquisition price of
an individual property would be in the range of $3,000,000 to $5,000,000,
and with our anticipated leverage, we could achieve this level of
diversification by raising $16,000,000 or selling 1,600,000
shares.
|
|
·
|
We
may incur substantial debt, which could hinder our ability to pay
distributions to our stockholders or could decrease the value of your
investment in the event that income on, or the value of, the property
securing the debt falls, but we will not incur debt to the extent it will
restrict our ability to qualify as a
REIT.
|
|
·
|
Until
the proceeds from this offering are invested and generating operating cash
flow sufficient to make distributions to our stockholders, we may pay all
or a substantial portion of our distributions from the proceeds of this
offering or from borrowings in anticipation of future cash flow, which may
constitute a return of your capital, reduce the amount of capital we
ultimately invest in properties, and negatively impact the value of your
investment.
|
|
·
|
If
we fail to continue to qualify as a REIT for federal income tax purposes
or if we qualify and subsequently lose our REIT status, our operations and
ability to make distributions to our stockholders would be adversely
affected.
|
|
·
|
We
are dependent on our advisor to select investments and conduct our
operations. Adverse changes in the financial condition of our advisor or
our relationship with our advisor could adversely affect
us.
|
|
·
|
We
will pay substantial fees and expenses to our advisor, its affiliates and
participating broker-dealers, which payments increase the risk that you
will not earn a profit on your
investment.
|
|
·
|
Our
board of directors has the authority to designate and issue one or more
classes or series of preferred stock without stockholder approval, with
rights and preferences senior to the rights of holders of common stock,
including rights to payment of distributions. If we issue any shares of
preferred stock, the amount of funds available for the payment of
distributions on the common stock could be reduced or
eliminated.
|
Before
you invest in us, you should carefully read and consider the more detailed “Risk
Factors” section of this prospectus.
American
Realty Capital Trust shall seek to build a diversified portfolio comprised
primarily of free-standing single-tenant bank branch, convenience store, retail,
office and industrial properties that are double-net and triple-net leased to
investment grade (S&P BBB- or better) and other creditworthy tenants.
Triple-net (NNN) leases typically require the tenant to pay substantially all of
the costs associated with operating and maintaining the property such as
maintenance, insurance, taxes, structural repairs and all other operating and
capital expenses. Double-net (NN) leases typically provide that the landlord is
responsible for maintaining the roof and structure, or other structural aspects
of the property, while the tenant is responsible for all remaining expenses
associated with the property. We will seek to build a portfolio where at least
50% of the portfolio will be comprised of properties leased to investment grade
tenants. While most of our investment will be directly in such properties, we
may also invest in entities that own or invest in such properties. We shall
strive to assemble a portfolio of real estate that is diversified by industry,
geography, tenants, credits, and use. We do not anticipate any single tenant or
geographic concentration to comprise more than 10% of our portfolio. We
anticipate that our portfolio will consist primarily of freestanding,
single-tenant properties net leased for use as bank branches, convenience
stores, retail, office and industrial establishments. Although we expect our
portfolio will consist primarily of freestanding, single-tenant properties, we
will not forgo opportunities to invest in other types of real estate investments
that meet our overall investment objectives. Additionally, we expect to further
diversify our portfolio by making first mortgage, bridge or mezzanine loans on
single-tenant net-leased properties. We will acquire or invest in properties and
loans located only in the United States and the Commonwealth of Puerto
Rico.
Our
advisor, American Realty Capital Advisors, LLC, will make recommendations to our
board of directors for our investments. All acquisitions of commercial
properties will be evaluated for tenant creditworthiness and the reliability and
stability of their future income and capital appreciation potential. We will
consider the risk profile, credit quality and reputation of potential tenants
and the impact of each particular acquisition as it relates to the portfolio as
a whole. Our board of directors will exercise its fiduciary duties to our
stockholders in determining to approve or reject each of these investment
recommendations. See the section of this prospectus captioned “Investment
Objectives and Policies — Real Property Investments” for a more
detailed descriptions. As we acquire properties, we will supplement this
prospectus to describe material changes to our portfolio.
We
operate under the direction of our board of directors, the members of which are
accountable to us and our stockholders as fiduciaries. The board is responsible
for the overall management and control of our affairs. The board has retained
American Realty Capital Advisors, LLC to manage our day-to-day affairs and the
acquisition and disposition of our investments, subject to the board’s
supervision. As described in greater detail under “Our Advisor,” below, our
advisor will be responsible for making investment decisions where the purchase
price of a particular property is less than $15,000,000 and the investment does
not exceed stated leverage limitations. Where such leverage limitations are
exceeded, or where the purchase price is equal to or greater than $15,000,000,
investment decisions will be made by our board of directors.
Because,
other than as described in the “Investment Objectives and Policies” section
herein, we have not yet identified any specific properties to purchase, we are
considered to be a blind pool. As we acquire properties, we will supplement this
prospectus to describe material changes to our portfolio.
Estimated
Use of Proceeds of This Offering
Depending
primarily on the number of shares we sell in this offering, we estimate for each
share sold in this offering approximately $8.71 (assuming no shares available
under our distribution reinvestment plan are sold) will be available for the
purchase of real estate. We will use the remainder of the offering proceeds to
pay the costs of the offering, including selling commissions and the dealer
manager fee, and to pay a fee to our advisor for its services in connection with
the selection and acquisition of properties. We will not pay selling commissions
or a dealer manager fee on shares sold under our distribution reinvestment plan.
The table below sets forth our estimated use of proceeds from this
offering:
|
|
Maximum
Offering
(Not
Including Distribution
Reinvestment
Plan)
|
|
Minimum
Offering
(Not
Including Distribution
Reinvestment
Plan)
|
|
|
Amount
|
|
Amount
|
|
Percent
|
Gross
Offering Proceeds
|
|
$
|
1,500,000,000
|
|
|
$
|
7,500,000
|
|
|
|
100
%
|
|
Less
Public Offering Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
Commissions and Dealer Manager Fee
|
|
|
150,000,000
|
|
|
|
750,000
|
|
|
|
10.0
%
|
|
Organization
and Offering Expenses
|
|
|
22,500,000
|
|
|
|
112,500
|
|
|
|
1.5
%
|
|
Amount
Available for Investment
|
|
|
1,327,500,000
|
|
|
|
6,637,500
|
|
|
|
88.5
|
%
|
Acquisition
and Development:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
and Advisory Fees
|
|
|
13,275,000
|
|
|
|
66,375
|
|
|
|
0.885
%
|
|
Acquisition
Expenses
|
|
|
6,000,000
|
|
|
|
30,000
|
|
|
|
0.4
%
|
|
Initial
Working Capital Reserve
|
|
|
1,500,000
|
|
|
|
7,500
|
|
|
|
0.1
%
|
|
Amount
Invested in Properties
|
|
$
|
1,306,725,000
|
|
|
$
|
6,533,625
|
|
|
|
87.115
%
|
|
Our
primary investment objectives are:
|
·
|
to
provide current income for you through the payment of cash distributions;
and
|
|
·
|
to
preserve, protect and return your invested
capital.
|
We also
seek capital gain from our investments. Our core investment strategy for
achieving these objectives is to acquire, own and manage a portfolio of free
standing commercial properties that are leased to a diversified group of
creditworthy companies on a single tenant, net lease basis. Net leases generally
require the tenant to pay substantially all of the costs associated with
operating and maintaining the property such as maintenance, insurance, taxes,
structural repairs and all other operating and capital expenses (referred to as
“triple-net leases”). See the “Investment Objectives and Policies” section of
this prospectus for a more complete description of our investment policies and
investment restrictions.
American
Realty Capital Advisors, LLC, as our advisor, will experience conflicts of
interest in connection with the management of our business affairs, including
the following:
|
·
|
The
management personnel of American Realty Capital Advisors, LLC, each of
whom may in the future make investment decisions for other American Realty
Capital-sponsored programs and direct investments, must determine which
investment opportunities to recommend to us or another American Realty
Capital-sponsored program or joint venture, and must determine how to
allocate resources among us and any other future American Realty
Capital-sponsored programs;
|
|
·
|
American
Realty Capital Advisors, LLC may structure the terms of joint ventures
between us and other American Realty Capital-sponsored
programs;
|
|
·
|
We
have retained American Realty Capital Properties, LLC, an affiliate of
American Realty Capital Advisors, LLC, to manage and lease some or all of
our properties;
|
|
·
|
American
Realty Capital Advisors, LLC and its affiliates will have to allocate
their time between us and other real estate programs and activities in
which they may be involved in the future;
and
|
|
·
|
American
Realty Capital Advisors, LLC and its affiliates will receive fees in
connection with transactions involving the purchase, financing, management
and sale of our properties, and, because our advisor does not maintain a
significant equity interest in us and is entitled to receive substantial
minimum compensation regardless of performance, our advisor’s interests
are not wholly aligned with those of our
stockholders.
|
Our
officers and two of our directors also will face these conflicts because of
their affiliation with American Realty Capital Advisors, LLC. These conflicts of
interest could result in decisions that are not in our best interests. See the
“Conflicts of Interest” section of this prospectus for a detailed discussion of
the various conflicts of interest relating to your investment, as well as the
procedures that we have established to mitigate a number of these potential
conflicts.
The
following chart shows the ownership structure of the various American Realty
Capital entities that are affiliated with American Realty Capital Advisors,
LLC.
|
(1)
|
The
investors in this offering will own registered shares of common stock in
American Realty Capital Trust, Inc.
|
|
(2)
|
The
Individuals are our Sponsors, Nicholas S. Schorsch, William M. Kahane,
Peter M. Budko, Brian S. Block, and Michael Weil, whose ownership in the
affiliates is represented by direct and indirect
interests.
|
|
(3)
|
American
Realty Capital II, LLC currently owns 20,000 shares of our common stock,
which represents less than 0.2% of our outstanding common stock as of
October 20, 2009.
|
|
(4)
|
American
Realty Capital Trust, Inc. and American Realty Capital Operating
Partnership, L.P. have entered into a Dealer Manager Agreement with Realty
Capital Securities, LLC, which will serve as our dealer
manager.
|
|
(5)
|
American
Realty Capital Trust, Inc. and American Realty Capital Operating
Partnership, L.P. have entered into an Advisory Agreement with American
Realty Capital Advisors, LLC, which will serve as our
advisor.
|
|
(6)
|
American
Realty Capital Trust, Inc. and American Realty Capital Operating
Partnership, L.P. have entered into a Property Management Agreement with
American Realty Capital Properties, LLC, which serves as our property
manager.
|
For a
summary of the prior offerings of our Sponsors see the section of this
prospectus captioned “Prior Offering Summary.”
We are
offering an aggregate of 150,000,000 shares of common stock in our primary
offering on a best-efforts basis at $10.00 per share. Discounts are available
for certain categories of purchasers as described in the “Plan of Distribution”
section of this prospectus. We also are offering 25,000,000 shares of common
stock under our distribution reinvestment plan at $9.50 per share, subject to
certain limitations, as described in the “Summary of Distribution Reinvestment
Plan” section of this prospectus. We will offer shares of common stock in our
primary offering until the earlier of January 25, 2011, which is three years
from the effective date of this offering, or the date we sell 150,000,000
shares. We may sell shares under the distribution reinvestment plan beyond the
termination of our primary offering until we have sold 25,000,000 shares through
the reinvestment of distributions, but only if there is an effective
registration statement with respect to the shares. Under the Securities Act of
1933, as amended (the “Securities Act”), and in some states, we may not be able
to continue the offering for these periods without filing a new registration
statement, or in the case of shares sold under the distribution reinvestment
plan, renew or extend the registration statement in such state. We may terminate
this offering at any time prior to the stated termination date. We reserve the
right to reallocate the shares of our common stock we are offering between the
primary offering and the distribution reinvestment plan.
We have
sold the minimum amount of 4,500,000 shares of our common stock required for the
release of all funds from escrow as of July 1, 2009. All subscription payments
placed in escrow have been released to us.
Our
Advisor, American Realty Capital Advisors, LLC and its affiliates will receive
compensation and reimbursement for services relating to this offering and the
investment and management of our assets. The most significant items of
compensation are included in the table below. The selling commissions and dealer
manager fee may vary for different categories of purchasers. See the “Plan of
Distribution” section of this prospectus. The table below assumes the shares are
sold through distribution channels associated with the highest possible selling
commissions and dealer manager fees. No effect is given to any shares sold
through our distribution reinvestment plan.
Type
of Compensation
|
|
Determination
of Amount
|
|
Estimated
Amount for
Minimum
Offering
(750,000
shares)/Maximum
Offering
(150,000,000 shares)
|
Selling
Commission
|
|
We
will pay to Realty Capital Securities, LLC 7% of gross proceeds of our
primary offering; we will not pay any selling commissions on sales of
shares under our distribution reinvestment plan; Realty Capital
Securities, LLC will reallow all selling commissions to participating
broker-dealers.
|
|
$525,000
/ $105,000,000
|
Dealer
Manager Fee
|
|
We
will pay to Realty Capital Securities, LLC 3% of gross proceeds of our
primary offering; we will not pay a dealer manager fee with respect to
sales under our distribution reinvestment plan; Realty Capital Securities,
LLC may reallow all or a portion of its dealer manager fees to
participating broker-dealers.
|
|
$225,000
/ $45,000,000
|
Other
Organization and Offering Expenses
|
|
We
will reimburse American Realty Capital Advisors, LLC up to 1.5% of gross
offering proceeds for organization and offering expenses.
|
|
$112,500
/ $22,500,000
|
|
|
|
|
|
|
|
Operational
Stage
|
|
Acquisition
Fees
|
|
We
will pay to American Realty Capital Advisors, LLC 1% of the contract
purchase price of each property
acquired.
|
|
$66,375
/ $13,275,000
|
Acquisition
Expenses
|
|
We
will reimburse American Realty Capital Advisors, LLC for acquisition
expenses (including, personnel costs) incurred in acquiring property. We
expect these fees to be approximately 0.5% of the purchase price of each
property. In no event will the total of all acquisition and advisory fees
and acquisition expenses payable with respect to a particular investment
exceed 4% of the contract purchase price.
|
|
$30,000
/ $6,000,000
|
Asset
Management Fees
|
|
We
will pay American Realty Capital Advisors, LLC a yearly fee equal to 1% of
the contract purchase price of each property plus costs and expenses
incurred by the advisor in providing asset management services, payable
semiannually, based on assets held by us on the measurement date, adjusted
for appropriate closing dates for individual property
acquisitions.
|
|
Not
determinable at this time. Because the fee is based on a fixed percentage
of aggregate asset value there is no maximum dollar amount of this
fee.
|
Property
Management and Leasing Fees
|
|
For
the management and leasing of our properties, we will pay to American
Realty Capital Properties, LLC, an affiliate of our advisor, a property
management fee (a) 2% of gross revenues from our single tenant properties
and (b) 4% of gross revenues from our multi-tenant properties, plus, in
each case, market-based leasing commissions applicable to the geographic
location of the property. We also will reimburse American Realty Capital
Properties, LLC’s costs of managing the properties. American Realty
Capital Properties, LLC or its affiliates may also receive a fee for the
initial leasing of newly constructed properties, which would generally
equal one month’s rent. In the unlikely event that American Realty Capital
Properties, LLC assists a tenant with tenant improvements, a separate fee
may be charged to, and payable by, us. This fee will not exceed 5% of the
cost of the tenant improvements. The aggregate of all property management
and leasing fees paid to our affiliates plus all payments to third parties
for such fees will not exceed the amount that other nonaffiliated
management and leasing companies generally charge for similar services in
the same geographic location as determined by a survey of brokers and
agents in such area.
|
|
Not
determinable at this time. Because the fee is based on a fixed percentage
of gross revenue and/or market rates, there is no maximum dollar amount of
this fee.
|
Operating
Expenses
|
|
We
will reimburse our advisor’s costs of providing administrative services,
subject to the limitation that we will not reimburse our advisor for any
amount by which our operating expenses (including the asset management
fee) at the end of the four preceding fiscal quarters exceeds the greater
of (a) 2% of average invested assets, or (b) 25% of net income other than
any additions to reserves for depreciation, bad debt or other similar
non-cash reserves and excluding any gain from the sale of assets for that
period. Additionally, we will not reimburse our advisor for personnel
costs in connection with services for which the advisor receives
acquisition fees or real estate commissions.
|
|
Not
determinable at this time.
|
Financing
Coordination Fee
|
|
If
our advisor provides services in connection with the origination or
refinancing of any debt that we obtain, and use to acquire properties or
to make other permitted investments, or that is assumed, directly or
indirectly, in connection with the acquisition of properties, we will pay
the advisor a financing coordination fee equal to 1% of the amount
available and/or outstanding under such financing, subject to certain
limitations.
|
|
Not
determinable at this time. Because the fee is based on a fixed percentage
of any debt financing, there is no maximum dollar amount of this
fee.
|
|
|
|
|
|
|
|
Liquidation/Listing
Stage
|
|
Real
Estate
Commissions
|
|
A
brokerage commission paid on the sale of property, not to exceed the
lesser of one-half of reasonable, customary and competitive real estate
commission or 3% of the contract price for property sold (inclusive of any
commission paid to outside brokers), in each case, payable to our advisor
if our advisor or its affiliates, as determined by a majority of the
independent directors, provided a substantial amount of services in
connection with the sale.
|
|
Not
determinable at this time. Because the commission is based on a fixed
percentage of the contract price for a sold property, there is no maximum
dollar amount of these commissions.
|
Subordinated
Participation in Net Sale Proceeds (payable only if we are not listed on
an exchange)
|
|
15%
of remaining net sale proceeds after return of capital contributions plus
payment to investors of a 6% cumulative, non-compounded return on the
capital contributed by investors. We cannot assure you that we will
provide this 6% return, which we have disclosed solely as a measure for
our advisor’s and its affiliates’ incentive compensation.
|
|
Not
determinable at this time. There is no maximum amount of these
payments.
|
Subordinated
Incentive Listing Fee (payable only if we are listed on an exchange, which
we have no intention to do at this time)
|
|
15%
of the amount by which our adjusted market value plus distributions
exceeds the aggregate capital contributed by investors plus an amount
equal to an 6% cumulative, non-compounded annual return to investors. We
cannot assure you that we will provide this 6% return, which we have
disclosed solely as a measure for our advisor’s and its affiliates’
incentive compensation.
|
|
Not
determinable at this time. There is no maximum amount of this
fee.
|
Status
of Fees Paid and Deferred
Through
December 31, 2008, the Company reimbursed the Advisor $0 and $1,507,369 for
organizational and offering expenses and acquisition cost, respectively, and
incurred:
|
·
|
acquisition
fees of $1,507,369 paid to the
Advisor
|
|
·
|
finance
coordination fees of $1,131,015 paid to the
Advisor
|
|
·
|
property
management fees of $4,230 paid to the Property
Manager
|
From
January 1, 2009 through September 30, 2009, the Company reimbursed the Advisor
$3,916,836 and $197,731 for organizational and offering expenses and acquisition
cost, respectively. Such amounts include $2,424,506 of offering cost incurred by
the affiliated Advisor and Dealer Manager that exceeds 1.5% of gross offering
proceeds earned as of September 30, 2009. From January 1, 2009 through September
30, 2009, the Company incurred:
|
·
|
acquisition fees of $742,536 paid
to the Advisor
|
|
·
|
finance coordination fees of
$411,784 paid to the
Advisor
|
|
·
|
property management fees of $0
paid to the Property
Manager
|
The
Company pays the Advisor an annualized asset management fee of 1.0% based on the
aggregate contract purchase price of all properties. Through June 30, 2009, the
Company paid no such fees to the Advisor and will determine if such fees will be
waived in subsequent periods on a quarter-to-quarter basis. Such waived fees for
the period ended December 31, 2008 and six months ended June 30, 2009 equal
approximately $733,000 and $771,000, respectively. If the Advisor had not agreed
to waive the asset management fee, we would not have had sufficient cash to fund
our distributions. Had this been the case, additional borrowings would have been
incurred to fund our monthly distributions.
Distributions
To
maintain our qualification as a REIT, we are required to make aggregate annual
distributions to our stockholders of at least 90% of our annual taxable income
(which does not necessarily equal net income as calculated in accordance with
accounting principles generally accepted in the United States of America
(“GAAP”)). Our board of directors may authorize distributions in excess of those
required for us to maintain REIT status depending on our financial condition and
such other factors as our board of directors deems relevant. We expect to
calculate our monthly distributions based upon daily record and distribution
declaration dates so investors may be entitled to distributions immediately upon
purchasing our shares. On February 25, 2008, our Board of Directors declared a
distribution for each monthly period commencing 30 days subsequent to acquiring
our initial portfolio of real estate investments. Accordingly, our daily
dividend commenced accruing on April 5, 2008. The REIT’s initial distribution
payment was paid to shareholders on May 21, 2008 representing dividends accrued
from April 5, 2008 through April 30, 2008. Subsequently, we modified the payment
date to the 2nd day following each month-end to stockholders of record at the
close of business each day during the applicable period. The distribution was
calculated based on stockholders of record each day during the applicable period
at a rate of $0.00178082191 per day, and equaled a daily amount that, if paid
each day for a 365-day period, equaled a 6.5% annualized rate based on the share
price of $10.00. On November 5, 2008, the Board of Directors of American Realty
Capital Trust, Inc. (the “Company”) approved an increase in its annual cash
distribution from $.65 to $.67, paid monthly. Based on a $10.00 share price,
this 20-basis point increase, effective January 2, 2009, will result in an
annualized distribution rate of 6.7%. For the period from January 1, 2008
through October 20, 2009 distributions paid totaled $2,414,456, inclusive of
$933,631 of common shares issued under the distribution reinvestment plan. As of
October 20, 2009, cash used to pay our distributions was entirely generated from
funds received from operating activities and fee waivers from our Advisor. Our
distributions have not been paid from any other sources. We have continued to
pay distributions to our shareholders each month since our initial dividend
payment. On October 5, 2009, the Board of Directors of the Company approved a
special distribution of $0.05 per share payable to shareholders of record on
December 31, 2009. This special distribution will be paid in January 2010, and
shall be paid in addition to the current annualized distribution of $0.67 per
share. In the event we do not have enough cash to make distributions in the
future, we may borrow, use proceeds from this offering, issue additional
securities or sell assets in order to fund
distributions.
See the
section of this prospectus captioned “Description of
Shares — Distribution Policy and Distributions” for a description of
our distributions.
We will
seek to list our shares of common stock for trading on the New York Stock
Exchange, NASDAQ Stock Market or any successor exchange or market when and if
our independent directors believe listing would be in the best interest of our
stockholders. However, at this time, we have no intention to list our shares. We
do not anticipate that there will be any market for our common stock unless and
until our shares are listed. If we do not list our shares of common stock on the
New York Stock Exchange or NASDAQ Stock Market by December 1, 2018, we intend to
either:
|
·
|
seek
stockholder approval of an extension or amendment of this listing
deadline; or
|
|
·
|
seek
stockholder approval of the liquidation of our
corporation.
|
If we
seek and do not obtain stockholder approval of an extension or amendment to the
listing deadline, we intend then to adopt a plan of liquidation and commence an
orderly liquidation of our properties.
Pursuant
to our distribution reinvestment plan, you may have the distributions you
receive from us reinvested in additional shares of our common stock. The
purchase price per share under our distribution reinvestment plan will be the
higher of 95% of the fair market value per share as determined by our board of
directors and $9.50 per share. No sales commissions or dealer manager fees will
be paid on shares sold under our distribution reinvestment plan. If you
participate in the distribution reinvestment plan, you will not receive the cash
from your distributions, other than special distributions that are designated by
our board of directors. As a result, you may have a tax liability with respect
to your share of our taxable income, but you will not receive cash distributions
to pay such liability. We may terminate the distribution reinvestment plan at
our discretion at any time upon ten days prior written notice to you.
Additionally, we will be required to discontinue sales of shares under the
distribution reinvestment plan on the earlier of January 25, 2011, which is
three years from the effective date of this offering, or the date we sell all of
the shares registered for sale under the distribution reinvestment plan, unless
we file a new registration statement with the Securities and Exchange Commission
and applicable states. We reserve the right to reallocate the shares of our
common stock we are offering between the primary offering and the distribution
reinvestment plan.
Our board
of directors has adopted a share repurchase program that enables our
stockholders to sell their shares to us in limited circumstances. Our share
repurchase program permits you to sell your shares back to us after you have
held them for at least one year, subject to the significant conditions and
limitations described below
Our
common stock is currently not listed on a national securities exchange and we
will not seek to list our stock until such time as our independent directors
believe that the listing of our stock would be in the best interest of our
stockholders. In order to provide stockholders with the benefit of interim
liquidity, stockholders who have held their shares for at least one year and who
purchased their shares from us or received the shares through a non-cash
transaction, not in the secondary market, may present all or a portion
consisting of the holder’s shares to us for repurchase at any time in accordance
with the procedures outlined below. At that time, we may, subject to the
conditions and limitations described below, redeem the shares presented for
repurchase for cash to the extent that we have sufficient funds available to us
to fund such repurchase. We will not pay to our board of directors, advisor or
its affiliates any fees to complete any transactions under our share repurchase
program.
During
the term of this offering and any subsequent public offering of our shares, the
purchase price per share will depend on the length of time you have held such
shares as follows: after one year from the purchase date — 96.25% of the amount
you actually paid for each share; and after two years from the purchase date -
97.75% of the amount you actually paid for each share; and after three years
from the purchase date — 100% of the amount you actually paid for each share;
(in each case, as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to our common stock). At any time we
are engaged in an offering of shares, the per share price for shares purchased
under our repurchase plan will always be equal to or lower than the applicable
per share offering price. Thereafter, the per share purchase price will be based
on the greater of $10.00 or the then-current net asset value of the shares as
determined by our board of directors (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with respect to our common
stock). Our board of directors will announce any purchase price adjustment and
the time period of its effectiveness as a part of its regular communications
with our stockholders. Our board of directors shall use the following criteria
for determining the net asset value of the shares: value of our assets
(estimated market value) less the estimated market value of our liabilities,
divided by the number of shares. The Board, with advice from the Advisor, (i)
will make internal valuations of the market value of its assets based upon the
current capitalization rates of similar properties in the market, recent
transactions for similar properties acquired by the Company and any extensions,
cancellations, modifications or other material events affecting the leases,
changes in rents or other circumstances related to such properties, (ii) review
internal appraisals prepared by the Advisor following standard commercial real
estate appraisal practice and (iii) every three years or earlier, in rotation
will have all of the properties appraised by an external appraiser. Upon the
death or disability of a stockholder, upon request, we will waive the one-year
holding requirement. Shares repurchased in connection with the death or
disability of a stockholder will be repurchased at a purchase price equal to the
price actually paid for the shares during the offering, or if not engaged in the
offering, the per share purchase price will be based on the greater of $10.00 or
the then-current net asset value of the shares as determined by our board of
directors (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to our common stock). In addition,
we may waive the holding period in the event of a stockholder’s bankruptcy or
other exigent circumstances.
On
November 12, 2008, the Company’s board of directors modified the Share
Repurchase Program (“SRP”) to fund purchases under the SRP, not only from the
Distribution Reinvestment Plan (“DRIP”), but also from operating funds of the
Company. Accordingly, purchases under the SRP, subject to the terms of the SRP,
may be funded from the proceeds from the sale of shares under the DRIP, from
proceeds of the sale of shares in a public offering, and with other available
allocated operating funds. However, purchases under the SRP by the Company will
be limited in any calendar year to 5% of the weighted average number of shares
outstanding during the prior year. The other terms and conditions of the SRP
remain unchanged.
We will
redeem our shares on the last business day of the month following the end of
each quarter. Requests for repurchases must be received on or prior to the end
of the quarter in order for us to repurchase the shares as of the end of the
next month. You may withdraw your request to have your shares repurchased at any
time prior to the last day of the applicable quarter. Shares presented for
repurchase will continue to earn daily distributions up to and including the
repurchase date.
Our board of directors may choose to amend, suspend or terminate our
share repurchase program upon 30 days notice at any time.
Uncertificated
Shares
Our board
of directors has authorized the issuance of shares of our stock without
certificates. We expect that, unless and until our shares are listed on the New
York Stock Exchange or NASDAQ Stock Market, we will not issue shares in
certificated form. Our transfer agent maintains a stock ledger that contains the
name and address of each stockholder and the number of shares that the
stockholder holds. With respect to uncertificated stock, we will continue to
treat the stockholder registered on our stock ledger as the owner of the shares
until the record owner and the new owner delivers a properly executed stock
transfer form to us, along with a fee to cover reasonable transfer costs, in an
amount determined by our board of directors. We will provide the required form
to you upon request. The
transfer will be effective and the transferee of the shares will be recognized
as the holder of such shares within five business days of our receipt of the
required documentation, subject to restrictions in our charter. If the
transferor (original owner) is participating in the Share Repurchase Program at
the time of transfer, then distributions owed and paid after the transfer date
will be paid in the form of cash and not reinvested in additional shares. The
transferor will continue to earn dividends up to and including the transfer
date.
Stockholder
Voting Rights and Limitations
We hold
annual meetings of our stockholders for the purpose of electing our directors
and conducting other business matters that may be presented at such meetings. We
may also call special meetings of stockholders from time to time. You are
entitled to one vote for each share of common stock you own at any of these
meetings.
Restriction
on Ownership and Transfer
Our
charter contains restrictions on ownership and transfer of the shares that,
among other restrictions, prevent any one person from owning more than 9.8% in
value of the aggregate of the outstanding shares of our stock or from owning any
class or more than 9.8% (in value or in number of shares, whichever is more
restrictive) of any class of series of our outstanding shares of that class or
series of stock, unless exempted by our board of directors. For a more complete
description of the shares, including this and other restrictions on the
ownership and transfer of our shares, please see the “Description of Shares”
section of this prospectus. Our charter also limits your ability to transfer
your shares to prospective stockholders unless (a) they meet the minimum
suitability standards regarding income or net worth, which are described in the
“Suitability Standards” section immediately following the cover page of this
prospectus, and (b) the transfer complies with minimum purchase requirements,
which are described above in the sections entitled “Suitability Standards” and
“How to Subscribe.”
An
investment in our common stock involves various risks and uncertainties. You
should carefully consider the following risk factors in conjunction with the
other information contained in this prospectus before purchasing our common
stock. The risks discussed in this prospectus can adversely affect our business,
operating results, prospects and financial condition. These risks could cause
the value of our common stock to decline and could cause you to lose all or part
of your investment. The risks and uncertainties described below are not the only
ones we face but do represent those risks and uncertainties that we believe are
material to our business, operating results, prospects and financial condition.
Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also harm our business.
Except
as described herein, we have no prior operating history or established financing
sources, and the prior performance of real estate investment programs sponsored
by affiliates of our advisor may not be an indication of our future
results.
Except as
described in this prospectus, we have no operating history and you should not
rely upon the past performance of other real estate investment programs
sponsored by affiliates of our advisor to predict our future results. We were
incorporated on August 17, 2007. We have limited investments in real estate or
otherwise. Although Mr. Schorsch, Mr. Kahane and other members of our advisor’s
management have significant experience in the acquisition, finance, management
and development of commercial real estate, the prior performance of real estate
investment programs sponsored by affiliates of Mr. Schorsch, Mr. Kahane and our
advisor may not be indicative of our future results.
You
should consider our prospects in light of the risks, uncertainties and
difficulties frequently encountered by companies that are, like us, in their
early stage of development. To be successful in this market, we must, among
other things:
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identify
and acquire investments that further our investment
strategies;
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increase
awareness of the American Realty Capital Trust, Inc. name within the
investment products market;
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expand
and maintain our network of licensed securities brokers and other
agents;
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attract,
integrate, motivate and retain qualified personnel to manage our
day-to-day operations;
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respond
to competition for our targeted real estate properties and other
investments as well as for potential investors;
and
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continue
to build and expand our operations structure to support our
business.
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We cannot
guarantee that we will succeed in achieving these goals, and our failure to do
so could cause you to lose all or a portion of your investment.
Please
also see herein the section entitled “Adverse Business Developments and
Conditions.”
Because
this is a blind pool offering, you will not have the opportunity to evaluate all
of our investments before we make them, which makes an investment in us more
speculative.
Other
than as described in the “Investment Objectives and Policies” section herein, we
have not yet acquired or identified any investments that we may make.
Additionally, we will not provide you with information to evaluate our
investments prior to our acquisition of properties. We will seek to invest
substantially all of the offering proceeds available for investment, after the
payment of fees and expenses, in the acquisition of freestanding, single-tenant
commercial properties net leased to investment grade or other creditworthy
tenants. We may also, in the discretion of our advisor, invest in other types of
real estate or in entities that invest in real estate. We will acquire or invest
in properties located only in the United States and the Commonwealth of Puerto
Rico. In addition, our advisor may make or invest in mortgage, bridge or
mezzanine loans or participations therein on our behalf if our board of
directors determines, due to the state of the real estate market or in order to
diversify our investment portfolio or otherwise, that such investments are
advantageous to us. We have established policies relating to the
creditworthiness of tenants of our properties, but our board of directors will
have wide discretion in implementing these policies, and you will not have the
opportunity to evaluate potential tenants. For a more detailed discussion of our
investment policies, see the “Investment Objectives and
Policies — Acquisition and Investment Policies” section of this
prospectus.
There
is no public trading market for our shares and there may never be one;
therefore, it will be difficult for you to sell your shares.
There
currently is no public market for our shares and there may never be one. If you
are able to find a buyer for your shares, you may not sell your shares unless
the buyer meets applicable suitability and minimum purchase standards. Our
charter also prohibits the ownership of more than 9.8% of the aggregate of our
stock or of any class or series of our stock by a single investor, unless
exempted by our board of directors, which may inhibit large investors from
desiring to purchase your shares. Moreover, our share repurchase program
includes numerous restrictions that would limit your ability to sell your shares
to us. Our board of directors may reject any request for repurchase of shares,
or amend, suspend or terminate our share repurchase program upon 30 days’
notice. Therefore, it will be difficult for you to sell your shares promptly or
at all. If you are able to sell your shares, you will likely have to sell them
at a substantial discount to the price you paid for the shares. It also is
likely that your shares would not be accepted as the primary collateral for a
loan. You should purchase the shares only as a long-term investment because of
the illiquid nature of the shares. See “Suitability Standards,” “Description of
Shares — Restrictions on Ownership and Transfer” and “Share Repurchase
Program” elsewhere for a more complete discussion on the restrictions on your
ability to transfer your shares.
If
we, through American Realty Capital Advisors, LLC, are unable to find suitable
investments, then we may not be able to achieve our investment objectives or pay
distributions.
Our
ability to achieve our investment objectives and to pay distributions is
dependent upon the performance of American Realty Capital Advisors, LLC, our
advisor, in acquiring of our investments, selecting tenants for our properties
and securing independent financing arrangements. We currently do not own any
properties or have any operations, financing or investments. Except for
investors who purchase shares in this offering after such time as this
prospectus is supplemented to describe one or more identified investments, you
will have no opportunity to evaluate the terms of transactions or other economic
or financial data concerning our investments. You must rely entirely on the
management ability of American Realty Capital Advisors, LLC and the oversight of
our board of directors. We cannot be sure that American Realty Capital Advisors,
LLC will be successful in obtaining suitable investments on financially
attractive terms or that, if it makes investments on our behalf, our objectives
will be achieved. If we, through American Realty Capital Advisors, LLC, are
unable to find suitable investments, we will hold the proceeds of this offering
in an interest-bearing account, invest the proceeds in short-term,
investment-grade investments or, if we cannot find at least one suitable
investment within one year after we reach our minimum offering, and if our board
of directors determines it is in our best interests, liquidate. In such an
event, our ability to pay distributions to our stockholders would be adversely
affected.
We
may suffer from delays in locating suitable investments, which could adversely
affect our ability to make distributions and the value of your
investment.
We could
suffer from delays in locating suitable investments, particularly as a result of
our reliance on our advisor at times when management of our advisor is
simultaneously seeking to locate suitable investments for other affiliated
programs. Delays we encounter in the selection, acquisition and, in the event we
develop properties, development of income-producing properties, likely would
adversely affect our ability to make distributions and the value of your overall
returns. In such event, we may pay all or a substantial portion of our
distributions from the proceeds of this offering or from borrowings in
anticipation of future cash flow, which may constitute a return of your capital.
Distributions from the proceeds of this offering or from borrowings also could
reduce the amount of capital we ultimately invest in properties. This, in turn,
would reduce the value of your investment. In particular, where we acquire
properties prior to the start of construction or during the early stages of
construction, it will typically take several months to complete construction and
rent available space. Therefore, you could suffer delays in the receipt of cash
distributions attributable to those particular properties. If American Realty
Capital Advisors, LLC is unable to obtain suitable investments, we will hold the
proceeds of this offering in an interest-bearing account or invest the proceeds
in short-term, investment-grade investments. If we cannot invest proceeds from
this offering within a reasonable amount of time, or if our board of directors
determines it is in the best interests of our stockholders, we will return the
uninvested proceeds to investors.
If
we are unable to raise substantial funds, we will be limited in the number and
type of investments we may make, the value of your investment in us will
fluctuate with the performance of the specific properties we
acquire.
This
offering is being made on a best efforts basis, whereby the brokers
participating in the offering are only required to use their best efforts to
sell our shares and have no firm commitment or obligation to purchase any of the
shares. As a result, the amount of proceeds we raise in this offering may be
substantially less than the amount we would need to achieve a broadly
diversified property portfolio. If we are unable to raise substantially more
than the minimum offering amount, we will make fewer investments resulting in
less diversification in terms of the number of investments owned, the geographic
regions in which our investments are located and the types of investments that
we make. In such event, the likelihood of our profitability being affected by
the performance of any one of our investments will increase. For example, in the
event we only sell a small amount in excess of 750,000 shares, we may be able to
make only a few investments. If we only are able to make a few investments, we
would not achieve any asset diversification. Additionally, we are not limited in
the number or size of our investments or the percentage of net proceeds we may
dedicate to a single investment. Your investment in our shares will be subject
to greater risk to the extent that we lack a diversified portfolio of
investments. In addition, our inability to raise substantial funds would
increase our fixed operating expenses as a percentage of gross income, and our
financial condition and ability to pay distributions could be adversely
affected.
If
our advisor loses or is unable to obtain key personnel, our ability to implement
our investment strategies could be delayed or hindered, which could adversely
affect our ability to make distributions and the value of your
investment.
Our
success depends to a significant degree upon the contributions of certain of our
executive officers and other key personnel of our advisor, including Nicholas S.
Schorsch and William M. Kahane, each of whom would be difficult to replace. Our
advisor does not have an employment agreement with any of these key personnel
and we cannot guarantee that all, or any particular one, will remain affiliated
with us and/or our advisor. If any of our key personnel were to cease their
affiliation with our advisor, our operating results could suffer. Further, we do
not intend to separately maintain key person life insurance on Mr. Schorsch or
any other person. We believe that our future success depends, in large part,
upon our advisor’s ability to hire and retain highly skilled managerial,
operational and marketing personnel. Competition for such personnel is intense,
and we cannot assure you that our advisor will be successful in attracting and
retaining such skilled personnel. If our advisor loses or is unable to obtain
the services of key personnel, our ability to implement our investment
strategies could be delayed or hindered, and the value of your investment may
decline.
Our
rights and the rights of our stockholders to recover claims against our
officers, directors and our advisor are limited, which could reduce your and our
recovery against them if they cause us to incur losses.
Maryland
law provides that a director has no liability in that capacity if he or she
performs his or her duties in good faith, in a manner he or she reasonably
believes to be in the corporation’s best interests and with the care that an
ordinarily prudent person in a like position would use under similar
circumstances. Our charter, in the case of our directors, officers, employees
and agents, and the advisory agreement, in the case of our advisor, generally
require us to indemnify our directors, officers, employees and agents and our
advisor and its affiliates for actions taken by them in good faith and without
negligence or misconduct. Additionally, our charter limits the liability of our
directors and officers subject to the conditions imposed by Maryland law,
subject to the limitations required by the Statement of Policy Regarding Real
Estate Investment Trusts published by the North American Securities
Administrators Associations, also known as the NASAA REIT Guidelines. Although
our charter does not allow us to exonerate and indemnify our directors and
officers to a greater extent than permitted under Maryland law and the NASAA
REIT Guidelines, we and our stockholders may have more limited rights against
our directors, officers, employees and agents, and our advisor and its
affiliates, than might otherwise exist under common law, which could reduce your
and our recovery against them. In addition, we may be obligated to fund the
defense costs incurred by our directors, officers, employees and agents or our
advisor in some cases which would decrease the cash otherwise available for
distribution to you. See the section captioned “Management — Limited
Liability and Indemnification of Directors, Officers, Employees and Other
Agents” elsewhere herein.
We will
be subject to conflicts of interest arising out of our relationships with our
advisor and its affiliates, including the material conflicts discussed below.
The “Conflicts of Interest” section of this prospectus provides a more detailed
discussion of the conflicts of interest between us and our advisor and its
affiliates, and our policies to reduce or eliminate certain potential
conflicts.
American
Realty Capital Advisors, LLC will face conflicts of interest relating to the
purchase and leasing of properties, and such conflicts may not be resolved in
our favor, which could adversely affect our investment
opportunities.
Affiliates
of our advisor may sponsor other real estate investment programs in the future.
We may buy properties at the same time and/or in the same geographic areas as
one or more of the other American Realty Capital-sponsored programs managed by
officers and key personnel of American Realty Capital Advisors, LLC. There is a
risk that American Realty Capital Advisors, LLC will choose a property that
provides lower returns to us than a property purchased by another American
Realty Capital-sponsored program. We cannot be sure that officers and key
personnel acting on behalf of American Realty Capital Advisors, LLC and on
behalf of managers of other American Realty Capital-sponsored programs will act
in our best interests when deciding whether to allocate any particular property
to us. Also, we may acquire properties from, or sell properties to, other
American Realty Capital-sponsored programs, and although we will do so
consistent with our investment procedures, objectives and policies, transactions
entered between us and our affiliates will not be subject to arm’s-length
negotiations, which could mean that the acquisitions may be on terms less
favorable to us than those negotiated with unaffiliated parties. However, our
charter provides that the purchase price of any property acquired from an
affiliate may not exceed its fair market value as determined by a qualified
independent appraiser selected by our independent directors. In addition, a
majority of our directors, including a majority of independent directors, who
have no financial interest in the transaction, must determine that the
transaction is fair and reasonable to us and that the transaction is at a price
to us not greater than the cost to our affiliate or, if the price to us exceeds
the cost paid by our affiliate, that there is substantial justification for the
excess cost. Furthermore, if one of the other American Realty Capital-sponsored
programs attracts a tenant that we are competing for, we could suffer a loss of
revenue due to delays in locating another suitable tenant. You will not have the
opportunity to evaluate the manner in which these conflicts of interest are
resolved before or after making your investment. Similar conflicts of interest
may apply if our advisor determines to make or purchase mortgage, bridge or
mezzanine loans or participations therein on our behalf, since other American
Realty Capital-sponsored programs may be competing with us for these
investments.
American
Realty Capital Advisors, LLC faces conflicts of interest relating to joint
ventures, which could result in a disproportionate benefit to the other venture
partners at our expense.
We may
enter into joint ventures with other American Realty Capital-sponsored programs
for the acquisition, development or improvement of properties. American Realty
Capital Advisors, LLC may have conflicts of interest in determining which
American Realty Capital-sponsored program should enter into any particular joint
venture agreement. The co-venturer may have economic or business interests or
goals that are or may become inconsistent with our business interests or goals.
In addition, American Realty Capital Advisors, LLC may face a conflict in
structuring the terms of the relationship between our interests and the interest
of the affiliated co-venturer and in managing the joint venture. Since American
Realty Capital Advisors, LLC and its affiliates will control both the affiliated
co-venturer and, to a certain extent, us, agreements and transactions between
the co-venturers with respect to any such joint venture will not have the
benefit of arm’s-length negotiation of the type normally conducted between
unrelated co-venturers, which may result in the co-venturer receiving benefits
greater than the benefits that we receive. In addition, we may assume
liabilities related to the joint venture that exceeds the percentage of our
investment in the joint venture.
American
Realty Capital Advisors, LLC and its officers and employees and certain of our
key personnel face competing demands relating to their time, and this may cause
our operating results to suffer.
American
Realty Capital Advisors, LLC and its officers and employees and certain of our
key personnel and their respective affiliates are key personnel, general
partners and sponsors of other real estate programs having investment objectives
and legal and financial obligations similar to ours and may have other business
interests as well. Because these persons have competing demands on their time
and resources, they may have conflicts of interest in allocating their time
between our business and these other activities. All of our executive officers
will spend at least a majority of their time involved in our operations and
Messrs. Budko, Block and Weil will spend substantially all of their time
involved in our operations. However, during times of intense activity in other
programs and ventures, they may devote less time and fewer resources to our
business than is necessary or appropriate. If this occurs, the returns on our
investments may suffer.
Our
officers face conflicts of interest related to the positions they hold with
affiliated entities, which could hinder our ability to successfully implement
our business strategy and to generate returns to you.
Each of
our executive officers, including Nicholas S. Schorsch, who also serves as the
chairman of our board of directors, and William M. Kahane, president and chief
operating officer, also are officers of our advisor, our property manager, our
dealer manager and other affiliated entities. As a result, these individuals owe
fiduciary duties to these other entities and their stockholders and limited
partners, which fiduciary duties may conflict with the duties that they owe to
us or our stockholders. Their loyalties to these other entities could result in
actions or inactions that are detrimental to our business, which could harm the
implementation of our business strategy and our investment and leasing
opportunities. Conflicts with our business and interests are most likely to
arise from involvement in activities related to (a) allocation of new
investments and management time and services between us and the other entities,
(b) our purchase of properties from, or sale of properties, to affiliated
entities, (c) the timing and terms of the investment in or sale of an asset, (d)
development of our properties by affiliates, (e) investments with affiliates of
our advisor, (f) compensation to our advisor, and (g) our relationship with our
dealer manager and property manager. If we do not successfully implement our
business strategy, we may be unable to generate cash needed to make
distributions to you and to maintain or increase the value of our
assets.
American
Realty Capital Advisors, LLC faces conflicts of interest relating to the
incentive fee structure under our advisory agreement, which could result in
actions that are not necessarily in the long-term best interests of our
stockholders.
Under our
advisory agreement, American Realty Capital Advisors, LLC or its affiliates will
be entitled to fees that are structured in a manner intended to provide
incentives to our advisor to perform in our best interests and in the best
interests of our stockholders. However, because our advisor does not maintain a
significant equity interest in us and is entitled to receive substantial minimum
compensation regardless of performance, our advisor’s interests are not wholly
aligned with those of our stockholders. In that regard, our advisor could be
motivated to recommend riskier or more speculative investments in order for us
to generate the specified levels of performance or sales proceeds that would
entitle our advisor to fees. In addition, our advisor’s or its affiliates’
entitlement to fees upon the sale of our assets and to participate in sale
proceeds could result in our advisor recommending sales of our investments at
the earliest possible time at which sales of investments would produce the level
of return that would entitle the advisor to compensation relating to such sales,
even if continued ownership of those investments might be in our best long-term
interest. Our advisory agreement will require us to pay a performance-based
termination fee to our advisor or its affiliates in the event that we terminate
the advisor prior to the listing of our shares for trading on an exchange or,
absent such listing, in respect of its participation in net sales proceeds. To
avoid paying this fee, our independent directors may decide against terminating
the advisory agreement prior to our listing of our shares or disposition of our
investments even if, but for the termination fee, termination of the advisory
agreement would be in our best interest. In addition, the requirement to pay the
fee to the advisor or its affiliates at termination could cause us to make
different investment or disposition decisions than we would otherwise make, in
order to satisfy our obligation to pay the fee to the terminated advisor.
Moreover, our advisor will have the right to terminate the advisory agreement
upon a change of control of our company and thereby trigger the payment of the
performance fee, which could have the effect of delaying, deferring or
preventing the change of control.
There
is no separate counsel for us and our affiliates, which could result in
conflicts of interest.
Proskauer
Rose LLP acts as legal counsel to us and also represents our advisor and some of
its affiliates. There is a possibility in the future that the interests of the
various parties may become adverse and, under the Code of Professional
Responsibility of the legal profession, Proskauer Rose LLP may be precluded from
representing any one or all of such parties. If any situation arises in which
our interests appear to be in conflict with those of our advisor or its
affiliates, additional counsel may be retained by one or more of the parties to
assure that their interests are adequately protected. Moreover, should a
conflict of interest not be readily apparent, Proskauer Rose LLP may
inadvertently act in derogation of the interest of the parties which could
affect our ability to meet our investment objectives.
We
may have increased exposure to liabilities from litigation as a result of our
participation in the Section 1031 Exchange Program, which increases the risks
you face as a stockholder.
An
affiliate of American Realty Capital Advisors, LLC, our advisor, has developed a
program to facilitate real estate acquisitions for persons (“1031 Participants”)
who seek to reinvest proceeds from a real estate sale and qualify that
reinvestment for like-kind exchange treatment under Section 1031 of the Internal
Revenue Code (“Section 1031 Exchange Program”). The program is described in
greater detail under “Investment Objectives and Criteria — Acquisition and
Investment Policies — Section 1031 Exchange Program.” The Section 1031 Exchange
Program involves a private placement of co-tenancy interests in real estate.
There are significant tax and securities disclosure risks associated with these
private placement offerings of co-tenancy interests to 1031 Participants. For
example, in the event that the Internal Revenue Service conducts an audit of the
purchasers of co tenancy interests and successfully challenges the qualification
of the transaction as a like-kind exchange, purchasers of co-tenancy interests
may file a lawsuit against the entity offering the co- tenancy interests and its
sponsors. We anticipate providing certain financial guarantees, described in
“Investment Objectives and Policies — Section 1031 Exchange Program,”
in the event co-tenancy interests in such offerings are not sold and could
therefore be named in or otherwise required to defend against lawsuits brought
by 1031 Participants. Any amounts we are required to expend for any such
litigation claims may reduce the amount of funds available for distribution to
you. In addition, disclosure of any such litigation may limit our future ability
to raise additional capital through the sale of stock or
borrowings.
We
are subject to risks associated with co-tenancy arrangements that are not
otherwise present in a real estate investment; these risks could reduce the
value of our co-tenancy investments and your overall return.
Our
participation in the Section 1031 Exchange Program involves an obligation to
purchase any co-tenancy interests in a property that remain unsold at the
completion of a Section 1031 Exchange Program private placement offering.
Accordingly, we could be required to purchase the unsold co-tenancy interests
and thus become subject to the risks of ownership of properties in a co-tenancy
arrangement with unrelated third parties.
Ownership
of co-tenancy interests involves risks not otherwise present with an investment
in real estate such as the following:
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the
risk that a co-tenant may at any time have economic or business interests
or goals that are inconsistent with our business interests or
goals;
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the
risk that a co-tenant may be in a position to take action contrary to our
instructions or requests or contrary to our policies or objectives;
or
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the
possibility that a co-tenant might become insolvent or bankrupt, which may
be an event of default under mortgage loan financing documents, or allow
the bankruptcy court to reject the tenants-in-common agreement or
management agreement entered into by the co-tenants owning interests in
the property.
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Any of
the above might subject a property to liabilities in excess of those
contemplated and thus reduce your returns. In the event that our interests
become adverse to those of the other co-tenants, we may not have the contractual
right to purchase the co-tenancy interests from the other co-tenants. Even if we
are given the opportunity to purchase such co-tenancy interests in the future,
we cannot guarantee that we will have sufficient funds available at the time to
purchase co-tenancy interests from the 1031 Participants. We might want to sell
our co-tenancy interests in a given property at a time when the other cotenants
in such property do not desire to sell their interests. Therefore, we may not be
able to sell our interest in a property at the time we would like to sell. In
addition, we anticipate that it will be much more difficult to find a willing
buyer for our co-tenancy interests in a property than it would be to find a
buyer for a property we owned entirely.
Our
participation in the Section 1031 Exchange Program may limit our ability to
borrow funds in the future; this could reduce the number of investments we can
make and limit our ability to make distributions to you.
Institutional
lenders may view our obligations under agreements to acquire unsold co-tenancy
interests in properties as a contingent liability against our cash or other
assets, which may limit our ability to borrow funds in the future. Lenders
providing lines of credit may restrict our ability to draw on our lines of
credit by the amount of our potential obligation. Further, our lenders may view
such obligations in such a manner as to limit our ability to borrow funds based
on regulatory restrictions on lenders that limit the amount of loans they can
make to any one borrower. These events could limit our operating flexibility and
our ability to make distributions to you.
The
limit on the number of shares a person may own may discourage a takeover that
could otherwise result in a premium price to our stockholders.
Our
charter, with certain exceptions, authorizes our directors to take such actions
as are necessary and desirable to preserve our qualification as a REIT. Unless
exempted by our board of directors, no person may own more than 9.8% in value of
the aggregate our outstanding stock or more than 9.8% in value or number of
shares, whichever is more restrictive) of any class or series of our outstanding
shares. This and other restrictions in our charter on the ownership and transfer
of our stock may have the effect of delaying, deferring or preventing a change
in control of us, including an extraordinary transaction (such as a merger,
tender offer or sale of all or substantially all of our assets) that might
provide a premium price for holders of our common stock. See the “Description of
Shares — Restrictions on Ownership and Transfer” section of this
prospectus.
Our
charter permits our board of directors to issue stock with terms that may
subordinate the rights of common stockholders or discourage a third party from
acquiring us in a manner that might result in a premium price to our
stockholders.
Our
charter permits our board of directors to issue up to 250,000,000 shares of
stock. In addition, our board of directors, without any action by our
stockholders, may amend our charter from time to time to increase or decrease
the aggregate number of shares or the number of shares of any class or series of
stock that we have authority to issue. Our board of directors may classify or
reclassify any unissued preferred stock and establish the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
distributions, qualifications and terms or conditions of repurchase of any such
stock. Thus, our board of directors could authorize the issuance of preferred
stock with terms and conditions that could have a priority as to distributions
and amounts payable upon liquidation over the rights of the holders of our
common stock. Preferred stock could also have the effect of delaying, deferring
or preventing a change in control of us, including an extraordinary transaction
(such as a merger, tender offer or sale of all or substantially all of our
assets) that might provide a premium price for holders of our common stock. See
the “Description of Shares — Preferred Stock” section of this
prospectus.
Maryland
law prohibits certain business combinations, which may make it more difficult
for us to be acquired and may limit your ability to exit the
investment.
Under
Maryland law, “business combinations” between a Maryland corporation and an
interested stockholder or an affiliate of an interested stockholder are
prohibited for five years after the most recent date on which the interested
stockholder becomes an interested stockholder. These business combinations
include a merger, consolidation, share exchange or, in circumstances specified
in the statute, an asset transfer or issuance or reclassification of equity
securities. An interested stockholder is defined as:
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any
person who beneficially owns 10% or more of the voting power of the
corporation’s shares; or
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an
affiliate or associate of the corporation who, at any time within the
two-year period prior to the date in question, was the beneficial owner of
10% or more of the voting power of the then outstanding voting stock of
the corporation.
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A person
is not an interested stockholder under the statute if the board of directors
approved in advance the transaction by which he or she otherwise would have
become an interested stockholder. However, in approving a transaction, the board
of directors may provide that its approval is subject to compliance, at or after
the time of approval, with any terms and conditions determined by the
board.
After the
five-year prohibition, any business combination between the Maryland corporation
and an interested stockholder generally must be recommended by the board of
directors of the corporation and approved by the affirmative vote of at
least:
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80%
of the votes entitled to be cast by holders of outstanding shares of
voting stock of the corporation;
and
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two-thirds
of the votes entitled to be cast by holders of voting stock of the
corporation other than shares held by the interested stockholder with whom
or with whose affiliate the business combination is to be effected or held
by an affiliate or associate of the interested
stockholder.
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These
super-majority vote requirements do not apply if the corporation’s stockholders
receive a minimum price, as defined under Maryland law, for their shares in the
form of cash or other consideration in the same form as previously paid by the
interested stockholder for its shares. The business combination statute permits
various exemptions from its provisions, including business combinations that are
exempted by the board of directors prior to the time that the interested
stockholder becomes an interested stockholder. Pursuant to the statute, our
board of directors has exempted any business combination involving American
Realty Capital Advisors, LLC or any affiliate of American Realty Capital
Advisors, LLC. Consequently, the five-year prohibition and the super-majority
vote requirements will not apply to business combinations between us and
American Realty Capital Advisors, LLC or any affiliate of American Realty
Capital Advisors, LLC. As a result, American Realty Capital Advisors, LLC and
any affiliate of American Realty Capital Advisors, LLC may be able to enter into
business combinations with us that may not be in the best interest of our
stockholders, without compliance with the super-majority vote requirements and
the other provisions of the statute. The business combination statute may
discourage others from trying to acquire control of us and increase the
difficulty of consummating any offer. For a more detailed discussion of the
Maryland laws governing us and the ownership of our shares of common stock, see
the section of this prospectus captioned “Description of
Shares — Business Combinations.”
Maryland
law also limits the ability of a third-party to buy a large stake in us and
exercise voting power in electing directors.
The
Maryland Control Share Acquisition Act provides that “control shares” of a
Maryland corporation acquired in a “control share acquisition” have no voting
rights except to the extent approved by the corporation’s disinterested
stockholders by a vote of two-thirds of the votes entitled to be cast on the
matter. Shares of stock owned by interested stockholders, that is, by the
acquirer, by officers or by directors who are employees of the corporation, are
excluded from shares entitled to vote on the matter. “Control shares” are voting
shares of stock that would entitle the acquirer to exercise voting power in
electing directors within specified ranges of voting power. Control shares do
not include shares the acquiring person is then entitled to vote as a result of
having previously obtained stockholder approval. A “control share acquisition”
means the acquisition of control shares. The control share acquisition statute
does not apply (a) to shares acquired in a merger, consolidation or share
exchange if the corporation is a party to the transaction or (b) to acquisitions
approved or exempted by the articles of incorporation or bylaws of the
corporation. Our bylaws contain a provision exempting from the Control Share
Acquisition act any and all acquisitions of our common stock by American Realty
Capital Advisors, LLC or any affiliate of American Realty Capital Advisors, LLC.
This statute could have the effect of discouraging offers from third parties to
acquire us and increasing the difficulty of successfully completing this type of
offer by anyone other than our affiliates or any of their affiliates. For a more
detailed discussion on the Maryland laws governing control share acquisitions,
see the section of this prospectus captioned “Description of
Shares — Control Share Acquisitions.”
If
we are required to register as an investment company under the Investment
Company Act, we could not continue our business, which may significantly reduce
the value of your investment.
We are
not registered as an investment company under the Investment Company Act of
1940, as amended (Investment Company Act), pursuant to an exemption in Section
3(c)(5)(C) of the Investment Company Act and certain No-Action Letters from the
Securities and Exchange Commission. Pursuant to this exemption, (a) at least 55%
of our assets must consist of real estate fee interests or loans secured
exclusively by real estate or both; (b) at least 25% of our assets must consist
of loans secured primarily by real estate (this percentage will be reduced by
the amount by which the percentage in (a) above is increased); and (c) up to 20%
of our assets may consist of miscellaneous investments. We intend to monitor
compliance with these requirements on an ongoing basis. If we were obligated to
register as an investment company, we would have to comply with a variety of
substantive requirements under the Investment Company Act imposing, among other
things:
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limitations
on capital structure;
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restrictions
on specified investments;
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prohibitions
on transactions with affiliates;
and
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compliance
with reporting, record keeping, voting, proxy disclosure and other rules
and regulations that would significantly change our
operations.
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In order
to maintain our exemption from regulation under the Investment Company Act, we
must engage primarily in the business of buying real estate, and these
investments must be made within a year after the offering ends. If we are unable
to invest a significant portion of the proceeds of this offering in properties
within one year of the termination of the offering, we may avoid being required
to register as an investment company by temporarily investing any unused
proceeds in government securities with low returns. This would reduce the cash
available for distribution to investors and possibly lower your
returns.
To
maintain compliance with the Investment Company Act exemption, we may be unable
to sell assets we would otherwise want to sell and may need to sell assets we
would otherwise wish to retain. In addition, we may have to acquire additional
income or loss generating assets that we might not otherwise have acquired or
may have to forgo opportunities to acquire interests in companies that we would
otherwise want to acquire and would be important to our investment strategy. If
we were required to register as an investment company but failed to do so, we
would be prohibited from engaging in our business, and criminal and civil
actions could be brought against us. In addition, our contracts would be
unenforceable unless a court were to require enforcement, and a court could
appoint a receiver to take control of us and liquidate our
business.
You
are bound by the majority vote on matters on which you are entitled to vote, and
therefore, your vote on a particular matter may be superseded by the vote of
others.
You may
vote on certain matters at any annual or special meeting of stockholders,
including the election of directors. However, you will be bound by the majority
vote on matters requiring approval of a majority of the stockholders even if you
do not vote with the majority on any such matter.
If
you do not agree with the decisions of our board of directors, you only have
limited control over changes in our policies and operations and may not be able
to change such policies and operations.
Our board
of directors determines our major policies, including our policies regarding
investments, financing, growth, debt capitalization, REIT qualification and
distributions. Our board of directors may amend or revise these and other
policies without a vote of the stockholders. Under the Maryland General
Corporation Law and our charter, our stockholders have a right to vote only on
the following:
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the
election or removal of directors;
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amendments
of our charter (including a change in our investment objectives), except
certain amendments that do not adversely affect the rights, preferences
and privileges of our stockholders;
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our
liquidation or dissolution;
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a
reorganization of our company, as provided in our charter;
and
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mergers,
consolidations or sales or other dispositions of substantially all of our
assets, as provided in our charter.
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All other
matters are subject to the discretion of our board of directors.
Our board
of
directors may change our investment policies without stockholder approval, which
could alter the nature of your investments.
Our
charter requires that our independent directors review our investment policies
at least annually to determine that the policies we are following are in the
best interest of the stockholders. These policies may change over time. The
methods of implementing our investment policies may also vary, as new real
estate development trends emerge and new investment techniques are developed.
Our investment policies, the methods for their implementation, and our other
objectives, policies and procedures may be altered by our board of directors
without the approval of our stockholders. As a result, the nature of your
investment could change without your consent.
You
are limited in your ability to sell your shares pursuant to our share repurchase
program and may have to hold your shares for an indefinite period of
time.
Our board
of directors may amend the terms of our share repurchase program without
stockholder approval. Our board of directors also is free to suspend or
terminate the program upon 30 days notice or to reject any request for
repurchase. In addition, the share repurchase program includes numerous
restrictions that would limit your ability to sell your shares. Generally, you
must have held your shares for at least one year in order to participate in our
share repurchase program. If our board of directors authorizes a repurchase from
legally available funds, we will limit the number of shares repurchased pursuant
to our share repurchase program as follows: (a) during any calendar year, the
number of shares we will redeem will be limited to the proceeds in the
distribution reinvestment plan (shares requested for repurchase upon the death
of a stockholder will not be subject to this limitation); and (b) funding for
the repurchase of shares will be limited to the net proceeds we receive from the
sale of shares under our distribution reinvestment plan. These limits might
prevent us from accommodating all repurchase requests made in any year. See the
“Description of Shares — Share Repurchase Program” section of this
prospectus for more information about the share repurchase program. These
restrictions severely limit your ability to sell your shares should you require
liquidity, and limit your ability to recover the value you invested or the fair
market value of your shares.
We
established the offering price on an arbitrary basis; as a result, the actual
value of your investment may be substantially less than what you
pay.
Our board
of directors has arbitrarily determined the selling price of the shares
consistent with comparable real estate investment programs in the market, and
such price bears no relationship to our book or asset values, or to any other
established criteria for valuing issued or outstanding shares. Because the
offering price is not based upon any independent valuation, the offering price
is not indicative of the proceeds that you would receive upon
liquidation.
Because
the dealer manager is one of our affiliates, you will not have the benefit of an
independent review of the prospectus or us customarily performed in underwritten
offerings.
The
dealer manager, Realty Capital Securities, LLC, is one of our affiliates and
will not make an independent review of us or the offering. Accordingly, you will
have to rely on your own broker-dealer to make an independent review of the
terms of this offering. If your broker-dealer does not conduct such a review,
you will not have the benefit of an independent review of the terms of this
offering. Further, the due diligence investigation of us by the dealer manager
cannot be considered to be an independent review and, therefore, may not be as
meaningful as a review conducted by an unaffiliated broker-dealer or investment
banker.
Your
interest in us will be diluted if we issue additional shares.
Existing
stockholders and potential investors in this offering do not have preemptive
rights to any shares issued by us in the future. Our charter currently
authorizes us to issue up to 250,000,000 shares of stock, of which 240,000,000
shares are designated as common stock and 10,000,000 are designated as preferred
stock.
Subject
to any limitations set forth under Maryland law, our board of directors may
increase the number of authorized shares of stock, increase or decrease the
number of shares of any class or series of stock designated, or reclassify any
unissued shares without the necessity of obtaining stockholder approval. All of
such shares may be issued in the discretion of our board of directors. Existing
stockholders and investors purchasing shares in this offering likely will suffer
dilution of their equity investment in us, in the event that we (a) sell shares
in this offering or sell additional shares in the future, including those issued
pursuant to our distribution reinvestment plan, (b) sell securities that are
convertible into shares of our common stock, (c) issue shares of our common
stock in a private offering of securities to institutional investors, (d) issue
shares of our common stock upon the exercise of the options granted to our
independent directors, (e) issue shares to our advisor, its successors or
assigns, in payment of an outstanding fee obligation as set forth under our
advisory agreement, or (f) issue shares of our common stock to sellers of
properties acquired by us in connection with an exchange of limited partnership
interests of American Realty Capital Operating Partnership, L.P., existing
stockholders and investors purchasing shares in this offering will likely
experience dilution of their equity investment in us. In addition, the
partnership agreement for American Realty Capital Operating Partnership, L.P.
contains provisions that would allow, under certain circumstances, other
entities, including other American Realty Capital-sponsored programs, to merge
into or cause the exchange or conversion of their interest for interests of
American Realty Capital Operating Partnership, L.P. Because the limited
partnership units of American Realty Capital Operating Partnership, L.P. may, in
the discretion of our board of directors, be exchanged for shares of our common
stock, any merger, exchange or conversion between American Realty Capital
Operating Partnership, L.P. and another entity ultimately could result in the
issuance of a substantial number of shares of our common stock, thereby diluting
the percentage ownership interest of other stockholders. Because of these and
other reasons described in this “Risk Factors” section, you should not expect to
be able to own a significant percentage of our shares.
Payment
of fees to American Realty Capital Advisors, LLC and its affiliates reduces cash
available for investment and distribution.
American
Realty Capital Advisors, LLC and its affiliates will perform services for us in
connection with the offer and sale of the shares, the selection and acquisition
of our investments, and the management and leasing of our properties, the
servicing of our mortgage, bridge or mezzanine loans, if any, and the
administration of our other investments. They are paid substantial fees for
these services, which reduces the amount of cash available for investment in
properties or distribution to stockholders. For a more detailed discussion of
the fees payable to such entities in respect of this offering, see the
“Management Compensation” section of this prospectus.
We
may be unable to pay or maintain cash distributions or increase distributions
over time.
There are
many factors that can affect the availability and timing of cash distributions
to stockholders. Distributions will be based principally on cash available from
our operations. The amount of cash available for distributions is affected by
many factors, such as our ability to buy properties as offering proceeds become
available, rental income from such properties, and our operating expense levels,
as well as many other variables. Actual cash available for distributions may
vary substantially from estimates. We cannot assure you that we will be able to
pay or maintain our current anticipated level of distributions or that
distributions will increase over time. We cannot give any assurance that rents
from the properties will increase, that the securities we buy will increase in
value or provide constant or increased distributions over time, or that future
acquisitions of real properties, mortgage, bridge or mezzanine loans or any
investments in securities will increase our cash available for distributions to
stockholders. Our actual results may differ significantly from the assumptions
used by our board of directors in establishing the distribution rate to
stockholders. We may not have sufficient legally available cash from operations
to make a distribution required to qualify for or maintain our REIT status. We
may increase borrowing or use proceeds from this offering to make distributions,
each of which could be deemed to be a return of your capital. We may make
distributions from the proceeds of this offering or from borrowings in
anticipation of future cash flow. Any such distributions will constitute a
return of capital and may reduce the amount of capital we ultimately invest in
properties and negatively impact the value of your investment. For a description
of the factors that can affect the availability and timing of cash distributions
to stockholders, see the section of this prospectus captioned “Description of
Shares — Distributions Policy.”
We
will not calculate the net asset value per share for our shares until 18 months
after completion of our last offering, therefore, you will not be able to
determine the net asset value of your shares on an on-going basis during this
offering and for a substantial period of time thereafter.
Until 18
months after the termination of this offering or the termination of any
subsequent offering of our shares, we intend to use the offering price of shares
in our most recent offering as the per share value (unless we have made a
special distribution to stockholders of net sales proceeds from the sale of one
or more properties prior to the date of determination of the per share value, in
which case we will use the offering price less the per share amount of the
special distribution). Beginning 18 months after the completion of
the last offering of our shares (excluding offerings under our distribution
reinvestment plan), our board of directors will determine the value of our
properties and our other assets based on such information as our board
determines appropriate, which may or may not include independent valuations of
our properties or of our enterprise as a whole. We will disclose this net asset
value to stockholders in our filings with the SEC. Therefore, you will not be
able to determine the net asset value of your shares on an on-going basis during
this offering. See “Investment by Tax-Exempt Entities and ERISA Considerations
— Annual or
More Frequent Valuation Requirement.”
Our
operating results will be affected by economic and regulatory changes that have
an adverse impact on the real estate market in general, and we cannot assure you
that we will be profitable or that we will realize growth in the value of our
real estate properties.
Our
operating results are subject to risks generally incident to the ownership of
real estate, including:
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changes
in general economic or local
conditions;
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changes
in supply of or demand for similar or competing properties in an
area;
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changes
in interest rates and availability of permanent mortgage funds that may
render the sale of a property difficult or
unattractive;
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changes
in tax, real estate, environmental and zoning laws;
and
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periods
of high interest rates and tight money
supply.
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These and
other reasons may prevent us from being profitable or from realizing growth or
maintaining the value of our real estate properties.
Many
of our properties will depend upon a single tenant for all or a majority of
their rental income, and our financial condition and ability to make
distributions may be adversely affected by the bankruptcy or insolvency, a
downturn in the business, or a lease termination of a single
tenant.
We expect
that many of our properties will be occupied by only one tenant or will derive a
majority of their rental income from one tenant and, therefore, the success of
those properties will be materially dependent on the financial stability of such
tenants. Lease payment defaults by tenants could cause us to reduce the amount
of distributions we pay. A default of a tenant on its lease payments to us would
cause us to lose the revenue from the property and force us to find an
alternative source of revenue to meet any mortgage payment and prevent a
foreclosure if the property is subject to a mortgage. In the event of a default,
we may experience delays in enforcing our rights as landlord and may incur
substantial costs in protecting our investment and re-letting the property. If a
lease is terminated, there is no assurance that we will be able to lease the
property for the rent previously received or sell the property without incurring
a loss. A default by a tenant, the failure of a guarantor to fulfill its
obligations or other premature termination of a lease, or a tenant’s election
not to extend a lease upon its expiration, could have an adverse effect on our
financial condition and our ability to pay distributions.
If
a tenant declares bankruptcy, we may be unable to collect balances due under
relevant leases.
Any of
our tenants, or any guarantor of a tenant’s lease obligations, could be subject
to a bankruptcy proceeding pursuant to Title 11 of the bankruptcy laws of the
United States. Such a bankruptcy filing would bar all efforts by us to collect
pre-bankruptcy debts from these entities or their properties, unless we receive
an enabling order from the bankruptcy court. Post-bankruptcy debts would be paid
currently. If a lease is assumed, all pre-bankruptcy balances owing under it
must be paid in full. If a lease is rejected by a tenant in bankruptcy, we would
have a general unsecured claim for damages. If a lease is rejected, it is
unlikely we would receive any payments from the tenant because our claim is
capped at the rent reserved under the lease, without acceleration, for the
greater of one year or 15% of the remaining term of the lease, but not greater
than three years, plus rent already due but unpaid. This claim could be paid
only in the event funds were available, and then only in the same percentage as
that realized on other unsecured claims.
A tenant
or lease guarantor bankruptcy could delay efforts to collect past due balances
under the relevant leases, and could ultimately preclude full collection of
these sums. Such an event could cause a decrease or cessation of rental payments
that would mean a reduction in our cash flow and the amount available for
distributions to you. In the event of a bankruptcy, we cannot assure you that
the tenant or its trustee will assume our lease. If a given lease, or guaranty
of a lease, is not assumed, our cash flow and the amounts available for
distributions to you may be adversely affected.
A
high concentration of our properties in a particular geographic area, or that
have tenants in a similar industry, would magnify the effects of downturns in
that geographic area or industry.
We expect
that our properties will be diverse according to geographic area and industry of
our tenants. However, in the event that we have a concentration of properties in
any particular geographic area, any adverse situation that disproportionately
affects that geographic area would have a magnified adverse effect on our
portfolio. Similarly, if our tenants are concentrated in a certain industry or
industries, any adverse effect to that industry generally would have a
disproportionately adverse effect on our portfolio.
If
a sale-leaseback transaction is re-characterized in a tenant’s bankruptcy
proceeding, our financial condition could be adversely affected.
We may
enter into sale-leaseback transactions, whereby we would purchase a property and
then lease the same property back to the person from whom we purchased it. In
the event of the bankruptcy of a tenant, a transaction structured as a
sale-leaseback may be re-characterized as either a financing or a joint venture,
either of which outcomes could adversely affect our business. If the
sale-leaseback were re-characterized as a financing, we might not be considered
the owner of the property, and as a result would have the status of a creditor
in relation to the tenant. In that event, we would no longer have the right to
sell or encumber our ownership interest in the property. Instead, we would have
a claim against the tenant for the amounts owed under the lease, with the claim
arguably secured by the property. The tenant/debtor might have the ability to
propose a plan restructuring the term, interest rate and amortization schedule
of its outstanding balance. If confirmed by the bankruptcy court, we could be
bound by the new terms, and prevented from foreclosing our lien on the property.
If the sale-leaseback were re-characterized as a joint venture, our lessee and
we could be treated as co-venturers with regard to the property. As a result, we
could be held liable, under some circumstances, for debts incurred by the lessee
relating to the property. Either of these outcomes could adversely affect our
cash flow and the amount available for distributions to you.
Properties
that have vacancies for a significant period of time could be difficult to sell,
which could diminish the return on your investment.
A
property may incur vacancies either by the continued default of tenants under
their leases or the expiration of tenant leases. If vacancies continue for a
long period of time, we will suffer reduced revenues which may result in less
cash to be distributed to stockholders. In addition, because properties’ market
values depend principally upon the value of the properties’ leases, the resale
value of properties with prolonged vacancies could suffer, which could further
reduce your return.
We
may obtain only limited warranties when we purchase a property and would have
only limited recourse in the event our due diligence did not identify any issues
that lower the value of our property.
The
seller of a property often sells such property in its “as is” condition on a
“where is” basis and “with all faults,” without any warranties of
merchantability or fitness for a particular use or purpose. In addition,
purchase agreements may contain only limited warranties, representations and
indemnifications that will only survive for a limited period after the closing.
The purchase of properties with limited warranties increases the risk that we
may lose some or all of our invested capital in the property as well as the loss
of rental income from that property.
We
may be unable to secure funds for future tenant improvements or capital needs,
which could adversely impact our ability to pay cash distributions to our
stockholders.
When
tenants do not renew their leases or otherwise vacate their space, it is usual
that, in order to attract replacement tenants, we will be required to expend
substantial funds for tenant improvements and tenant refurbishments to the
vacated space. In addition, although we expect that our leases with tenants will
require tenants to pay routine property maintenance costs, we will likely be
responsible for any major structural repairs, such as repairs to the foundation,
exterior walls and rooftops. We will use substantially all of this offering’s
gross proceeds to buy real estate and pay various fees and expenses. We intend
to reserve only 0.1% of the gross proceeds from this offering for future capital
needs. Accordingly, if we need additional capital in the future to improve or
maintain our properties or for any other reason, we will have to obtain
financing from other sources, such as cash flow from operations, borrowings,
property sales or future equity offerings. These sources of funding may not be
available on attractive terms or at all. If we cannot procure additional funding
for capital improvements, our investments may generate lower cash flows or
decline in value, or both.
Our
inability to sell a property when we desire to do so could adversely impact our
ability to pay cash distributions to you.
The real
estate market is affected by many factors, such as general economic conditions,
availability of financing, interest rates and other factors, including supply
and demand, that are beyond our control. We cannot predict whether we will be
able to sell any property for the price or on the terms set by us, or whether
any price or other terms offered by a prospective purchaser would be acceptable
to us. We cannot predict the length of time needed to find a willing purchaser
and to close the sale of a property.
We may be
required to expend funds to correct defects or to make improvements before a
property can be sold. We cannot assure you that we will have funds available to
correct such defects or to make such improvements. Moreover, in acquiring a
property, we may agree to restrictions that prohibit the sale of that property
for a period of time or impose other restrictions, such as a limitation on the
amount of debt that can be placed or repaid on that property. These provisions
would restrict our ability to sell a property.
We
may not be able to sell our properties at a price equal to, or greater than, the
price for which we purchased such property, which may lead to a decrease in the
value of our assets.
Many of
our leases will not contain rental increases over time. Therefore, the value of
the property to a potential purchaser may not increase over time, which may
restrict our ability to sell a property, or in the event we are able to sell
such property, may lead to a sale price less than the price that we paid to
purchase the property.
We
may acquire or finance properties with lock-out provisions, which may prohibit
us from selling a property, or may require us to maintain specified debt levels
for a period of years on some properties.
Lock-out
provisions, which preclude pre-payments of a loan, could materially restrict us
from selling or otherwise disposing of or refinancing properties. These
provisions would affect our ability to turn our investments into cash and thus
affect cash available for distributions to you. Lock out provisions may prohibit
us from reducing the outstanding indebtedness with respect to any properties,
refinancing such indebtedness on a non-recourse basis at maturity, or increasing
the amount of indebtedness with respect to such properties. Lock-out provisions
could impair our ability to take other actions during the lock-out period that
could be in the best interests of our stockholders and, therefore, may have an
adverse impact on the value of the shares, relative to the value that would
result if the lock-out provisions did not exist. In particular, lock-out
provisions could preclude us from participating in major transactions that could
result in a disposition of our assets or a change in control even though that
disposition or change in control might be in the best interests of our
stockholders.
Rising
expenses could reduce cash flow and funds available for future
acquisitions.
Any
properties that we buy in the future will be, subject to operating risks common
to real estate in general, any or all of which may negatively affect us. If any
property is not fully occupied or if rents are being paid in an amount that is
insufficient to cover operating expenses, we could be required to expend funds
with respect to that property for operating expenses. The properties will be
subject to increases in tax rates, utility costs, operating expenses, insurance
costs, repairs and maintenance and administrative expenses. While we expect that
many of our properties will be leased on a triple-net-lease basis or will
require the tenants to pay all or a portion of such expenses, renewals of leases
or future leases may not be negotiated on that basis, in which event we may have
to pay those costs. If we are unable to lease properties on a triple-net-lease
basis or on a basis requiring the tenants to pay all or some of such expenses,
or if tenants fail to pay required tax, utility and other impositions, we could
be required to pay those costs which could adversely affect funds available for
future acquisitions or cash available for distributions.
Adverse
economic conditions will negatively affect our returns and
profitability.
Our
operating results may be affected by the following market and economic
challenges, which may result from a continued or exacerbated general economic
slow down experienced by the nation as a whole or by the local economics where
our properties may be located:
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poor
economic conditions may result in tenant defaults under
leases;
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re-leasing
may require concessions or reduced rental rates under the new leases;
and
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increased
insurance premiums may reduce funds available for distribution or, to the
extent such increases are passed through to tenants, may lead to tenant
defaults. Increased insurance premiums may make it difficult to increase
rents to tenants on turnover, which may adversely affect our ability to
increase our returns.
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The
length and severity of any economic downturn cannot be predicted. Our operations
could be negatively affected to the extent that an economic downturn is
prolonged or becomes more severe.
If
we suffer losses that are not covered by insurance or that are in excess of
insurance coverage, we could lose invested capital and anticipated
profits.
Generally,
each of our tenants will be responsible for insuring its goods and premises and,
in some circumstances, may be required to reimburse us for a share of the cost
of acquiring comprehensive insurance for the property, including casualty,
liability, fire and extended coverage customarily obtained for similar
properties in amounts that our advisor determines are sufficient to cover
reasonably foreseeable losses. Tenants of single-user properties leased on a
triple-net-lease basis typically are required to pay all insurance costs
associated with those properties. Material losses may occur in excess of
insurance proceeds with respect to any property, as insurance may not be
sufficient to fund the losses. However, there are types of losses, generally of
a catastrophic nature, such as losses due to wars, acts of terrorism,
earthquakes, floods, hurricanes, pollution or environmental matters, which are
either uninsurable or not economically insurable, or may be insured subject to
limitations, such as large deductibles or co-payments. Insurance risks
associated with potential terrorism acts could sharply increase the premiums we
pay for coverage against property and casualty claims. Additionally, mortgage
lenders in some cases have begun to insist that commercial property owners
purchase specific coverage against terrorism as a condition for providing
mortgage loans. It is uncertain whether such insurance policies will be
available, or available at reasonable cost, which could inhibit our ability to
finance or refinance our potential properties. In these instances, we may be
required to provide other financial support, either through financial assurances
or self-insurance, to cover potential losses. We may not have adequate, or any,
coverage for such losses. The Terrorism Risk Insurance Act of 2002 is designed
for a sharing of terrorism losses between insurance companies and the federal
government, and has been renewed until December 31, 2014. We cannot be certain
how this act will impact us or what additional cost to us, if any, could result.
If such an event damaged or destroyed one or more of our properties, we could
lose both our invested capital and anticipated profits from such
property.
Real
estate related taxes may increase and if these increases are not passed on to
tenants, our income will be reduced.
Some
local real property tax assessors may seek to reassess some of our properties as
a result of our acquisition of the property. Generally, from time to time our
property taxes increase as property values or assessment rates change or for
other reasons deemed relevant by the assessors. An increase in the assessed
valuation of a property for real estate tax purposes will result in an increase
in the related real estate taxes on that property. Although some tenant leases
may permit us to pass through such tax increases to the tenants for payment,
there is no assurance that renewal leases or future leases will be negotiated on
the same basis. Increases not passed through to tenants will adversely affect
our income, cash available for distributions, and the amount of distributions to
you.
CC&Rs
may restrict our ability to operate a property.
Some of
our properties are contiguous to other parcels of real property, comprising part
of the same commercial center. In connection with such properties, there are
significant covenants, conditions and restrictions, known as “CC&Rs,”
restricting the operation of such properties and any improvements on such
properties, and related to granting easements on such properties. Moreover, the
operation and management of the contiguous properties may impact such
properties. Compliance with CC&Rs may adversely affect our operating costs
and reduce the amount of funds that we have available to pay
distributions.
Our
operating results may be negatively affected by potential development and
construction delays and resultant increased costs and risks.
While we
do not currently intend to do so, we may use proceeds from this offering to
acquire and develop properties upon which we will construct improvements. We
will be subject to uncertainties associated with re-zoning for development,
environmental concerns of governmental entities and/or community groups, and our
builder’s ability to build in conformity with plans, specifications, budgeted
costs, and timetables. If a builder fails to perform, we may resort to legal
action to rescind the purchase or the construction contract or to compel
performance. A builder’s performance may also be affected or delayed by
conditions beyond the builder’s control. Delays in completion of construction
could also give tenants the right to terminate preconstruction leases. We may
incur additional risks when we make periodic progress payments or other advances
to builders before they complete construction. These and other such factors can
result in increased costs of a project or loss of our investment. In addition,
we will be subject to normal lease-up risks relating to newly constructed
projects. We also must rely on rental income and expense projections and
estimates of the fair market value of property upon completion of construction
when agreeing upon a price at the time we acquire the property. If our
projections are inaccurate, we may pay too much for a property, and our return
on our investment could suffer.
While we
do not currently intend to do so, we may invest in unimproved real property.
Returns from development of unimproved properties are also subject to risks
associated with re-zoning the land for development and environmental concerns of
governmental entities and/or community groups. Although we intend to limit any
investment in unimproved property to property we intend to develop, your
investment nevertheless is subject to the risks associated with investments in
unimproved real property.
If
we contract with an affiliated development company for newly developed property,
we cannot guarantee that our earnest money deposit made to the development
company will be fully refunded.
While we
currently do not have an affiliated development company, our sponsor and/or its
affiliates may form a development company. In such an event, we may enter into
one or more contracts, either directly or indirectly through joint ventures with
affiliates or others, to acquire real property from an affiliate of American
Realty Capital Advisors, LLC that is engaged in construction and development of
commercial real properties. Properties acquired from an affiliated development
company may be either existing income-producing properties, properties to be
developed or properties under development. We anticipate that we will be
obligated to pay a substantial earnest money deposit at the time of contracting
to acquire such properties. In the case of properties to be developed by an
affiliated development company, we anticipate that we will be required to close
the purchase of the property upon completion of the development of the property
by our affiliate. At the time of contracting and the payment of the earnest
money deposit by us, our development company affiliate typically will not have
acquired title to any real property. Typically, our development company
affiliate will only have a contract to acquire land, a development agreement to
develop a building on the land and an agreement with one or more tenants to
lease all or part of the property upon its completion. We may enter into such a
contract with our development company affiliate even if at the time of
contracting we have not yet raised sufficient proceeds in our offering to enable
us to close the purchase of such property. However, we will not be required to
close a purchase from our development company affiliate, and will be entitled to
a refund of our earnest money, in the following circumstances:
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our
development company affiliate fails to develop the
property;
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all
or a specified portion of the pre-leased tenants fail to take possession
under their leases for any reason;
or
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we
are unable to raise sufficient proceeds from our offering to pay the
purchase price at closing.
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The
obligation of our development company affiliate to refund our earnest money will
be unsecured, and no assurance can be made that we would be able to obtain a
refund of such earnest money deposit from it under these circumstances since our
development company affiliate may be an entity without substantial assets or
operations. However, our development company affiliate’s obligation to refund
our earnest money deposit may be guaranteed by American Realty Capital
Properties, LLC, our property manager, which will enter into contracts to
provide property management and leasing services to various American Realty
Capital-sponsored programs, including us, for substantial monthly fees. As of
the time American Realty Capital Properties, LLC may be required to perform
under any guaranty, we cannot assure that American Realty Capital Properties,
LLC will have sufficient assets to refund all of our earnest money deposit in a
lump sum payment. If we were forced to collect our earnest money deposit by
enforcing the guaranty of American Realty Capital Properties, LLC, we will
likely be required to accept installment payments over time payable out of the
revenues of American Realty Capital Properties, LLC operations. We cannot assure
you that we would be able to collect the entire amount of our earnest money
deposit under such circumstances. See “Investment Objectives and
Policies — Acquisition and Investment Policies.”
Competition
with third parties in acquiring properties and other investments may reduce our
profitability and the return on your investment.
We
compete with many other entities engaged in real estate investment activities,
including individuals, corporations, bank and insurance company investment
accounts, other REITs, real estate limited partnerships, and other entities
engaged in real estate investment activities, many of which have greater
resources than we do. Larger REITs may enjoy significant competitive advantages
that result from, among other things, a lower cost of capital and enhanced
operating efficiencies. In addition, the number of entities and the amount of
funds competing for suitable investments may increase. Any such increase would
result in increased demand for these assets and therefore increased prices paid
for them. If we pay higher prices for properties and other investments, our
profitability will be reduced and you may experience a lower return on your
investment.
Our
properties face competition that may affect tenants’ ability to pay rent and the
amount of rent paid to us may affect the cash available for distributions and
the amount of distributions.
Our
properties typically are, and we expect will be, located in developed areas.
Therefore, there are and will be numerous other properties within the market
area of each of our properties that will compete with us for tenants. The number
of competitive properties could have a material effect on our ability to rent
space at our properties and the amount of rents charged. We could be adversely
affected if additional competitive properties are built in locations competitive
with our properties, causing increased competition for customer traffic and
creditworthy tenants. This could result in decreased cash flow from tenants and
may require us to make capital improvements to properties that we would not have
otherwise made, thus affecting cash available for distributions, and the amount
available for distributions to you.
Delays
in acquisitions of properties may an have adverse effect on your
investment.
There may
be a substantial period of time before the proceeds of this offering are
invested. Delays we encounter in the selection, acquisition and/or development
of properties could adversely affect your returns. Where properties are acquired
prior to the start of construction or during the early stages of construction,
it will typically take several months to complete construction and rent
available space. Therefore, you could suffer delays in the payment of cash
distributions attributable to those particular properties.
Costs
of complying with governmental laws and regulations, including those relating to
environmental matters, may adversely affect our income and the cash available
for any distributions.
All real
property and the operations conducted on real property are subject to federal,
state and local laws and regulations relating to environmental protection and
human health and safety. These laws and regulations generally govern wastewater
discharges, air emissions, the operation and removal of underground and
above-ground storage tanks, the use, storage, treatment, transportation and
disposal of solid and hazardous materials, and the remediation of contamination
associated with disposals. Environmental laws and regulations may impose joint
and several liability on tenants, owners or operators for the costs to
investigate or remediate contaminated properties, regardless of fault or whether
the acts causing the contamination were legal. This liability could be
substantial. In addition, the presence of hazardous substances, or the failure
to properly remediate these substances, may adversely affect our ability to
sell, rent or pledge such property as collateral for future
borrowings.
Some of
these laws and regulations have been amended so as to require compliance with
new or more stringent standards as of future dates. Compliance with new or more
stringent laws or regulations or stricter interpretation of existing laws may
require material expenditures by us. Future laws, ordinances or regulations may
impose material environmental liability. Additionally, our tenants’ operations,
the existing condition of land when we buy it, operations in the vicinity of our
properties, such as the presence of underground storage tanks, or activities of
unrelated third parties may affect our properties. In addition, there are
various local, state and federal fire, health, life-safety and similar
regulations with which we may be required to comply, and that may subject us to
liability in the form of fines or damages for noncompliance. Any material
expenditures, fines, or damages we must pay will reduce our ability to make
distributions and may reduce the value of your investment.
State and
federal laws in this area are constantly evolving, and we intend to monitor
these laws and take commercially reasonable steps to protect ourselves from the
impact of these laws, including obtaining environmental assessments of most
properties that we acquire; however, we will not obtain an independent
third-party environmental assessment for every property we acquire. In addition,
any such assessment that we do obtain may not reveal all environmental
liabilities or that a prior owner of a property did not create a material
environmental condition not known to us. The cost of defending against claims of
liability, of compliance with environmental regulatory requirements, of
remediating any contaminated property, or of paying personal injury claims would
materially adversely affect our business, assets or results of operations and,
consequently, amounts available for distribution to you. See “Investment
Objectives and Policies — Environmental Matters.”
If
we sell properties by providing financing to purchasers, defaults by the
purchasers would adversely affect our cash flows.
If we
decide to sell any of our properties, we intend to use our best efforts to sell
them for cash. However, in some instances we may sell our properties by
providing financing to purchasers. When we provide financing to purchasers, we
will bear the risk that the purchaser may default, which could negatively impact
our cash distributions to stockholders. Even in the absence of a purchaser
default, the distribution of the proceeds of sales to our stockholders, or their
reinvestment in other assets, will be delayed until the promissory notes or
other property we may accept upon the sale are actually paid, sold, refinanced
or otherwise disposed of. In some cases, we may receive initial down payments in
cash and other property in the year of sale in an amount less than the selling
price and subsequent payments will be spread over a number of years. If any
purchaser defaults under a financing arrangement with us, it could negatively
impact our ability to pay cash distributions to our stockholders.
Our
recovery of an investment in a mortgage, bridge or mezzanine loan that has
defaulted may be limited.
There is
no guarantee that the mortgage, loan or deed of trust securing an investment
will, following a default, permit us to recover the original investment and
interest that would have been received absent a default. The security provided
by a mortgage, deed of trust or loan is directly related to the difference
between the amount owed and the appraised market value of the property. Although
we intend to rely on a current real estate appraisal when we make the
investment, the value of the property is affected by factors outside our
control, including general fluctuations in the real estate market, rezoning,
neighborhood changes, highway relocations and failure by the borrower to
maintain the property. In addition, we may incur the costs of litigation in our
efforts to enforce our rights under defaulted loans.
Our
costs associated with complying with the Americans with Disabilities Act may
affect cash available for distributions.
Our
properties will be subject to the Americans with Disabilities Act of 1990 (the
“Disabilities Act”). Under the Disabilities Act, all places of public
accommodation are required to comply with federal requirements related to access
and use by disabled persons. The Disabilities Act has separate compliance
requirements for “public accommodations” and “commercial facilities” that
generally require that buildings and services, including restaurants and retail
stores, be made accessible and available to people with disabilities. The
Disabilities Act’s requirements could require removal of access barriers and
could result in the imposition of injunctive relief, monetary penalties, or, in
some cases, an award of damages. We will attempt to acquire properties that
comply with the Disabilities Act or place the burden on the seller or other
third party, such as a tenant, to ensure compliance with the Disabilities Act.
However, we cannot assure you that we will be able to acquire properties or
allocate responsibilities in this manner. If we cannot, our funds used for
Disabilities Act compliance may affect cash available for distributions and the
amount of distributions to you.
Economic
conditions may adversely affect our income.
U.S. and
international markets are currently experiencing increased levels of volatility
due to a combination of many factors, including decreasing values of home
prices, limited access to credit markets, higher fuel prices, less consumer
spending and fears of a national and global recession. The effects of the
current market dislocation may persist as financial institutions continue to
take the necessary steps to restructure their business and capital structures.
As a result, this economic downturn has reduced demand for space and removed
support for rents and property values. Since we cannot predict when the real
estate markets will recover, the value of our properties may decline if current
market conditions persist or worsen.
Net
leases may not result in fair market lease rates over time.
We expect
a large portion of our rental income to come from net leases, which generally
provide the tenant greater discretion in using the leased property than ordinary
property leases, such as the right to freely sublease the property, to make
alterations in the leased premises and to terminate the lease prior to its
expiration under specified circumstances. Furthermore, net leases typically have
longer lease terms and, thus, there is an increased risk that contractual rental
increases in future years will fail to result in fair market rental rates during
those years. As a result, our income and distributions to our stockholders could
be lower than they would otherwise be if we did not engage in net
leases.
Our
real estate investments may include special use single tenant properties that
may be difficult to sell or re-lease upon tenant defaults or early lease
terminations.
We focus
our investments on commercial and industrial properties, including special use
single tenant properties. These types of properties are relatively illiquid
compared to other types of real estate and financial assets. This illiquidity
will limit our ability to quickly change our portfolio in response to changes in
economic or other conditions. With these properties, if the current lease is
terminated or not renewed or, in the case of a mortgage loan, if we take such
property in foreclosure, we may be required to renovate the property or to make
rent concessions in order to lease the property to another tenant or sell the
property. In addition, in the event we are forced to sell the property, we may
have difficulty selling it to a party other than the tenant or borrower due to
the special purpose for which the property may have been designed. These and
other limitations may affect our ability to sell or re-lease properties and
adversely affect returns to you.
We
may incur mortgage indebtedness and other borrowings, which may increase our
business risks.
We expect
that in most instances, we will acquire real properties by using either existing
financing or borrowing new funds. In addition, we may incur mortgage debt and
pledge all or some of our real properties as security for that debt to obtain
funds to acquire additional real properties. We may borrow if we need funds to
satisfy the REIT tax qualification requirement that we distribute at least 90%
of our annual REIT taxable income to our stockholders. We may also borrow if we
otherwise deem it necessary or advisable to assure that we maintain our
qualification as a REIT for federal income tax purposes.
Our
advisor believes that utilizing borrowing is consistent with our investment
objective of maximizing the return to investors. There is no limitation on the
amount we may borrow against any single improved property. However, under our
charter, we are required to limit our borrowings to 75% of the greater of the
aggregate cost (before deducting depreciation or other non-cash reserves) or the
aggregate fair market value of our gross assets as of the date of any borrowing,
unless excess borrowing is approved by a majority of the independent directors.
Our borrowings will not exceed 300% of our net assets, unless the excess is
approved by a majority of our independent directors, which is the maximum level
of indebtedness permitted under the NASAA REIT Guidelines. We expect that during
the period of this offering we will request that our independent directors
approve borrowings in excess of this limitation since we will then be in the
process of raising our equity capital to acquire our portfolio. As a result, we
expect that our debt levels will be higher until we have invested most of our
capital.
If there
is a shortfall between the cash flow from a property and the cash flow needed to
service mortgage debt on a property, then the amount available for distributions
to stockholders may be reduced. In addition, incurring mortgage debt increases
the risk of loss since defaults on indebtedness secured by a property may result
in lenders initiating foreclosure actions. In that case, we could lose the
property securing the loan that is in default, thus reducing the value of your
investment. For tax purposes, a foreclosure of any of our properties would be
treated as a sale of the property for a purchase price equal to the outstanding
balance of the debt secured by the mortgage. If the outstanding balance of the
debt secured by the mortgage exceeds our tax basis in the property, we would
recognize taxable income on foreclosure, but would not receive any cash
proceeds. In such event, we may be unable to pay the amount of distributions
required in order to maintain our REIT status. We may give full or partial
guarantees to lenders of mortgage debt to the entities that own our properties.
When we provide a guaranty on behalf of an entity that owns one of our
properties, we will be responsible to the lender for satisfaction of the debt if
it is not paid by such entity. If any mortgages contain cross-collateralization
or cross-default provisions, a default on a single property could affect
multiple properties. If any of our properties are foreclosed upon due to a
default, our ability to pay cash distributions to our stockholders will be
adversely affected which could result in our losing our REIT status and would
result in a decrease in the value of your investment.
Current
state of debt markets could have a material adverse impact on our earnings and
financial condition
The
domestic and international commercial real estate debt markets are currently
experiencing volatility as a result of certain factors including the tightening
of underwriting standards by lenders and credit rating agencies and the
significant inventory of unsold Collateralized Mortgage Backed Securities in the
market. This is resulting in lenders increasing the cost for debt
financing. Should the overall cost of borrowings increase, either by increases
in the index rates or by increases in lender spreads, we will need to factor
such increases into the economics of future acquisitions. This may result in
future acquisitions generating lower overall economic returns and potentially
reducing future cash flow available for distribution. If these disruptions in
the debt markets persist, our ability to borrow monies to finance the purchase
of, or other activities related to, real estate assets will be negatively
impacted. If we are unable to borrow monies on terms and conditions that we find
acceptable, we likely will have to reduce the number of properties we can
purchase, and the return on the properties we do purchase may be lower. In
addition, we may find it difficult, costly or impossible to refinance
indebtedness which is maturing
The
recent dislocations in the debt markets has reduced the amount of capital that
is available to finance real estate, which, in turn, (a) will no longer allow
real estate investors to rely on capitalization rate compression to generate
returns and (b) has slowed real estate transaction activity, all of which may
reasonably be expected to have a material impact, favorable or unfavorable, on
revenues or income from the acquisition and operations of real properties and
mortgage loans. Investors will need to focus on market-specific growth dynamics,
operating performance, asset management and the long-term quality of the
underlying real estate.
In
addition, the state of the debt markets could have an impact on the overall
amount of capital investing in real estate which may result in price or value
decreases of real estate assets. Although this may benefit us for future
acquisitions, it could negatively impact the current value of our existing
assets.
High
mortgage rates may make it difficult for us to finance or refinance properties,
which could reduce the number of properties we can acquire and the amount of
cash distributions we can make.
If we
place mortgage debt on properties, we run the risk of being unable to refinance
the properties when the loans come due, or of being unable to refinance on
favorable terms. If interest rates are higher when the properties are
refinanced, we may not be able to finance the properties and our income could be
reduced. If any of these events occur, our cash flow would be reduced. This, in
turn, would reduce cash available for distribution to you and may hinder our
ability to raise more capital by issuing more stock or by borrowing more
money.
Lenders
may require us to enter into restrictive covenants relating to our operations,
which could limit our ability to make distributions to our
stockholders.
In
connection with providing us financing, a lender could impose restrictions on us
that affect our distribution and operating policies and our ability to incur
additional debt. Loan documents we enter into may contain covenants that limit
our ability to further mortgage the property, discontinue insurance coverage or
replace American Realty Capital Advisors, LLC as our advisor. These or other
limitations may adversely affect our flexibility and our ability to achieve our
investment and operating objectives.
Increases
in interest rates could increase the amount of our debt payments and adversely
affect our ability to pay distributions to our stockholders.
We expect
that we will incur indebtedness in the future. To the extent that we incur
variable rate debt, increases in interest rates would increase our interest
costs, which could reduce our cash flows and our ability to pay distributions to
you. In addition, if we need to repay existing debt during periods of rising
interest rates, we could be required to liquidate one or more of our investments
in properties at times that may not permit realization of the maximum return on
such investments.
We
have broad authority to incur debt, and high debt levels could hinder our
ability to make distributions and could decrease the value of your
investment.
Our
charter generally limits us to incurring debt no greater than 75% of the greater
of the aggregate cost (before deducting depreciation or other non-cash reserves)
or the aggregate fair market value of all of our assets as of the date of any
borrowing, unless any excess borrowing is approved by a majority of our
independent directors and disclosed to our stockholders in our next quarterly
report, along with a justification for such excess borrowing. We expect that
during the period of this offering we will request that our independent
directors approve borrowings in excess of this limitation since we will then be
in the process of raising our equity capital to acquire our portfolio. As a
result, we expect that our debt levels will be higher until we have invested
most of our capital. High debt levels would cause us to incur higher interest
charges, would result in higher debt service payments, and could be accompanied
by restrictive covenants. These factors could limit the amount of cash we have
available to distribute and could result in a decline in the value of your
investment.
Failure
to qualify as a REIT would adversely affect our operations and our ability to
make distributions.
We have
elected to be taxed as a REIT beginning with the tax year ending December 31,
2008. In order for us to qualify as a REIT, we must satisfy certain requirements
set forth in the Internal Revenue Code and Treasury Regulations and various
factual matters and circumstances that are not entirely within our control. We
intend to structure our activities in a manner designed to satisfy all of these
requirements. However, if certain of our operations were to be recharacterized
by the Internal Revenue Service, such recharacterization could jeopardize our
ability to satisfy all of the requirements for qualification as a REIT.
Proskauer Rose LLP, our legal counsel, has rendered its opinion that we will
qualify as a REIT, based upon our representations as to the manner in which we
are and will be owned, invest in assets and operate, among other things.
However, our qualification as a REIT will depend upon our ability to meet,
through investments, actual operating results, distributions and satisfaction of
specific rules, the various tests imposed by the Internal Revenue Code.
Proskauer Rose LLP will not review these operating results or compliance with
the qualification standards on an ongoing basis. This means that we may fail to
satisfy the REIT requirements in the future. Also, this opinion represents
Proskauer Rose LLP’s legal judgment based on the law in effect as of the date of
this prospectus. Proskauer Rose LLP’s opinion is not binding on the Internal
Revenue Service or the courts and we will not apply for a ruling from the
Internal Revenue Service regarding our status as a REIT. Future legislative,
judicial or administrative changes to the federal income tax laws could be
applied retroactively, which could result in our disqualification as a
REIT.
If we
fail to qualify as a REIT for any taxable year, we will be subject to federal
income tax on our taxable income at corporate rates. In addition, we would
generally be disqualified from treatment as a REIT for the four taxable years
following the year of losing our REIT status. Losing our REIT status would
reduce our net earnings available for investment or distribution to stockholders
because of the additional tax liability. In addition, distributions to
stockholders would no longer qualify for the dividends paid deduction, and we
would no longer be required to make distributions. If this occurs, we might be
required to borrow funds or liquidate some investments in order to pay the
applicable tax.
Re-characterization
of sale-leaseback transactions may cause us to lose our REIT
status.
We may
purchase properties and lease them back to the sellers of such properties. While
we will use our best efforts to structure any such sale-leaseback transaction so
that the lease will be characterized as a “true lease,” thereby allowing us to
be treated as the owner of the property for federal income tax purposes, the IRS
could challenge such characterization. In the event that any sale-leaseback
transaction is challenged and re-characterized as a financing transaction or
loan for federal income tax purposes, deductions for depreciation and cost
recovery relating to such property would be disallowed. If a sale-leaseback
transaction were so recharacterized, we might fail to satisfy the REIT
qualification “asset tests” or the “income tests” and, consequently, lose our
REIT status effective with the year of recharacterization. Alternatively, the
amount of our REIT taxable income could be recalculated which might also cause
us to fail to meet the distribution requirement for a taxable year.
You
may have tax liability on distributions you elect to reinvest in our common
stock.
If you
participate in our distribution reinvestment plan, you will be deemed to have
received, and for income tax purposes will be taxed on, the amount reinvested in
common stock to the extent the amount reinvested was not a tax-free return of
capital. As a result, unless you are a tax-exempt entity, you may have to use
funds from other sources to pay your tax liability on the value of the common
stock received.
In
certain circumstances, we may be subject to federal and state income taxes as a
REIT, which would reduce our cash available for distribution to
you.
Even if
we qualify and maintain our status as a REIT, we may be subject to federal
income taxes or state taxes. For example, net income from the sale of properties
that are “dealer” properties sold by a REIT (a “prohibited transaction” under
the Internal Revenue Code) will be subject to a 100% tax. We may not be able to
make sufficient distributions to avoid excise taxes applicable to REITs. We may
also decide to retain income we earn from the sale or other disposition of our
property and pay income tax directly on such income. In that event, our
stockholders would be treated as if they earned that income and paid the tax on
it directly. However, stockholders that are tax-exempt, such as charities or
qualified pension plans, would have no benefit from their deemed payment of such
tax liability. We may also be subject to state and local taxes on our income or
property, either directly or at the level of American Realty Capital Operating
Partnership, L.P. or at the level of the other companies through which we
indirectly own our assets. Any federal or state taxes we pay will reduce our
cash available for distribution to you.
Legislative
or regulatory action could adversely affect investors.
Because
our operations are governed to a significant extent by the federal tax laws, new
legislative or regulatory action could adversely affect investors.
You are
urged to consult with your own tax advisor with respect to the status of
legislative, regulatory or administrative developments and proposals and their
potential effect on an investment in our common stock. You should also note that
our counsel’s tax opinion assumes that no legislation will be enacted after the
date of this prospectus that will be applicable to an investment in our
shares.
Foreign
purchasers of our common stock may be subject to FIRPTA tax upon the sale of
their shares.
A foreign
person disposing of a U.S. real property interest, including shares of a U.S.
corporation whose assets consist principally of U.S. real property interests, is
generally subject to the Foreign Investment in Real Property Tax of 1980, as
amended, known as FIRPTA, on the gain recognized on the disposition. Such FIRPTA
tax does not apply, however, to the disposition of stock in a REIT if the REIT
is “domestically controlled.” A REIT is “domestically controlled” if less than
50% of the REIT’s stock, by value, has been owned directly or indirectly by
persons who are not qualifying U.S. persons during a continuous five-year period
ending on the date of disposition or, if shorter, during the entire period of
the REIT’s existence. We cannot assure you that we will qualify as a
“domestically controlled” REIT. If we were to fail to so qualify, gain realized
by foreign investors on a sale of our shares would be subject to FIRPTA tax,
unless our shares were traded on an established securities market and the
foreign investor did not at any time during a specified testing period directly
or indirectly own more than 5% of the value of our outstanding common stock. See
“Federal Income Tax Considerations — Special Tax Considerations for
Non-U.S. Stockholders — Sale of our Shares by a Non-U.S.
Stockholder.”
In
order to avoid triggering additional taxes and/or penalties, if you intend to
invest in our shares through pension or profit-sharing trusts or IRAs, you
should consider additional factors.
If you
are investing the assets of a pension, profit-sharing, 401(k), Keogh or other
qualified retirement plan or the assets of an IRA in our common stock, you
should satisfy yourself that, among other things:
|
·
|
your
investment is consistent with your fiduciary obligations under ERISA and
the Internal Revenue Code;
|
|
·
|
your
investment is made in accordance with the documents and instruments
governing your plan or IRA, including your plan’s investment
policy;
|
|
·
|
your
investment satisfies the prudence and diversification requirements of
ERISA;
|
|
·
|
your
investment will not impair the liquidity of the plan or
IRA;
|
|
·
|
your
investment will not produce UBTI for the plan or
IRA;
|
|
·
|
you
will be able to value the assets of the plan annually in accordance with
ERISA requirements; and
|
|
·
|
your
investment will not constitute a prohibited transaction under Section 406
of ERISA or Section 4975 of the Internal Revenue
Code.
|
For a
more complete discussion of the foregoing risks and other issues associated with
an investment in shares by retirement plans, please see the “Investment by
Tax-Exempt Entities and ERISA Considerations” section of this
prospectus.
Certain
statements contained in this registration statement, other than historical
facts, may be considered forward-looking statements within the meaning of
Section 27A of the Securities Act, and Section 21E of the Exchange Act. We
intend for all such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in Section 27A of the
Securities Act and Section 21E of the Exchange Act, as applicable by law. Such
statements include, in particular, statements about our plans, strategies, and
prospects and are subject to certain risks and uncertainties, as well as known
and unknown risks, which could cause actual results to differ materially from
those projected or anticipated. Therefore, such statements are not intended to
be a guarantee of our performance in future periods. Such forward-looking
statements can generally be identified by our use of forward-looking terminology
such as “may,” “will,” “would,” “could,” “should,” “expect,” “intend,”
“anticipate,” “estimate,” “believe,” “continue,” or other similar words. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date this report is filed with the Securities and
Exchange Commission. We make no representation or warranty (express or implied)
about the accuracy of any such forward-looking statements contained in this
registration statement, and we do not undertake to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise. Any forward-looking statements are subject to unknown
risks and uncertainties, including those discussed in the “Risk Factors” section
of this registration statement.
The
following table sets forth information about how we intend to use the proceeds
raised in this offering, assuming that we sell the maximum offering of
150,000,000 shares of common stock pursuant to this offering. Many of the
figures set forth below represent management’s best estimate since they cannot
be precisely calculated at this time. Assuming a maximum offering, we expect
that approximately 87.115% of the money that stockholders invest will be used to
buy real estate or make other investments and approximately 0.1% will be used
for working capital, while the remaining approximately 12.885% will be used to
pay expenses and fees including the payment of fees to Realty Capital Advisors,
LLC, our advisor, and Realty Capital Securities, LLC, our dealer
manager.
|
|
Maximum
Offering Amount (1)
|
|
|
Minimum
Offering Amount (2)
|
|
|
Percent
|
|
Gross
Offering Proceeds
|
|
|
1,500,000,000 |
|
|
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7,500,000 |
|
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|
100 |
|
Less
Public Offering Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
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Selling
Commissions and Dealer Manager Fee (3)
|
|
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150,000,000 |
|
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750,000 |
|
|
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10.0 |
|
Organization
and Offering Expenses (4)
|
|
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22,500,000 |
|
|
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112,500 |
|
|
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1.5 |
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Amount
Available for Investment (5)
|
|
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1,327,500,000 |
|
|
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6,637,500 |
|
|
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88.5 |
|
Acquisition
and Development:
|
|
|
|
|
|
|
|
|
|
|
|
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Acquisition
Fees (6)
|
|
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13,275,000 |
|
|
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66,375 |
|
|
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0.885 |
|
Acquisition
Expenses (7)
|
|
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6,000,000 |
|
|
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30,000 |
|
|
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0.4 |
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Initial
Working Capital Reserve (8)
|
|
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1,500,000 |
|
|
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7,500 |
|
|
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0.1 |
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Amount
Invested in Properties (9)
|
|
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1,306,725,000 |
|
|
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6,533,625 |
|
|
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87.115 |
|
________________
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(1)
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Assumes
the maximum offering is sold, which includes 150,000,000 shares offered to
the public at $10.00 per share. No effect is given to the 25,000,000
shares offered pursuant to our distribution reinvestment plan at $9.50 per
share.
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(2)
|
Assumes
the minimum offering is sold, which includes 750,000 shares offered to the
public at $10.00 per share. No effect is given to the shares offered
pursuant to our distribution reinvestment
plan.
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(3)
|
Includes
selling commissions equal to 7% of aggregate gross offering proceeds,
which commissions may be reduced for volume discounts described in “Plan
of Distribution – Volume Discounts” herein, and a dealer
manager fee equal to 3% of aggregate gross offering proceeds, both of
which are payable to the dealer manager, an affiliate of our advisor. The
dealer manager, in its sole discretion, may reallow selling commissions of
up to 7% of gross offering proceeds to other broker-dealers participating
in this offering attributable to the shares sold by them and may reallow
its dealer manager fee up to 2.5% of gross offering proceeds in marketing
fees and 0.5% of gross offering proceeds in “bona fide” due diligence
expenses (identified in an itemized invoice of their actual costs) to
broker-dealers participating in this offering based on such factors
including the participating broker-dealer’s level of marketing support,
level of due diligence review and success of its sales efforts, each as
compared to those of the other participating broker-dealers. Additionally,
we will not pay a selling commission or a dealer manager fee on shares
purchased pursuant to our distribution reinvestment plan. See the “Plan of
Distribution” section of this prospectus for a description of the volume
discount provisions.
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(4)
|
Organization
and offering expenses consist of reimbursement of actual legal,
accounting, printing and other accountable offering expenses, including
amounts to reimburse American Realty Capital Advisors, LLC, our advisor,
for marketing, salaries and direct expenses of its employees, and
employees of its affiliates while engaged in registering and marketing the
shares (including, without limitation, development of marketing materials
and marketing presentations, and participating in due diligence, training
seminars and educational conferences) and other marketing, coordination,
administrative oversight and organization costs, other than selling
commissions and the dealer manager fee. American Realty Capital Advisors,
LLC and its affiliates are responsible for the payment of organization and
offering expenses, other than selling commissions and the dealer manager
fee, to the extent they exceed 1.5% of gross offering proceeds, without
recourse against or reimbursement by us; provided, however, that in no
event will we pay or reimburse organization and offering expenses in
excess of 10% of the gross offering proceeds. We currently estimate that
approximately $22,500,000 of organization and offering costs will be
incurred if the maximum offering of 150,000,000 shares is
sold.
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(5)
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Until
required in connection with the acquisition and/or development of
properties, substantially all of the net proceeds of the offering and,
thereafter, any working capital reserves we may have, may be invested in
short-term, highly-liquid investments including government obligations,
bank certificates of deposit, short-term debt obligations and
interest-bearing accounts.
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(6)
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Acquisition
fees are defined generally as fees and commissions paid by any party to
any person in connection with identifying, reviewing, evaluating,
investing in and the purchase, development or construction of properties.
We will pay to our advisor, acquisition fees of 1% of the gross purchase
price of each property acquired, which for purposes of this table we have
assumed is an aggregate amount equal to our estimated amount invested in
properties. Acquisition fees do not include acquisition expenses. For
purposes of this table, we have assumed that no financing is used to
acquire properties or other real estate
assets.
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(7)
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Acquisition
expenses include legal fees and expenses, travel expenses, costs of
appraisals, nonrefundable option payments on property not acquired,
accounting fees and expenses, title insurance premiums and other closing
costs, personnel costs and miscellaneous expenses relating to the
selection, acquisition and development of real estate properties. For
purposes of this table, we have assumed expenses of 0.5% of average
invested assets, which for purposes of this table we have assumed is our
estimated amount invested in properties; however, expenses on a particular
acquisition may be higher. Notwithstanding the foregoing, the total of all
acquisition expenses and acquisition fees payable with respect to a
particular property or investment shall be reasonable, and shall not
exceed an amount equal to 4% of the gross purchase price of the property,
or in the case of a mortgage loan 4% of the funds advanced, unless a
majority of our directors (including a majority of our independent
directors) not otherwise interested in the transaction approve fees and
expenses in excess of this limit and determine the transaction to be
commercially competitive, fair and reasonable to
us.
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(8)
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Working
capital reserves typically are utilized for extraordinary expenses that
are not covered by revenue generation of the property, such as tenant
improvements, leasing commissions and major capital expenditures.
Alternatively, a lender may require its own formula for escrow of working
capital reserves. Because we expect most of our leases will be “net”
leases, as described elsewhere herein, we do not expect to maintain
significant working capital
reserves.
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(9)
|
Includes
amounts anticipated to be invested in properties net of fees, expenses and
initial working capital reserves.
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MANAGEMENT
We
operate under the direction of our board of directors, the members of which are
accountable to us and our stockholders as fiduciaries. The board is responsible
for the overall management and control of our affairs. The board has retained
American Realty Capital Advisors, LLC to manage our day-to-day affairs and the
acquisition and disposition of our investments, subject to the board’s
supervision. As described in greater detail under “Our Advisor,” below, our
advisor will be responsible (with the approval of the independent directors, in
the case of the purchase of a property from an affiliate) for making investment
decisions where the purchase price of a particular property is less than
$15,000,000 and the investment does not exceed stated leverage limitations.
Where such leverage limitations are exceeded or where the purchase price is
equal to or greater than $15,000,000, investment decisions will be made by our
board of directors.
Our
charter has been reviewed and ratified by our entire board of directors,
including the independent directors. This ratification by our board of directors
is required by the Statement of Policy Regarding Real Estate Investment Trusts
published by the North American Securities Administrators Association, also
known as the NASAA REIT Guidelines.
Our
charter and bylaws provide that the number of our directors may be established
by a majority of the entire board of directors, and after we commence this
offering may not be fewer than three nor more than nine. Our charter provides
that, after we commence this offering, a majority of the directors must be
independent directors, except for a period of up to 60 days after the death,
resignation or removal of an independent director. An “independent director” is
a person who is not one of our officers or employees or an officer or employee
of American Realty Capital Advisors, LLC or its affiliates or any other real
estate investment trust organized by our sponsor or advised by American Realty
Capital Advisors, LLC, has not otherwise been affiliated with such entities for
the previous two years and does not serve as a director of more than three REITs
organized by any principal executive or advised by American Realty Capital
Advisors, LLC. Of our five directors, three are considered independent
directors. There are no family relationships among any of our directors or
officers, or officers of our advisor. Each director must have at least three
years of relevant experience demonstrating the knowledge and experience required
to successfully acquire and manage the type of assets being acquired by us. At
least one of the independent directors must have at least three years of
relevant real estate experience and at least one of our independent directors
must be a financial expert with at least three years of relevant financial
experience. Currently, substantially all of our directors has substantially in
excess of three years of relevant real estate experience.
Each
director will serve until the next annual meeting of stockholders or until his
or her successor is duly elected and qualified. Although the number of directors
may be increased or decreased, a decrease will not have the effect of shortening
the term of any incumbent director.
Any
director may resign at any time and may be removed with or without cause by the
stockholders upon the affirmative vote of at least a majority of all the votes
entitled to be cast at a meeting properly called for the purpose of the proposed
removal.
Any
vacancy created by an increase in the number of directors or the death,
resignation, removal, adjudicated incompetence or other incapacity of a director
may be filled only by a vote of a majority of the remaining directors.
Independent directors shall nominate replacements for vacancies in the
independent director positions. If at any time there are no directors in office,
successor directors shall be elected by the stockholders. Each director will be
bound by the charter and the bylaws.
The
directors are not required to devote all of their time to our business and are
only required to devote the time to our affairs as their duties require. The
directors meet quarterly or more frequently if necessary. Our directors are not
required to devote a substantial portion of their time to discharge their duties
as our directors. Consequently, in the exercise of their responsibilities, the
directors heavily rely on our advisor. Our directors have a fiduciary duty to
our stockholders to supervise the relationship between us and our advisor. The
board is empowered to fix the compensation of all officers that it selects and
approve the payment of compensation to directors for services rendered to us in
any other capacity.
Our board
of directors has established policies on investments and borrowing, the general
terms of which are set forth in this prospectus. The directors may establish
further policies on investments and borrowings and are required to monitor our
administrative procedures, investment operations and performance to ensure that
the policies are fulfilled and are in the best interest of our
stockholders.
The
independent directors are responsible for reviewing our fees and expenses on at
least an annual basis and with sufficient frequency to determine that the
expenses incurred are in the best interest of the stockholders. In addition, a
majority of the directors, including a majority of the independent directors who
are not otherwise interested in the transaction, must determine that any
transaction with American Realty Capital Advisors, LLC or its affiliates is fair
and reasonable to us. The independent directors also are responsible for
reviewing the performance of American Realty Capital Advisors, LLC and
determining that the compensation to be paid to American Realty Capital
Advisors, LLC is reasonable in relation to the nature and quality of services to
be performed and that the provisions of the advisory agreement are being carried
out. Specifically, the independent directors consider factors such
as:
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·
|
the
amount of the fees paid to American Realty Capital Advisors, LLC or its
affiliates in relation to the size, composition and performance of our
investments;
|
|
·
|
the
success of American Realty Capital Advisors, LLC in generating appropriate
investment opportunities;
|
|
·
|
rates
charged to other REITs, and other investors by advisors performing similar
services;
|
|
·
|
additional
revenues realized by American Realty Capital Advisors, LLC and its
affiliates through their relationship with us, whether we pay them or they
are paid by others with whom we do
business;
|
|
·
|
the
quality and extent of service and advice furnished by American Realty
Capital Advisors, LLC;
|
|
·
|
the
performance of our investment portfolio, including income, conservation or
appreciation of capital, frequency of problem investments and competence
in dealing with distress situations;
and
|
|
·
|
the
quality of our portfolio relative to the investments generated by American
Realty Capital Advisors, LLC or its affiliates for its other
clients.
|
Neither
our advisor or any of its affiliates nor any director may vote or consent to the
voting of shares of our common stock they now own or hereafter acquire on
matters submitted to the stockholders regarding either (a) the removal of such
director or American Realty Capital Advisors, LLC as our advisor, or (b) any
transaction between us and American Realty Capital Advisors, LLC, such director
or any of their respective affiliates.
Our
entire board of directors considers all major decisions concerning our business,
including property acquisitions. However, our bylaws provide that our board must
establish an audit committee composed of three independent directors (one of
whom must be an expert in the field of finance) and may establish an Executive
Committee, a Compensation Committee or such other committees as the board
believes appropriate. The board will appoint the members of the committee in the
board’s discretion. Our bylaws require that a majority of the members of each
committee of our board other than the audit committee be comprised of
independent directors. Our board of directors has established and adopted
charters for an audit committee, a conflicts committee and a nominating and
corporate governance committee.
Our board
of directors has established an audit committee, which consists of our three
independent directors. The audit committee, by approval of at least a majority
of the members, selects the independent registered public accounting firm to
audit our annual financial statements, reviews with the independent registered
public accounting firm the plans and results of the audit engagement, approves
the audit and non-audit services provided by the independent registered public
accounting firm, reviews the independence of the independent registered public
accounting firm, considers the range of audit and non-audit fees and reviews the
adequacy of our internal accounting controls. Our board of directors has adopted
a charter for the audit committee that sets forth its specific functions and
responsibilities. The financial statements contained in the prospectus were
audited by our independent registered public accounting firm who were not
approved or selected by an audit committee containing any independent directors.
Also, the financial statements were not reviewed by independent directors.
We have
provided below certain information about our executive officers and directors,
all of whom, other than the Independent Directors, are employees only of
American Realty Capital Advisors, LLC and not of any other of the
affiliates.
Name
|
|
Age
|
|
Position(s)
|
Nicholas
S. Schorsch
|
|
48
|
|
Chairman
of the Board of Directors and Chief Executive Officer
|
William
M. Kahane
|
|
61
|
|
President,
Chief Operating Officer, Treasurer and Director
|
Peter
M. Budko
|
|
49
|
|
Executive
Vice President and Chief Investment Officer
|
Brian
S. Block
|
|
37
|
|
Executive
Vice President and Chief Financial Officer
|
Michael
Weil
|
|
42
|
|
Executive
Vice President and Secretary
|
Leslie
D. Michelson
|
|
58
|
|
Independent
Director
|
William
G. Stanley
|
|
54
|
|
Independent
Director
|
Robert
H. Burns
|
|
79
|
|
Independent
Director
|
Nicholas S. Schorsch has
served as the chairman of the board and chief executive officer of our company
since our formation. He also has been the chief executive officer of American
Realty Capital Properties, LLC, and American Realty Capital Advisors, LLC since
its formation. Prior to his current position with our company, from September
2006 to July 2007, Mr. Schorsch was Chief Executive Officer of an affiliate,
American Realty Capital, a real estate investment firm. Mr. Schorsch founded and
formerly served as President, CEO and Vice-Chairman of American Financial Realty
Trust (“AFR”) since its inception as a REIT in September 2002 until August 2006.
American Financial Realty Trust is a publicly traded REIT that invests
exclusively in offices, operation centers, bank branches, and other operating
real estate assets that are net leased to tenants in the financial service
industry such as banks and insurance companies. Through American Financial
Resource Group and its successor corporation, now American Financial Realty
Trust, Mr. Schorsch has executed in excess of 1,000 acquisitions, both in
acquiring businesses and real estate property with transactional value of
approximately $5 billion. In 2003, Mr. Schorsch received an Entrepreneur of the
Year award from Ernst & Young. From 1995 to September 2002, Mr. Schorsch
served as CEO and President of American Financial Resource Group (“AFRG”), AFR’s
predecessor, a private equity firm founded for the purpose of acquiring
operating companies and other assets in a number of industries. In 1998, Mr.
Schorsch was engaged in operating Arlington Cemetery and several other AFRG
highly specialized enterprises when he learned that First Union Corporation was
divesting 105 bank branches. He offered to buy the entire portfolio and
approximately one month later Mr. Schorsch had closed on all 105 branches. Prior
to this transaction, it was very unusual to buy a portfolio of this magnitude
without first “cherry-picking” the best locations. Prior to AFRG, Mr. Schorsch
served as President of a non-ferrous metal product manufacturing business,
Thermal Reduction. He successfully built the business through mergers and
acquisitions and ultimately sold his interests to Corrpro (NYSE) in
1994.
William M. Kahane has served
as President, chief operating officer and treasurer of our company since its
formation. He has been active in the structuring and financial management of
commercial real estate investments for over 25 years. He is also president,
chief operating officer and treasurer of American Realty Capital Properties, LLC
and American Realty Capital Advisors, LLC. Mr. Kahane began his career as a real
estate lawyer practicing in the public and private sectors from 1974-1979. From
1981-1992 Mr. Kahane worked at Morgan Stanley & Co., specializing in real
estate, becoming a Managing Director in 1989. In 1992, Mr. Kahane left Morgan
Stanley to establish a real estate advisory and asset sales business known as
Milestone Partners which continues to operate and of which Mr. Kahane is
currently the Chairman. Mr. Kahane worked very closely with Mr. Schorsch while a
trustee at AFRT (2003 to 2006), during which time Mr. Kahane served as Chairman
of the Finance Committee of the Board of Trustees. Mr. Kahane has been a
Managing Director of GF Capital Management & Advisors LLC, a New York-based
merchant banking firm, where he directs the firm’s real estate investments since
2001. GF Capital offers comprehensive wealth management services through its
subsidiary TAG Associates LLC, a leading multi-client family office and
portfolio management services company with approximately $5 billion of assets
under management. Mr. Kahane also was on the Board of Directors of Catellus
Development Corp., an NYSE growth-oriented real estate development company,
where he served as Chairman.
Peter M. Budko has served as
Executive Vice President and Chief Investment Officer of our company since its
formation. He also is executive vice president and chief investment officer of
American Realty Capital Advisors, LLC, American Realty Capital Properties, LLC
and Realty Capital Securities, LLC. Prior to his current position, from January
2007 to July 2007, Mr. Budko was Chief Operating Officer of an affiliated
American Realty Capital real estate investment firm. Mr. Budko founded and
formerly served as Managing Director and Group Head of the Structured Asset
Finance Group, a division of Wachovia Capital Markets, LLC from 1997-2006. The
Structured Asset Finance Group structures and invests in real estate that is net
leased to corporate tenants. While at Wachovia, Mr. Budko acquired over $5
billion of net leased real estate assets. From 1987-1997, Mr. Budko worked in
the Corporate Real Estate Finance Group at NationsBank Capital Market
(predecessor to Bank of America Securities) becoming head of the group in
1990.
Brian S. Block has served as
Executive Vice President and Chief Financial Officer since September 2007. He is
also Executive Vice President and Chief Financial Officer of American Realty
Capital, LLC and American Realty Capital Properties, LLC. Mr. Block is
responsible for the accounting, finance and reporting functions at ARC. He has
extensive experience in SEC reporting requirements as well as REIT tax
compliance matters. Mr. Block has been instrumental in developing ARC’s
infrastructure and positioning the organization for growth. Mr. Block began his
career in public accounting at Ernst & Young and Arthur Andersen from 1994
to 2000. Subsequently, Mr. Block was the Chief Financial Officer of a venture
capital-backed technology company for several years prior to joining AFRT in
2002. While at AFRT, Mr. Block served as Chief Accounting Officer from 2003 to
2007 and oversaw the financial, administrative and reporting functions of the
organization. He is a certified public accountant and is a member of the AICPA
and PICPA. Mr. Block serves on the REIT Committee of the Investment Program
Association.
Michael Weil has served as our
Executive Vice President and Secretary since May 2007. He also is executive vice
president and chief financial officer of American Realty Capital Advisors, LLC
and American Realty Capital Properties, LLC. He was formerly the Senior Vice
President of Sales and Leasing for American Financial Realty Trust (AFR, from
April 2004 to October 2006), where he was responsible for the disposition and
leasing activity for a 33 million square foot portfolio. Under the direction of
Mr. Weil, his department was the sole contributor in the increase of occupancy
and portfolio revenue through the sales of over 200 properties and the leasing
of over 2.2 million square feet, averaging 325,000 square feet of newly executed
leases per quarter. After working at AFR, from October 2006 to May 2007, Mr.
Weil was managing director of Milestone Partners Limited and prior to joining
AFR, from July 1987 to April 2004, Mr. Weil was president of Plymouth Pump &
Systems Co.
Leslie D. Michelson was
appointed as an Independent Director of our company on January 22, 2008. Mr.
Michelson has served as the Chairman and Chief Executive Officer of Private
Health Management, a retainer-based primary care medical practice management
company since April 2007. Mr. Michelson served as Vice Chairman and Chief
Executive Officer of the Prostate Cancer Foundation, the world’s largest private
source of prostate cancer research funding, from April 2002 until December 2006
and currently serves on its Board of Directors. Mr. Michelson served on the
Board of Directors of Catellus Development Corp. (a publicly traded national
mixed-use and retail developer) from 1997 until 2004 when the company was sold
to ProLogis. Mr. Michelson was a member of the Audit Committee of the Board of
Directors for 5 years. From April 2001 to April 2002, he was an investor in, and
served as an advisor or director of, a portfolio of entrepreneurial healthcare,
technology and real estate companies. From March 2000 to August 2001, he served
as Chief Executive Officer and as a director of Acurian, Inc., an Internet
company that accelerates clinical trials for new prescription drugs. From 1999
to March 2000, Mr. Michelson served as an adviser of Saybrook Capital, LLC, an
investment bank specializing in the real estate and health care industries. From
June 1998 to February 1999, Mr. Michelson served as Chairman and Co-Chief
Executive Officer of Protocare, Inc., a manager of clinical trials for the
pharmaceutical industry and disease management firm. From 1988 to 1998, he
served as Chairman and Chief Executive Officer of Value Health Sciences, Inc.,
an applied health services research firm he co-founded. Since June 2004 and
through the present, he has been and is a director of Nastech Pharmaceutical
Company Inc., a NASDAQ-traded biotechnology company focused on innovative drug
delivery technology, Highlands Acquisition Company, a AMEX-traded special
purpose acquisition company, and Landmark Imaging, a privately held imaging
center. Also since June 2004 and through the present, he has been and is a
Director of ALS-TDI, a philanthropy dedicated to curing Amyotrophic Lateral
Sclerosis (ALS), commonly known as Lou Gehrig’s disease. Mr. Michelson received
his B.A. from The Johns Hopkins University in 1973 and a J.D. from Yale Law
School in 1976.
William G. Stanley was
appointed as an Independent Director of our company on January 22, 2008. Mr.
Stanley is the founder and managing member of Stanley Laman Securities, LLC
(SLS), a FINRA member broker-dealer, since 2004, and the founder and president
of The Stanley-Laman Group, Ltd (SLG), a registered investment advisor for high
net worth clients since 1997. SLG has built a multi-member staff which
critically and extensively studies the research of the world’s leading
economists and technical analysts to support its tactical approach to portfolio
management. Over its history, SLG and SLS have assembled a unique and impressive
array of intellectual property in the investment, estate, tax and business
planning arenas and boasts a portfolio management returns that rivals or exceeds
top global managers. Additionally SLG counts some of the countries wealthiest
and most successful business owners and entrepreneurs as its clients. Mr.
Stanley has been Managing Member of Stanley Laman Securities, LLC from 2004 to
the present and President of the Stanley-Laman Group, Ltd. Mr. Stanley has
earned designations as a Chartered Financial Consultant, Chartered Life
Underwriter, and received his Masters of Financial Sciences from the American
College in 1997. From 1977 to 1979, Mr. Stanley served as a District Field
Representative at General Electric Capital. From 1979 to 1986, Mr. Stanley was a
Senior Vice President at Capital Analysts (CA) of Radnor, Pennsylvania, a
national investment advisory firm. From 1986 to 1991, Mr. Stanley was Senior
Vice President at First Capital Analysts (CA Affiliate). Stanley’s practice
within CA was to serve the ultra high net worth private business owners and
investors and specialized in bringing creative investment and planning trends to
his clients. In the early 1980’s Mr. Stanley identified the emergence of cable
television, real estate syndications, equipment leasing, mutual funds, and high
yield bonds as investment trends. Mr. Stanley rose quickly within CA and became
a national production leader. At 30, he chaired the CA National Field Advisory
Board. As the Chair of that Board, Mr. Stanley brought the interest in
technology and creativity that was forged at GE to CA. CA employed teams
consisting of lawyers, accountants and other financial specialists to support
their integrated approach to investment and tax planning.
Robert H. Burns was appointed
as an Independent Director of our company on January 22, 2008. Mr. Burns is a
hotel industry veteran with an international reputation and over thirty years of
hotel, real estate, food and beverage and retail experience. Mr. Burns founded
and built the luxurious Regent International Hotels brand, which he sold in
1992.
From 1970
to 1992, Mr. Burns served as chairman and chief executive officer of Regent
International Hotels, where he was personally involved in all strategic and
major operating decisions. In this connection, Mr. Burns and his team of
professionals performed site selection, obtained land use and zoning approvals,
performed all property due diligence, financed each project by raising both
equity and arranging debt, oversaw planning, design and construction of each
hotel property, and managed each asset. Each Regent hotel typically contained a
significant food and beverage element and high-end retail component, frequently
including luxury goods such as clothing, jewelry, and well as retail shops. In
fact, Mr. Burns is extremely familiar with the retail landscape as his flagship
hotel in Hong Kong was part of a mixed-use complex anchored by a major enclosed
shopping center connected to the Regent Hong Kong. Thus, Mr. Burns has over
forty (40) years as a manager and principal acquiring, financing, developing and
operating properties.
Mr. Burns
opened the first Regent hotel in Honolulu, Hawaii, in 1970. From 1970 to 1979,
the company opened and managed a number of prominent hotels, but gained truly
international recognition in 1980 with the opening of The Regent Hong Kong,
which brought a new dimension in amenities and service to hotels in the city and
attracted attention throughout the world. It was in this way that the hotel
innovatively combined the Eastern standard of service excellence with the
Western standard of luxurious spaces. In all, Mr. Burns developed over 18 major
hotel projects including the Four Seasons Hotel in New York City, the Beverly
Wilshire Hotel in Beverly Hills, the Four Seasons Hotel in Milan, Italy, and the
Four Seasons Hotel in Bali, Indonesia.
Mr. Burns
currently serves as Chairman of Barings’ Chrysalis Emerging Markets Fund (since
1991) and as a director of Barings’ Asia Pacific Fund (since 1986).
Additionally, he is a member of the executive committee of the board of
directors of Jazz at Lincoln Center in New York City (since 2000), and chairs
the Robert H. Burns Foundation which he founded in 1992 and which funds the
education of Asian students at American schools. Mr. Burns frequently lectures
at Stanford Business School.
Mr. Burns
was chairman and co-founder of the World Travel and Tourism Council (1994 to
1996), a forum for business leaders in the travel and tourism industry. With
Chief Executives of some one hundred of the world’s leading travel and tourism
companies as its members, WTTC has a unique mandate and overview on all matters
related to travel and tourism. He served as a faculty member at the University
of Hawaii (1963 to 1994) and as president of the Hawaii Hotel Association (1968
to 1970).
Mr. Burns
began his career in Sheraton’s Executive Training Program in 1958, and advanced
rapidly within Sheraton and then within Westin Hotels (1962 to 1963). He later
spent eight years with Hilton International Hotels (1963 to 1970).
Mr. Burns
graduated from the School of Hotel Management at Michigan State University
(1958), and the University of Michigan’s Graduate School of Business (1960),
after serving three years in the U.S. Army in Korea. For the past 5 years Mr.
Burns has devoted his time to owning and operating Villa Feltrinelli on Lago di
Garda, in Northern Italy, a small, luxury hotel, and working on developing hotel
projects in Asia, focusing on Vietnam and China.
We pay to
each of our independent directors a retainer of $25,000 per year, plus $2,000
for each board or board committee meeting the director attends in person ($2,500
for attendance by the chairperson of the audit committee at each meeting of the
audit committee) and $250 for each meeting the director attends by telephone. In
the event there is a meeting of the board and one or more committees in a single
day, the fees will be limited to $2,500 per day ($3,000 for the chairperson of
the audit committee if there is a meeting of such committee). In addition, we
have reserved 1,000,000 shares of common stock for future issuance upon the
exercise of stock options that may be granted to our independent directors
pursuant to our stock option plan (described below). We have granted each of our
independent directors options to purchase 6,000 shares of common
stock. Three thousand shares were granted to them on the date such
independent director was elected as a director and an additional 3,000 were
granted at the first annual stockholders meeting. The independent directors
shall receive additional 3,000-share option grants on the date of each annual
meeting of stockholders, each with an exercise price equal to $10.00 per share
during such time as we are offering shares to the public at $10.00 per share and
thereafter at 100% of the then-current fair market value per share. The
independent directors received their second options to purchase 3,000 shares at
the 2009 annual stockholders’ meeting. The total number of options
granted will not exceed 10% of the total outstanding shares at the time of
grant. All directors receive reimbursement of reasonable out-of-pocket expenses
incurred in connection with attendance at meetings of our board of directors. If
a director is also an employee of American Realty Capital Trust, Inc. or
American Realty Capital Advisors, LLC or their affiliates, we do not pay
compensation for services rendered as a director.
Name
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Fees
Earned or Paid in Cash ($)
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Option
Awards ($)
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Independent
Directors
(2)
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$25,000
yearly retainer; $2,000 for all meetings personally attended by the
directors and $250 for each meeting attended via telephone. (1)
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We
have granted each of our independent directors options to purchase 6,000
shares of common stock. An initial 3,000 options were granted to them on
the date such independent director was elected as a director. Such options
have an exercise price equal to $10.00 per share and vest after two years
from the date of grant. Nonqualified options will be granted on the date
of each annual stockholder meeting to purchase 3,000 shares of common
stock at $10.00 per share until the termination of the initial public
offering, and thereafter, at fair market value. Accordingly, a
second grant of 3,000 options occurred in connection with our initial
annual shareholders meeting.
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(1)
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If
there is a board meeting and one or more committee meetings in one day,
the director’s fees shall not exceed $2,500 ($3,000 for the chairperson of
the audit committee if there is a meeting of such
committee).
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(2)
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An
independent director who is also an audit committee chairperson will
receive an additional $500 for personal attendance of all audit committee
meetings.
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Stock
Option Plan
We have
adopted a stock option plan under which our independent directors are eligible
to receive annual nondiscretionary awards of nonqualified stock options. Our
stock option plan is designed to enhance our profitability and value for the
benefit of our stockholders by enabling us to offer independent directors
stock-based incentives, thereby creating a means to raise the level of equity
ownership by such individuals in order to attract, retain and reward such
individuals and strengthen the mutuality of interests between such individuals
and our stockholders.
We have
authorized and reserved 1,000,000 shares of our common stock for issuance under
our stock option plan. The board of directors may make appropriate adjustments
to the number of shares available for awards and the terms of outstanding awards
under our stock option plan to reflect any change in our capital structure or
business, stock dividend, stock split, recapitalization, reorganization, merger,
consolidation or sale of all or substantially all of our assets.
Our stock
option plan provides for the automatic grant of a nonqualified stock option to
each of our independent directors, without any further action by our board of
directors or the stockholders, to purchase 3,000 shares of our common stock on
the date of each annual stockholder’s meeting. The exercise price for all stock
options granted under our stock option plan will be fixed at $10.00 per share
until the termination of our initial public offering, and thereafter the
exercise price for stock options granted to our independent directors will be
equal to the last sales price reported for a share on the last business day
preceding the annual meeting of stockholders. It is intended that the exercise
price for options granted under our stock option plan will be at least 100% of
the fair market value of our common stock as of the date the option is
granted. The term of each such option will be 10 years. Options
granted to non-employee directors will vest and become exercisable on the second
anniversary of the date of grant, provided that the independent director is a
director on the board of directors on that date. As
of
October 20,
2009, we have granted the
independent directors options to purchase 6,000 shares of common stock under the
stock option plan.
Notwithstanding
any other provisions of our stock option plan to the contrary, no stock option
issued pursuant thereto may be exercised if such exercise would jeopardize our
status as a REIT under the Internal Revenue Code. The total number of options
granted will not exceed 10% of the total outstanding shares at the time of
grant.
As part
of our strategy for compensating our independent directors, we have issued, and
we intend to issue, options to purchase our common stock under our independent
directors’ stock option plan, which is described above. This method of
compensating individuals may possibly be considered to be a “nonqualified
deferred compensation plan” under Section 409A of the Internal Revenue
Code.
Under
Section 409A, “nonqualified deferred compensation plans” must meet certain
requirements regarding the timing of distributions or payments and the timing of
agreements or elections to defer payments, and must also prohibit any
possibility of acceleration of distributions or payments, as well as certain
other requirements. Stock options with an exercise price that is less than the
fair market value of the underlying stock as of the date of grant would be
considered a “nonqualified deferred compensation plan.”
If
Section 409A applies to any of the awards issued under the plan, or if Section
409A applies to any other arrangement or agreement that we may make, and if such
award, arrangement or agreement does not meet the timing and other requirements
of Section 409A, then (a) all amounts deferred for all taxable years under the
award, arrangement or agreement would be currently includible in the gross
income of the recipient of such award or of such deferred amount to the extent
not subject to a substantial risk of forfeiture and not previously included in
the gross income of the recipient, (b) interest at the underpayment rate plus 1%
would be imposed on the underpayments that would have occurred had the
compensation been includible in income when first deferred (or, if later, when
not subject to a substantial risk of forfeiture) would be imposed upon the
recipient and (c) a 20% additional tax would be imposed on the recipient with
respect to the amounts required to be included in the recipient’s income.
Furthermore, if the affected individual is our employee, we would be required to
withhold federal income taxes on the amount deferred but includible in income
due to Section 409A, although there may be no funds currently being paid to the
individual from which we could withhold such taxes. We would also be required to
report on an appropriate form (W-2 or 1099) amounts which are deferred, whether
or not they meet the requirements of Section 409A, and if we fail to do so,
penalties could apply.
We do not
intend to issue any award, or enter into any agreement or arrangement that would
be considered a “nonqualified deferred compensation plan” under Section 409A,
unless such award, agreement or arrangement complies with the timing and other
requirements of Section 409A. It is our current belief, based upon the statute,
the regulations issued under Section 409A and legislative history, the options
we have granted and that we currently intend to implement will not be subject to
taxation under Section 409A because the options will not be considered a
“nonqualified deferred compensation plan.” Nonetheless, there can be no
assurances that any options award, agreement or arrangement which we have
entered into will not be affected by Section 409A, or that any such award,
agreement or arrangement will not be subject to income taxation under Section
409A.
Except as
set forth below, our charter and bylaws limit the personal liability of our
directors and officers to us and our stockholders for monetary damages and
require us to indemnify and pay or reimburse the reasonable expenses in advance
of final disposition of a proceeding to:
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any
individual who is a present or former director or officer of the company
and who is made or threatened to be made a party to the proceeding by
reason of his or her service in that
capacity;
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any
individual who, while a director or officer of the company and at the
request of the company, serves or has served as a director, officer,
partner, or trustee of another corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or other
enterprise and who is made or threatened to be made a party to the
proceeding by reason of his or her service in that capacity;
and
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our
advisor and of any of its affiliates, acting as an agent of the
company.
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Our
charter provides that a director, our advisor or any of its affiliates will be
indemnified by us for losses suffered by it and held harmless for losses
suffered by us only if all of the following conditions are met:
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the
director, our advisor or its affiliate has determined, in good faith, that
the course of conduct which caused the loss or liability was in our best
interest;
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the
director, our advisor or its affiliate was acting on our behalf or
performing services for us; and
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the
liability or loss was not the result of (A) negligence or misconduct by
the director (other than an independent director), our advisor or its
affiliate or (B) gross negligence or willful misconduct by an independent
director.
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In
addition, any indemnification or any agreement to hold harmless is recoverable
only out of our assets and not from the stockholders. Indemnification could
reduce the legal remedies available to us and the stockholders against the
indemnified individuals.
This
provision does not reduce the exposure of directors and officers to liability
under federal or state securities laws, nor does it limit the stockholder’s
ability to obtain injunctive relief or other equitable remedies for a violation
of a director’s or an officer’s duties to us or our stockholders, although the
equitable remedies may not be an effective remedy in some
circumstances.
Our
charter also prohibits us from providing indemnification for losses and
liabilities arising from alleged violations of federal or state securities laws
unless one or more of the following conditions are met:
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there
has been a successful adjudication on the merits of each count involving
alleged securities law violations as to the particular
indemnitee;
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such
claims have been dismissed with prejudice on the merits by a court of
competent jurisdiction as to the particular indemnitee;
or
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a
court of competent jurisdiction approves a settlement of the claims
against a particular indemnitee and finds that indemnification of the
settlement and the related costs should be made, and the court considering
the request for indemnification has been advised of the position of the
SEC and of the published position of any state securities regulatory
authority in which securities of us were offered or sold as to
indemnification for violation of securities
laws.
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Our
charter further prohibits us from paying or reimbursing the reasonable legal
expenses and other costs incurred by a director, our advisor or any affiliate of
our advisor, in advance of final disposition of a proceeding,
unless:
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the
proceeding relates to acts or omissions with respect to the performance of
duties or services on our behalf;
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the
director, our advisor or its affiliate provides us with a written
affirmation of his, her or its good faith belief that he, she or it has
met the standard of conduct necessary for
indemnification;
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the
proceeding was initiated by a third party who is not a stockholder or, if
initiated by a stockholder acting in his or her capacity as such, a court
of competent jurisdiction approves such reimbursement or advancement of
expenses; and
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the
director, our advisor or its affiliate provides us with a written
undertaking to repay the amount paid or reimbursed by us, together with
the applicable legal rate of interest if it is ultimately determined that
the director, our advisor or its affiliate did not comply with the
requisite standard of conduct.
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Provided
the above conditions are met, we have also agreed to indemnify and hold harmless
our advisor and its affiliates performing services for us from any loss or
liability arising out of the performance of its/their obligations under the
advisory agreement. As a result, we and our stockholders may be entitled to a
more limited right of action than we and you would otherwise have if these
indemnification rights were not included in the charter and bylaws or the
advisory agreement.
In
addition to the limitations imposed by our charter, Maryland law provides that a
Maryland corporation may not limit the liability of directors and officers to
the corporation and its stockholders if such liability results from (a) actual
receipt of an improper benefit or profit in money, property or services or (b)
active and deliberate dishonesty established by a final judgment and which is
material to the cause of action.
Maryland
law also allows directors and officers to be indemnified against judgments,
penalties, fines, settlements and expenses actually incurred in a proceeding
unless the following can be established:
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the
act or omission of the director or officer was material to the cause of
action adjudicated in the proceeding and was committed in bad faith or was
the result of active and deliberate
dishonesty;
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the
director or officer actually received an improper personal benefit in
money, property or services; or
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with
respect to any criminal proceeding, the director or officer had reasonable
cause to believe his or her act or omission was
unlawful.
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We have
been informed that the SEC and some states’ securities commissions take the
position that indemnification against liabilities arising under the Securities
Act is against public policy and unenforceable.
The
general effect to investors of any arrangement under which any controlling
person, director or officer of us is insured or indemnified against liability is
a potential reduction in distributions resulting from our payment of premiums
associated with insurance. In addition, indemnification could reduce the legal
remedies available to us and our stockholders against the officers and
directors.
Our
advisor is American Realty Capital Advisors, LLC. Our officers and two of our
directors also are officers, key personnel and/or members of American Realty
Capital Advisors, LLC. American Realty Capital Advisors, LLC has contractual
responsibility to us and our stockholders pursuant to the advisory agreement.
American Realty Capital Advisors, LLC is indirectly wholly-owned and controlled
by Messrs. Schorsch and Kahane and certain other executives.
The
officers and key personnel of our advisor are as follows:
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President,
Chief Operating Officer and Treasurer
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Executive
Vice President and Chief Investment Officer
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Executive
Vice President and Chief Financial Officer
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Executive
Vice President and Secretary
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The
backgrounds of Messrs. Schorsch, Kahane, Budko, Block and Weil are described in
the “Management — Executive Officers and Directors” section of this prospectus.
The background of Ms Quarto is described in the “Management — Affiliated
Companies — Dealer Manager” section of this prospectus.
In
addition to the directors and key personnel listed above, American Realty
Capital Advisors, LLC employs personnel who have extensive experience in
selecting and managing commercial properties similar to the properties sought to
be acquired by us. As of the date of this prospectus our advisor is the sole
limited partner of American Realty Capital Operating Partnership,
L.P.
The
Advisory Agreement
Many of
the services to be performed by American Realty Capital Advisors, LLC in
managing our day-to-day activities are summarized below. This summary is
provided to illustrate the material functions that we expect American Realty
Capital Advisors, LLC will perform for us as our advisor, and it is not intended
to include all of the services that may be provided to us by third parties.
Under the terms of the advisory agreement, American Realty Capital Advisors, LLC
will undertake to use its commercially reasonable best efforts to present to us
investment opportunities consistent with our investment policies and objectives
as adopted by our board of directors. In its performance of this undertaking,
American Realty Capital Advisors, LLC, either directly or indirectly by engaging
an affiliate, shall, among other duties and subject to the authority of our
board of directors:
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find,
evaluate, present and recommend to us investment opportunities consistent
with our investment policies and
objectives;
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serve
as our investment and financial advisor and provide research and economic
and statistical data in connection with our assets and our investment
policies;
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provide
the daily management and perform and supervise the various administrative
functions reasonably necessary for our management and
operations;
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investigate,
select, and, on our behalf, engage and conduct business with such third
parties as the advisor deems necessary to the proper performance of its
obligations under the advisory
agreement;
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consult
with our officers and board of directors and assist the board of directors
in the formulating and implementing of our financial
policies;
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structure
and negotiate the terms and conditions of our real estate acquisitions,
sales or joint ventures;
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review
and analyze each property’s operating and capital
budget;
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acquire
properties and make investments on our behalf in compliance with our
investment objectives and policies;
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survey
local brokers and agents to determine market rates fees charged by
management and leasing companies for similar services provided by the
property manager;
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arrange,
structure and negotiate financing and refinancing of
properties;
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enter
into leases of property and service contracts for assets and, to the
extent necessary, perform all other operational functions for the
maintenance and administration of such assets, including the servicing of
mortgages; and
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prepare
and review on our behalf, with the participation of one designated
principal executive officer and principal financial officer, all reports
and returns required by the Securities and Exchange Commission, Internal
Revenue Service and other state or federal governmental
agencies.
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The
advisor may not acquire any property with a purchase price that is equal to or
greater than $15,000,000 or finance any such acquisition, on our behalf, without
the prior approval of a majority of our board of directors. The actual terms and
conditions of transactions involving investments in such properties will be
determined in the sole discretion of the advisor, subject at all times to such
board of directors approval. Conversely, the advisor may acquire any real
property with purchase price that is lower than $15,000,000, or finance any such
acquisition, on our behalf, without the prior approval of the board of directors
(unless the purchase is from an affiliate, in which case the independent
directors shall approve the purchase), if the following conditions are
satisfied: (a) the investment in the property would not, if consummated, violate
our investment guidelines, (b) the investment in the property would not, if
consummated, violate any restrictions on indebtedness; and (c) the consideration
to be paid for such properties does not exceed the fair market value of such
properties, as determined by a qualified independent real estate appraiser
selected by the advisor.
The
advisory agreement has a one-year term ending January 25, 2010, and may be
renewed for an unlimited number of successive one-year periods. Additionally,
either party may terminate the advisory agreement without penalty immediately
upon a change of control of us, or upon 60 days’ written notice without penalty.
If we elect to terminate the agreement, we must obtain the approval of a
majority of our independent directors. In the event of the termination of our
advisory agreement, our advisor is required to cooperate with us and take all
reasonable steps requested by us to assist our board of directors in making an
orderly transition of the advisory function.
We pay
American Realty Capital Advisors, LLC a yearly asset management fee equal to 1%
of the gross purchase price of our assets. We also pay American Realty Capital
Advisors, LLC acquisition fees equal to 1% of the gross purchase price of each
property or asset that we acquire, along with reimbursement of acquisition
expenses. We also pay to American Realty Capital Advisors, LLC a finance
coordination fee equal to 1% of the amount available and/or outstanding under
any debt financing that we obtain and use for the acquisition of properties and
other investments or that is assumed, directly or indirectly, in connection with
the acquisition of properties. Additionally, we are required to pay to American
Realty Capital Advisors, LLC or its affiliates fees based on a percentage of
proceeds or stock value upon our sale of assets or the listing of our common
stock on the New York Stock Exchange or NASDAQ Stock Market, but only if, in the
case of our sale of assets, our investors have received a return of their net
capital (original share purchase price reduced by prior distributions of
proceeds from the sale or refinancing of REIT assets) invested and an 6% annual
cumulative, non-compounded return or, in the case of the listing of our common
stock, the market value of our common stock plus the distributions paid to our
investors exceeds the sum of the total amount of capital raised from investors
plus the amount of cash flow necessary to generate an 6% annual cumulative,
non-compounded return to investors. Upon termination of the Advisory Agreement,
we may be required to pay to American Realty Capital Advisors, LLC or its
affiliates a similar performance fee if American Realty Capital Advisors, LLC
would have been entitled to a subordinated participation in net sale proceeds
had the portfolio been liquidated (based on an independent appraised value of
the portfolio) on the date of termination.
American
Realty Capital Advisors, LLC and its officers, employees and affiliates engage
in other business ventures and, as a result, their resources are not dedicated
exclusively to our business. However, pursuant to the advisory agreement,
American Realty Capital Advisors, LLC is required to devote sufficient resources
to our administration to discharge its obligations. American Realty Capital
Advisors, LLC currently has approximately 35 paid employees as of October 20,
2009. However, certain of these employees may dedicate a portion of his or her
time providing services to affiliates of our advisor. Our advisor is responsible
for a pro rata portion of each employee’s compensation based upon the
approximate percentage of time the employee dedicates to our advisor. American
Realty Capital Advisors, LLC may assign the advisory agreement to an affiliate
upon approval of a majority of our independent directors. We may assign or
transfer the advisory agreement to a successor entity; provided that at least a
majority of our independent directors determines that any such successor advisor
possesses sufficient qualifications to perform the advisory function and to
justify the compensation payable to the advisor. Our independent directors will
base their determination on the general facts and circumstances that they deem
applicable, including the overall experience and specific industry experience of
the successor advisor and its management. Other factors that will be considered
are the compensation to be paid to the successor advisor and any potential
conflicts of interest that may occur.
The fees
payable to American Realty Capital Advisors, LLC or its affiliates under the
advisory agreement are described in further detail in the section captioned
“Management Compensation” below. We also describe in that section our obligation
to reimburse American Realty Capital Advisors, LLC for organization and offering
expenses, administrative and management services, and payments made by American
Realty Capital Advisors, LLC to third parties in connection with potential
acquisitions.
Upon
termination of the Advisory Agreement, American Realty Capital II, LLC may be
entitled to a performance fee if American Realty Capital II, LLC would have been
entitled to a subordinated participation in net sale proceeds had the portfolio
been liquidated (based on an independent appraised value of the portfolio) on
the date of termination. Under our charter, we could not increase these
success-based fees without the approval of a majority of our independent
directors, and any increase in the subordinated participation in net sale
proceeds would have to be reasonable. Our charter provides that such incentive
fee is “presumptively reasonable” if it does not exceed 15% of the balance of
such net proceeds remaining after investors have received a return of their net
capital contributions and an 6% per year cumulative, non-compounded
return.
American
Realty Capital II, LLC cannot earn both the subordinated participation in net
sale proceeds and the subordinated incentive listing fee. The subordinated
participation in net sale proceeds or the subordinated listing fee, as the case
may be, will be paid in the form of a non-interest bearing promissory note that
will be repaid from the net sale proceeds of each sale after the date of the
termination or listing. At the time of such sale, we may, however, at our
discretion, pay all or a portion of such promissory note with shares of our
common stock or cash. If shares are used for payment, we do not anticipate that
they will be registered under the Securities Act and, therefore, will be subject
to restrictions on transferability. Any portion of the subordinated
participation in net sale proceeds that American Realty Capital II, LLC receives
prior to our listing will offset the amount otherwise due pursuant to the
subordinated incentive listing fee. In no event will the amount paid to American
Realty Capital II, LLC under the promissory note, if any, exceed the amount
considered presumptively reasonable by the NASAA REIT Guidelines.
If at any
time the shares become listed on the New York Stock Exchange or NASDAQ Stock
Market, we will negotiate in good faith with American Realty Capital II, LLC a
fee structure appropriate for an entity with a perpetual life. Our independent
directors must approve the new fee structure negotiated with American Realty
Capital II, LLC. The market value of our outstanding stock will be calculated
based on the average market value of the shares issued and outstanding at
listing over the 30 trading days beginning 180 days after the shares are first
listed or included for quotation. We have the option to pay the subordinated
incentive listing fee in the form of stock, cash, a promissory note or any
combination thereof. In the event the subordinated incentive listing fee is
earned by American Realty Capital II, LLC as a result of the listing of the
shares, any previous payments of the subordinated participation in net sale
proceeds will offset the amounts due pursuant to the subordinated incentive
listing fee, and we will not be required to pay American Realty Capital
Advisors, LLC any further subordinated participation in net sale
proceeds.
Property
Manager
Our
properties are managed and leased initially by American Realty Capital
Properties, LLC, our property manager. American Realty Capital Properties, LLC
is indirectly wholly-owned and controlled by Messrs. Schorsch and Kahane.
Nicholas S. Schorsch serves as chief executive officer of American Realty
Capital Properties, LLC. William M. Kahane serves as its president and
treasurer. Peter M. Budko serves as Executive Vice President and Chief
Investment Officer of American Realty Capital Properties, LLC. Brian S. Block
serves as Executive Vice President and Chief Financial Officer of American
Realty Capital Properties, LLC. Michael Weil serves as Executive Vice President
and Secretary of American Realty Capital Properties, LLC. See the “Conflicts of
Interest” section of this prospectus.
American
Realty Capital Properties, LLC was organized in 2007 to lease and manage
properties that we or our affiliated entities acquire. In accordance with the
property management and leasing agreement, we pay to American Realty Capital
Properties, LLC a property management fee (a) 2% of gross revenues from our
single tenant properties and (b) 4% of gross revenues from our multi-tenant
properties. In addition, we pay leasing commissions to American Realty Capital
Properties, LLC based upon the customary leasing commission applicable to the
geographic location of the property; provided however, that the aggregate of all
property management and leasing fees paid to the property manager plus all
payments to third parties may not exceed the amount that other nonaffiliated
management and leasing companies generally charge for similar services in the
same geographic location. American Realty Capital Properties, LLC derives
substantially all of its income from the property management and leasing
services it performs for us and other American Realty Capital-sponsored
programs.
The
company intends to build a portfolio comprised almost entirely of triple-net
(NNN) (1) and
double-net (NN) (2) leased
real estate. Given the terms of these leases, tenant improvements will almost
always be the responsibility of the tenant. There may be limited circumstances
where tenant improvements become the landlord’s responsibility, e.g.,
Governmental Services Administration (GSA) leases, at which point the property
manager will have to seek approval from our advisors on our behalf pursuant to
the terms of the Advisory Agreement prior to providing tenant improvement
services. In the event that American Realty Capital Properties, LLC assists a
tenant with tenant improvements, a separate fee may be charged to, and payable
by, us. This fee will not exceed 5% of the cost of the tenant improvements. The
property manager will only provide these services if it does not cause any of
our income from the applicable property to be treated as other than rents from
real property for purposes of the applicable REIT requirements described under
“Federal Income Tax Considerations” below.
1
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Triple-net
leases typically require the tenant to pay all costs associated with a
property in addition to the base rent and percentage rent, if
any.
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2
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Double-net
leases typically have the landlord responsible for the roof and structure,
or other aspects of the property, while the tenant is responsible for all
remaining expenses associated with the
property.
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The
property management agreement among American Realty Capital Operating
Partnership, L.P., American Realty Capital Trust, Inc. and American Realty
Capital Properties, LLC has a one-year term ending January 25, 2009, and is
subject to successive one-year renewals unless American Realty Capital
Properties, LLC provides written notice of its intent to terminate 30 days’
prior to the expiration of the initial or renewal term. We may also terminate
the agreement upon 30 days’ prior written notice in the event of negligence or
misconduct by the property manager.
American
Realty Capital Properties, LLC hires, directs and establishes policies for
employees who have direct responsibility for the operations of each property we
acquire, which may include, but is not be limited to, on-site managers and
building and maintenance personnel. Certain employees of the property manager
may be employed on a part-time basis and also may be employed by our advisor or
certain companies affiliated with it.
The
property manager also directs the purchase of equipment and supplies, and
supervises all maintenance activity, for our properties. The management fees
paid to the property manager cover, without additional expense to us, all of the
property manager’s general overhead costs. The principal office of the property
manager is located at 106 Old York Road, Jenkintown, PA 19046.
Dealer
Manager
Realty
Capital Securities, LLC, our dealer manager, is a member firm of the Financial
Industry Regulatory Authority (FINRA). Realty Capital Securities, LLC was
organized on August 29, 2007 for the purpose of participating in and
facilitating the distribution of securities of real estate programs sponsored by
American Realty Capital Trust, Inc., its affiliates and its
predecessors.
Realty
Capital Securities, LLC provides certain wholesaling, sales, promotional and
marketing assistance services to us in connection with the distribution of the
shares offered pursuant to this prospectus. It may also sell a limited number of
shares at the retail level. The compensation we will pay to Realty Capital
Securities, LLC in connection with this offering is described in the section of
this prospectus captioned “Management Compensation.” See also “Plan of
Distribution — Compensation We Will Pay for the Sale of Our
Shares.”
Realty
Capital Securities, LLC is controlled by Messrs. Schorsch and Kahane and certain
other officers. Realty Capital Securities, LLC is an affiliate of both our
advisor and the property manager. See “Conflicts of Interest.”
The
current officers of Realty Capital Securities, LLC are:
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Executive
Vice President and Chief Compliance
Officer
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The
backgrounds of Messrs. Corvinus, Jafarnia and Watt and Ms Quarto are described
below:
Nicholas
Corvinus, age 62, joined American Realty Capital Advisors, LLC and Realty
Capital Securities, LLC, in April 2008 and currently serves as CEO of Realty
Capital Securities, LLC. Mr. Corvinus brings more than 30 years of financial
industry experience in sales, business development and commercial real estate to
Realty Capital Securities, LLC. Most recently, he served as Senior Vice
President at Behringer Harvard. Additionally, Mr. Corvinus has over 15 years
experience at Putnam Retail Management where he last served as Managing Director
and was responsible for developing new business, building key relationships with
wirehouses and broker-dealers and increasing sales and product recognition. Mr.
Corvinus holds FINRA Series 7, 63 and 24 licenses.
Louisa
Quarto, age 41, joined Realty Capital Securities, LLC as Senior Vice President,
Key Accounts and Compliance in April 2008 and became Co-President in July 2009.
Ms Quarto served as Chief Compliance Officer for Realty Capital Securities, LLC
from May 2008 until February 2009. She is also a Senior Vice President of
American Realty Capital Advisors, LLC. Ms Quarto’s responsibilities include
overseeing national accounts, operations and compliance activities for Realty
Capital Securities. From February 1996 through April 2008 Ms Quarto was with W.
P. Carey & Co. LLC, most recently as Executive Director and Chief Management
Officer of Carey Financial, LLC, the broker-dealer subsidiary of W. P. Carey,
where she managed relationships with the broker-dealers that were part of the
CPA® REIT selling groups. Ms Quarto earned a Bachelor of Arts from Bucknell
University and an MBA in Finance and Marketing from The Stern School of Business
at New York University. She holds FINRA Series 7, 63 and 24 licenses and is a
member of the Investment Program Association’s (“IPA”) Executive Committee, its
Board of Trustees and serves as the IPA’s Treasurer and Chair of its Finance
Committee.
Bradford
Watt, age 50, joined Realty Capital Securities, LLC as Executive Vice President
and National Sales Director in September 2008 and became Co-President in July
2009. Mr. Watt also serves as President and Managing Director of American Realty
Capital Exchange, LLC (“ARCX”) where he is responsible for structuring and
distributing the ARCX’s diversified co-ownership and single-owner 1031
programs. Prior to joining American Realty Capital Mr. Watt
served as Managing Director and President of Applied Capital Advisors, LLC
(“ACA”), an integrated real estate advisory services firm specializing in
advising and arranging high-quality real estate portfolios (separately managed
accounts) for high net worth and ultra high net worth investors. Prior to
forming ACA, Mr. Watt served as Managing Director and Executive Vice President
of Cole 1031 Exchange Advisors (“Cole”). Before his tenure at Cole, Mr. Watt
held senior positions with Inland Securities Corp. and was Chief Operating
Officer for CNL Income and Growth Funds. Mr. Watt has over 25 years experience
in structuring, marketing, and managing private and public real estate
investment programs. He holds FINRA Series 7, 63 and 24 licenses.
Kamal
Jafarnia, age 43, is Executive Vice President and Chief Compliance Officer for
Realty Capital Securities and is Senior Vice President for American Realty
Capital. Mr. Jafarnia joined Realty Capital Securities in November 2008 and
became its Chief Compliance Officer in February 2009. Mr. Jafarnia has more than
15 years experience both as an attorney and as a compliance professional,
including 10 years of related industry experience in financial services. Before
joining American Realty Capital, he served as Executive Vice President of
Franklin Square Capital Partners and as Chief Compliance Officer of FB Income
Advisor, LLC, the registered investment adviser to Franklin Square’s proprietary
offering, where he was responsible for overseeing the regulatory compliance
programs for the firm. Prior to Franklin Square Capital Partners, Mr. Jafarnia
was Assistant General Counsel and Chief Compliance Officer for Behringer Harvard
and Behringer Securities, LP, respectively, where he coordinated the selling
group due diligence and oversaw the regulatory compliance efforts. Prior to
Behringer Harvard, Mr. Jafarnia worked as Vice President of CNL Capital Markets,
Inc. and Chief Compliance Officer of CNL Fund Advisors,
Inc. Mr. Jafarnia earned a Bachelor of Arts from the University
of Texas at Austin and his law degree from Temple University School of Law in
Philadelphia, PA. He is currently participating in the Masters of Laws degree
program in Securities and Finance Regulation at the Georgetown University Law
Center in Washington, DC. Mr. Jafarnia holds FINRA Series 6, 7, 24, 63 and 65
licenses.
The
primary responsibility for the investment decisions of American Realty Capital
Advisors, LLC and its affiliates, the negotiation for these investments, and the
property management and leasing of these investment properties resides with
Nicholas S. Schorsch, William M. Kahane, Peter M. Budko, Brian S. Block and
Michael Weil. American Realty Capital Advisors, LLC seeks to invest in
commercial properties on our behalf that satisfy our investment objectives. To
the extent we invest in properties, a majority of the directors will approve the
consideration paid for such properties based on the fair market value of the
properties. If a majority of independent directors so determines, or if an asset
is acquired from our advisor, one or more of our directors, our sponsor or any
of their affiliates, the fair market value will be determined by a qualified
independent real estate appraiser selected by the independent directors. In
addition, the advisor may purchase on our account, without the prior approval of
the board of directors, properties whose purchase price is less than $15,000,000
(unless the purchase is from an affiliate, in which case the independent
directors shall approve the purchase), if the following conditions are
satisfied:
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The
investment in the property would not, if consummated, violate our
investment guidelines;
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The
investment in the property would not, if consummated, violate any
restrictions on indebtedness; and
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The
consideration to be paid for such properties does not exceed the fair
market value of such properties, as determined by a qualified independent
real estate appraiser selected by the advisor and acceptable to the
independent directors.
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Appraisals
are estimates of value and should not be relied on as measures of true worth or
realizable value. We will maintain the appraisal in our records for at least
five years, and copies of each appraisal will be available for review by
stockholders upon their request.
Effective
March 31, 2009, the Board of Directors approved the recommendation of the
officers of the Company that the Company not pursue any opportunities to acquire
real property from an entity affiliated with its advisor, American Realty
Capital Advisor, LLC. The foregoing recommendation shall be reviewed annually by
the Board of Directors.
Advisory Agreement.
We have entered into an Advisory Agreement with American Realty
Capital Advisors, LLC, whereby American Realty Capital Advisors, LLC will manage
our day-to-day operations. In return, we will pay to American Realty Capital
Advisors, LLC an asset management fee equal to 1% of the gross purchase price of
our assets. We also will pay to American Realty Capital Advisors, LLC 1% of the
gross purchase price of each property or asset that we acquire, as an
acquisition fee, along with reimbursement of acquisition expenses. We also will
pay to American Realty Capital Advisors, LLC a financing coordination fee equal
to 1% of the amount available under any debt financing that we obtain and use
for the acquisition of properties and other investments. Additionally, we will
be required to pay to American Realty Capital Advisors, LLC or its affiliates
fees based on a percentage of proceeds or stock value upon our sale of assets or
the listing of our common stock on the New York Stock Exchange or The Nasdaq
Stock Market, but only if, in the case of our sale of assets, our investors have
received a return of their net capital invested and an 6% annual cumulative,
non-compounded return or, in the case of the listing or quotation of our common
stock, the market value of our common stock plus the distributions paid to our
investors exceeds the sum of the total amount of capital raised from investors
plus the amount of cash flow necessary to generate an 6% annual cumulative,
non-compounded return to investors.
Nicholas
S. Schorsch, our chief executive officer and chairman of our board of directors.
Mr. Schorsch also is the chief executive officer of American Realty Capital
Advisors, LLC. William M. Kahane, our President, Chief Operating Officer and
Treasurer is the President, Chief Operating Officer and Treasurer of American
Realty Capital Advisors, LLC. Along with certain executives, Mr. Schorsch and
Mr. Kahane are indirect owners of American Realty Capital Advisors, LLC. Peter
M. Budko, our executive vice president and chief investment officer, is the
executive vice president and chief investment officer of American Realty Capital
Advisors, LLC. Brian S. Block, our executive vice president and chief financial
officer, is the senior vice president and chief financial officer of American
Realty Capital Advisors, LLC. Michael Weil, our executive vice president and
secretary is the executive vice president and secretary of American Realty
Capital Advisors, LLC. For a further description of this agreement, see
“Management — The Advisory Agreement” and “Management Compensation.”
See also “Conflicts of Interest.”
Property Management
Agreement. We entered into a Property Management Agreement
with American Realty Capital Properties, LLC. We will pay to American Realty
Capital Properties, LLC fees equal to (a) 2.0% from our single tenant properties
and (b) 4% of the gross revenues from our multi-tenant properties. In addition,
we will pay leasing commissions to American Realty Capital Properties, LLC based
upon the customary leasing commissions applicable to the geographic location of
the property, subject to certain limits. Nicholas S. Schorsch, our chief
executive officer and chairman of our board of directors, is the chief executive
officer of American Realty Capital Properties, LLC. William M. Kahane, our
President, Chief Operating Officer and Treasurer is the President, Chief
Operating Officer and Treasurer of American Realty Capital Properties, LLC. Mr.
Schorsch and Mr. Kahane are indirect owners of American Realty Capital
Properties, LLC. Peter M. Budko, our executive vice president and chief
investment officer, is the executive vice president and chief investment officer
of American Realty Capital Properties, LLC. Brian S. Block, our executive vice
president and chief financial officer, is the senior vice president and chief
financial officer of American Realty Capital Properties, LLC. Michael Weil, our
executive vice president and secretary is the executive vice president and
secretary of American Realty Capital Properties, LLC. For a further description
of this agreement, see “Management — Affiliated
Companies — Property Manager” and “Management Compensation.” See also
“Conflicts of Interest.”
Dealer Manager
Agreement. We entered into a Dealer Manager Agreement with
Realty Capital Securities, LLC, our dealer manager. We will pay to Realty
Capital Securities, LLC 7% of the gross offering proceeds from this offering,
except that no selling commissions will be paid on shares sold under our
distribution reinvestment plan. Realty Capital Securities, LLC may reallow all
of the selling commission to participating broker-dealers. Realty Capital
Securities, LLC also will waive the selling commission with respect to shares
sold by an investment advisory representative. Additionally, we will pay to
Realty Capital Securities, LLC a dealer manager fee equal to 3% of the gross
offering proceeds sold through broker-dealers. Realty Capital Securities, LLC
may reallow all or part of the dealer manager fee to participating
broker-dealers. We will not pay a dealer manager fee for shares purchased
through our distribution reinvestment plan. Nicholas S. Schorsch, our chief
executive officer and a member of our board of directors, indirectly and
together with Mr. Kahane owns a majority of the ownership and voting interests
of Realty Capital Securities, LLC. William M. Kahane, our president and a member
of our board of directors, indirectly and together with Mr. Schorsch owns a
majority of the ownership and voting interests of Realty Capital Securities,
LLC. Louisa Quarto and Bradford Watt are the co-presidents and secretaries of
Realty Capital Securities, LLC. For a further description of this agreement, see
“Management — Affiliated Companies — Dealer Manager,”
“Management Compensation” and “Plan of Distribution.” See also “Conflicts of
Interest.”
American Realty Capital II,
LLC. Upon termination of the Advisory Agreement, American
Realty Capital II, LLC may be entitled to a performance fee if American Realty
Capital II, LLC would have been entitled to a subordinated participation in net
sale proceeds had the portfolio been liquidated (based on an independent
appraised value of the portfolio) on the date of termination. Under our charter,
we could not increase these success-based fees without the approval of a
majority of our independent directors, and any increase in the subordinated
participation in net sale proceeds would have to be reasonable. Our charter
provides that such incentive fee is “presumptively reasonable” if it does not
exceed 15% of the balance of such net proceeds remaining after investors have
received a return of their net capital contributions and an 6% per year
cumulative, non-compounded return. The payment of these fees to American Realty
Capital II, LLC is related to our successful performance because of the fact
that American Realty Capital II, LLC would receive this fee only if it is
entitled to a subordinated participation in the net proceeds at the liquidation
of the portfolio. The “subordinated participation in net sale proceeds,” also
known as the “promote,” is a success-based performance fee. It is meant to
motivate the Advisor to obtain the highest possible selling price for the
property. The fee is calculated as 15% of the remaining net sale proceeds after
the investors have received a return of their net capital invested and a 6%
annual cumulative, non-compounded return. If the Advisor does not succeed in
achieving a purchase price that would result in an annual cumulative
non-compounded return greater than 6%, then the Advisor would not earn this
incentive fee.
American Realty Capital Exchange,
LLC. American Realty Capital Exchange, LLC (“ARCX”) is a
subsidiary of American Realty Capital Advisors, LLC (the “Advisor”). Persons
selling real estate held for investment often seek to reinvest the proceeds of
that sale in another real estate investment in an effort to obtain favorable tax
treatment under Section 1031 of the Internal Revenue Code. As a result of demand
in the marketplace for this type of offering, our Advisor has developed a
program to facilitate these transactions, referred to as like-kind exchanges.
ARCX will acquire real estate to be owned in co-tenancy arrangements with
persons desiring to engage in such like-kind exchanges (“1031 Participants”).
ARCX will acquire the subject property or portfolio of properties and, either
concurrently with or following such acquisition, prepare and market a private
placement memorandum for the sale of co-tenancy interests in that property.
See “Section 1031
Exchange Program” within the prospectus.
We have
no paid employees. American Realty Capital Advisors, LLC, our advisor, and its
affiliates manages our day-to-day affairs. The following table summarizes all of
the compensation and fees we pay to American Realty Capital Advisors, LLC and
its affiliates, including amounts to reimburse their costs in providing
services. The selling commissions may vary for different categories of
purchasers. See “Plan of Distribution.” This table assumes the shares are sold
through distribution channels associated with the highest possible selling
commissions and dealer manager fee. No effect is given to any shares sold
through our distribution reinvestment plan.
Type
of Compensation (1)
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Determination
of Amount
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Estimated
Amount for
Minimum
Offering (750,000 shares)/
Maximum
Offering
(150,000,000
shares) (2)
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Offering
Stage
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Selling
Commissions — Realty Capital Securities, LLC (3)
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We
will pay to Realty Capital Securities, LLC 7% of the gross offering
proceeds before reallowance of commissions earned by participating
broker-dealers, except that no selling commission is payable on shares
sold under our distribution reinvestment plan. Realty Capital Securities,
LLC, our dealer manager, will reallow 100% of commissions earned to
participating broker-dealers.
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$525,000
/ $105,000,000
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Dealer
Manager Fee — Realty Capital Securities, LLC (3)
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We
will pay to Realty Capital Securities, LLC 3% of the gross offering
proceeds before reallowance to participating broker-dealers, except that
no dealer manager fee is payable on shares sold under our distribution
reinvestment plan. Realty Capital Securities, LLC may reallow all or a
portion of its dealer manager fee to participating broker-dealers. See
“Plan of Distribution.”
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$225,000
/ $45,000,000
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Reimbursement
of Other Organization and Offering Expenses — American Realty
Capital Advisors, LLC (4)
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We
will reimburse American Realty Capital Advisors, LLC up to 1.5% of our
gross offering proceeds. American Realty Capital Advisors, LLC will incur
or pay our organization and offering expenses (excluding selling
commissions and the dealer manager fee). We will then reimburse American
Realty Capital Advisors, LLC for these amounts up to 1.5% of aggregate
gross offering proceeds.
|
|
$112,500
/ $22,500,000
|
|
|
Acquisition
and Operations Stage
|
|
|
Acquisition
Fees — American Realty Capital Advisors, LLC (5)
(6)
|
|
We
will pay to American Realty Capital Advisors, LLC 1% of the contract
purchase price of each property or asset.
|
|
$66,375
/ $13,275,000
|
Acquisition
Expenses — American Realty Capital Advisors, LLC (7)
|
|
We
will reimburse our advisor for acquisition expenses (including, personnel
costs) incurred in the process of acquiring property. We expect these
expenses to be approximately 0.5% of the purchase price of each property
(8)
. In no event will the total of all fees and acquisition expenses payable
with respect to a particular property or investment exceed 4% of the
contract purchase price.
|
|
$30,000
/ $6,000,000
|
Asset
Management Fee — American Realty Capital Advisors, LLC (9)
|
|
We
will pay to American Realty Capital Advisors, LLC a yearly fee equal to 1%
of the contract purchase price of all the properties payable semiannually
based on assets held by us on the measurement date, adjusted for
appropriate closing dates for individual property
acquisitions.
|
|
Actual
amounts are dependent upon the aggregate asset value of our properties
and, therefore, cannot be determined at the present time. Because the fee
is based on a fixed percentage of aggregate asset value there is no limit
on the aggregate amount of these
fees.
|
Type
of Compensation (1)
|
|
Determination
of Amount
|
|
Estimated
Amount for
Minimum
Offering (750,000 shares)/
Maximum
Offering
(150,000,000
shares) (2)
|
|
|
Offering
Stage
|
|
|
Property
Management Fees — American Realty Capital Properties, LLC (10)
(16)
|
|
We
will pay to American Realty Capital Properties, LLC (a) 2% of the gross
revenues from our single tenant properties and (b) 4% of the gross
revenues from our multi-tenant properties, plus reimbursement of American
Realty Capital Properties, LLC’ costs of managing the properties. In the
event that American Realty Capital Properties, LLC assists a tenant with
tenant improvements, a separate fee may be charged to, and payable by, us.
This fee will not exceed 5% of the cost of the tenant
improvements.
|
|
Actual
amounts are dependent upon the gross revenues from properties and,
therefore, cannot be determined at the present time. Because the fee is
based on a fixed percentage of the gross revenue and/or market rates,
there is no limit on the aggregate amount of these
fees.
|
Leasing
Commissions — American Realty Capital Properties, LLC (11)
(16)
|
|
We
will pay to American Realty Capital Properties, LLC prevailing market
rates. American Realty Capital Properties, LLC may also receive a fee for
the initial leasing of newly constructed properties, which generally would
equal one month’s rent.
|
|
Actual
amounts are dependent upon prevailing market rates in the geographic
regions in which we acquire property and, therefore, cannot be determined
at the present time. There is no limit on the aggregate amount of these
commissions.
|
Financing
Coordination Fee — American Realty Capital Advisors, LLC (7)
|
|
For
services in connection with the origination or refinancing of any debt
financing we obtain and use to acquire properties or to make other
permitted investments, or that is assumed, directly or indirectly, in
connection with the acquisition of properties, we will pay our advisor a
financing coordination fee equal to 1% of the amount available and/or
outstanding under such financing; provided, however, that our advisor will
not be entitled to a financing coordination fee in connection with the
refinancing of any loan secured by any particular property that was
previously subject to a refinancing in which our advisor received such a
fee. Financing coordination fees payable from loan proceeds from permanent
financing will be paid to our advisor as we acquire and/or assume such
permanent financing. However, no acquisition fees will be paid on the
investments of loan proceeds from any line of credit until such time as we
have invested all net offering proceeds.
|
|
Actual
amounts are dependent on the amount of any debt financing or refinancing
and, therefore, cannot be determined at the present time. Because the fee
is based on a fixed percentage of any debt financing, there is no limit on
the aggregate amount of these fees.
|
Operating
Expenses — American Realty Capital Advisors, LLC (11)
|
|
We
will reimburse the expenses incurred by American Realty Capital Advisors,
LLC in connection with its provision of administrative services, including
related personnel costs, subject to the limitation that we will not
reimburse our advisor for any amount by which the operating expenses
(including the asset management fee) at the end of the four preceding
fiscal quarters exceeds the greater of (a) 2% of average invested assets,
or (b) 25% of net income other than any additions to reserves for
depreciation, bad debt or other similar non-cash reserves and excluding
any gain from the sale of assets for that period.
|
|
Actual
amounts are dependent upon the expenses incurred and, therefore, cannot be
determined at the present time.
|
|
|
Liquidation/Listing
Stage
|
|
|
Type
of Compensation (1)
|
|
Determination
of Amount
|
|
Estimated
Amount for
Minimum
Offering (750,000 shares)/
Maximum
Offering
(150,000,000
shares) (2)
|
|
|
Offering
Stage
|
|
|
Real
Estate Commissions — American Realty Capital Advisors, LLC or
its Affiliates (12)
|
|
For
substantial assistance in connection with the sale of properties, we will
pay our advisor or its affiliates a brokerage commission paid on the sale
of property, not to exceed the lesser of one-half of reasonable customary
and competitive real estate commission or 3% of the contract price of each
property sold (inclusive of commissions paid to third party brokers);
provided, however, in no event may the real estate commissions paid to our
advisor, its affiliates and unaffiliated third parties exceed 6% of the
contract sales price.
|
|
Actual
amounts are dependent upon the contract price of properties sold and,
therefore, cannot be determined at the present time. Because the
commission is based on a fixed percentage of the contract price for a sold
property, there is no limit on the aggregate amount of these
commissions.
|
Subordinated
Participation in Net Sale Proceeds — American Realty Capital II,
LLC (14)
(15)
|
|
After
investors have received a return of their capital contributions invested
and an 6% annual cumulative, non- compounded return, then American Realty
Capital II, LLC is entitled to receive 15% of remaining net sale proceeds.
We cannot assure you that we will provide this 6% return, which we have
disclosed solely as a measure for our advisor’s and its affiliates
incentive compensation.
|
|
Actual
amounts are dependent upon results of operations and, therefore, cannot be
determined at the present time. There is no limit on the aggregate amount
of these payments.
|
Subordinated
Incentive Listing Fee — American Realty Capital II, LLC (13)
(14)
(15)
|
|
Upon
listing our common stock on the New York Stock Exchange or NASDAQ Stock
Market, our advisor is entitled to a fee equal to 15% of the amount, if
any, by which (a) the market value of our outstanding stock plus
distributions paid by us prior to listing, exceeds (b) the sum of the
total amount of capital raised from investors and the amount of cash flow
necessary to generate an 6% annual cumulative, non-compounded return to
investors. We have no intent to list our shares at this time. We cannot
assure you that we will provide this 6% return, which we have disclosed
solely as a measure for our advisor’s and its affiliates incentive
compensation.
|
|
Actual
amounts are dependent upon total equity and debt capital we raise and
results of operations and, therefore, cannot be determined at the present
time. There is no limit on the aggregate amount of this
fee.
|
________________
(1)
|
We
will pay all fees, commissions and expenses in cash, other than the
subordinated participation in net sales proceeds and incentive listing
fees with respect to which we may pay to American Realty Capital Advisors,
LLC in cash, common stock, a promissory note or any combination of the
foregoing, as we may determine in our
discretion.
|
(2)
|
The
estimated maximum dollar amounts are based on the sale of a maximum of
150,000,000 shares to the public at $10.00 per share and the sale of
25,000,000 shares at $9.50 per share pursuant to our distribution
reinvestment plan.
|
(3)
|
Selling
commissions and, in some cases, the dealer manager fee, will not be
charged with regard to shares sold to or for the account of certain
categories of purchasers. See “Plan of Distribution.” Selling commissions
and the dealer manager fee will not be charged with regard to shares
purchased pursuant to our distribution reinvestment
plan.
|
(4)
|
These
organization and offering expenses include all expenses (other than
selling commissions and the dealer manager fee) to be paid by us in
connection with the offering, including our legal, accounting, printing,
mailing and filing fees, charges of our escrow holder, due diligence
expense reimbursements to participating broker-dealers and amounts to
reimburse American Realty Capital Advisors, LLC for its portion of the
salaries of the employees of its affiliates who provide services to our
advisor and other costs in connection with administrative oversight of the
offering and marketing process and preparing supplemental sales materials,
holding educational conferences and attending retail seminars conducted by
broker-dealers. Our advisor will be responsible for the payment of all
such organization and offering expenses to the extent such expenses exceed
1.5% of the aggregate gross proceeds of this
offering.
|
(5)
|
This
estimate assumes the amount of proceeds available for investment is equal
to the gross offering proceeds less the public offering expenses, and we
have assumed that no financing is used to acquire properties or other real
estate assets. Our board’s investment policies limit our ability to
purchase property if the total of all acquisition fees and expenses
relating to the purchase exceeds 4% of the contract purchase price unless
a majority of our directors (including a majority of our independent
directors) not otherwise interested in the transaction approve fees and
expenses in excess of this limit and determine the transaction to be
commercially competitive, fair and reasonable to
us.
|
(6)
|
Included
in the computation of such fees will be any real estate commission,
acquisition and advisory fee, development fee, construction fee,
non-recurring management fee, loan fees, financing coordination fees or
points or any fee of a similar nature, which in the aggregate will not
exceed 6% of the sale price of such property or
properties.
|
(7)
|
Actual
gross amounts determined on a leveraged basis are dependent upon the
aggregate purchase price of our properties and, therefore, cannot be
determined at the present time.
|
(8)
|
Based
on the Sponsors’ experience with the acquisitions completed by American
Financial Realty Trust and our acquisitions completed to date, acquisition
expenses are generally 0.5% of the purchase price of each
property.
|
(9)
|
Aggregate
asset value will be equal to the aggregate value of our assets (other than
investments in bank accounts, money markets funds or other current assets)
at cost before deducting depreciation, bad debts or other similar non-cash
reserves and without reduction for any debt relating to such assets at the
date of measurement, except that during such periods in which our board of
directors is determining on a regular basis the current value of our net
assets for purposes of enabling fiduciaries of employee benefit plans
stockholders to comply with applicable Department of Labor reporting
requirements, aggregate asset value is the greater of (a) the amount
determined pursuant to the foregoing or (b) our assets’ aggregate
valuation most recently established by our board without reduction for
depreciation, bad debts or other similar non-cash reserves and without
reduction for any debt secured by or relating to such
assets.
|
(10)
|
The
property management and leasing fees payable to American Realty Capital
Properties, LLC are subject to the limitation that the aggregate of all
property management and leasing fees paid to American Realty Capital
Properties, LLC and its affiliates plus all payments to third parties for
property management and leasing services may not exceed the amount that
other non-affiliated property management and leasing companies generally
charge for similar services in the same geographic location. Additionally,
all property management and leasing fees, including both those paid to
American Realty Capital Properties, LLC and third parties, are subject to
the limit on total operating expenses as described on the following two
pages. American Realty Capital Properties, LLC may subcontract its duties
for a fee that may be less than the fee provided for in our property
management agreement with American Realty Capital Properties,
LLC.
|
|
|
(11)
|
We
may reimburse our advisor in excess of that limit in the event that a
majority of our independent directors determine, based on unusual and
non-recurring factors, that a higher level of expense is justified. In
such an event, we will send notice to each of our stockholders within 60
days after the end of the fiscal quarter for which such determination was
made, along with an explanation of the factors our independent directors
considered in making such determination. We will not reimburse our advisor
for personnel costs in connection with services for which the advisor
receives acquisition fees or real estate commissions.
|
|
|
|
We
lease a portion of our office space from an affiliate of our advisor and
share the space with other American Realty Capital-related entities. The
amount we will pay under the lease will be determined on a monthly basis
based upon on the allocation of the overall lease cost to the approximate
percentage of time, size of the area that we utilize and other resources
allocated to us.
|
|
|
(12)
|
Although
we are most likely to pay real estate commissions to American Realty
Capital Advisors, LLC or an affiliate in the event of our liquidation,
these fees may also be earned during our operational
stage.
|
(13)
|
Upon
termination of the Advisory Agreement, American Realty Capital II, LLC may
be entitled to a similar performance fee if American Realty Capital II,
LLC would have been entitled to a subordinated participation in net sale
proceeds had the portfolio been liquidated (based on an independent
appraised value of the portfolio) on the date of termination. Under our
charter, we could not increase these success-based fees without the
approval of a majority of our independent directors, and any increase in
the subordinated participation in net sale proceeds would have to be
reasonable. Our charter provides that such incentive fee is “presumptively
reasonable” if it does not exceed 15% of the balance of such net proceeds
remaining after investors have received a return of their net capital
contributions and an 6% per year cumulative, non-compounded
return.
|
|
American
Realty Capital II, LLC cannot earn both the subordinated participation in
net sale proceeds and the subordinated incentive listing fee. The
subordinated participation in net sale proceeds or the subordinated
listing fee, as the case may be, will be paid in the form of a
non-interest bearing promissory note that will be repaid from the net sale
proceeds of each sale after the date of the termination or listing. At the
time of such sale, we may, however, at our discretion, pay all or a
portion of such promissory note with shares of our common stock or cash.
If shares are used for payment, we do not anticipate that they will be
registered under the Securities Act and, therefore, will be subject to
restrictions on transferability. Any portion of the subordinated
participation in net sale proceeds that American Realty Capital II, LLC
receives prior to our listing will offset the amount otherwise due
pursuant to the subordinated incentive listing fee. In no event will the
amount paid to American Realty Capital II, LLC under the promissory note,
if any, exceed the amount considered presumptively reasonable by the NASAA
REIT Guidelines.
|
(14)
|
If
at any time the shares become listed on the New York Stock Exchange or
NASDAQ Stock Market, we will negotiate in good faith with American Realty
Capital II, LLC a fee structure appropriate for an entity with a perpetual
life. Our independent directors must approve the new fee structure
negotiated with American Realty Capital II, LLC. The market value of our
outstanding stock will be calculated based on the average market value of
the shares issued and outstanding at listing over the 30 trading days
beginning 180 days after the shares are first listed or included for
quotation. We have the option to pay the subordinated incentive listing
fee in the form of stock, cash, a promissory note or any combination
thereof. In the event the subordinated incentive listing fee is earned by
American Realty Capital II, LLC as a result of the listing of the shares,
any previous payments of the subordinated participation in net sale
proceeds will offset the amounts due pursuant to the subordinated
incentive listing fee, and we will not be required to pay American Realty
Capital Advisors, LLC any further subordinated participation in net sale
proceeds.
|
(15)
|
Our
charter and the Partnership Agreement of American Realty Capital Operating
Partnership, L.P. provide that before any subordinated participation in
net sales proceeds or subordinated incentive listing fee is paid to
American Realty Capital II, LLC, the shareholders of our stock have to
receive a 6% cumulative non-compounded return on their original purchase
price for their shares.
|
(16)
|
All
fees and commissions under the Property Management Agreement will be no
less favorable than fees and commissions from transactions with
unaffiliated third parties performing property management for double and
triple net leases.
|
American
Realty Capital II, LLC cannot earn both the subordinated participation in net
sale proceeds and the subordinated incentive listing fee. The subordinated
participation in net sale proceeds or the subordinated listing fee, as the case
may be, will be paid in the form of a non-interest bearing promissory note that
will be repaid from the net sale proceeds of each sale after the date of the
termination or listing. We may, after such note is issued however, at our
discretion, pay all or a portion of such promissory note with shares of our
common stock or cash. If shares are used for payment, we do not anticipate that
they will be registered under the Securities Act and, therefore, will be subject
to restrictions on transferability. Any portion of the subordinated
participation in net sale proceeds that American Realty Capital II, LLC receives
prior to our listing will offset the amount otherwise due pursuant to the
subordinated incentive listing fee. In no event will the amount paid to American
Realty Capital II, LLC under the promissory note, if any, exceed the amount
considered presumptively reasonable by the NASAA REIT Guidelines.
At least
a majority of our independent directors must determine, from time to time but at
least annually, that our total fees and expenses are reasonable in light of our
investment performance, net assets, net income and the fees and expenses of
other comparable unaffiliated REITs. Each such determination will be reflected
in the minutes of our board of directors. The total operating expenses (as
defined in the NASAA REIT Guidelines) of the company will not exceed, in any
fiscal year, the greater of 2% of the Average Invested Assets (as defined in the
NASAA REIT Guidelines) or 25% of Net Income (as defined in the NASAA REIT
Guidelines), unless our independent directors find that, based on unusual and
non-recurring factors, a higher level of expense is justified for that year. Our
independent directors shall also supervise the performance of our advisor and
the compensation that we pay to it to determine that the provisions of our
advisory agreement are being carried out.
Each such
determination will be recorded in the minutes of our board of directors and
based on the factors set forth below and other factors that the independent
directors deem relevant:
|
·
|
the
size of the advisory fee in relation to the size, composition and
profitability of our portfolio;
|
|
·
|
the
success of American Realty Capital Advisors, LLC in generating
opportunities that meet our investment
objectives;
|
|
·
|
the
rates charged to other REITs, especially similarly structured REITs, and
to investors other than REITs by advisors performing similar
services;
|
|
·
|
additional
revenues realized by American Realty Capital Advisors, LLC through its
relationship with us;
|
|
·
|
the
quality and extent of service and advice furnished by American Realty
Capital Advisors, LLC;
|
|
·
|
the
performance of our investment portfolio, including income, conservation or
appreciation of capital, frequency of problem investments and competence
in dealing with distress situations;
and
|
|
·
|
the
quality of our portfolio in relationship to the investments generated by
American Realty Capital Advisors, LLC for the account of other
clients.
|
Since
American Realty Capital Advisors, LLC and its affiliates are entitled to
differing levels of compensation for undertaking different transactions on our
behalf, such as the property management fees for operating our properties and
the subordinated participation in net sale proceeds, our advisor has the ability
to affect the nature of the compensation it receives by undertaking different
transactions. However, American Realty Capital Advisors, LLC is obligated to
exercise good faith and integrity in all its dealings with respect to our
affairs pursuant to the advisory agreement. See “Management — The
Advisory Agreement.”
The
following table shows, as of the date of October 20, 2009, the amount of our
common stock beneficially owned by (a) any person who is known by us to be the
beneficial owner of more than 5% of our outstanding shares, (b) members of our
board of directors and proposed directors, (c) our executive officers, and (d)
all of our directors and executive officers as a group.
|
|
Common
Stock
Beneficially
Owned (2)
|
Name
of Beneficial Owner (1)
|
|
Number
of Shares of Common Stock
|
|
Percentage
of
Class
|
|