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EX-31.1 - CERTIFICATION - CNL LIFESTYLE PROPERTIES INCd832390dex311.htm
EX-21.1 - SUBSIDIARIES OF THE REGISTRANT - CNL LIFESTYLE PROPERTIES INCd832390dex211.htm
EX-32.1 - CERTIFICATION - CNL LIFESTYLE PROPERTIES INCd832390dex321.htm
EX-31.2 - CERTIFICATION - CNL LIFESTYLE PROPERTIES INCd832390dex312.htm
EX-12.1 - COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES - CNL LIFESTYLE PROPERTIES INCd832390dex121.htm
EX-10.12 - PURCHASE AND SALE AGREEMENT - CNL LIFESTYLE PROPERTIES INCd832390dex1012.htm
EXCEL - IDEA: XBRL DOCUMENT - CNL LIFESTYLE PROPERTIES INCFinancial_Report.xls
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2014

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 000-51288

 

 

CNL LIFESTYLE PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   20-0183627

(State of other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

450 South Orange Avenue

Orlando, Florida

  32801
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (407) 650-1000

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of exchange on which registered

None   Not applicable

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 par value per share

(Title of class)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.05 of this Chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ¨

There is currently no established market for the registrant’s shares of common stock. Based on the estimated net asset value per share of the registrant’s common stock of $6.85 per share at June 30, 2014 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market of stock by non-affiliates as of June 30, 2014 was $2.2 billion.

As of March 13, 2015, there were 325,184,227 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

[Intentionally left blank]

 

 

 


Table of Contents

Contents

 

               Page  
Part I         
      Cautionary Note Regarding Forward Looking Information      1   
   Item 1.    Business      2   
   Item 1A.    Risk Factors      25   
   Item 1B.    Unresolved Staff Comments      48   
   Item 2.    Properties      49   
   Item 3.    Legal Proceedings      56   
   Item 4.    Mine Safety Disclosure      56   
Part II.         
   Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      57   
   Item 6.    Selected Financial Data      61   
   Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      64   
   Item 7A.    Quantitative and Qualitative Disclosures About Market Risk      95   
   Item 8.    Financial Statements and Supplementary Data      98   
   Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure      144   
   Item 9A.    Controls and Procedures      144   
   Item 9B.    Other Information      144   
Part III.
 
        
   Item 10.    Directors, Executive Officers and Corporate Governance      145   
   Item 11.    Executive Compensation      150   
   Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      151   
   Item 13.    Certain Relationships and Related Transactions and Director Independence      152   
   Item 14.    Principal Accountant Fees and Services      152   
Part IV.
 
        
   Item 15.    Exhibits, Financial Statement Schedules      154   

Signatures

     174   

Schedule II—Valuation and Qualifying Accounts

     176   

Schedule III—Real Estate and Accumulated Depreciation

     177   

Schedule IV—Mortgage Loans on Real Estate

     181   


Table of Contents

PART I

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements contained under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report on Form 10-K for the fiscal year ended December 31, 2014 (this “Annual Report”) that are not statements of historical or current fact may constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. The Company intends that such forward-looking statements be subject to the safe harbor created by Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are statements that do not relate strictly to historical or current facts, but reflect management’s current understandings, intentions, beliefs, plans, expectations, assumptions and/or predictions regarding the future of the Company’s business and its performance, the economy, and other future conditions and forecasts of future events and circumstances. Forward-looking statements are typically identified by words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “plans,” “continues,” “pro forma,” “may,” “will,” “seeks,” “should,” “could” and words and terms of similar substance in connection with discussions of future operating or financial performance, business strategy and portfolios, projected growth prospects, cash flows, costs and financing needs, legal proceedings, amount and timing of anticipated future distributions, estimates of per share net asset value of the Company’s common stock, and/or other matters. The Company’s forward-looking statements are not guarantees of future performance. While the Company’s management believes its forward-looking statements are reasonable, such statements are inherently susceptible to uncertainty and changes in circumstances. As with any projection or forecast, forward-looking statements are necessarily dependent on assumptions, data and/or methods that may be incorrect or imprecise, and may not be realized. The Company’s forward-looking statements are based on management’s current expectations and a variety of risks, uncertainties and other factors, many of which are beyond the Company’s ability to control or accurately predict. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company’s actual results could differ materially from those set forth in the forward-looking statements due to a variety of risks, uncertainties and other factors. Given these uncertainties, the Company cautions you not to place undue reliance on such statements.

For further information regarding risks and uncertainties associated with the Company’s business, and important factors that could cause the Company’s actual results to vary materially from those expressed or implied in its forward-looking statements, please refer to the factors listed and described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Risk Factors” sections of the Company’s documents filed from time to time with the U.S. Securities and Exchange Commission, including, but not limited to, this Annual Report and the Company’s quarterly reports on Form 10-Q, copies of which may be obtained from the Company’s website at http://www.cnllifestylereit.com.

All written and oral forward-looking statements attributable to the Company or persons acting on its behalf are qualified in their entirety by this cautionary note. Forward-looking statements speak only as of the date on which they are made, and the Company undertakes no obligation to, and expressly disclaims any obligation to, publicly release the results of any revisions to its forward-looking statements to reflect new information, changed assumptions, the occurrence of unanticipated subsequent events or circumstances, or changes to future operating results over time, except as otherwise required by law.

 

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Item 1. BUSINESS

General

CNL Lifestyle Properties, Inc. is a Maryland corporation incorporated on August 11, 2003. The terms “we,” “our,” or “us,” “the Company” and “CNL Lifestyle Properties” include CNL Lifestyle Properties, Inc. and each of its subsidiaries. We operate as a real estate investment trust (“REIT”). Two of our wholly owned subsidiaries, CLP GP Corp. and CLP LP Partners Corp., are the general and limited partners, respectively, of CLP Partners, LP, who is our operating partnership, which conducts substantially all of our operations and owns substantially all of our assets. We have retained CNL Lifestyle Advisor Corporation (the “Advisor”), as our Advisor to provide management, acquisition, disposition, advisory and administrative services. Our offices are located at 450 South Orange Avenue within the CNL Center at City Commons in Orlando, Florida 32801, and our telephone number is (407) 650-1000.

Our Exit Strategy

As required under our articles of incorporation, we began a process of evaluating strategic alternatives in an effort to undertake to provide stockholders with liquidity of their investment by December 31, 2015, either in whole or in part, including, without limitation, through (i) the commencement of an orderly sale of our assets, outside of the ordinary course of business and consistent with our objectives of qualifying as a REIT, and the distribution of the net sales proceeds thereof to the stockholders or (ii) our merger with or into another entity in a transaction which provides the stockholders with cash or securities of a publicly traded company or (iii) a listing of our shares on a national stock exchange (“Listing”).

We will seek to maximize the total value of our portfolio in connection with our evaluation of various strategic opportunities in preparation for an exit strategy. In connection with these objectives, in March 2014, we engaged Jefferies LLC, a leading global investment banking and advisory firm, to assist management and the Board of Directors in actively evaluating various strategic opportunities including the sale of either us or our assets, potential merger opportunities, or the Listing of our common stock. In connection with this process, during 2014 we sold 49 properties for total net sales proceeds of $384.3 million (including the sale of our entire 48 property golf portfolio). We used net proceeds from these sales and other cash on hand to repay mortgage loans associated with the assets sold for $145.0 million and repurchased and cancelled $78.3 million in unsecured senior notes. In December 2014, we entered into a purchase and sale agreement for the sale of our entire portfolio of senior housing assets comprised of 38 properties, for $790 million, subject to certain adjustment, which we expect to sell during the second quarter of 2015. We expect the net proceeds from the sale of our senior housing properties and other assets to be used to (i) retire debt, including the repurchase of our senior unsecured notes; (ii) make a special distribution to stockholders; and/or (iii) make strategic capital expenditures to enhance certain of our remaining properties. In addition, as of December 31, 2014, we had agreed to a plan to sell our marinas portfolio consisting of 17 properties.

In March 2015, we entered into an agreement to sell our 81.98% interest in the DMC Partnership, an unconsolidated joint venture, for $140 million to our co-venture partner, and entered into an agreement to sell one of our attractions properties for $140 million and entered into a letter of intent to sell our unimproved land for $5.5 million, all at amounts that equal or exceed the carrying value of these properties. We are evaluating the sale of other assets as part of our strategic alternatives.

Business Strategy

Our principal investment objectives include investing in and owning a diversified portfolio of real estate with a goal to preserve, protect and enhance the long-term value of those assets. We primarily invested in lifestyle properties in the United States that we believed had the potential for long-term growth and income generation. Our investment thesis was supported by demographic trends which we believed affected consumer demand for the various lifestyle asset classes that were the focus of our investment strategy. We defined lifestyle properties as those properties that reflect or are impacted by the social, consumption and entertainment values and choices of our society. A large number of our properties are leased on a long-term, triple-net basis (generally five to 20 years, plus multiple renewal options) to tenants or operators that we consider to be industry leading. When beneficial to our investment structure and as a result of tenant defaults, we engage third-party managers to operate certain properties on our behalf as permitted under applicable tax regulations. To a lesser extent, we also made and acquired loans generally collateralized by interests in real estate and enter into joint ventures related to interests in real estate.

 

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Following our investment strategy of acquiring carefully selected and well-located lifestyle and other income producing properties, we believe we built a unique portfolio of assets with established long-term operating histories, and created diversification within the portfolio by region, operator and asset class. As of March 13, 2015, we held ownership interests in 105 lifestyle properties (of which 55 consolidated properties and one unconsolidated property held through one joint venture, were classified as held for sale as of December 31, 2014, by us and the joint venture, respectively). When aggregated by initial purchase price, the portfolio is diversified as follows: approximately 30% in ski and mountain lifestyle, 25% in senior housing, 27% in attractions, 7% in marinas and 11% in additional lifestyle properties. These assets consist of 24 ski and mountain lifestyle properties, 38 senior housing properties, 24 attractions, 17 marinas and two additional lifestyle properties with the following investment structure:

 

Wholly-owned:

Leased properties

  42   

Managed properties

  54   

Unimproved Land

  1   

Unconsolidated joint ventures: (1)

Leased properties

  8   
  

 

 

 
  105   
  

 

 

 

 

FOOTNOTE:

 

(1) As of December 31, 2014, one property, held through one of our unconsolidated joint ventures, is expected to be sold in 2015. In addition, during 2015, we entered into an agreement in to sell our 81.98% interest in the DMC Partnership joint venture, which owns one property, to our co-venture partner. See Item 7. “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” for additional information.

Our real estate investment portfolio is geographically diversified with properties in 34 states and 2 Canadian provinces. The map below shows our current property allocations across geographic regions as of March 13, 2015.

 

LOGO

 

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Our tenants and operators. We generally attempt to lease our properties to tenants and operators that we consider to be industry leading. However, we do not believe the success of our properties is based solely on the performance or abilities of our tenants and operators. In some cases, we consider the assets we have acquired to be unique, iconic or nonreplicable which by their nature have an intrinsic value. In addition, in the event a tenant is in default and vacates a property, under special provisions in the tax laws, we are able to engage a third-party manager to operate the property on our behalf for a period of time until we re-lease it to a new tenant. During this period, the property remains open and we receive any net earnings from the property’s operations. These amounts may be more or less than the rents that were contractually due under the prior leases. Any taxable income from these properties will be subject to income tax until we re-lease these properties to new tenants.

Financial information about geographic areas. We have one consolidated property, Cypress Mountain, located in British Columbia, Canada, which generated total rental income of approximately $6.3 million, $7.2 million and $7.6 million for the years ended December 31, 2014, 2013 and 2012, respectively. We also own interests in two other properties located in Canada through unconsolidated joint ventures that generated a combined equity in earnings (loss) of approximately ($0.1) million, $0.9 million and ($1.0) million during the years ended December 31, 2014, 2013 and 2012, respectively. The remainder of our net loss was generated from properties or investments located in the United States.

Our leases and ventures. As part of our net lease investment strategy, we either acquire properties directly or purchase interests in entities that own the properties. Once we acquire the properties, we either lease them back to the original seller or to a third-party operator. These leases are usually structured as triple-net leases which means our tenants are generally responsible for repairs, maintenance, property taxes, ground lease or permit expenses (where applicable), utilities and insurance for the properties that they lease.

The weighted-average lease rate of our consolidated properties subject to long-term triple-net leases as of December 31, 2014 was approximately 10.0% (excluding our properties held for sale). This rate was based on the weighted-average annualized straight-lined base rent due under our leases. We typically structure our leases to provide for the payment of a minimum annual base rent with periodic increases in base rent over the lease term. In addition, our leases typically provide for the payment of percentage rent based on a percentage of gross revenues generated at the property over certain thresholds. Within the provisions of our leases, we also generally require the payment of capital improvement reserve rent. Capital improvement reserve rents are paid by the tenant and are generally based on a percentage of gross revenue of the property and are set aside by us for capital improvements, replacements and other capital expenditures at the property. These amounts are and will remain our property during and after the term of the lease and help maintain the integrity of our assets.

Our leases are generally long-term in nature (generally five to 20 years with multiple renewal options). We have no near-term lease expiration. Many of our tenants operate more than one of our properties with the leases being cross-defaulted. As of December 31, 2014, we have 42 consolidated properties structured as triple-net leases with the average lease expiration of approximately 13 years. The following table lists, on an aggregate basis, scheduled expirations for the next 10 years ending December 31st and thereafter for our consolidated properties, including properties held for sale, structured under triple-net leases (dollar amounts are in thousands).

 

Lease

Expiration

Year (1)

   Number of
Tenants
   Number of
Leases /
Properties
     Expiring
Annual
Base
Rents
     Percentage of
Expiring
Annual Base
Rents
 

2023

   3      8       $ 11,667         9.7

2024

   4      8         10,129         8.4

Thereafter

   10      26         98,077         81.9
     

 

 

    

 

 

    

 

 

 

Total

  42    $ 119,873      100.0
     

 

 

    

 

 

    

 

 

 

 

FOOTNOTE:

 

(1) There is no lease expiration for years excluded from the table. Lease expiration dates do not include renewal options held by our tenants.

 

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Our managed properties. When beneficial to our investment structure and subject to applicable tax regulations, certain properties (hotels and senior housing properties) may be leased to wholly-owned tenants that are taxable REIT subsidiaries or that are owned through taxable REIT subsidiaries (referred to as “TRS” entities). Under this structure, we engage a third-party manager to conduct day-to-day operations and our results of operations will include the operating results of the underlying properties as opposed to rental income from operating leases that is recorded for properties leased to third-party tenants. In addition, in the case of a tenant default and lease termination, we may engage a third-party manager to operate the property on our behalf for a period of time until we can re-lease the property. This allows us time to stabilize the property, if necessary, and enter into a new lease when market conditions are potentially more favorable. During this managed period, we recognize all the underlying property operating revenues and expenses in our consolidated financial statements and may be subject to more direct operating risk including risks associated with seasonality and are subject to federal income tax on taxable income from the operations. See “Seasonality” below for additional information.

Our joint ventures. We have entered into joint ventures in which our partners subordinate their returns to our minimum return. This structure provides us with some protection against the risk of downturns in performance but may allow our partners to obtain a higher rate of return on their investment than we receive if the underlying performance of the properties exceeds certain thresholds. Properties that are owned through unconsolidated joint ventures may be leased or managed depending on the circumstance related to each property. As of December 31, 2014, we had a total of eight properties, under leased structure, owned through two unconsolidated joint ventures. As of December 31, 2014, one of the properties held through one of our unconsolidated joint ventures is classified as assets held for sale and is expected to be sold in 2015. In March 2015, we entered into an agreement to sell our 81.98% interest in the DMC Partnership, which owns one property under a leased structure. See Item 7. “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” for additional information.

Seasonality. Many of the asset classes in which we invest experience seasonal fluctuations due to the nature of their business, geographic location, climate and weather patterns. As a result, these businesses experience seasonal variations in revenues that may require our tenants to supplement operating cash from properties in order to be able to make scheduled rent payments to us. We have structured the leases for certain tenants such that rents are paid on a seasonal schedule with most, if not all, of the rent being paid during the tenant’s seasonally busy operating period.

As part of our portfolio diversification strategy, we have specifically considered the varying and complementary seasonality of our asset classes and portfolio mix. For example, the peak operating season of our ski and mountain lifestyle assets is highly complementary to the peak seasons in our attractions and marinas to balance and mitigate the risks associated with seasonality. Generally, seasonality does not significantly affect our recognition of rental income from operating leases due to straight-line revenue recognition in accordance with generally accepted accounting principles (“GAAP”). However, seasonality does impact the timing of when base rent payments are made by our tenants, which impacts our operating cash flows and the amount of rental revenue we recognize in connection with capital improvement reserve revenue and percentage rents paid by our tenants, which is recognized in the period in which it is earned and is generally based on a percentage of tenant gross revenues.

In addition, seasonality directly impacts certain of our properties where we engage independent third-party managers to operate properties on our behalf and where we record property operating revenues and expenses rather than straight-line rents from operating leases. These properties will likely generate net operating losses during their non-peak months while generating most, if not all, of their operating income during their peak operating months. As of December 31, 2014, we had a total of 54 wholly-owned managed properties consisting of one ski and mountain lifestyle, 16 attractions properties, 20 senior housing properties, and 17 marinas. Our consolidated operating results and cash flows during the first, second and fourth quarters will generally be lower than the third quarter primarily due to the non-peak operating months of our larger attractions properties.

Significant tenants. As of the year ended December 31, 2014, we did not have any tenants who accounted for 10% or more of our aggregate revenue and assets.

 

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Distribution Reinvestment Plan

In 2011 we completed our common stock offerings and filed a registration statement on Form S-3 under the Securities Exchange Act of 1933, as amended, to register the sale of additional shares of common stock under our Distribution Reinvestment Plan (“DRP”). In May 2014, we filed another registration statement on Form S-3 with the SEC for the purpose of registering additional shares of our common stock to be offered for sale pursuant to the DRP.

During the years ended December 31, 2014, 2013 and 2012, we raised approximately $27.2 million, $54.9 million and $69.0 million, respectively, through our DRP. Our DRP was suspended by our Board of Directors in the third quarter of 2014. See “Part II – Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Distribution Plan” and Item 7. “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” for additional information.

Our Disposition Policies

As a mature REIT, a significant focus is to actively manage our assets and reinvest in our existing properties in order to maximize growth in rental income and property operating incomeAs part of exploring strategic alternatives, as described above under “Our Exit Strategy”, we are evaluating each of our properties on a rigorous and ongoing basis and in an effort to optimize and enhance the value of our assets, and we have sold and may consider selling some or all of our other properties in preparation for an exit strategy.

Termination and REIT Status

Our articles of incorporation provide that the Board of Directors shall use its best efforts to take such actions as are necessary, and may take such actions as it deems desirable, to preserve the status of the Company as a REIT. However, in the event that the Board of Directors determines, by a vote of at least two-thirds (2/3) of the Directors, that it is no longer in the best interests of the Company to remain qualified as a REIT, the Board of Directors shall cause the termination of the Company’s qualification as a REIT to be submitted to a vote of the Company’s stockholders. The stockholders may terminate the Company’s status as a REIT by a vote of holders of majority of our shares of stock outstanding and entitled to vote.

Our articles of incorporation also provide for the Company’s voluntary termination and dissolution by the affirmative vote of a majority of our shares of stock outstanding and entitled to vote. Under Maryland law, the Company’s voluntary termination and dissolution must also be declared advisable by a majority of the entire Board of Directors.

Competition

As a REIT, we have historically experienced competition from other REITs (both traded and non-traded), real estate partnerships, mutual funds, institutional investors, specialty finance companies, opportunity funds, healthcare providers, and other investors, including, but not limited to, banks and insurance companies, many of which generally have had greater financial resources than we do for the purposes of leasing and financing properties within our targeted asset classes. These competitors often may also have a lower cost of capital and may be subject to less regulation. The level of competition impacts both our ability to raise capital, find real estate investments and locate suitable tenants. We may also face competition from other funds in which affiliates of our Advisor participate or advise.

 

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In general, we perceived there to be a lower level of competition for the types of assets that we acquired in comparison to assets in more core real estate sectors based on the number of willing buyers and the volume of transactions in their respective markets. Accordingly, we believed that being focused in specialty or lifestyle asset classes allowed us to take advantage of unique opportunities although it may also make it challenging for us to sell our properties. Some of our key competitive advantages were as follows:

 

    We acquired assets in niche sectors which historically traded at higher cap rates than other core commercial real estate sectors such as multi-family, industrial, office and retail.

 

    Certain of our lifestyle properties have inherently high barriers to entry. For example, the process of obtaining permits to create a new ski resort is highly regulated and significantly more difficult than obtaining permits for the construction of new office or retail space. Additionally, general geographic constraints, such as the availability of suitable mountain terrain, are an inherent barrier to entry in several of our asset classes. There are also high costs associated with building a new ski resort or regional gated attractions that may be prohibitive to potential market participants.

 

    Our leasing arrangements generally require the payment of capital improvement reserve rent which is paid by the tenants and set aside by us to be reinvested into the properties. This arrangement allows us to maintain the integrity of our properties and mitigates deferred maintenance issues.

 

    Unlike our competitors in many other commercial real estate sectors that generally receive no income in the event a tenant defaults or vacates a property, applicable tax laws allow us to engage a third-party manager to operate a property on our behalf for a period of time until we can re-lease it to a new tenant. During that period, we receive any net earnings from the underlying business operations, which may be less than rents collected under the previous leasing arrangement. However, our ability to continue to operate the property under such an arrangement helps to off-set taxes, insurance and other operating costs that would otherwise have to be absorbed by a landlord and allows the property some time to stabilize, if necessary, before entering into a new lease.

Financial Information About Industry Segments

We have determined that we operate in one business segment, real estate ownership, which consists of investing in and owning a diversified portfolio of real estate primarily within the United States. We view, manage and evaluate all of our lifestyle properties homogeneously as one collection of assets with a common goal to maximize revenues and property income regardless of the type (ski, attractions, senior housing, etc.) or ownership structure (leased or managed). Our chief operating decision maker reviews all of our properties as one consolidated portfolio and does not drive resource allocation decisions based on individual property or groups of properties. In addition, we evaluated each individual property and determined they were individually less than 10% of the combined revenue for the year ended December 31, 2014. Accordingly, we do not report segment information.

Advisory Services

Under the terms of the advisory agreement, our Advisor is responsible for our day-to-day operations, administers our bookkeeping and accounting functions, serves as our consultant in connection with policy decisions to be made by our Board of Directors, manages our properties, loans, and other permitted investments and renders other services as the Board of Directors deems appropriate. In addition, the Advisor engages and contracts with certain of its affiliates to provide services and personnel to the Company. In exchange for these services, our Advisor is entitled to receive certain fees from us. First, for supervision and day-to-day management of the properties and the mortgage loans, our Advisor receives an asset management fee, which is payable monthly, based on the total real estate asset value of a property as defined in the advisory agreement (exclusive of acquisition fees and acquisition expenses), the outstanding principal amounts of any loans made by us and the amount invested in any other permitted investments as of the end of the preceding month. Second, for the period prior to April 1, 2014, our Advisor received an acquisition fee equal to 3% of the gross proceeds from our common stock offerings and loan proceeds from debt, lines of credit and other permanent financing that we used to acquire properties or to make or acquire loans and other permitted investments for the selection, purchase, financing, development, construction or renovation of real properties and services related to the issuance of debt.

 

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In March 2014, our Advisor amended the advisory agreement, effective April 1, 2014, to eliminate acquisition fees on equity, performance fees, debt acquisition fees and disposition fees, and to reduce the asset management fees to 0.075% monthly (or 0.90% annually) of average invested assets. In March 2015, our Advisor reaffirmed its agreement to continue to accept a reduced asset management fee of 0.90% of average invested assets.

In addition, we reimburse our Advisor for all of the costs it incurs in connection with the administrative services it provides to us. However, in accordance with the advisory agreement, our Advisor is required to reimburse us for the amount by which the total operating expenses (as described in the advisory agreement) incurred by us in any four consecutive fiscal quarters (the “Expense Year”) exceed the greater of 2% of average invested assets or 25% of net income (the “Expense Cap”). For the Expense Years ended December 31, 2014, 2013 and 2012, operating expenses did not exceed the Expense Cap.

Legal and Regulatory Considerations

General. Our properties are subject to various laws, ordinances and regulations, including regulations relating to common areas. We believe that each of our properties as of December 31, 2014 has the necessary permits and approvals to operate its business.

Americans with Disabilities Act. Our U.S. properties must comply with Title III of the Americans with Disabilities Act of 1990, or the ADA, to the extent that such properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. We are not aware of any material noncompliance with the ADA at our properties. However, noncompliance with the ADA could result in imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our properties and to make alterations as appropriate in this respect. See “Risk Factors – Real Estate and Other Investment Risks – We may incur significant costs complying with the Americans with Disabilities Act and Similar Laws.”

Environmental, Health, and Safety Matters. We are subject to many federal, state, and local environmental, health, and safety laws. The applicability of specific environmental, health, and, safety laws to each of our individual properties is dependent upon a number of property-specific factors, including: the current and former uses of the property; any impacts to the property from other properties; the type and amount of any emissions or discharges from or releases at the property; the building materials used at the property, including any asbestos-containing materials; and the type and amount of any hazardous substances or wastes used, stored, or generated at the property.

Under various laws relating to protection of the environment, current and former owners and operators of real property may be liable for any contamination resulting from the presence or release of hazardous or toxic substances at the property. Current and former owners and operators may also be held liable to the government or to third parties for property damage and for investigation and remediation costs related to contamination, regardless of whether the owners and operators were responsible for or even knew of the contamination, and the liability may be joint and several. The government may be entitled to a lien on a contaminated property. Certain environmental laws, as well as the common law, may subject us to liability for damages or injuries suffered by third parties as a result of environmental contamination or releases originating at our properties, including releases of asbestos, and the liabilities associated with our properties could exceed the values of the respective properties. Some of our properties were previously used for industrial purposes, and those properties may contain some degree of contamination. Environmental impacts or contamination at our properties may prevent us from selling or leasing the properties or using them as collateral. Environmental laws may regulate the use of our properties or the types of operations which can be conducted at our properties, and these regulations may necessitate corrective or other expenditures.

Some of our properties may contain asbestos-containing building materials. Asbestos-containing building materials are subject to management and maintenance requirements under environmental laws, and owners and operators may be subject to penalty for noncompliance. Environmental laws may allow suits by third parties for recovery from owners and operators for personal injury related to exposure to asbestos-containing building materials.

 

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Prior to the purchase of our properties, we generally engage independent environmental consultants to perform Phase I environmental assessments, which normally do not involve soil, groundwater or other invasive sampling. When Phase I environmental assessment results indicated the need to do so, we conducted Phase II assessments, which do involve invasive sampling. These assessments have not revealed any materially adverse environmental conditions which impact or have impacted our properties other than conditions which have been remediated or are currently undergoing remediation. There can be no assurance, however, that new environmental liabilities have not developed since the assessments were performed, that the assessment failed to reveal material adverse environmental conditions, liabilities, or compliance concerns, or that future developments, including changes in laws or regulations, will not impose environmental costs or liabilities upon us. If we become subject to material environmental liabilities, these liabilities could adversely affect us, our business and assets, the results of our operations, and our ability to meet our obligations. See, “Risk Factors – Real Estate and Other Investment Risks – Our properties may be subject to environmental liabilities that could significantly impact or return from the properties and the success of our ventures.”

Insurance. We maintain, or cause operators to maintain, insurance including, but not limited to, liability, fire, wind, earthquake, and business income coverage on all of our properties that are not being leased on a triple-net basis under various policies. We select policy specifications and insured limits which we believe to be appropriate given the relative risk of loss, the cost of the coverage and industry practice and, in the opinion of our company’s management, our properties that are not being leased on a triple-net basis are currently adequately insured. We do not carry insurance for generally uninsured losses such as loss from war or nuclear reaction. Certain of our properties are located in areas known to be seismically active. See “Risk Factors—Real Estate and Other Investment Risks—Potential losses may not be covered by insurance; and – Dramatic increases in insurance rates could adversely affect our cash flows and our ability to pay distributions to our stockholders.”

Government Regulation of Senior Housing. Senior housing communities are subject to relatively few, if any, federal regulations. Instead, to the extent they are regulated, the regulation is conducted mainly by state and local laws governing licensure, provision of services, staffing requirements and other operational matters. These state laws vary, however, most states require senior housing facilities to be licensed and to undergo planned and unplanned inspections. Typical state regulation provides that administrators and staff must have adequate education, demonstrated experience and attend ongoing training. In addition, state senior housing regulations generally require that the facility must demonstrate the ability to maintain overall operations while providing quality care, services and 24-hour supervision and oversight. In most states, senior housing communities are also subject to state or local building codes, fire codes, and food service licensing or certification requirements.

Federal regulation of senior housing is indirect through the regulation of the receipt of Medicare and Medicaid payments. Medicare and Medicaid payments may be subject to statutory and regulatory changes, retroactive rate adjustments, recovery of program overpayments or set-offs, administrative rulings, policy interpretations, payment or other delays by fiscal intermediaries, government funding restrictions (at a program level or with respect to specific facilities) and interruption or delays in payments due to any ongoing governmental investigations and audits at such property. See, “Risk Factors – Real Estate and Other Investment Risks – The U.S. healthcare environment is changing in many ways, which may not be favorable to our senior housing properties that offer healthcare services, as a result of recent federal healthcare legislation; – Some tenants of senior housing properties are subject to fraud and abuse laws, the violation of which by a tenant may jeopardize the tenant’s ability to make rent payments to us; – Legislation and governmental regulation mad adversely affect the development and operations of our properties; and – Government budget deficits could lead to a reduction in Medicare and Medicaid reimbursement.”

Employees

We are externally managed and as such we do not have any employees.

Taxation

The following summary of the taxation of the Company and the material federal tax consequences to the holders of our debt and equity securities (“securities”) is for general information only and is not tax advice. This summary does not address all aspects of taxation that may be relevant to certain types of holders of stock or securities (including, but not limited to, insurance companies, tax-exempt entities, financial institutions or broker-dealers, persons holding our securities as part of a hedging, integrated conversion, or constructive sale transaction or a straddle, traders in securities that use a mark-to-market method of accounting for their securities, investors in pass-through entities and foreign corporations and persons who are not citizens or residents of the United States).

 

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This summary does not discuss all of the aspects of U.S. federal income taxation that may be relevant in light of a particular investment or other circumstances. In addition, this summary does not discuss any state or local income taxation or foreign income taxation or other tax consequences. This summary is based on current U.S. federal income tax law. Subsequent developments in U.S. federal income tax law, including changes in law or differing interpretations, which may be applied retroactively, could have a material effect on the U.S. federal income tax consequences of purchasing, owning and disposing of our securities as set forth in this summary.

General. We elected to be taxed as a REIT commencing with our taxable year ended December 31, 2004. We believe that, commencing with such taxable year, we have been organized and have operated in a manner so as to qualify as a REIT for U.S. federal income tax purposes. Qualification and taxation as a REIT depends on our ability to meet on a continuing basis various qualification requirements imposed upon REITs by the Internal Revenue Code (the “Code”). Our ability to qualify as a REIT also requires that we satisfy certain asset tests (discussed below), some of which depend upon the fair market values of assets directly or indirectly owned by us. Such values may not be susceptible to a precise determination. While we intend to continue to operate in a manner that will allow us to qualify as a REIT, no assurance can be given that the actual results of our operations for any taxable year will satisfy such requirements for qualification and taxation as a REIT.

In any year in which we qualify as a REIT, in general, we will not be subject to federal income tax on that portion of our taxable income or capital gain that is distributed as taxable dividends to stockholders. This substantially eliminates the federal double taxation on earnings (taxation at both the corporate level and stockholder level) that usually results from an investment in a corporation. We may, however, be subject to tax at normal corporate rates on any taxable income or capital gain not distributed.

Despite our REIT election, we may be subject to federal income and excise tax as follows:

 

    We will be taxed at regular corporate rates on our undistributed taxable income, including undistributed net capital gains.

 

    Under some circumstances, we may be subject to an “alternative minimum tax.”

 

    If we have net gain for tax purposes from prohibited transactions (which are, in general, sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business), such gain will be subject to a 100% tax.

 

    To the extent we have elected to treat property that we acquire in connection with a foreclosure of a mortgage loan or certain leasehold terminations as “foreclosure property,” we may avoid the 100% tax on gain from a sale of that property (if the sale would otherwise constitute a prohibited transaction), but the income from the operation of the property may be subject to corporate income tax at the highest applicable rate.

 

    If we derive “excess inclusion income” from an interest in certain mortgage loan securitization structures (i.e. a “taxable mortgage pool” or a residual interest in a real estate mortgage investment conduit, or “REMIC”), then we could be subject to corporate level federal income tax at the highest corporate tax rate to the extent that such income is allocable to specified types of tax-exempt stockholders known as “disqualified organizations” that are not subject to unrelated business income tax;

 

    If we should fail to satisfy the asset test other than certain de minimis violations or other requirements applicable to REITs, as described below, yet nonetheless maintain our qualification as a REIT because there is reasonable cause for the failure and other applicable requirements are met, we may be subject to an excise tax. In that case, the amount of the tax will be at least $50,000 per failure, and, in the case of certain asset test failures, will be determined as the amount of net income generated by the assets in question multiplied by the highest corporate tax rate if that amount exceeds $50,000 per failure.

 

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    If we fail to satisfy either of the 75% or 95% gross income tests (discussed below) but have nonetheless maintained our qualification as a REIT because certain conditions have been met, we will be subject to a 100% tax on an amount based on the magnitude of the failure, as adjusted to reflect the profit margin associated with our gross income.

 

    If we fail to distribute during each year at least the sum of (i) 85% of our taxable income for the year, (ii) 95% of our capital gain net income for such year, and (iii) any undistributed taxable income from prior periods, then we will be subject to a 4% excise tax on the excess of the required distribution over the sum of (A) the amounts actually distributed, plus (B) retained amounts on which corporate level tax is paid by us.

 

    We may elect to retain and pay tax on our net long-term capital gains. In that case, a U.S. stockholder would be taxed on its proportionate share of our undistributed long-term capital gains and would receive a credit or refund for its proportionate share of the tax we paid.

 

    If we acquire appreciated assets from a C corporation that is not a REIT (i.e., a corporation generally subject to corporate level tax) in a transaction in which the C corporation would not normally be required to recognize any gain or loss on disposition of the asset and we subsequently recognize gain on the disposition of the asset during the ten-year period beginning on the date on which we acquired the asset, then a portion of the gain may be subject to tax at the highest regular corporate rate, unless the C corporation made an election to treat the asset as if it were sold for its fair market value at the time of our acquisition. We will also be required to distribute prior non-REIT earnings and profits.

 

    We may be required to pay monetary penalties to the Internal Revenue Service in certain circumstances, including if we fail to meet record keeping requirements intended to monitor our compliance with rules relating to the composition of a REIT’s stockholders.

 

    The earnings of our TRSs are subject to federal corporate income tax. In addition, a 100% excise tax will be imposed on the REIT and corporate level tax on the TRS for transactions between a TRS and the REIT that are deemed not to be conducted on an arm’s length basis.

In addition, we and our subsidiaries may be subject to a variety of taxes, including payroll taxes and state, local, foreign, property and other taxes, on our assets and operations. We could also be subject to tax in situations and on transactions not presently contemplated.

Qualification as a REIT. A REIT is defined as a corporation, trust or association:

 

  (1) which is managed by one or more trustees or directors;

 

  (2) the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest;

 

  (3) which would be taxable as a domestic corporation but for the federal income tax law relating to REITs;

 

  (4) which uses a calendar year for federal income tax purposes;

 

  (5) which is neither a financial institution nor an insurance company;

 

  (6) the beneficial ownership of which is held by 100 or more persons in each taxable year of the REIT except for its first taxable year;

 

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  (7) not more than 50% in value of the outstanding stock of which is owned during the last half of each taxable year, excluding its first taxable year, directly or indirectly, by or for five or fewer individuals (which includes certain entities) (the “Five or Fewer Requirement”); and

 

  (8) which meets certain income and asset tests described below.

Conditions (1) to (5), inclusive, must be met during the entire taxable year and condition (6) must be met during at least 335 days of a taxable year of 12 months or during a proportionate part of a taxable year of less than 12 months. For purposes of conditions (6) and (7), pension funds and certain other tax-exempt entities are treated as individuals, subject to a “look-through” exception in the case of condition (7).

Based on available information, we believe we have satisfied the share ownership requirements set forth in (6) and (7) above. In addition, our Amended and Restated Articles of Incorporation, provides for restrictions regarding ownership and transfer of shares. These restrictions are intended to assist us in continuing to satisfy the share ownership requirements described in (6) and (7) above. These restrictions, however, may not ensure that we will, in all cases, be able to satisfy the share ownership requirements described in (6) and (7) above.

Ownership of Qualified REIT Subsidiaries. We may own a number of properties through wholly owned subsidiaries. A corporation will qualify as a qualified REIT subsidiary (or “QRS”) if 100% of its stock is owned by a REIT, and the REIT does not elect to treat the subsidiary as a TRS. A QRS will not be treated as a separate corporation, and all assets, liabilities and items of income, deductions and credits of a QRS will be treated as assets, liabilities and items (as the case may be) of the REIT. A QRS is not subject to federal income tax, although they may be subject to state and local taxation in certain jurisdictions, and our ownership of the voting stock of a QRS will not violate the restrictions against ownership of securities of any one issuer which constitute more than 10% of the value or total voting power of such issuer or more than 5% of the value of our total assets, as described below under “— Asset Tests.”

Ownership of Partnership Interests. If we invest in a partnership, a limited liability company or a trust taxed as a partnership or as a disregarded entity, we will be deemed to own a proportionate share of the partnership’s, limited liability company’s or trust’s assets. Likewise, we will be treated as receiving our share of the income and loss of the partnership, limited liability company or trust, and the gross income will retain the same character in our hands as it has in the hands of the partnership, limited liability company or trust. These “look-through” rules apply for purposes of the income tests and assets tests described below. Thus, our proportionate share of the assets and items of gross income of our operating partnership, including its share of such items of any subsidiaries that are partnerships or limited liability companies that have not elected to be treated as corporations for U.S. federal income tax purposes, are treated as assets and items of gross income of the Company for purposes of applying the requirements described herein.

Investments in TRSs. A TRS is any corporation in which a REIT directly or indirectly owns stocks, provided that the REIT and the corporation make a joint election to treat that corporations as a TRS. The election can be revoked at any time as long as the REIT and the TRS revoke such election jointly. In addition, if a TRS holds, directly or indirectly, more than 35% of the securities of any other corporation (by vote or by value), then that other corporation also is treated as a TRS. A corporation can be a TRS with respect to more than one REIT.

Certain of our subsidiaries have elected to be treated as a TRS. TRSs are subject to full corporate level federal taxation on their earnings but are permitted to engage in certain types of activities that cannot be performed directly by REITs without jeopardizing REIT status. Our TRSs will attempt to minimize the amount of these taxes, but there can be no assurance whether or the extent to which measures taken to minimize taxes will be successful. To the extent our TRSs are required to pay federal, state or local taxes, the cash available for distribution as dividends to us from our TRSs will be reduced.

The amount of interest on related-party debt that a TRS may deduct is limited. Further, a 100% tax applies to any interest payments by a TRS to its affiliated REIT to the extent the interest rate is not commercially reasonable. A TRS is permitted to deduct interest payments to unrelated parties without restriction.

 

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The Internal Revenue Service (“IRS”) may reallocate costs between a REIT and its TRS where there is a lack of arm’s-length dealing between the parties. Any deductible expenses allocated away from a TRS would increase its tax liability. Further, any amount by which a REIT understates its deductions and overstates those of its TRS will, subject to certain exceptions, be subject to a 100% tax. Additional TRS elections may be made in the future for additional entities in which we own an interest.

Income Tests. There are two separate percentage tests relating to our sources of gross income that we must satisfy for each taxable year.

 

    At least 75% of our gross income for each taxable year must be derived directly or indirectly from investments relating to real property or mortgages on real property and from other specified sources, including qualified temporary investment income. Gross income includes “rents from real property” and, in some circumstances, interest, but excludes gross income from prohibited transactions.

 

    At least 95% of our gross income must be derived directly or indirectly each taxable year from any of the sources qualifying for the 75% gross income test and from dividends (including dividends from TRSs) and interest.

Rents received by us will qualify as “rents from real property” for purposes of satisfying the gross income tests for a REIT only if several conditions are met:

 

    The amount of rent must not be based in whole or in part on the income or profits of any person, although rents generally will not be excluded merely because they are based on a fixed percentage or percentages of receipts or sales.

 

    Rents received from a tenant will not qualify as rents from real property if the REIT, or an owner of 10% or more of the REIT, also directly or constructively owns 10% or more of the tenant, unless the tenant is our TRS and certain other requirements are met with respect to the real property being rented.

 

    If rent attributable to personal property leased in connection with a lease of real property is greater than 15% of the total rent received under the lease, then the portion of rent attributable to such personal property will not qualify as “rents from real property.”

 

    For rents to qualify as rents from real property, we generally must not furnish or render services to tenants, other than through a TRS or an “independent contractor” from whom we derive no income, except that we may directly provide services that are “usually or customarily rendered” in the geographic area in which the property is located in connection with the rental of real property for occupancy only, or are not otherwise considered “rendered to the occupant for his convenience.” If the services provided by us with respect to a property are impermissible customer services, the income derived there from will qualify as “rents from real property” if such income does not exceed 1% of all amounts received or accrued with respect to that property. The amount received for any service or management operation for this purpose shall be deemed to be not less than 150% of the direct cost of the REIT in furnishing or rendering the service or providing the management or operation.

 

   

A REIT may lease “qualified lodging facilities” and, for taxable years beginning after July 30, 2008, “qualified health care properties” on an arm’s-length basis to a TRS if the property is operated on behalf of such subsidiary by a person who qualifies as an “eligible independent contractor,” which generally is an “independent contractor” and who is, or is related to a person who is, actively engaged in the trade or business of operating qualified lodging facilities or qualified health care facilities, as applicable, for any person unrelated to us or our TRS. Generally, the rent that the REIT receives from the TRS will be treated as “rents from real property” notwithstanding the limit on 10% owned tenants described above. A “qualified lodging facility” is a hotel, motel or other establishment where more than one-half of the dwelling units in which are used on a transient basis, unless wagering activities are conducted at or in connection with such facility. A “qualified health care property” includes real property and any personal property that is, or is necessary or incidental to the use of, a hospital,

 

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nursing facility, assisted living facility, congregate care facility, qualified continuing care facility, or other licensed facility which extends medical or nursing or ancillary services to patients and which is operated by a provider of such services which is eligible for participation in the Medicare program with respect to such facility.

Interest income constitutes qualifying mortgage interest for purposes of the 75% income test to the extent that the obligation upon which such interest is paid is secured by a mortgage on real property. If we receive interest income with respect to a mortgage loan that is secured by both real property and other property, and the highest principal amount of the loan outstanding during a taxable year exceeds the fair market value of the real property on the date that we acquired or originated the mortgage loan, the interest income will be apportioned between the real property and the other collateral, and our income from the arrangement will qualify for purposes of the 75% income test only to the extent that the interest is allocable to the real property. Even if a loan is not secured by real property, or is undersecured, the income that it generates may nonetheless qualify for purposes of the 95% income test. The term “interest” generally does not include any amount if the determination of the amount depends in whole or in part on the income or profits of any person, although an amount generally will not be excluded from the term “interest” solely by reason of being based on a fixed percentage of receipts or sales.

We may, from time to time, enter into hedging transactions with respect to interest rate exposure or currency fluctuation on one or more of our assets or liabilities. For taxable years beginning on or before October 22, 2004, (1) payments to us under an interest rate swap or cap agreement, option, futures contract, forward rate agreement or any similar financial instrument entered into by us to reduce interest rate risk on indebtedness incurred or to be incurred and (2) gain from the sale or other disposition of any such investment are treated as income qualifying under the 95% gross income test. For transactions entered into after July 30, 2008, any of our income from a clearly identified hedging transaction that is entered into by us in the normal course of business, directly or indirectly, to manage the risk of interest rate movements, price changes or currency fluctuations with respect to borrowings or obligations incurred or to be incurred by us, or such other risks that are prescribed by the IRS, is excluded from the 95% and 75% gross income tests. In general, a hedging transaction is “clearly identified” if (1) the transaction is identified as a hedging transaction before the end of the day on which it is entered into and (2) the items or risks being hedged are identified “substantially contemporaneously” with the hedging transaction. An identification is not substantially contemporaneous if it is made more than 35 days after entering into the hedging transaction. We have and intend to structure any hedging transactions in a manner that does not jeopardize our status as a REIT. We may conduct some or all of our hedging activities through a TRS or other corporate entity, the income from which may be subject to federal, state, and/or international income tax, rather than by participating in the arrangements directly or through pass-through subsidiaries. No assurance can be given, however, that our hedging activities will not give rise to income that does not qualify for purposes of either or both of the REIT income tests, or that our hedging activities will not adversely affect our ability to satisfy the REIT qualification requirements.

As to gains and items of income recognized after July 30, 2008, “passive foreign exchange gain” for any taxable year will not constitute gross income for purposes of the 95% gross income test and “real estate foreign exchange gain” for any taxable year will not constitute gross income for purposes of the 75% gross income test. Real estate foreign exchange gain is foreign currency gain (as defined in Code section 988(b)(1)) which is attributable to: (i) any qualifying item of income or gain for purposes of the 75% gross income test; (ii) the acquisition or ownership of obligations secured by mortgages on real property or interests in real property; or (iii) becoming or being the obligor under obligations secured by mortgages on real property or on interests in real property. Real estate foreign exchange gain also includes Code section 987 gain attributable to a qualified business unit (a “QBU”) of a REIT if the QBU itself meets the 75% income test for the taxable year and the 75% asset test at the close of each quarter that the REIT has directly or indirectly held the QBU. Real estate foreign exchange gain also includes any other foreign currency gain as determined by the Secretary of the Treasury. Passive foreign exchange gain includes all real estate foreign exchange gain and foreign currency gain which is attributable to: (i) any qualifying item of income or gain for purposes of the 95% gross income test; (ii) the acquisition or ownership of obligations; (iii) becoming or being the obligor under obligations; and (iv) any other foreign currency gain as determined by the Secretary of the Treasury.

Generally, other than income from clearly identified hedging transactions entered into by us in the normal course of business, any foreign currency gain derived by us from dealing, or engaging in substantial and regular trading, in securities will constitute gross income which does not qualify under the 95% or 75% gross income tests.

 

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License income and other income from the right to use property which is not properly characterized as a lease for federal income tax purposes will not qualify under either the 75% or 95% gross income tests.

Income from sales of property by a REIT which are held for sale to customers may be subject to a 100% prohibited transactions tax and do not constitute gross income for purposes of the 75% and 95% gross income tests. A safe harbor to the characterization of the sale of property by a REIT as a prohibited transaction and the 100% prohibited transaction tax is available if the following requirements are met:

 

    the REIT has held the property for at least two years for the production of rental income;

 

    the aggregate expenditures made by the REIT, or any partner of the REIT, during the two-year period preceding the date of the sale that are includable in the basis of the property do not exceed 30% of the net selling price of the property;

 

    either (i) during the year in question, the REIT did not make more than seven sales of property other than foreclosure property or Section 1031 like-kind exchanges, or (ii) the aggregate adjusted bases of the non-foreclosure property sold by the REIT during the year did not exceed 10% of the aggregate bases of all of the assets of the REIT at the beginning of such year, or (iii) the fair market value of the non-foreclosure property sold by the REIT during the year did not exceed 10% of the fair market value of all the assets of the REIT at the beginning of such year; and

 

    if the REIT has made more than seven sales of non-foreclosure property during the year, substantially all of the marketing and development expenditures with respect to the property were made through an independent contractor from whom the REIT derives no income.

For purposes of the limitation on the number of sales that a REIT may complete in any given year, the sale of more than one property to one buyer will be treated as one sale. Moreover, if a REIT obtains replacement property pursuant to a Section 1031 like-kind exchange, then it will be entitled to take the holding period it has in the relinquished property for purposes of the two-year holding period requirement. The failure of a sale to fall within the safe harbor does not alone cause such sale to be a prohibited transaction subject to the 100% tax. In that event, the particular facts and circumstances of the transaction must be analyzed to determine whether it is a prohibited transaction.

Properties we acquire for the purpose of developing and selling to third parties, such as certain interests in vacation ownership properties, would generally held by us through a TRS and subject to corporate level taxes. Net after-tax income of a TRS may be distributed to us and will be qualifying income for purposes of the 95% but not the 75% gross income test.

If a REIT acquires real property and personal property incident to such real property through a foreclosure or similar process following a default on a lease of such property or a default on indebtedness owed to the REIT that is secured by the property, and if the REIT makes a timely election to treat such property as “foreclosure property” under applicable provisions of the Code, net income (including any foreign currency gain) the REIT realizes from such property generally will be subject to tax at the maximum U.S. federal corporate income tax rate, regardless of whether the REIT distributes such income to its shareholders currently. However, such income will nonetheless qualify for purposes of the 75% and 95% gross income tests even if it would not otherwise be qualifying income for such purposes in the absence of the foreclosure property election.

If we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may nevertheless qualify as a REIT for such year if we are eligible for relief. For taxable years beginning on or before October 22, 2004, these relief provisions generally will be available if: (1) our failure to meet such tests was due to reasonable cause and not due to willful neglect; (2) we attach a schedule of the sources of our income to our return; and (3) any incorrect information on the schedule was not due to fraud with intent to evade tax. For taxable years beginning after October 22, 2004, these relief provisions generally will be available if (1) following our identification of the failure, we file a schedule for such taxable year describing each item of our gross income, and (2) the failure to meet such tests was due to reasonable cause and not due to willful neglect.

 

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It is not now possible to determine the circumstances under which we may be entitled to the benefit of these relief provisions. If these relief provisions apply, a 100% tax is imposed on an amount equal to (a) the gross income attributable to (1) 75% of our gross income over the amount of qualifying gross income for purposes of the 75% income test and (2) 95% of our gross income (90% of our gross income for taxable years beginning on or before October 22, 2004) over the amount of qualifying gross income for purposes of the 95% income test, multiplied by (b) a fraction intended to reflect our profitability.

The Secretary of the Treasury is given broad authority to determine whether particular items of income or gain qualify or not under the 75% and 95% gross income tests, or are to be excluded from the measure of gross income for such purposes.

Asset Tests. Within 30 days after the close of each quarter of our taxable year, we must also satisfy several tests relating to the nature and diversification of our assets determined in accordance with generally accepted accounting principles. At least 75% of the value of our total assets must be represented by real estate assets, cash, cash items (including receivables arising in the ordinary course of our operation), government securities and qualified temporary investments. The term “real estate assets” includes real property, interests in real property, leaseholds of land or improvements, mortgages on real property, shares of common stock in other qualified U.S. REITs, any property attributable to the temporary investment of new capital (but only if such property is stock or a debt instrument and only for the one-year period beginning on the date the REIT receives such capital), and a proportionate share of any real estate assets owned by a partnership in which we are a partner. When a mortgage is secured by both real property and other property, it is considered to constitute a mortgage on real property to the extent of the fair market value of the real property when the REIT is committed to originate the loan or, in the case of a construction loan, the reasonably estimated cost of construction.

Although 25% of our assets generally may be invested without regard to the above restrictions, we are prohibited from owning securities representing more than 10% of either the vote (the “10% vote test”) or value (the “10% value test”) of the outstanding securities of any issuer other than a QRS, another REIT or a TRS. Further, no more than 25% of the total assets may be represented by securities of one or more TRSs (the “25% asset test”) and no more than 5% of the value of our total assets may be represented by securities of any non-governmental issuer other than a QRS (the “5% asset test”), another REIT or a TRS. Each of the 10% vote test, the 10% value test and the 25% and 5% asset tests must be satisfied at the end of each quarter. There are special rules which provide relief if the value related tests are not satisfied due to changes in the value of the assets of a REIT.

Certain items are excluded from the 10% value test, including: (1) straight debt securities of an issuer (including straight debt that provides certain contingent payments); (2) any loan to an individual or an estate; (3) any rental agreement described in Section 467 of the Code, other than with a “related person”; (4) any obligation to pay rents from real property; (5) certain securities issued by a state or any subdivision thereof, the District of Columbia, a foreign government, or any political subdivision thereof, or the Commonwealth of Puerto Rico; (6) any security issued by a REIT; and (7) any other arrangement that, as determined by the Secretary of the Treasury, is excerpted from the definition of security (“excluded securities”). Special rules apply to straight debt securities issued by corporations and entities taxable as partnerships for federal income tax purposes. If a REIT, or its TRS, holds (1) straight debt securities of a corporate or partnership issuer and (2) securities of such issuer that are not excluded securities and have an aggregate value greater than 1% of such issuer’s outstanding securities, the straight debt securities will be included in the 10% value test.

A REIT’s interest as a partner in a partnership is not treated as a security for purposes of applying the 10% value test to securities issued by the partnership. Further, any debt instrument issued by a partnership will not be a security for purposes of applying the 10% value test (1) to the extent of the REIT’s interest as a partner in the partnership and (2) if at least 75% of the partnership’s gross income (excluding gross income from prohibited transactions) would qualify for the 75% gross income test. For taxable years beginning after October 22, 2004, for purposes of the 10% value test, a REIT’s interest in a partnership’s assets is determined by the REIT’s proportionate interest in any securities issued by the partnership (other than the excluded securities described in the preceding paragraph).

 

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For taxable years beginning after July 30, 2008, if the REIT or its QBU uses a foreign currency as its functional currency, the term “cash” includes such foreign currency, but only to the extent such foreign currency is (i) held for use in the normal course of the activities of the REIT or QBU which give rise to items of income or gain that are included in the 95% and 75% gross income tests or are directly related to acquiring or holding assets qualifying under the 75% asset test, and (ii) not held in connection with dealing or engaging in substantial and regular trading in securities.

With respect to corrections of failures for which the requirements for corrections are satisfied after October 22, 2004, regardless of whether such failures occurred in taxable years beginning on, before or after such date, as to violations of the 10% vote test, the 10% value test or the 5% asset test, a REIT may avoid disqualification as a REIT by disposing of sufficient assets to cure a violation that does not exceed the lesser of 1% of the REIT’s assets at the end of the relevant quarter or $10,000,000, provided that the disposition occurs within six months following the last day of the quarter in which the REIT first identified the violation. For violations of any of the REIT asset tests due to reasonable cause and not willful neglect that exceed the thresholds described in the preceding sentence, a REIT can avoid disqualification as a REIT after the close of a taxable quarter by taking certain steps, including disposition of sufficient assets within the six month period described above to meet the applicable asset test, paying a tax equal to the greater of $50,000 or the highest corporate tax rate multiplied by the net income generated by the non-qualifying assets during the period of time that the assets were held as non-qualifying assets and filing a schedule with the IRS that describes the non-qualifying assets.

Annual Distribution Requirements. In order to avoid being taxed as a regular corporation, we are required to make cash or taxable property distributions to our stockholders which qualify for the dividends paid deduction in an amount at least equal to (1) the sum of (i) 90% of our taxable income (computed without regard to the dividends paid deduction and our net capital gain) and (ii) 90% of the after-tax net income, if any, from foreclosure property, minus (2) a portion of certain items of non-cash income. These distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for that year and if paid on or before the first regular distribution payment after such declaration. Dividends we declare in October, November, or December of any year and which are payable to a stockholder of record on a specified date in any of these months will be treated as both paid by us and received by the stockholder on December 31 of that year, provided we actually pay the dividend on or before January 31 of the following year. The amount distributed must not be preferential. This means that every stockholder of the class of stock to which a distribution is made must be treated the same as every other stockholder of that class, and no class of stock may be treated otherwise than in accordance with its dividend rights as a class. To the extent that we do not distribute all of our net capital gain or distribute at least 90%, but less than 100%, of our taxable income, we will be subject to tax on the undistributed amount at regular corporate tax rates. Finally, as discussed above, we may be subject to an excise tax if we fail to meet certain other distribution requirements. We intend to make timely distributions sufficient to satisfy these annual distribution requirements.

It is possible that, from time to time, we may not have sufficient cash or other liquid assets to meet the 90% distribution requirement, or to distribute such greater amount as may be necessary to avoid income and excise taxation, due to, among other things, (1) timing differences between (i) the actual receipt of income and actual payment of deductible expenses and (ii) the inclusion of income and deduction of expenses in arriving at our taxable income, or (2) the payment of severance benefits that may not be deductible to us. For example, in the event of the default or financial failure of one or more tenants, we might be required to continue to accrue rent for some period of time under federal income tax principles even though we would not currently be receiving the corresponding amounts of cash. Similarly, under federal income tax principles, we might not be entitled to deduct certain expenses at the time those expenses are incurred. In either case, our cash available for making distributions might not be sufficient to satisfy the 90% distribution requirement. If the cash available to us is insufficient, we might raise cash in order to make the distributions by borrowing funds, issuing new securities or selling assets. In the event that timing differences occur, we may find it necessary to arrange for borrowings or, if possible, pay dividends in the form of taxable stock dividends in order to meet the distribution requirement.

Under certain circumstances, in the event of a deficiency determined by the IRS, we may be able to rectify a resulting failure to meet the distribution requirement for a year by paying “deficiency dividends” to stockholders in a later year, which may be included in our deduction for distributions paid for the earlier year. Thus, we may be able to avoid being taxed on amounts distributed as deficiency dividends; however, we will be required to pay applicable penalties and interest based upon the amount of any deduction taken for deficiency dividend distributions.

 

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Failure to Qualify as a REIT

If we fail to qualify for taxation as a REIT in any taxable year, we will be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. Distributions to stockholders in any year in which we fail to qualify as a REIT will not be deductible nor will any particular amount of distributions be required to be made in any year. All distributions to stockholders will be taxable as ordinary income to the extent of current and accumulated earnings and profits allocable to these distributions. Unless entitled to relief under specific statutory provisions, we also will be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. It is not possible to state whether in all circumstances we would be entitled to statutory relief. Failure to qualify for even one year could result in our need to incur indebtedness or liquidate investments in order to pay potentially significant resulting tax liabilities. In addition, a failure by us to qualify as a REIT could significantly reduce the cash available to pay dividends on our common shares and interest on debt securities, and could materially reduce the value of our common share and debt securities.

U.S. Federal Income Taxation of Holders of Our Stock

Treatment of Taxable U.S. Stockholders. The following summary applies to you only if you are a “U.S. stockholder.” A “U.S. stockholder” means a holder of our common stock that for United States federal income tax purposes is:

 

    a citizen or resident of the United States;

 

    a corporation, partnership or other entity classified as a corporation or partnership for these purposes, created or organized in or under the laws of the United States or of any political subdivision of the United States, including any state;

 

    an estate, the income of which is subject to United States federal income taxation regardless of its source; or

 

    a trust, if, in general, a U.S. court is able to exercise primary supervision over the trust’s administration and one or more U.S. persons, within the meaning of the Code, has the authority to control all of the trust’s substantial decisions.

So long as we qualify for taxation as a REIT, distributions on shares of our stock made out of the current or accumulated earnings and profits allocable to these distributions (and not designated as capital gain dividends) will be includable as ordinary income for federal income tax purposes. None of these distributions will be eligible for the dividends received deduction for U.S. corporate stockholders.

Distributions that are designated as capital gain dividends will be taxed as long-term capital gains (to the extent they do not exceed our actual net capital gain for the taxable year), without regard to the period for which you held our stock. However, if you are a corporation, you may be required to treat a portion of some capital gain dividends as ordinary income.

If we elect to retain and pay income tax on any net long-term capital gain, you would include in income, as long-term capital gain, your proportionate share of this net long-term capital gain. You would also receive a refundable tax credit for your proportionate share of the tax paid by us on such retained capital gains, and you would have an increase in the basis of your shares of our stock in an amount equal to your includable capital gains less your share of the tax deemed paid.

You may not include in your federal income tax return any of our net operating losses or capital losses. Federal income tax rules may also require that certain minimum tax adjustments and preferences be apportioned to you. In addition, any distribution declared by us in October, November or December of any year on a specified date in any such month shall be treated as both paid by us and received by you on December 31 of that year, provided that the distribution is actually paid by us no later than January 31 of the following year.

 

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We will be treated as having sufficient earnings and profits to treat as a dividend any distribution up to the amount required to be distributed in order to avoid imposition of the 4% excise tax discussed under “— General” and “— Qualification as a REIT — Annual Distribution Requirements” above. As a result, you may be required to treat as taxable dividends certain distributions that would otherwise result in a tax-free return of capital. Moreover, any “deficiency dividend” will be treated as a dividend (an ordinary dividend or a capital gain dividend, as the case may be), regardless of our earnings and profits. Any other distributions in excess of current or accumulated earnings and profits will not be taxable to you to the extent these distributions do not exceed the adjusted tax basis of your shares of our stock. You will be required to reduce the tax basis of your shares of our stock by the amount of these distributions until the basis has been reduced to zero, after which these distributions will be taxable as capital gain, if the shares of our stock are held as capital assets. The tax basis as so reduced will be used in computing the capital gain or loss, if any, realized upon sale of the shares of our stock. Capital losses recognized by a stockholder upon the disposition of a share of our common stock held for more than one year will be considered long-term capital losses, and are generally available only to offset capital gain income of the stockholder but not ordinary income (except in the case of individuals, trusts and estates, who may offset up to $3,000 of ordinary income each year). Any loss upon a sale or exchange of shares of our stock which were held for six months or less (after application of certain holding period rules) will generally be treated as a long-term capital loss to the extent you previously received capital gain distributions with respect to these shares of our stock.

Upon the sale or exchange of any shares of our stock to or with a person other than us or a sale or exchange of all shares of our stock (whether actually or constructively owned) with us, you will generally recognize capital gain or loss equal to the difference between the amount realized on the sale or exchange and your adjusted tax basis in these shares of our stock. This gain will be capital gain if you held these shares of our stock as a capital asset.

If we redeem any of your shares in us, the treatment can only be determined on the basis of particular facts at the time of redemption. In general, you will recognize gain or loss (as opposed to dividend income) equal to the difference between the amount received by you in the redemption and your adjusted tax basis in your shares redeemed if such redemption: (1) results in a “complete termination” of your interest in all classes of our equity securities; (2) is a “substantially disproportionate redemption”; or (3) is “not essentially equivalent to a dividend” with respect to you. In applying these tests, you must take into account your ownership of all classes of our equity securities (e.g., common stock, preferred stock, depositary shares and warrants). You also must take into account any equity securities that are considered to be constructively owned by you.

If, as a result of a redemption by us of your shares, you no longer own (either actually or constructively) any of our equity securities or only own (actually and constructively) an insubstantial percentage of our equity securities, then it is probable that the redemption of your shares would be considered “not essentially equivalent to a dividend” and, thus, would result in gain or loss to you. However, whether a distribution is “not essentially equivalent to a dividend” depends on all of the facts and circumstances, and if you rely on any of these tests at the time of redemption, you should consult your tax advisor to determine their application to the particular situation.

Generally, if the redemption does not meet the tests described above, then the proceeds received by you from the redemption of your shares will be treated as a distribution taxable as a dividend to the extent of the allocable portion of current or accumulated earnings and profits. If the redemption is taxed as a dividend, your adjusted tax basis in the redeemed shares will be transferred to any other shareholdings in us that you own. If you own no other shareholdings in us, under certain circumstances, such basis may be transferred to a related person, or it may be lost entirely.

Gain from the sale or exchange of our shares held for more than one year is taxed at a maximum long-term capital gain rate pursuant to IRS guidance, we may classify portions of our capital gain dividends as gains eligible for the long-term capital gains rate or as gain taxable to individual stockholders.

An additional tax of 3.8% generally will be imposed on the “net investment income” of U.S. stockholders who meet certain requirements and are individuals, estates or certain trusts for taxable years beginning after December 31, 2012. Among other items, “net investment income” generally includes gross income from dividends and net gain attributable to the disposition of certain property, such as shares of our stock. U.S. stockholders should consult their tax advisors regarding the possible applicability of this additional tax in their particular circumstances.

 

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Treatment of Tax-Exempt U.S. Stockholders. Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts (“Exempt Organizations”), generally are exempt from federal income taxation. These entities are, however, subject to taxation on their unrelated business taxable income (“UBTI”). The IRS has issued a published revenue ruling that dividend distributions from a REIT to an exempt employee pension trust do not constitute UBTI, provided that the shares of the REIT are not otherwise used in an unrelated trade or business of the exempt employee pension trust. Based on this ruling, amounts distributed by us to Exempt Organizations generally should not constitute UBTI. However, if an Exempt Organization finances its acquisition of the shares of our stock with debt, a portion of its income from us will constitute UBTI pursuant to the “debt financed property” rules. Likewise, a portion of the Exempt Organization’s income from us would constitute UBTI if we held a residual interest in a real estate mortgage investment conduit.

In addition, in certain circumstances, a pension trust that owns more than 10% of our stock is required to treat a percentage of our dividends as UBTI. This rule applies to a pension trust holding more than 10% of our stock only if: (1) the percentage of our income that is UBTI (determined as if we were a pension trust) is at least 5%; (2) we qualify as a REIT by reason of the modification of the Five or Fewer Requirement that allows beneficiaries of the pension trust to be treated as holding shares in proportion to their actuarial interests in the pension trust; and (3) either (i) one pension trust owns more than 25% of the value of our stock, or (ii) a group of pension trusts individually holding more than 10% of the value of our stock collectively own more than 50% of the value of our stock.

Backup Withholding. Under certain circumstances, you may be subject to backup withholding at applicable rates on payments made with respect to, or cash proceeds of a sale or exchange of, shares of our stock. Backup withholding will apply only if you: (1) fail to provide a correct taxpayer identification number, which if you are an individual, is ordinarily your social security number; (2) furnish an incorrect taxpayer identification number; (3) are notified by the IRS that you have failed to properly report payments of interest or dividends; or (4) fail to certify, under penalties of perjury, that you have furnished a correct taxpayer identification number and that the IRS has not notified you that you are subject to backup withholding.

Backup withholding will not apply with respect to payments made to certain exempt recipients, such as corporations and tax-exempt organizations. You should consult with a tax advisor regarding qualification for exemption from backup withholding, and the procedure for obtaining an exemption. Backup withholding is not an additional tax. Rather, the amount of any backup withholding with respect to a payment to a stockholder will be allowed as a credit against such stockholder’s United States federal income tax liability and may entitle such stockholder to a refund, provided that the required information is provided to the IRS. In addition, withholding a portion of capital gain distributions made to stockholders may be required for stockholders who fail to certify their non-foreign status.

U.S. Federal Income and Estate Taxation of Holders of Our Debt Securities. The following is a general summary of the United States federal income tax consequences and, in the case that you are a holder that is a non-U.S. holder, as defined below, the United States federal estate tax consequences, of purchasing, owning and disposing of debt securities periodically offered under one or more indentures (the “notes”). This summary assumes that you hold the notes as capital assets. This summary applies to you only if you are the initial holder of the notes and you acquire the notes for a price equal to the issue price of the notes. The issue price of the notes is the first price at which a substantial amount of the notes is sold other than to bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers. In addition, this summary does not consider any foreign, state, local or other tax laws that may be applicable to us or a purchaser of the notes.

Taxable U.S. Holders of the Notes. The following summary applies to you only if you are a U.S. holder, as defined below.

Definition of a U.S. Holder. A “U.S. holder” is a beneficial owner of a note or notes that is for United States federal income tax purposes:

 

    a citizen or resident of the United States;

 

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    a corporation, partnership or other entity classified as a corporation or partnership for these purposes, created or organized in or under the laws of the United States or of any political subdivision of the United States, including any state;

 

    an estate, the income of which is subject to United States federal income taxation regardless of its source; or

 

    a trust, if, in general, a U.S. court is able to exercise primary supervision over the trust’s administration and one or more U.S. persons, within the meaning of the Code, has the authority to control all of the trust’s substantial decisions.

Payments of Interest. Stated interest on the notes generally will be taxed as ordinary interest income from domestic sources at the time it is paid or accrues in accordance with your method of accounting for tax purposes.

Sale, Exchange or Other Disposition of the Notes. The adjusted tax basis in your note acquired at a premium will generally be your cost. You generally will recognize taxable gain or loss when you sell or otherwise dispose of your notes equal to the difference, if any, between:

 

    the amount realized on the sale or other disposition, less any amount attributable to any accrued interest, which will be taxable in the manner described under “— Payments of Interest” above; and

 

    your adjusted tax basis in the notes.

Your gain or loss generally will be capital gain or loss. This capital gain or loss will be long-term capital gain or loss if at the time of the sale or other disposition you have held the notes for more than one year. Subject to limited exceptions, your capital losses cannot be used to offset your ordinary income.

Redemption or Repurchase of the Notes. If we redeem or otherwise repurchase the notes, we may be obligated to pay additional amounts in excess of stated principal and interest. We intend to take the position that the notes should not be treated as contingent payment debt instruments because of this additional payment. Assuming such position is respected, a U.S. holder would be required to include in income the amount of any such additional payment at the time such payment is received or accrued in accordance with such U.S. holder’s method of accounting for United States federal income tax purposes. If the IRS successfully challenged this position, and the notes were treated as contingent payment debt instruments, U.S. holders could be required to accrue interest income at a rate higher than the stated interest rate on the debt securities and to treat as ordinary income, rather than capital gain, any gain recognized on a sale, exchange or redemption of a note. U.S. holders are urged to consult their tax advisors regarding the potential application to the notes of the contingent payment debt instrument rules and the consequences thereof.

Backup Withholding and Information Reporting. In general, “backup withholding” may apply to any payments made to you of principal and interest on your note, and to payment of the proceeds of a sale or other disposition of your note before maturity, if you are a non-exempt U.S. holder and: (1) fail to provide a correct taxpayer identification number, which if you are an individual, is ordinarily your social security number; (2) furnish an incorrect taxpayer identification number; (3) are notified by the IRS that you have failed to properly report payments of interest or dividends; or (4) fail to certify, under penalties of perjury, that you have furnished a correct taxpayer identification number and that the IRS has not notified you that you are subject to backup withholding. The amount of any reportable payments, including interest, made to you (unless you are an exempt recipient) and the amount of tax withheld, if any, with respect to such payments will be reported to you and to the IRS for each calendar year. You should consult your tax advisor regarding your qualification for an exemption from backup withholding and the procedures for obtaining such an exemption, if applicable. The backup withholding tax is not an additional tax, and amount withheld may be refunded to you and/or credited against your U.S. federal income tax liability, provided that required and correct information is provided to the IRS.

Non-U.S. Holders of the Notes. The following summary applies to you if you are a beneficial owner of a note and are not a U.S. holder, as defined above (a “non-U.S. holder”).

 

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Special rules may apply to certain non-U.S. holders such as “controlled foreign corporations,” “passive foreign investment companies” and “foreign personal holding companies.” Such entities are encouraged to consult their tax advisors to determine the United States federal, state, local and other tax consequences that may be relevant to them.

U.S. Federal Withholding Tax. Subject to the discussion below, U.S. federal withholding tax will not apply to payments by us or our paying agent, in its capacity as such, of principal and interest on your notes under the “portfolio interest” exception of the Code, provided that:

 

    you do not, directly or indirectly, actually or constructively, own 10% or more of the total combined voting power of all classes of our stock entitled to vote;

 

    you are not (1) a controlled foreign corporation for U.S. federal income tax purposes that is related, directly or indirectly, to us through sufficient stock ownership, as provided in the Code, or (2) a bank receiving interest described in Section 881(c)(3)(A) of the Code;

 

    such interest is not effectively connected with your conduct of a U.S. trade or business; and

 

    you provide a signed written statement, under penalties of perjury, which can reliably be related to you, certifying that you are not a U.S. person within the meaning of the Code and providing your name and address to:

 

    us or our paying agent; or

 

    a securities clearing organization, bank or other financial institution that holds customers’ securities in the ordinary course of its trade or business and holds your notes on your behalf and that certifies to us or our paying agent under penalties of perjury that it, or the bank or financial institution between it and you, has received from you your signed, written statement and provides us or our paying agent with a copy of such statement.

Treasury regulations provide that:

 

    if you are a foreign partnership, the certification requirement will generally apply to your partners, and you will be required to provide certain information;

 

    if you are a foreign trust, the certification requirement will generally be applied to you or your beneficial owners depending on whether you are a “foreign complex trust,” “foreign simple trust,” or “foreign grantor trust” as defined in the Treasury regulations; and

 

    look-through rules will apply for tiered partnerships, foreign simple trusts and foreign grantor trusts.

If you are a foreign partnership or a foreign trust, you should consult your own tax advisor regarding your status under these Treasury regulations and the certification requirements applicable to you.

If you cannot satisfy the portfolio interest requirements described above, payments of interest will be subject to the 30% United States withholding tax, unless you provide us with a properly executed (1) IRS Form W-8BEN claiming an exemption from or reduction in withholding under the benefit of an applicable treaty or (2) IRS Form W-8ECI stating that interest paid on the note is not subject to withholding tax because it is effectively connected with your conduct of a trade or business in the United States. Alternative documentation may be applicable in certain circumstances.

If you are engaged in a trade or business in the United States and interest on a note is effectively connected with the conduct of that trade or business, you will be required to pay United States federal income tax on that interest on a net income basis (although you will be exempt from the 30% withholding tax provided the certification requirement described above is met) in the same manner as if you were a U.S. person, except as otherwise provided by an applicable tax treaty. If you are a foreign corporation, you may be required to pay a branch profits tax on the earnings and profits that are effectively connected to the conduct of your trade or business in the United States.

 

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Recent legislation generally will impose U.S. withholding tax at a 30% rate on payments of interest (including original issue discount) and proceeds of sale in respect of debt instruments to certain non-U.S. holders if certain additional disclosure requirements related to U.S. ownership of such non-U.S. holders or U.S. accounts maintained by such non-U.S. holders are not satisfied. However, the withholding tax will not be imposed on payments pursuant to debt or other obligations outstanding as of March 18, 2012. If payment of withholding taxes is required, non-U.S. holders that are otherwise eligible for an exemption from, or reduction of, U.S. withholding taxes with respect to such distributions and proceeds of a sale of such shares will be entitled to seek a refund from the IRS to obtain the benefit of such exemption or reduction. We will not pay any additional amounts to non-U.S. holders in respect of any amounts withheld. These new withholding rules are generally effective for payments of interest made after June 30, 2014.

Sale, Exchange or other Disposition of Notes. You generally will not have to pay U.S. federal income tax on any gain or income realized from the sale, redemption, retirement at maturity or other disposition of your notes, unless:

 

    in the case of gain, you are an individual who is present in the United States for 183 days or more during the taxable year of the sale or other disposition of your notes, and specific other conditions are met;

 

    you are subject to tax provisions applicable to certain United States expatriates; or

 

    the gain is effectively connected with your conduct of a U.S. trade or business.

If you are described in the first bullet point above, you will be subject to United States federal income tax at a rate of 30% (or, if applicable, a lower treaty rate) on the gain derived from the sale, which may be offset by certain Untied States source capital losses, even though you are not considered a resident of the United States. If you are described in the second bullet above, you should consult your tax advisor regarding the potential liability for United States federal income tax on your gain realized on the notes. If you are engaged in a trade or business in the United States, and gain with respect to your notes is effectively connected with the conduct of that trade or business (and if an income tax treaty applies, you maintain a United States permanent establishment to which any such gain is generally attributable), you generally will be subject to U.S. income tax on a net basis on the gain as if you were a U.S. Holder. In addition, if you are a foreign corporation, you may be subject to a branch profits tax on your effectively connected earnings and profits for the taxable year, as adjusted for certain items.

U.S. Federal Estate Tax. If you are an individual and are not a U.S. citizen or a resident of the United States, as specially defined for U.S. federal estate tax purposes, at the time of your death, your notes will generally not be subject to the U.S. federal estate tax, unless, at the time of your death (1) you owned actually or constructively 10% or more of the total combined voting power of all our classes of stock entitled to vote, or (2) interest on the notes is effectively connected with your conduct of a U.S. trade or business.

Backup Withholding and Information Reporting. Backup withholding will not apply to payments of principal or interest made by us or our paying agent, in its capacity as such, to you if you have provided the required certification that you are a non-U.S. holder as described in “— U.S. Federal Withholding Tax” above, and provided that neither we nor our paying agent have actual knowledge that you are a U.S. holder, as described in “— U.S. Holders” above. We or our paying agent may, however, report payments of interest on the notes.

 

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The gross proceeds from the disposition of your notes may be subject to information reporting and backup withholding tax. If you sell your notes outside the United States through a non-U.S. office of a non-U.S. broker and the sales proceeds are paid to you outside the United States, then the U.S. backup withholding and information reporting requirements generally will not apply to that payment. However, U.S. information reporting, but not backup withholding, will apply to a payment of sales proceeds, even if that payment is made outside the United States, if you sell your notes through a non-U.S. office of a broker that:

 

    is a U.S. person, as defined in the Code;

 

    derives 50% or more of its gross income in specific periods from the conduct of a trade or business in the United States;

 

    is a “controlled foreign corporation” for U.S. federal income tax purposes; or

 

    is a foreign partnership, if at any time during its tax year, one or more of its partners are U.S. persons who in the aggregate hold more than 50% of the income or capital interests in the partnership, or the foreign partnership is engaged in a U.S. trade or business, unless the broker has documentary evidence in its files that you are a non-U.S. person and certain other conditions are met or you otherwise establish an exemption. If you receive payments of the proceeds of a sale of your notes to or through a U.S. office of a broker, the payment is subject to both U.S. backup withholding and information reporting unless you provide a Form W-8BEN certifying that you are a non-U.S. person or you otherwise establish an exemption.

You should consult your own tax advisor regarding application of backup withholding in your particular circumstance and the availability of and procedure for obtaining an exemption from backup withholding. Any amounts withheld under the backup withholding rules from a payment to you will be allowed as a refund or credit against your U.S. federal income tax liability, provided the required information is furnished to the IRS.

Potential Legislation or Other Actions Affecting Tax Consequences. Current and prospective securities holders should recognize that the present federal income tax treatment of an investment in us may be modified by legislative, judicial or administrative action at any time and that any such action may affect investments and commitments previously made. The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the Treasury Department, resulting in revisions of regulations and revised interpretations of established concepts as well as statutory changes. Revisions in federal tax laws and interpretations of these laws could adversely affect the tax consequences of an investment in our securities.

Available Information

CNL Financial Group, LLC (our “Sponsor” or “CNL”) maintains a web site at www.cnllifestylereit.com containing additional information about our business, and a link to the SEC web site (www.sec.gov). We make available free of charge on our web site, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practical after we file such material, or furnish it to, the SEC. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site (www.sec.gov) where you can search for annual, quarterly and current reports, proxy and information statements, and other information regarding us and other public companies.

The contents of our web site are not incorporated by reference in, or otherwise a part of, this report.

 

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Item 1A. RISK FACTORS

Real Estate and Other Investment Risks

Certain of our tenants may be unable to make rental payments to us in accordance with their lease agreement.

Some of our tenants have not fully recovered from the recent economic downturn and have experienced difficulties or have been unable to obtain working capital lines of credit or renew their existing lines of credit. As a result, we restructured the leases for certain tenants such that the rents are paid on a seasonal schedule with most, if not all, of the rent being paid during the tenants’ seasonally busy period. In other cases, we restructured the lease terms to allow for rent deferrals or reductions for a period of time to provide temporary relief that then become payable in later periods of the lease term. In addition, we have refunded security deposits which must be replaced up to specified amounts and have provided lease allowances. The rent deferrals granted, the security deposits refunded and lease allowances paid reduced our cash flows from operating activities. Other restructures, such as the reductions in lease rates and the future amortization of lease allowances against rental income have reduced, and will continue to reduce, our net operating results and cash flows in current and future periods. Any significant reduction in our cash flow may cause us not to have sources of cash available to us in an amount sufficient to enable us to pay amounts due on our indebtedness.

Our operating results will experience seasonal fluctuations on properties in which we have engaged third-party managers to operate the properties on our behalf.

In certain circumstances, we have engaged third-party managers to operate properties on our behalf as a result of tenant defaults or utilizing the TRS leasing structure. In these situations, we recognize the properties’ operating revenues and expenses in our consolidated financial statements; and we may be subject to more direct operating risk. In addition, certain of our managed properties are seasonal in nature due to geographic location, climate and weather patterns. These properties will likely generate net operating losses during their non-peak months while generating most, if not all, of their operating income during their peak operating season. Our consolidated operating results will fluctuate quarter to quarter depending on the number and types of properties being managed by third-party operators and the seasonal results of those properties.

We will be exposed to various operational risks, liabilities and claims with respect to the properties that we have engaged third-party managers to operate on our behalf, which may adversely affect our operating results.

With respect to the properties that are managed by third-party operators, we are exposed to various operational risks, liabilities and claims in addition to those generally applicable to ownership of real property. These risks include the operator’s inability to manage the properties and fulfill its obligations, increases in labor costs and services, cost of energy, insurance, operating supplies and litigation costs relating to accidents or injuries at the properties. Although we maintain reasonable levels of insurance, we cannot be certain the insurance will adequately cover all litigation costs relating to accidents or injuries. Any one or a combination of these factors, together with other market and conditions beyond our control, could result in operating deficiencies at our managed properties, which could have a material adverse effect on our operating results and our ability to pay amounts due on our indebtedness.

Because our revenues are highly dependent on lease payments from our properties and interest payments from loans that we make, defaults by our tenants or borrowers would reduce our cash available for the repayment of our outstanding debt.

Our ability to repay any outstanding debt will depend upon the ability of our tenants and borrowers to make payments to us, and their ability to make these payments will depend primarily on their ability to generate sufficient revenues in excess of operating expenses from businesses conducted on our properties. For example, the ability of our tenants to make their scheduled payments to us will depend upon their ability to generate sufficient operating income at the property they operate. A tenant’s failure or delay in making scheduled rent payments to us or a borrower’s failure to make debt service payments to us may result from the tenant or borrower realizing reduced revenues at the properties it operates.

 

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Discretionary consumer spending may affect the profitability of certain of our properties.

The financial performance of certain properties in our portfolio depends in part on a number of factors relating to or affecting discretionary consumer spending for the types of services provided by businesses operated on these properties. Unfavorable local, regional, or national economic developments or uncertainties regarding future economic prospects have reduced consumer spending in the markets where we own properties and, when combined with the lack of available debt, have adversely affected certain of our tenants’ businesses. As a result, certain of our tenants have experienced declines in operating results, and a number of our tenants have modified the terms of certain of their leases with us. Any continuation of such events that leads to lower spending on lifestyle activities could impact our tenants’ ability to pay rent and may also adversely affect the operating results we recognize from the properties where we have engaged third party managers to operate on our behalf, thereby having a material adverse effect on our operating results and our ability to pay amounts due on our indebtedness.

The inability to increase or maintain lease rates at our properties might affect the level of distributions to stockholders.

Given the nature of certain properties in our portfolio, the relative stagnation of base lease rates in certain sectors might not allow for substantial increases in rental revenue to us that could allow us to maintain levels of distributions to stockholders.

Seasonal revenue variations in certain asset classes will require the operators of those asset classes to manage cash flow properly over time so as to meet their non-seasonal scheduled rent payments to us.

Certain of the properties in which we invest or may invest are generally seasonal in nature due to geographic location, climate and weather patterns. For example, revenue and profits at ski resorts and their related properties are substantially lower and historically result in losses during the summer months due to the closure of ski operations, while many attractions properties are closed during the winter months and produce the majority of their revenues and profits during summer months. As a result of the seasonal nature of certain business operations that may be conducted on our properties, these businesses experience seasonal variations in revenues that may require our operators to supplement revenue at their properties in order to be able to make scheduled rent payments to us, or require us, in certain cases, to adjust their lease payments so that we collect more rent during their seasonally busy time.

Our real estate assets may be subject to impairment charges.

We periodically evaluate the recoverability of the carrying value of our real estate assets for impairment indicators. Factors considered in evaluating impairment of our existing real estate assets held for investment include significant declines in property operating profits, recurring property operating losses and other significant adverse changes in general market conditions. Generally, a real estate asset held for investment is not considered impaired if the undiscounted, estimated future cash flows of the asset over its estimated holding period and the proceeds from a future sale are in excess of the asset’s net book value at the balance sheet date. Investments in unconsolidated entities are not considered impaired if the estimated fair value of the investment exceeds the carrying value of the investment. Management makes assumptions and estimates when considering impairments and actual results could vary materially from these assumptions and estimates.

 

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We do not have control over market and business conditions that may affect our success.

The following external factors, as well as other factors beyond our control, may reduce the value of our properties, the ability of tenants to pay rent on a timely basis, or at all, the amount of the rent to be paid, and the ability of borrowers to make loan payments on time, or at all:

 

    changes in general or local economic or market conditions;

 

    the pricing and availability of debt, operating lines of credit or working capital;

 

    increased costs of energy, insurance or products;

 

    increased costs and shortages of labor;

 

    increased competition;

 

    quality of management;

 

    failure by a tenant to meet its obligations under a lease;

 

    bankruptcy of a tenant or borrower;

 

    the ability of an operator to fulfill its obligations;

 

    limited alternative uses for properties;

 

    changing consumer habits;

 

    condemnation or uninsured losses;

 

    changing demographics; and

 

    changing government regulations including tax policies.

Further, the results of operations for a property in any one period may not be indicative of results in future periods, and the long-term performance of such property generally may not be comparable to, and cash flows may not be as predictable as, other properties owned by third parties in the same or similar industry. If tenants are unable to make lease payments or borrowers are unable to make loan payments as a result of any of these factors, we may have insufficient cash available to pay amounts due on our indebtedness.

Our exposure to typical real estate investment risks could reduce our income.

Our properties, loans and other permitted investments will be subject to the risks typically associated with investments in real estate. Such risks include the possibility that our properties will generate rent and capital appreciation, if any, at rates lower than we anticipated or will yield returns lower than those available through other investments or that the value of our properties will decline. Further, there are other risks by virtue of the fact that our ability to vary our portfolio in response to changes in economic and other conditions will be limited because of the general illiquidity of real estate investments. Income from our properties may be adversely affected by many factors including, but not limited to, an increase in the local supply of properties similar to our properties, a decrease in the number of people interested in participating in activities related to the businesses conducted on our properties, adverse weather conditions, changes in government regulation, international, national or local economic deterioration, increases in energy costs and other expenses affecting travel, factors which may affect travel patterns and reduce the number of travelers and tourists, increases in operating costs due to inflation and other factors that may not be offset by increased revenue, and changes in consumer tastes.

We obtain only limited warranties when we purchase a property and 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 and sale agreements often contain limited warranties, representations and indemnifications that 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.

 

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If one or more of our tenants file for bankruptcy protection, we may be precluded from collecting all sums due.

If one or more of our tenants, or the guarantor of a tenant’s lease obligation, commences or is subject to an involuntary bankruptcy proceeding, any proceeding under any provision of the U.S. federal bankruptcy code, or any other legal or equitable proceeding under any bankruptcy, insolvency, rehabilitation, receivership or debtor’s relief statute or law, (such proceedings being referred to as, a “Bankruptcy Proceeding”), we may be unable to collect sums due under our lease(s) with that tenant. Any or all of our tenants, or a guarantor of a tenant’s lease obligations, could be subject to a Bankruptcy Proceeding. A Bankruptcy Proceeding may bar our efforts to collect pre-bankruptcy debts from those entities or their properties, unless we are able to obtain an enabling order from the bankruptcy court. If a lease is rejected by a tenant in bankruptcy, we would only have a general unsecured claim against the tenant, and may not be entitled to any further payments under the lease. We believe that our security deposits in the form of letters of credit would be protected from bankruptcy in most jurisdictions. However, a tenant’s or lease guarantor’s Bankruptcy Proceeding could hinder or delay efforts to collect past due balances under relevant leases or guarantees and could ultimately preclude collection of these sums. Such an event could cause a decrease or cessation of rental payments which would reduce our cash flow and the amount available to pay our indebtedness. In the event of a Bankruptcy Proceeding, 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 to pay amounts due on our indebtedness may be materially adversely affected.

Multiple property leases or loans with individual tenants or borrowers increase our risks in the event that such tenants or borrowers become financially impaired.

The value of our properties will depend principally upon the value of the leases entered into for the properties. Defaults by a tenant or borrower may continue for some time before we determine that it is in our best interest to terminate the lease of the tenant or foreclose on the property of the borrower. Tenants may lease more than one property, and borrowers may enter into more than one loan. As a result, a default by, or the financial failure of, a tenant or borrower could cause more than one property to become vacant or be in default or more than one lease or loan to become non-performing. Defaults or vacancies can reduce and have reduced our cash receipts and funds available for the payment of our indebtedness, and could decrease the resale value of affected properties until they can be re-leased.

Joint venture partners may have different interests than we have, which may negatively impact our control over our ventures and make it difficult to exit a joint venture after an impasse.

Investments in joint ventures involve the risk that our co-venturer may have economic or business interests or goals which, at a particular time, are inconsistent with our interests or goals, that the co-venturer may be in a position to take action contrary to our instructions, requests, policies or objectives, or that the co-venturer may experience financial difficulties and be unable to fund its share of required capital contributions. Among other things, actions by a co-venturer might subject assets owned by the joint venture to liabilities in excess of those contemplated by the terms of the joint venture agreement or to other adverse consequences. This risk is also present when we make investments in securities of other entities. If we do not have full control over a joint venture, the value of our investment will be affected to some extent by a third party that may have different goals and capabilities than ours, and if our joint approval is necessary there is a potential risk of impasse. In any joint venture, we may have the right to buy the other co-venturer’s interest or to sell our own interest on specified terms and conditions in the event of an impasse regarding a sale. In the event of an impasse, it is possible that neither party will have the funds necessary to complete a buy-out. In addition, we may experience difficulty in locating a third-party purchaser for our joint venture interest and in obtaining a favorable sale price for the interest. As a result, it is possible that we may not be able to exit the relationship if an impasse develops. As a result, joint ownership of investments and investments in other entities may materially adversely affect our returns on investments and results of operations, and, therefore, cash available to pay distributions to stockholders and amounts due on our indebtedness, may be adversely affected.

 

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We may have difficulty selling real estate investment, and our ability to distribute all or a portion of the net proceeds from such sales to our stockholders may be limited.

We will seek to maximize the total value of our portfolio in connection with our evaluation of various strategic opportunities in preparation for an exit strategy. We cannot assure you that we will be able to sell or exchange such asset or assets in a timely manner or on terms beneficial or satisfactory to us. Real estate investments are relatively illiquid. We will have a limited ability to vary our portfolio in response to changes in economic or other conditions. We generally hold a real estate investment for the long term. When we sell any of our real estate investments, we may not realize a gain on such sale or the amount of our taxable gain could exceed the cash proceeds we receive from such sale. We expect the net proceeds of our senior housing properties and other assets to be used to (i) retire debt, including the repurchase of our senior unsecured notes; (ii) make a special distribution to stockholders; and/or (iii) make strategic capital expenditures to enhance certain of our remaining properties.

The real estate industry is capital intensive and we are subject to risks associated with ongoing needs for renovation and capital improvements to our properties as well as financing for such expenditures.

In order for us to remain competitive, our properties will have an ongoing need for renovations and other capital improvements, including replacements, from time to time, of furniture, fixtures and equipment. These capital improvements may give rise to the following risks:

 

    construction cost overruns and delays;

 

    a possible shortage of available cash to fund capital improvements and the related possibility that financing for these capital improvements may not be available to us on satisfactory terms; and

 

    disruptions in the operation of the properties while capital improvements are underway.

We do not control the management of our properties.

In order to maintain our status as a REIT for federal income tax purposes, we may not operate certain types of properties we acquire or participate in the decisions affecting their daily operations, except under certain circumstances discussed below. Our success, therefore, will depend on our ability to select qualified and creditworthy tenants and managers who can effectively manage and operate the properties. Our tenants will be responsible for maintenance and other day-to-day management of the properties and, because our revenues will largely be derived from rents, our financial condition will be dependent on the ability of third-party tenants and/or operators to operate the properties successfully. We attempt to enter into leasing agreements with tenants having substantial prior experience in the operation of the type of property being rented, however, there can be no assurance that our third-party tenants and/or operators will operate the properties successfully. Additionally, if we elect to treat property we acquire as a result of a borrower’s default on a loan or a tenant’s default on a lease as “foreclosure property” for federal income tax purposes, we will be required to operate that property through an independent contractor over whom we will not have control. If our tenants or third-party operators are unable to operate the properties successfully or if we select unqualified managers, then such tenants and operators might not be able to pay our rent, or generate sufficient property-level operating income for us, which could adversely affect our financial condition.

Adverse weather conditions may damage certain properties we acquire and/or reduce our operators’ ability to make scheduled rent payments to us.

Weather conditions may influence revenues at certain types of properties in our portfolio. These adverse weather conditions include heavy snowfall (or lack thereof), hurricanes, tropical storms, high winds, heat waves, frosts, drought (or reduced rainfall levels), excessive rain, avalanches, mudslides and floods. Adverse weather could reduce the number of people participating in activities at our properties. Certain properties may be susceptible to damage from weather conditions such as hurricanes, which may cause damage (including, but not limited to property damage and loss of revenue) that is not generally insurable at commercially reasonable rates. Further, the physical condition of our properties must be satisfactory to attract visitation. In addition to severe or generally inclement weather, other factors, including, but not limited to plant disease and insect infestation, as well as the quality and quantity of water, could materially adversely affect the conditions at our properties. Most properties have some insurance coverage that will offset such losses and fund needed repairs.

 

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Potential losses may not be covered by insurance.

We maintain, or cause our operators to maintain, insurance including, but not limited to, liability, fire, wind, earthquake, and business income coverage on all of our properties that are not being leased on a triple-net basis under various insurance policies. We select policy specifications and insured limits which we believe to be appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice. We do not carry insurance for generally uninsured losses such as loss from riots, terrorist threats, war or nuclear reaction. Most of our policies, like those covering losses due to floods, are insured subject to limitations involving large deductibles or co-payments and policy limits which may not be sufficient to cover losses. While we carry earthquake insurance on properties that are not being leased on a triple-net basis, the amount of our earthquake coverage may not be sufficient to fully cover losses from earthquakes. In addition, we may discontinue earthquake or other insurance on some or all of our properties in the future if the cost of premiums for any of these policies exceeds, in our judgment, the value of the coverage relative to the risk of loss. This risk may limit our ability to finance or refinance debt secured by our prosperities. Additionally, we could default under debt or other agreements if the cost and/or availability of certain types of insurance make it impractical or impossible to comply with covenants relating to the insurance we are required to maintain under such agreements. In such instances, we may be required to self-insure against certain losses or seek other forms of financial assurance.

Dramatic increases in insurance rates could adversely affect our cash flows and our ability to pay distributions to our stockholders.

We may not be able to obtain insurance coverage at reasonable rates due to high premium and/or deductible amounts. As a result, our cash flows could be adversely impacted due to these higher costs, which would materially adversely affect our ability to pay distributions to our stockholders.

If we set aside insufficient reserves for capital expenditures, we may be required to defer necessary property improvements.

If we do not have enough reserves for capital expenditures to supply needed funds for capital improvements throughout the life of the investment in a property and there is insufficient cash available from our operations, we may be required to defer necessary improvements to the property that may cause the property to suffer from a greater risk of obsolescence, a decline in value and/or a greater risk of decreased cash flow as a result of attracting fewer potential tenants to the property and adversely affecting our tenants’ businesses. If we lack sufficient capital to make necessary capital improvements, then we may not be able to maintain projected rental rates for certain properties, and our results of operations and ability to pay distributions to stockholders and amounts due under our indebtedness may be materially adversely affected.

We may be required to defer property expansion during the foreclosure period after a tenant’s default.

In cases where a tenant has defaulted and we have foreclosed on the leases and engaged a third-party manager to operate the property for a period of time, we are prohibited by tax regulations from conducting any new construction during the foreclosure period to expand these properties. The inability to continue to expand certain of our properties may reduce the competitiveness of such properties, and result in declining revenues and operating income. Our results of operations, and our ability to pay distributions to stockholders and amounts due on our indebtedness, may be adversely affected.

Our failure or the failure of the tenants and managers of our facilities to comply with licensing and certification requirements, the requirements of governmental programs, fraud and abuse regulations or new legislative developments may materially adversely affect the operations of our senior housing facilities.

The operations of our senior housing facilities are subject to numerous federal, state and local laws and regulations that are subject to frequent and substantial changes resulting from legislation, adoption of rules and regulations, and administrative and judicial interpretations of existing laws. The ultimate timing or effect of any changes in these laws and regulations cannot be predicted. Failure to obtain licensure or loss or suspension of licensure or certification may prevent a facility from operating or result in a suspension of certain revenue sources until all licensure or certification issues have been resolved. Facilities may also be affected by changes in accreditation standards or procedures of accrediting agencies that are recognized by governments in the certification process.

 

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State laws may require compliance with extensive standards governing operations and agencies administering those laws regularly inspect such facilities and investigate complaints. Failure to comply with all regulatory requirements could result in the loss of the ability to provide or bill and receive payment for healthcare services at our senior housing properties. Additionally, transfers of operations of certain senior housing properties are subject to regulatory approvals not required for transfers of other types of commercial operations and real estate. We may have no direct control over the tenant’s or manager’s ability to meet regulatory requirements and failure to comply with these laws, regulations and requirements may materially adversely affect the operations of these properties.

We may incur significant costs complying with the Americans with Disabilities Act and similar laws.

Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. We have not conducted an audit or investigation of all of our properties to determine our compliance with the ADA. If one or more of our properties does not comply with the ADA, then we would be required to incur additional costs to bring the property into compliance. Further, noncompliance with the ADA could result in imposition of fines or an award of damages to private litigants. Additional federal, state and local laws also may require modifications to our properties or restrict our ability to renovate our properties. We cannot predict the ultimate cost of compliance with the ADA or other legislation. If we incur substantial costs to comply with the ADA and any other similar legislation, our financial condition, results of operations, cash flow, cash available for distribution and ability to satisfy our debt service obligations could be materially adversely affected.

The U.S. housing market may adversely affect our operators’ and tenants’ ability to increase or maintain occupancy levels at, and rental income from, our senior housing facilities which may impact the amount of distributions and earnings we receive from our unconsolidated venture that owns senior housing facilities.

The performance of the senior housing sector is linked to the performance of the general economy and, specifically, the housing market in the United States. It is also sensitive to personal wealth and available fixed income of seniors and their adult children. Declines in home values, consumer confidence and net worth due to adverse general economic conditions may reduce demand for senior housing properties. Our tenants and the operators of our senior housing facilities have experienced and may continue to experience relatively flat or declining occupancy levels due to falling home prices, declining incomes, stagnant home sales and other economic factors. Seniors may choose to postpone their plans to move into senior housing facilities rather than sell their homes at a loss or for a profit below their expectations. Moreover, tightened lending standards have made it more difficult for potential buyers to obtain mortgage financing, all of which have contributed to the declining home sales. Any future rise in interest rates may compound or prolong this problem. In addition, the senior housing segment may continue to experience a decline in occupancy associated with private pay residents choosing to move out of the facilities to be cared for at home by relatives due to difficulties selling their existing homes. A material decline in occupancy levels and revenues may make it more difficult for them to meet scheduled rent payments to us, which could adversely affect our financial condition.

Events which adversely affect the ability of seniors to afford daily resident fees could cause the occupancy rates, resident fee revenues and results of operations of our senior housing facilities to decline.

Costs to seniors associated with certain types of the senior housing properties generally are not reimbursable under government reimbursement programs such as Medicaid and Medicare. Substantially all of the resident fee revenues generated by our facilities will be derived from private payment sources consisting of income or assets of residents or their family members. Only seniors with income or assets meeting or exceeding certain standards can typically afford to pay our daily resident and service fees and, in some cases, entrance fees. Economic downturns such as the one experienced in the United States beginning in 2008, reductions or declining growth of government entitlement programs, such as social security benefits, or stock market volatility could adversely affect the ability of seniors to afford the fees for our senior housing facilities. If our tenants or managers are unable to attract and retain seniors with sufficient income, assets or other resources required to pay the fees associated with assisted and independent living services, the occupancy rates, resident fee revenues and results of operations for these facilities could decline, which, in turn, could have a material adverse effect on our business and our ability to pay amounts due on our indebtedness.

 

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Increased competition may reduce the ability of certain of our operators to make scheduled rent payments to us or materially adversely affect our operating results.

The types of properties in which we invest are expected to face competition for customers from other similar properties, both locally and nationally. For example, competing senior housing properties may be located near our senior housing properties. Any decrease in revenues due to competition at any of our properties may materially adversely affect our operators’ ability to make scheduled rent payments to us and with respect to certain of our senior housing and lodging properties leased to TRS entities, may materially adversely affect our operating results of those properties.

Our senior housing and healthcare properties may be subject to unknown or contingent liabilities which could cause us to incur substantial costs.

Our portfolio includes operating senior housing and healthcare properties. Our senior housing and healthcare properties may be subject to unknown or contingent liabilities for which we may have no recourse, or only limited recourse, against the sellers. In general, the representations and warranties provided under transaction agreements related to the acquisition of our senior housing and healthcare properties often do not survive the closing of the transactions. While some sellers have been required to indemnify us with respect to breaches of representations and warranties that survive, such indemnification are limited, and are subject to various materiality thresholds, significant deductibles or a cap on indemnifiable losses. There is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their representations and warranties. In addition, the total amount of costs and expenses that may be incurred with respect to liabilities associated with these properties may exceed our expectations, and we may experience other unanticipated adverse effects, all of which may adversely affect our financial condition, results of operations, the value of our common stock and our ability to make distributions to our stockholders.

We invest in private-pay senior housing properties, an asset class of the senior housing sector that is highly competitive.

Private-pay senior housing is a competitive asset class of the senior housing sector. Our senior housing properties compete on the basis of location, affordability, quality of service, reputation and availability of alternative care environments. Our senior housing properties also rely on the willingness and ability of seniors to select senior housing options. Our property operators have competitors with greater marketing and financial resources and are able to offer incentives or reduce fees charged to residents thereby reducing the perceived affordability of our properties. Additionally, the high demand for quality caregivers in a given market could increase the costs associated with providing care and services to residents. These and other factors could cause the amount of our revenue generated by private payment sources to decline or our operating expenses to increase. In periods of weak demand, as has occurred during the recent general economic recession, profitability may be negatively affected by the relatively high fixed costs of operating a senior housing property.

The inability of seniors to sell their homes could negatively impact occupancy rates, revenues, cash flows and results of operations of the properties we acquire.

Downturns in U.S. housing markets could cause seniors to experience difficulty selling their homes, which could impact their ability to relocate into or finance their stays at our senior housing properties with private resources. Specifically, these difficulties could materially adversely affect the ability (or perceived ability) of seniors to afford entrance fees and resident fees, as residents frequently use the proceeds from the sale of their homes to cover the cost of these fees.

Significant legal actions brought against the tenants or managers of our senior housing properties could subject them to increased operating costs and substantial uninsured liabilities, which may affect their ability to meet their obligations to us.

As is typical in the healthcare industry, the tenants or managers of our senior housing properties may be subject to claims that their services have resulted in resident injury or other adverse effects. Many of these tenants or managers may have experienced an increasing trend in the frequency and severity of professional liability and general liability insurance claims and litigation asserted against them. The insurance coverage that will be maintained by such

 

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tenants or managers, whether through commercial insurance or self-insurance, may not cover all claims made against them or continue to be available at a reasonable cost, if at all. In some states, insurance coverage for the risk of punitive damages arising from professional liability and general liability claims and/or litigation may not, in certain cases, be available to our tenants or managers due to state law prohibitions or limitations of availability. As a result, tenants of our medical office buildings and healthcare-related facilities operating in these states may be liable for punitive damage awards that are either not covered or are in excess of their insurance policy limits. We also believe that there has been, and will continue to be, an increase in governmental investigations of certain healthcare providers, particularly in the area of Medicare/Medicaid false claims, as well as an increase in enforcement actions resulting from these investigations. Insurance is not available to cover such losses. Any adverse determination in a legal proceeding or government investigation could lead to potential termination from government programs, large penalties and fines and otherwise have a material adverse effect on a facility operator’s financial condition. If a tenant or manager is unable to obtain or maintain insurance coverage, if judgments are obtained in excess of the insurance coverage, if a tenant or manager is required to pay uninsured punitive damages, or if a tenant or manager is subject to an uninsurable government enforcement action, the tenant or manager could be exposed to substantial additional liabilities, which could result in its bankruptcy or insolvency or have a material adverse effect on a tenant’s or manager’s business and its ability to meet its obligations to us, which in turn could have a material adverse effect on our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

We will be exposed to various operational risks, liabilities and claims with respect to our senior housing properties that may adversely affect our ability to generate revenues and/or increase our costs.

Through our ownership of senior housing properties, we will be exposed to various operational risks, liabilities and claims with respect to our properties in addition to those generally applicable to ownership of real property. These risks include fluctuations in occupancy levels, the inability to achieve economic resident fees (including anticipated increases in those fees), rent control regulations, and increases in labor costs (as a result of unionization or otherwise) and services. Any one or a combination of these factors, together with other market and business conditions beyond our control, could result in operating deficiencies at our senior housing properties, which could have a material adverse effect on our facility operators’ results of operations and their ability to meet their obligations to us and operate our properties effectively and efficiently, which in turn could materially adversely affect us.

If our operators fail to cultivate new or maintain existing relationships with residents in the markets in which they operate, our occupancy percentage, payor mix and resident rates may deteriorate, which could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to you.

We have built relationships with several key operators, which makes us extremely dependent on those select operators. The ability of our operators to improve the overall occupancy percentage, payor mix and resident rates at our senior housing and other healthcare facilities, depends on our operators’ reputation in the communities they serve and our operators’ ability to successfully market our facilities to potential residents. A large part of our operators’ marketing and sales effort is directed towards cultivating and maintaining relationships with key community organizations that work with seniors, physicians and other healthcare providers in the communities where our facilities are located, whose referral practices significantly affect the choices seniors make with respect to their long-term care needs. If our operators are unable to successfully cultivate and maintain strong relationships with these community organizations, physicians and other healthcare providers, occupancy rates at our facilities could decline, which could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to you.

Some tenants of senior housing properties are subject to fraud and abuse laws, the violation of which by a tenant may jeopardize the tenant’s ability to make rent payments to us.

There are various federal and state laws prohibiting fraudulent and abusive business practices by healthcare providers who participate in, receive payments from or are in a position to make referrals in connection with government-sponsored healthcare programs, including the Medicare and Medicaid programs. Any lease arrangements we may enter into with certain tenants could also be subject to these fraud and abuse laws concerning Medicare and Medicaid. Examples of these laws include the Federal Anti-Kickback Statute, the Federal Physician

 

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Self-Referral Prohibition, the False Claims Act, and the Civil Monetary Penalties Law. Additionally, states in which the facilities are located may have similar fraud and abuse laws. These laws include penalties for violations that range from punitive sanctions, damage assessments, penalties, imprisonment, denial of Medicare and Medicaid payments and exclusion from the Medicare and Medicaid programs. Investigation by a federal or state governmental body for violation of fraud and abuse laws or imposition of any of these penalties upon one of our tenants could jeopardize that tenant’s ability to operate or to make rent payments, which may have a material adverse effect on our business, financial condition and results of operations and our ability to make cash distributions.

Our TRS structure subjects us to the risk that the leases with our TRS lessees do not qualify for tax purposes as arm’s-length, which would expose us to potentially significant tax penalties.

Lessees of properties held in our TRSs, i.e., certain senior housing properties, will incur taxes or accrue tax benefits consistent with a “C” corporation. If the leases between us and our TRS lessees were deemed by the Internal Revenue Service to not reflect an arm’s-length transaction, as that term is defined by tax law, we may be subject to significant tax penalties as the lessor, which would materially adversely impact our profitability and our cash flows.

Increased competition for customers may reduce the ability of certain of our operators to make scheduled rent payments to us.

The types of properties in which we invest are expected to face competition for customers from other similar properties, both locally and nationally. For example, marinas we own compete in each market with other marinas, some of which have greater resources than our marinas, for a limited number of boaters seeking boat rental slips. Any decrease in revenues due to such competition at any of our properties may adversely affect our operators’ ability to make scheduled rent payments to us, which may materially adversely affect our results of operations and our ability to pay amounts due on our indebtedness.

We have no economic interest in the land beneath ground lease properties in our portfolio.

A significant number of the properties that we have acquired are on land owned by a governmental entity or other third party, while we own a leasehold, permit, or similar interest. This means that while we have a right to use the property, we do not retain fee ownership in the underlying land. Accordingly, with respect to such properties, we have no economic interest in the land or buildings at the expiration of the ground lease or permit. As a result, although we share in the income stream derived from the lease or permit, we will not share in any increase in value of the land associated with the underlying property. Further, because we do not completely control the underlying land, the governmental or other third party owners that lease this land to us could take certain actions to disrupt our rights in the properties or our tenants’ operation of the properties or take the properties in an eminent domain proceeding. While we do not think such interruption is likely, such events are beyond our control. If the entity owning the land under one of our properties chose to disrupt our use either permanently or for a significant period of time, then the value of our assets could be impaired and our results of operations and ability to pay amounts due on our indebtedness, could be materially adversely affected.

Marinas, ski resorts and other types of properties in which we invest may not be readily adaptable to other uses.

Ski resorts and related properties, marinas and other types of properties in our portfolio are specific-use properties that have limited alternative uses. Therefore, if the operations of any of our properties in these sectors, such as our ski properties, become unprofitable for our tenant or operator due to industry competition, a general deterioration of the applicable industry or otherwise, such that the tenant becomes unable to meet its obligations under its lease, then we may have great difficulty re-leasing the property and the liquidation value of the property may be substantially less than would be the case if the property were readily adaptable to other uses. Should any of these events occur, our income and cash available to pay our indebtedness, and the value of our property portfolio, could be materially reduced.

We may not control our joint ventures.

Our independent directors must approve all joint venture or general partnership arrangements. Subject to that approval, we have entered and we may, in the future, enter into joint ventures with unaffiliated third-parties to purchase properties or to make loans or other permitted investments, and the joint venture or general partnership

 

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agreement relating to that joint venture or partnership may provide that we will share with the unaffiliated party management control of the joint venture. For instance, with respect to the commercial retail property we own with Intrawest Corporation at five ski resorts and the Dallas Market Center, our venture partners share approval rights on many major decisions. Those venture partners may have differing interests from ours and the power to direct the joint venture or partnership on certain matters in a manner with which we do not agree. In the event the joint venture or general partnership agreement provides that we will have sole management control of the joint venture, the agreement may be ineffective as to a third party who has no notice of the agreement, and we may therefore be unable to control fully the activities of the joint venture. Should we enter into a joint venture with another program sponsored by an affiliate, we do not anticipate that we will have sole management control of the joint venture. In addition, when we invest in properties, loans or other permitted investments indirectly through the acquisition of interests in entities that own such properties, loans or other permitted investments, we may not be able to control the management of such assets.

Certain of our properties are subject to environmental liabilities that could significantly impact our return from the properties and the success of our ventures.

Operations at certain of our properties involve the use, handling, storage, and contracting for recycling or disposal of hazardous or toxic substances or wastes, including environmentally sensitive materials such as herbicides, pesticides, fertilizers, motor oil, waste motor oil and filters, transmission fluid, antifreeze, freon, waste paint and lacquer thinner, batteries, solvents, lubricants, degreasing agents, gasoline and diesel fuels, and sewage. Accordingly, the operations of certain properties in our portfolio are subject to regulation by federal, state, and local authorities establishing health and environmental quality standards. In addition, certain of our properties may maintain and operate underground storage tanks, or USTs, for the storage of various petroleum products. USTs are generally subject to federal, state, and local laws and regulations that require testing and upgrading of USTs and the remediation of contaminated soils and groundwater resulting from leaking USTs.

As an owner of real estate, various federal and state environmental laws and regulations may require us to investigate and clean up certain hazardous or toxic substances, asbestos-containing materials, or petroleum products located on, in or emanating from our properties. Such laws often impose liability without regard to whether the owner knew of, or was responsible for, the release of hazardous substances. Asbestos-containing building materials are subject to management and maintenance requirements under environmental laws, and owners and operators may be subject to penalty for noncompliance. Environmental laws may allow suits by third parties for recovery from owners or operators for personal injury related to exposure to asbestos-containing building materials.

We may also be held liable to a governmental entity or to third parties for property damage and for investigation and cleanup costs incurred by those parties in connection with the contamination. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. Other environmental laws impose liability on a previous owner of property to the extent hazardous or toxic substances were present during the prior ownership period. A transfer of the property may not relieve us of such liability; therefore, we may have liability with respect to properties that we or our predecessors sold in the past.

The presence of contamination or the failure to remediate contamination at any of our properties may materially adversely affect our ability to sell or lease the properties or to borrow using the properties as collateral. Some of our tenants routinely handle hazardous substances and wastes at our properties. Environmental laws and regulations subject our tenants, and potentially us, to liability resulting from these activities or from previous activities at the properties. Environmental liabilities could also affect the ability of our tenants to meet their obligations to pay us for leasing the properties. While our leases generally provide that the tenant is solely responsible for any environmental hazards created during the term of the lease, we or an operator of a site may be liable to third parties for damages and injuries resulting from environmental contamination coming from the site.

All of our properties have been acquired subject to satisfactory Phase I environmental assessments, which assessments generally involve the inspection of site conditions without invasive testing such as sampling or analysis of soil, groundwater or other conditions, or satisfactory Phase II environmental assessments, which generally involve the testing of soil, groundwater or other conditions. Our Board of Directors and our Advisor may determine that we will acquire a property in which a Phase I or Phase II environmental assessment indicates that a problem exists and has not been resolved at the time the property is acquired, provided, however, that if it is a material

 

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problem: (i) the seller has (a) agreed in writing to indemnify us and/or (b) established an escrow fund with cash equal to a predetermined amount greater than the estimated costs to remediate the problem; or (ii) we have negotiated other comparable arrangements, including, but not limited to, a reduction in the purchase price. We cannot be sure, however, that any seller will be able to pay under an indemnity we obtain or that the amount in escrow will be sufficient to pay all remediation costs. Further, we cannot be sure that all environmental liabilities associated with the properties that we may acquire from time to time will have been identified or that no prior owner, operator or current occupant will have created an environmental condition not known to us. Moreover, we cannot be sure that: (i) future laws, ordinances or regulations will not impose any material environmental liability on us; (ii) that the assessment failed to reveal material adverse environmental conditions, liabilities, or compliance concerns, or (iii) the environmental condition of our properties will not be affected by tenants and occupants of the properties, by the condition of land or operations in the vicinity of the properties (such as the presence of USTs), or by third parties unrelated to us. Environmental liabilities that we may incur could have a materially adverse effect on our financial condition, results of operations and/or our ability to pay distributions to stockholders and amounts due on our indebtedness. In addition to the risks associated with potential environmental liabilities discussed above, compliance with environmental laws and regulations that govern our properties may require expenditures and modifications of development plans and operations that could have a materially detrimental effect on the operations of the properties and our financial condition, results of operations and ability to pay distributions to stockholders and amounts due on our indebtedness. There can be no assurance that the application of environmental laws, regulations or policies, or changes in such laws, regulations and policies, will not occur in a manner that could have a material detrimental effect on any of our properties.

Mold or other indoor air quality issues may exist or arise in the future at our properties, and they could result in our being liable for adverse health effects and remediation costs.

Excessive moisture accumulation in our buildings or on our building materials may trigger mold growth, and the problem may be exacerbated if the moisture is either undiscovered or not addressed immediately. Mold may emit airborne toxins or irritants. Inadequate ventilation, chemical contamination, and other biological contaminants (including pollen, viruses and bacteria) can also impair indoor air quality. Impaired indoor air quality may cause a variety of adverse health effects such as allergic reactions. If mold or other airborne contaminants exist or appear at our properties, we may have to undertake a costly remediation program to contain or remove the contaminants or increase indoor ventilation. If indoor air quality were impaired, we could be liable to our tenants, their employees or others for property damage or personal injury.

Legislation and government regulation may adversely affect the development and operations of our properties.

In addition to being subject to environmental laws and regulations, certain of the development plans and operations conducted or to be conducted on our properties require permits, licenses and approvals from certain federal, state and local authorities. For example, ski resort operations often require federal permits from the U.S. Forest Service to use forests as ski slopes. Material permits, licenses or approvals may be terminated, not renewed or renewed on terms or interpreted in ways that are materially less favorable to the properties we purchase. Furthermore, laws and regulations that we or our operators are subject to may change in ways that are difficult to predict. There can be no assurance that the application of laws, regulations or policies, or changes in such laws, regulations and policies, will not occur in a manner that could have a material detrimental effect on our properties, the operations of our properties and the amount of rent we receive from our tenants.

Governmental regulation with respect to water use by ski resorts could negatively impact our ski resorts.

The rights of our ski resorts and related properties to use various water sources on or about their properties may also be subject to significant restrictions or the rights of other riparian users and the public generally. Certain ski resorts and related properties and the municipalities in which they are located may be dependent upon a single source of water, which sources could be historically low or inconsistent. Such a problem with water may lead to disputes and litigation over, and restrictions placed on, water use. Disputes and litigation over water use could damage the reputation of the ski resorts and related properties and could be expensive to defend, and together with restrictions placed on water use, could have a material adverse effect on the business and operating results of our ski resorts and related properties.

 

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Governmental regulation of marinas with respect to dredging or damming could negatively impact our marinas.

Government regulations require that marinas be dredged from time to time to remove the silt and mud that collect in harbor areas as a result of, among other factors, heavy boat traffic, tidal flow, water flow and storm runoff. Dredging and disposing of the dredged material can be very costly and may require permits from various governmental authorities. In addition, the Army Corps of Engineers often has the authority to dam rivers and lakes, which can negatively affect our marinas. If we or our marina tenants or operators engaged by our marina tenants cannot timely obtain the permits necessary to dredge our marinas or dispose of the dredged material, if dredging is not practical or is exceedingly expensive, or damming drops water levels, the operations of our marina could be materially and adversely affected, which could have a material negative impact on our financial condition and our ability to pay amounts due on our indebtedness.

Financing Related Risks

Borrowing creates risks.

We have borrowed and may continue to borrow money to acquire assets, to preserve our status as a REIT, or for other corporate purposes. We generally mortgage or put a lien on one or more of our assets in connection with any borrowing. We intend to maintain one or more revolving lines of credit of up to $160 million to provide financing for the potential acquisition of assets, although our Board of Directors could determine to borrow a greater amount. We may repay the line of credit using proceeds from the sale of assets, working capital or long-term financing. We also have obtained, and intend to continue to obtain, long-term financing. We may not borrow more than 300% of the value of our net assets without the approval of a majority of our independent directors and the borrowing must be disclosed and explained to our stockholders in our first quarterly report after such approval. Borrowing may be risky if the cash flow from our properties and other permitted investments is insufficient to meet our debt obligations. In addition, our lenders may seek to impose restrictions on future borrowings, distributions to stockholders and operating policies, including with respect to capital expenditures and asset dispositions. If we mortgage assets or pledge equity as collateral and we cannot meet our debt obligations, then the lender could take the collateral, and we would lose the asset or equity and the income we were deriving from the asset.

Existing debt agreements and future debt agreements may contain restrictive covenants relating to our operations, which could limit our ability to make distributions to stockholders and from making other types of payments and investments.

When providing financing, a lender may impose restrictions on us that affect our distributions, operating policies, ability to incur additional debt and our ability to pay distributions to stockholders. Loan documents we enter into may also contain covenants that limit our ability to further mortgage a property or affect other operational policies. Such limitations would hamper our flexibility and may impair our ability to achieve our operating plans.

Disruption or volatility in the credit markets could affect our ability to obtain debt financing on reasonable terms, which could reduce the number of properties we may be able to acquire.

The global and U.S. economy have shown some signs of improvement in recent years, however, concerns continue to exist about the strength of the recovery. If mortgage debt is limited or if we are unable to obtain favorable terms as a result of increased interest rates, increased credit spreads, decreased liquidity or other factors, our ability to acquire properties may be limited and we risk being unable to refinance our existing debt upon maturity.

There is no guarantee that borrowing arrangements or other arrangements for obtaining leverage will be available, or if available, will be available on terms and conditions acceptable to us.

Unfavorable economic conditions have increased financing costs and limited access to the capital markets. In addition, any decline in market value of our assets may have adverse consequences in instances where we borrow money based on the fair value of those assets and may make refinancing more difficult.

 

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We may use credit facilities to finance our investments, which may require us to provide additional collateral and significantly impact our liquidity position.

We may use credit facilities to finance some of our investments. To the extent these credit facilities contain mark-to-market provisions, if the market value of the commercial real estate debt or securities pledged by us declines in value due to credit quality deterioration, we may be required by our lenders to provide additional collateral or pay down a portion of our borrowings. In a weakening economic environment, we would generally expect credit quality and the value of the commercial real estate debt or securities that serve as collateral for our credit facilities to decline and in such a scenario, it is likely that the terms of our credit facilities would require partial repayment from us, which could be substantial. Posting additional collateral to support our credit facilities could significantly reduce our liquidity and limit our ability to leverage our assets. In the event we do not have sufficient liquidity to meet such requirements, our lenders can accelerate our borrowings, which could have a material adverse effect on our business and operations.

We may not be able to continue to borrow on our revolving line of credit.

Our current line of credit is subject to various requirements and financial covenants. We utilize our line of credit to fund operating expenses, distributions, debt service and other expenditures during seasonally slow periods and to make opportunistic acquisitions. In the event we are unable to maintain or extend existing and/or secure new lines of credit or collateralized financing on favorable terms, our ability to make new investments and improvements in existing properties as well as our ability to pay amounts due on our indebtedness, operating expenses and distributions may be significantly negatively impacted.

Defaults on our borrowings may adversely affect our financial condition and results of operations.

Defaults on loans collateralized by a property we own may result in foreclosure actions and our loss of the property or properties securing the loan that is in default. Such legal actions are expensive. For tax purposes, a foreclosure would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt collateralized by the property. If the outstanding balance of the debt exceeds our tax basis in the property, we would recognize taxable income on the foreclosure and all or a portion of such taxable income may be subject to tax and/or required to be distributed to our stockholders in order for us to qualify as a REIT. In such case, we would not receive any cash proceeds to enable us to pay such tax or make such distributions. If any mortgages contain cross collateralization or cross default provisions, more than one property may be affected by a default. If any of our properties are foreclosed upon due to a default, our financial condition, results of operations and our ability to pay distributions to stockholders and amounts due on our indebtedness may be materially adversely affected.

Financing arrangements involving balloon payment obligations may adversely affect our ability to make distributions.

Some of our fixed-term financing arrangements require us to make balloon payments at maturity. Our ability to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or sell a particular property. At the time the balloon payment is due, we may not be able to refinance the balloon payment on terms as favorable as the original loan, or sell the property at a price sufficient to make the balloon payment. These refinancing or property sales could negatively impact the rate of return to stockholders and the timing of disposition of our assets. In addition, payments of principal and interest may leave us with insufficient cash to pay the distributions that we are required to pay to maintain our qualification as a REIT.

Increases in interest rates could increase the amount of our debt payments and materially adversely affect our ability to make distributions to stockholders.

We borrow money that bears interest at a variable rate; and from time to time, we may incur mortgage loans or refinance our properties in a rising interest rate environment. Accordingly, increases in interest rates could increase our interest costs, which could have a material adverse effect on our operating cash flow and our ability to pay amounts due on our indebtedness.

 

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We may acquire various financial instruments for purposes of hedging or reducing our risks which may be costly and/or ineffective and will reduce our cash available for distribution to our stockholders.

Use of derivative instruments for hedging purposes may present significant risks, including the risk of loss of the amounts invested. Defaults by the other party to a hedging transaction can result in the hedging transaction becoming worthless or a speculative hedge. Hedging activities also involve the risk of an imperfect correlation between the hedging instrument and the asset being hedged, which could result in losses both on the hedging transaction and on the asset being hedged. Use of hedging activities generally may not prevent significant losses and could increase our losses. Further, hedging transactions may reduce cash available to pay amounts due on our indebtedness.

Our substantial level of indebtedness could materially adversely affect our financial condition and prevent us from fulfilling our obligations under our senior notes.

Our substantial level of indebtedness could have other important consequences and significant effects on our business. For example, our level of indebtedness and the terms of our debt agreements may:

 

    make it more difficult for us to satisfy our financial obligations under our senior notes, our other indebtedness and our contractual and commercial commitments and increase the risk that we may default on our debt obligations;

 

    prevent us from raising the funds necessary to repurchase notes tendered to us if there is a change of control, which would constitute a default under the indenture governing our senior notes;

 

    heighten our vulnerability to downturns in our business, our industry or in the general economy and restrict us from exploiting business opportunities or making acquisitions;

 

    limit management’s discretion in operating our business;

 

    require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, distributions and other general corporate purposes;

 

    place us at a competitive disadvantage compared to our competitors that have less debt;

 

    limit our ability to borrow additional funds; and

 

    limit our flexibility in planning for, or reacting to, changes in our business, the industry in which we operate or the general economy.

Each of these factors may have a material adverse effect on our financial condition and viability. Our ability to make payments with respect to our senior notes and to satisfy our other debt obligations will depend on our future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors affecting our Company and industry, many of which are beyond our control.

 

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The indenture governing our senior notes imposes significant operating and financial restrictions on us and our subsidiaries, which may prevent us from pursuing certain business opportunities and restrict our ability to operate our business.

The indenture governing our senior notes contains covenants that restrict our and our restricted subsidiaries’ ability to take various actions, such as:

 

    transferring or selling assets;

 

    paying dividends or distributions, buying subordinated indebtedness or securities, making certain investments or making other restricted payments;

 

    incurring or guaranteeing additional indebtedness or issuing preferred stock;

 

    incurring dividend or other payment restrictions affecting restricted subsidiaries;

 

    consummating a merger, consolidation or sale of all or substantially all our assets;

 

    entering into transactions with affiliates;

 

    engaging in business other than a business that is the same or similar to our current business or a reasonably related extension thereof; and

 

    designating subsidiaries as unrestricted subsidiaries.

Additionally, the indenture requires us to maintain at all times total unencumbered assets of not less than 150% of the aggregated principle amount of our and our restricted subsidiaries unsecured indebtedness.

We may also be prevented from taking advantage of business opportunities that arise if we fail to meet certain ratios or because of the limitations imposed on us by the restrictive covenants under the indenture governing the senior notes. The restrictions contained in the indenture governing the senior notes may also limit our ability to plan for or react to market conditions, meet capital needs or otherwise restrict our activities or business plans and materially adversely affect our ability to finance our operations, enter into acquisitions, execute our business strategy, effectively compete with companies that are not similarly restricted or engage in other business activities that would be in our interest. In the future, we may also incur debt obligations that might subject us to additional and different restrictive covenants that could materially adversely affect our financial and operational flexibility. We cannot assure you that we will be granted waivers or amendments to the indenture governing the senior notes if for any reason we are unable to comply with the indenture, or that we will be able to refinance our debt on acceptable terms or at all should we seek to do so.

Our ability to comply with these covenants will likely be affected by events beyond our control, and we cannot assure you that we will satisfy those requirements. A breach of any of these provisions could result in a default under our credit facility, the indenture governing the senior notes or any future credit facilities we may enter into, which could allow all amounts outstanding thereunder to be declared immediately due and payable, subject to the terms and conditions of the documents governing such indebtedness. If we were unable to repay the accelerated amounts, our secured lenders could proceed against the collateral granted to them to secure such indebtedness. This would likely in turn trigger cross-acceleration and cross-default rights under any other credit facilities and indentures, if any then exist governing the senior notes and the terms of our other indebtedness outstanding at such time. If the amounts outstanding under the senior notes or any other indebtedness outstanding at such time were to be accelerated or were the subject of foreclosure actions, we cannot assure you that our assets would be sufficient to repay in full the money owed to the lenders or to our other debt holders.

Tax Related Risks

We will be subject to increased taxation if we fail to qualify as a REIT for federal income tax purposes.

We believe that we have been organized and have operated, and intend to continue to be organized and to operate, in a manner that will enable us to meet the requirements for qualification and taxation as a REIT for federal income tax purposes, commencing with our taxable year ended December 31, 2004. A REIT generally must distribute to its stockholders at least 90% of its taxable income each year, excluding net capital gains, and meet other compliance

 

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requirements. To the extent that a REIT does not distribute all of its net capital gain or distributes at least 90%, but less than 100%, of its taxable income, it will be subject to tax on the undistributed amounts at regular corporate tax rates. We have not requested, and do not plan to request, a ruling from the IRS, that we qualify as a REIT. Our qualification as a REIT will depend on our continuing ability to meet highly technical and complex requirements concerning, among other things, the ownership of our outstanding shares of common stock, the nature of our assets, the sources of our income, the amount of our distributions to stockholders and the filing of TRS elections. No assurance can be given that we qualify or will continue to qualify as a REIT or that new legislation, Treasury Regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to our qualification as a REIT.

If we fail to qualify as a REIT, we would be subject to additional federal income tax at regular corporate rates.

If we fail to qualify as a REIT, for any taxable year (i) we will be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income for that year at regular corporate rates, (ii) unless entitled to relief under relevant statutory provisions, we will be disqualified from treatment as a REIT for the four taxable years following the year during which we lost our REIT status, and (iii) we will not be allowed a deduction for distributions made to stockholders in computing our taxable income. Therefore, if we fail to qualify as a REIT, the funds available to pay distributions to stockholders and amounts due under our indebtedness, may be reduced substantially for each of the years involved.

Our leases may be recharacterized as financings which would eliminate depreciation deductions on our properties.

We believe that we would be treated as the owner of properties where we would own the underlying land, except with respect to leases structured as “financing leases,” which would constitute financings for federal income tax purposes. If the lease of a property does not constitute a lease for federal income tax purposes and is recharacterized as a secured financing by the IRS, then we believe the lease should be treated as a financing arrangement and the income derived from such a financing arrangement should satisfy the 75% and the 95% gross income tests for REIT qualification as it would be considered to be interest on a loan collateralized by real property. Nevertheless, the recharacterization of a lease in this fashion may have adverse tax consequences for us. In particular, we would not be entitled to claim depreciation deductions with respect to the property (although we should be entitled to treat part of the payments we would receive under the arrangement as the repayment of principal). In such event, in some taxable years our taxable income, and the corresponding obligation to distribute 90% of such income, would be increased. With respect to leases structured as “financing leases,” we will report income received as interest income and will not take depreciation deductions related to the real property. Any increase in our distribution requirements may limit our ability to invest in additional properties and to make additional mortgage loans. No assurance can be provided that the IRS would recharacterize such transactions as financings that would qualify under the 95% and 75% gross income tests.

Excessive non-real estate asset values may jeopardize our REIT status.

In order to qualify as a REIT, among other requirements, at least 75% of the value of our assets must consist of investments in real estate, investments in other REITs, cash and cash equivalents and government securities. Accordingly, the value of any other property that is not considered a real estate asset for federal income tax purposes must represent in the aggregate not more than 25% of our total assets. In addition, under federal income tax law, we may not own securities in, or make loans to, any one company (other than a REIT, a qualified REIT subsidiary or a TRS) which represent in excess of 10% of the voting securities or 10% of the value of all securities of that company or which have, in the aggregate, a value in excess of 5% of our total assets, and we may not own securities of one or more TRSs which have, in the aggregate, a value in excess of 25% of our total assets.

The 25%, 10% and 5% REIT qualification tests are determined at the end of each calendar quarter. If we fail to meet any such test at the end of any calendar quarter, and such failure is not remedied within 30 days after the close of such quarter, we will cease to qualify as a REIT, unless certain requirements are satisfied.

 

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Despite our REIT status, we remain subject to various taxes which would reduce operating cash flow if and to the extent certain liabilities are incurred.

Even if we qualify as a REIT, we are subject to some federal, state and local taxes on our income and property that could reduce operating cash flow, including but not limited to: (i) tax on any undistributed REIT taxable income; (ii) “alternative minimum tax” on our items of tax preference; (iii) certain state income, franchise, and gross margins taxes (because not all states treat REITs the same as they are treated for federal income tax purposes); (iv) a tax equal to 100% of net gain from “prohibited transactions;” (v) tax on gains from the sale of certain “foreclosure property;” (vi) tax on gains of sale of certain “built-in gain” properties; and (vii) certain taxes and penalties if we fail to comply with one or more REIT qualification requirements, but nevertheless qualify to maintain our status as a REIT. Foreclosure property includes property with respect to which we acquire ownership by reason of a borrower’s default on a loan or possession by reason of a tenant’s default on a lease. We may elect to treat certain qualifying property as “foreclosure property,” in which case, the income from such property will be treated as qualifying income under the 75% and 95% gross income tests for three years following such acquisition. To qualify for such treatment, we must satisfy additional requirements, including that we operate the property through an independent contractor after a short grace period. We will be subject to tax on our net income from foreclosure property. Such net income generally means the excess of any gain from the sale or other disposition of foreclosure property and income derived from foreclosure property that otherwise does not qualify for the 75% gross income test, over the allowable deductions that relate to the production of such income.

We may be required to pay a penalty tax upon the sale of a property.

The federal income tax provisions applicable to REITs provide that any gain realized by a REIT on the sale of property held as inventory or other property held primarily for sale to customers in the ordinary course of business is treated as income from a “prohibited transaction” that is subject to a 100% penalty tax. Under current law, unless a sale of real property qualifies for a safe harbor, the question of whether the sale of a property constitutes the sale of property held primarily for sale to customers is generally a question of the facts and circumstances regarding a particular transaction. Under the safe harbor rules a REIT, among other things, is required to hold the property for two years before it may be sold. We intend that we and our subsidiaries will hold the interests in our properties for investment with a view to long-term appreciation, to engage in the business of acquiring and owning properties, and to make occasional sales as are consistent with our investment objectives. We do not intend to engage in prohibited transactions. We cannot assure you, however, that we will make no more than seven sales within a year to satisfy the requirements of the safe harbor or that the IRS will not successfully assert that one or more of such sales are prohibited transactions.

The lease of qualified lodging and qualified healthcare properties to a TRS are subject to special requirements.

We lease certain qualified lodging and qualified healthcare properties we acquire from operators to a TRS (or a limited liability company of which the TRS is a member), which lessee will contract with such operators (or a related party) to manage and operate the lodging or healthcare operations at these properties. The rents from this TRS lessee structure will be treated as qualifying rents from real property if among other things, (i) they are paid pursuant to an arms-length lease of a qualified lodging or qualified healthcare property with a TRS and (ii) the operator qualifies as an eligible independent contractor. If any of these conditions are not satisfied, then the rents will not be qualifying rents for purposes of the 75% and 95% gross income tests for REIT qualification.

Our ownership of TRS is limited, and our transactions with our TRSs will cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s length terms.

A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 25% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. In addition, the rules applicable to TRSs limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on “redetermined rent” or “redetermined deductions” to the extent rent paid by a TRS exceeds an arm’s-length amount.

 

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Our TRSs will pay U.S. federal, state and local income taxes on their net taxable income, and their after-tax net income will be available for distribution to us but is not required to be distributed. We anticipate that the aggregate value of the stock and securities of our TRSs will be less than 25% of the value of our total assets (including the stock and securities of our TRSs). Furthermore, we will monitor the value of our respective investments in our TRSs for the purpose of ensuring compliance with the ownership limitations applicable to TRSs. In addition, we will scrutinize all of our transactions with our TRSs to ensure that they are entered into on arm’s-length terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the 25% limitation discussed above or to avoid application of the 100% excise tax discussed above. While we believe our leases have customary terms and reflect normal business practices and that the rents paid thereto reflect market terms, there can be no assurance that the IRS will agree.

Legislative or regulatory action could adversely affect the returns to our stockholders.

In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of the federal income tax laws applicable to investments similar to an investment in shares of our common stock. Additional changes to the tax laws are likely to continue to occur, and we cannot assure our stockholders that any such changes will not adversely affect the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. Our stockholders are urged to consult with their own tax advisor with respect to the impact of recent legislation on their investment in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares.

Although REITs continue to receive substantially more favorable tax treatment than entities taxed as corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be taxed for federal income tax purposes as a corporation. Our Board of Directors has fiduciary duties to us and our stockholders and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders.

Company Related Risks

We have paid and we may continue to pay distributions from sources other than cash flow from operations or funds from operation, which may reduce the amount of capital available for operations, may have negative tax implications, and may have a negative effect on the value of your shares under certain conditions.

Our organizational documents permit us to make distributions from any source, including cash flows from operating activities, proceeds from the sale of assets, borrowings from affiliates and other persons in anticipation of future net operating cash flow, which may be unsecured or secured by our assets, and proceeds of equity offerings. For the years ended December 31, 2014 and 2012, 7.9% and 46.3%, respectively, of distributions were funded from borrowings. For the year ended December 31, 2013, 100.0% of distributions were funded from cash flows from operating activities. In the future we may continue to borrow money to make cash distributions or fund distributions from other sources as we consider necessary or advisable to meet our distribution requirements.

Our distributions have exceeded our earnings and profits in the past and will likely do so in the future. To the extent that the aggregate amount of cash distributed in any given year exceeds the amount of our current and accumulated earnings and profits for the same period, the excess amount will be deemed a return of capital for federal income tax purposes, rather than a return on capital. Furthermore, in the event that we are unable to fund future distributions from our cash flows from operating activities, the value of your shares, the sale of our assets or any other liquidity event may be materially adversely affected.

At any time that we are not generating cash flow from operations sufficient to cover the current distribution rate, we may determine to pay lower distributions, or to fund all or a portion of our future distributions from other sources. If we utilize borrowings for the purpose of funding all or a portion of our distributions, we will incur additional interest expense. We have not established any limit on the extent to which we may use alternate sources of cash for distributions, except that, in accordance with the law of the State of Maryland and our organizational documents, generally, we may not make distributions that would: (i) cause us to be unable to pay our debts as they become due in the usual course of business, (ii) cause our total assets to be less than the sum of our total liabilities, or (iii) jeopardize our ability to maintain our qualification as a REIT. Distributions that exceed cash flow from operations may not be sustainable at current levels, or at all.

 

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Our distribution policy is subject to change. We may not be able to pay distribution at our current rate or at all.

The actual amount and timing of distributions are determined by our Board of Directors in its sole discretion and typically will depend on the amount of funds available for distribution, our financial condition, current and projected capital expenditure requirements, tax considerations and annual distribution requirements needed to maintain our qualification as a REIT. As a result, our distribution rate and payment frequency may vary from time to time; and we can provide no assurance that we will be able to continue current distributions rates, or pay any subsequent distributions. Our ability to declare and pay distribution at our current rate or at all will be subject to an evaluation, by our Board of Directors, of our current and expected future operating results, capital levels, financial condition, future plans, general business and economic conditions and other relevant considerations; and we cannot assure you that we will continue to pay distribution on any schedule or that we will not reduce the amount of our cease paying distributions in the future. The continued disposition of assets, may affect the ability to pay distributions at the level currently set. Future distribution levels are subject to adjustment or termination based upon any one or more risk factors set forth herein as well as other factors that our Board of Directors may, from time to time, deem relevant to consider when determining an appropriate common stock distribution.

We rely on the senior management team of our Advisor, the loss of whom could significantly harm our business.

We depend to a significant extent on the efforts and abilities of the senior management team of our Advisor. These individuals are important to our business and strategy and to the extent that any one or more of them departs and are not replaced with qualified substitutes, such persons’ departures could harm our operations and financial condition.

Because not all REITs calculate modified funds from operations the same way, our use of modified funds from operations may not provide meaningful comparisons with other REITs.

We use modified funds from operations, or MFFO, and the adjustments used to calculate it in order to evaluate our performance against other publicly registered, non-listed REITs, which intend to have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. However, not all REITs calculate MFFO the same way. If REITs use different methods of calculating MFFO, it may not be possible for investors to meaningfully compare the performance of certain REITs.

The liquidation of our assets may be delayed.

Generally, absent an affirmative vote of our stockholders to extend the date, we are obligated under our articles of incorporation to sell our assets and distribute the net sales proceeds to our stockholders or merge with another entity in a transaction that provides our stockholders with cash or securities of a publicly traded company on or before December 31, 2015. In such instances, we will engage only in activities related to our orderly liquidation or merger, unless stockholders owning a majority of our shares of common stock elect to extend our duration by amendment of our articles of incorporation. Neither our advisor nor our Board of Directors may be able to control the timing of the sale of our assets or completion of a merger; and we cannot assure you that we will be able to sell our assets or merge with another company so as to return our stockholders’ aggregate invested capital, generate a profit for the stockholders, or fully satisfy our debt obligations. Because we have used a portion of the offering proceeds to pay expenses and fees, and the full net offering proceeds were not invested in properties, loans or other investments, we would only return all of our stockholders’ invested capital if we sell our assets or the Company for a sufficient amount in excess of the original purchase price of our assets, which at this time is unlikely. If we take a purchase money obligation in partial payment of the sales price of a property, we may realize the proceeds of the sale over a period of years.

Non-traded REITs have been the subject of increased scrutiny by regulators and media outlets resulting from inquiries and investigations initiated by the Financial Industry Regulatory Authority, Inc. and the Commission.

The Company’s securities, like other non-traded REITs, are sold through broker-dealers and financial advisors. Governmental and self-regulatory organizations like the Commission and self-regulatory organizations like Financial Industry Regulatory Authority, Inc. (“FINRA”) impose and enforce regulations on broker-dealers,

 

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investment advisers and similar financial services companies. In disciplinary proceedings in 2012, the Enforcement Division of FINRA required a broker-dealer to pay restitution to investors of a non-traded REIT in connection with the broker-dealer’s sale and promotion activities. FINRA has also filed complaints against a broker-dealer firm with respect to (i) its solicitation of investors to purchase shares in a non-traded REIT without conducting a reasonable inquiry of investor suitability and (ii) its provision of misleading distribution information. In March 2013, a non-traded REIT disclosed in a public filing with the Commission that it was the subject of a Commission investigation focused principally on the adequacy of certain of its disclosures and certain transactions involving affiliated non-traded REITs.

The above-referenced proceedings have resulted in increased regulatory scrutiny from the Commission regarding non-traded REITs. As a result of this increased scrutiny and accompanying negative publicity and coverage by media outlets, FINRA may impose additional restrictions on sales practices in the independent broker-dealer channel for non-traded REITs. If the Company becomes the subject of scrutiny, even if the Company has complied with all applicable laws and regulations, responding to such regulator inquiries could be expensive and distract the Company’s management.

Changes in accounting pronouncements could adversely impact our or our tenants’ reported financial performance.

Accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the Financial Accounting Standards Board and the Commission, entities that create and interpret appropriate accounting standards, may change the financial accounting and reporting standards, or their interpretation and application of the standards that govern the preparation of our financial statements. Such changes could have a material impact on our reported financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements. Similarly, these changes could have a material impact on our tenants’ reported financial condition or results of operations and affect their preferences regarding leasing real estate. In such event, tenants may determine not to lease properties from us, or, if applicable, not to exercise their option to renew their leases with us. This in turn could make it more difficult for us to enter into leases on terms we find favorable and impact the distributions to stockholders.

Cyber security risks and cyber incidents could adversely affect our business and disrupt operations.

Cyber incidents can result from deliberate attacks or unintentional events. These incidents can include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. The result of these incidents could include, but are not limited to, disrupted operations, misstated financial data, liability for stolen assets or information, increased cyber security protection costs, litigation and reputational damage adversely affecting customer or investor confidence.

If our risk management systems are ineffective, we may be exposed to material unanticipated losses.

We continue to refine our risk management techniques, strategies and assessment methods. However, our risk management techniques and strategies may not fully mitigate the risk exposure of our operations in all economic or market environments, or against all types of risk, including risks that we might fail to identify or anticipate. Any failures in our risk management techniques and strategies to accurately quantify such risk exposure could limit our ability to manage risks in our operations or to seek adequate risk-adjusted returns.

Risks Related to Our Valuation

Valuations and appraisals of our properties and real estate-related assets are estimates of value and may not necessarily correspond to realizable value.

On March 6, 2015, we updated our estimated net asset value (“NAV”) to $5.20 per shares as of December 31, 2014, net of estimated transaction fees and closing costs in connection with the strategic alternatives process. In determining the NAV per share, the Board of Directors considered various analyses and information including appraisals by an independent investment banking firm that was engaged as our valuation advisor. The valuation

 

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methodologies used to value our assets involve subjective judgments regarding such factors as leased fee values for our leased properties, net operating income, net proceeds after debt repayment to capture specific joint venture promote structures, discounted cash flow value indications from MAI appraisals, pending purchase price for assets currently under contract or expected to be under contract, market indications of value, and letters of intent from multiple buyers and executed purchase and sale agreements. The fair market value of debt was estimated by discounting the required payments under the Company’s debt agreements using the estimated interest rate that it would expect to receive had it entered into the agreement as of December 31, 2014. The valuation analyses performed are not necessarily indicative of actual values, trading values or actual future results of the Company’s common stock that might be achieved, all of which may be significantly more or less favorable than suggested by the valuation report. The analyses do not purport to be appraisals or to reflect the prices at which the properties may actually be sold and such estimates are inherently subject to uncertainty. The actual value of the Company’s common stock may vary significantly depending on numerous factors that generally impact the price of securities, the financial condition of the Company and the state of the real estate industry more generally, including what a third-party would be willing to pay for the assets. There will be no retroactive adjustment in the valuation of the assets, the price of our shares of common stock or the price we paid to redeem shares of our common stock to the extent such valuations prove to not accurately reflect the true estimate of value. There will be no retroactive change to fees paid or payable to the advisor and the managing dealer. Prior to the time we began estimating our NAV per share, the price you paid for our common stock in our equity offerings was based on a number of factors, including what we believed investors would pay for our shares, estimated fees to be paid to third parties and to our Advisor and its affiliates, the expenses of our public offering and the funds we believed should be available for us to invest in properties, loans and other permitted investments. You may have paid more than realizable value for your investment.

Our estimated NAV per share is not subject to GAAP, will not be independently audited and will involve subjective judgments by parties involved in valuing our assets and liabilities.

Our methodology and our NAV per share are not subject to GAAP and will not be subject to independent audit. Our estimated NAV per share may differ from equity (net assets) reflected on our audited financial statements, even if we are required to adopt a fair value basis of accounting for GAAP financial statement purposes. Our estimated NAV per share is based, in part, on estimates of the values of our properties, consisting principally of illiquid real estate and other assets, and liabilities as of December 31, 2014. The valuation methodologies used by the independent investment banking firm retained by our Board of Directors to estimate the value of our properties, and the estimated NAV per shares as of December 31, 2014, involved subjective judgments, assumptions and opinions, which may or may not turn out to be correct.

The estimated NAV per share as of December 31, 2014 is not intended to be related to any analysis of individual asset values performed for financial statement purposes nor to the values at which individual assets may be carried on financial statements under GAAP. Accordingly, you will be relying entirely on our Board of Directors to adopt an appropriate valuation methodology and approve an appropriate estimated NAV per share, which may not correspond to realizable value upon a sale of our assets.

Our estimated NAV per share may change over time if the valuations of our properties materially change from prior valuations or the actual operating results materially differ from what we originally projected.

Subsequent estimated NAV per share may increase or decrease from the prior estimated NAV per share. Actual operating results may differ from what we originally projected, which may cause an increase or decrease in the estimated NAV per share.

Our estimated NAV per share may not be indicative of the price at which our shares would trade if they were actively traded.

Our Board of Directors determined our estimated NAV per share of our common stock utilizing a valuation report from an independent investment banking firm as valuation expert. Although we used guidelines recommended by the Investment Program Association for valuing issued or outstanding shares of non-traded real estate investment trusts such as us, our estimated NAV per share may not be indicative of either the price at which our shares would trade if they were listed on a national exchange or actively traded by brokers or of the proceeds that a stockholder would receive if we were liquidated or dissolved and the proceeds were distributed to our stockholders.

 

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Risks Related to Conflicts of Interest and Our Relationships with Our Advisor and Its Affiliates

There may be conflicts of interest because of interlocking boards of directors with affiliated companies.

James M. Seneff, Jr. and Thomas K. Sittema serve as our chairman and vice chairman, respectively, and as directors of our Board and concurrently serve as directors for CNL Healthcare Properties, Inc. Mr. Seneff also currently serves as chairman and a director for CNL Growth Properties, Inc. and for Global Income Trust, Inc.

There will be competing demands on our officers and directors and they may not devote all of their attention to us which could have a material adverse effect on our business and financial condition.

Two of our directors, James M. Seneff, Jr. and Thomas K. Sittema are also officers and directors of our advisor and other affiliated entities and may experience conflicts of interest in managing us because they also have management responsibilities for other companies including companies that may invest in some of the same types of assets in which we may invest. In addition, substantially all of the other companies that they work for are affiliates of us and/or our advisor. For these reasons, all of these individuals will share their management time and services among those companies and us, and will not devote all of their attention to us and could take actions that are more favorable to the other companies than to us.

In addition, Stephen H. Mauldin, our president and chief executive officer and Joseph T. Johnson, our chief financial officer, and our other officers serve as officers of, and devote time to, CNL Healthcare Properties, Inc., with similar investment objectives and which owns assets in several of the asset classes in which we invest, and may serve as officers of, and devote time to, other companies which may be affiliated with us in the future. These officers may experience conflicts of interest in managing us because they also have management responsibilities for CNL Healthcare Properties, Inc. For these reasons, these officers will share their management time and services between CNL Healthcare Properties, Inc. and us, and will not devote all of their attention to us and could take actions that are more favorable to CNL Healthcare Properties, Inc. than to us.

Other real estate investment programs sponsored by CNL use investment strategies that are similar to ours. Our advisor and its affiliates, and their and our executive officers will face conflicts of interest relating to the purchase and leasing of properties and other investments, and such conflicts may not be resolved in our favor.

One or more real estate investment programs sponsored by CNL may be seeking to invest in properties and other real estate-related investments similar to the assets we are seeking to acquire. CNL has three other public active real estate investment programs. All of these programs invest in commercial properties. As a result, we may be buying properties and other real estate-related investments at the same time as other programs sponsored by CNL and managed by the executive officers of our advisor or its affiliates are also buying properties and other real estate-related investments. We cannot assure you that properties we want to acquire will be allocated to us in this situation. CNL is not required to allocate each prospective investment to our advisor for review. Our advisor may choose a property that provides lower returns to us than a property allocated to another program sponsored by CNL. In addition, we may acquire properties in geographic areas where other programs sponsored by CNL own properties. If one of such other programs sponsored by CNL 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.

Our advisor and its affiliates, including all of our executive officers and our affiliated directors, will face conflicts of interest as a result of their compensation arrangements with us, which could result in actions that are not in the best interest of our stockholders.

Although our advisory agreement was amended in March 2014 to reduce asset management fees and eliminate acquisition fees on equity, performance fees, debt acquisition fees and disposition fees, we continue to pay our advisor and its affiliates substantial fees. These fees could influence their advice to us, as well as the judgment of affiliates of our advisor performing services for us. Among other matters, these compensation arrangements could affect their judgment with respect to:

 

    the continuation, renewal or enforcement of our agreements with our advisor and its affiliates; and

 

    borrowings to acquire assets, which increase the asset management fees payable to our advisor.

 

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The fees our advisor receives in connection with transactions involving the purchase and management of our assets are not necessarily based on the quality of the investment or the quality of the services rendered to us. The basis upon which fees are calculated may influence our advisor to recommend riskier transactions to us.

None of the agreements with our advisor or any other affiliates were negotiated at arm’s length.

Agreements with our advisor, and its affiliates may contain terms that are not in our best interest and would not otherwise apply if we entered into agreements negotiated at arm’s length with unaffiliated third parties.

We will not be in privity of contract with service providers that may be engaged by our advisor to perform advisory services and they may be insulated from liabilities to us, and our advisor may have minimal assets with which to remedy any liabilities to us.

Our advisor subcontracts with affiliated and unaffiliated service providers for the performance of substantially all or a portion of its advisory services. In the event our advisor elects to subcontract with any service provider, our advisor will enter into an agreement with such service provider and we will not be a party to such agreement. As a result, we will not be in privity of contract with any such service provider and, therefore, such service provider will have no direct duties, obligations or liabilities to us. In addition, we will have no right to any indemnification to which our advisor may be entitled under any agreement with a service provider. The service providers our advisor may subcontract with may be insulated from liabilities to us for services they perform, but may have certain liabilities to our advisor. Our advisor may have minimal assets with which to remedy any liabilities to us resulting under the advisory agreement.

 

Item 1B. UNRESOLVED STAFF COMMENTS

None.

 

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Item 2. PROPERTIES

As of December 31, 2014, through various limited partnerships and limited liability companies, we had invested in 105 real estate investment properties. The following tables set forth details about our property holdings by asset class beginning with wholly-owned properties followed by properties owned through joint venture arrangements (in thousands):

 

Name and Location

  

Description

   Mortgages
and Other
Notes Payable
as of
December 31,
2014
     Initial
Purchase
Price
     Date
Acquired
 

Ski and Mountain Lifestyle

           

The Omni Mount Washington Resort and Bretton Woods Ski Area—

Bretton Woods, New Hampshire

   284-room hotel, 434 skiable acres, nine chairlifts, one golf facility, resort amenities and development land    $ —         $ 55,500         (3 ) 

Brighton Ski Resort—(1)

Brighton, Utah

   1,050 skiable acres, seven lifts; permit and fee interests    $ 20,642       $ 35,000         1/8/07   

Crested Butte Mountain Resort—

Mt. Crested Butte, Colorado

   1,167 skiable acres, 16 chairlifts; permit and leasehold interests    $ —         $ 41,000         12/5/08   

Cypress Mountain—(6)

West Vancouver, BC, Canada

   600 skiable acres, nine lifts; permit and interests    $ —         $ 27,500         5/30/06   

Gatlinburg Sky Lift—(1)

Gatlinburg, Tennessee

   Scenic chairlift; leasehold interest    $ —         $ 19,940         12/22/05   

Jiminy Peak Mountain Resort—

Hancock, Massachusetts

   167 skiable acres, nine lifts; fee interest    $ 8,402       $ 27,000         1/27/09   

Loon Mountain Resort—(1)

Lincoln, New Hampshire

   370 skiable acres, 12 lifts; leasehold, permit and fee interests    $ 16,363       $ 15,539         1/19/07   

Mount Sunapee Mountain Resort—

Newbury, New Hampshire

   233 skiable acres, 11 lifts leasehold interest    $ —         $ 19,000         12/5/08   

Mountain High Resort—

Wrightwood, California

   290 skiable acres, 59 trails, 14 lifts; permit interest    $ 14,550       $ 45,000         6/29/07   

Northstar-at-Tahoe Resort—(1)

Truckee, California

   3,170 skiable acres, 20 lifts; permit and fee interests    $ 41,946       $ 80,097         1/19/07   

Okemo Mountain Resort—

Ludlow, Vermont

   655 skiable acres, 19 lifts; leasehold interest    $ —         $ 72,000         12/5/08   

Sierra-at-Tahoe Resort—(1)

Twin Bridges, California

   2,000 skiable acres, 14 lifts; permit and fee interest    $ 15,677       $ 39,898         1/19/07   

Sugarloaf Mountain Resort—

Carrabassett Valley, Maine

   1,230 skiable acres, 14 lifts; fee and leasehold interest    $ —         $ 26,000         8/7/07   

Summit-at-Snoqualmie Resort—(1)

Snoqualmie Pass, Washington

   1,981 skiable acres, 24 lifts; permit and fee interest    $ 28,086       $ 34,466         1/19/07   

Stevens Pass—

Skykomish, Washington

   1,125 skiable acres, 10 chairlifts; fee interest and special use permit    $ 12,270       $ 20,475         11/17/11   

Sunday River Resort—

Newry, Maine

   820 skiable acres, 15 lifts; leasehold, permit and fee interest    $ —         $ 50,500         8/7/07   

 

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Name and Location

  

Description

   Mortgages
and Other
Notes Payable
as of
December 31,
2014
     Initial
Purchase
Price
     Date
Acquired
 

Ski and Mountain Lifestyle (continued)

        

The Village at Northstar—(1)

Lake Tahoe, California

   79,898 leasable square feet    $ —         $ 36,100         11/15/07   
     

 

 

    

 

 

    
$ 157,936    $ 645,015   
     

 

 

    

 

 

    

Senior Housing (2)

Amber Ridge Assisted Living—

Moline, Illinois

31 residential units $ 2,400    $ 3,600      6/29/12   

Amber Ridge Memory Care—

Moline, Illinois

41 residential units $ 4,800    $ 6,900      6/29/12   

Bozeman Lodge—

Bozeman, Montana

131 residential units $ 20,395    $ 31,000      8/9/13   

Chateau Vestavia—

Vestavia Hills, Alabama

163 residential units $ 12,171    $ 18,500      12/20/13   

Culpepper Place at Branson Meadows—

Branson, Missouri

65 residential units $ 4,772    $ 9,850      8/31/11   

Culpepper Place of Springfield -Chesterfield Village—

Springfield, Missouri

80 residential units $ 6,764    $ 12,200      8/31/11   

Culpepper Place of Fayetteville—

Fayetteville, Arkansas

67 residential units $ 8,602    $ 14,000      11/30/12   

Culpepper Place of Jonesboro—

Jonesboro, Arkansas

61 residential units $ 4,448    $ 7,950      8/31/11   

Culpepper Place of Nevada, MO—

Nevada, Missouri

31 residential units $ —      $ 425      8/31/11   

Culpepper of Springdale—

Springdale, Arkansas

59 residential units $ 4,494    $ 8,850      8/31/11   

Culpepper Place of Springfield -East—

Springfield, Missouri

61 residential units $ 3,892    $ 7,725      8/31/11   

Dogwood Forest of Alpharetta—

Alpharetta, Georgia

76 residential units $ 10,098    $ 15,300      4/30/12   

Dogwood Forest of Cumming—

Cumming, Georgia

48 residential units $ 5,100    $ 7,500      12/14/12   

Dogwood Forest of Eagles Landing—

Stockbridge, Georgia

61 residential units $ 10,168    $ 12,800      4/30/12   

Dogwood Forest of Fayetteville—

Fayetteville, Georgia

62 residential units $ 9,270    $ 12,900      4/30/12   

Dogwood Forest of Gainesville—

Gainesville, Georgia

148 residential units $ 16,629    $ 38,800      4/30/12   

 

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Name and Location

  

Description

   Mortgages
and Other
Notes Payable
as of
December 31,
2014
     Initial
Purchase
Price
     Date
Acquired
 

Senior Housing (2) (Continued)

           

The Grand Victorian of Pekin—

Pekin, Illinois

   61 residential units    $ 5,292       $ 9,930         12/29/11   

Good Neighbor Care of Sterling—

Sterling, Illinois

   61 residential units    $ 5,116       $ 9,700         12/29/11   

The Grand Victorian of Washington—

Washington, Illinois

   61 residential units    $ 5,960       $ 11,120         12/29/11   

La Conner Retirement Inn—

La Conner, Washington

   67 residential units    $ —         $ 8,250         6/2/14   

MorningStar at Dayton Place—

Aurora, Colorado

   239 residential units    $ —         $ 29,908         12/13/13   

The Oaks at Braselton—

Hoschton, Georgia

   80 residential units    $ —         $ 15,000         9/22/14   

The Oaks at Post Road—

Cumming, Georgia

   100 residential units    $ —         $ 18,600         9/22/14   

Pacifica Senior Living Bakersfield—

Bakersfield, California

   78 residential units    $ 14,021       $ 28,750         7/25/14   

Pacifica Senior Living Modesto—

Modesto, California

   60 residential units    $ 6,904       $ 16,250         7/24/14   

Pacifica Senior Living Northridge—

Northridge, California

   78 residential units    $ —         $ 25,250         6/6/14   

Pacifica Senior Living Peoria—

Peoria, Arizona

   84 residential units    $ 8,717       $ 13,250         12/20/13   

Pacifica Senior Living Portland—

Portland, Oregon

   99 residential units    $ 17,928       $ 27,250         12/20/13   

Pacifica Senior Living Santa Clarita—

Newhall, California

   88 residential units    $ 12,664       $ 19,250         12/20/13   

Pacifica Senior Living Victoria Court—

Cranston, Rhode Island

   90 residential units    $ 10,033       $ 15,250         1/5/14   

Pacifica Senior Living Wilmington—

Wilmington, North Carolina

   87 residential units    $ 13,191       $ 22,250         7/25/14   

South Pointe Assisted Living—

Everett, Washington

   41 residential units    $ —         $ 4,300         6/2/14   

Sun City Senior Living—

Sun City Center. Florida

   113 residential units    $ 13,322       $ 20,250         12/20/13   

Pioneer Village—

Jacksonville, Oregon

   99 residential units    $ 9,770       $ 14,850         7/31/13   

 

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Name and Location

  

Description

   Mortgages
and Other
Notes Payable
as of
December 31,
2014
     Initial
Purchase
Price
     Date
Acquired
 

Senior Housing (2) (Continued)

           

Provision Living at Godfrey—

Godfrey, Illinois

   77 residential units    $ 7,800       $ 11,000         5/7/12   

The Stratford—

Carmel, Indiana

   213 residential units    $ —         $ 22,000         6/28/13   

Town Center Village—

Portland, Oregon

   338 residential units    $ 24,740       $ 40,967         8/31/11   

The Lodge Assisted Living and Memory Care Community—

Carson City, Nevada

   82 residential units    $ 9,900       $ 15,500         6/29/12   
     

 

 

    

 

 

    
$ 289,361    $ 607,175   
     

 

 

    

 

 

    

Attractions

Adventure Landing—(1)

Pineville, North Carolina

Miniature golf course, batting cages, bumper boats and go-karts $ —      $ 7,378      10/6/06   

Camelot Park—(1)

Bakersfield, California

Miniature golf course, go-karts, batting cages and arcade; fee and leasehold interest $ —      $ 948      10/6/06   

Coco Key Water Resort—(4)

Orlando, Florida

399-room waterpark hotel $ —      $ 18,527      5/28/08   

Darien Lake—

Buffalo, New York

978-acre theme park and waterpark $ —      $ 109,000      4/6/07   

Elitch Gardens—(1)

Denver, Colorado

62-acre theme park and waterpark $ 42,859    $ 109,000      4/6/07   

Frontier City—

Oklahoma City, Oklahoma

113-acre theme park $ —      $ 17,750      4/6/07   

Funtasticks Fun Center—(1)

Tucson, Arizona

Miniature golf course, go-karts, batting cages, bumper boats and kiddie land with rides $ —      $ 6,424      10/6/06   

Great Wolf Lodge—Sandusky—

Sandusky, Ohio

271-room waterpark resort $ —      $ 43,400      8/6/09   

Great Wolf Lodge—Wisconsin Dells—

Wisconsin Dells, Wisconsin

309-room waterpark resort $ —      $ 46,900      8/6/09   

Hawaiian Falls-Garland—(1)

Garland, Texas

11-acre waterpark; leasehold interest $ —      $ 6,318      4/21/06   

Hawaiian Falls-The Colony(1)

The Colony, Texas

12-acre waterpark; leasehold interest $ —      $ 5,807      4/21/06   

Magic Springs and Crystal Falls Water and Theme Park—(1)

Hot Springs, Arkansas

70-acre theme park and waterpark $ 9,384    $ 20,000      4/16/07   

 

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Table of Contents

Name and Location

  

Description

   Mortgages
and Other
Notes Payable
as of
December 31,
2014
     Initial
Purchase
Price
     Date
Acquired
 

Attractions (Continued)

           

Mountasia Family Fun Center—(1)

North Richland Hills, Texas

   Two miniature golf courses, go-karts, bumper boats, batting cages, paintball fields and arcade    $ —         $ 1,776         10/6/06   

Myrtle Waves Water Park—(5)

Myrtle Beach, South Carolina

   2-acre theme park; leasehold interest    $ —         $ 7,900         4/25/14   

Pacific Park—(1)

Santa Monica, California

   2-acre theme park; leasehold interest    $ 18,939       $ 34,000         12/29/10   

Rapids Waterpark—

Riviera Beach, Florida

   30-acre waterpark    $ 20,781       $ 51,850         6/29/12   

Wet ‘n’ Wild Palm Springs—

Palm Springs, California

   21-acre waterpark    $ —         $ 15,601         8/12/13   

Wet ‘n’ Wild Splashtown—

Houston, Texas

   53-acre waterpark    $ —         $ 13,700         4/6/07   

Waterworld—

Concord, California

   23-acre waterpark; leasehold interest    $ —         $ 10,800         4/6/07   

Wet ’n’ Wild Hawaii—(1)

Kapolei, Hawaii

   29-acre waterpark; leasehold interest    $ —         $ 25,800         5/6/09   

Wet’n’ Wild Phoenix—

Glendale, Arizona

   35-acre waterpark    $ —         $ 33,000         11/26/13   

White Water Bay—

Oklahoma City, Oklahoma

   21-acre waterpark    $ —         $ 20,000         4/6/07   

Wild Waves Theme Park—(1)

Seattle, Washington

   67-acre theme park and waterpark; leasehold interest    $ —         $ 31,750         4/6/07   

Zuma Fun Center—(1)

South Houston, Texas

   Miniature golf course, batting cages, bumper boats and go-karts    $ —         $ 4,883         10/6/06   
     

 

 

    

 

 

    
$ 91,963    $ 642,512   
     

 

 

    

 

 

    

Marinas(2)(4)

Anacapa Isle Marina—

Oxnard, California

438 wet slips; leasehold interest $ 2,295    $ 9,829      3/12/10   

Ballena Isle Marina—

Alameda, California

504 wet slips; leasehold interest $ —      $ 8,179      3/12/10   

Beaver Creek Resort & Marina—(1)

Monticello, Kentucky

275 wet slips; leasehold interest $ —      $ 10,525      12/22/06   

Brady Mountain Resort & Marina—(1)

Royal (Hot Springs), Arkansas

585 wet slips, 55 dry storage units; leasehold interest $ —      $ 14,140      4/10/08   

Bohemia Vista Marina—

Chesapeake City, Maryland

239 wet slips; fee interest $ —      $ 4,970      5/20/10   

 

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Table of Contents

Name and Location

  

Description

   Mortgages
and Other
Notes Payable
as of
December 31,
2014
     Initial
Purchase
Price
     Date
Acquired
 

Marinas(2)(4) (Continued)

           

Burnside Marina—(1)

Somerset, Kentucky

   400 wet slips; leasehold interest    $ —         $ 7,130         12/22/06   

Cabrillo Isle Marina—

San Diego, California

   463 slips; leasehold interest    $ 5,478       $ 20,575         3/12/10   

Crystal Point Yacht Club—

Point Pleasant, New Jersey

   200 wet slips    $ —         $ 5,600         6/8/07   

Eagle Cove Marina—(1)

Byrdstown, Tennessee

   106 wet slips; leasehold and fee interest    $ —         $ 5,300         8/1/07   

Great Lakes Marina—

Muskegon, Michigan

   350 wet slips; 150 dry storage units    $ —         $ 10,088         8/20/07   

Hack’s Point Marina—

Earleville, Maryland

   239 wet slips; fee interest    $ —         $ 2,030         5/20/10   

Holly Creek Marina—(1)

Celina, Tennessee

   250 wet slips; leasehold and fee interest    $ —         $ 6,790         8/1/07   

Lakefront Marina—(1)

Port Clinton, Ohio

   470 wet slips; leasehold and fee interest    $ —         $ 5,600         12/22/06   

Manasquan River Club—

Brick Township, New Jersey

   199 wet slips    $ —         $ 8,900         6/8/07   

Pier 121 Marina —(1)

Lewisville, Texas

   1,007 wet slips, 250 dry storage units; leasehold interest    $ —         $ 37,190         12/22/06   

Sandusky Harbor Marina—(1)

Sandusky, Ohio

   660 wet slips; leasehold and fee interests    $ —         $ 8,953         12/22/06   

Ventura Isle Marina—

Ventura, California

   579 slips; leasehold interest    $ 3,471       $ 16,417         3/12/10   
     

 

 

    

 

 

    
$ 11,244    $ 182,216   
     

 

 

    

 

 

    

Other(4)

Granby Unimproved Land— (1)

Granby, Colorado

1,553 acres with infrastructure water, sewer, golf course in various stages of completion and improvements such as roads, water, sewer, golf course in various stages of completion $ —      $ 51,255      10/29/09   
     

 

 

    

 

 

    
$ —      $ 51,255   
     

 

 

    

 

 

    
$ 550,504    $ 2,128,173   
     

 

 

    

 

 

    

 

FOOTNOTES:

 

(1) We issued $400 million senior notes which are guaranteed by the subsidiaries that own the respective properties.
(2) These properties are classified as assets held for sale as of December 31, 2014 and are expected to be sold during 2015.
(3) The initial purchase price includes the original purchase of $45.0 million, acquired July 23, 2006. In 2011, we purchased the golf facility, resort amenities and development land at this property for an additional $10.5 million. In addition, during our ownership period, we have funded $26.5 million in expansion capital to grow, renovate and enhance this resort.

 

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(4) As of December 31, 2014, we recorded impairment provisions when we determined that the net carrying value exceeded the expected net sales proceeds. We also recorded impairment provisions of approximately $25.4 million and $5.0 million related to one of our attractions properties and our unimproved land, respectively, as of December 31, 2014 to write down the book values related to these properties to estimated sales prices from third party buyers less costs to sell. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Impairments” for additional information.
(5) In April 2014, we foreclosed on an attractions property that served as collateral on one of our mortgage notes receivable. The estimated fair value of the collateral was approximately $7.9 million, which approximated the carrying value of the loan.
(6) Converted from Canadian dollars to U.S. dollars at the exchange rate in place as of the end of the year.

As of December 31, 2014, we own interests in eight properties held through two unconsolidated entities with the following ownership percentage (i) Intrawest Venture at 80.0% and (ii) DMC Partnership at 81.98%. These unconsolidated entities are in the business of owning and leasing real estate. The following tables set forth details about our property holdings by asset class owned through our joint-venture agreements (in thousands):

 

Name and Location

  

Description

   Mortgages
and Other
Notes Payable
as of
December 31,
2014
     Initial
Purchase
Price
     Date
Acquired
 

Destination Retail — Intrawest Venture

           

Village at Blue Mountain— (1)

Collingwood, ON, Canada

   39,723 leasable square feet    $ 10,792       $ 10,781         12/3/04   

Village at Copper Mountain—

Copper Mountain, Colorado

   97,928 leasable square feet    $ 9,511       $ 23,300         12/16/04   

Village at Mammoth Mountain—

Mammoth Lakes, California

   57,924 leasable square feet    $ 10,710       $ 22,300         12/16/04   

Village of Snowshoe Mountain—

Snowshoe, West Virginia

   39,846 leasable square feet    $ 4,214       $ 8,400         12/16/04   

Village of Baytowne Wharf—(2)

Destin, Florida

   56,104 leasable square feet    $ 8,661       $ 17,100         12/16/04   

Village at Stratton—

Stratton, Vermont

   47,837 leasable square feet    $ 2,475       $ 9,500         12/16/04   

Whistler Creekside—(1)

Vancouver, BC, Canada

   70,802 leasable square feet    $ 20,327       $ 19,500         12/3/04   
     

 

 

    

 

 

    
$ 66,690    $ 110,881   
     

 

 

    

 

 

    

Dallas Market Center—(3)

International Floral and Gift Center—

Dallas, Texas

4.8 million leasable square feet; leasehold and fee interests $ 131,500    $ 260,659      2/14/05   
     

 

 

    

 

 

    
$ 131,500    $ 260,659   
     

 

 

    

 

 

    
$ 198,190    $ 371,540   
     

 

 

    

 

 

    

 

FOOTNOTES:

 

(1) Converted from Canadian dollars to U.S. dollars at the exchange rate in place as of the end of the year.
(2) This property is classified as assets held for sale by the joint venture and is expected to be sold in 2015.
(3) In March 2015, we entered into an agreement to sell our 81.98% interest in the DMC Partnership for $140 million.

 

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Table of Contents
Item 3. LEGAL PROCEEDINGS

We are subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business. While resolution of these matters cannot be predicted with certainty, we believe, based upon currently available information that the final outcome of such matters will not have a material adverse effect on our results of operations or financial condition.

 

Item 4. MINE SAFETY DISCLOSURES

None.

 

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Table of Contents

PART II

 

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

There is no established public trading market for our common stock, therefore, there is a risk that a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder, or at all. Unless and until our shares are listed on a national securities exchange, it is not expected that a public market for the shares will develop.

On August 22, 2013, we adopted a valuation policy (the “Valuation Policy”) consistent with IPA Practice Guideline 2013-01, Valuations of Publicly Registered Non-Listed REITs, which was issued by the IPA April 2013 (the “IPA Guidelines”).

The audit committee of the Board of Directors, comprised solely of independent directors, was charged with oversight of the valuation process. The valuation process used by the audit committee and the board to determine the 2014 estimated net asset value per share was designed to follow recommendations in the IPA Guidelines and our Valuation Policy. In accordance with our Valuation Policy and in order to assist brokers in providing information on customer account statements consistent with the requirements of NASD Notice 01-08 and Financial Industry Regulatory Authority (“FINRA”) Rule 2340, the audit committee engaged CBRE Capital Advisors, Inc. (“CBRE Cap”), to assist it and the board in determining the estimated net asset value per share of our common stock as of December 31, 2014. On the recommendation of the audit committee and the approval by our Board of Directors, we deemed it to be in our best interest and the best interests of our stockholders to engage CBRE Cap to provide the valuation analysis, based upon CBRE Cap’s familiarity with our business model and portfolio of assets.

In August 2012, we announced an estimated NAV of $7.31 per share (the “2012 NAV”) and on March 4, 2014, our Board of Directors approved a revised estimated NAV per share of $6.85 as of December 31, 2013 (the “2013 NAV”). On March 6, 2015 our Board announced an updated estimated NAV per share of $5.20 (the “2014 NAV”). In connection with establishing the 2014 NAV, our Board of Directors engaged an independent investment banking firm, CBRE Cap, as our valuation expert to provide property-level and aggregate valuation analyses of the Company and considered other information provided by a variety of sources including our Advisor and Jefferies.

Valuation Methodologies

In preparing the Valuation Report, CBRE Cap, among other things:

 

    reviewed financial and operating information requested from or provided by the Company’s Advisor and senior management;

 

    reviewed and discussed with senior management of the Company and its Advisor the historical and anticipated future financial performance of the Company’s properties, including forecasts prepared by the Company’s senior management and its Advisor;

 

    commissioned restricted-use appraisals which contained analysis on each of the Company’s real property assets (“MAI Appraisals”) and performed analyses and studies for each property;

 

    reviewed the Company’s reports filed with the U.S. Securities and Exchange Commission, including the Company’s preliminary unaudited balance sheet as of December 31, 2014 and Quarterly Report on Form 10-Q for the nine months ended September 30, 2014; and

 

    held discussions with, and reviewed materials from, Jefferies, including market indications of value and letters of intent from multiple potential buyers and executed purchase and sale agreements, in each case with respect to several assets in the Company’s portfolio (collectively, “Market Value Indications”). For further discussion of recent developments in the Company’s strategic alternatives process see the Company’s Current Reports on Form 8-K filed October 2, 2014, November 24, 2014, December 8, 2014 and December 23, 2014.

 

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Appraisals of all of our properties were performed in accordance with Uniform Standards of Professional Appraisal Practice (“USPAP”). The appraisals were commissioned by CBRE Cap from CBRE Valuation Advisory Services Group, a CBRE affiliate that conducts appraisals and valuations of real properties. Each of the appraisals was prepared by personnel who are members of the Appraisal Institute and have the Member of Appraisal Institute (“MAI”) designations.

Refer to our Form 8-K filed on March 10, 2015 for additional details on the 2014 estimated NAV valuation, valuation methodologies, material assumptions, limitations and engagement of CBRE Cap.

The December 31, 2014 estimated NAV was determined by our Board of Directors on March 6, 2015. The value of the Company’s shares will fluctuate over time as a result of, among other things, developments related to individual assets and responses to the real estate and capital markets. We currently expect to update and announce our estimated NAV at least annually.

Recent Sales of Unregistered Securities

None.

Secondary Sales of Registered Shares between Investors

For the years ended December 31, 2014 and 2013, we are aware of transfers of 1,391,947 and 963,650 shares between investors, respectively. We are not aware of any other trades of our shares, other than purchases made in our public offerings and redemptions of shares by us. The following table reflects, for each calendar quarter, the high, the low and the average sales prices for transfers of shares between investors during 2014 and 2013 of which we are aware, net of commissions:

 

     2014  
     High      Low      Average  

First quarter

   $ 7.31       $ 4.00       $ 5.34   

Second quarter

   $ 5.60       $ 3.72       $ 4.30   

Third quarter

   $ 6.85       $ 4.00       $ 5.03   

Fourth quarter

   $ 5.80       $ 4.00       $ 5.20   
     2013  
     High      Low      Average  

First quarter

   $ 10.00       $ 4.72       $ 5.51   

Second quarter

   $ 7.31       $ 4.00       $ 4.72   

Third quarter

   $ 6.15       $ 3.85       $ 4.74   

Fourth quarter

   $ 10.00       $ 4.00       $ 5.22   

Distributions

We declare and pay distributions to stockholders on a quarterly basis. The amount of distributions declared to our stockholders is determined by our Board of Directors and is dependent upon a number of factors, including:

 

    Sources of cash available for distribution such as expected cash flows from operating activities, Funds from Operations (“FFO”), Modified Funds from Operations (“MFFO”) and Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), as well as expected future long-term stabilized cash flows, FFO, MFFO and Adjusted EBITDA from Continuing Operations;

 

    Limitations and restrictions contained in the terms of our current and future indebtedness concerning the payment of distributions; and

 

    Other factors such as the avoidance of distribution volatility, our objective of continuing to qualify as a REIT, capital requirements, the general economic environment and other factors.

 

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On August 9, 2012, our Board of Directors approved a reduction in quarterly distributions to $0.10625 per share, effective during the third quarter of 2012. On an annualized basis, this amount represented a yield of 5.81% on our estimated 2012 NAV of $7.31 per share and 4.25% on our original $10.00 per share value offering price. In March 2014, our Board of Directors approved the revised estimated 2013 NAV of $6.85 per share as of December 31, 2013 and kept the distributions per share at $0.10625 on a quarterly basis, representing an annualized yield of 6.2% on the then current estimated 2013 NAV of $6.85 per share.

In March 2015, our Board of Directors approved a revised estimated 2014 NAV of $5.20 per share as of December 31, 2014 and reduced distributions per share to $0.05 on a quarterly basis representing an annualized yield of 3.8% on our revised estimated 2014 NAV of $5.20 per share. The reduction in distributions is a result of selling our golf portfolio and other individual assets, the repayment of two mortgage notes receivable in 2014, the expected sale of our senior housing portfolio and other assets in 2015, cash needs for routine capital expenditures and the associated impact of asset sales on our operating cash flows. The reduction was made to ensure that the level of cash distributions are consistent with our projected reduction in our remaining earnings base and cash flows.

See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” Sources and Uses of Liquidity and Capital Resources- Distributions” for the table showing cash distributions declared, distributions reinvested and net cash distributions. In determining the apportionment between taxable income and a return of capital, the amounts distributed to stockholders (other than any amounts designated as capital gains dividends) in excess of current or accumulated Earnings and Profits (“E&P”) are treated as a return of capital to the stockholders. E&P is a statutory calculation, which is derived from net income and determined in accordance with the Code. It is not intended to be a measure of the REIT’s performance, nor do we consider it to be an absolute measure or indicator of our source or ability to pay distributions to stockholders. Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Distributions” for further information. Distributions for the allocation of distributions paid to stockholders considered taxable income versus a return of capital to stockholders for federal tax purposes for the years ended December 31, 2014, 2013 and 2012.

Distribution Reinvestment Plan

In 2011 we completed our common stock offerings and filed a registration statement on Form S-3 under the Securities Exchange Act of 1933, as amended, to register the sale of shares of common stock under our Distribution Reinvestment Plan (“DRP”). Shares were originally sold under DRP at a price of $9.50 per share, representing a 5% discount from our public offering price of $10.00. In August 2012, the DRP shares were offered at $6.95, which represented a 5% discount to our estimated 2012 NAV of $7.31 per share. In March 2014, our Board of Directors approved 2013 NAV of $6.85 per share as of December 31, 2013 and amended our DRP so that shares under our DRP would be sold at the 2013 NAV per share of $6.85 rather than a discount to the NAV.

In May 2014, we filed a registration statement on Form S-3 with the SEC for the purpose of registering additional shares of our common stock to be offered for sale pursuant to the DRP. On September 4, 2014, our Board of Directors approved the suspension of our DRP effective as of September 26, 2014. As a result of the suspension of the DRP, beginning with the September 2014 quarterly distributions, stockholders who were participants in the DRP received cash distributions instead of additional shares in the Company. During the years ended December 31, 2014, 2013 and 2012, we raised approximately $27.2 million, $54.9 million and $69.0 million, respectively, through our DRP. As of December 31, 2014, we had approximately 93,560 common stockholders of record.

Securities Authorized for Issuance under Equity Compensation Plans

None.

Redemption of Shares and Issuer Purchases of Equity Securities

Our redemption plan was designed to provide eligible stockholders with limited interim liquidity by enabling them to sell shares back to us prior to any listing of our shares. The aggregate amount of funds under the redemption plan was determined on a quarterly basis in the sole discretion of our Board of Directors and was less than but did not exceed the aggregate proceeds received through our DRP subject to limitations.

 

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Prior to March 2014, our redemption plan provided for redemptions of our common stock at prices ranging between 92.5% and 100.0% of our current estimated NAV per share, depending on the length of time that the shares were owned. In March 2014, our Board approved the Fourth Amended and Restated Redemption Plan which discontinued the tiered redemption price structure and permitted shares that have been held for at least one year to be submitted for redemption at an amount equal to our NAV per share as of the redemption date.

On September 4, 2014, the Board approved the suspension of redemption plan effective as of September 26, 2014. Pursuant to the redemption plan, all redemption requests received in good order by September 26, 2014, were processed and those deemed priority requests and all approved qualified hardship requests were redeemed as of September 30, 2014, subject to the limitations of the redemption plan. Redeemed shares were considered retired and will not be reissued. All other redemption requests received by September 26, 2014, were placed in the redemption queue. However, we will not accept or otherwise process any additional redemption requests after September 26, 2014 unless the redemption plan is reinstated by the Board, which is not expected at this time.

The following table presents information about redemptions for the years ended December 31, 2014 and 2013 (in thousands except per share data):

 

     First     Second     Third     Fourth      Full Year  

2014 Quarters

           

Requests in queue

     10,547        10,798        10,809        11,572         10,547   

Redemptions requested

     778        864        1,355        —           2,997   

Shares redeemed:

           

Prior period requests

     (135     (80     (60     —           (275

Current period request

     (300     (369     (439     —           (1,108

Adjustments (1)

     (92     (404     (93     —           (589
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Pending redemption requests (2)

  10,798      10,809      11,572      11,572      11,572   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Average price paid per share

$ 6.85    $ 6.85    $ 6.81    $ —      $ 6.84   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

     First     Second     Third     Fourth     Full Year  

2013 Quarters

          

Requests in queue

     9,726        9,962        10,109        10,312        9,726   

Redemptions requested

     716        825        685        696        2,922   

Shares redeemed:

          

Prior period requests

     (213     (70     (77     (190     (550

Current period request

     (192     (351     (329     (223     (1,095

Adjustments (1)

     (75     (257     (76     (48     (456
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pending redemption requests (2)

  9,962      10,109      10,312      10,547      10,547   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average price paid per share

$ 7.31    $ 7.30    $ 7.29    $ 7.26    $ 7.29   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

FOOTNOTES:

 

(1) This amount represents redemption request cancellations and other adjustments.
(2) Requests that were not fulfilled in whole during a particular quarter were redeemed on a pro rata basis to the extent funds were made available pursuant to the redemption plan. As described above, no redemption requests were processed after September 26, 2014 pursuant to suspension of the redemption plan.

 

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Item 6. SELECTED FINANCIAL DATA

The following selected financial data for CNL Lifestyle Properties, Inc. should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data” (in thousands except per share data):

 

     Year Ended December 31,  
     2014     2013     2012     2011     2010  

Operating Data:

          

Revenues

   $ 373,295      $ 362,490      $ 349,527      $ 330,434      $ 218,073   

Operating income (loss) (1)

     (10,378     (25,960     11,668        5,402        (69,116

Loss from continuing operations (1)

     (60,438     (11,422     (37,059     (40,851     (81,566

(Loss) from discontinued operations (2)

     (31,706     (241,117     (39,014     (28,759     (323

Net loss (1)(2)

     (92,144     (252,539     (76,073     (69,610     (81,889

Per share data (basic and diluted):

          

From continuing operations (1)

   $ (0.18   $ (0.03   $ (0.12   $ (0.14   $ (0.31

From discontinued operations (2)

     (0.10     (0.76     (0.12     (0.09     (0.00
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share (1)(2)

$ (0.28 $ (0.79 $ (0.24 $ (0.23 $ (0.31
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares outstanding (basic and diluted)

  324,451      318,742      312,309      302,250      263,516   

Distributions declared (3)

  137,880      135,450      163,713      188,447      163,939   

Distributions declared per share

  0.43      0.43      0.53      0.63      0.63   

Cash provided by operating activities

  126,934      135,480      87,893      83,064      79,776   

Cash provided by (used in) investing activities

  273,986      (102,930   (271,464   (373,008   (138,575

Cash provided by (used in) financing activities

  335,458      (34,140   93,955      252,498      75,603   

Other Data:

Funds from operations (4)

  116,465      67,189      97,738      89,556      82,096   

FFO per share (basic and diluted)

  0.36      0.21      0.31      0.30      0.31   

Modified funds from operations (4)

  134,589      122,911      114,327      96,593      98,603   

MFFO per share (basic and diluted)

  0.41      0.39      0.37      0.32      0.37   
     As of December 31,  
     2014     2013     2012     2011     2010  

Balance Sheet Data:

          

Real estate investment properties, net

     1,136,451        2,068,973        2,176,357        2,059,288        2,025,522   

Investments in unconsolidated entities

     127,102        132,324        287,339        318,158        140,372   

Assets held for sale, net

     699,816        90,794        5,473        2,863        —     

Mortgages and other notes receivable, net

     19,361        117,963        124,730        124,352        116,427   

Cash

     136,985        71,574        73,224        162,839        200,517   

Total assets

     2,284,212        2,700,653        2,938,028        2,893,949        2,673,926   

Mortgages and other notes payable

     550,504        760,192        649,002        530,855        603,144   

Senior notes, net of discount

     316,846        394,419        394,100        393,782        —     

Line of credit

     152,500        50,000        95,000        —          58,000   

Total liabilities

     1,126,822        1,332,275        1,226,597        1,003,969        742,886   

Stockholders’ equity

     1,157,390        1,368,378        1,711,431        1,889,980        1,931,040   

Number of Properties:

          

Consolidated:

          

Leased properties

     42        72        73        88        98   

Managed properties

     54        63        55        32        15   

Unimproved land or development

     1        1        1        1        1   

Unconsolidated:

          

Leased properties

     8        8        14        14        8   

Managed properties

     —          —          36        36        —     

 

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FOOTNOTES:

 

(1) We evaluated the carrying value of our properties for impairment and determined that the carrying value on some of our properties were not recoverable and recorded impairment provisions of approximately $30.4 million, $50.0 million, $10 thousand and $24.8 million for the years ended December 31, 2014, 2013, 2012 and 2010, respectively. We did not record any impairments for the year ended December 31, 2011. Certain of our tenants experienced financial difficulties and have defaulted on their leases. As a result, we terminated their leases and recorded losses on lease terminations of approximately $8.9 million, $1.6 million and $55.0 million for the years ended December 31, 2014, 2012, and 2010, respectively. For the year ended December 31, 2013, we recorded a net gain on lease termination of approximately $3.9 million as a result of terminating our lease related to an attractions property in Hawaii in exchange for receiving an intangible trade name. For the year ended December 31, 2011, we recorded a net gain on lease termination of approximately $0.4 million as a result of terminating our lease related to our attractions properties. In addition, we recorded loan loss provisions of approximately $3.3 million, $3.1 million, $1.7 million and $4.1 million on mortgages and other notes receivable that were deemed uncollectible for the years ended December 31, 2014, 2013, 2012 and 2010, respectively. We did not record any loan loss provisions for the year ended December 31, 2011.
(2) Included in discontinued operations for the years ended December 31, 2014, 2013, 2012, 2011 and 2010 is an impairment provision of approximately $37.9 million, $219.5 million, $0.7 million, $16.9 million and $2.0 million, respectively, relating to certain properties where we determined the carrying value was not recoverable based on an analysis comparing estimated and current projected undiscounted cash flows, including estimated net sales proceeds, of the properties over its remaining useful life to the net carrying value of the properties. Additionally, included in discontinued operations for the years ended December 31, 2014, 2013, 2012, and 2011 is a gain of approximately $4.1 million, $2.4 million, $0.3 million and $1.2 million, respectively, from the sale of properties that were classified as assets held for sale. We did not record a gain from sale of properties that were classified as assets held for sale for the year ended December 31, 2010.

In accordance with GAAP, we have reclassified and included the results of operations from the properties classified as assets held for sale as discontinued operations in the consolidated statements of operations for all periods presented.

 

(3) Cash distributions are declared by the Board of Directors and generally are based on various factors, including actual and future expected net cash from operations, FFO and MFFO, and our general financial condition, among others. For each of the years ended December 31, 2014, 2012 and 2011 none of the distributions paid to stockholders were considered taxable income and approximately 100.0% were considered a return of capital to stockholders for federal income tax purposes. For the year ended December 31, 2013, approximately 29.3% of the distributions paid to stockholders were considered capital gain as a result of the gain on the sale of our three unconsolidated senior housing joint ventures and approximately 70.7% were considered a return of capital to stockholders for federal income tax purposes. For the year ended December 31, 2010, approximately 0.3% of the distributions received by stockholders were considered to be taxable income and approximately 99.7% were considered a return of capital for federal income tax purposes. We have not treated such amounts as a return of capital for purposes of calculating the stockholders’ return on their invested capital, as described in our advisory agreement.
(4) Due to certain unique operating characteristics of real estate companies, as discussed below, National Association Real Estate Investment Trust, (“NAREIT”), promulgated a measure known as FFO, which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to net income or loss as determined under GAAP.

We define FFO, a non-GAAP measure, consistent with the standards approved by the Board of Governors of NAREIT. NAREIT defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property, real estate impairment write-downs, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Our FFO calculation complies with NAREIT’s policy described above.

 

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We define MFFO, a non-GAAP measure, consistent with the IPA Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: MFFO, or the Practice Guideline, issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income or loss: acquisition fees and expenses; amounts relating to the write-off of deferred rent receivables and other lease-related assets as well as amortization of above and below market leases and liabilities (which are adjusted in order to remove the impact of GAAP straight-line adjustments from rental revenues); accretion of discounts and amortization of premiums on debt investments, mark-to-market adjustments included in net income; nonrecurring gains or losses included in net income or loss from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, and unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, nonrecurring unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized. While we are responsible for managing interest rate, hedge and foreign exchange risk, we do retain an outside consultant to review all of our hedging agreements. Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such non-recurring gains and losses in calculating MFFO, as such gains and losses are not reflective of on-going operations.

See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional disclosures relating to FFO and MFFO.

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CNL Lifestyle Properties, Inc. is a Maryland corporation incorporated on August 11, 2003. We were formed primarily to acquire lifestyle properties in the United States that we generally lease on a long-term, triple-net basis (generally five to 20 years, plus multiple renewal options) to tenants or operators that we consider to be industry leading. We also engage third-party managers to operate certain properties on our behalf as permitted under applicable tax regulations. We define lifestyle properties as those properties that reflect or are impacted by the social, consumption and entertainment values and choices of our society. A large number of our properties are leased on a long-term, triple-net basis (generally five to 20 years, plus multiple renewal options) to tenants or operators that we consider to be industry leading. When beneficial to our investment structure and as a result of tenant defaults, we engage third-party manager to operate properties on our behalf as permitted under applicable tax regulations. We have also made loans (including mortgage, mezzanine and other loans) generally collateralized by interests in real estate. We have engaged CNL Lifestyle Advisor Corporation (“the Advisor”) as our Advisor to provide management, acquisition, disposition, advisory and administrative services.

Our principal business objectives include investing in and owning a diversified portfolio of real estate with a goal to preserve, protect and enhance the long-term value of those assets. We have built a portfolio of properties that we consider to be well-diversified by region, asset type and operator. In March 2014, we engaged Jefferies LLC, a leading global investment banking and advisory firm, to assist management and the Board of Directors in actively evaluating various strategic opportunities including the sale of either us or our assets, potential merger opportunities, or the listing of our common stock. During 2014, we sold our golf portfolio, entered into an agreement to sell our entire 38 property senior housing portfolio for $790 million and agreed on a plan to sell our marinas portfolio. As of March 13, 2015, we have entered into an agreement to sell our 81.98% interest in one of our unconsolidated joint ventures for $140 million, entered into an agreement to sell one of our attractions properties for $140 million and entered into a letter of intent to sell our unimproved land for $5.5 million. We expect all of these transactions to close during 2015. See “Item 7. Management’s Discussion and analysis of financial condition and results of operations -Exit Strategy” for additional information.

Our Exit Strategy

As required under our articles of incorporation, we began a process of evaluating strategic alternatives in an effort to undertake to provide stockholders with liquidity of their investment by December 31, 2015, either in whole or in part, including, without limitation, through (i) the commencement of an orderly sale of our assets, outside of the ordinary course of business and consistent with our objectives of qualifying as a REIT, and the distribution of the net sales proceeds thereof to the stockholders or (ii) our merger with or into another entity in a transaction which provides the stockholders with cash or securities of a publicly traded company or (iii) a listing of our shares on a national stock exchange (“Listing”).

We will seek to maximize the total value of our portfolio in connection with our evaluation of various strategic opportunities in preparation for an exit strategy. In connection with these objectives, in March 2014, we engaged Jefferies LLC, a leading global investment banking and advisory firm, to assist management and the Board of Directors in actively evaluating various strategic opportunities including the sale of either us or our assets, potential merger opportunities, or the Listing of our common stock. In connection with this process, during 2014 we sold 49 properties for total net sales proceeds of $384.3 million (including the sale of our entire 48 property golf portfolio). We used net proceeds from these sales and other cash on hand to repay mortgage loans associated with the assets sold for $145.0 million and repurchased and cancelled $78.3 million in unsecured senior notes. In December 2014, we entered into a purchase and sale agreement for the sale of our entire portfolio of senior housing assets comprised of 38 properties, for $790 million, subject to certain adjustment, which we expect to sell during 2015. We expect the net proceeds from the sale of our senior housing properties and other assets to be used to (i) retire debt, including the repurchase of our senior unsecured notes; (ii) make a special distribution to stockholders; and/or (iii) make strategic capital expenditures to enhance certain of our remaining properties. In addition, as of December 31, 2014, we had agreed to a plan to sell our marinas portfolio consisting of 17 properties.

In March 2015, we entered into an agreement to sell our 81.98% interest in the DMC Partnership, an unconsolidated joint venture, for $140 million to our co-venture partner, and had entered into an agreement to sell one of our attractions properties for $140 million and entered into a letter of intent to sell our unimproved land for $5.5 million. We are evaluating the sale of other assets as part of our strategic alternatives.

 

 

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As of March 13, 2015, we had a portfolio of 105 lifestyle properties, of which 55 properties had been classified as held for sale as of December 31, 2014. When aggregated by initial purchase price, the portfolio is diversified as follows: approximately 30% in ski and mountain lifestyle, 25% in senior housing, 27% in attractions, 7% in marinas and 11% in additional lifestyle properties. As of March 13, 2015, these assets consist of 24 ski and mountain lifestyle properties, 38 senior housing properties, 24 attractions, 17 marinas and two additional lifestyle properties with the following investment structure:

 

Wholly-owned:

Leased properties (1)

  42   

Managed properties (2)

  54   

Unimproved land

  1   

Unconsolidated joint ventures: (3)

Leased properties

  8   
  

 

 

 
  105   
  

 

 

 

 

FOOTNOTES:

 

(1) Leased to single tenant operators, with a weighted-average lease rate of 10.0% at March 13, 2015 (excluding real estate held for sale). These rates are based on weighted-average annualized straight-line rent due under our leases. These leases have an average lease expiration of 13 years and tenants have multiple renewal options beyond the initial term.
(2) Wholly-owned managed properties include: 1 ski and mountain lifestyle, 16 attractions, 20 senior housing properties, and 17 marinas properties. Under certain applicable tax regulations, properties are permitted to be temporarily managed (up to three years) and certain properties are permitted to be indefinitely managed. We had 30 properties that were temporarily managed and 24 properties that were indefinitely managed under management agreements.
(3) Two properties held through two of our unconsolidated joint ventures are expected to be sold in 2015. See “Distributions from Unconsolidated Entities” for additional information.

We currently operate and have elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes. As a REIT, we generally will not be subject to federal income tax at the corporate level to the extent that we distribute at least 100% of our REIT taxable income and capital gains to our stockholders and meet other compliance requirements. We are subject to income taxes on taxable income from properties operated by third-party managers. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on all of our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which our qualification is lost. Such an event could materially and adversely affect our operating results and cash flows. However, we believe that we are organized and have operated in a manner to qualify for treatment as a REIT beginning with the year ended December 31, 2004. In addition, we intend to continue to be organized and to operate so as to remain qualified as a REIT for federal income tax purposes.

Portfolio Trends

A large number of the properties in our real estate portfolio are operated by third-party tenant operators under long-term triple-net leases for which we report rental income and are not directly exposed to the variability of property-level operating revenues and expenses. We also engage third-party managers to operate certain properties on our behalf for which we record the property-level operating revenues and expenses and are directly exposed to the variability of the property’s operations which impacts our results of operations. We believe that the financial and operational performance of our tenants and managers, and the general conditions of the industries within which they operate, provide indicators about our tenants’ health and their ability to pay contractually obligated rent. For example, positive growth in visitation and per capita spending may result in our receipt of additional percentage rent and, conversely, declines may impact our tenants’ ability to pay rent to us.

 

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The following table illustrates property level revenues and EBITDA reported to us by our tenants and managers for the asset types below and includes both our leased and managed properties. We have only included property-level operating performance for consolidated properties in the table below. Property-level operating performance from our unconsolidated properties has been excluded because we do not believe it is as relevant and meaningful particularly since we are entitled to receive cash distribution preferences where we receive a stated return on our investment each year ahead of our partners. Our tenants and managers are contractually required to provide this information to us in accordance with their respective lease and management agreements. While this information has not been audited, it has been reviewed by management to determine whether the information is reasonable and accurate in all material respects. In connection with this review, management reviews monthly property level operating performance versus budgeted expectations, conducts periodic operational review calls with operators and conducts periodic property inspections. We monitor the credit of our tenants by reviewing their rental payment history, timeliness of rent collections, their operational performance on our properties and by monitoring news and industry reports regarding our tenants and their underlying businesses. We have aggregated this performance data on a “same-store” basis only for comparable properties that we have owned during the entirety of all periods presented and have included information for both leased and managed properties. We have not included performance data on acquisitions made after January 1, 2013 because we did not own those properties during the entirety of all periods presented below. For these reasons, we consider the property level data to be performance information that gives us information on trends which does not directly represent our results of operations. We do not consider this information to be a non-GAAP measure which can be reconciled to our GAAP financial statements because it includes the performance of properties that are leased to third-party tenants. However, we believe this information is useful to help readers of our financial statements understand and evaluate trends, events and uncertainties in our business as it relates to our prior periods and to broader industry performance (in thousands):

 

            Year Ended December 31,               
     Number
of properties
     2014      2013      Increase/(Decrease)  
        Revenue      EBITDA (1)      Revenue      EBITDA (1)      Revenue     EBITDA  

Ski and mountain lifestyle

     17       $ 437,924       $ 108,085       $ 442,689       $ 109,371         -1.1     -1.2

Attractions

     21         261,592         66,501         241,720         58,643         8.2     13.4

Senior housing

     20         70,945         21,457         68,941         22,422         2.9     -4.3

Marinas

     17         33,353         10,222         33,905         11,652         -1.6     -12.3
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      
  75    $ 803,814    $ 206,265    $ 787,255    $ 202,088      2.1   2.1
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

            Year Ended December 31,               
     Number
of properties
     2013      2012      Increase/(Decrease)  
        Revenue      EBITDA (1)      Revenue      EBITDA (1)      Revenue     EBITDA  

Ski and mountain lifestyle

     17       $ 442,689       $ 109,371       $ 409,568       $ 94,418         8.1     15.8

Attractions

     21         226,813         51,273         222,928         48,392         1.7     6.0

Senior housing

     10         36,530         11,557         34,632         11,043         5.5     4.7

Marinas

     17         33,905         11,652         34,416         12,436         -1.5     -6.3
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      
  65    $ 739,937    $ 183,853    $ 701,544    $ 166,289      5.5   10.6
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

FOOTNOTE:

 

(1) Property operating results for tenants under leased arrangements are not included in the company’s operating results. Property-level EBITDA above is disclosed before rent and capital reserve payments to us, as applicable.

Overall, for the year ended December 31, 2014, our same-store tenants and managers reported to us an increase in revenue and property-level EBITDA of 2.1% as compared to the same period in the prior year. The increase in property-level revenue was attributable to our attractions and senior housing properties. Our attractions properties exhibited an increase due to higher ticket sales and in-park spending. In addition, visitation at our attractions

 

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properties increased by 10.6% year-over-year. Our senior housing properties experienced an increase in revenue due to higher average rates paid by our residents. Although revenues on our senior housing properties increased, EBITDA decreased due to the impact of winter storms in several locations where staff were required to stay in buildings overnight, resulting in certain of our properties incurring overtime costs, as well as higher than normal repairs and maintenance and snow removal costs. The decrease in EBITDA was also due to higher resident care expenses and other operating expenses. The increases were partially offset by a decrease in our ski and mountain lifestyle properties and marinas properties. Our ski and mountain lifestyle properties experienced a decrease primarily due to properties in the Pacific West (specifically in California) where our properties were challenged with snow levels that were significantly below historic norms during much of the 2013/2014 ski season as a result of warm temperatures and drought conditions. Unfortunately, poor weather conditions in the Pacific West have continued and have expanded to impact the Pacific Northwest (in the 2014/2015 season). Our marinas properties experienced a decrease in revenue due to operator transitions. Additionally, in December 2013 and in late 2014, record-breaking cold temperatures and ice storms damaged several of our marinas, which has impacted operating results and required extensive repairs. EBITDA at our marinas was further impacted by the introduction of third party management fees resulting from the transition from lease to managed securities.

Overall, for the year ended December 31, 2013, our same-store tenants and managers reported to us an increase in revenue and property-level EBITDA of 5.5% and 10.6%, respectively, as compared to the same period in the prior year. The increases were primarily attributable to our ski and mountain lifestyle and attractions properties. Our ski and lifestyle properties finished the 2012/2013 ski season with skier visits totaling 6.05 million, up 10.4% over the prior year as a result of the return to normal levels of natural snowfall and favorable snowmaking conditions during the first quarter of 2013 as compared to low levels of natural snowfall for the same period in 2012. In addition, our ski and lifestyle properties experienced an increase in summer-based activities which includes scenic chairlift rides, mountain biking, zip lining and other attractions activities, due to favorable weather and the impact of new summer-based capital improvements. Our attractions properties experienced an increase in revenue due to increases in pricing and in-park spending as compared to the same period in 2012. Our senior housing properties experienced increases driven by increases in the average rate paid by our residents. Our marina properties experienced some minor declines, mostly driven by a reduction in slip rental revenues, concentrated in the California market where competition and price sensitivity were more pronounced and the economy has been slower to recover.

When evaluating our senior housing properties’ performance, (for which we are under contract to sell, as described above), management reviews operating statistics of the underlying properties, including revenue per occupied unit (“RevPOU”) and occupancy levels. RevPOU, which is defined as total revenue divided by number of occupied units, is a widely used performance metric within the healthcare sector. As of December 31, 2014, the managers of our 20 comparable, consolidated properties reported to us a decrease in occupancy of 0.6% as compared to the same period in 2013 and an increase in average RevPOU of 3.5%, for the year ended December 31, 2014 as compared to the same period in 2013. The increase in RevPOU was primarily due to strong demand and resultant ability to drive rate increases at the properties. As of December 31, 2013, the managers of our ten comparable, consolidated properties reported to us an increase in occupancy of 0.1% as compared to the same period in 2012 and an increase in average RevPOU of 6.1%, for the year ended December 31, 2013 as compared to the same period in 2012. The increases in occupancy and RevPOU were primarily due to strong demand and resultant ability to drive rate increases at the properties.

 

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The following table presents same-store unaudited property-level information of our senior housing properties as of and for the years ended December 31, 2014 and 2013 (in thousands):

 

            Occupancy           RevPOU         
                              For the year ended         
     Number of      As of December 31,     Increase/     December 31,      Increase/  
     Properties      2014     2013     (Decrease)     2014      2013      (Decrease)  

Senior housing

     20         95.4     96.0     (0.6 %)    $ 3,927       $ 3,794         3.5
            Occupancy           RevPOU         
                              For the year ended         
     Number of      As of December 31,     Increase/     December 31,      Increase/  
     Properties      2013     2012     (Decrease)     2013      2012      (Decrease)  

Senior housing

     10         98.4     98.3     0.1   $ 3,516       $ 3,314         6.1

We continue to closely monitor the performance of all tenants, their financial strength and their ability to pay rent under the leases for our properties. Our asset managers review operating results and rent coverage compared to budget for each of our properties on a monthly basis, monitor the local and regional economy, competitor activity, and other environmental, regulatory or operating conditions for each property, make periodic site visits and engage in regular discussions with our tenants.

Ski and Mountain Lifestyle. According to the National Ski Areas Association and the Kottke National End of Season Survey 2013/2014, the U.S. ski industry recorded a total of 56.2 million visits, down 1.3% from the 2012/13 season. Our ski resorts finished the season with visits totaling 5.63 million, down 7% from the prior year. Our ski and mountain lifestyle properties experienced a decrease primarily due to properties in the Pacific West (specifically in California) where our properties were challenged with snow levels that were significantly below historic norms during much of the 2013/2014 ski season as a result of warm temperatures and drought conditions.

Unfortunately, the poor snow conditions persisted into the 2014/2015 season and our Pacific West resorts located in Washington, Southern California and British Columbia have continued to experience record warmth and rain through February causing business volume to vary negatively at those locations. As a result, one of our tenants has been unable to make their scheduled rent payments for two properties in 2015. We are in discussions with this tenant and may ultimately terminate the leases for these properties and engage the operator as a third party manager. Season-to-date through February 2015, our ski operators reported to us that ski visits for the 2014/2015 ski season were down 8.6% compared to the same period last year. However, revenue per visit has been up 7.9% thus far resulting in total ski revenues being down 1.4% season-to-date as compared to the 2013/2014 ski season.

Senior Housing. Americans 65 years and older are expected to live longer than the elderly did in the past and will need additional housing options to accommodate their special needs. Demand for senior housing options is currently outpacing the existing supply of senior housing units. The supply growth of certain senior housing asset classes over the last decade has declined dramatically following a boom in senior housing development in the 1990’s. According to the National Investment Center for the Senior Housing and Care Industry Map Monitor, which covers the top 31 metro markets in the United States, for the fourth quarter of 2014 (the “Q4 2014 NIC Map Monitor”), the seniors housing occupancy recovery continued, as absorption continued to outpace inventory growth. Despite inventory growth of more than 2,100 units, occupancy rose to its highest rate since the fourth quarter of 2007. As of the fourth quarter of 2014, average occupancy was 90.5%, up 0.2% from the prior quarter and up 0.9% from a year ago. Seniors housing occupancy has risen 3.6% from its cyclical low and is within 1.0% of its previous market cycle high. The pace of inventory growth slowed, but is poised to modestly accelerate going into 2015. As of December 31, 2014, occupancy for our 38 total senior housing properties was 92.3%.

 

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Attractions. Our properties include regionally diverse gated amusement parks and water parks that generally draw most of their visitation from local markets. Regional and local attractions have historically been resistant to recession, with inclement weather being a more significant factor impacting attendance. For the year ended December 31, 2014, our attractions portfolio exhibited property-level revenue increases of approximately 8.2% as compared to the same periods in 2013. According to the January 2015 IBIS World Industry Report on “Amusement Parks in the US” update, the industry amusement park companies continued to build record performance through the end of 2014. Our attraction properties achieved similar results as planned driven by capital investments within selected parks and continued growth with our season pass usage strategies employed across the parks.

Marinas. According to the January 2015 industry publication, Marina Dock Age, the industry remains highly fragmented. The Marinas industry trend shows 44% of operators reported higher occupancy for 2014 vs. 2013. With regard to gross profits, the industry trends reported gross profits increasing from 2010 to 2014. Our marinas properties experienced a decrease due to the incurrence of management fees on properties as a result of being transitioned from leased to managed structures. Additionally, in December 2013, record-breaking cold temperatures and ice storms at one of our largest marinas caused damage to the docks and other floating structures, which resulted in temporary partial closure of this property, reducing operating results during 2014. Repairs are expected to be completed by the end of 2015. We filed property insurance claims relating to the damage and received insurance proceeds as described below in Item 7. “Liquidity and Capital Resources – Proceeds from Insurance – Hurricane and Storm Damage.”

Seasonality

Many of the asset classes in which we invest experience seasonal fluctuations due to the nature of their business, geographic location, climate and weather patterns. As a result, these businesses experience seasonal variations in revenues that may require our tenants to supplement operating cash from their properties in order to be able to make scheduled rent payments to us. We have structured the leases for certain tenants such that rents are paid on a seasonal schedule with most, if not all, of the rent being paid during the tenant’s seasonally busy operating period.

As part of our portfolio diversification strategy, we have specifically considered the varying and complimentary seasonality of our asset classes and portfolio mix. For example, the peak operating season for our ski and mountain lifestyle assets is highly complementary to the peak seasons for our attractions and marinas to balance and mitigate the risks associated with seasonality. Generally, seasonality does not significantly affect our recognition of rental income from operating leases due to straight-line revenue recognition in accordance with GAAP. However, seasonality does impact the timing of when base rent payments are made by our tenants, which impacts our operating cash flows and the amount of rental revenue we recognize in connection with capital improvement reserve revenue and percentage rents paid by our tenants, which is recognized in the period in which it is earned and is generally based on a percentage of tenant revenues.

In addition, seasonality directly impacts certain of our attractions and marinas properties where we engage independent third-party operators to manage the properties on our behalf and where we record property operating revenues and expenses rather than straight-line rents from operating leases. These properties will likely generate net operating losses during their non-peak months while generating most, if not all, of their operating income during their peak operating months. Our consolidated operating results and cash flows during the first, second and fourth quarters will be lower than the third quarter primarily due to the non-peak operating months of our larger attractions and marinas properties.

Operator Transitions, Loan Foreclosure and Provisions

Operator Transitions. During 2014, we completed the transition of our leased marinas properties to third-party managers and recorded a net recovery on lease terminations of approximately $0.7 million due to a change in an estimate for two marinas properties that were transitioned in 2013. In addition, one of our ski tenants with two leases on properties in the Pacific-West is experiencing financial difficulties and has been unable to pay rent in 2015 due to lower operating results from the low levels of snow accompanied by unusually warm weather. Due to their financial difficulty and the continued low level of snow during 2015 at these two locations, we recorded a loss on lease termination of approximately $8.9 million (representing the write-off of straight-line rents) during the year ended December 31, 2014. Based on ongoing weather challenges, additional tenants and borrowers may experience financial hardships and not be able to make payments under their leases or loans, which may result in additional losses on lease terminations or loan provisions.

 

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Loan Foreclosure and Provisions. During the years ended December 31, 2014 and 2012, we recorded loan loss provisions of approximately $3.3 million and $1.7 million, respectively, relating to our mortgage and other notes receivable with one of our golf operators, as a result of uncertainty related to the collectability of the note receivable. We collected the remaining $1.3 million balance of the note as full satisfaction of the note during 2014.

During the year ended December 31, 2013, we recorded loan loss provisions of approximately $1.8 million relating to one ski loan as a result of a troubled debt restructure that provided payment concessions to the borrower in 2014. In addition, we recorded a loan loss provision of approximately $1.3 million on an attractions property that served as collateral on one of our other existing loans based on the estimated fair value of the collateral. During 2014, we foreclosed on this attractions property and recorded the collateral at approximately $7.9 million, which approximated the carrying value of the loan.

Litigation

We are subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business. While resolution of these matters cannot be predicted with certainty, we believe, based upon currently available information that the final outcome of such matters will not have a material adverse effect on our results of operations or financial condition.

Impairments

As described above in Item 1. “Business – Our Disposition Policies”, we evaluate our properties on an ongoing basis in an effort to optimize and enhance the value of our assets. As part of this evaluation, and as part of “Our Exit Strategy” discussed above, as of December 31, 2014, we agreed on a plan to sell the marinas portfolio during 2015. As a result, we recorded impairment provisions of approximately $33.4 million to write down their book values to estimated net sales proceeds expected from these marinas properties. We also recorded impairment provisions of approximately $25.4 million and $5.0 million related to one of our attractions properties and our unimproved land, respectively, as of December 31, 2014 to write down the book values related to these properties to estimated sales prices from third party buyers less costs to sell.

LIQUIDITY AND CAPITAL RESOURCES

General

Our principal demand for funds will be for operating expenses, debt service and cash distributions to stockholders. Generally, our cash needs will be covered by cash generated from our investments including rental income, property operating income from managed properties, interest payments on the loans we make and distributions from our unconsolidated entities. We currently have a revolving line of credit with a total capacity of $153.3 million, as discussed below.

We believe that our current liquidity needs for operating expenses, debt service and cash distributions to stockholders will be adequately covered by cash generated from our investments and other sources of available cash. Additionally, as previously discussed many of our asset classes experience seasonal fluctuations where they make rental payments to us during their peak operating months. As a result, our operating cash flows will fluctuate due to the seasonality of those properties. We believe that we will be able to repay or refinance our debt as it comes due in the ordinary course of business. From time to time we will consider open market purchases of our senior notes or other indebtedness when considered advantageous.

 

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Cash Flows. Our primary sources of cash include rental income from operating leases, property operating revenues, collection of principal and interest on loans we make, distributions from our unconsolidated entities, proceeds from sales of properties and borrowings under our revolving line of credit, offset by payments made for operating expenses, including property operating expenses, asset management fees to our Advisor, debt service payments (principal and interest), and real estate investments (including acquisitions and capital expenditures). The following is a summary of our cash flows (in thousands):

 

     Year Ended December 31,  
     2014      2013      2012  

Cash at beginning of period

   $ 71,574       $ 73,224       $ 162,839   

Cash provided from (used in):

        

Operating activities

     126,934         135,480         87,893   

Investing activities

     273,986         (102,930      (271,464

Financing activities

     (335,458      (34,140      93,955   

Effect of foreign currency translation on cash

     (51      (60      1   
  

 

 

    

 

 

    

 

 

 

Cash at the end of period

$ 136,985    $ 71,574    $ 73,224   
  

 

 

    

 

 

    

 

 

 

Sources and Uses of Liquidity and Capital Resources

Operating Activities. – Net cash provided from operating activities decreased $8.5 million or 6.3% for the year ended December 31, 2014 as compared to the same period in 2013. The decrease is primarily attributable to (i) a reduction in rental revenue due to the sale of 49 properties, (ii) a reduction in distributions we received from our unconsolidated joint ventures as a result of the sale of our interest in three unconsolidated senior housing joint ventures in July 2013, (iii) an increase in interest expense on our indebtedness due to increase in weighted average debt outstanding, and (iv) prepayment penalties in connection with early retirement of certain loans. The decreases were partially offset by an increase in rental revenue from properties acquired during the year ended December 31, 2014 as well as increases in “same-store” net operating income from managed properties.

Proceeds from Sales or Real Estate—As described above in “Our Exit Strategy”, we engaged Jefferies LLC to assist management and our Board of Directors in actively evaluating various strategic opportunities including the sale of our assets. As part of this evaluation, we sold the golf portfolio consisting of 48 properties and also sold our multi-family residential property. During the years ended December 31, 2014, 2013 and 2012, we received aggregate net sales proceeds of approximately $384.3 million, $12.4 million and $1.5 million, respectively, from the sale of 49, four and three properties, respectively. We used the net sales proceeds from the sales of the properties to pay down the indebtedness associated with the properties sold and to pay down a portion of our line of credit, as further described below under “Uses of Liquidity and Capital Resources”. During the year ended December 31, 2013, we received approximately $195.4 million from the sale of our interests in 42 senior housing properties held in three unconsolidated joint ventures. We did not sell any interests in unconsolidated joint ventures during 2014 or 2012. As described above under “Our Exit Strategy”, we entered into an agreement to sell our senior housing portfolio, anticipate the sale to occur in the second quarter of 2015 and expect the net proceeds from the sale of our senior housing properties and other assets to be used to (i) retire debt, including repurchases of our senior unsecured notes; (ii) make a special distribution to stockholders; and/or (iii) make necessary capital expenditures for certain of our remaining properties. In addition, we agreed on a plan to sell our marinas portfolio which we anticipate will be sold during 2015.

Proceeds from Insurance – Hurricane and Storm Damage – In December 2013, one of our marina properties experienced significant damage to the docks and certain other floating structures as a result of an ice storm in Northern Texas. A few of our other properties were also impacted by storms during 2014. We maintain insurance coverage on these properties and filed property insurance claims to cover the cost of the required repairs. During 2014, we collected $10.2 million in insurance proceeds for damages to these properties and recorded gains from insurance proceeds of $4.9 million during 2014. As of December 31, 2014, we had not collected all of the proceeds from the insurance claims submitted with the insurance company under our property liability policies. We have the potential to receive an additional $7.6 million in claims from the insurance companies during 2015 related to these properties which have not been recorded as of December 31, 2014.

 

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Mortgages and Other Notes Receivable. During the years ended December 31, 2014, 2013 and 2012, we received approximately $83.5 million, $4.3 million and $4.8 million, respectively, from repayment of loans receivable. We are not scheduled to receive significant collection of loan repayments in 2015. See “Item 8. Financial Statements and Supplementary Data — Note 9. Mortgages and Other Notes Receivable, net” for additional information including a schedule of future principal maturities for all mortgages and other notes receivable as of December 31, 2014.

Distributions from Unconsolidated Entities. We are entitled to receive quarterly cash distributions from our unconsolidated entities to the extent there is cash available to distribute. For the years ended December 31, 2014, 2013 and 2012, we received distributions of approximately $13.5 million, $32.0 million and $40.2 million, respectively, from investments in eight, 50 and 50 properties, respectively. The reduction in distributions received for the year ended December 31, 2014 as compared to the same period in 2013 was primarily due to the sale of 42 senior housing properties held through three unconsolidated entities, in July 2013. We expect our distributions from unconsolidated entities to decrease due to the anticipated 2015 sale of one of our Intrawest Venture village retail properties and the sale of our 81.98% interest in the DMC Partnership to our co-venture partner.

The Intrawest Venture is working with the Canada Revenue Authority to resolve an assessment and other matters related to one of its entities. The Intrawest Venture’s maximum exposure relating to these matters is approximately $14.0 million, however, it believes the more likely than not resolution will be approximately $1.5 million. As such, an accrual of $1.5 million has been reflected in the financial information for the Intrawest Venture.

Distribution Reinvestment Plan. In 2011 we completed our final offering and filed a registration statement on Form S-3 under the Securities Act of 1933, as amended, to register the sale of shares of common stock under our DRP. Shares were originally sold under the DRP at a price of $9.50 per share, representing a 5% discount from our public offering price of $10.00. In August 2012, DRP shares were offered at $6.95, which represented a 5% discount to our estimated 2012 NAV of $7.31 per share. In March 2014, our Board of Directors approved our 2013 NAV at $6.85 per share as of December 31, 2013 and amended the DRP so that shares under our DRP would be sold at the new estimated 2013 NAV per share of $6.85 rather than a discount to the NAV.

In May 2014, we filed a registration statement on Form S-3 with the SEC for the purpose of registering additional shares of our common stock to be offered for sale pursuant to the DRP. On September 4, 2014, our Board of Directors approved the suspension of our DRP effective as of September 26, 2014. As a result of the suspension of the DRP, beginning with the September 2014 quarterly distributions, stockholders who were participants in the DRP received cash distributions instead of additional shares in the Company. During the years ended December 31, 2014, 2013 and 2012, we raised approximately $27.2 million, $54.9 million and $69.0 million, respectively through the DRP.

Borrowings. We have borrowed and, subject to our goal or providing liquidity to our shareholders, may continue to borrow money to acquire properties, fund ongoing enhancements to our portfolio, pay certain related fees and to cover periodic shortfalls between distributions paid and cash flows from operating activities. See “Distributions” below for additional information. In many cases, we have pledged our assets in connection with such borrowings. We have also borrowed, and may continue to borrow, money to pay distributions to stockholders in order to avoid distribution volatility. The aggregate amount of long-term financing is not expected to exceed 50% of our total assets. As of December 31, 2014, our leverage ratio, calculated as total indebtedness over total assets, was 44.6% (48.7% including our share of unconsolidated assets and debts).

For the years ended December 31, 2014, 2013 and 2012, we received aggregate proceeds from indebtedness of approximately $290.3 million, $231.3 million and $322.3 million, respectively. Proceeds from 2014 included a $40.0 million loan with an existing third-party lender, as part of a supplement to one of our existing loans which is collateralized by six ski and mountain lifestyle properties; amounts to acquire three properties (and assumed the fair value of three loans with a principal outstanding balance of approximately $25.5 million); and two supplemental loans with a third-party lender in an aggregate amount of approximately $7.1 million to partially fund the acquisition.

 

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We used proceeds from our borrowings for working capital and senior note repurchases. Our current revolving line of credit currently matures in August 2015, however, we are in discussion with our lenders to obtain an extension of this maturity.

As of December 31, 2014, certain of our loans required us to meet certain customary financial covenants and ratios including fixed charge coverage ratio, leverage ratio, interest coverage ratio, debt to total assets ratio and limitations on distributions. In addition, under the terms of the indenture governing our senior notes which place certain limitations on us and certain of our subsidiaries, cash distributions may not exceed 95% of the adjusted funds from operations as defined. See Item 8. “Financial Statements and Supplementary Data – Note 10. Indebtedness” for additional covenants relating to our senior notes. We were in compliance with all applicable provisions as of December 31, 2014 other than for one loan whereby in March 2015, we became aware that we had not met a minimum tangible net worth calculation requirement under one of our mortgage loans with an outstanding principal balance of approximately $43 million and we are in discussions with our lender regarding a waiver of this requirement for all applicable periods. We expect to repay this loan in full during the second quarter of 2015 with the proceeds from the sale of the asset which serves as collateral for the loan and do not expect material adverse consequences to result from failing to meet this requirement.

Uses of Liquidity and Capital Resources

Indebtedness – Repayments During the year ended 2014, we repaid $130.0 million of our revolving line of credit with net sales proceeds received from the sale of our 48 golf properties and collections of our mortgage loans receivable. We also borrowed from our line of credit and used approximately $80.8 million in cash to repurchase at a premium the face value of $78.3 million in our senior notes in order to take advantage of a lower cost of funds under our line of credit. In addition, we repaid $145.0 million of outstanding mortgage loans associated with the assets of our golf portfolio and multifamily property sold during the year, $42.2 million of regularly scheduled maturity payments, and $92.7 million in early prepayment of other outstanding mortgage loans. We also repaid $7.0 million related to our $105.0 million collateralized bridge loan which originally matured in June 2014, and paid $2.2 million in extension fees, exit fees and modification fees and extended the maturity date to June 2015. In 2015, we have approximately $307.2 million maturing and we plan to refinance debts as they mature or deleverage with the proceeds of asset sales.

See also “Off Balance Sheet and Other Arrangements—Borrowings of Our Unconsolidated Entities” for a description of the borrowings of our unconsolidated entities.

Acquisitions and Capital Expenditures. During the years ended December 31, 2014, 2013 and 2012, we acquired nine, eleven and eleven properties, respectively, and paid approximately $128.4 million (net of debt assumed), $244.9 million and $190.2 million, respectively.

During the years ended December 31, 2014, 2013 and 2012, we funded approximately $79.1 million, $70.2 million and $69.7 million, respectively, in capital improvements at our properties.

Related Party Arrangements. Our Advisor received certain fees and compensation in connection with the acquisition, management and sale of our assets. Amounts incurred relating to these transactions were approximately $31.7 million, $39.2 million and $42.7 million for the years ended December 31, 2014, 2013 and 2012, respectively. Our Advisor and its affiliates were also entitled to reimbursement of certain expenses and amounts incurred on our behalf in connection with our acquisitions and operating activities. In March 2014, our Advisor amended the advisory agreement, effective April 1, 2014, to eliminate acquisition fees on equity, performance fees, debt acquisition fees and disposition fees, and to reduce asset management fees to 0.075% monthly (or 0.90% annually), down from 0.083% monthly (or 1.00% annually), of average invested assets. Reimbursable expenses for the years ended December 31, 2014, 2013 and 2012 were approximately $6.9 million, $7.4 million and $8.4 million, respectively. Of these amounts, approximately $0.5 million and $1.0 million are included in due to affiliates in the accompanying consolidated balance sheets as of December 31, 2014 and 2013, respectively.

Pursuant to the advisory agreement, we will not reimburse our Advisor for any amount by which total operating expenses paid or incurred by us exceed the greater of 2% of average invested assets or 25% of net income (the “Expense Cap”) in any expense year. For the expense years ended December 31, 2014, 2013 and 2012, operating expenses did not exceed the Expense Cap.

We also maintain accounts at a bank in which our chairman and vice-chairman serve as directors. We had deposits at that bank of approximately $15.2 million and $8.6 million as of December 31, 2014 and 2013, respectively.

 

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Common Stock Redemptions. Our redemption plan was designed to provide eligible stockholders with limited interim liquidity by enabling them to sell shares back to us prior to any listing of our shares. The aggregate amount of funds under the redemption plan was determined on a quarterly basis in the sole discretion of the Board. Refer to Item 5. “Market for Registrant’s Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities” — “Redemption of Shares” for additional information on how amounts were determined as available for redemption under our redemption plan.

On September 4, 2014, the Board approved the suspension of our redemption plan effective as of September 26, 2014. Pursuant to the redemption plan, all redemption requests received in good order by September 26, 2014, were processed and those deemed priority requests and all approved qualified hardship requests were redeemed as of September 30, 2014, subject to the limitations of the redemption plan. Redeemed shares were considered retired and will not be reissued. All other redemption requests received by September 26, 2014, were placed in the redemption queue. However, we will not accept or otherwise process any additional redemption requests after September 26, 2014 unless the redemption plan is reinstated by the Board, which is not expected at this time.

For the years ended December 31, 2014, 2013 and 2012, redemptions were approximately $9.6 million (1.4 million shares), $12.0 million (1.6 million shares) and $9.6 million (1.2 million shares), respectively.

Distributions. We declare and pay distributions on a quarterly basis. The amount of distributions declared to our stockholders is determined by our Board of Directors and is dependent upon a number of factors, including:

 

    Sources of cash available for distribution such as expected cash flows operating activities, FFO, MFFO and Adjusted EBITDA from Continuing Operations on a rolling 12 months basis;

 

    Limitations and restrictions contained in the terms of our current and future indebtedness concerning the payment of distributions; and

 

    Other factors such as the avoidance of distribution volatility, our objective of continuing to qualify as a REIT, capital requirements, the general economic environment and other factors.

We have and may continue to use borrowings to fund a portion of our distributions in order to avoid distribution volatility. For the years ended December 31, 2014, 2013 and 2012, we declared and paid distributions to our stockholders of approximately $137.9 million, $135.5 million and $163.7 million, respectively. Our cash flows from operating activities covered 92.1%, 100% and 53.7% of distributions paid for the years ended December 31, 2014, 2013 and 2012, respectively. The shortfall in cash flows from operating activities versus distributions paid for the years ended December 31, 2014 and 2012 was 7.9% and 46.3%, respectively, and was covered by borrowings.

In March 2015, our Board of Directors approved our estimated 2014 NAV of $5.20 per share as of December 31, 2014 and reduced distributions per share to $0.05 on a quarterly basis representing an annualized yield of 3.8% on our revised estimated NAV of $5.20 per share. The reduction in distributions is a result of selling our golf portfolio and other individual assets, and the repayment of two mortgage notes receivable in 2014, the expected sale of our senior housing portfolio and other assets in 2015, and the associated impact of such sales on our operating cash flows. These transactions have and will result in a reduction to our future cash flows from operations, earnings before interest, taxes, depreciation and amortization and our modified funds from operations (“MFFO”).

 

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The following table represents total distributions declared including cash distributions, distributions reinvested and distributions per share for the years ended December 31, 2014, 2013 and 2012 (in thousands except per share data):

 

                                 Sources of
Distributions
Paid in Cash
 
     Distributions
Per Share
     Total
Distributions
Declared
     Distributions
Reinvested (1)
     Net Cash
Distributions
     Cash Flows
From (Used in)
Operating
Activities (2)(3)
 

2014 Quarter

              

First

   $ 0.1063       $ 34,278       $ 13,627       $ 20,651       $ 37,560   

Second

     0.1063         34,442         13,582         20,860         39,197   

Third (4)

     0.1063         34,608         —           34,608         56,061   

Fourth (4)

     0.1063         34,552         —           34,552         (5,884
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Year

$ 0.4252    $ 137,880    $ 27,209    $ 110,671    $ 126,934   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

2013 Quarter

First

$ 0.1063    $ 33,611    $ 13,714    $ 19,897    $ 48,644   

Second

  0.1063      33,782      13,697      20,085      33,521   

Third

  0.1063      33,946      13,748      20,198      50,870   

Fourth

  0.1063      34,111      13,777      20,334      2,445   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Year

$ 0.4252    $ 135,450    $ 54,936    $ 80,514    $ 135,480   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

2012 Quarter

First

$ 0.1563    $ 48,353    $ 20,876    $ 27,477    $ 22,157   

Second

  0.1563      48,631      20,579      28,052      14,025   

Third

  0.1063      33,280      13,820      19,460      57,784   

Fourth

  0.1063      33,449      13,761      19,688      (6,073
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Year

$ 0.5252    $ 163,713    $ 69,036    $ 94,677    $ 87,893   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

FOOTNOTES:

 

(1) Distributions reinvested may be dilutive to stockholders to the extent that they are not covered by cash flows from operations, FFO and MFFO and such shortfalls are instead covered by borrowings.
(2) Cash flows from operating activities calculated in accordance with GAAP are not necessarily indicative of the amount of cash available to pay distributions. For example, GAAP requires that the payment of acquisition fees and costs be classified as a use of cash in operating activities in the statement of cash flows, which directly reduces the measure of cash flows from operations. However, acquisition fees and costs are paid for with proceeds from our offerings and debt financings as opposed to operating cash flows. The Board of Directors also uses other measures such as FFO and MFFO in order to evaluate the level of distributions.
(3) The shortfall between total distributions and cash flows from operating activities was covered by financing activities such as borrowings.
(4) In September 2014, our Board of Directors suspended the DRP and beginning with the September 2014 quarterly distributions, stockholders who were participants in the DRP received cash distributions instead of additional shares of our common stock.

Our cash flows from operating activities will fluctuate due to the seasonality of certain properties. As such, we anticipate cash flows from operating activities to increase during the third quarter to reflect the peak seasonal period of our attractions properties.

 

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For the years ended December 31, 2014 and 2012, none of the distributions paid to stockholders were considered ordinary income and approximately 100% were considered a return of capital to stockholders for federal income tax purposes. For the year ended December 31, 2013, approximately 29.3% of the distributions paid to stockholders were considered capital gain as a result of the gain on the sale of our three unconsolidated senior housing joint ventures and approximately 70.7% were considered a return of capital to stockholders for federal income tax purposes. Due to a variety of factors, the characterization of distributions declared for the year ended December 31, 2014 may not be indicative of the characterization of distributions that may be expected for the year ending December 31, 2015. No amounts distributed to stockholders for the years ended December 31, 2014, 2013 and 2012 were required to be or have been treated as a return of capital for purposes of calculating the stockholders’ return on their invested capital as described in our advisory agreement.

Critical Accounting Policies and Estimates

Below is a discussion of the accounting policies that management believes are critical to our operations. We consider these policies critical because they involve difficult management judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results. The judgments affect the reporting amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting period. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.

Basis of Presentation and Consolidation. Our consolidated financial statements will include our accounts, the accounts of our wholly owned subsidiaries or subsidiaries for which we have a controlling interest, the accounts of variable interest entities (“VIEs”) in which we are the primary beneficiary, and the accounts of other subsidiaries over which we have a controlling financial interest. All material intercompany accounts and transactions will be eliminated in consolidation.

We will analyze our variable interests, including loans, leases, guarantees, and equity investments, to determine if the entity in which we have a variable interest is a variable interest entity. Our analysis includes both quantitative and qualitative reviews. We base our quantitative analysis on the forecasted cash flows of the entity, and our qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and financial agreements. We also use our quantitative and qualitative analyses to determine if we must consolidate a variable interest entity as the primary beneficiary.

Allocation of Purchase Price for Real Estate Acquisitions. Upon the acquisition of real estate properties, we record the fair value of the tangible assets (consisting of land, buildings, improvements and equipment), intangible assets (consisting of in-place leases and above or below market lease values), assumed liabilities and any contingent liabilities at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value is determined based on incorporating market participant assumptions, discounted cash flow models using appropriate capitalization rates, and our estimate reflecting the facts and circumstances of each acquisition. Acquisition fees and costs are expensed for acquisitions that are considered a business combination.

The fair value of the tangible assets of an acquired leased property is determined by various factors including the comparable land sale method and cost approach method which estimates the replacement cost new less depreciation and a go dark income approach on the building in which the building is assumed to be vacant.

The purchase price is allocated to in-place lease intangibles based on management’s evaluation of the specific characteristics of the acquired lease. Factors considered include estimates of carrying costs during hypothetical expected lease up periods, including estimates of lost rental income during the expected lease up periods, and costs to execute similar leases such as leasing commissions, legal and other related expenses.

 

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We may also enter into yield guarantees in connection with an acquisition, whereby the seller agrees to hold a portion of the purchase price in escrow that may be repaid to us in the event certain thresholds are not met. In calculating the estimated fair value of the yield guarantee, we consider information obtained about each property during the due diligence and budget process as well as discount rates to determine the fair value. We periodically evaluate the fair value of the yield guarantee and record any adjustments to the fair value as a component of other income (expense) in the consolidated statement of operations.

Investment in Unconsolidated Entities. We account for our investment in unconsolidated joint ventures under the equity method of accounting as we exercise significant influence, but do not maintain a controlling financial interest over these entities. These investments are recorded initially at cost and subsequently adjusted for cash contributions, distributions and equity in earnings (loss) of the unconsolidated entities. Based on the respective venture structures and preferences we receive on distributions and liquidation, we record our equity in earnings of the entities under the hypothetical liquidation book value (“HLBV”) method of accounting. Under this method, we recognize income or loss in each period as if the net book value of the assets in the ventures were hypothetically liquidated at the end of each reporting period following the provisions of the joint venture agreements. In any given period, we could be recording more or less income than actual cash distributions received and more or less than what we may receive in the event of an actual liquidation. Our investment in unconsolidated entities is accounted for as an asset acquisition in which acquisition fees and expenses are capitalized as part of the basis in the investment in unconsolidated entities. The acquisition fees and expenses create an outside basis difference that are allocated to the assets of the investee and, if assigned to depreciable or amortizable assets, the basis differences are then amortized as a component of equity in earnings (loss) of unconsolidated entities.

Assets Held for Sale, net and Discontinued Operations. Assets that are classified as held for sale are recorded at the lower of their carrying value or fair value less costs to dispose. We classify assets as held for sale once management has the authority to approve and commits to a plan to sell, the assets are available for immediate sale, an active program to locate a buyer and the sale of the assets are probable and transfer of the assets are expected to occur within one year. Upon the determination of the assets classified as held for sale or sold, the depreciation and amortization of the assets will terminate. The related operations of assets held for sale are reported as discontinued if such operations and cash flows can be clearly distinguished both operationally and financially from the ongoing operations, such operations and cash flows will be eliminated from ongoing operations once the disposal occurs, and if we will not have any significant continuing involvement subsequent to the sale.

Impairment of Real Estate Assets. Real estate assets are reviewed on an ongoing basis to determine whether there are any indicators, including property operating performance, general market conditions and significant changes in the manner of use or estimated holding period of our real estate assets or the strategy of our overall business, that the value of the real estate properties (including any related amortizable intangible assets or liabilities) may be impaired. To assess if a property value is potentially impaired, management compares the estimated current and projected undiscounted operating cash flows, including estimated net sales proceeds, of the property over its remaining useful life to the net carrying value of the property. Such cash flow projections consider factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. In the event that the carrying value exceeds the undiscounted operating cash flows, we would record an impairment provision to adjust the carrying value of the asset group to the estimated fair value of the property.

For real estate we indirectly own through an investment in a joint venture, tenant-in-common interest or other similar investment structure which is accounted for under the equity method, when impairment indicators are present, we compare the estimated fair value of its investment to the carrying value. An impairment charge will be recorded to the extent the fair value of its investment is less than the carrying amount and the decline in value is determined to be other than a temporary decline.

The estimated fair values of unconsolidated entities are based upon a discounted cash flow model that includes all estimated cash inflows and outflows over the expected holding period. The capitalization rates and discounted rates utilized in the model are based upon rates that we believe to be within a reasonable range of current market rates for the underlying properties.

 

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Real Estate Dispositions. When real estate is disposed of, the related cost, accumulated depreciation or amortization and any accrued rental income for operating leases are removed from the accounts and gains and losses from the disposition are reflected in the consolidated statements of operations. Gains from the disposition of real estate are generally recognized using the full accrual method in accordance with the Financial Accounting Standards Board (“FASB”) guidance included in Real Estate Sales, provided that various criteria relating to the terms of sale and subsequent involvement by us with the properties are met. Gains may be deferred in whole or in part until the sales satisfy the requirements of gain recognition on sale of real estate. As of December 31, 2014, we deferred gains on two of our real estate dispositions as a result of making loans to the buyers financing a portion of the sales price.

Leases. Our leases are accounted for as operating leases. Lease accounting principles require management to estimate the economic life of the leased property, the residual value of the leased property and the present value of minimum lease payments to be received from the tenant in order to determine the proper lease classification. Changes in our estimates or assumptions regarding collectability of lease payments, the residual value or economic lives of the leased property could result in a change in lease classification and our accounting for leases.

Revenue Recognition. For properties subject to operating leases, rental revenue is recorded on a straight-line basis over the terms of the leases. Additional percentage rent that is due contingent upon tenant performance thresholds, such as gross revenues, is deferred until the underlying performance thresholds have been achieved. Property operating revenues from managed properties, which are not subject to leasing arrangements, are derived from room rentals, food and beverage sales, ski and spa operations, golf operations, membership dues, ticket sales, concessions, waterpark and theme park operations, resident rental fees and services, and other service revenues. Such revenues, excluding membership dues, are recognized when rooms are occupied, when services have been performed, and when products are delivered. Membership dues are recognized ratably over the term of the membership period. For mortgages and other notes receivable, interest income is recognized on an accrual basis when earned, except for loans placed on non-accrual status, for which interest income is recognized when received. Any deferred portion of contractual interest is recognized on a straight-line basis over the term of the corresponding note. Loan origination fees charged and acquisition fees incurred in connection with the making of loans are recognized as interest income, and a reduction in interest income, respectively over the term of the notes.

Mortgages and Other Notes Receivables. Mortgages and other notes receivable are stated at the principal amount outstanding, net of deferred loan origination costs or fees. Loan origination and other fees received by us in connection with making the loans are recorded as reduction of the note receivable and amortized into interest income, using the effective interest method, over the term of the loan. Acquisition fees and costs in connection with making the loans are capitalized and recorded as part of the mortgages and other notes receivable balance and amortized as a reduction of interest income over the term of the notes.

We evaluate impairment on our mortgages and other notes receivable on an individual loan basis which includes, current information and events, periodic visits and quarterly discussions on the financial results of the properties being collateralized and the financial stability of the borrowers who are also tenants or third-party managers for certain properties in our real estate portfolio. We review each loan to determine the risk of loss and whether the individual loan is impaired and whether an allowance is necessary. If allowance is necessary, we will reduce the carrying value of the loan accordingly and record a corresponding charge to net income (loss). The credit quality of our borrowers is primarily based on their payment history on an individual loan basis, and, as such, we do not assign our mortgages and other note receivable in credit quality categories.

Derivative instruments and hedging activities. We utilize derivative instruments to partially offset the effect of fluctuating interest rates on the cash flows associated with our variable-rate debt. We follow established risk management policies and procedures in our use of derivatives and do not enter into or hold derivatives for trading or speculative purposes. We record all derivative instruments on the balance sheet at fair value. On the date we enter into a derivative contract, the derivative is designated as a hedge of the exposure to variable cash flows of a forecasted transaction. The effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income (loss) and subsequently recognized in the statement of operations in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. Any ineffective portion of the gain or loss is reflected in interest expense in the statement of operations. Determining fair value and testing effectiveness of these financial instruments requires management to make certain estimates and judgments. Changes in assumptions could have a positive or negative impact on the estimated fair values and measured effectiveness of such instruments could in turn impact our results of operations.

 

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Mortgages and other notes payable. Mortgages and other notes payable, other than those assumed in an acquisition, are recorded at the stated principal amount and are generally collateralized by our lifestyle properties with monthly interest only and/or principal payments. A loan that is accounted for as a troubled debt restructuring is recorded at the present value of future cash payments, which includes principal and interest, specified by the new terms. We have and may undergo a troubled debt restructuring if management determines that the underlying collateralized properties are not performing to meet debt service. In order to qualify as a troubled debt restructuring, the following must apply: (i) the underlying collateralized property value decreased as a result of the economic environment, (ii) transfer of an asset (cash) to partially satisfy the loan has occurred and (iii) new loan terms decrease the effective interest rate and extend the maturity date. The difference between the future cash payments specified by the new terms and the carrying value immediately preceding the restructure is recorded as gain on extinguishment of debt.

Impact of recent accounting pronouncements

See Item 8. “Financial Statements and Supplementary Data” — Note 2. “Significant Accounting Policies” for additional information about the impact of recent accounting pronouncements.

Results of Operations

We had invested in properties through the following investment structures as of:

 

     December 31,  
     2014      2013      2012  

Wholly-owned:

        

Leased properties

     42         72         73   

Managed properties (1)(2)

     54         63         55   

Unimproved land

     1         1         1   

Unconsolidated joint ventures: (3)

        

Leased properties

     8         8         14   

Managed properties

     —           —           36   
  

 

 

    

 

 

    

 

 

 
  105      144      179   
  

 

 

    

 

 

    

 

 

 

 

 

FOOTNOTES:

 

(1) As of December 31, 2014, 2013, and 2012, wholly-owned managed properties are as follows:

 

     December 31,  
     2014      2013      2012  

Ski & Mountain Lifestyle

     1         1         1   

Golf

     —           13         13   

Attractions

     16         15         18   

Senior housing

     20         20         20   

Marinas

     17         13         2   

Additional lifestyle

     —           1         1   
  

 

 

    

 

 

    

 

 

 
  54      63      55   
  

 

 

    

 

 

    

 

 

 

 

(2) Under certain applicable tax regulations, properties are permitted to be temporarily managed and certain properties are permitted to be indefinitely managed. As of December 31, 2014, 2013 and 2012, we had 30, 38 and 30 properties, respectively, that were temporarily managed and 24, 25 and 25 properties that were indefinitely managed under management agreements, respectively.
(3) In July 2013, we completed the sale of 42 properties held through three unconsolidated joint ventures. As of December 31, 2014, one property held through one unconsolidated joint venture is expected to be sold in 2015. See “Distributions from Unconsolidated Entities” for additional information.

 

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Year ended December 31, 2014 compared to Year ended December 31, 2013

Rental income from operating leases. Rental income for the year ended December 31, 2014 increased by approximately $12.6 million as compared to the same period in 2013. The increase is primarily attributable to (i) capital improvements made at our ski and mountain lifestyle properties that resulted in higher lease basis, (ii) the conversion of one attractions property from managed to leased structure during the first quarter of 2014, and (iii) acquisitions during 2013 that earned rental income for a full year during 2014 as compared to a partial year during 2013.

The following information summarizes trends in rental income from operating leases and base rents for certain of our properties excluding properties that have been classified as assets held for sale (in thousands):

 

     For the Year Ended
December 31,
               

Properties Subject to Operating Leases

   2014      2013      $ Change      % Change  

Ski and mountain lifestyle

   $ 98,440       $ 96,326       $ 2,114         2.2

Attractions

     29,583         19,088         10,495         55.0
  

 

 

    

 

 

    

 

 

    

Total

$ 128,023    $ 115,414    $ 12,609      10.9
  

 

 

    

 

 

    

 

 

    

As of December 31, 2014 and 2013, the weighted-average lease rate for our portfolio of wholly-owned leased properties was 10.0% and 9.8%, respectively. The increase in the weighted average lease rate was primarily attributable to the transition of one of our attractions properties from managed to leased during 2014. These rates are based on annualized straight-line base rent due under our leases and the weighted-average contractual lease basis of our real estate investment properties subject to operating leases. The weighted-average lease rate of our portfolio will fluctuate based on our asset mix, timing of property acquisitions, lease terminations and reductions in rent granted to tenants.

Property operating revenues. Property operating revenues from managed properties, which are not subject to leasing arrangements, are derived from room rentals, food and beverage sales, ski and spa operations, ticket sales, concessions, waterpark and theme park operations, and other service revenues. The following information summarizes the revenues of our properties that are operated by third-party managers for the years ended December 31, 2014 and 2013 (in thousands):

 

     For the Year Ended
December 31,
               

Properties Operated by Third-Party Managers

   2014      2013      $ Change      % Change  

Ski & mountain lifestyle

   $ 54,019       $ 51,018       $ 3,001         5.9

Attractions

     182,841         182,938         (97      -0.1
  

 

 

    

 

 

    

 

 

    

Total

$ 236,860    $ 233,956    $ 2,904      1.2
  

 

 

    

 

 

    

 

 

    

As of December 31, 2014 and 2013, we had a total of 17 and 16 managed properties (excluding properties that we classified as held for sale), respectively, of which certain properties are operated seasonally due to geographic location, climate and weather patterns. The increase in property operating revenues is primarily attributable to our Mount Washington Resort which continues to experience increased occupancy and high revenue per available room (“RevPAR”) as a result of renovations and enhancements we have made at the property and operational strategies that have been implemented, as well as strong group and conference business. Increased revenues at our attraction properties was offset by one previously managed property that transitioned to a lease at the beginning of 2014.

Interest income on mortgages and other notes receivable. Interest income on mortgages and other notes receivable was approximately $8.4 million and $13.1 million for the year ended December 31, 2014 and 2013, respectively. The decrease is primarily attributable to (i) the repayment of approximately $83.5 million for two of our loans that matured in September 2014, (ii) the restructure of one of our other notes reducing the interest rate which was effective as of September 1, 2013 and (iii) the foreclosure of an attractions property that served as collateral on one of our mortgage notes receivable in April 2014. See “Operator Transitions, Loan Foreclosure and Provisions” above for additional information.

 

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Property operating expenses. Property operating expenses increase primarily due to repair and maintenance expenses and the increased visitation at our Omni Mt. Washington property and attractions properties offset by one attraction property that became leased in 2014. See “Property operating revenues” above for additional information. The following information summarizes the expenses of our properties that are operated by third-party managers for the years ended December 31, 2014 and 2013 (in thousands):

 

     For the Year Ended
December 31,
               

Properties Operated by Third-Party Managers

   2014      2013      $ Change      % Change  

Ski & mountain lifestyle

   $ 45,940       $ 44,840       $ 1,100         2.5

Attractions

     144,225         142,741         1,484         1.0
  

 

 

    

 

 

    

 

 

    

Total

$ 190,165    $ 187,581    $ 2,584      1.4
  

 

 

    

 

 

    

 

 

    

Asset management fees to advisor. Monthly asset management fees were equal to 0.08334% prior to April 1, 2014 and 0.075% effective April 1, 2014 of invested assets were paid to the Advisor for the management of our real estate assets, loans and other permitted investments. For the years ended December 31, 2014 and 2013, asset management fees to our Advisor were approximately $18.7 million and $23.1 million, respectively. The decrease in such fees is primarily attributable to the reduction in asset fee rates described above.

General and administrative. General and administrative expenses totaled approximately $17.1 million and $17.2 million for the years ended December 31, 2014 and 2013, respectively.

Ground leases and permit fees. Ground lease payments and land permit fees are generally based on a percentage of gross revenue of the underlying property over certain thresholds. For properties that are subject to leasing arrangements, ground leases and permit fees are paid by the tenants in accordance with the terms of our leases with those tenants and we record the corresponding equivalent revenues in rental income from operating leases. For the years ended December 31, 2014 and 2013, ground lease and land permit fees were approximately $10.2 million and $9.8 million, respectively, of which approximately $6.8 million and $6.9 million, respectively, represents the corresponding equivalent revenues in rental income from operating leases. The increase in such fees is primarily attributable to an increase in gross revenues of our ski and mountain lifestyle properties.

Acquisition fees and costs. Acquisition fees were paid to our Advisor for services in connection with the selection, purchase, development or construction of real property and were generally 3% of gross offering proceeds including proceeds from our DRP. Acquisition fees and costs totaled approximately $0.7 million and $2.5 million for the years ended December 31, 2014 and 2013, respectively. The decrease is primarily attributable to the elimination of acquisition fees effective April 2014.

Other operating expenses. Other operating expenses totaled approximately $5.3 million and $4.5 million for the years ended December 31, 2014 and 2013, respectively. The increase is primarily attributable to an increase in repair and maintenance expenses, offset by lower taxes assessed for properties that were transitioned from leased to managed structures in 2012.

Bad debt expense. Bad debt expense was approximately $0.3 million and $0.05 million for the years ended December 31, 2014 and 2013, respectively.

Impairment provision. Impairment provisions were approximately $30.4 million and $50.0 million for the years ended December 31, 2014 and 2013, respectively, related to one of our attractions properties and our unimproved land, respectively, to write down the book value related to these properties to estimated sales prices from third party buyers less costs to sell.

 

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Interest and other income (expense). Interest and other income (expense) was approximately $0.8 million and $0.6 million for the years ended December 31, 2014 and 2013, respectively.

(Gain) loss on lease terminations. (Gain) loss on lease terminations was approximately $8.9 million and $(3.9) million for the years ended December 31, 2014 and 2013, respectively. As described above in “Operator Transitions and Lease Terminations”, one of our ski tenants on two leases has experienced financial difficulties and has been unable to pay rent in 2015 due to low levels of snow accompanied by unusually warm weather. In connection with the ongoing financial difficulties, we recorded a loss on lease termination (for the write off of straight-line rents) of approximately $8.9 million during the year ended December 31, 2014. During 2013, we recorded a gain on lease terminations of approximately $3.8 million as a result of terminating our lease related to an attractions property in Hawaii in exchange for receiving the Wet ‘n Wild trade name.

Loan loss provision. Loan loss provisions were approximately $3.3 million and $3.1 million for the years ended December 31, 2014 and 2013, respectively. During the year ended 2014, we recorded a loan loss provision of approximately $3.3 million on one of our mortgage and other notes receivable with one of our golf operators, as a result of uncertainty related to the collectability of the note receivable. We collected the remaining $1.3 million balance of the note as full satisfaction of the note during 2014. During the year ended December 31, 2013, we recorded loan loss provisions of approximately $1.8 million relating to one ski loan as a result of a proposed restructure as a result of providing payment concessions to the borrower in 2014. In addition, we foreclosed on an attractions property that served as collateral on one of our other existing loans and we recorded a loan loss provision of approximately $1.3 million based on expected the estimated fair value of the collateral.

Depreciation and amortization. Depreciation and amortization expense was approximately $98.7 million and $94.5 million for the years ended December 31, 2014 and 2013, respectively. The increase is primarily due to an increase in intangible assets acquired subsequent to December 31, 2013.

Bargain purchase gain. Bargain purchase gain was approximately $2.7 million for the year ended December 31, 2013. This gain relates to the acquisition of an attractions property where the fair value of the net assets acquired exceeded the consideration transferred. The excess resulted from the fact that the seller did not widely market the property for sale and was motivated to sell because the property was deemed an outlier from the other investments owned by the seller. There was no bargain purchase gain for the year ended December 31, 2014.

Interest expense and loan cost amortization. Interest expense and loan cost amortization was approximately $57.3 million and $55.8 million for the years ended December 31, 2014 and 2013, respectively. The increase is primarily attributable to an increase in weighted average debt outstanding and was slightly offset by a decrease in the weighted average interest rate as a result of using proceeds from our line of credit (which had a lower cost of funds) to prepay approximately $78.3 million in bonds during 2014.

Loss on extinguishment of debt. Losses on extinguishment of debt were approximately $1.4 million for the year ended December 31, 2014. The loss incurred relates to repayments of certain loans during 2014. We did not record a loss on extinguishment of debt during the year ended December 31, 2013.

Gain from sale of unconsolidated entities. Gain from sale of unconsolidated entities was approximately $55.4 million for the year ended December 31, 2013. This gain related to the sale of our interests in the 42 senior housing properties held through the CNLSun I, CNLSun II and CNLSun III ventures in July 2013. See “Distributions from Unconsolidated Entities” above for additional information. There was no sale of unconsolidated entities during the year ended December 31, 2014.

 

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Equity in earnings (loss) of unconsolidated entities. The following table summarizes equity in earnings from our unconsolidated entities (in thousands):

 

     For the Year Ended
December 31,
               
     2014      2013      $ Change      % Change  

DMC Partnership

   $ 8,519       $ 10,912       $ (2,393      -21.9

Intrawest Venture

     (766      3,924         (4,690      119.5

CNLSun I Venture

     —           (1,804      1,804         100.0

CNLSun II Venture

     —           (509      509         100.0

CNLSun III Venture

     —           (822      822         -100.0
  

 

 

    

 

 

    

 

 

    

Total

$ 7,753    $ 11,701    $ (3,948   -33.7
  

 

 

    

 

 

    

 

 

    

Equity in earnings of unconsolidated entities was approximately $7.8 million and $11.7 million for the years ended December 31, 2014 and 2013, respectively. The change was primarily due to recording the 2014 depreciation and amortization catch up in connection with the reclassification of the six Intrawest village retail properties from assets held for sale to held and used. See Note 8. “Variable Interest and Unconsolidated Entities” for additional information. Also, in July 2013, we completed the sale of our interest in 42 senior housing properties held through the CNLSun I, CNLSun II and CNLSun III Ventures, as such, there was no equity in earnings (loss) allocated to us from the aforementioned ventures.

Loss from discontinued operations. Loss from discontinued operations was approximately $31.7 million and $241.1 million for the years ended December 31, 2014 and 2013, respectively. The results of operations of real estate properties that are classified as held for sale, along with properties sold during 2014 or 2013, are reflected in discontinued operations for all periods presented. The reduction in loss was primarily attributable to recording approximately $37.9 million in impairments primarily related to our marinas properties during 2014, as compared to $219.5 million in impairments primarily relating to our golf properties and our multi-family property during 2013. In addition, depreciation and amortization were lower in 2014 as compared to 2013 due to a lower depreciable basis of our golf properties as a result of impairment provisions recorded in December 2013, and because during 2014, we ceased depreciation and amortization as a result of the golf properties being classified as held for sale. Additionally, as of December 31, 2014, we ceased depreciation and amortization on the senior housing and marinas properties as a result of them being classified as held for sale.

Year ended December 31, 2013 compared to Year ended December 31, 2012

Rental income from operating leases. Rental income for the year ended December 31, 2013 increased primarily due to the acquisition of two attractions properties during 2013 and an increase in capital reserve income (which is generally a percentage of gross revenue) on our ski and mountain lifestyle properties as a result of an improved 2012/2013 ski season. The following information summarizes trends in rental income from operating leases and base rents for certain of our properties (in thousands):

 

     For the Year Ended
December 31,
               

Properties Subject to Operating Leases

   2013      2012      $ Change      % Change  

Ski and mountain lifestyle

   $ 96,326       $ 93,079       $ 3,247         3.5

Attractions

     19,088         15,383         3,705         24.1
  

 

 

    

 

 

    

 

 

    

Total

$ 115,414    $ 108,462    $ 6,952      6.4
  

 

 

    

 

 

    

 

 

    

As of December 31, 2013 and 2012, the weighted-average lease rate for our portfolio of wholly-owned leased properties was 9.8% and 9.9%, respectively. The decrease in the weighted average lease rate was primarily attributable to the acquisition of two attractions properties during 2013 and the transition of one attractions property from managed to leased during 2013.

 

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Property operating revenues. The following information summarizes the revenues of our properties that are operated by third-party managers for the years ended December 31, 2013 and 2012 (in thousands):

 

     For the Year Ended
December 31,
               

Properties Operated by Third-Party Managers

   2013      2012      $ Change      % Change  

Ski & mountain lifestyle

   $ 51,018       $ 46,437       $ 4,581         9.9

Attractions

     182,938         181,631         1,307         0.7
  

 

 

    

 

 

    

 

 

    

Total

$ 233,956    $ 228,068    $ 5,888      2.6
  

 

 

    

 

 

    

 

 

    

As of December 31, 2013 and 2012, we had a total of 16 and 19 managed properties (excluding properties that we classified as held for sale), respectively, of which certain properties are operated seasonally due to geographic location, climate and weather patterns. The increase in property operating revenues is primarily attributable to an increase at the Omni Mount Washington Resort, our only ski property under a managed structure, as a result of a strong 2012/2013 ski season.

Interest income on mortgages and other notes receivable. Interest income on mortgages and other notes receivable was approximately $13.1 million and 13.0 million for the year ended December 31, 2013 and 2012, respectively.

Property operating expenses. Property operating expenses from managed properties increased primarily due to an increase in operating expenses from increased traffic due to the strong 2012/2013 ski season at our ski and mountain lifestyle properties. See “Property operating revenues” above for additional information. The following information summarizes the expenses of our properties that are operated by third-party managers for the years ended December 31, 2013 and 2012 (in thousands):

 

     For the Year Ended
December 31,
               

Properties Operated by Third-Party Managers

   2013      2012      $ Change      % Change  

Ski & Mountain Lifestyle

   $ 44,840       $ 42,420       $ 2,420         5.7

Attractions

     142,741         143,118         (377      -0.3
  

 

 

    

 

 

    

 

 

    

Total

$ 187,581    $ 185,538    $ 2,043      1.1
  

 

 

    

 

 

    

 

 

    

Asset management fees to advisor. Monthly asset management fees equal to 0.08334% of invested assets are paid to the Advisor for the management of our real estate assets, loans and other permitted investments. For the years ended December 31, 2013 and 2012, asset management fees to our Advisor were approximately $23.1 million and $25.0 million, respectively. The decrease in such fees is due to the sale of our interests in 42 senior housing properties held through three unconsolidated joint ventures as discussed above offset, in part by, additional real estate properties acquired in 2013.

General and administrative. General and administrative expenses totaled approximately $17.2 million and $17.7 million for the years ended December 31, 2013 and 2012, respectively.

Ground leases and permit fees. For the years ended December 31, 2013 and 2012, ground lease and land permit fees were approximately $9.8 million and $8.9 million, respectively, of which approximately $6.9 million and $6.5 million, respectively, represents the corresponding equivalent revenues in rental income from operating leases. The increase in such fees is primarily attributable to an increase in gross revenues of our ski and mountain lifestyle properties.

Acquisition fees and costs. Acquisition fees and costs totaled approximately $2.5 million and $3.2 million for the years ended December 31, 2013 and 2012, respectively. The decrease is primarily due to the reduction in the proceeds received through our DRP due to lowering the distribution rate in August 2012.

 

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Other operating expenses. Other operating expenses totaled approximately $4.5 million and $6.5 million for the years ended December 31, 2013 and 2012, respectively. The decrease is primarily attributable to lower taxes assessed for properties that were transitioned from leased to managed structures in 2012. The decreases were partially offset by an increase in repair and maintenance expenses.

Bad debt expense. Bad debt expense was approximately $0.05 million and $0.2 million for the years ended December 31, 2013 and 2012, respectively.

Impairment provision. Impairment provisions were approximately $50.0 million and $10 thousand for the years ended December 31, 2013 and 2012, respectively. During the year ended 2013, we determined that the carrying values of three of our attractions properties and our one property consisting of undeveloped land exceeded their realizable values as described above. During the year ended December 31, 2013, we decided that we would no longer actively pursue the development of our unimproved land. We determined that the carrying value was not recoverable based on comparable land sales and as such, we recorded an impairment provision of approximately $42.4 million to write down its book value to the estimated sales price less costs to sell. We also recorded approximately $7.6 million in impairments related to a few of our smaller, non-core attractions properties. We marketed some of these properties for sale during 2013 or received unsolicited offers during the first quarter of 2014. We recorded these impairment provisions as of December 31, 2013 to write down their book values to estimated sales prices from third party buyers less costs to sell.

Interest and other income (expense). Interest and other income (expense) was approximately $0.6 million and $0.9 million for the years ended December 31, 2013 and 2012, respectively.

(Gain) loss on lease terminations. (Gain) Loss on lease terminations was approximately $(3.8) million and $1.6 million for the years ended December 31, 2013 and 2012, respectively. During 2013, we recorded a gain on lease terminations of approximately $3.8 million as a result of terminating our lease related to an attractions property in Hawaii in exchange for receiving the Wet ‘n Wild trade name. During 2012, we recorded a loss on lease termination of $1.6 million, primarily due to the transition of one of our attractions properties from leased to managed.

Loan loss provision. Loan loss provisions were approximately $3.1 million and $1.7 million for the years ended December 31, 2013 and 2012, respectively. During the year ended December 31, 2013, we recorded loan loss provisions of approximately $1.8 million relating to one ski loan as a result of a proposed restructure involving payment concessions to the borrower. In addition, we foreclosed on an attractions property that served as collateral on one of our other existing loans and we recorded a loan loss provision of approximately $1.3 million during 2013 based on the estimated fair value of the collateral. During 2012, we recorded a loan loss provision of approximately $1.7 million as result of a troubled debt restructuring on a note receivable from one of our golf tenants where we restructured their loan.

Depreciation and amortization. Depreciation and amortization expense was approximately $94.5 million and $87.5 million for the years ended December 31, 2013 and 2012, respectively. The increase is primarily due to new properties acquired subsequent to December 31, 2012.

Bargain purchase gain. Bargain purchase gain was approximately $2.7 million for the year ended December 31, 2013. This gain relates to the acquisition of an attractions property where the fair value of the net assets acquired exceeded the consideration transferred. The excess resulted from the fact that the seller did not widely market the property for sale and was motivated to sell because the property was deemed an outlier from the other investments owned by the seller.

Interest expense and loan cost amortization. Interest expense and loan cost amortization was approximately $55.8 million and $55.1 million for the years ended December 31, 2013 and 2012, respectively. The increase is primarily attributable to the additional long-term debt obtained subsequent to December 31, 2012.

Gain from sale of unconsolidated entities. Gain from sale of unconsolidated entities was approximately $55.4 million for the year ended December 31, 2013. This gain relates to the sale of our interests in the 42 senior housing properties held through the CNLSun I, CNLSun II and CNLSun III ventures in July 2013. See “Distributions from Unconsolidated Entities” above for additional information. There was no sale of unconsolidated entities during the year ended December 31, 2012.

 

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Equity in earnings (loss) of unconsolidated entities. The following table summarizes equity in earnings from our unconsolidated entities (in thousands):

 

     For the Year Ended
December 31,
               
     2013      2012      $ Change      % Change  

DMC Partnership

   $ 10,912       $ 8,962       $ 1,950         21.8

Intrawest Venture

     3,924         (4,238      8,162         192.6

CNLSun I Venture

     (1,804      (936      (868      -92.7

CNLSun II Venture

     (509      (937      428         45.7

CNLSun III Venture

     (822      2,670         (3,492      -130.8
  

 

 

    

 

 

    

 

 

    

Total

$ 11,701    $ 5,521    $ 6,180      111.9
  

 

 

    

 

 

    

 

 

    

Equity in earnings of unconsolidated entities was approximately $11.7 million and $5.5 million for the years ended December 31, 2013 and 2012, respectively. The change is primarily attributable to an impairment provision of approximately $4.5 million recorded for the year ended December 31, 2012 as a result of an impairment analysis performed in connection with the marketing of seven retail destination properties for sale where it was determined that the carrying value of one of the Intrawest Venture properties was higher than the expected net sales proceeds. In addition, the Intrawest Venture stopped recording depreciation and amortization expenses during the fourth quarter of 2012 due to the venture’s decision to market its properties for sale. Also, the DMC Partnership incurred approximately $2.3 million in acquisition costs during the third quarter of 2012 relating to a potential acquisition that was ultimately not pursued. The increases were offset by the impact of the sale of our interest in 42 senior housing properties held through CNLSun I, CNLSun II and CNLSun III Ventures in July 2013. See “Distributions from Unconsolidated Entities” above for additional information.

Loss from discontinued operations. Loss from discontinued operations was approximately $241.1 million and $39.0 million for the years ended December 31, 2013 and 2012, respectively. During 2013, we recorded an impairment and determined that the carrying values of our 48-property golf portfolio and our multi-family property were unrecoverable when compared to the estimated fair value less costs to sell based on estimates of expected net sales proceeds. During 2012, we determined that the carrying values were unrecoverable when compared to the estimated fair value less costs to sell for our two golf properties based on estimates of net sales proceeds.

Other

Funds from Operations and Modified Funds From Operations

Due to certain unique operating characteristics of real estate companies, as discussed below, NAREIT, promulgated a measure known as FFO, which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to net income or loss as determined under GAAP.

We define FFO, a non-GAAP measure, consistent with the standards approved by the Board of Governors of NAREIT. NAREIT defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property, real estate impairment write-downs, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Our FFO calculation complies with NAREIT’s policy described above.

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or is requested or required by lessees for operational purposes in order to maintain the value of the property. We believe

 

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that, because real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income or loss. However, FFO and MFFO, as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or loss in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.

Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses for business combinations from a capitalization/depreciation model to an expensed-as-incurred model) that were put into effect in 2009 and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses as items that are expensed under GAAP and accounted for as operating expenses. Our management believes these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start up entities may also experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases. Due to the above factors and other unique features of publicly registered, non-listed REITs, the IPA, an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we acquired our properties and once our portfolio is in place. By providing MFFO, we believe it is presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry.

We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, or the Practice Guideline, issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income or loss: acquisition fees and expenses; amounts relating to the write-off of deferred rent receivables and other lease-related assets as well as amortization of above and below market leases and liabilities (which are adjusted in order to remove the impact of GAAP straight-line adjustments from rental revenues); accretion of discounts and amortization of premiums on debt investments, eliminations of adjustments relating to contingent purchase price obligations where such adjustments have been included in the derivation of GAAP net income or loss, mark-to-market adjustments included in net income or loss; nonrecurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, and unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such

 

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adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, nonrecurring unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized. While we are responsible for managing interest rate, hedge and foreign exchange risk, we do retain an outside consultant to review all of our hedging agreements. Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such non-recurring gains and losses in calculating MFFO, as such gains and losses are not reflective of on-going operations.

Our MFFO calculation complies with the IPA’s Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses, straight-line adjustments for leases and notes receivable, amortization of above and below market leases, impairments of lease related assets, loss from early extinguishment of debt and accretion of discounts or amortization of premiums for debt investments. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income or loss. These expenses are paid in cash by us. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income or loss in determining cash flow from operating activities.

Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-listed REITs which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures is useful to investors. For example, acquisitions costs are funded from our subscription proceeds and other financing sources and not from operations. By excluding expensed acquisition costs, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.

Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different non-listed REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way and as such comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flows available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of its liquidity, or indicative of funds available to fund cash needs including our ability to make distributions to stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. MFFO has limitations as a performance measure in an offering such as ours where the price of a share of common stock is a stated value or based on an estimated net asset value. MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. FFO and MFFO are not useful measures in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO and MFFO.

Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and we would have to adjust its calculation and characterization of FFO or MFFO.

 

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The following table presents a reconciliation of net loss to FFO and MFFO for the years ended December 31, 2014, 2013 and 2012 (in thousands except per share data).

 

     Year Ended December 31,  
     2014      2013      2012  

Net loss

   $ (92,144    $ (252,539    $ (76,073

Adjustments:

        

Depreciation and amortization

        

Continuing Operations

     98,664         94,459         87,479   

Discontinued Operations

     36,709         55,852         48,078   

Impairment of real estate assets (7)

        

Continuing Operations

     30,428         50,033         10   

Discontinued Operations

     37,867         161,410         670   

(Gain) loss on sale of real estate investment

        

Continuing Operations

     19         24         —     

Discontinued Operations

     (8,935      (2,408      (288

Gain on sale of unconsolidated entites (6)

        

Continuing Operations

     —           (55,394      —     

Net effect of FFO adjustment from unconsolidated entities (1)

     13,857         15,752         37,862   
  

 

 

    

 

 

    

 

 

 

Total funds from operations

  116,465      67,189      97,738   
  

 

 

    

 

 

    

 

 

 

Acquisition fees and expenses (2)

Continuing Operations

  664      2,467      3,224   

Discontinued Operations

  1,937      674      1,226   

Straight-line adjustments on leases and notes receivable (3)

Continuing Operations

  (2,171   (3,597   (5,555

Discontinued Operations

  (3,554   (2,417   (9,181

Amortization of above/below market intangible assets and liabilities

Continuing Operations

  16      (5   (18

Discontinued Operations

  583      1,388      625   

Loss (gain) from early extinguishment of debt (4)

Continuing Operations

  1,851      —        4   

Discontinued Operations

  7,157      —        —     

(Gains) write-off of lease related costs (5)

Continuing Operations

  8,914      (3,888   —     

Discontinued Operations

  —        58,092      23,669   

Loan loss provision (8)

Continuing Operations

  3,270      3,104      1,699   

Contingent purchase consideration (9)

Discontinued Operations

  (665   —        —     

Accretion of discounts/amortization of premiums for debt investments

Continuing Operations

  51      12      645   

MFFO adjustments from unconsolidated entities (1)

Straight-line adjustments for leases and notes receivable (3)

Continuing Operations

  228      (160   269   

Amortization of above/below market intangible assets and liabilities

Continuing Operations

  (157   52      (18
  

 

 

    

 

 

    

 

 

 

Modified funds from operations

$ 134,589    $ 122,911    $ 114,327   
  

 

 

    

 

 

    

 

 

 

Weighted average number of shares of common stock outstanding (basic and diluted)

  324,451      318,742      312,309   
  

 

 

    

 

 

    

 

 

 

FFO per share (basic and diluted)

$ 0.36    $ 0.21    $ 0.31   
  

 

 

    

 

 

    

 

 

 

MFFO per share (basic and diluted)

$ 0.41    $ 0.39    $ 0.37   
  

 

 

    

 

 

    

 

 

 

 

FOOTNOTES:

 

(1) This amount represents our share of the FFO or MFFO adjustments allowable under the NAREIT or IPA definitions, respectively, multiplied by the percentage of income or loss recognized under the HLBV method.

 

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(2) In evaluating investments in real estate, management differentiates the costs to acquire the investment from the operations derived from the investment. By adding back acquisition fees and expense relating to business combinations, management believes MFFO provides useful supplemental information of its operating performance and will also allow comparability between real estate entities regardless of their level of acquisition activities. Acquisition fees and expenses include payments to our advisor or third parties. Acquisition fees and expenses relating to business combinations under GAAP are considered operating expenses and as expenses included in the determination of net income (loss) and income (loss) from continuing operations, both of which are performance measures under GAAP. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of properties are generated to cover the purchase price of the property.
(3) Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, providing insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management’s analysis of operating performance.
(4) (Gain) loss of extinguishment of debt includes legal fees incurred with the transaction, prepayment penalty fees and write-off of unamortized loan costs, as applicable.
(5) Management believes that adjusting for gains or write-offs of lease related assets is appropriate because they are non-recurring non-cash adjustments that may not be reflective of our ongoing operating performance. In 2013, we recorded an impairment provision totaling $58.1 million for deferred rent from prior GAAP straight-lining adjustments and lease incentives which resulted from a change in our expected holding periods for those properties.
(6) In July 2013, we completed the sale of our interests in 42 senior housing properties held through three unconsolidated joint ventures. See “Distributions from Unconsolidated Entities” for additional information.
(7) The add back for impairment of real estate assets to arrive at FFO does not include approximately $58.1 million in impairments of deferred rent from prior GAAP straight-lining adjustments and lease incentives described in Footnote (5) above. While impairment charges are excluded from the calculation of FFO, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges.
(8) We recorded loan loss provisions on our mortgages and other notes receivable as a result of uncertainty related to the collectability of these notes receivables.
(9) Management believes that the elimination of the contingent purchase price consideration adjustment, which represents the Yield Guarantee as mentioned above, included in interest and other income (expense) for GAAP purposes is appropriate because the adjustment is a non-recurring, non-cash adjustment that is not reflective of our ongoing operating performance and aligns results with management’s analysis of operating performance.

Total FFO and FFO per share was approximately $116.5 million and $67.2 million or $0.36 and $0.21 for the years ended December 31, 2014 and 2013, respectively. The increase in FFO and FFO per share is primarily attributable to (i) an increase in rental income from leased properties and net operating income from managed properties related to properties acquired during 2013 and 2014, (ii) an increase in “same-store” rental income from leased properties and net operating income from managed properties and (iii) a decrease in write-offs of deferred rents from straight-lining adjustments and lease incentives, and (iv) a decrease in asset management fees. The increases were partially offset by (i) a net loss on extinguishment of debt as a result of prepayment on several loans, (ii) an increase in interest expense and loan cost amortization, (iii) a decrease in rental income and net operating income from leased and managed properties due to the sale of our golf portfolio and our multi-family residential property, (iv) a decrease in interest income on mortgage notes receivable due to the collection of $83.5 million of principal outstanding that matured in 2014, and (v) a decrease in equity in earnings from unconsolidated entities due to the sale of our interests in 42 senior housing properties held through three unconsolidated joint ventures.

Total MFFO and MFFO per share was $134.6 million and $122.9 million or $0.41 and $0.39 for the years ended December 31, 2014 and 2013, respectively. The increase in MFFO and MFFO per share is primarily attributable to (i) an increase in rent payments from leased properties (rental revenue excluding straight-line adjustments for GAAP) and net operating income from managed properties related to properties acquired during 2013 and 2014, (ii) an increase in “same-store” rent payments from leased properties and net operating income from managed properties, and (iii) a decrease in asset management fees. The increases were partially offset by (i) an increase in interest expense and loan cost amortization, (ii) a decrease in rental income and net operating income from leased and managed properties due to the sale of our golf portfolio and our multi-family residential property, (iii) a decrease in interest income on mortgage notes receivable due to the collection of principal that matured in 2014 and (iv) a decrease in equity in earnings from unconsolidated entities due to the sale of our interest in 42 senior housing properties held through three unconsolidated joint ventures.

 

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Total FFO and FFO per share was approximately $67.2 million and $97.7 million or $0.21 and $0.31 for the years ended December 31, 2013 and 2012, respectively. The decrease in FFO and FFO per share is primarily attributable to (i) the recording of non-cash impairment provision related to deferred rent and lease incentives for certain properties primarily due to an expected change in our holding periods for those properties, (ii) a reduction in FFO contribution from unconsolidated entities primarily relating to the CNLSun I, CNLSun II, CNLSun III ventures as discussed above and (iii) an increase in interest expense and loan cost amortization. These factors decreasing FFO were partially offset by (i) an increase in rental income from leased properties and net operating income from managed properties related to properties acquired during 2013, (ii) an increase in “same-store” rental income from leased properties and net operating income from managed properties primarily relating to our senior housing properties and ski and mountain lifestyle properties as a result of a strong 2012/2013 ski season, (iii) a decrease in asset management fees, acquisition fees and expenses, other operating expenses and loss on lease terminations.

Total MFFO and MFFO per share was $122.9 million and $114.3 million or $0.39 and $0.37 for the years ended December 31, 2013 and 2012, respectively. The increase in MFFO and MFFO per share is primarily attributable to (i) an increase in rent payments from leased properties (rental revenue excluding straight-line adjustments for GAAP) and net operating income from managed properties related to properties acquired during 2013, (ii) an increase in “same-store” rent payments from leased properties and net operating income from managed properties primarily relating to our senior housing properties and ski and mountain lifestyle properties as a result of a strong 2012/2013 ski season, and (iii) a decrease in asset management fees and other operating expenses. The increases were partially offset by a reduction in MFFO contribution from unconsolidated entities primarily relating to the CNLSun I, CNLSun II, CNLSun III ventures as discussed above and an increase in interest expense and loan cost amortization.

Adjusted EBITDA from Continuing Operations

We present Adjusted EBITDA from Continuing Operations as a supplemental measure of our performance. We define Adjusted EBITDA from Continuing Operations as net income (loss), less discontinued operations and other income, plus (i) interest expense, net, and loan cost amortization and (ii) depreciation and amortization, as further adjusted for the impact of equity in earnings (loss) of our unconsolidated entities, straight-line adjustments for leased properties and mortgages and other notes receivables, cash distributions from our unconsolidated entities and certain other non-recurring items that we do not consider indicative of our ongoing operating performance. These further adjustments are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA from Continuing Operations, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA from Continuing Operations should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

We present Adjusted EBITDA from Continuing Operations because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance.

Adjusted EBITDA from Continuing Operations has limitations as an analytical tool. Some of these limitations are:

 

    Adjusted EBITDA from Continuing Operations does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

 

    Adjusted EBITDA from Continuing Operations does not reflect changes in, or cash requirements for, our working capital needs;

 

    Adjusted EBITDA from Continuing Operations does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;

 

    Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and Adjusted EBITDA from Continuing Operations does not reflect any cash requirements for such replacements;

 

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    Adjusted EBITDA from Continuing Operations does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and

 

    Other companies in our industry may calculate Adjusted EBITDA from Continuing Operations differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA from Continuing Operations should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA from Continuing Operations only supplementally. Adjusted EBITDA from Continuing Operations for the years ended December 31, 2013 and 2012 has been restated for discontinued operations and does not include add backs related to properties held for sale.

Set forth below is a reconciliation of Adjusted EBITDA from Continuing Operations to net loss (in thousands):

 

     Year Ended December 31,  
     2014      2013      2012  

Net loss

   $ (92,144    $ (252,539    $ (76,073

Loss from discontinued operations

     31,706         241,117         39,014   

Interest and other (income) expense

     (838      (559      (850

Bargain purchase gain on acquisition of real estate (4)

     —           (2,653      —     

Interest expense and loan cost amortization

     57,260         55,769         55,094   

Equity in earnings of unconsolidated entities (1)

     (7,753      (11,701      (5,521

Cash distribution from unconsolidated entities (1)

     13,497         26,769         36,743   

Gain on sale of unconsolidated entities (3)

     —           (55,394      —     

Loss from early extinguishment of debt

     1,391         —           4   

Depreciation and amortization

     98,664         94,459         87,479   

Loan loss provision

     3,270         3,104         1,699   

(Gain) loss on lease terminations

     8,914         (3,850      1,560   

Impairment provision

     30,428         50,033         10   

Straight-line rent adjustments for leases and notes receivables (2)

     (2,171      (3,597      (5,555
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA from Continuing Operations

$ 142,224    $ 140,958    $ 133,604   
  

 

 

    

 

 

    

 

 

 

 

FOOTNOTES:

 

(1) Investments in our unconsolidated joint ventures are accounted for under the HLBV method of accounting. Under this method, we recognize income or loss based on the change in liquidating proceeds we would receive from a hypothetical liquidation of our investments based on depreciated book value. We adjust EBITDA from continuing operations for equity in earnings (loss) of our unconsolidated entities because we believe this is not reflective of the joint ventures’ operating performance or cash flows available for distributions to us. We believe cash distributions from our unconsolidated entities, exclusive of any financing transactions, are reflective of their operating performance and its impact to us and have been added back to Adjusted EBITDA from Continuing Operations above. For the years ended December 31, 2013 and 2012, cash distributions from unconsolidated entities excludes approximately $5.3 million and $3.4 million in return of capital, respectively. For the year ended December 31, 2014, cash distributions from unconsolidated entities did not result in a return of capital.
(2) We believe that adjusting for straight-line adjustments for leased properties and mortgages and other notes receivable is appropriate because they are non-cash adjustments and reflect the actual cash receipts received by us from our tenants and borrowers.
(3) In July 2013, we completed the sale of our interests in 42 senior housing properties held through three unconsolidated joint ventures. See “Distributions from Unconsolidated Entities” above for additional information.
(4) In connection with an acquisition of an attraction property, we recorded a bargain purchase gain as a result of the fair value of the net assets acquired exceeding the consideration transferred as discussed above.

 

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Adjusted EBITDA from Continuing Operations was approximately $142.2 million and $141.0 million for the years ended December 31, 2014 and 2013, respectively. The increase in Adjusted EBITDA from Continuing Operations is primarily attributable to (i) an increase in rent payments from leased properties (rental revenue excluding straight-line adjustments for GAAP) and net operating income from managed properties related to properties acquired during 2013 and 2014, (ii) an increase in “same-store” rent payment for leased properties and net operating income from managed properties, and (iii) a decrease in asset management fees. The increases were mostly offset by a decrease in interest income on mortgage notes receivable due to the collection of principal that matured in 2014 and decreases in cash distributions from unconsolidated entities due to the sale of our interest in 42 senior housing properties held through three unconsolidated joint ventures.

Adjusted EBITDA from Continuing Operations was approximately $141.0 million as compared to approximately $133.6 million for the years ended December 31, 2013 and 2012, respectively. The increase in Adjusted EBITDA from Continuing Operations is primarily attributable to (i) an increase in rent payments from leased properties (rental revenue excluding straight-line adjustments for GAAP) and net operating income from managed properties related to properties acquired during 2013, (ii) an increase in “same-store” rent payment for leased properties and net operating income from managed properties primarily relating to our senior housing properties and ski and mountain lifestyle properties as a result of a strong 2012/2013 ski season, and (iii) a decrease in asset management fees and other operating expenses. The increases were partially offset by a decrease in cash distributions from unconsolidated entities due to the sale of our interests in three unconsolidated senior housing joint ventures and an increase in interest expense and loan cost amortization.

Off Balance Sheet and Other Arrangements

Our equity in earnings from unconsolidated entities for the years ended December 31, 2014, 2013 and 2012 contributed approximately $7.8 million, $11.7 million and $5.5 million, respectively, to our results of operations. The partnership agreements governing the allocation of cash flows from the entities provide for the annual payment of a preferred return on our invested capital and thereafter in accordance with specified residual sharing percentages. Below is a schedule of our unconsolidated entities and its outstanding debt (in thousands):

 

                         Principal Balance at  
                         December 31,  

Unconsolidated Entity

   Date of
Agreement
     Maturity
Date
     Interest
Rate
    2014      2013  

Intrawest U.S. Venture

     12/3/2004         6/1/2015         5.8   $ 35,571       $ 36,955   

Intrawest Canadian Venture (1)

     12/3/2004         1/11/2015         5.8     20,019         22,237   

Intrawest Canadian Venture

     12/3/2004         12/2/2029         14.5     11,100         11,100   

DMC Partnership (2)

     10/29/2014         5/9/2015        
 
LIBOR +
1.75
  
    131,500         131,860   
          

 

 

    

 

 

 
$ 198,190    $ 202,152   
          

 

 

    

 

 

 

 

FOOTNOTES:

 

(1) Converted from Canadian dollars to U.S. dollars at the exchange rate in place as of the end of the year. The loan that matured in January 2015 was repaid at its maturity date.
(2) In October 2014, the DMC Partnership refinanced its existing loans, which had a principal balance of $131.9 million as of December 31, 2013 and matured in September 2014, with a bridge loan from a new third-party lender for an aggregate principal amount of $131.5 million. The new loan bears interest at 30-day LIBOR plus 1.75% with a 0.25% LIBOR floor and matures in May 2015 with one six-month extension option for a fee of approximately $0.7 million.

 

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In connection with the loans encumbering properties owned by our unconsolidated entities, if we engage in certain prohibited activities, we could become liable for the obligations of the unconsolidated entities which own the properties for certain enumerated recourse liabilities related to those entities and their properties. In the case of the borrowing for the resort village properties located in Canada, our obligations are such that we could become liable for the entire loan if we triggered a default due to bankruptcy or other similar events.

Commitments, Contingencies and Contractual Obligations

The following tables present our contractual obligations and contingent commitments and the related payments due by period as of December 31, 2014:

Contractual Obligations

 

     Payments Due by Period (in thousands)  
     Less than 1                    More than         
     year      Years 1-3      Years 3-5      5 years      Total  

Mortgages and other notes payable

    (principal and interest) (1)

   $ 165,165       $ 243,593       $ 200,403       $ 4,973       $ 614,134   

Senior notes (principal and interest)

     23,073         46,146         348,053         —           417,272   

Line of credit (principal and interest)

     153,094         —           —           —           153,094   

Capital Lease

     2,714         2,314         247         —           5,275   

Obligations under operating leases (2)

     12,570         25,140         25,140         168,948         231,798   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 356,616    $ 317,193    $ 573,843    $ 173,921    $ 1,421,573   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

FOOTNOTES:

 

(1) This line item includes all third-party and seller financing obtained in connection with the acquisition of properties. Future interest payments on our variable rate debt and line of credit were estimated based on a 30-day LIBOR forward rate curve.
(2) This line item represents obligations under ground leases, concession holds and land permits of which the majority are paid by our third-party tenants on our behalf. Ground lease payments, concession holds and land permit fees are generally based on a percentage of gross revenue of the related property exceeding a certain threshold. The future obligations have been estimated based on current revenue levels projected over the term of the leases or permits.

Contingent Commitments

 

     Payments Due by Period (in thousands)  
     Less than 1
year
     Years 1-3      Years 3-5      More than
5 years
     Total  

Capital improvements (1)

   $ 39,795       $ 4,500       $ —         $ —         $ 44,295   

 

FOOTNOTE:

 

(1) We have committed to fund ongoing equipment replacements and other capital improvement projects on our existing properties through capital reserves set aside by us for this purpose and additional capital investment in the properties that will increase the lease basis and generate additional rental income.

 

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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to interest rate changes primarily as a result of long-term debt used to acquire properties, make loans and other permitted investments. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve our objectives, we expect to borrow and lend primarily at fixed rates or variable rates with the lowest margins available, and in some cases, with the ability to convert variable rates to fixed rates. With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.

Our fixed rate mortgage and other notes receivable, which totaled $19.4 million and $118.0 million at December 31, 2014 and 2013, respectively, are subject to market risk to the extent that the stated interest rates vary from current market rates for borrowings under similar terms. The estimated fair value of the mortgage notes receivable was approximately $16.6 million and $112.2 million at December 31, 2014 and 2013, respectively.

The following is a schedule of our fixed and variable debt maturities for each of the next five years, and thereafter (in thousands):

 

     2015     2016     2017     2018     2019     Thereafter     Total     Fair Value (1)  

Fixed-rate debt

   $ 11,320      $ 40,065      $ 91,046      $ 140,440      $ 43,683      $ 322,799      $ 649,353      $ 661,074   

Variable-rate
debt (2)

     295,876        30,169        37,029        437        6,799        —          370,310        371,631   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
$ 307,196    $ 70,234    $ 128,075    $ 140,877    $ 50,482    $ 322,799    $ 1,019,663    $ 1,032,705   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2015     2016     2017     2018     2019     Thereafter     Total        

Weighted average fixed interest rate of maturities

     5.67     6.37     6.03     5.24     3.85     7.20     6.31  

Average interest rate on variable debt (3)

    
 
3.29% +
LIBOR
 
  
   
 
3.50% +
LIBOR
 
  
   
 
3.50% +
LIBOR
 
  
   
 
3.30% +
LIBOR
 
  
   
 
3.30% +
LIBOR
 
  
     

 

FOOTNOTES:

 

(1) The fair value of our fixed-rate and variable-rate debt was determined using discounted cash flows based on market interest rates as of December 31, 2014. We determined market rates through discussions with our existing lenders pricing our loans with similar terms and current rates and spreads.