EFTA01384995.pdf

our trade or business in excess of directly connected deductions is subject to the 100% prohibited transaction tax. 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 that year if we arc entitled to relief under the Code. These relief provisions generally will be available if our failure to meet the tests is due to reasonable cause and not due to willful neglect, we attach a schedule of the sources of our income to our U.S. federal income tax return and otherwise comply with the applicable Treasury Regulations. It is not possible, however, to state whether in all circumstances we would be entitled to the benefit of these relief provisions. For example, if we fail to satisfy the gross income tests because nonqualifying income that we intentionally incur unexpectedly exceeds the limits on nonqualifying income, the IRS could conclude that the failure to satisfy the tests was not due to reasonable cause. If these relief provisions are inapplicable to a particular set of circumstances involving us, we will fail to qualify as a REIT. Even if these relief provisions apply, a tax would be imposed based on the amount of nonqualifying income. Asset DS Applicable to REIM At the close of each quarter of our taxable year, we must satisfy four tests relating to the nature of our assets: (1) at least 75% of the value of our total assets must be represented by real estate assets, cash, cash items and U.S. Government securities; (2) not more than 25% of the value of our total assets may be represented by securities other than those in the 75% asset class; (3) except for equity investments in REM, qualified REIT subsidiaries, other securities that qualify as "real estate assets" for purposes of the test described in clause (1) or securities of our TRSs: the value of any one issuer's securities owned by us may not exceed 5% of the value of our total assets; we may not own more than 10% of any one issuer's outstanding voting securities; and we may not own more than 10% of the value of the outstanding securities of any one issuer; and (4) not more than 25% of the value of our total assets may be represented by securities of one or more TRSs. Securities for purposes of the asset tests may include debt securities that are not fully secured by a mortgage on real property (or treated as such). However, the 10% value test does not apply to certain "straight debt" and other excluded securities, as described in the Code including, but not limited to, any loan to an individual or estate, any obligation to pay rents from real property and any security issued by a REIT. In addition, for purposes of applying the 10% value test (a) a REirs interest as a partner in a partnership is not considered a security; (b) any debt instrument issued by a partnership (other than straight debt or another excluded security) will not be considered a security issued by the partnership if at least 75% of the partnership's gross income is derived from sources that would qualify for the 75% REIT gross income test; and (c) any debt instrument issued by a partnership (other than straight debt or another excluded security) will not be considered a security issued by the partnership to the extent of the REIT's interest as a partner in the partnership. In general, straight debt is defined as a written, unconditional promise to pay on demand or at a specific date a fixed principal amount, and the interest rate and payment dates on the debt must not be contingent on profits or the discretion of the debtor. In addition, straight debt may not contain a convertibility feature. Real estate assets for purposes of the above tests include shares in other qualifying REM and stock or debt instruments held for less than one year purchased with the proceeds from an offering of shares of our stock or certain debt. Our assets consist primarily of farmland, buildings and permanent crops, vines and trees, which are treated as real property for REIT purposes, and short term investments of cash. In addition, in the 218 CONFIDENTIAL - PURSUANT TO FED. R. CRIM P 6(e) DB-SDNY-0085781 CONFIDENTIAL SONY_GM_00231965 EFTA01384995