| Related Party Transactions and Arrangements | Related Party Transactions and Arrangements As of June 30, 2024 and December 31, 2023, the Special Limited Partner owned 10,873 and 10,710 shares (assuming conversion of its partnership interests), respectively, of the Company’s outstanding common stock. The Advisor and its affiliates may incur and pay costs and fees on behalf of the Company. As of June 30, 2024 and December 31, 2023, the Advisor held 90 partnership units in the OP designated as “Common OP Units”. The limited partnership agreement of the OP (as amended from time to time, the “LPA”) allows for the special allocation, solely for tax purposes, of excess depreciation deductions of up to $10.0 million to the Advisor, a limited partner of the OP. In connection with this special allocation, the Advisor has agreed to restore a deficit balance in its capital account in the event of a liquidation of the OP and has agreed to provide a guaranty or indemnity of indebtedness of the OP. Fees Incurred in Connection with the Operations of the Company The Second Amended and Restated Advisory Agreement by and among the Company, the OP and the Advisor (as amended the “Second A&R Advisory Agreement”) took effect on February 17, 2017 and is automatically renewable for another ten-year term upon each ten-year anniversary unless the Second A&R Advisory Agreement is terminated (i) with notice of an election not to renew at least 365 days prior to the applicable tenth anniversary, (ii) in accordance with a change of control (as defined in the Second A&R Advisory Agreement) or a transition to self-management, (iii) by 67% of the independent directors of the Board for cause, without penalty, with 45 days’ notice or (iv) with 60 days’ prior written notice by the Advisor for (a) a failure to obtain a satisfactory agreement for any successor to the Company to assume and agree to perform obligations under the Second A&R Advisory Agreement or (b) any material breach of the Second A&R Advisory Agreement of any nature whatsoever by the Company. On July 25, 2019, the Company entered into Amendment No. 1 to the Second A&R Advisory Agreement (the “Advisory Agreement Amendment”) among the Company, the OP, and the Advisor. The Advisory Agreement Amendment was unanimously approved by the Company’s independent directors. Additional information on the Advisory Agreement Amendment is included later in this footnote under “ Professional Fees and Other Reimbursements .” On July 1, 2024, the Company announced that, in anticipation of a potential future listing of the Company’s common stock on a national securities exchange, it provided notice in June 2024 to the Advisor of its intent to transition to self-management. The Advisory Agreement will be terminated upon the effective date of the Internalization, which is expected to be no later than the fourth quarter of 2024. Certain expenses have been incurred as a result of the Company’s decision to terminate the Advisory Agreement, which are discussed below in the section “Intent to Internalize Management — Termination Fees”. Acquisition Expense Reimbursements The Advisor may be reimbursed for services provided for which it incurs investment-related expenses, or insourced expenses. The amount reimbursed for insourced expenses may not exceed 0.5% of the contract purchase price of each acquired property or 0.5% of the amount advanced for a loan or other investment. Additionally, the Company reimburses the Advisor for third-party acquisition expenses. Under the Second A&R Advisory Agreement, total acquisition expenses may not exceed 4.5% of the contract purchase price of the Company’s portfolio or 4.5% of the amount advanced for all loans or other investments. This threshold has not been exceeded through June 30, 2024. Asset Management Fees Under the LPA and the advisory agreement that was superseded by the original amended and restated advisory agreement and until March 31, 2015, for its asset management services, the Company issued the Advisor an asset management subordinated participation by causing the OP to issue (subject to periodic approval by the Board) to the Advisor partnership units of the OP designated as “Class B Units” (“Class B Units”). The Class B Units were intended to be profit interests and vest, and no longer are subject to forfeiture, at such time as: (x) the value of the OP’s assets plus all distributions made equals or exceeds the total amount of capital contributed by investors plus a 6.0% cumulative, pre-tax, non-compounded annual return thereon (the “Economic Hurdle”); (y) any one of the following occurs: (1) a listing; (2) another liquidity event or (3) the termination of the advisory agreement by an affirmative vote of a majority of the Company’s independent directors without cause; and (z) the Advisor is still providing advisory services to the Company (the “Performance Condition”). Unvested Class B Units will be forfeited immediately if: (a) the advisory agreement is terminated for any reason other than a termination without cause; or (b) the advisory agreement is terminated by an affirmative vote of a majority of the Company’s independent directors without cause before the Economic Hurdle has been met. Subject to approval by the Board, the Class B Units were issued to the Advisor quarterly in arrears pursuant to the terms of the LPA. The number of Class B Units issued in any quarter was equal to: (i) the excess of (A) the product of (y) the cost of assets multiplied by (z) 0.1875% over (B) any amounts payable as an oversight fee (as described below) for such calendar quarter; divided by (ii) the value of one share of common stock as of the last day of such calendar quarter, which was initially equal to $22.50 (the price in the Company’s initial public offering of common stock minus the selling commissions and dealer manager fees). The value of issued Class B Units will be determined and expensed when the Company deems the achievement of the Performance Condition to be probable. As of June 30, 2024, the Company determined that achieving the Performance Condition was not yet considered probable for accounting purposes. The Advisor receives cash distributions on each issued Class B Unit equivalent to the cash distribution paid, if any, on the Company’s common stock. These cash distributions on Class B Units are included in general and administrative expenses in the consolidated statements of operations and comprehensive loss until the Performance Condition is considered probable to occur. stock dividends do not cause the OP to issue additional Class B Units, rather, the redemption ratio to common stock is adjusted. The Board has previously approved the issuance of 359,250 Class B Units to the Advisor in connection with this arrangement. The Board determined in February 2018 that the Economic Hurdle had been satisfied, however none of the events have occurred, including a listing of the Company’s common stock on a national securities exchange, which would have satisfied the other vesting requirement of the Class B Units. Therefore, no expense has ever been recognized in connection with the Class B Units. On May 12, 2015, the Company, the OP and the Advisor entered into an amendment to the then-current advisory agreement, which, among other things, provided that the Company would cease causing the OP to issue Class B Units to the Advisor with respect to any period ending after March 31, 2015. Effective February 17, 2017, the Second A&R Advisory Agreement requires the Company to pay the Advisor a base management fee, which is payable on the first business day of each month. The fixed portion of the base management fee is equal to $1.625 million per month, while the variable portion of the base management fee is equal to one-twelfth of 1.25% of the cumulative net proceeds of any equity (including convertible equity and certain convertible debt but excluding proceeds from the DRIP) issued by the Company and its subsidiaries subsequent to February 17, 2017 per month. There are no variable management fees earned from the issuance of common stock dividends. The base management fee is payable to the Advisor or its assignees in cash, Common OP Units or shares, or a combination thereof, the form of payment to be determined at the discretion of the Advisor and the value of any Common OP Unit or share to be determined by the Advisor acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. In addition, the Second A&R Advisory Agreement requires the Company to pay the Advisor a variable management/incentive fee quarterly in arrears equal to (1) the product of fully diluted shares of common stock outstanding multiplied by (2) (x) 15.0% of the applicable prior quarter’s Core Earnings (as defined below) per share in excess of $0.375 per share plus (y) 10.0% of the applicable prior quarter’s Core Earnings per share in excess of $0.47 per share. Core Earnings is defined as, for the applicable period, net income or loss, computed in accordance with GAAP, excluding non-cash equity compensation expense, the variable management/incentive fee, acquisition and transaction related fees and expenses, financing related fees and expenses, depreciation and amortization, realized gains and losses on the sale of assets, any unrealized gains or losses or other non-cash items recorded in net income or loss for the applicable period, regardless of whether such items are included in other comprehensive income or loss, or in net income, one-time events pursuant to changes in GAAP and certain non-cash charges, impairment losses on real estate related investments and other than temporary impairments of securities, amortization of deferred financing costs, amortization of tenant inducements, amortization of straight-line rent and any associated bad debt reserves, amortization of market lease intangibles, provision for loss loans, and other non-recurring revenue and expenses (in each case after discussions between the Advisor and the independent directors and approved by a majority of the independent directors). The variable management/incentive fee is payable to the Advisor or its assignees in cash or shares, or a combination of both, the form of payment to be determined in the sole discretion of the Advisor and the value of any share to be determined by the Advisor acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. No incentive fee was incurred for the six months ended June 30, 2024 or 2023. Pursuant to the terms of the Internalization Agreement, the Company has agreed to pay an asset management fee of $10.9 million, representing the aggregate base management fees that the Company would have been required to pay to the Advisor during the six month notice period required to terminate the Second A&R Advisory Agreement (assuming the Closing occurs on or prior to December 25, 2024), beginning June 25, 2024 when the Company delivered notice to the Advisor of its intent to effect the Internalization, subject to certain closing adjustments. Professional Fees and Other Reimbursements The Company reimburses the Advisor’s costs of providing administrative services including personnel costs, except for costs to the extent that the employees perform services for which the Advisor receives a separate fee. This reimbursement includes reasonable overhead expenses for employees of the Advisor or its affiliates directly involved in the performance of services on behalf of the Company, including the reimbursement of rent expense at certain properties that are both occupied by employees of the Advisor or its affiliates and owned by affiliates of the Advisor. During the three months ended June 30, 2024 and 2023, the Company incurred $3.0 million and $2.4 million, respectively of reimbursement expenses from the Advisor for providing administrative services. During the six months ended June 30, 2024 and 2023, the Company incurred $7.0 million and $4.8 million, respectively, of reimbursement expenses from the Advisor for providing administrative services. These reimbursement expenses are included in general and administrative expense on the consolidated statements of operations and comprehensive loss. On July 25, 2019, the Company entered into the Advisory Agreement Amendment. Under the Advisory Agreement Amendment, including prior to the Advisory Agreement Amendment, the Company has been required to reimburse the Advisor for, among other things, reasonable salaries and wages, benefits and overhead of all employees of the Advisor or its affiliates, except for costs of employees to the extent that the employees perform services for which the Advisor receives a separate fee. The Advisory Agreement Amendment clarifies that, with respect to executive officers of the Advisor, the Company is required to reimburse the Advisor or its affiliates for the reasonable salaries and wages, benefits and overhead of the Company’s executive officers, other than for any executive officer that is also a partner, member or equity owner of AR Global, an affiliate of the Advisor. Further, under the Advisory Agreement Amendment, the aggregate amount of expenses relating to salaries, wages, severance and benefits, including for executive officers and all other employees of the Advisor or its affiliates (the “Capped Reimbursement Amount”), is limited to the greater of: (a) a fixed component (the “Fixed Component”) and (b) a variable component (the “Variable Component”). Initially, for the year ended December 31, 2019; (a) the Fixed Component was equal to $6.8 million and the Variable Component was equal to (i) the sum of the total real estate investments, at cost as recorded on the balance sheet dated as of the last day of each fiscal quarter (the “Real Estate Cost”) in the year divided by four, which amount was then (ii) multiplied by 0.29%. Both the Fixed Component and the Variable Component increase by an annual cost of living adjustment equal to the greater of (x) 3.0% and (y) the CPI, as defined in the Advisory Agreement Amendment for the prior year ended December 31st. For the fiscal year ended December 31, 2024, the Fixed Component is $8.2 million and the Company expects the Variable Component to be approximately $9.3 million. During the three and six months ended June 30, 2024, the Company incurred $2.0 million and $4.9 million, respectively, of expenses subject to the Capped Reimbursement Amount. If the Company sells real estate investments aggregating an amount equal to or more than 25.0% of Real Estate Cost, in one or a series of related dispositions in which the proceeds of the disposition(s) are not reinvested in Investments (as defined in the Advisory Agreement Amendment), then within 12 months following the disposition(s), the Advisory Agreement Amendment requires the Advisor and the Company to negotiate in good faith to reset the Fixed Component; provided that if the proceeds of the disposition(s) are paid to shareholders of the Company as a special distribution or used to repay loans with no intent of subsequently re-financing and re-investing the proceeds thereof in Investments, the Advisory Agreement Amendment requires these negotiations within 90 days thereof, in each case taking into account reasonable projections of reimbursable costs in light of the Company’s reduced assets. Bonus Awards Prior to the COVID-19 pandemic, the Advisor had awarded bonuses to its employees, or employees of its affiliates, in March of each year as an all-cash award, prorated for the amount of time spent providing administrative services relating to the Company. Such bonus amounts were paid by the Advisor to its employees, or employees of its affiliates, throughout the year subsequent to the year in which such services were rendered. Reimbursements for the cash portion of 2023 bonuses paid by the Advisor to its employees, or employees of its affiliates, were expensed and reimbursed on a monthly basis during the year ended December 31, 2023 in accordance with estimates provided by the Advisor. These amounts were awarded in May 2024 and are scheduled to be paid by the Advisor to its employees from September 2024 to March 2025. To the extent that any amounts remain unpaid at the time of the Closing of the Internalization, the Company will receive such amounts from the Advisor as a credit to its Closing Payments. Reimbursements for the cash portion of 2024 bonuses paid by the Advisor to its employees, or employees of its affiliates, are being expensed and reimbursed on a monthly basis during the year ended December 31, 2024 in accordance with estimates provided by the Advisor. To the extent that any amounts remain unpaid at the time of the Closing of the Internalization, the Company will receive such amounts from the Advisor as a credit to its Closing Payments. Property Management Fees Unless the Company contracts with a third party, the Company pays the Property Manager a property management fee on a monthly basis, equal to 1.5% of gross revenues from the Company’s stand-alone single-tenant net leased properties managed and 2.5% of gross revenues from all other types of properties managed, plus market-based leasing commissions applicable to the geographic location of the property. The Company also reimburses the Property Manager for property level expenses incurred by the Property Manager. The Property Manager may charge a separate fee for the one-time initial rent-up or leasing-up of newly constructed properties in an amount not to exceed the fee customarily charged in arm’s length transactions by others rendering similar services in the same geographic area for similar properties, and the Property Manager is allowed to receive a higher property management fee in certain cases if approved by the Company’s Board (including a majority of the independent directors). If the Company contracts directly with third parties for such services, the Company will pay the third party customary market fees and will pay the Property Manager an oversight fee of 1.0% of the gross revenues of the property managed by the third party. In no event will the Company pay the Property Manager or any affiliate of the Property Manager both a property management fee and an oversight fee with respect to any particular property. If the Property Manager provides services other than those specified in the Property Management Agreement, the Company will pay the Property Manager a monthly fee equal to no more than that which the Company would pay to a third party that is not an affiliate of the Company or the Property Manager to provide the services. On February 17, 2017, the Company entered into the Amended and Restated Property Management and Leasing Agreement (the “A&R Property Management Agreement”) with the OP and the Property Manager. The A&R Property Management Agreement automatically renews for successive one-year terms unless any party provides written notice of its intention to terminate the A&R Property Management Agreement. The Company provided the Property Manager with notice of its intent to self-manage during the three months ended June 30, 2024 and, as a result, the current term of the A&R Property Management Agreement will expire the earlier of the effective date of the Internalization or February 17, 2025. The Property Manager may assign the A&R Property Management Agreement to any party with expertise in commercial real estate which has, together with its affiliates, over $100.0 million in assets under management. Pursuant to the terms of the Internalization Agreement, the Company has agreed to pay a property management fee of $3.9 million, representing the aggregate property management fees that the Company would have been required to pay to the Property Manager through the current term of the Property Management Agreement, subject to certain closing adjustments. Summary of Related Party Expenses and Payables The following table details amounts incurred and payable in connection with the Company’s operations-related services described above as of and for the periods presented: Three Months Ended June 30, Six Months Ended June 30, Payable (Prepayments) as of 2024 2023 2024 2023 (In thousands) Incurred Incurred Incurred Incurred June 30, December 31, 2023 Non-recurring fees and reimbursements: Acquisition cost reimbursements $ — $ — $ 20 $ 21 $ 20 $ — Ongoing fees and reimbursements: Asset management fees 5,458 5,458 10,916 10,916 — — Professional fees and other reimbursements (1) 3,021 2,373 6,980 4,759 (46) 198 Property management fees (2) 1,022 911 2,492 1,840 73 97 Termination fees (3) 98,241 — 98,241 — 98,241 — Total related party operation fees and reimbursements $ 107,742 $ 8,742 $ 118,649 $ 17,536 $ 98,288 $ 295 ___________ (1) Included in general and administrative expenses in the consolidated statements of operations. Includes $2.0 million and $1.7 million for the three months ended June 30, 2024 and 2023, respectively, and $4.9 million and $3.2 million for the six months ended June 30, 2024 and 2023, respectively, subject to the Capped Reimbursement Amount. (2) The three months ended June 30, 2024 and 2023 includ es $0.1 million and $49,000 respectively, and the six months ended June 30, 2024 and 2023 includes $0.6 million and $0.1 million , respectively, of leasing commissions which are capitalized and included in deferred costs, net on the Company’s consolidated balance sheets . (3) The three and six months ended June 30, 2024 includes an estimate for termination fees of $98.2 million, resulting from the Company’s intent to internalize its management functions, which is payable within 30 days of the effective date of the termination of the Advisory Agreement. Please see the below section “Intent to Internalize Management — Termination Fees” for additional information. Intent to Internalize Management On July 1, 2024, the Company announced that, in anticipation of a potential future listing of the Company’s common stock on a national securities exchange, it provided notice in June 2024 to the Advisor of its intent to transition to self-management and internalize management functions. On August 6, 2024, the Company entered into the Internalization Agreement with Merger Sub, the Advisor and the Advisor Parent. The Internalization Agreement may be terminated, subject to certain limitations set forth in the Internalization Agreement, (i) by mutual written agreement by the parties thereto, (ii) by any party if a final and non-appealable order is entered that permanently restrains or otherwise prohibits the Internalization, or (iii) by any party should the Effective Time (as defined in the Internalization Agreement) not have occurred on or before June 28, 2025. The Company expects the Internalization to close no later than the fourth quarter of 2024. There can be no assurance that the Internalization will close within the anticipated time frame, or at all, or that the Company will be able to list its shares of common stock on a national securities exchange. Closing Payments Pursuant to the terms of the Internalization Agreement, the Company is required to pay the Advisor Payment certain fees in connection with the Internalization. All fees will be due within 30 days after the Closing. To the extent the Closing Payments exceed the Company’s Available Cash, the Company has agreed to pay the Advisor Parent the Closing Date Cash Consideration, and the Company shall issue to Advisor Parent a promissory note in a principal amount equal to the difference between the Closing Date Cash Consideration and the Closing Payments, as may be adjusted for any post-Closing true-ups on the Closing Payments. The Company intends to fund the Closing Date Cash Consideration through a combination of cash on hand and the net proceeds from certain anticipated strategic dispositions. The Company expects to pay the Advisor such fees in connection with the Closing, but there can be no assurance that the Internalization closes on its anticipated time frame, or subject to the terms described herein, or at all. Self-Management Termination Fee Upon a termination by the Company in connection with a transition to self-management, the Company is required to pay the Advisor Parent a self-management termination fee equal to (i) $15.0 million plus (ii) the product of four multiplied by the Subject Fees, provided that the transition fee shall not exceed an amount equal to 4.5 multiplied by the Subject Fees. Such fee is a component of the Closing Payments contemplated by the Internalization Agreement. The Subject Fees are equal to (i) the product of four multiplied by the actual base management fee plus (ii) the product of four multiplied by the actual variable management/incentive fee, in each of clauses (i) and (ii), payable for the fiscal quarter immediately prior to the fiscal quarter in which the change of control occurs or the transition to self-management, as applicable, is consummated, plus (iii) without duplication, the annual increase in the base management fee resulting from the cumulative net proceeds of any equity raised (but excluding proceeds from the DRIP) in respect to the fiscal quarter immediately prior to the fiscal quarter in which the change of control occurs or the transition to self-management, as applicable, is consummated. The Company has recorded the transition fee agreed upon in the Internalization Agreement of $98.2 million, in the three and six months ended June 30, 2024. Asset Management Fees, Property Management Fees and Other Closing Payments Pursuant to the terms of the Internalization Agreement, the Company is required to pay to the Advisor Parent (i) an asset management fee of $10.9 million, representing the aggregate base management fees that the Company would have been required to pay to the Advisor during the six month notice period required to terminate the Second A&R Advisory Agreement (assuming the Closing occurs on or prior to December 25, 2024), and (ii) a property management fee of $3.9 million, representing the aggregate property management fees that the Company would have been required to pay to the Property Manager through the current term of the Property Management Agreement, in each case subject to certain closing adjustments. Advisor Parent will also deliver cash to the Company at Closing in order for the Company to pay any unpaid employee bonuses for calendar year 2023 and any accrued bonuses for calendar year 2024 to the extent that the Company has previously reimbursed Advisor Parent for, but Advisor Parent has not paid, such bonuses. Fees and Participations Incurred in Connection with a Listing or the Liquidation of the Company’s Real Estate Assets Fees Incurred in Connection with a Listing If the common stock of the Company is listed on a national securities exchange, the Special Limited Partner will be entitled to receive a promissory note as evidence of its right to receive a subordinated incentive listing distribution from the OP equal to 15.0% of the amount by which the market value of all issued and outstanding shares of common stock plus distributions exceeds the aggregate capital contributed plus an amount equal to a 6.0% cumulative, pre-tax non-compounded annual return to investors in the Company’s initial public offering of common stock. No such distribution was incurred during the three or six months ended June 30, 2024 or 2023. If the Special Limited Partner or any of its affiliates receives the subordinated incentive listing distribution, the Special Limited Partner and its affiliates will no longer be entitled to receive the subordinated participation in net sales proceeds or the subordinated incentive termination distribution described below. Subordinated Participation in Net Sales Proceeds Upon a liquidation or sale of all or substantially all of the Company’s assets, including through a merger or sale of stock, the Special Limited Partner will be entitled to receive a subordinated participation in the net sales proceeds of the sale of real estate assets from the OP equal to 15.0% of remaining net sale proceeds after return of capital contributions to investors in the Company’s initial public offering of common stock plus payment to investors of a 6.0% cumulative, pre-tax non-compounded annual return on the capital contributed by investors. No such participation in net sales proceeds became due and payable during the three or six months ended June 30, 2024 or 2023. Any amount of net sales proceeds paid to the Special Limited Partner or any of its affiliates prior to the Company’s listing or termination or non-renewal of the advisory agreement with the Advisor, as applicable, will reduce dollar for dollar the amount of the subordinated incentive listing distribution described above and subordinated incentive termination distribution described below. Termination Fees Under the operating partnership agreement of the OP, upon termination or non-renewal of the advisory agreement with the Advisor, with or without cause, the Special Limited Partner will be entitled to receive a promissory note as evidence of its right to receive subordinated termination distributions from the OP equal to 15.0% of the amount by which the sum of the Company’s market value plus distributions exceeds the sum of the aggregate capital contributed plus an amount equal to a 6.0% cumulative, pre-tax, non-compounded annual return to investors in the Company’s initial public offering of common stock. The Special Limited Partner is able to elect to defer its right to receive a subordinated distribution upon termination until either a listing on a national securities exchange or other liquidity event occurs. If the Special Limited Partner or any of its affiliates receives the subordinated incentive termination distribution, the Special Limited Partner and its affiliates will no longer be entitled to receive the subordinated participation in net sales proceeds or the subordinated incentive listing distribution described above. |
