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Item 1. Business

2023-02-15 compared with 2022-02-16 · 146 added, 113 removed, 664 unchanged (28% of the section changed)

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Our Business Strategy

Our business plan is to focus on owning and leasing high quality office properties to tenants with high credit quality characteristics in select, growth-oriented U.S.

We seek to maintain or selectively develop our properties, extend or enter new leases as leases approach expiration as well as enter new leases for our vacant space and selectively acquire additional properties.

As our lease expirations approach, we will attempt to renew our leases with existing tenants or to enter leases with new tenants, in both circumstances at rents equal to or higher than the rents we now receive.

Our business plan is to focus on acquiring, owning, developing and leasing high-quality office and mixed-use properties in select, growth-oriented U.S.

We seek to diversify our revenue base across geographies with ownership in central business district, urban infill and suburban locations.

Our approach emphasizes properties, markets or locations with high barriers to entry, qualities and characteristics to attract and retain talent and investment toward sustainability efforts.

As our lease expirations approach, we will attempt to evaluate the highest and best use for a property and focus on proactive asset management to renew our leases with existing tenants or to enter leases with new tenants to enhance long-term cash flow growth and asset values.

Our ability to renew leases with our existing tenants or to enter new leases with new tenants and the rents we are able to charge will depend in large part upon market conditions, which are beyond our control.

For our properties that are leased to single or majority tenants, because of the capital improvements in which many of these tenants have invested and because many of our properties that are leased to single or majority tenants appear to have strategic importance to the tenants’ businesses, we believe that there is a greater likelihood that these tenants will renew or extend their leases when they expire as compared to tenants that have not invested capital into a property or where the property location may not be strategic to its business.

However, we also believe that if a property previously occupied by a single or majority tenant becomes vacant, it may take longer and cost more to reposition that property or to locate a replacement tenant than compared to space for lease in a multi-tenant property because in place improvements designed specifically for the needs of the prior single or majority tenant may not suit a replacement tenant’s needs.

We expect to selectively sell properties from time to time when we determine our continued ownership or ongoing required capital expenditures will not achieve desired returns or when we believe we can successfully pursue more desirable opportunities than retaining those properties.

We also expect to use sales proceeds to acquire new properties that we believe will help us reduce the average age of our properties, lengthen our weighted average lease term, reduce our ongoing capital requirements and/or increase our distributions to shareholders.

We believe that if a property previously occupied by a single or majority tenant becomes vacant, it may be capital and time intensive to restabilize, redevelop or reposition depending on various factors including market conditions.

We expect to selectively sell properties from time to time when we determine we have maximized value, our continued ownership or ongoing required capital expenditures will not achieve desired returns or when we believe we can successfully pursue more desirable opportunities than retaining those properties.

We also expect to use sales proceeds to manage leverage levels and to acquire new properties or portfolios that we believe will help diversify our revenue base, improve the average age of our properties, lengthen our weighted average lease term, reduce our ongoing capital requirements and/or increase our distributions to shareholders.

We refer to this as our capital recycling program.

Our Growth Strategy

Our internal growth strategy is to attempt to increase the rents we receive from our current properties and to increase occupancy by leasing vacant space.

To achieve rent or occupancy increases we may invest in our properties through development, redevelopment or repositioning activities or through improvements requested by existing tenants or to induce lease renewals or new tenant leases when our current leases expire or vacant space is leased.

However, as noted above, our ability to increase occupancy or to maintain or increase the rents we receive from our current properties will depend in large part upon market conditions, which are beyond our control.

Our internal growth strategy is to attempt to increase the rents and corresponding cash flows we receive from our current properties and to increase occupancy by leasing vacant space.

To achieve these increases, we may invest in our properties through development, redevelopment or repositioning activities or through improvements requested by existing tenants or to induce lease renewals or new tenant leases when our current leases expire or vacant space is leased.

However, as noted above, our ability to increase occupancy or to maintain or increase the rents and corresponding cash flows we receive from our current properties will depend in large part upon market conditions, which are beyond our control.

Our external growth strategy is defined by our investment policies, including our capital recycling program, and our acquisition, disposition and financing policies.

Our Investment Policies

Our primary investment objectives include acquiring properties that produce yields that are greater than the yields of properties we are disposing in connection with our capital recycling program, as well as acquiring properties with yields that are greater than our cost of capital, with a goal of (1) improving the asset quality of our portfolio by reducing the average age of our properties, lengthening the weighted average term of our leases and increasing the likelihood of retaining our tenants, and (2) increasing our distributions to shareholders.

Our primary investment objectives include acquiring properties or portfolios that enhance our overall portfolio composition and produce greater returns than those properties or portfolios we are disposing in connection with our capital recycling program.

We intend to acquire properties or portfolios with a goal of improving our asset diversification, our geographical footprint and the average age of our properties, lengthening the weighted average term of our leases and increasing tenant

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retention, and increasing our distributions to shareholders.

To achieve these objectives, we seek to:

(a) invest in institutional quality properties with high credit quality tenants;

(b) use proceeds from our capital recycling program to fund additional investments and to manage leverage at levels we believe appropriate;

(a) invest in institutional quality properties with an emphasis on high credit quality tenants;

(b) use proceeds from our capital recycling program to manage leverage levels and to fund additional investments we believe appropriate;

and (d) pursue diversification so that our cash flow from operations comes from diverse properties and tenants.

and (d) pursue capital allocation strategies so that our cash flow from operations comes from a diversified portfolio of properties, geographies, industries and tenants.

Acquisition Policies .

We currently intend to focus our investments primarily in U.S.

office properties in markets we believe have strong economic fundamentals to support growth, including (1) properties leased to a single or majority tenant that are strategic to that tenant and which may include built-to-suit, specialty use or corporate or regional headquarters and properties where the tenant has invested meaningful capital, with a minimum remaining lease term of at least seven years and (2) properties with specialty uses where remote work is less likely to occur.

office, mixed-use or similar type properties in markets we believe have strong economic fundamentals to support growth, including (1) properties leased to a single or majority tenant that are strategic to that tenant and which may include built-to-suit, specialty use or corporate or regional headquarters and properties where the tenant has invested meaningful capital, with a minimum remaining lease term of at least seven years and (2) properties with specialty uses or those deemed to be mission critical to a user.

We also expect to seek investments primarily in first generation properties where we believe there is a reasonably high likelihood of renewing the tenants in place and where we expect ongoing capital needs to be relatively modest when compared to older properties.

We expect to use the extensive nationwide resources of our manager, The RMR Group LLC, or RMR LLC, to locate and manage the acquisition of such properties.

We expect to use the extensive nationwide resources of our manager, The RMR Group LLC, or RMR, to locate and manage the acquisition of such properties.

We expect most of our future acquisitions will be office properties;

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• the likelihood of the tenant(s) renewing at lease expiration;

• the type of property (e.g., single tenant or multi-tenant, etc.);

• the type of property (e.g., single tenant, multi-tenant, specialty use, etc.);

• the growth, tax and regulatory environments of the market in which the property is located;

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• the use and size of the property;

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• the price at which the property may be acquired or redeveloped;

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Disposition Policies .

We expect to sell properties, from time to time, in order to recycle capital into properties that we believe have better long term earnings potential.

We expect to sell properties, from time to time, in order to manage leverage levels or to recycle capital into properties that we believe have better long term earnings potential.

We make disposition decisions based on a number of factors including, but not limited to, the following:

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• the existence of alternative sources, uses or needs for capital, including our debt leverage.

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Our Board of Trustees may change our disposition policies without a vote of, or notice to, our shareholders.

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For more information regarding our financing sources and activities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 of this Annual Report on Form 10-K.

Generally, we intend to manage our leverage in a way that may allow us to maintain “investment grade” ratings from nationally recognized rating organizations.

However, we cannot be sure that we will be able to maintain our investment grade ratings in the future.

Generally, we intend to manage our leverage in a way that may allow us to achieve and maintain “investment grade” ratings from nationally recognized rating organizations.

However, we cannot be sure that we will be able to achieve and maintain our investment grade ratings in the future.

Our Board of Trustees may change our financing policies at any time without a vote of, or notice to, our shareholders.

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We have no employees.

Services which would otherwise be provided to us by employees are provided by RMR LLC and by our Managing Trustees and officers.

As of December 31, 2021, RMR LLC had approximately 600 full time employees in its headquarters and regional offices located throughout the United States.

The RMR Group Inc., or RMR Inc., is a holding company and substantially all of its business is conducted by its majority owned subsidiary, RMR LLC.

Services which would otherwise be provided to us by employees are provided by RMR and by our Managing Trustees and officers.

As of December 31, 2022, RMR had approximately 600 full time employees in its headquarters and regional offices located throughout the United States.

The RMR Group Inc., or RMR Inc., is a holding company and substantially all of its business is conducted by its majority owned subsidiary, RMR.

The Chair of our Board of Trustees and one of our Managing Trustees, Adam D.

Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., a managing director and the president and chief executive officer of RMR Inc.

and an officer and employee of RMR LLC.

David Blackman resigned as our President and Chief Executive Officer, effective December 31, 2020, and as a Managing Trustee, effective June 17, 2021.

In replacement of Mr.

Blackman, Christopher J.

Bilotto was appointed as our President and

Chief Operating Officer, effective January 1, 2021, and Jennifer Clark was elected as a Managing Trustee on June 17, 2021.

Bilotto is an officer and employee of RMR LLC, Ms.

Clark is a managing director and an executive officer of RMR Inc.

and an officer and employee of RMR LLC, and each of our other officers is also an officer and employee of RMR LLC.

Our day to day operations are conducted by RMR LLC.

RMR LLC originates and presents investment and divestment opportunities to our Board of Trustees and provides management and administrative services to us.

RMR LLC has a principal place of business at Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458-1634, and its telephone number is (617) 796-8390.

RMR LLC is an alternative asset management company that is focused on commercial real estate and related businesses.

RMR LLC or its subsidiaries also act as a manager to other publicly traded real estate companies, privately held real estate funds and real estate related operating businesses.

As of the date of this Annual Report on Form 10-K, the executive officers of RMR LLC are:

Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., chair of the board of directors, a managing director and the president and chief executive officer of RMR Inc.

and an officer and employee of RMR.

Clark, our other Managing Trustee, also serves as a managing director and an executive officer of RMR Inc.

and as an officer and employee of RMR, and each of our other officers is also an officer and employee of RMR.

Our day to day operations are conducted by RMR.

RMR originates and presents investment and divestment opportunities to our Board of Trustees and provides management and administrative services to us.

RMR has a principal place of business at Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458-1634, and its telephone number is (617) 796-8390.

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RMR is an alternative asset management company that is focused on commercial real estate and related businesses.

RMR or its subsidiaries also act as a manager to other publicly traded real estate companies, privately held real estate funds and real estate related operating businesses.

As of the date of this Annual Report on Form 10-K, the executive officers of RMR are:

Portnoy, President and Chief Executive Officer;

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Our President and Chief Operating Officer, Christopher J.

Bilotto, is a Senior Vice President of RMR LLC.

Bilotto, is a Senior Vice President of RMR.

Our Chief Financial Officer and Treasurer, Matthew C.

Brown, is also a Senior Vice President of RMR LLC.

Other officers of RMR LLC also serve as officers of other companies to which RMR LLC or its subsidiaries provide management services.

Brown, is also a Senior Vice President of RMR.

Other officers of RMR also serve as officers of other companies to which RMR or its subsidiaries provide management services.

Corporate Sustainability.

Since our inception in 2009, we have been guided by ESG principles, and believe corporate sustainability must be a strategic focus alongside our focus on economic performance.

Our sustainability practices, which align with those of our manager, RMR LLC — minimizing our impact on the environment, embracing the communities where we operate and attracting top professionals — are critical elements supporting our long-term success.

We recognize our responsibility to minimize the impact of our business on the environment and seek to preserve natural resources and maximize efficiencies in order to reduce the impact the properties we own have on the planet.

Since our inception in 2009, we have been guided by ESG principles, and believe corporate sustainability must be a strategic focus as part of our focus on operational practices, enhancing our competitive position, development and redevelopment efforts and economic performance.

Our sustainability practices, which align with those of our manager, RMR — minimizing our impact on the environment, embracing the communities where we operate and attracting top professionals — are critical elements supporting our long-term success.

Our environmental sustainability strategies and best practices help to mitigate our properties’ environmental footprint, optimize operational efficiency and enhance our competitiveness in the marketplace.

We seek to obtain certifications that measure progress in environmental sustainability, which helps to benchmark performance and mitigate risk.

We and our manager, RMR LLC, drive value, manage risk and benchmark the performance of our properties by effectively capturing and managing data through real-time energy monitoring, or RTM.

In July 2022, RMR announced its zero emissions goal pursuant to which it has pledged to reduce scope 1 and 2 emissions by 2050 with a 50% reduction commitment by 2030 from a 2019 baseline.

We and our manager, RMR, drive value, manage risk and benchmark the performance of our properties by effectively capturing and managing data through real-time energy monitoring, or RTM.

RTM facilitates advanced data analytics and access to detect faults and inefficiencies in equipment operations faster meanwhile enhancing building system control in a cost-effective and scalable way.

RMR LLC’s RTM program captures 30 of our properties totaling approximately 51% of our annual electricity spend and generated $1.5 million in annual savings.

RMR’s RTM program captures 38 of our properties totaling approximately 56% of our annual electricity spend and generated $1.7 million in cumulative savings to date, of which $0.2 million was generated in 2022.

Our energy performance programs drive down energy consumption and reduce carbon emissions of our properties.

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Our existing business practices are intended to align with the Task Force on Climate-related Financial Disclosures framework across both physical and transition risks and opportunities.

With respect to our development and redevelopment activities, RMR LLC considers how to best incorporate ESG as part of the overall goal of any development or redevelopment project at our properties.

With respect to our development and redevelopment activities, RMR considers how to best incorporate ESG as part of the overall goal of any development or redevelopment project at our properties.

Each potential project’s design phase begins with an evaluation of potential environmental certifications, including Leadership in Energy and Environmental Design, or LEED®, and the WELL Building Standard criteria, among others.

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government has instituted “green lease” policies which include the “Promotion of Energy Efficiency and Use of Renewable Energy” as one of the factors it considers when leasing property.

The Energy Independence and Security Act of 2007 also allows the General Services Administration, or GSA, to give preference to properties for lease that have received an “ENERGY STAR” certification.

The Energy Independence and Security Act of 2007 also allows the General Services Administration to give preference to properties for lease that have received an “ENERGY STAR” certification.

The ENERGY STAR program is a joint program of the U.S.

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For example, lab uses, medical office properties and properties less than 50% occupied cannot be ENERGY STAR certified.

As of February 15, 2022, we have submitted 47 of our properties containing 7.4 million rentable square feet (32.4% and 37.0% of our eligible properties and eligible rentable square feet, respectively) for consideration for ENERGY STAR certification.

Of the 47 properties submitted for consideration, 43 have been awarded and none have been denied.

In May 2022, we were recognized as an Energy Star Partner of the Year for the fifth consecutive year and a Sustained Excellence honoree for the third consecutive year.

As of December 31, 2022, 43 of our properties containing 6.6 million rentable square feet (28.5% and 33.6% of our eligible properties and eligible rentable square feet, respectively) are ENERGY STAR certified.

Government’s “green lease” policies also permit government tenants to require LEED® designation in selecting new premises or renewing leases at existing premises.

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Properties that reach specified levels of sustainability may receive a LEED® designation.

As of December 31, 2021, 39 of our properties containing 6.2 million rentable square feet (21.9% and 26.8% of our total properties and total rentable square feet, respectively) were LEED® designated.

As of December 31, 2022, 37 of our

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properties containing 6.1 million rentable square feet (23.1% and 28.9% of our total properties and total rentable square feet, respectively) were LEED® designated.

In an effort to reduce the effects of any increased energy costs in the future, we continuously study ways to improve the energy efficiency at all of our properties.

Our manager, RMR LLC, is a member of the “ENERGY STAR” partner program, and a member of the U.S.

Our manager, RMR, is a member of the “ENERGY STAR” partner program, and a member of the U.S.

Green Building Council.

We believe our effort to obtain additional ENERGY STAR labels and/or LEED® designations and manage our properties in a sustainable manner benefits our business while also bettering the environment.

Additionally, RMR LLC releases an annual Sustainability Report, which summarizes the ESG initiatives RMR LLC and its clients, including OPI, employ.

RMR LLC’s Sustainability Report may be accessed on RMR Inc.’s website at www.rmrgroup.com/corporate-sustainability/default.aspx.

In June 2022, we were selected by the U.S.

Department of Energy’s Better Buildings Alliance and Institute for Market Transformation as a Gold Level Green Lease Leader, which highlights our commitment to environmental stewardship.

We believe our efforts to obtain additional ENERGY STAR labels, LEED® and/or other designations and managing our properties in a sustainable manner benefits our business while also bettering the environment.

Additionally, RMR releases an annual Sustainability Report, which summarizes the ESG initiatives RMR and its clients, including OPI, employ.

RMR’s Sustainability Report may be accessed on RMR Inc.’s website at www.rmrgroup.com/corporate-sustainability/default.aspx.

The information on or accessible through RMR Inc.’s website is not incorporated by reference into this Annual Report on Form 10-K.

For more information, see “Risk Factors—Risks Related to Our Business—Third party expectations relating to ESG factors may impose additional costs and expose us to new risks” included in Part I, Item 1A of this Annual Report on Form 10-K.

For more information, see “Risk Factors—Risks Related to Our Business—ESG initiatives, requirements and market expectations may impose additional costs and expose us to new risks” included in Part I, Item 1A of this Annual Report on Form 10-K.

Environmental Matters.

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Board Diversity.

As of December 31, 2021, our Board of Trustees was comprised of eight Trustees, of which six were independent trustees and four, or 50%, were female.

As of December 31, 2022, our Board of Trustees was comprised of nine Trustees, of which seven were independent trustees, four, or approximately 44%, were female and one, or approximately 11%, was a member of under represented communities.

Investing in and operating real estate properties is a highly competitive business.

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Some of our competitors may have greater financial and other resources, or lower costs of capital than us.

Also, we compete for investments based on a number of factors, including purchase prices, closing terms, underwriting criteria and our and RMR LLC’s reputations.

Also, we compete for investments based on a number of factors, including purchase prices, closing terms, underwriting criteria and our and RMR’s reputations.

Our ability to successfully compete is also materially impacted by the availability and cost of capital to us.

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Some of our leases allow government and non-government tenants to vacate the leased premises before the stated expirations of their leases with little or no liability, or with penalty, by exercising early termination rights.

For additional information about tenants’ rights to terminate leases early, see “Risk Factors—Risks Related to Our Business—Some tenants have the right to terminate their leases prior to their lease expiration date” included in Part I, Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Property Operations” included in Part II, Item 7 of this Annual Report on Form 10-K.

For additional information about our tenants’ rights to terminate leases early, see “Risk Factors—Risks Related to Our Business—Some tenants have the right to terminate their leases prior to their lease expiration date” included in Part I, Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Property Operations” included in Part II, Item 7 of this Annual Report on Form 10-K.

Other Matters.

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direct ownership of real estate properties.

For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included

in Part II, Item 7 of this Annual Report on Form 10-K and our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 and our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

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Internet Website.

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Accordingly, investors should monitor our website, in addition to following our press releases, SEC filings and public conference calls and webcasts.

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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

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• a “qualified foreign pension fund” (as defined in Section 897(l)(2) of the IRC) or any entity wholly owned by one or more qualified foreign pension funds;

shareholder that is a passive foreign investment company or controlled foreign corporation;

• a person subject to special tax accounting rules as a result of their use of applicable financial statements (within the meaning of Section 451(b)(3) of the IRC);

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If new laws or regulations are enacted which impact us directly or indirectly, we may change our intentions or beliefs.

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Your federal income tax consequences generally will differ depending on whether or not you are a “U.S.

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Distributions to our shareholders generally are included in our shareholders’ income as dividends to the extent of our available current or accumulated earnings and profits.

Our dividends are not generally entitled to the preferential tax rates on qualified dividend income, but a portion of our dividends may be treated as capital gain dividends or as qualified dividend

income, all as explained below.

Our dividends are not generally entitled to the preferential tax rates on qualified dividend income, but a portion of our dividends may be treated as capital gain dividends or as qualified dividend income, all as explained below.

In addition, for taxable years beginning before 2026 and pursuant to the deduction-without-outlay mechanism of Section 199A of the IRC, our noncorporate U.S.

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The opinions of our counsel are based upon the law as it exists today, but the law may change in the future, possibly with retroactive effect.

Given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our circumstances, neither Sullivan & Worcester LLP nor we can be sure that we will qualify as or be taxed as a REIT for any particular year.

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LLP nor we can be sure that we will qualify as or be taxed as a REIT for any particular year.

Any opinion of Sullivan & Worcester LLP as to our qualification or taxation as a REIT will be expressed as of the date issued.

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While we believe that we have satisfied and will satisfy these tests, our counsel does not review compliance with these tests on a continuing basis.

If we fail to qualify for taxation as a REIT in any year, then we will be subject to federal income taxation as if we were a corporation taxed under subchapter C of the IRC, or a C corporation, and our shareholders will be taxed like shareholders of regular C corporations, meaning that federal income tax generally will be applied at both the corporate and shareholder levels.

If we fail to qualify for taxation as a REIT in any year, then we will be subject to federal income taxation as if we were a corporation taxed under subchapter C of the IRC, or a C corporation, and our shareholders will be taxed like shareholders of a regular C corporation , meaning that federal income tax generally will be applied at both the corporate and shareholder levels.

In this event, we could be subject to significant tax liabilities, and the amount of cash available for distribution to our shareholders could be reduced or eliminated.

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• We will be taxed at regular corporate income tax rates on any undistributed “real estate investment trust taxable income,” determined by including our undistributed ordinary income and net capital gains, if any.

We may elect to retain and pay inc ome tax on our net capital gain.

In addition, if we so elect by making a timely designation to our shareholders, a shareholder would be taxed on its proportionate share of our undistributed capital gain and would generally be expected to receive a credit or refund for its proportionate share of the tax we paid.

• If we have net income from the disposition of “foreclosure property,” as described in Section 856(e) of the IRC, that is held primarily for sale to customers in the ordinary course of a trade or business or other nonqualifying income from foreclosure property, we will be subject to tax on this income at the highest regular corporate income tax rate.

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• If we fail to satisfy the 75% gross income test or the 95% gross income test discussed below, due to reasonable cause and not due to willful neglect, but nonetheless maintain our qualification for taxation as a REIT because of specified cure provisions, we will be subject to tax at a 100% rate on the greater of the amount by which we fail the 75% gross income test or the 95% gross income test, with adjustments, multiplied by a fraction intended to reflect our profitability for the taxable year.

a REIT because of specified cure provisions, we will be subject to a tax equal to the greater of $50,000 or the highest regular corporate income tax rate multiplied by the net income generated by the nonqualifying assets that caused us to fail the test.

• If we fail to satisfy any of the REIT asset tests described below (other than a de minimis failure of the 5% or 10% asset tests) due to reasonable cause and not due to willful neglect, but nonetheless maintain our qualification for taxation as a REIT because of specified cure provisions, we will be subject to a tax equal to the greater of $50,000 or the highest regular corporate income tax rate multiplied by the net income generated by the nonqualifying assets that caused us to fail the test.

• If we fail to satisfy any provision of the IRC that would result in our failure to qualify for taxation as a REIT (other than violations of the REIT gross income tests or violations of the REIT asset tests described below) due to reasonable cause and not due to willful neglect, we may retain our qualification for taxation as a REIT but will be subject to a penalty of $50,000 for each failure.

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• If we acquire a REIT asset where our adjusted tax basis in the asset is determined by reference to the adjusted tax basis of the asset in the hands of a C corporation, under specified circumstances we may be subject to federal income taxation on all or part of the built-in gain (calculated as of the date the property ceased being owned by the C corporation) on such asset.

We generally do not expect to sell assets if doing so would result in the imposition of a material built-in gains tax liability;

We generally do not expect to sell assets if doing so would result in the imposition of a

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material built-in gains tax liability;

but if and when we do sell assets that may have associated built-in gains tax exposure, then we expect to make appropriate provision for the associated tax liabilities on our financial statements.

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• Our subsidiaries that are C corporations, including our “taxable REIT subsidiaries”, as defined in Section 856(l) of the IRC, or TRSs, generally will be required to pay federal corporate income tax on their earnings, and a 100% tax may be imposed on any transaction between us and one of our TRSs that does not reflect arm’s length terms.

• We have acquired entities by merger that formerly qualified for taxation as REITs.

If it is determined that one of these entities failed to satisfy one or more of the REIT tests described below before their respective mergers into us, the IRS might allow us, as such entity’s successor, the same opportunity for relief as though we were the remediating REIT.

In such case, such entity would be deemed to have retained its qualification for taxation as a REIT and the relevant penalties or sanctions for remediation would fall upon us in a manner comparable to the above.

If we fail to qualify for taxation as a REIT in any year, then we will be subject to federal income tax in the same manner as a regular C corporation.

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Accordingly, we have complied and will continue to comply with these regulations, including by requesting annually from holders of significant percentages of our shares information regarding the ownership of our shares.

Under our declaration of trust, our shareholders are required to respond to these requests for information.

Under our declaration of trust, our shareholders are required to respond to

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these requests for information.

A shareholder that fails or refuses to comply with the request is required by Treasury regulations to submit a statement with its federal income tax return disclosing its actual ownership of our shares and other information.

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In addition, for these purposes, the character of the assets and items of gross income of the partnership generally remains the same in the hands of the REIT.

contrast, for purposes of the distribution requirements discussed below, we must take into account as a partner our share of the partnership’s income as determined under the general federal income tax rules governing partners and partnerships under Subchapter K of the IRC.

In contrast, for purposes of the distribution requirements discussed below, we must take into account as a partner our share of the partnership’s income as determined under the general federal income tax rules governing partners and partnerships under Subchapter K of the IRC.

Subsidiary REITs.

We have invested and may invest in real estate through one or more entities that are intended to qualify for taxation as REITs.

We have in the past invested in real estate through entities that were intended to qualify for taxation as REITs, and we may in the future form or acquire additional entities that are intended to qualify for taxation as REITs.

When a subsidiary qualifies for taxation as a REIT separate and apart from its REIT parent, the subsidiary’s shares are qualifying real estate assets for purposes of the REIT parent’s 75% asset test described below.

However, failure of the subsidiary to separately satisfy the various REIT qualification requirements described in this summary or that are otherwise applicable (and failure to qualify for the applicable relief provisions) would generally result in (a) the subsidiary being subject to regular U.S.

corporate income tax, as described above, and (b) the REIT parent’s ownership in the subsidiary (i) ceasing to be qualifying real estate assets for purposes of the 75% asset test and (ii) becoming subject to the 5% asset test, the 10% vote test and the 10% value test generally applicable to a REIT’s ownership in corporations other than REITs and TRSs.

In such a situation, the REIT parent’s own REIT qualification and taxation could be jeopardized on account of the subsidiary’s failure cascading up to the REIT parent, all as described below under the heading “—Asset Tests”.

corporate income tax, as described above, and (b) the REIT parent’s ownership in the subsidiary (i) ceasing to be qualifying real estate assets for purposes of the 75% asset test and (ii) becoming subject to the 5% asset test, the 10% vote test and the 10% value test , each as described below, generally applicable to a REIT’s ownership in corporations other than REITs and TRSs.

In such a situation, the REIT parent’s own qualification and taxation as a REIT could be jeopardized on account of the subsidiary’s failure cascading up to the REIT parent, all as described below under the heading “—Asset Tests”.

We have made and expect to make protective TRS elections with respect to our subsidiary REITs and may implement other protective arrangements intended to avoid a cascading REIT failure if any of our intended subsidiary REITs were not to qualify for taxation as a REIT, but we cannot be sure that such protective elections or other arrangements will be effective to avoid or mitigate the resulting adverse consequences to us.

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As a REIT, we are permitted to own any or all of the securities of a TRS, provided that no more than 20% of the total value of our assets, at the close of each quarter, is comprised of our investments in the stock or other securities of our TRSs.

Very generally, a TRS is a subsidiary corporation other than a REIT in which a REIT directly or indirectly holds stock and that has made a joint election with such REIT to be treated as a TRS.

Very generally, a TRS is a subsidiary corporation other than a REIT in which a REIT directly or

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indirectly holds stock and that has made a joint election with such REIT to be treated as a TRS.

A TRS is taxed as a regular C corporation, separate and apart from any affiliated REIT.

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First, at least 75% of our gross income for each taxable year must be derived from investments relating to real property, including “rents from real property” within the meaning of Section 856(d) of the IRC, interest and gain from mortgages on real property or on interests in real property, income and gain from foreclosure property, gain from the sale or other disposition of real property (including specified ancillary personal property treated as real property under the IRC), or dividends on and gain from the sale or disposition of shares in other REITs (but excluding in all cases any gains subject to the 100% tax on prohibited transactions).

accrued within one year of our receipt of the new capital, is generally also qualifying income under the 75% gross income test.

When we receive new capital in exchange for our shares or in a public offering of our five-year or longer debt instruments, income attributable to the temporary investment of this new capital in stock or a debt instrument, if received or accrued within one year of our receipt of the new capital, is generally also qualifying income under the 75% gross income test.

Second, at least 95% of our gross income for each taxable year must consist of income that is qualifying income for purposes of the 75% gross income test, other types of interest and dividends, gain from the sale or disposition of stock or securities, or any combination of these.

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Our declaration of trust generally disallows transfers or purported acquisitions, directly or by attribution, of our shares to the extent necessary to maintain our qualification for taxation as a REIT under the IRC.

Nevertheless, we cannot be sure that these restrictions will be effective to prevent our qualification for taxation as a REIT from being jeopardized under the 10% affiliated tenant rule.

Nevertheless, we cannot be sure that these restrictions will be

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effective to prevent our qualification for taxation as a REIT from being jeopardized under the 10% affiliated tenant rule.

Furthermore, we cannot be sure that we will be able to monitor and enforce these restrictions, nor will our shareholders necessarily be aware of ownership of our shares attributed to them under the IRC’s attribution rules.

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• for which the REIT makes a proper election to treat the property as foreclosure property.

Any gain that a REIT recognizes on the sale of foreclosure property held as inventory or primarily for sale to customers, plus any income it receives from foreclosure property that would not otherwise qualify under the 75% gross income test in the absence of foreclosure property treatment, reduced by expenses directly connected with the production of those items of income, would be subject to income tax at the highest regular corporate income tax rate under the foreclosure property income tax rules of Section 857(b)(4) of the IRC.

Any gain that a REIT recognizes on the sale of foreclosure property held as inventory or primarily for sale to customers, plus any income it receives from foreclosure property that would not otherwise qualify under the 75% gross income test in the absence of foreclosure property treatment, reduced by expenses directly connected with the production of those items of income, would be subject to federal income tax at the highest regular corporate income tax rate under the foreclosure property income tax rules of Section 857(b)(4) of the IRC.

Thus, if a REIT should lease foreclosure property in exchange for rent that qualifies as “rents from real property” as described above, then that rental income is not subject to the foreclosure property income tax.

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Property generally ceases to be foreclosure property at the end of the third taxable year following the taxable year in which the REIT acquired the property, or longer if an extension is obtained from the IRS.

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(a) own our assets for investment (including through joint ventures) with a view to long-term income production and capital appreciation;

(b) engage in the business of developing, owning, leasing and managing our existing properties and acquiring,

developing, owning, leasing and managing new properties;

(b) engage in the business of developing, owning, leasing and managing our existing properties and acquiring, developing, owning, leasing and managing new properties;

and (c) make occasional dispositions of our assets consistent with our long-term investment objectives.

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At the close of each calendar quarter of each taxable year, we must also satisfy the following asset percentage tests in order to qualify for taxation as a REIT for federal income tax purposes:

• At least 75% of the value of our total assets must consist of “real estate assets,” defined as real property (including interests in real property and interests in mortgages on real property or on interests in real property), ancillary personal property to the extent that rents attributable to such personal property are treated as rents from real property in accordance with the rules described above, cash and cash items, shares in other REITs, debt instruments issued by “publicly offered REITs” as defined in Section 562(c)(2) of the IRC, government securities and temporary investments of new capital (that is, any stock or debt instrument that we hold that is attributable to any amount received by us (a) in exchange for our stock or (b) in a public offering of our five-year or longer debt instruments, but in each case only for the one-year period commencing with our receipt of the new capital).

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“publicly offered REITs” as defined in Section 562(c)(2) of the IRC, government securities and temporary investments of new capital (that is, any stock or debt instrument that we hold that is attributable to any amount received by us (a) in exchange for our shares or (b) in a public offering of our five-year or longer debt instruments, but in each case only for the one-year period commencing with our receipt of the new capital).

• Not more than 25% of the value of our total assets may be represented by securities other than those securities that count favorably toward the preceding 75% asset test.

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In addition, if we fail the 5% asset test, the 10% vote test or the 10% value test at the close of any quarter and we do not cure such failure within thirty days after the close of that quarter, that failure will nevertheless be excused if (a) the failure is de minimis and (b) within six months after the last day of the quarter in which we identify the failure, we either dispose of the assets causing the failure or otherwise satisfy the 5% asset test, the 10% vote test and the 10% value test.

For purposes of this relief provision, the failure will be de minimis if the value of the assets causing the failure does not exceed $10,000,000.

imposed on the net income generated by the assets causing the failure during the period of the failure, and (d) within six months after the last day of the quarter in which we identify the failure, we either dispose of the assets causing the failure or otherwise satisfy all of the REIT asset tests.

For purposes of this relief provision, the failure will be de minimis if the value of the assets causing the failure does not exceed the lesser of (a) 1% of the total value of our assets at the end of the relevant quarter or (b) $10,000,000 .

If our failure is not de minimis, or if any of the other REIT asset tests have been violated, we may nevertheless qualify for taxation as a REIT if (a) we provide the IRS with a description of each asset causing the failure, (b) the failure was due to reasonable cause and not willful neglect, (c) we pay a tax equal to the greater of (1) $50,000 or (2) the highest regular corporate income tax rate imposed on the net income generated by the assets causing the failure during the period of the failure, and (d) within six months after the last day of the quarter in which we identify the failure, we either dispose of the assets causing the failure or otherwise satisfy all of the REIT asset tests.

These relief provisions may apply to a failure of the applicable asset tests even if the failure first occurred in a year prior to the taxable year in which the failure was discovered.

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Based on the discussion above, we believe that we have satisfied, and will continue to satisfy, the REIT asset tests outlined above on a continuing basis beginning with our first taxable year as a REIT.

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Annual Distribution Requirements .

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In addition, we will be subject to a 4% nondeductible excise tax to the extent we fail within a calendar year to make required distributions to our shareholders of 85% of our ordinary income and 95% of our capital gain net income plus the excess, if any, of the “grossed up required distribution” for the preceding calendar year over the amount treated as distributed for that preceding calendar year.

For this purpose, the term “grossed up required distribution” for any calendar year is the sum of our taxable income for the calendar year without regard to the deduction for dividends paid and all amounts from earlier years that are not treated as having been distributed

under the provision.

We will be treated as having sufficient earnings and profits to treat as a dividend any distribution by us up to the amount required to be distributed in order to avoid imposition of the 4% excise tax.

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In addition to the other distribution requirements above, to preserve our qualification for taxation as a REIT we are required to timely distribute all C corporation earnings and profits that we inherit from acquired corporations, as described below.

We may elect to retain, rather than distribute, some or all of our net capital gain and pay income tax on such gain.

In addition, if we so elect by making a timely designation to our shareholders, our shareholders would include their proportionate share of such undistributed capital gain in their taxable income, and they would receive a corresponding credit for their share of the federal corporate income tax that we pay thereon.

Our shareholders would then increase the adjusted tax basis of their shares

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by the difference between (a) the amount of capital gain dividends that we designated and that they included in their taxable income, and (b) the tax that we paid on their behalf with respect to that capital gain.

Acquisitions of C Corporations

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Shareholders.”

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Section 302 of the IRC treats a redemption of our shares for cash only as a distribution under Section 301 of the IRC, and hence taxable as a dividend to the extent of our available current or accumulated earnings and profits, unless the redemption satisfies one of the tests set forth in Section 302(b) of the IRC enabling the redemption to be treated as a sale or exchange of the shares.

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shareholders that meet specified holding period requirements for taxable years before 2026).

Distributions made out of our current or accumulated earnings and profits that we properly designate as capital gain dividends generally will be taxed as long-term capital gains, as

discussed below, to the extent they do not exceed our actual net capital gain for the taxable year.

Distributions made out of our current or accumulated earnings and profits that we properly designate as capital gain dividends generally will be taxed as long-term capital gains, as discussed below, to the extent they do not exceed our actual net capital gain for the taxable year.

However, corporate shareholders may be required to treat up to 20% of any capital gain dividend as ordinary income under Section 291 of the IRC.

In addition, we may elect to retain net capital gain income and treat it as constructively distributed.

In that case:

(1) we will be taxed at regular corporate capital gains tax rates on retained amounts;

If for any taxable year we designate capital gain dividends for our shareholders, then a portion of the capital gain dividends we designate will be allocated to the holders of a particular class of shares on a percentage basis equal to the ratio of the amount of the total dividends paid or made available for the year to the holders of that class of shares to the total dividends paid or made available for the year to holders of all outstanding classes of our shares.

We will similarly designate the portion of any dividend that is to be taxed to noncorporate U.S.

shareholders at preferential maximum rates (including any qualified dividend income and any capital gains attributable to real estate depreciation recapture that are subject to a maximum 25% federal income tax rate) so that the designations will be proportionate among all outstanding classes of our shares.

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We may elect to retain and pay income taxes on some or all of our net capital gain.

In addition, if we so elect by making a timely designation to our shareholders:

(1) each of our U.S.

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(4) both we and our corporate shareholders will make commensurate adjustments in our respective earnings and profits for federal income tax purposes.

If we elect to retain our net capital gains in this fashion, we will notify our U.S.

shareholders of the relevant tax information within sixty days after the close of the affected taxable year.

We will similarly designate the portion of any dividend that is to be taxed to noncorporate U.S.

Distributions in excess of our current or accumulated earnings and profits will not be taxable to a U.S.

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These Treasury regulations are written quite broadly, and apply to many routine and simple transactions.

corporation partners or (b) $2 million in any single year or $4 million in a prescribed combination of taxable years in the case of our shares held by any other partnership or an S corporation, trust or individual, including losses that flow through pass through entities to individuals.

A reportable transaction currently includes, among other things, a sale or exchange of our shares resulting in a tax loss in excess of (a) $10 million in any single year or $20 million in a prescribed combination of taxable years in the case of our shares held by a C corporation or by a partnership with only C corporation partners or (b) $2 million in any single year or $4 million in a prescribed combination of taxable years in the case of our shares held by any other partnership or an S corporation, trust or individual, including losses that flow through pass through entities to individuals.

A taxpayer discloses a reportable transaction by filing IRS Form 8886 with its federal income tax return and, in the first year of filing, a copy of Form 8886 must be sent to the IRS’s Office of Tax Shelter Analysis.

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however, distributions treated as a nontaxable return of the shareholder’s basis will not enter into the computation of net investment income.

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Taxation of Tax-Exempt U.S.

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shareholder’s adjusted basis in our shares, the distributions will give rise to U.S.

federal income tax liability only in the unlikely event that the

federal income tax liability only in the unlikely event that the non-U.S.

shareholder would otherwise be subject to tax on any gain from the sale or exchange of these shares, as discussed below under the heading “—Dispositions of Our Shares.” A non-U.S.

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national securities exchange, capital gain dividends that we declare and pay to a non-U.S.

shareholder on those shares, as well as dividends to a non-U.S.

shareholder on those shares, as well as dividends to such a non-U.S.

shareholder on those shares attributable to our sale or exchange of “United States real property interests” within the meaning of Section 897 of the IRC, or USRPIs, will not be subject to withholding as though those amounts were effectively connected with a U.S.

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Under some treaties, however, rates below 30% that are applicable to ordinary income dividends from U.S.

corporations may not apply to ordinary income dividends from a REIT or may apply only if the REIT meets specified additional conditions.

corporations may not apply to ordinary income dividends from a

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REIT or may apply only if the REIT meets specified additional conditions.

shareholder must generally use an applicable IRS Form W-8, or substantially similar form, to claim tax treaty benefits.

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shareholder, may owe the up to 30% branch profits tax under Section 884 of the IRC (or lower applicable tax treaty rate) in respect of these amounts.

Although the law is not entirely clear on the matter, it appears that amounts designated by us as undistributed capital gain in respect of our shares that are held by non-U.S.

shareholders generally should be treated in the same manner as actual distributions by us of capital gain dividends.

Under this approach, the non-U.S.

shareholder would be able to offset as a credit against its resulting U.S.

federal income tax liability its proportionate share of the tax paid by us on the undistributed capital gain treated as distributed to the non-U.S.

shareholder, and receive from the IRS a refund to the extent its proportionate share of the tax paid by us were to exceed the non-U.S.

shareholder’s actual U.S.

federal income tax liability on such deemed distribution.

If we were to designate any portion of our net capital gain as undistributed capital gain, a non-U.S.

shareholder should consult its tax advisors regarding taxation of such undistributed capital gain.

Dispositions of Our Shares .

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If a shareholder is subject to backup or other U.S.

federal income

tax withholding, then the applicable withholding agent will be required to withhold the appropriate amount with respect to a deemed or constructive distribution or a distribution in kind even though there is insufficient cash from which to satisfy the withholding obligation.

federal income tax withholding, then the applicable withholding agent will be required to withhold the appropriate amount with respect to a deemed or constructive distribution or a distribution in kind even though there is insufficient cash from which to satisfy the withholding obligation.

To satisfy this withholding obligation, the applicable withholding agent may collect the amount of U.S.

federal income tax required to be withheld by reducing to cash for remittance to the IRS a sufficient portion of the property that the shareholder would otherwise receive or own, and the shareholder may bear brokerage or other costs for this withholding procedure.

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Amounts withheld under backup withholding are generally not an additional tax and may be refunded by the IRS or credited against the shareholder’s federal income tax liability, provided that such shareholder timely files for a refund or credit with the IRS.

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No prediction can be made as to the likelihood of passage of new tax legislation or other provisions, or the direct or indirect effect on us and our shareholders.

Revisions to tax laws and interpretations of these laws could adversely affect our ability to qualify and be taxed as a REIT, as well as the tax or other consequences of an investment in our shares.

Revisions to tax laws and interpretations of these laws could adversely affect our ability to qualify and be taxed as a REIT, as well as the tax or other

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consequences of an investment in our shares.

We and our shareholders may also be subject to taxation by state, local or other jurisdictions, including those in which we or our shareholders transact business or reside.

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A non-exempt prohibited transaction, in addition to imposing potential personal liability upon ERISA Plan fiduciaries, may also result in the imposition of an excise tax under the IRC or a penalty under ERISA upon the disqualified person or party in interest.

If the disqualified person who engages in the transaction is the individual on behalf of whom an IRA, Roth IRA or other tax-favored account is maintained (or his beneficiary), the IRA, Roth IRA or other tax-favored account may lose its tax-exempt status and its assets may be deemed to

have been distributed to the individual in a taxable distribution on account of the non-exempt prohibited transaction, but no excise tax will be imposed.

If the disqualified person who engages in the transaction is the individual on behalf of whom an IRA, Roth IRA or other tax-favored account is maintained (or their beneficiary), the IRA, Roth IRA or other tax-favored account may lose its tax-exempt status and its assets may be deemed to have been distributed to the individual in a taxable distribution on account of the non-exempt prohibited transaction, but no excise tax will be imposed.

Fiduciaries considering an investment in our securities should consult their own legal advisors as to whether the ownership of our securities involves a non-exempt prohibited transaction.

“Plan Assets” Considerations

Department of Labor has issued a regulation defining “plan assets.” The regulation, as subsequently modified by ERISA, generally provides that when an ERISA Plan or a Non-ERISA Plan otherwise subject to Title I of ERISA and/or Section 4975 of the IRC acquires an interest in an entity that is neither a “publicly offered security” nor a security issued by an investment company registered under the Investment Company Act of 1940, as amended, the assets of the ERISA Plan or Non-ERISA Plan include both the equity interest and an undivided interest in each of the underlying assets of the entity, unless it is established either that the entity is an operating company or that equity participation in the entity by benefit plan investors is not significant.

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investment company registered under the Investment Company Act of 1940, as amended, the assets of the ERISA Plan or Non-ERISA Plan include both the equity interest and an undivided interest in each of the underlying assets of the entity, unless it is established either that the entity is an operating company or that equity participation in the entity by benefit plan investors is not significant.

We are not an investment company registered under the Investment Company Act of 1940, as amended.

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Assuming that each class of our shares will be “widely held” and that no other facts and circumstances exist that restrict transferability of these shares, our counsel, Sullivan & Worcester LLP, is of the opinion that our shares will not fail to be “freely transferable” for purposes of the regulation due to the restrictions on transfer of our shares in our declaration of trust and that under the regulation each class of our currently outstanding shares is publicly offered and our assets will not be deemed to be “plan assets” of any ERISA Plan or Non-ERISA Plan that acquires our shares in a public offering.

This opinion is

conditioned upon certain assumptions and representations, as discussed above under the heading “Material United States Federal Income Tax Considerations—Taxation as a REIT.”

This opinion is conditioned upon certain assumptions and representations, as discussed above under the heading “Material United States Federal Income Tax Considerations—Taxation as a REIT.”

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business