TRANSACTIONS WITH AFFILIATES AND AFFILIATED ENTITIES |
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Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Transactions With Affiliates And Affiliated Entity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| TRANSACTIONS WITH AFFILIATES AND AFFILIATED ENTITIES |
TRANSACTIONS WITH AFFILIATES AND AFFILIATED ENTITIES
Management Agreement
Drive Shack Inc. is party to a Management Agreement with FIG, LLC, its Manager and an affiliate of Fortress, which provides for automatically renewing one-year terms subject to certain termination rights. The Manager’s performance is reviewed annually and the Management Agreement may be terminated by Drive Shack Inc. by payment of a termination fee, as defined in the Management Agreement, equal to the amount of management fees earned by the Manager during the 12 consecutive calendar months immediately preceding the termination, upon the affirmative vote of at least two-thirds of the independent directors, or by a majority vote of the holders of common stock. Pursuant to the Management Agreement, the Manager provides for a management team and other professionals who are responsible for implementing our business strategy, subject to the supervision of our board of directors. Our Manager is responsible for, among other things, (i) setting investment criteria in accordance with broad investment guidelines adopted by our board of directors, (ii) sourcing, analyzing and executing acquisitions, (iii) providing financial and accounting management services and (iv) performing other duties as specified in the Management Agreement. For performing these services, Drive Shack Inc. pays the Manager an annual management fee equal to 1.5% of the gross equity of Drive Shack Inc., as defined, including adjustments for return of capital dividends.
The Management Agreement provides that Drive Shack Inc. will reimburse the Manager for various expenses incurred by the Manager or its officers, employees and agents on Drive Shack Inc.’s behalf, including costs of legal, accounting, tax, auditing, administrative and other similar services rendered for Drive Shack Inc. by providers retained by the Manager or, if provided by the Manager’s employees, in amounts which are no greater than those which would be payable to outside professionals or consultants engaged to perform such services pursuant to agreements negotiated on an arm’s-length basis. In addition to expense reimbursements for expenses incurred by the Manager, Drive Shack Inc. is responsible for reimbursing the Manager for certain expenses incurred by Drive Shack Inc. that are initially paid by the Manager on behalf of Drive Shack Inc.
To provide an incentive for the Manager to enhance the value of the common stock, the Manager is entitled to receive an incentive return (the “Incentive Compensation’’) on a cumulative, but not compounding, basis in an amount equal to the product of (A) 25% of the dollar amount by which (1) (a) the Funds from Operations (defined as the net income applicable to common stockholders before Incentive Compensation, excluding extraordinary items, plus depreciation of operating real estate and after adjustments for unconsolidated subsidiaries, if any) of Drive Shack Inc. per share of common stock (based on the weighted average number of shares of common stock outstanding) plus (b) gains (or losses) from debt restructuring and from sales of property and other assets per share of common stock (based on the weighted average number of shares of common stock outstanding), exceed (2) an amount equal to (a) the weighted average of the price per share of common stock in the initial public offering (“IPO”) and the value attributed to the net assets transferred to Drive Shack Inc. by its predecessor, and in any subsequent offerings by Drive Shack Inc. (adjusted for prior return of capital dividends or capital distributions) multiplied by (b) a simple interest rate of 10% per annum (divided by four to adjust for quarterly calculations) multiplied by (B) the weighted average number of shares of common stock outstanding.
At December 31, 2016, Fortress, through its affiliates, and principals of Fortress, owned 4.1 million shares of Drive Shack Inc.’s common stock and Fortress, through its affiliates, had options relating to an additional 5.1 million shares of Drive Shack Inc.’s common stock (Note 12).
At December 31, 2016 and 2015, due to affiliates was comprised of $0.9 million and $0.9 million, respectively, of management fees and expense reimbursements payable to the Manager.
Other Affiliated Entities
In April 2006, Drive Shack Inc. securitized Subprime Portfolio I and, through Securitization Trust 2006, entered into a servicing agreement with a subprime home equity mortgage lender (the “Subprime Servicer”) to service this portfolio. In July 2006, private equity funds managed by an affiliate of Drive Shack Inc.’s Manager completed the acquisition of the Subprime Servicer. As compensation under the servicing agreement, the Subprime Servicer receives, on a monthly basis, a net servicing fee equal to 0.5% per annum on the unpaid principal balance of the portfolio. In March 2007, through Securitization Trust 2007, Drive Shack Inc. entered into a servicing agreement with the Subprime Servicer to service Subprime Portfolio II under substantially the same terms. At December 31, 2016, the outstanding unpaid principal balances of Subprime Portfolios I and II were approximately $237.6 million and $349.8 million, respectively.
In April 2010, Drive Shack Inc., through two of its CDOs, made a cash investment of $75.0 million in the resorts-related loan to a portfolio company of a private equity fund managed by an affiliate of Drive Shack Inc.’s Manager. Drive Shack Inc.’s chairman is a director of and has an indirect ownership interest in the borrower. This investment improved the applicable CDOs’ results under some of their respective tests, and is expected to yield approximately 22.5%. The maturity of the resorts-related loan has been extended to June 2019. Interest on the loan will be accrued and deferred until maturity.
In September 2016, Drive Shack Inc. received a $109.9 million pay down on the loan. As of December 31, 2016, Drive Shack Inc. held on its balance sheet total investments of $61.0 million face amount of loans issued by affiliates of the Manager. Drive Shack Inc. earned approximately $29.0 million, $25.8 million and $20.0 million of interest on investments issued by affiliates of the Manager for the years ended December 31, 2016, 2015 and 2014, respectively.
In each instance described above, affiliates of Drive Shack Inc.’s Manager have an investment in the applicable affiliated fund and receive from the fund, in addition to management fees, incentive compensation if the fund’s aggregate investment returns exceed certain thresholds.
A principal of the Manager owned or leased aircraft that Drive Shack Inc. chartered from a third-party aircraft operator for business purposes in the course of operations. Drive Shack Inc. paid the aircraft operator market rates for the charters. These amounts totaled $0.1 million and less than $0.1 million for the years ended December 31, 2016 and 2015, respectively.
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