TRANSACTIONS WITH AFFILIATES AND AFFILIATED ENTITIES
|9 Months Ended|
Sep. 30, 2017
|Transactions With Affiliates And Affiliated Entity [Abstract]|
|TRANSACTIONS WITH AFFILIATES AND AFFILIATED ENTITIES||
TRANSACTIONS WITH AFFILIATES AND AFFILIATED ENTITIES
The Company is party to a Management Agreement with FIG LLC, its Manager and an affiliate of Fortress Investment Group LLC (“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 the Company 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, the Company pays the Manager an annual management fee equal to 1.5% of the gross equity of the Company, as defined, including adjustments for return of capital dividends.
The Management Agreement provides that the Company will reimburse the Manager for various expenses incurred by the Manager or its officers, employees and agents on the Company’s behalf, including costs of legal, accounting, tax, auditing, administrative and other similar services rendered for the Company 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, the Company is responsible for reimbursing the Manager for certain expenses incurred by the Company that are initially paid by the Manager on behalf of the Company.
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 the Company 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 the Company by its predecessor, and in any subsequent offerings by the Company (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 September 30, 2017, Fortress, through its affiliates, and principals of Fortress, owned 5.1 million shares of the Company’s common stock and Fortress, through its affiliates, had options relating to an additional 3.9 million shares of the Company’s common stock (Note 11).
At both September 30, 2017 and December 31, 2016, due to affiliates was comprised of $0.9 million in management fees and expense reimbursements payable to the Manager.
Other Affiliated Entities
In April 2006, the Company 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 the Company’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, the Company entered into a servicing agreement with the Subprime Servicer to service Subprime Portfolio II under substantially the same terms. At September 30, 2017, the outstanding unpaid principal balances of Subprime Portfolios I and II were approximately $209.0 million and $315.6 million, respectively. The Company received negligible cash inflows from the retained interests of Subprime Portfolios I and II during the three and nine months ended September 30, 2017 and 2016. The Company's exposure to loss is solely limited to the carrying amount of the residual interests and retained bonds which are issued by Subprime Portfolios I and II.
In April 2010, the Company, 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 the Company’s Manager through July 31, 2017. The Company’s chairman was a director of and had an indirect ownership interest in the borrower. This investment improved the applicable CDOs’ results under some of their respective tests, and yielded approximately 22.5%. In September 2016, the Company received a $109.9 million pay down on the loan. In August 2017, the Company received the final pay down of the loan in the amount of $69.5 million (see Note 8). The Company earned approximately $6.9 million and $14.0 million of income on investments issued by affiliates of the Manager for the three and nine months ended September 30, 2017, respectively, and $19.7 million and $36.2 million of income on investments issued by affiliates of the Manager for the three and nine months ended September 30, 2016, respectively. The income on investments includes recognition of discount accretion for the three and nine months ended September 30, 2017 and 2016.
In each instance described above, affiliates of the Company’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 the Company chartered from a third-party aircraft operator for business purposes in the course of operations. The Company paid the aircraft operator market rates for the charters.
The entire disclosure for related party transactions. Examples of related party transactions include transactions between (a) a parent company and its subsidiary; (b) subsidiaries of a common parent; (c) and entity and its principal owners; and (d) affiliates.
Reference 1: http://www.xbrl.org/2003/role/presentationRef