File No. 811-09751
As filed with the Securities and Exchange Commission on May 30, 2000
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
(X) REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
FORTRESS REGISTERED INVESTMENT TRUST
(Exact Name of Registrant as Specified in Charter)
1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(Address of Principal Executive Offices) (Zip Code)
(212) 798-6100
(Registrant's Telephone Number, including Area Code)
RANDAL NARDONE, SECRETARY
FORTRESS REGISTERED INVESTMENT TRUST
1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(Name and Address of Agent for Service)
Copies to:
PHILIP H. HARRIS, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
FOUR TIMES SQUARE
NEW YORK, NEW YORK 10036
FORM N-2
CROSS REFERENCE SHEET
as required by Rule 495(a)
Part A
Item No. Caption Prospectus Caption
-------- ------- ------------------
1. Cover Page..........................Not Applicable
2. Inside Front and Outside Back
Cover Page..........................Not Applicable
3. Fee Table and Synopsis..............Fee Table and Synopsis
4. Financial Highlights................Not Applicable
5. Plan of Distribution................Not Applicable
6. Selling Shareholders................Not Applicable
7. Use of Proceeds.....................Not Applicable
8. General Description of the
Registrant .........................General Description of
the Registrant; General;
Investment Objectives
and Policies; Risk
Factors; Other Policies
9. Management..........................Management; General
10. Capital Stock, Long-Term
Debt, and Other Securities..........Capital Stock, Long
Term Debt, and Other
Securities; Capital
Stock; Long-Term Debt;
General; Taxes;
Outstanding Securities;
Securities Ratings
11. Defaults and Arrears on
Senior Securities...................Not Applicable
12. Legal Proceedings...................Not Applicable
13. Table of Contents of
Statement of Additional
Information.........................Not Applicable
Part B Statement of
Item No. Additional Information
-------- ----------------------
14. Cover Page..........................Not Applicable
15. Table of Contents...................Not Applicable
16. General Information and
History.............................General Description
of the Registrant
17. Investment Objective and
Policies............................Investment Objective
and Policies; Investment
Restrictions
18. Management..........................Management of the
Trust; Officers and
Directors
19. Control Persons and Principal
Holders of Securities...............Control Persons;
Affiliated Subscriptions
20. Investment Advisory and Other
Services............................Management of the Trust
21. Brokerage Allocation and Other
Practices...........................Management of the Trust
22. Tax Status..........................Taxation of the Trust
23. Financial Statements................Not Applicable
Part C
Item No.
--------
Information required to be included in Part C is set forth, under the
appropriate item so numbered, in Part C of this registration statement.
PART A
ITEM 1. COVER PAGE
Not Applicable.
ITEM 2. INSIDE FRONT AND OUTSIDE BACK COVER PAGE
Not Applicable.
ITEM 3. FEE TABLE AND SYNOPSIS
3.1 Expense Information
Annual Expenses
Advisory Fees* 0.650%
Interest Payments on Borrowed Funds 0.001%
Other Expenses ** 0.137%
------------------------------------------------
Total Annual Expenses*** 0.788%
Example 1 Year 3 Years 5 Years 10 Years
You would pay the following
expenses on a $1,000 investment, $ 8.27 $25.87 $44.96 $100.11
assuming a 5% annual return:
The purpose of the preceding table is to assist the investor in
understanding the various costs and expenses that an investor in Fortress
Registered Investment Trust (the "Trust") will bear directly or indirectly,
and do not include expenses of Fortress Capital Finance LLC ("Trust
Operating Subsidiary") or other mortgage affiliates that are not investment
companies.
*The Advisory Fee is computed on the lesser of (i) the
aggregate amount of capital invested in the Trust and (ii) the average
daily net assets of the Trust over the semi-annual period with respect to
which the Advisory Fee is being paid. The Advisory Fee is payable
semi-annually in arrears. The Advisory Fee does not include or refer to any
asset-based or performance-based management fee charged by the manager of
the Common Shareholder (as hereinafter defined in Item 8). The Advisory Fee
currently is being waived by the investment advisor. The investment advisor
anticipates waiving the fee for so long as the Common Shareholder (defined
below) is the sole shareholder of the Trust.
**Other Expenses are based on estimated amounts for the current
fiscal year. The example above should not be considered a representation of
future expenses, which may be higher or lower.
***Total Annual Expenses are based upon the assumption that the
aggregate amount of capital invested at year end will be $450,000,000.
3.2 Not Applicable.
3.3 Not Applicable.
ITEM 4. FINANCIAL HIGHLIGHTS
4.1 Financial Highlights for the period ended February 29,
2000, are incorporated herein by reference to the Trust's annual report
filed with the Securities and Exchange Commission ("SEC") on Form N-30D on
May 1, 2000.
4.2 Not Applicable.
4.3 Not Applicable.
ITEM 5. PLAN OF DISTRIBUTION
Not Applicable.
ITEM 6. SELLING SHAREHOLDERS
Not Applicable.
ITEM 7. USE OF PROCEEDS
Not Applicable.
ITEM 8. GENERAL DESCRIPTION OF THE REGISTRANT
8.1 General. The Trust was formed by its trustees as a business
trust under the laws of the State of Delaware on November 8, 1999, and is a
non-diversified closed-end management investment company. The Trust is
authorized to issue up to 1,000,000 common shares of beneficial interest.
Unless terminated earlier, the Trust shall terminate on the eighth
anniversary of the final closing of its private placement, which occurred
on April 28, 2000, subject to no more than two separate one-year extensions
approved by the shareholder of the common shares (the "Common
Shareholder"). At the discretion of the Board of Trustees of the Trust (the
"Board" or the "Trustees"), the Trust has accepted a binding subscription
agreement of the Common Shareholder to purchase one hundred percent of the
Common Shares (as hereinafter defined in Item 10) of the Trust. The Common
Shareholder is a limited liability company that has itself accepted
subscription agreements from various investors, and invests primarily in
the Trust, though the Common Shareholder has the right to invest in other
investments. The Trust has obtained approximately $872.8 million in capital
commitments ("Capital Commitments") in the form of a subscription agreement
from the Common Shareholder, which in turn has obtained commitments from
institutional and high net worth investors. The Trust has issued $51,500 in
principal amount of Notes to various individuals ("Noteholders," and
together with the Common Shareholder, the "Securityholders").
The commitment period shall be until the third anniversary of
the final closing of the Trust (the "Commitment Period"). On the third
anniversary of the final closing, the Common Shareholder will be released
from any further obligation with respect to its unfunded Capital
Commitments, except to the extent necessary to pay expenses and obligations
of the Trust, including amounts owing or which may become due under any
existing credit facility and Advisory Fees, complete investments by the
Trust in transactions which were in process as of the end of the Commitment
Period, and effect follow-on investments in existing portfolio investments.
In addition, the Common Shareholder's commitment is reduced to the extent
that it invests in accordance with its investment policies other than
through the Trust.
During the Commitment Period, the Trust will draw down capital
from time to time from the Common Shareholder to make investments in
accordance with its investment objectives and policies and to fund its
expenses. No additional common shares or other securities will be issued in
connection with such draw downs for so long as there is only one holder of
the Trust's equity securities. Unfunded Capital Commitments may be called
by the Trust at any time during the Commitment Period in any amount on not
less than 12 business days' prior written notice in accordance with the
terms of the Declaration of Trust and the Common Shareholder's subscription
agreement. Investors who fail to pay a capital call within 12 business days
after receiving a notice from the Trust may be subject to having a portion
of their Common Shares repurchased, retired and canceled by the Trust, or
be subject to dilution. In addition, the Trust may elect to withhold
distributions related to a portion of the Common Shares or prohibit such
Common Shareholder from fully participating in future Trust investments.
Other than in connection with the preceding sentence, the Trust will only
be permitted to purchase, redeem or otherwise acquire its Common Shares if
the Trustees do not reapprove the Advisory Agreement (as defined in Item 9)
in accordance with the Investment Company Act of 1940, as amended (the
"1940 Act") or the terms therein. The Trust may not, without the consent of
the Common Shareholder, issue Common Shares in addition to the then issued
and outstanding Common Shares and Common Shares held in treasury for anyone
from whom the Trust has accepted binding agreements to subscribe for Common
Shares.
8.2 Investment Objectives and Policies. The investment
objective of the Trust is to seek to achieve superior returns by investing
in residential and commercial "Real Estate-Related Assets." Real
Estate-Related Assets shall include (i) mortgage loans and non-mortgage
receivables; (ii) securities secured by or evidencing interests in assets
described in clause (i); (iii) fee or leasehold interests in real
properties, whether improved or unimproved, whether commercial, residential
or multifamily; (iv) debt interests (whether secured or unsecured, recourse
or non-recourse, senior or subordinated, convertible or otherwise), equity
interests (whether preferred or common) and derivative interests in
entities (whether in the form of partnerships, limited liability companies,
trusts, corporations or otherwise) the assets of which consist primarily of
assets described in clauses (i), (ii) or (iii) hereof, or in entities that
otherwise have substantial assets of the type described in clauses (i),
(ii) or (iii) hereof or in entities that provide services to or management
in connection with any other asset included in this paragraph; (v) options,
including without limitation, rights of first refusal, rights of first
offer, and puts or calls with respect to in any of the foregoing; and (f)
Hedging (as hereinafter defined) relating to any of the foregoing. No
assurance can be given that the Trust will achieve its investment
objectives.
The Trust will comply with its Primary Investment Criteria. The
Trust's "Primary Investment Criteria" are as follows:
(a) Identifying and Acquiring Undervalued Assets. The Trust seeks to
acquire assets where the market value diverges from intrinsic value whether
due to the: (i) credit quality of the obligors; (ii) complexity of the
transaction; (iii) viability of the capital structure; (iv) accuracy and
availability of information; or (v) availability of appropriate
informational and operating systems. The Trust focuses on investment
opportunities where incremental value can be extracted through active
post-acquisition management.
(b) Broad Portfolio Diversification. The Trust seeks to diversify its
portfolio broadly by both product type and geography to mitigate risk.
(c) Prudently Leveraged Capital Structures. The Trust seeks to employ
prudent leverage when capitalizing investments, consistent with the
philosophy of maximizing returns while mitigating risks.
(d) Aligning with Strategic Partners. The Trust seeks to, as
appropriate, align with strategic partners possessing local, operational or
asset-specific expertise who typically will invest significant capital on a
pari passu basis with the Trust. In addition, the Trust seeks to engage
highly capable special servicers and other service providers (e.g., local
property or asset management firms) when conducting due diligence or
post-acquisition asset management.
(e) Product Types. The Trust invests primarily in four product types:
(i) distressed residential and commercial mortgage and real property
portfolios; (ii) Real Estate-Related Assets privatized by governmental
agencies or disposed of by institutional sources; (iii) Real Estate-Related
Assets imbedded in complex capital structures or bankruptcies; and (iv)
opportunistic financings.
(f) Distressed Residential and Commercial Mortgage and Real Property
Portfolios. The Trust will target acquiring portfolios of distressed,
sub-performing and non-performing residential and commercial mortgage loans
and related properties acquired in foreclosure or by deed in lieu of
foreclosure in the United States and abroad.
(g) Privatizations and Institutional Dispositions. The Trust will
target Real Estate-Related Assets liquidated through privatizations and
institutional dispositions, in the United States and abroad.
(h) Real Estate-Related Assets Imbedded in Complex Capital Structures
or Bankruptcies. The Trust will target fundamentally sound Real
Estate-Related Assets held by entities with complex or otherwise
inefficient capital structures or which are the subject of bankruptcy
proceedings, including, without limitation: (i) inefficiently structured
mortgage backed securities; (ii) illiquid interests in syndicated real
estate limited partnerships; and (iii) capital constrained real estate
investment trusts and finance companies.
(i) Opportunistic Financing. The Trust will seek to provide
relatively short-term, secured loans to owners of real estate and/or
mortgage portfolios.
(j) Geographic Focus. The Trust will seek to diversify its portfolio
of investments geographically and anticipates that it, directly or
indirectly, will make investments in a number of regions, including the
United States, Canada, Western Europe and Japan.
The Trust has a policy of investing at least 25% of its capital
in assets in the real estate and real estate financial products industry,
including mortgage loans and other Real Estate-Related Assets. As such, the
Trust is more susceptible to financial, regulatory, political and other
factors affecting the real estate industry. The Trust does not anticipate
making such investments directly, but through a Trust Operating Subsidiary
and other wholly-owned subsidiaries. The Trust initially will own all of
the equity securities of Trust Operating Subsidiary. The Trust Operating
Subsidiary's operating agreement will provide that it operate so as to
qualify for the exemption from registration as an investment company under
the 1940 Act as provided in Section 3(c)(5)(C) therein for entities whose
investments consist primarily of mortgage loans and other interests in real
estate.
The Trust Operating Subsidiary, and other affiliates, will
engage primarily in the business of (i) acquiring, managing and/or
disposing of residential and commercial Real Estate-Related Assets, (ii)
acquiring, pooling and repackaging performing mortgage loans as mortgage
backed securities ("MBS") for distribution to the Trust and for sale in the
capital markets, and (iii) acquiring and working out distressed commercial
and residential mortgage loans. Pursuant to its investment policies,
neither the Trust nor the Trust Operating Subsidiary may hold "residual
interests" ("Residuals") of real estate mortgage investment conduits
("REMICs"), as such terms are defined, respectively, in Sections 860G and
860D of the Internal Revenue Code of 1986, as amended (the "Code"). The
Trust Operating Subsidiary will also distribute cash to the Trust in an
amount sufficient to enable the Trust to pay its expenses and any
distributions that the Trust is required to make in order to maintain its
federal tax status as a regulated investment company, with the effect of
reducing the Trust's investment in the Trust Operating Subsidiary. After
the expiration of the Commitment Period, the Trust will cease making new
investments in the Trust Operating Subsidiary (except for follow-on
investments and investments in progress at such time). Unless otherwise
indicated, references herein to the operations and activities the "Trust"
shall include the operations and activities of the Trust Operating
Subsidiary.
In addition, the Trust will utilize Treasury, mortgage,
Eurodollar and currency futures and options (on cash and futures) and
interest rate, currency and mortgage swaps, caps and floors and other
financial instruments, provided that the Trust may utilize these
instruments solely for the purpose of hedging the investment risks of
individual securities (including mortgage loans) and the portfolio as a
whole ("Hedging") and not for speculative purposes, and will utilize
financing agreements, such as reverse repurchase agreements and dollar
rolls, subject to the leverage limitations set forth below. The Trust may
also invest, consistent with the Trust's investment objectives, in other
assets (as specified in Item 8.4 or as approved by a majority of the
Trustees and each of the Trustees who is not a director, officer or
employee of the Advisor and who has been designated by an investor of the
Common Shareholder.)
In addition, the Trust may acquire securities on a when-issued,
forward commitment or delayed delivery basis for settlement beyond the time
frame customary for securities of the type being purchased and may make
short sales solely for Hedging purposes.
The Trust Operating Subsidiary will acquire performing and
distressed commercial and residential real estate debt in bulk and on a
wholesale basis from mortgage originators and investors. The Trust
Operating Subsidiary will utilize leverage for the purpose of financing
acquisitions, paying expenses contemplated in its budget and making
distributions to the Trust and not for the purpose of speculating on
anticipated changes in interest rates.
The Trust's investment objective and the following investment
restrictions are fundamental and cannot be changed without the approval of
the holders of a majority of the Trust's outstanding voting securities
(defined in the 1940 Act as the lesser of (a) more than 50% of the
outstanding Common and Preferred Shares, voting together as a single class
or (b) 67% or more of the Common and Preferred Shares represented at a
meeting at which more than 50% of the outstanding Common and Preferred
Shares, treated as a single class, are represented). In connection with its
investment in Common Shares of the Trust, the Common Shareholder will
undertake to seek instructions from its members with regard to the voting
of all proxies with respect to such Common Shares, and to vote such proxies
only in accordance with such instructions. All other investment policies or
practices are considered by the Trust not to be fundamental and accordingly
may be changed without approval of the holders of a majority of the Trust's
outstanding voting securities. If a percentage restriction on investment or
use of assets set forth below is adhered to at the time a transaction is
effected, later changes in percentage resulting from changing market values
will not be considered a deviation from policy. The Trust may not:
(1) borrow money or issue senior securities except in
compliance with the 1940 Act;
(2) make loans of money or property to any person, except as
may be consistent with the Trust's investment objectives
and policies;
(3) underwrite the securities of other issuers, except to the
extent that in connection with the disposition of
portfolio securities or the sale of its own shares or
securities of its subsidiaries, the Trust may be deemed
to be an underwriter;
(4) purchase real estate or interests therein to the extent
that as a result of such investments the Trust would not
be (a) an investment company by virtue of Section
3(c)(5)(C) of the 1940 Act or (b) a regulated investment
company under the Code;
(5) purchase or sell commodities or commodity contracts for
any purposes except as, and to the extent, permitted by
applicable law without the Trust becoming subject to
registration with the Commodity Futures Trading
Commissions as a commodity pool; or
(6) invest in excess of 25% of its capital in assets in any
industry other than the real estate and real estate
financial products industry, including mortgage loans and
other Real Estate-Related Assets, except that Trust may
invest without limit in securities backed by the credit
the United States of America or agencies or
instrumentalities thereof.
The preceding paragraph regarding objectives and restrictions
applies to the Trust specifically and not necessarily to the Trust
Operating Subsidiary.
The Trust will not make any investment or finance any
investment or otherwise utilize financial leverage or engage in any other
action to the extent the result of doing so would cause it to violate the
following:
(i) The Trust shall not make any investment if such investment
would cause the Common Shareholder to have more than twenty percent (20%)
of its aggregate capital commitments of its investors in any one portfolio
investment; provided, however, that the limitation set forth in this
paragraph (i) shall not apply in the case of any investments (such as
portfolio acquisitions) which are reasonably determined by the Advisor,
based on the composition of the applicable underlying assets, to be of such
a nature that they provide broad diversification, in and of themselves; and
provided, further, that the foregoing limitation shall not be deemed to
prohibit or to be violated by the merger of two (2) or more portfolio
companies or any other similar combination of two or more portfolio
investments, provided that (a) the Trust's original investment in each such
investment, as the case may be, on its own was made in compliance with the
foregoing limitation, (b) the provision contained in the second proviso of
this paragraph (i) shall not be used to circumvent the intention of the
limitation set forth in this paragraph (i), and (c) any such merger,
acquisition or other similar combination shall have been approved by a
majority in interest of the members (other than the managing member or any
affiliate thereof that is a member) of the Common Shareholder.
(ii) The Trust shall not make any investment if such investment
would cause the Common Shareholder to have more than (i) 10% of its
aggregate capital commitments of its investors in portfolio investments
consisting of non-mortgage receivables; (ii) 25% of the aggregate capital
commitments of its investors in portfolio investments consisting of raw
land and "ground-up" development; or (iii) 35% of the aggregate capital
commitments of its investors in investments located outside of the United
States or denominated in a currency other than United States dollars. The
Trust shall not invest in portfolio investments consisting, other than to
an insignificant extent, of raw land and "ground-up" development without
all necessary building permits having been obtained.
(iii) Subject to the provisions of paragraph (iv) below and to
any more restrictive limitations under the 1940 Act, following the first
anniversary of the final closing of the Common Shareholder, the Trust will
not, and will not permit any subsidiary of the Trust, including the Trust
Operating Subsidiary or any subsidiary thereof (collectively, the "Owning
Companies", and each, an "Owning Trust") to employ Financial Leverage (as
defined below) on any of their investments in an amount that would cause
the Financial Leverage Ratio (as defined below) of the Common Shareholder
to exceed sixty-five percent (65%) (the "Financial Leverage Limitation"),
it being understood that, during the one-year period following the final
closing of the Common Shareholder, the Trust may employ Financial Leverage
that is greater than or less than the Financial Leverage Limitation on an
asset-by-asset basis, but, in any event, following the first anniversary of
the final closing of the Common Shareholder, the aggregate of all Financial
Leverage will be subject to the Financial Leverage Limitation. As used
herein the term "Financial Leverage" means and includes any financing or
refinancing, whether secured or unsecured, whether recourse or nonrecourse,
procured by an Owning Trust in connection with the acquisition or ownership
of a portfolio investment; provided, however, that, for purposes hereof,
neither securitization nor term financing shall be deemed to be Financial
Leverage. As used herein the term "Financial Leverage Ratio" means, at the
time of determination, the fraction, stated as a percentage, resulting from
dividing (y) the then outstanding principal amount of the Financial
Leverage of the Owning Companies by (z) the then value of, without
duplication, all assets of the Owning Companies; provided, however, that,
with respect to Financial Leverage utilized by an Owning Trust, other than
the Trust, that is not a recourse obligation of the Trust, then (1) such
Financial Leverage of the Owning Trust shall not be included as Financial
Leverage of such Owning Trust for purposes of the immediately preceding
clause (y) and (2) only the Trust's net equity interest in such Owning
Trust shall be included in the assets of the Trust for purposes of the
immediately preceding clause (z).
(iv) The Trust shall, in good faith and using commercially
reasonable methodology, determine whether the Financial Leverage Limitation
of the Common Shareholder would be exceeded by an Owning Trust's obtaining
proposed Financial Leverage for a Portfolio Investment by calculating the
Financial Leverage Ratio as of the date such proposed Financial Leverage is
to be obtained. In the event that the Financial Leverage Ratio as of such
date would not exceed the Financial Leverage Limitation following
procurement of such proposed Financial Leverage, such proposed Financial
Leverage shall be deemed permitted. In no event shall maintaining such
Financial Leverage be affected by the procurement of future Financial
Leverage (provided such future Financial Leverage is procured in accordance
herewith), reductions in the value of Portfolio Investments or changes in
market conditions. Anything contained herein to the contrary
notwithstanding, (i) no proposed investment comprising the acquisition of
equity, preferred equity or debt convertible into equity in an operating
Trust by an Owning Trust, which investment is otherwise consistent with the
investment objectives and policies of the Trust, shall be prohibited due to
the fact that the asset values and leverage ratios employed by such
operating Trust would, if included in the calculation of the Financial
Leverage Ratio, cause the Financial Leverage Ratio to exceed the Financial
Leverage Limitation, and (ii) no entity shall be deemed to be an "Owning
Trust" for the purposes of determining the Financial Leverage Ratio unless
such entity is controlled by the Common Shareholder, a sister company of
the Common Shareholder or the Trust or an entity controlled by the Common
Shareholder, a sister company of the Common Shareholder or the Trust. For
purposes of the foregoing clause (ii), "control" means, when used in
reference to an entity, the power to direct the management and policies of
such entity, directly or indirectly, whether through the ownership of
voting securities or other beneficial interest, by contract or otherwise,
and "controlled" has a correlative meaning.
(v) Subject to paragraph (vi), in the event the Trust
contemplates making an investment in a Real-Estate Related Asset located
outside the United States or denominated in a currency other than United
States dollars (a "Foreign Investment"), then, prior to the Trust
consummating such investment (i) the Trust shall exercise good faith,
commercially reasonable efforts to ascertain (which will include compliance
with paragraph (ii)(b) below) that the laws of such jurisdiction will
recognize the limited liability of the members of the Common Shareholder in
connection with the portfolio investment in question to the same extent in
all material respects as is provided for under the operating agreement of
the Common Shareholder, or that the members of the Common Shareholder will
otherwise not be exposed to greater personal liability by virtue of the
Foreign Investment in question than is provided for under the operating
agreement of the Common Shareholder, and (ii) the Advisor shall also
exercise good faith, commercially reasonable efforts to ascertain (which
will include obtaining an opinion from such counsel addressed to the Trust,
which, by its terms, may be relied upon by the members of the Common
Shareholder, to the effect) that no member of the Common Shareholder will
be subject to any tax or foreign currency exchange controls in such
jurisdiction, have any obligation to file a tax return in such
jurisdiction, or be subject to the jurisdiction of any court or
administrative agency in such jurisdiction, in each case arising out of or
relating to the making of such Foreign Investment (although the Trust or
applicable portfolio company of the Trust (but not any member of the Common
Shareholder directly) may be subject to such tax, foreign currency exchange
controls, tax return obligation or jurisdiction). If considered appropriate
by the Advisor, the Advisor shall procure fidelity bonds and/or insurance
against wrongful acts or omissions of the Trust's foreign agents. If the
Advisor is unable, after exercising the requisite good faith, commercially
reasonable efforts, to satisfy the requirements set forth in the first
sentence of this paragraph (viii) in connection with any one or more
Foreign Investments, then, any contrary provisions of this Agreement
notwithstanding, affiliates of the Advisor, the Common Shareholder and the
members of the Common Shareholder shall be free to pursue such Foreign
Investments through other vehicles. In the event that a member of the
Common Shareholder becomes subject to tax or a tax return filing obligation
in a jurisdiction outside the United States of America as a result of the
Trust's making of a Foreign Investment, the Advisor will, at the expense
and on behalf of the Trust, engage appropriate reputable professional
service providers to complete all tax forms necessary to claim any refund
or credit of such foreign taxes, submit all such refund or credit forms to
the appropriate taxing authorities and take such follow-up actions as are
reasonably necessary to facilitate the processing of any such refund or
credit, and otherwise provide such information and documentation and such
further assistance as such member of the Common Shareholder may reasonably
require to enable it to seek any repayment of foreign taxes or complete any
foreign tax returns.
(vi) If and to the extent that the Trust proposes to make an
investment in any entity organized under the laws of jurisdictions other
than the United States, the Advisor shall:
(a) consider whether the making, holding, administering
and/or selling of such investment could cause the members of
the Common Shareholders to lose their limited liability as
provided by Delaware law; and
(b) either (x) obtain a favorable opinion of reputable
counsel, in form and substance satisfactory to the Advisor,
which, by its terms, may be relied upon by the members of the
Common Shareholder, to the effect that the members of the
Common Shareholder will not incur any liability beyond or in
addition to the liability that they would otherwise have under
Delaware law or the operating agreement of the Common
Shareholder as a result of, or in connection with, such
investment; provided, however, that the provisions of this
subclause (x) shall not apply in the case of a Foreign
Investment if one or more Foreign Investments shall have
previously been made by the Trust in the same jurisdiction
utilizing, if applicable, a substantially similar structure and
a similar asset composition as to which the opinion
contemplated hereby was delivered, or (y) make such investment
through an intermediate holding Trust which is a limited
liability vehicle formed under, and the limited liability of
whose beneficial owners is recognized by, the laws of the
jurisdiction in question. A copy of any such opinion obtained
by the Trust shall be made available to any member of the
Common Shareholder on request.
(vii) The Advisor shall use commercially reasonable efforts (i)
to give notice to the members of the Common Shareholder in the event that
the Trust will be investing in a "passive foreign investment company"
(within the meaning of Section 1297 of the Internal Revenue Code of 1986,
as amended (the "Code")), and (ii) if the Trust does invest in a passive
foreign investment company, to cause the Trust either to make and maintain
a "qualifying electing fund" election (within the meaning of Section 1295
of the Code) or a "mark to market" election (within the meaning of Section
1296 of the Code), as appropriate, and in any event the Advisor shall use
commercially reasonable efforts to include in relevant acquisition
documents or contracts a requirement on the part of the respective
portfolio companies to cooperate with the Advisor's request for any such
information to permit the Trust to make such "qualifying electing fund" or
"mark to market" elections.
8.3 Risk Factors. Investment in the Trust may involve certain
risk factors and special considerations, including those arising from the
Trust's investment securities, policies and practices, from the Trust's
investment strategy, and from the structure of the Trust and restrictions
applicable to its Shares. Since the Trust directly or indirectly through
the Trust Operating Subsidiary or others may only make a limited number of
investments and since many of the investments may involve a high degree of
risk, poor performance by a few of the investments could severely affect
the total return to the Trust.
General Real Estate Risks. Investments comprising mortgage or
other loans are subject to, among other risks, the risk of borrower
default, the risks attendant to foreclosure, such as delays and expenses
due to interposed defenses or counterclaims and the possibilities that
under certain circumstances even a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless
of the parties' intent and that the Trust may be precluded from pursuing
both foreclosure and an action on a note as remedies simultaneously, the
risk that the Trust may be limited in its ability to collect certain funds
due it from a borrower which is a debtor in a case filed under Title 11 of
the United States Code, 111 U.S.C. ss.ss. 101 et seq., as amended (the
"Bankruptcy Code"), and the risk that the Trust's borrowers may not
maintain adequate insurance coverage against liability for personal injury
and property damage in the event of casualty or accident.
Real property investments are subject to varying degrees of
risk. Real estate values are affected by a number of factors, including
changes in the general economic climate, local conditions (such as an
oversupply of space or a reduction in demand for space), the quality and
philosophy of management, competition based on rental rates, attractiveness
and location of the properties, financial condition of tenants, buyers and
sellers of properties, quality of maintenance, insurance and management
services and changes in operating costs. Real estate values are also
affected by such factors as government regulations (including those
governing usage, improvements, zoning and taxes), interest rate levels, the
availability of financing and potential liability under changing
environmental and other laws.
Additionally, all real estate and real estate-related
investments are subject to the risk that a general downturn in a foreign
economy or the national or local economy within the United States will
depress real estate prices. The Trust may be unsuccessful in structuring
its investments to minimize any detrimental impact that a recession may
have on its investments and as a result the Trust may suffer significant
losses.
Risks of Foreign Investments. The Trust intends to invest in
Real Estate-Related Assets, including mortgage loans, located outside of
the United States. The Trust's international operations are subject to most
of the same risks associated with its United States operations as well as
additional risks, such as fluctuations in foreign currency exchange rates,
unexpected changes in regulatory requirements, heightened risks of
political and economic instability in certain geographic locations,
difficulties in managing international operations, potentially adverse tax
consequences, enhanced accounting and control expenses and the burden of
complying with a wide variety of foreign laws. Legal systems abroad may
differ in a number of respects from the United States legal system,
including requiring transfer taxes and added taxes on certain transfers,
imposing limits on usurious interest rates and subjecting lenders to
liability for inappropriate lending. Regulatory schemes in foreign
jurisdictions vary, and no assurance can be made that loans to borrowers in
foreign jurisdictions will have the benefit of security and/or collateral
similar to the types of security and/or collateral typical for mortgage
loans in the United States mortgage lending markets or that remedies
available to lenders under such loans correspond to remedies available to
lenders in the United States mortgage lending markets. The Trust is subject
to no limitations on foreign investments in general, on investment in any
particular country or investment in any particular foreign asset class.
Fluctuations in currency rates may adversely affect the ability
of the Trust successfully to make non-United States investments, and may
also adversely affect the performance of the Trust's investments. Since
foreign securities or other foreign assets may be purchased with and
payable in the currencies of foreign countries, the value of such assets
measured in United States dollars may be affected favorably or unfavorably
by changes in currency rates and exchange control regulations.
In connection with the consummation of certain investments, the
Trust may employ Hedging techniques designed to protect the Trust against
adverse movements in currency and/or interest rates. While such
transactions may reduce certain risks, such transactions themselves may
entail certain other risks. Thus, while the Trust may benefit from the use
of these Hedging mechanisms, unanticipated changes in interest rates,
securities prices, or currency exchange rates may result in a poorer
overall performance for the Trust than if it had not entered into such
Hedging transactions.
Liquidity Considerations. The investments to be made by the
Trust may be illiquid. Illiquidity may result from the absence of an
established market for the investments, as well as legal or contractual
restrictions on their resale, refinancing or other disposition by the
Trust. Dispositions of investments may be subject to contractual and other
limitations on transfer or other restrictions that would interfere with
subsequent sales of such investments or adversely affect the terms that
could be obtained upon any disposition thereof.
Leverage and Interest Rates. Most, if not all, of the
investments of the Trust may utilize a leveraged capital structure, in
which case lenders or other holders of senior positions would be entitled
to a preferred cash flow prior to the Trust receiving a return.
Fluctuations in interest rates may adversely affect the ability of the
Trust successfully to acquire investments and may also adversely affect the
performance of the Trust's investments. Although the use of leverage may
enhance returns and increase the number of investments that can be made, it
may also substantially increase the risk of loss.
Bankruptcy Considerations. Investments made in assets operating
in restructuring situations or under Chapter 11 of the Bankruptcy Code
could be subordinated or disallowed, and, if the Trust inappropriately
exercises control over the management and policies of the debtors, the
Trust could become liable to third parties in such circumstances.
Furthermore, distributions made to the Trust in respect of such
investments, and distributions by the Trust to the Trust, could be required
to be repaid to the creditors of such investment if such distributions are
found to be a fraudulent conveyance or preferential payment.
Potential Environmental Liability. Under various foreign and
United States Federal, state and local laws, ordinances and regulations, an
owner of real property may be liable for the costs of removal or
remediation of certain hazardous or toxic substances on or in such
property. Such laws often impose such liability without regard to whether
the owner knew of, or was responsible for, the presence of such hazardous
or toxic substances. The cost of any required remediation and the owner's
liability therefor as to any property is generally not limited under such
enactments and could exceed the value of the property and/or the aggregate
assets of the owner. The presence of such substances, or the failure to
properly remediate contamination from such substances, may adversely affect
the Trust's ability to sell real estate it acquires, wither as an equity
investment or through foreclosure on a loan investment, or to borrow using
such property as collateral.
The risks described above are generally applicable to the
operations of both the Trust and the Trust Operating Subsidiary. Additional
risks associated with the Trust Operating Subsidiary include: (1) operation
on a significantly more leveraged basis than the Trust, which will create
additional exposure to increases in interest rates; (2) investment of a
portion of its assets in mortgage loans that are in default or require
restructuring before they can be repackaged into mortgage securities or
otherwise liquidated, potentially requiring substantial time and expense or
additional equity investments in the underlying property by third parties
which may result in economic loss; (3) the ability of the Trust Operating
Subsidiary to repackage its mortgage loans profitably depends on not only
on the terms of such loans, but also on the interest of investors in such
mortgage securities; (4) the Trust Operating Subsidiary's ability to find
suitable investments in a competitive market; (5) the ability of the Trust
Operating Subsidiary to attract and retain qualified personnel.
As a result of concentrating its investments, the Trust will be
a non-diversified investment company and, therefore, more susceptible than
a more widely diversified fund to any single economic, political or
regulatory occurrence. In particular, developments in the commercial real
estate industry will affect the ability of the Trust and the Trust
Operating Subsidiary to conduct their operations. Moreover, Shares of the
Trust may be transferred only with the prior written consent of the Trust.
There will be no trading market for the Shares and investors may be
required to bear the economic risks of their investment until termination
of the Trust. Neither the Trust nor the Trust Operating Subsidiary has
previously conducted any business or identified specific investments,
although principals of the Advisor have managed businesses similar to those
of the Trust and the Trust Operating Subsidiary. The businesses of the
Trust and the Trust Operating Subsidiary rely on the services of key
personnel of the Advisor. There can be no assurance that the Advisor will
be able to retain its key personnel.
8.4 Other Policies. Consistent with its investment objectives,
policies and restrictions, the Trust may also invest in (a) United States
government and agency obligations with maturities of not more than one year
and one day from the date of acquisition, commercial paper with maturities
of not more than six months and one day from the date of acquisition and
having a rating assigned to such commercial paper by Standard & Poor's
Ratings Services, a Division of the McGraw-Hill Companies, Inc. ("S&P") or
Moody's Investor Service, Inc. ("Moody's") (or, if neither such
organization shall rate such commercial paper at such time, by any
nationally recognized statistical rating organization in the United States
of America) equal to one of the two highest commercial paper ratings
assigned by such organization, it being understood that as of the date
hereof such ratings by S&P are "P1" and "P2" and such ratings by Moody's
are "Al" and "A2," and interest-bearing deposits in dollars in United
States banks with an unrestricted surplus of at least two hundred fifty
million dollars ($250,000,000), maturing within one year and (b)
obligations, instruments and deposits of types which correspond to the
types described in clause (a), of issuers in jurisdictions other than the
United States in which the Trust is pursuing its portfolio investments.
8.5 Not Applicable.
8.6 Not Applicable.
ITEM 9. MANAGEMENT
9.1 General.
(a) Board of Trustees. The Trustees set broad policies for the Trust
and its officers. The Advisor manages the day-to-day operations of the
Trust subject to the oversight of the Trustees and supplies officers to the
Trust for this purpose. The Board of Trustees shall consist at all times of
no fewer than five (5) Trustees, of whom at least 40% are not "interested
persons" of the Trust as defined in Section 2(a)(19) of the 1940 Act. The
Supervisory Board of the Trust Operating Subsidiary (the "Supervisory
Board") will be responsible for the overall management of the Trust
Operating Subsidiary. The Supervisory Board will consist of at least five
(5) members, of whom 40% are not "interested persons" of the Advisor.
(b) Investment Advisor. The Advisor, FIG Advisors LLC, maintains its
office at 1301 Avenue of the Americas, New York, New York 10019. The
Advisor is a newly registered investment advisor. Initially, the Trust will
be the only client of the Advisor. The Advisor shall charge the Trust an
advisory fee as described in Item 3 - Fee Table and Synopsis. The Advisor
is owned by Fortress Investment Group LLC, a Delaware limited liability
company which, through itself and other affiliates, provides investment
advice to real estate investment trusts and other related accounts.
Pursuant to an Investment Advisory Agreement (the "Advisory
Agreement"), the Trust has retained the Advisor to manage the investment of
its assets, to provide such investment research, advice and supervision, in
conformity with its investment objective and policies, as may be necessary
for the operations of the Trust.
(c) Portfolio Management.
The Trust's assets are managed by a committee comprised of the
following persons:
WESLEY R. EDENS (38) is the Chief Executive Officer of Fortress
Investment Group LLC ("FIG") and Fortress Investment Corp. ("FIC"), as well
as the Chairman of the Board of FIC. Mr. Edens co-founded FIG, which
manages FIC's investment activities, with Messrs. Kauffman, Nardone and
Nygaard. Prior to the forming of FIG, Mr. Edens was the head of the Global
Principal Finance ("GPF") group at Union Bank of Switzerland ("UBS"), as
well as a Managing Director of UBS. Prior to joining GPF in 1997, Mr. Edens
was a partner and Managing Director of BlackRock Financial Management, Inc.
("BFM"), and the Chief Operating Officer of BlackRock Asset Investors
("BAI"), a real estate investment fund with approximately $560 million in
capital. In addition, Mr. Edens was formerly a partner and Managing
Director of Lehman Brothers, where he was head of the Non-Agency Mortgage
Trading Desk. Mr. Edens received a B.S. degree in Finance and Computer
Science from Oregon State University.
ROBERT I. KAUFFMAN (36) is the President of FIG and FIC, and a member
of the Board of Directors of FIC. Mr. Kauffman co-founded FIG with Messrs.
Edens, Nardone and Nygaard. Previously, Mr. Kauffman was the head of the
acquisitions and risk management department of GPF, as well as a Managing
Director of UBS. Prior to joining GPF in 1997, Mr. Kauffman was a principal
of BFM, and a Managing Director of BAI. Prior to joining BFM, Mr. Kauffman
was an Executive Director of Lehman Brothers International ("LBI"). Mr.
Kauffman received a B.S. degree in Business Administration from
Northeastern University.
RANDAL A. NARDONE (44) is the Chief Operating Officer and Secretary
of FIG and FIC. Mr. Nardone co-founded FIG with Messrs. Edens, Kauffman and
Nygaard. Previously, Mr. Nardone was the head of the structured finance and
contract finance department of GPF, as well as a Managing Director of UBS.
Prior to joining GPF in 1997, Mr. Nardone was a principal of BFM, and a
Managing Director of BAI. Prior to joining BFM, Mr. Nardone was a partner
and member of the executive committee at the law firm of Thacher Proffitt &
Wood ("Thacher Proffitt"). Mr. Nardone received a B.A. degree in English
and Biology from the University of Connecticut and a J.D. degree from the
Boston University School of Law.
ERIK P. NYGAARD (40) is the Chief Information Officer and Treasurer
of FIG and FIC. Mr. Nygaard co-founded FIG with Messrs. Edens, Kauffman and
Nardone. Previously, Mr. Nygaard was the head of the financial engineering
department of GPF, as well as a Managing Director of UBS. Prior to joining
GPF in 1997, Mr. Nygaard was a principal of BFM, and a Managing Director of
BAI. Mr. Nygaard received a B.S. degree in Electrical Engineering and
Computer Science from the Massachusetts Institute of Technology.
GREGORY F. HUGHES (37) is the Chief Financial Officer of FIG and FIC.
From 1997 to 1999, Mr. Hughes was the Chief Financial Officer for Wellsford
Real Properties, Inc., a real estate merchant banking firm which acquires,
finances, develops and operates real properties and organizes and invests
in private and public real estate companies. From 1993 to 1997, Mr. Hughes
served as the Chief Financial Officer for Wellsford Residential Property
Trust, a real estate investment trust. Mr. Hughes received a B.S. degree in
Accounting from the University of Maryland.
(d) Not Applicable.
(e) Custodian. United States Trust Company of New York will serve as
Custodian for the Trust, Dividend Disbursing Agent and Registrar for the
Shares, and in those capacities, maintains certain financial and accounting
books and records pursuant to agreements with the Trust.
(f) Expenses. The Advisory Agreement provides, among other things,
that the Advisor will bear all expenses of its employees and overhead
incurred in connection with its duties under the Advisory Agreement, and
the expense of services rendered by any employee of the Advisor in such
employee's capacity as a Trustee or officer of the Trust. The Advisor will
pay the fees and salaries of the Trust's officers and members of its Board
of Trustees who are "interested persons" of the Advisor except that a
majority of the independent members of the Board of Trustees may approve
reimbursement at cost for the salary of such officers and members allocable
to time spent on the legal, accounting and other administrative operations
(other than the provision of investment advice) of the Trust. The Advisory
Agreement provides that the Trust shall pay to the Advisor an annual fee
for its services, payable semi-annually in arrears, computed at the annual
rate of 0.65% of the lesser of (i) the aggregate amount of capital invested
in the Trust and (ii) average daily net assets of the Trust over the
quarterly period with respect to which the Advisory Fee is being paid.
The Advisory Agreement provides that the Trust will pay all
ordinary operating expenses of the Trust for salaries, rent and similar
overhead expenses (other than the Principals and their assistants),
including maintenance of the Trust's offices, in connection with the
investigation of investment and disposition opportunities for the Trust and
monitoring of the Trust's investments. In addition, the Trust will bear
expenses related to its activities including, without limitation, the
evaluation, acquisition, ownership, sale, Hedging or financing of any
potential investment, taxes, fees of auditors and counsel, expenses of the
Advisory Board and annual meetings, insurance, travel, litigation and
indemnification expenses, administrative expenses and, subject to the
approval of the Advisory Board, any extraordinary expenses.
The Trust Operating Subsidiary will directly employ its own
officers and staff who will perform the investment operations and
day-to-day affairs of the Trust Operating Subsidiary. Personnel employed
directly by the Trust Operating Subsidiary will devote substantially all of
their time to Trust matters, subject to the oversight of the Trust
Operating Subsidiary's Supervisory Board.
The Trust Operating Subsidiary will prepare an annual budget,
which will be subject to the review and approval of a majority of the
independent Supervisory Board members of the Trust Operating Subsidiary.
Except as otherwise provided herein, the Trust Operating Subsidiary will
pay all of its own operating expenses, including the fees, salaries and
bonuses of its Supervisory Board members, officers and employees who are
not "interested persons" of the Advisor.
At the beginning of each year, the Advisor will submit a budget
to the compensation committee of the Trust's Board. The budget will consist
of an annual estimate of the operating expenses in the coming year as well
as a salary and estimated bonus for each employee of the Trust Operating
Subsidiary. Employees of the Trust Operating Subsidiary will be compensated
in a manner and amount consistent with the market for comparable
professionals, including the payment of a base salary and bonus. At year's
end, the Advisor will submit recommended bonuses for employees to the
compensation committee that reflect individual employee performance,
aggregate Trust Operating Subsidiary performance as well as prevailing
market employment conditions. The budget as well as the bonus pool must be
approved by a majority of the compensation committee. No director, officer
or employee of the Advisor will receive compensation from the Trust
Operating Subsidiary. Pursuant to the Advisory Agreement, the Advisor will
assume all other costs and expenses of managing the Trust, including
supervising the management of the Trust Operating Subsidiary and the other
mortgage affiliates.
(g) Affiliated Brokerage. Not applicable.
9.2 Non-resident Managers. Not applicable.
9.3 Control Persons. Fortress Investment Fund LLC owns 100%
of the Trust's Common Shares.
ITEM 10. CAPITAL STOCK, LONG-TERM DEBT, AND OTHER SECURITIES
10.1 Capital Stock. The Trust is authorized to issue up to
1,000,000 common shares of beneficial interest (the "Shares"). The Shares
have no preemptive, conversion, appraisal, exchange or redemption rights.
Shareholders of the Trust have cumulative voting rights on the election of
Trustees and are entitled to one vote per Share on all other matters
subject to Shareholder approval. When issued against payment therefor, the
Shares will be fully paid and nonassessable. No person has any liability
for obligations of the Trust by reason of owning Shares, although each
person that subscribes for Shares is liable for the full amount of such
subscription in accordance with and subject to the terms of the related
subscription agreement.
10.2 Long-Term Debt. The Trust has issued $51,500 in aggregate
principal amount of Notes that provide for payments prior to maturity of
interest at the annual rate of 10%, that mature on December 23, 2014, and
that contain such other terms and conditions as are determined by the
Trustees.
10.3 General. None.
10.4 Taxes. The Trust and the Advisor will use their respective
best efforts to ensure that the Trust qualifies each year and elects to be
treated as a regulated investment company for federal income tax purposes.
In order so to qualify, the Trust must satisfy certain tests regarding the
nature of its income and assets, and must generally be registered under the
1940 Act as a management company or unit investment trust. If, as
anticipated, the Trust qualifies as a regulated investment company and
distributes at least 90% of its net investment company taxable income (as
defined in the Internal Revenue Code of 1986, as amended) to its
Shareholder(s), the Trust will not be subject to U.S. federal income tax on
the income so distributed. However, the Trust will be subject to corporate
income tax on any undistributed income. In addition, the Trust will be
subject to a non-deductible 4% excise tax on the amount by which the income
it distributes in any calendar year is less than the sum of 98% of its net
ordinary income for such taxable year and 98% of its capital gain net
income for the one-year period ending on October 31 of such year. To the
extent that the Trust realizes net capital gains, the Trust intends to
distribute such gains at least annually (unless more frequent distributions
are permitted by the SEC) and designate them as capital gain dividends.
Capital gain dividends are taxable as long-term capital gains regardless of
how long the Shares have been held. Dividends distributed by the Trust may
be eligible for the dividends received deduction in the hands of corporate
shareholders to the extent that the Trust receives dividend income that
would be eligible if received directly by the corporate shareholders.
10.5 Outstanding Securities.
Amount
Outstanding
Amount Held Exclusive of
by Amount Shown
Amount Registrant or Under Previous
Title of Class Authorized for its Account Column
-------------- ---------- --------------- --------------
Common Shares 1,000,000 shares None 1,000,000
Notes up to $275,000 None $ 51,500
principal amount principal amount
10.6 Securities Ratings. None.
ITEM 11. DEFAULTS AND ARREARS ON SENIOR SECURITIES
11.1 Not Applicable.
11.2 Not Applicable.
ITEM 12. LEGAL PROCEEDINGS
Not Applicable.
ITEM 13. TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
Not Applicable.
PART B
ITEM 14. COVER PAGE
Not Applicable.
ITEM 15. TABLE OF CONTENTS
Not Applicable.
ITEM 16. GENERAL INFORMATION AND HISTORY
The Trust has no history. See Item 8 - General Description of
the Registrant, for general information.
ITEM 17. INVESTMENT OBJECTIVE AND POLICIES
Additional information regarding the Trust's permitted
investment securities is set forth below. See Item 8 - General Description
of the Registrant, for additional information.
The Trust may invest in commercial MBS ("CMBS"), which are
generally multiple class debt or pass-through securities backed by a
mortgage loan or pool of mortgage loans secured by commercial property.
Assets underlying CMBS may relate to only a few properties or to a single
property. The commercial mortgage loans that underlie CMBS generally are
not amortizing or fully amortizing. At their maturity date, repayment of
the remaining principal balance or "balloon" is due and is repaid through
the attainment of an additional loan or sale of the property. CMBS have
been issued in public and private transactions by a variety of public and
private issuers. A variety of structures is available for CMBS, although
the senior/subordinated structure that the Trust Operating Subsidiary
expects to utilize is used most frequently. In general, CMBS are structured
such that a number of classes of securities are created with varying
degrees of credit exposure, prepayment exposure and potential total return.
This is achieved primarily by allocating principal losses on the underlying
commercial mortgage loans to the most junior class of the CMBS outstanding,
while allocating principal prepayments to the most senior class
outstanding. Other protections, which may benefit all of the classes,
including the subordinated classes in which the Trust intends to invest,
may include issuer guarantees, reserve funds, cross-collateralization,
over-collateralization, and the equity of the owners in the underlying
properties. As a result of the stratification of the credit risk on the
underlying commercial mortgage loans, subordinated classes are subject to a
substantially greater risk of nonpayment than are senior classes of CMBS.
While prioritization of cash flows serves to enhance the credit protection
of the senior classes of mortgage-backed securities, it also results in
more cash flow and average life stability for the subordinated classes.
The Trust may also invest in residential MBS, including MBS
issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities or by private issuers and representing participation
interests in pools of single family residential mortgage loans originated
by private mortgage originators. Residential mortgage-backed securities
have been issued using a variety of structures, including
senior/subordinated structures. While single family mortgage loans do not
typically have prepayment penalties or restrictions, as commercial mortgage
loans often do, non-agency residential mortgage-backed securities are often
structured so that subordinated classes may be locked out of prepayments
for a period of time. However, in a period of extremely rapid prepayments,
during which senior classes may be retired faster than expected, the
subordinated classes may receive unscheduled payments of principal and
would have average lives that, while longer than the average lives of the
senior classes, would be shorter than originally expected, which could
negatively affect the value of particular subordinated classes of such
securities.
Hedging instruments, including the use of futures, options,
swaps, caps and floors, present certain risks. With respect to Hedging, the
variable degree of correlation between price movements of Hedging
instruments and price movements in the position being hedged creates the
possibility that losses on the hedge may be greater than gains in the value
of the Trust's position. In addition, certain instruments and markets may
not be liquid in all circumstances. As a result, in volatile markets, the
Trust may not be able to close out a transaction without incurring losses
substantially greater than the initial deposit. Although the use of these
instruments for Hedging should tend to minimize the risk of loss due to a
decline in the value of the position, at the same time they tend to limit
any potential gain which might result from an increase in the value of such
position. The ability of the Trust to successfully utilize these Hedging
techniques will depend on the Advisor's ability to predict pertinent market
movements and sufficient correlations, which cannot be assured. Finally,
the daily deposit requirements in any futures contracts that the Trust has
sold create an ongoing greater potential financial risk than do options
transactions, where the exposure is limited to the cost of the initial
premium. Losses due to the use of Hedging techniques will reduce NAV.
The Trust may purchase and sell put and call options on
securities and indices solely for Hedging purposes. The Trust may also
purchase and sell options on stock indices ("index options"). The Trust is
authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options") which are privately negotiated
with the counterparty solely for Hedging purposes. Listed options are
issued by the Options Clearing Corporation ("OCC") which guarantees the
performance of the obligations of the parties to such options. The Trust's
ability to close out its position as a purchaser or seller of an
exchange-listed put or call option is dependent upon the existence of a
liquid secondary market on option exchanges. The hours of trading for
options on debt securities may not conform to the hours during which the
underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price
and rate movements can take place in the underlying markets that cannot be
reflected in the option markets. In addition, the Trust may sell financial
futures contracts or purchase put and call options on such futures solely
for Hedging purposes. At the time a futures contract is purchased or sold,
the Trust must allocate cash or securities as a deposit payment ("initial
margin"). It is expected that the initial margin that the Trust will pay
may range from approximately 1% to approximately 5% of the value of the
securities or commodities underlying the contract. In certain
circumstances, however, such as periods of high volatility, the Trust may
be required by an exchange to increase the level of its initial margin
payment. Additionally, initial margin requirements may be increased
generally in the future by regulatory action. The Trust's use of futures
and options on futures will in all cases be consistent with applicable
regulatory requirements and in particular the rules and regulations of the
Commodity Futures Trading Commission ("CFTC").
In accordance with such regulations and the Trust's investment policies,
the Trust currently may enter into such transactions without limit for bona
fide Hedging purposes.
Futures contracts, interest rate swaps, caps, floors and
collars, short sales, reverse repurchase agreements and dollar rolls, and
listed options on securities, indices and futures contracts sold by the
Trust are generally subject to segregation and coverage requirements of
either the CFTC or the SEC (as defined below in this Item), with the result
that, if the Trust does not hold the security or futures contract
underlying the instrument, the Trust may be required to segregate on an
ongoing basis with its custodian, cash, U.S. government securities, or
other liquid high grade debt obligations in an amount at least equal to the
Trust's obligations with respect to such instruments. Such amounts
fluctuate as the obligations increase or decrease. The segregation
requirement can result in the Trust maintaining securities positions it
would otherwise liquidate, segregating assets at a time when it might be
disadvantageous to do so or otherwise restrict portfolio management.
The Trust may make short sales of securities solely for Hedging
purposes. Short sales will be made in compliance with applicable regulatory
requirements and will be fully collateralized at all times. In conjunction
with such sales, the Trust may have to pay a fee to borrow particular
securities and is often obligated to pay over any payments received on such
borrowed securities. The Trust's obligation to replace the borrowed
security will be secured by collateral deposited with the broker-dealer,
usually cash, U.S. government securities or other high grade liquid
securities. The Trust will also be required to segregate similar collateral
with its custodian if and to the extent necessary so that the aggregate
collateral value is at all times at least equal to the current market value
of the security sold short. Although the Trust's gain is limited to the
price at which it sold the security short, its potential loss is
theoretically unlimited. The Trust will not make a short sale if, after
giving effect to such sale, the market value of all securities sold short
exceeds 25% of the value of its total assets and the Trust's aggregate
short sales of a particular class of securities exceeds 25% of the
outstanding securities of that class. The Trust may also make short sales
"against the box" without respect to such limitations. In this type of
short sale, at the time of the sale, the Trust owns or has the immediate
and unconditional right to acquire at no additional cost the identical
security.
The Trust may enter into interest rate swaps and the purchase
or sale of interest rate caps and floors. The Trust will enter into such
transactions solely for Hedging purposes or for duration or risk
management. The Trust may enter into such transactions on either an
asset-based or liability-based basis, and will usually enter into interest
rate swaps on a net basis, i.e., the Trust would be receiving or paying, as
the case may be, only the net amount of the two payments to be made on the
applicable payment dates. The Trust will accrue the net amount of the
excess, if any, of the Trust's obligations over its entitlements with
respect to each interest rate swap on a daily basis and will segregate with
a custodian an amount of cash or liquid high grade securities having an
aggregate NAV at all times at least equal to the accrued excess. The Trust
will not enter into any interest rate swap, cap or floor transaction unless
the unsecured senior debt or the claims-paying ability of the other party
thereto is rated investment grade by at least one nationally recognized
statistical rating organization at the time of entering into such
transaction.
Futures transactions, options, swaps and other negotiated
derivative transactions, as well as short sales, typically involve one or
more of the following risks: (i) imperfect correlation between the
performance and value of the instrument and the value of the Trust's
securities or other objective of the Advisor; (ii) possible lack of a
secondary market for such instruments; (iii) losses resulting from
unanticipated interest rate or other market movements; and (iv) the
possible obligation to meet additional margin or other payment
requirements, all of which could adversely affect the Trust.
The Trust may invest temporarily, without limitation, in
repurchase agreements, which are agreements pursuant to which securities
are acquired by the Trust from a third party with the understanding that
they will be repurchased by the seller at a fixed price on an agreed date.
These agreements may be made with respect to any of the portfolio
securities in which the Trust is authorized to invest. Repurchase
agreements may be characterized as loans secured by the underlying
securities and will be entered into in accordance with the requirements of
the SEC. The Trust may enter into repurchase agreements with (i) member
banks of the Federal Reserve System having total assets in excess of $500
million and (ii) securities dealers, provided that such banks or dealers
meet the creditworthiness standards established by the Trustees ("Qualified
Institutions"). The Advisor will monitor the continued creditworthiness of
Qualified Institutions, subject to the supervision of the Trustees. The
resale price reflects the purchase price plus an agreed upon market rate of
interest which is unrelated to the coupon rate or date of maturity of the
purchased security. The collateral is marked to market daily. Such
agreements permit the Trust to keep all its assets earning interest while
retaining "overnight" flexibility in pursuit of investments of a
longer-term nature.
The Trust may also purchase securities on a "when-issued" basis
and may purchase or sell securities on a "forward commitment" basis. When
such transactions are negotiated, the price, which is generally expressed
in yield terms, is fixed at the time the commitment is made, but delivery
and payment for the securities take place at a later date. When-issued
securities and forward commitments may be sold prior to the settlement
date, but the Trust will enter into when-issued and forward commitments
only with the intention of actually receiving or delivering the securities,
as the case may be. If the Trust disposes of the right to acquire a
when-issued security prior to its acquisition or disposes of its right to
deliver or receive against a forward commitment, it can incur a gain or
loss. At the time the Trust enters into a transaction on a when-issued or
forward commitment basis, it will segregate with its custodian cash or
other liquid debt securities with a value not less than the value of the
when-issued or forward commitment securities or will treat the portion not
segregated as leverage. The value of these assets will be monitored daily
to ensure that their marked to market value will at all times equal or
exceed the corresponding obligations of the Trust.
The Trust may purchase certain restricted securities ("Rule
144A securities") eligible for sale to qualified institutional buyers as
contemplated by Rule 144A under the Securities Act of 1933 (the "1933
Act"). Rule 144A provides an exemption from the registration requirements
of the 1933 Act for the resale of certain restricted securities to
qualified institutional buyers. No assurance can be given that a liquid
market for Rule 144A securities will develop or be maintained. The Trust's
holdings of Rule 144A securities which are liquid securities will not be
subject to its limitation on investment in illiquid securities. The
Trustees will adopt policies and procedures for the purpose of determining
whether securities that are eligible for resale under Rule 144A are liquid
or illiquid and will periodically review the Trust's purchases and sales of
Rule 144A securities.
U.S. Government securities include U.S. Treasury bills, notes
and bonds, and securities issued by agencies and instrumentalities of the
U.S. Government such as the Federal Housing Administration (FHA), the
Government National Mortgage Association (GNMA), the Department of Housing
and Urban Development, the Export-Import Bank, the Farmers Home
Administration (FmHA), the General Services Administration, the Maritime
Administration and the Small Business Administration. Neither the value nor
the yield of the Trust's Shares or of the U.S. Government securities in
which the Trust may invest are guaranteed by the U.S. Government. Such
values and yields will fluctuate with changes in prevailing interest rates
and other factors. Generally, as prevailing interest rates rise, the value
of any U.S. Government security held by the Trust will fall. Such
securities with longer maturities generally tend to produce higher yields
and are subject to greater market fluctuation as a result of changes in
interest rates than debt securities with shorter maturities.
The Trust may invest in corporate debt securities, which
include securities issued by corporations and other entities, including
bonds and debentures, notes, certificates of deposit, banker's acceptances,
and commercial paper. These securities may have adjustable or fixed rates
of interest and may be secured or unsecured by assets of the issuer or
another party. Adjustable rate corporate debt securities may have interest
rate caps and floors but such corporate debt securities are not subject to
prepayment risk other than through contractual call provisions, which
generally impose a penalty for prepayment during all or a portion of the
period such securities are outstanding. Fixed rate debt securities may also
be subject to call provisions. Corporate debt securities are subject to the
bankruptcy risk of the issuer.
The Trust will be authorized to borrow money and utilize other
forms of leverage to the full extent permitted under the 1940 Act. The
Trust may borrow from banking institutions, through the capital markets or
in the commercial paper markets. The Trust expects to utilize leverage
principally by entering into reverse repurchase agreements in which it will
sell portfolio securities at a stated price and agree to repurchase them at
a later date at a price reflecting an imputed interest cost. The Trust may
also use other investment techniques that have similar leveraging effects
to reverse repurchase agreements. These leveraging techniques as well as
when-issued, delayed delivery and forward purchase commitments, will be
treated as "senior securities" subject to the Trust's borrowing
restrictions, to the extent that the Trust's potential obligations are not
covered in accordance with requirements imposed by the SEC under the 1940
Act.
Reverse repurchase agreements involve the sale of securities
held by the Trust with an agreement by the Trust to repurchase the
securities at an agreed upon price, date and interest payment. The use by
the Trust of reverse repurchase agreements involves many of the same risks
as leverage since the proceeds derived from such reverse repurchase
agreements may be invested in additional securities. Reverse repurchase
agreements involve the risk that the market value of the securities
acquired in connection with the reverse repurchase agreement may decline
below the price of the securities the Trust has sold but is obligated to
repurchase. Also, reverse repurchase agreements involve the risk that the
market value of the securities retained in lieu of sale by the Trust in
connection with the reverse repurchase agreement may decline in price. At
the time the Trust enters into a reverse repurchase agreement, it may
establish and maintain a segregated account with the custodian containing
liquid instruments having a value not less than the repurchase price
(including accrued interest). If the Trust establishes and maintains such a
segregated account, a reverse repurchase agreement will not be considered a
borrowing by the Trust; however, under circumstances in which the Trust
does not establish and maintain such a segregated account, such reverse
repurchase agreement will be considered a borrowing for the purpose of the
Trust's limitation on borrowings.
If the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, such buyer or its trustee or
receiver may receive an extension of time to determine whether to enforce
the Trust's obligation to repurchase the securities, and the Trust's use of
the proceeds of the reverse repurchase agreement may effectively be
restricted pending such decision. Also, the Trust would bear the risk of
loss to the extent that the proceeds of the reverse repurchase agreement
are less than the value of the securities subject to such agreement.
Although limited, the use of leverage by the Trust creates
certain risks. In particular, if the Trust leverages on a short-term basis
and invests the proceeds in longer-term securities, an increase in
short-term interest rates may reduce, eliminate or reverse the interest
rate differential otherwise available between short-term and long-term
rates, thereby reducing the Trust's net investment income or causing loss.
Conversely, an increase in long-term interest rates may reduce the value of
the Trust's leveraged long-term securities by more than the yield advantage
from the leverage and may cause substantial loss in the Trust's NAV.
Leverage also magnifies gains and losses attributable to other investment
policies and practices, such as investing in lower credit quality
securities. The Trust will only borrow or use leverage in accordance with
its investment policies and when the Advisor reasonably believes that such
use of leverage will benefit the Trust.
ITEM 18. MANAGEMENT
18.1 The following individuals are the officers and Trustees of
the Trust. A brief statement of their present positions and principal
occupations during the past five years is also provided.
Position(s)
Name, Age and Business Held With Principal Occupation(s)
Address Registrant During Past Five Years
-----------------------------------------------------------------------------
Wesley R. Edens (38) (1,2) Chief Executive Chief Executive Officer of
Fortress Investment Fund LLC Officer (and the Advisor, FIG and FIC;
1301 Avenue of the Americas Chairman of the formerly Head of GPF and
New York, NY 10019 Board of Managing Director at UBS;
Trustees) Partner and Managing
Director, BFM (asset
management company) and
Chief Operating Officer,
BAI. Also, Partner and
Managing Director, Lehman
Brothers (investment
banking).
Brian S. Abrams (40) Trustee Real Estate Portfolio
Fortress Investment Fund LLC Manager, DuPont Capital
1301 Avenue of the Americas Management
New York, NY 10019
John C. Deterding (68) Trustee Owner, Deterding Associates;
Fortress Investment Fund LLC Director, Atrium Companies
1301 Avenue of the Americas and Amresco Capital Trust
New York, NY 10019
Robert H. Gidel (48) (2) Trustee Managing Partner, Liberty
Fortress Investment Fund LLC Partners, LP and Liberty
1301 Avenue of the Americas Realty Partners LP; Chief
New York, NY 10019 Operating Officer and Board
Member, Brazos Fund;
President and Board
Member, Brazos Partners;
Investment Committee,
Lone Star Opportunity
Fund I and Lone Star
Opportunity Fund II;
Board of Directors,
American Industrial
Properties and Developers
Diversified Realty Corp.;
formerly Chief Executive
Officer and Board Member,
Meridian Point 8;
President, Chief
Operating Officer and
Board Member, Paragon
Group
Marcia Haydel (37) Trustee Portfolio Manager, General
Fortress Investment Fund LLC Motors Investment Management
1301 Avenue of the Americas Corporation (Global Private
New York, NY 10019 Markets Group); Member,
General Motors Investment
Management Corporation
Private Equity Investment
Committee; formerly Vice-
President of Fixed
Income, Alliance Capital
Management; Director of
Investments, MetLife
Investments Ltd.
Dennis Porterfield (63) Trustee formerly Executive Vice
Fortress Investment Fund LLC President, Summit Bancorp
1301 Avenue of the Americas
New York, NY 10019
Thomas E. Ruggels (44) Trustee Acting Senior Investment
Fortress Investment Fund LLC Officer - Private Equity,
1301 Avenue of the Americas Washington State Investment
New York, NY 10019 Board; formerly Investment
Officer, Washington State
Investment Board
John C. Sites, Jr. (48) Trustee General Partner, Daystar
Fortress Investment Fund LLC Special Situations Fund, L.P.
1301 Avenue of the Americas and Rock Creek Partners II,
New York, NY 10019 Ltd.; formerly Senior
Managing Director,
Executive Vice President
and Board Member of Bear
Stearns & Company
Robert I. Kauffman (36) President President, Advisor, FIG and
Fortress Investment Fund LLC FIC; formerly, Managing
1301 Avenue of the Americas Director, GPF and UBS;
New York, NY 10019 Principal, BFM; Managing
Director, BAI; Executive
Director, LBI (Europe)
and Vice President,
Lehman Brothers.
Randal A. Nardone (44) Chief Operating Chief Operating Officer and
Fortress Investment Fund LLC Officer and Secretary, Advisor, FIG and
1301 Avenue of the Americas Secretary FIC; formerly Managing
New York, NY 10019 Director, GPF and UBS;
Principal, BFM; Managing
Director, BAI; and
Partner, Thatcher
Proffitt (attorneys).
Gregory F. Hughes (37) Chief Financial Chief Financial Officer,
Fortress Investment Fund LLC Officer Advisor, FIG and FIC;
1301 Avenue of the Americas formerly Chief Financial
New York, NY 10019 Officer, Wellsford Real
Properties, Inc.;
Chief Financial Officer,
Wellsford Residential
Property Trust
Erik P. Nygaard (40) Chief Chief Information Officer
Fortress Investment Fund LLC Information and Treasurer, Advisor, FIG
1301 Avenue of the Americas Officer and and FIC; formerly, Managing
New York, NY 10019 Treasurer Director, GPF and UBS;
Principal, BFM; Managing
Director, BAI; Director,
Nomura Securities
International (investment
banking); and Vice
President, Lehman
Brothers.
-----------
1. Trustees who are directors, officers or employees of the Advisor
2. Trustees who may be deemed to be "interested persons" of the Trust
Each Trustee (other than any Trustee who is an "affiliated
person" of the Trust or the Advisor) shall receive the following amounts
for serving as a Trustee: (i) $6,000 per year, (ii) $1,000 per physical
meeting, and (iii) $125 per telephonic meeting, subject to a cap of $500
per year for all telephonic meetings. The Trust also pays each Trustee
(whether or not such person is a partner, director, officer or employee of
the Advisor or any affiliate thereof or successor thereto) for all
out-of-pocket expenses of such Trustee incurred in attending each such
meeting.
18.2 See Item 18.1
18.3 Not Applicable
18.4 Not Applicable
18.5 See Exhibit R attached hereto.
ITEM 19. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
19.1 Fortress Investment Fund LLC, which is organized under the
laws of the State of Delaware and has offices at 1301 Avenue of the
Americas, New York, New York, 10019 owns 100% of the Common Shares.
19.2 See Item 19.1
19.3 None
ITEM 20. INVESTMENT ADVISORY AND OTHER SERVICES
20.1-6 See Item 9 - Management.
20.7 The Trust's independent auditors are Ernst & Young LLP,
1211 Avenue of the Americas, New York, New York 10036. Ernst & Young LLP
audits the Trust.
20.8 None.
ITEM 21. BROKERAGE ALLOCATION AND OTHER PRACTICES
21.1 See Item 9 - Management, above. From time to time, one or
more of the investment companies or accounts which the Advisor manages may
own the same investments as the Trust. Investment decisions for the Trust
are made independently from those of such other investment companies or
accounts; however, from time to time, the same investment decision may be
made for more than one company or account. Subject to the foregoing, when
two or more investment companies or accounts managed by the Advisor or its
affiliates seek to purchase or sell the same securities, the securities
actually purchased or sold will be allocated among the companies and
accounts on a good faith equitable basis by the Advisor in its discretion
in accordance with the accounts' various investment objectives. In some
cases, this system may adversely affect the price or size of the position
obtainable for the Trust. In other cases, however, the ability of the Trust
to participate in volume transactions may produce better execution for the
Trust. The foregoing principles will not apply in the case of subordinated
MBS issued through the Trust's mortgage affiliates, which will not be sold
to any of the other investment companies or accounts managed by the Advisor
and will not be sold to any other first-tier or second-tier "affiliated"
person of the Trust, except to an investment company which has obtained an
exemption from the SEC with respect to relevant sections of the 1940 Act.
The Advisor will, subject to the investment limitations and
restrictions set forth herein, make all decisions to buy and sell
securities for the Trust, will select dealers to effect transactions, will
negotiate prices, and will effect securities transactions in a manner
deemed fair and reasonable to Shareholders of the Trust and not according
to any formula. The Advisor's primary considerations in selecting the
manner of executing securities transactions for the Trust will be prompt
execution of orders, the size and breadth of the market for the security,
the reliability, integrity and financial condition and execution capability
of the firm, the size of and difficulty in executing the order, and the
best net price. The securities in which the Trust will invest are traded
principally in the over-the-counter market on a "net" basis with dealers
acting as principal for their own accounts without a stated commission,
although the price of the security usually includes a mark-up to the
dealer. The Trust is expected to acquire a substantial portion of its
securities directly from the Trust Operating Subsidiary, in which case no
commissions or discounts will be paid.
There are many instances when, in the judgment of the Advisor,
more than one firm can offer comparable execution services. In selecting
among such firms, consideration is given to those firms which supply
research and other services in addition to execution services. However, it
is not the policy of the Advisor, absent special circumstances, to pay
higher commissions to a firm because it has supplied such services. The
Advisor is able to fulfill its obligations to furnish a continuous
investment program to the Trust without receiving such information from
brokers; however, it considers access to such information to be an
important element of financial management. Although such information is
considered useful, its value is not determinable, as it must be reviewed
and assimilated by the Advisor, and does not reduce the Advisor's normal
research activities in rendering investment advice under the Advisory
Agreement. It is possible that the Advisor's expenses could be materially
increased if it attempted to purchase this type of information or generate
it through its own staff.
Although the Advisory Agreement contains no restrictions on
portfolio turnover, it is not the Trust's policy to engage in transactions
with the objective of seeking profits from short-term trading. It is
expected that the annual portfolio turnover rate of the Trust will not
exceed 400% excluding securities having a maturity of one year or less.
Because it is difficult to predict accurately portfolio turnover rates,
actual turnover may be higher or lower. Higher portfolio turnover results
in increased Trust expenses, including brokerage commissions, dealer mark-
ups and other transaction costs on the sale of securities and on the
reinvestment in other securities.
21.2 None.
21.3 See response to Item 21.1.
21.4 None.
21.5 None.
ITEM 22. TAX STATUS
The following discussion is based on the advice of Skadden,
Arps, Slate, Meagher & Flom LLP, counsel to the Trust, and except as
otherwise indicated, reflects provisions of the Code as of the date of this
Registration Statement. In addition, the following discussion is a general
summary of certain of the current federal income tax laws regarding the
Trust and the Shareholder, and does not purport to deal with all of the
federal income tax consequences or any of the state or other tax
considerations applicable to the Trust or the Shareholder, or to all
categories of investors, some of which may be subject to special rules.
Prospective investors should consult their own tax advisors regarding the
federal, state, local, foreign income and other tax consequences to them of
investments in the Trust, including the effects of any changes, including
proposed changes, in the tax laws.
Taxation of the Trust. The Trust and the Advisor will use their
respective best efforts to ensure that the Trust qualifies each year and
elects to be treated as a regulated investment company for federal income
tax purposes. In order to qualify for treatment as a regulated investment
company, the Trust must make an election to be so treated and must
distribute to the Shareholder for each taxable year at least 90% of its
investment company taxable income (the "Distribution Requirement") and must
meet several additional requirements. These requirements include the
following: (1) the Trust must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans and gains from the sale or other disposition of securities or foreign
currencies, or other income (including gains from options, futures or
forward contracts) derived with respect to its business of investing in
securities or those currencies ("Qualified Income Requirement"); (2) at the
close of each quarter of the Trust's taxable year, at least 50% of the
value of its total assets must be represented by cash and cash items, U.S.
government securities, securities of other regulated investment companies
and other securities that are limited, in respect of any one issuer, to an
amount that does not exceed 5% of the value of the Trust's total assets and
that does not represent more than 10% of the issuer's outstanding voting
securities; and (3) at the close of each quarter of the Trust's taxable
year, not more than 25% of the value of its total assets may be invested in
securities (other than U.S. government securities or the securities of
other regulated investment companies) of any one issuer or of two or more
issuers which the Trust controls and which are engaged in the same or
related trades or businesses (collectively, the "Diversification
Requirement").
For purposes of the foregoing requirements, the Trust will be
treated as owning the assets owned by and earning the income generated by
the Trust Operating Subsidiary. Moreover, the Trust's ownership of the
Trust Operating Subsidiary should not cause the Trust to violate the
Diversification Requirement. If for any reason, however, the Trust did not
qualify as a regulated investment company, the Trust would be taxable as an
ordinary corporation, which could have a material adverse effect on the
Trust and its Shareholder.
The Trust will be subject to a non-deductible 4% excise tax
("Excise Tax") to the extent that it fails to distribute by the end of any
calendar year substantially all of its net ordinary income for that year
and capital gain net income for the one-year period ending on October 31st
of that year, plus certain other amounts. For these purposes, any such
income retained by the Trust, and on which it pays U.S. federal income tax,
will be treated as having been distributed. The Trust's Amended and
Restated Declaration of Trust provides that the Trust will make actual or
constructive distributions in such amounts, and at such times, so that it
is not subject to the Excise Tax or to federal income tax on undistributed
income.
Some of the investment practices that may be employed by the
Trust, either directly or indirectly by the Trust Operating Subsidiary,
will be subject to special provisions that, among other things, may affect
the timing and character of the gains or losses recognized by the Trust.
These provisions may also require the Trust to accrue original issue
discount or be treated as having sold mortgage loans for their fair market
value, both of which may cause the Trust to recognize income without
receiving cash with which to make distributions in amounts necessary to
satisfy the Distribution Requirement and avoid imposition of the Excise
Tax. The Trust may be required to liquidate portfolio securities or borrow
funds in order to satisfy the Distribution Requirement and avoid the Excise
Tax.
The Trust intends to invest in mortgages, some of which may be
non-performing at the time they are purchased and which may require
modifications of their terms in order to convert such non-performing
mortgages into performing mortgages. If substantial modifications are made
to a particular mortgage, the Trust will be treated for federal income tax
purposes as having exchanged such mortgage for a new mortgage, and will be
required to recognize a gain or loss equal to the difference between the
fair market value of such renegotiated mortgage and the Trust's basis
therein. Such gain or loss will most likely be ordinary in character, as it
will arise in the context of the Trust's trade or business. Any gain
recognized by virtue of such a deemed exchange will increase the amount
that the Trust is required to distribute to its Shareholders in order to
satisfy the Distribution Requirement and to avoid the Excise Tax. In some
years, therefore, the Trust may be required to distribute an amount greater
than the total cash the Trust actually receives. Accordingly, in order to
make the required distributions, the Trust may be required to liquidate
portfolio securities or borrow funds.
To the extent that the Trust Operating Subsidiary is unable to
convert non-performing mortgages into performing mortgages, the Trust
Operating Subsidiary may foreclose on such mortgages and take title to the
underlying real property. Income arising from the rental or sale of such
real property will not satisfy the Qualified Income Requirement. To the
extent that such income, when combined with any other non-Qualifying Income
of the Trust, exceeds 10% of the Trust's gross income for any taxable year,
the Trust would be unable to qualify as a regulated investment company for
such taxable year. The Trust will use its best efforts to ensure that it
qualifies as a regulated investment company for each taxable year.
Income received by the Trust either directly or indirectly
through the Trust Operating Subsidiary from investments in foreign
securities may be subject to income, withholding or other taxes imposed by
foreign countries and U.S. possessions. Such taxes will generally not be
deductible or creditable by the Shareholder (but may be deductible by the
Trust), and may be withheld at a higher rate than that which would be
applicable if the underlying securities had been held directly by the
Shareholder. Tax conventions between certain countries and the United
States may reduce or eliminate those taxes.
The Trust intends to engage in various hedging transactions.
Under various provisions of the Code, the result of such investments and
transactions may be to change the character of recognized gains and losses,
accelerate the recognition of certain gains and losses, and defer the
recognition of certain losses. The amount of the Trust's income that must
be distributed each year to satisfy the Distribution Requirement and to
avoid the Excise Tax, and the amount and timing of the recognition by the
Shareholder of ordinary income and long-term capital gain, may be affected
by these provisions.
Interest income from non-U.S. securities may be subject to
withholding taxes imposed by the country in which the issuer is located and
the Trust will generally not be able to pass through to Shareholders
foreign tax credits or deductions with respect to these taxes.
Pursuant to a provision of the Code governing the treatment of
stripped securities, an investment in a principal-only class of securities
will result in original issue discount and, consequently, will result in
income to the Trust. Accordingly, investment by the Trust in such
instruments (or in other instruments which bear original issue discount)
would require the Trust to include such original issue discount in its
income as it accrues, prior to the receipt of the cash attributable to such
income.
The Trust's taxable income will in most cases be determined on
the basis of reports made to the Trust by the issuers of the securities in
which the Trust invests. The tax treatment of certain securities in which
the Trust may invest is not free from doubt and it is possible that an
Internal Revenue Service ("IRS") examination of the issuers of such
securities or of the Trust could result in adjustments to the income of the
Trust.
Distributions of the Trust's investment company taxable income
will be taxable to the Shareholders as ordinary dividends. Distributions
that exceed the Trust's earnings and profits generally are treated as a
return of capital, and to the extent such distributions exceed the
Shareholder's basis in its Shares of the Trust, will be treated as capital
gain. Distributions (or deemed distributions) of the Trust's net capital
gain, when designated as such, will be taxable to the Shareholder (or its
owners) as long-term capital gain. The Shareholder will be notified
following the end of each calendar year of the amounts of ordinary and
capital gain dividends paid (or deemed paid) that year and undistributed
capital gain designated for that year.
Should the Trust fail to qualify as a regulated investment
company for any taxable year, it will be treated for federal income tax
purposes as a corporation and subject to corporate-level income tax
(currently at a maximum marginal rate of 35%) on its taxable income for
such taxable year. Such tax liability could materially and adversely affect
the cash flow of the Trust available for distributions. In addition, the
Trust could be forced to liquidate portfolio securities or borrow to meet
such liability. Consequently, failure of the Trust to qualify as a
regulated investment company could have a material adverse effect on the
Trust and the Shareholder. Also, if the Trust fails to so qualify for a
taxable year, it may be difficult for the Trust to regain status as a
regulated investment company in subsequent taxable years.
ITEM 23. FINANCIAL STATEMENTS
Financial Statements of the Trust are incorporated herein by
reference to the Trust's annual report filed with the SEC on Form N-30D on
May 1, 2000.
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
24.1 FINANCIAL STATEMENTS:
Included in Part A of the Registration Statement:
Financial Highlights for the period ended February 29, 2000, which
have been incorporated by reference to the Trust's annual report filed with
the SEC on Form N-30D on May 1, 2000.
Included in Part B of the Registration Statement:
Incorporated by reference to the Trust's annual report filed with the
SEC on Form N-30D on May 1, 2000:
Statement of Assets and Liabilities as of February 29, 2000 (audited)
Schedule of Investments as of February 29, 2000 (audited)
Statement of Operations for the Period from November 23, 1999 (Date
of Formation) to February 29, 2000 (audited)
Statement of Cash Flows for the Period from November 23, 1999 (Date
of Formation) to February 29, 2000 (audited)
Statement of Changes in Net Assets for the Period from November 23,
1999 (Date of Formation) to February 29, 2000 (audited)
Notes to Financial Statements, as of February 29, 2000
Report of Independent Auditors, as of and for the Period from
November 23, 1999 (Date of Formation) to February 29, 2000, dated
April 17, 2000, except for Note 5, as to which the date is April
25, 2000
24.2 EXHIBITS:
The exhibits to this Registration Statement are listed in the Exhibit
Index located elsewhere herein.
ITEM 25. MARKETING ARRANGEMENTS
None.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Not Applicable.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The Trust controls the Trust Operating Subsidiary, a Delaware
limited liability company, as a wholly-owned subsidiary; Fortress CAP LLC,
a Delaware limited liability company, as a wholly-owned subsidiary;
Fortress IF Acquisition LLC, a Delaware limited liability company, as a
wholly-owned subsidiary; Fortress HQ LLC, a Delaware limited liability
company, as a wholly-owned subsidiary; and Fortress Brookdale Acquisition
LLC, a Delaware limited liability company, as a wholly-owned subsidiary.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
Title of Class Number of Record Holders
-------------- ------------------------
Common Shares 1
Notes 103
ITEM 29. INDEMNIFICATION
Under the Trust's Declaration of Trust, the Trust agrees to
indemnify the Trustees and officers of the Trust (each such person being an
"indemnitee") against any liabilities and expenses, including amounts paid
in satisfaction of judgments, in compromise or as fines and penalties, and
reasonable counsel fees reasonably incurred by such indemnitee in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative
or investigative body in which he may be or may have been involved as a
party or otherwise or with which he may be or may have been threatened,
while acting in any capacity set forth above in this paragraph by reason of
his having acted in any such capacity, except with respect to any matter as
to which he shall not have acted in good faith in the reasonable belief
that his action was in the best interest of the Trust or, in the case of
any criminal proceeding, as to which he shall have had reasonable cause to
believe that the conduct was unlawful; provided, however, that no
indemnitee shall be indemnified hereunder against any liability to any
person or any expense of such indemnitee arising by reason of (i) willful
misfeasance, (ii) bad faith, (iii) gross negligence (negligence in the case
of those Trustees or officers who are directors, officers or employees of
the Advisor), or (iv) reckless disregard of the duties involved in the
conduct of his position. Notwithstanding the foregoing, with respect to any
action, suit or other proceeding voluntarily prosecuted by any indemnitee
as plaintiff, indemnification shall be mandatory only if the prosecution of
such action, suit or other proceeding by such indemnitee was authorized by
a majority of the Trustees and a majority of the Investor Trustees.
Further, pursuant to the Advisory Agreement, the Trust agrees to
indemnify the Advisor and each of the Advisor's directors, officers,
employees and controlling persons and the partners, directors, officers and
employees thereof (including any individual who serves at the Advisor's
request as a director, officer, partner, trustee or the like of any of the
Trust's mortgage affiliates (each such person being an "indemnitee"))
against any liabilities and expenses, including amounts paid in
satisfaction of judgments, in compromise or as fines and penalties, and
reasonable counsel fees reasonably incurred by such indemnitee in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative
or investigative body in which he may be or may have been involved as a
party or otherwise or with which he may be or may have been threatened,
while acting in any capacity set forth above in this paragraph with respect
to the services provided hereunder or thereafter by reason of his having
acted in any such capacity, except with respect to any matter as to which
he shall not have acted in good faith in the reasonable belief that his
action was in the best interest of the Trust or, in the case of any
criminal proceeding, as to which he shall have had reasonable cause to
believe that the conduct was unlawful; provided, however, that no
indemnitee shall be indemnified hereunder against any liability to any
person or any expense of such indemnitee arising by reason of (i) willful
misfeasance, (ii) bad faith, (iii) negligence or (iv) reckless disregard of
the duties involved in the conduct of his position. Notwithstanding the
foregoing, with respect to any action, suit or other proceeding voluntarily
prosecuted by any indemnitee as plaintiff, indemnification shall be
mandatory only if the prosecution of such action, suit or other proceeding
by such indemnitee was authorized by a majority of the Trustees and a
majority of the Investor Trustees.
Insofar as indemnification for liabilities under the 1933 Act may
be permitted to the Trustees, officers or employees, the Trust has been
advised that in the opinion of the SEC such indemnification is against
public policy as expressed in such Act and is therefore unenforceable. If a
claim for indemnification against such liabilities under the 1933 Act
(other than for expenses incurred in a successful defense) is asserted
against the Trust by the directors or officers in connection with the
Shares, the Trust will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in such Act and will be governed by the final
adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
For information as to the business, profession, vocation or
employment of a substantial nature of each of the officers and directors of
the Advisor, reference is made to the Advisor's current Form ADV, which
shall be filed under the Investment Advisors Act of 1940, and incorporated
herein by reference upon filing.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Trust are maintained in part at
the office of the Advisor at 1301 Avenue of the Americas, New York, New
York 10019, and in part at the offices of the Custodian with offices at
114 West 47th Street, New York, NY 10036-1532.
ITEM 32. MANAGEMENT SERVICES
Except as described above in Item 9 - Management, the Trust is not
a party to any management service related contract.
ITEM 33. UNDERTAKINGS
Not Applicable.
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, as of the 30th day of May, 2000.
FORTRESS REGISTERED INVESTMENT TRUST
(Registrant)
/s/
------------------------------------
Wesley R. Edens
Chief Executive Officer
SCHEDULE OF EXHIBITS TO FORM N-2
Exhibit Exhibit Page
Number Number
Exhibit A Amended and Restated
Declaration of Trust.......................
Exhibit B By-Laws....................................
Exhibit C None.......................................
Exhibit D Not Applicable.............................
Exhibit E None.......................................
Exhibit F Not Applicable.............................
Exhibit G Form of Investment Advisory Agreement......
Exhibit H Not Applicable.............................
Exhibit I None.......................................
Exhibit J Form of Custodian Agreement................
Exhibit K None.......................................
Exhibit L Not Applicable ............................
Exhibit M None.......................................
Exhibit N Consent of Independent Auditors............
Exhibit O Not Applicable.............................
Exhibit P Form of Subscription Agreement.............
Exhibit Q None.......................................
Exhibit R Form of Code of Ethics.....................
1. Form of Trust Code of Ethics............
2. Form of Adviser Code of Ethics..........
