Equity Vehicle Concept Frequency Advantages Disadvantages Time-Based Restricted Stock Grant of actual shares of stock subject to restrictions and risk of forfeiture until vested, contingent upon remaining an employee through a specified date; typically, dividends or dividend equivalents are paid during the vesting period High ■ Full owner benefits (right to receive dividends and right to vote) ■ Grantee has ability to make a Section 83(b) election ■ 100% of potential shares must be granted on day one (i.e., no ability to convert up to 150% or 200% of target) ■ Company must withhold income taxes at the time the tax liability arises (vesting or a Section 83(b) election is made even if cash or liquidity is unavailable) ■ Dividends paid on unvested stock are reportable as compensation (unless Section 83(b) election is made) Time-Based RSUs Right, denominated in shares of company stock, to receive a future payment, which may be contingent on future service, with the payment equal to the number of shares earned or the then-equivalent cash value (economic value and vesting criteria are the same as equity granted in REIT shares) High ■ Provides more flexibility in plan design (i.e., units may convert at 150% or 200% of the target) ■ May be settled in stock or cash ■ Can allow for the deferral of taxes under Section 409A. See “Section 409A” below. ■ No voting rights until units have vested ■ Grantee does not have the ability to make a Section 83(b) election PerformanceBased Restricted Stock/RSUs Can be applied to any type of equity-based award, or cash award, in which vesting or payment is dependent on the satisfaction of performance criteria High ■ Can provide incentives to accomplish a wide range of company and individual goals and objectives ■ Can encourage a longerterm focus compared to the short-term focus of stock price ■ Positively viewed from a governance perspective ■ Grantee may not have voting rights, and accrued dividends are only paid on earned shares ■ Executives will receive no shares if company does not achieve minimum threshold ■ Company may recognize an accounting expense even if no shares are received LTIP Units Issuance of equity awards in the form of OP Units (or LTIP Units) as opposed to restricted stock that have special terms in order for them to qualify as “profits interest” for U.S. federal income tax purposes, including a “book-up” event requirement and holders being entitled to a portion of “profits” Can also be used to replicate stock options/ stock-settled SARs Moderate ■ Highly taxefficient equity vehicle for executives because it allows for tax deferral until the time of conversion at the grantee’s election ■ Effective tax rate upon conversion is more favorable than ordinary income tax rate afforded to restricted shares/RSUs ■ Full benefit of the award is dependent upon future appreciation of the company’s assets (i.e., “book-up” event) ■ Requires units to be held for three years to recognize the full tax benefits ■ Increased costs of tax compliance and administration of the operating partnership Stock Options/ SARs Right (but not the obligation) to purchase shares of company stock at a specified price over a specific period of time (or the right to receive the value of the appreciation in the stock price) Low ■ Provides a risk-free right to appreciation in stock price ■ Highly levered and may yield meaningful value in periods of significant stock price growth ■ Receives lower valuation for accounting purposes ■ No dividend distributions ■ No value earned if the stock price does not appreciate ■ Company may recognize an accounting expense even if no shares are received Advantages and Disadvantages of Commonly Used Equity Awards in the REIT Industry 2024 Guide to REIT Executive Compensation | 26
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