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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K

þ	 	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 	 	For the fiscal year ended December 31, 2009	
or	
o	 	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 	 	For the transition period from          to          	
 
Commission file number: 001-32136
Arbor Realty Trust, Inc.
(Exact name of registrant as specified in its charter)

Maryland	 	20-0057959	
(State or other jurisdiction
of incorporation)	 	(I.R.S. Employer
Identification No.)	
 	 	 	
333 Earle Ovington Boulevard, Suite 900
Uniondale, NY
(Address of principal executive offices)	 	11553
(Zip Code)	
 
(516) 506-4200
 
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	 	Name of Each Exchange on Which Registered	
 	 	 	
Common stock, par value $0.01 per share	 	The New York Stock Exchange	
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o      No  þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o      No  þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ      No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o      No  o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 	 	 	 	 	 	 	
Large accelerated filer  o	 	       Accelerated filer o	 	Non-accelerated filer o
(Do not check if a smaller reporting company)	 	Smaller reporting company  þ	
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o      No  þ
 
The aggregate market value of the registrant’s common stock, all of which is voting, held by non-affiliates of the registrant as of June 30, 2009 (computed based on the closing price on such date as reported on the NYSE) was $30.9 million. As of March 8, 2010, the registrant had 25,387,410 shares of common stock outstanding (excluding 279,400 shares held in treasury).
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the definitive proxy statement for the registrant’s 2010 Annual Meeting of Stockholders (the “2010 Proxy Statement”), to be filed within 120 days after the end of the registrant’s fiscal year ended December 31, 2009, are incorporated by reference into Part III of this Annual Report on Form 10-K.

 
 
INDEX

 	 	 	 	Page	
 	 	 	 	 	 	 	 	 	
PART I	
 	ITEM 1.	 	 	BUSINESS	 	 	1	 	
 	ITEM 1A.	 	 	RISK FACTORS	 	 	15	 	
 	ITEM 1B.	 	 	UNRESOLVED STAFF COMMENTS	 	 	32	 	
 	ITEM 2.	 	 	PROPERTIES	 	 	32	 	
 	ITEM 3.	 	 	LEGAL PROCEEDINGS	 	 	32	 	
 	ITEM 4.	 	 	RESERVED	 	 	32	 	
 	
PART II	
 	ITEM 5.	 	 	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	 	 	33	 	
 	ITEM 6.	 	 	SELECTED FINANCIAL DATA	 	 	35	 	
 	ITEM 7.	 	 	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	 	 	37	 	
 	ITEM 7A.	 	 	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	 	 	72	 	
 	ITEM 8.	 	 	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	 	 	75	 	
 	ITEM 9.	 	 	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	 	 	139	 	
 	ITEM 9A.	 	 	CONTROLS AND PROCEDURES	 	 	139	 	
 	ITEM 9B.	 	 	OTHER INFORMATION	 	 	140	 	
 	
PART III	
 	ITEM 10.	 	 	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	 	 	141	 	
 	ITEM 11.	 	 	EXECUTIVE COMPENSATION	 	 	141	 	
 	ITEM 12.	 	 	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	 	 	141	 	
 	ITEM 13.	 	 	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE	 	 	141	 	
 	ITEM 14.	 	 	PRINCIPAL ACCOUNTING FEES AND SERVICES	 	 	141	 	
 	
PART IV	
 	ITEM 15.	 	 	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	 	 	142	 	
 	EX-21.1:	 	 	SUBSIDIARIES OF ARBOR REALTY TRUST, INC.	 	 	149	 	
 	EX-23.1:	 	 	CONSENT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	 	 	150	 	
 	EX-31.1:	 	 	CERTIFICATION	 	 	151	 	
 	EX-31.2:	 	 	CERTIFICATION	 	 	152	 	
 	EX-32.1:	 	 	CERTIFICATION	 	 	153	 	
 	EX-32.2:	 	 	CERTIFICATION	 	 	154	 	
 EX-4.2	
 EX-4.3	
 EX-4.4	
 EX-10.35	
 EX-10.36	
 EX-10.37	
 EX-10.38	
 EX-10.39	
 EX-10.40	
 EX-10.41	
 EX-10.42	
 EX-10.43	
 EX-21.1	
 EX-23.1	
 EX-31.1	
 EX-31.2	
 EX-32.1	
 EX-32.2	

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FORWARD LOOKING STATEMENTS
 
This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, the operating performance of our investments and financing needs. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,” “believe,” “could,” “project,” “predict,” “continue” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from forecasted results. Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in economic conditions generally and the real estate market specifically; adverse changes in the financing markets we access affecting our ability to finance our loan and investment portfolio; changes in interest rates; the quality and size of the investment pipeline and the rate at which we can invest our cash; impairments in the value of the collateral underlying our loans and investments; changes in the markets; legislative/regulatory changes; completion of pending investments; the availability and cost of capital for future investments; competition within the finance and real estate industries; and other risks detailed from time to time in our SEC reports. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our management’s views as of the date of this report. The factors noted above could cause our actual results to differ significantly from those contained in any forward-looking statement. For a discussion of our critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Arbor Realty Trust, Inc. and Subsidiaries — Significant Accounting Estimates and Critical Accounting Policies” under Item 7 of this report.
 
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.
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PART I

ITEM 1.  	BUSINESS	
 
Overview
 
Arbor Realty Trust, Inc. is a specialized real estate finance company that invests in a diversified portfolio of structured finance assets in the multi-family and commercial real estate markets. We invest primarily in real estate-related bridge and mezzanine loans, including junior participating interests in first mortgages, preferred and direct equity, and in limited cases, discounted mortgage notes and other real estate-related assets, which we refer to collectively as structured finance investments. We also invest in mortgage-related securities and real estate property. Our principal business objective is to maximize the difference between the yield on our investments and the cost of financing these investments to generate cash available for distribution, facilitate capital appreciation and maximize total return to our stockholders.
 
We are organized to qualify as a real estate investment trust (“REIT”) for federal income tax purposes. A REIT is generally not subject to federal income tax on that portion of its REIT taxable income (“Taxable Income”) that is distributed to its stockholders, provided that at least 90% of Taxable Income is distributed and provided that certain other requirements are met. Certain of our assets that produce non-qualifying income are held in taxable REIT subsidiaries. Unlike other subsidiaries of a REIT, the income of a taxable REIT subsidiary is subject to federal and state income taxes.
 
We commenced operations in July 2003 and conduct substantially all of our operations and investing activities through our operating partnership, Arbor Realty Limited Partnership, and its wholly-owned subsidiaries. We serve as the general partner of our operating partnership, and own a 100% partnership interest in our operating partnership as of December 31, 2009.
 
We are externally managed and advised by Arbor Commercial Mortgage, LLC (“ACM”), a national commercial real estate finance company that specializes in debt and equity financing for multi-family and commercial real estate, pursuant to the terms of a management agreement described below. ACM provides us with all of the services vital to our operations other than asset management and securitization, and our executive officers and other staff are all employed by our manager, ACM, pursuant to the management agreement. The management agreement requires ACM to manage our business affairs in conformity with the policies and investment guidelines that are approved and monitored by our board of directors.
 
We believe ACM’s experience and reputation positions it to originate attractive investment opportunities for us. Our management agreement with ACM was developed to capitalize on synergies with ACM’s origination infrastructure, existing business relationships and management expertise. ACM has granted us a right of first refusal to pursue all structured finance investment opportunities in the multi-family or commercial real estate markets that are identified by ACM or its affiliates. ACM continues to originate and service multi-family and commercial mortgage loans under Fannie Mae, Federal Housing Administration and conduit commercial lending programs. We believe that the customer relationships established from these lines of business may generate additional real estate investment opportunities for our business.
 
Current Market Conditions
 
In 2009, the global economic and financial deterioration that began in 2007 continued, resulting in ongoing disruptions in the credit and capital markets, significant devaluations of assets, lack of liquidity throughout the worldwide financial system and a global economic recession. Global deleveraging by most financial institutions has severely limited the availability of capital for most businesses, including those involved in the commercial real estate sector. As a result, we, and most institutions in our industry, have significantly reduced new investment activity until the capital markets become more stable and market liquidity increases. Under normal market conditions, we rely on these credit and equity markets to generate capital for financing the growth of our business. However, in this current environment, we are focused on managing our portfolio to preserve capital, generate and recycle liquidity from existing assets and actively manage our financing facilities.
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Global stock and credit markets have experienced prolonged price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. Commercial real estate classes in general have been adversely affected by this prolonged economic downturn and liquidity crisis. If this continues, the commercial real estate sector will likely experience additional losses, challenges in complying with the terms of financing agreements, decreased net interest spreads, and additional difficulties in raising capital and obtaining investment financing on attractive terms.
 
These market conditions have also resulted in the unavailability of certain types of financing, and, in certain cases, making terms for certain financings less attractive. If these conditions persist, lending institutions may be forced to exit markets such as repurchase lending, become insolvent, further tighten their lending standards or increase the amount of equity capital required to obtain financing. In addition, these factors may make it more difficult for borrowers to repay our loans as they may experience difficulties in selling assets, increased costs of financing or obtaining financing at all. It may also make it more difficult for companies like us to raise capital through the issuance of common or preferred stock.
 
This environment has had a significant impact on our business, our borrowers and real estate values throughout all asset classes and geographic locations. Declining real estate values will likely continue to minimize our level of new mortgage loan originations, since borrowers often use increases in the value of their existing properties to support the purchase or investment in additional properties. Borrowers may also be less able to pay principal and interest on our loans if the real estate economy weakens. Declining real estate values also significantly increase the likelihood that we will continue to incur losses on our loans in the event of default because the value of our collateral may be insufficient to cover our investment in the loan. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from loans in our portfolio as well as our ability to originate, sell and securitize loans, which would significantly harm our revenues, results of operations, financial condition, business prospects and our ability to make distributions to the stockholders. We have made, and continue to make modifications and extensions to loans when it is economically feasible to do so. In some cases, modification is a more viable alternative to foreclosure proceedings when a borrower can not comply with loan terms. In doing so, lower borrower interest rates, combined with non-performing loans will result in reduced net interest margins.
 
In summary, commercial real estate financing companies have been severely impacted by the current economic environment and have had very little access to the capital markets or the debt markets in order to meet their existing obligations or to refinance maturing debt, and it is difficult to predict when conditions will improve. We have responded to these troubled times by decreasing investment activity for capital preservation, aggressively managing our assets through restructuring and extending our debt facilities and repurchasing and retiring our previously issued debt at discounts when economically feasible. In order to accomplish these goals, we have worked closely with our borrowers in restructuring our loans, receiving payoffs and paydowns and monetizing our investments as appropriate. We will continue to remain focused on executing these strategies when appropriate and where available as this significant economic downturn persists.
 
Our Corporate History
 
On July 1, 2003, ACM contributed a portfolio of structured finance investments to our operating partnership. Concurrently with this contribution, we and our operating partnership entered into a management agreement with ACM pursuant to which ACM manages our investments for a base management fee and incentive compensation, and the nine person asset management group of ACM became our employees.
 
In exchange for ACM’s contribution of structured finance investments, our operating partnership issued approximately 3.1 million units of limited partnership interest, or operating partnership units, and approximately 0.6 million warrants to purchase additional operating partnership units at an initial exercise price of $15.00 per operating partnership unit to ACM. Concurrently, we, our operating partnership and ACM entered into a pairing agreement. Pursuant to the pairing agreement, each operating partnership unit issued to ACM and issuable to ACM upon exercise of its warrants for additional operating partnership units in connection with the contribution of initial assets was paired with one share of the Company’s special voting preferred stock. In October 2004, ACM exercised
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these warrants and held approximately 3.8 million operating partnership units, constituting an approximately 16% limited partnership interest in our operating partnership. ACM had the ability to redeem each of these operating partnership units for cash or, at our election, one share of our common stock. We granted ACM certain demand and other registration rights with respect to the shares of common stock that may be issued upon redemption of these operating partnership units. Each of these operating partnership units were also paired with one share of our special voting preferred stock entitling ACM to one vote on all matters submitted to a vote of our stockholders. Upon redemption of these operating partnership units, an equivalent number of shares of our special voting preferred stock would be redeemed and cancelled.
 
Concurrently with ACM’s contribution of investments to our operating partnership, we sold approximately 1.6 million of our units, each consisting of five shares of our common stock and one warrant to purchase an additional share of common stock at an initial exercise price of $15.00 per share, for $75.00 per unit in a private placement and agreed to register the shares of common stock underlying these units and warrants for resale under the Securities Act of 1933, as amended (the “1933 Act”). In July 2004, we registered approximately 9.6 million shares of common stock underlying these units and warrants. At December 31, 2005, approximately 1.6 million warrants were exercised, of which 0.5 million were exercised “cashless”, for a total of 1.3 million common shares issued pursuant to their exercise.
 
In April 2004, we closed our initial public offering in which we issued and sold 6.3 million shares of common stock and a selling stockholder sold 22,500 shares of common stock, each at $20.00 per share. Concurrently with the initial public offering, we sold 0.5 million shares of common stock at the initial public offering price directly to an entity wholly-owned by one of our directors. The underwriters of our initial public offering exercised their overallotment option and, in May 2004, we issued and sold an additional 0.5 million shares of our common stock pursuant to such exercise.
 
In March 2007, we filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”) under the 1933 Act with respect to an aggregate of $500.0 million of debt securities, common stock, preferred stock, depositary shares and warrants, that may be sold by us from time to time pursuant to Rule 415 of the 1933 Act. On April 19, 2007, the SEC declared this shelf registration statement effective.
 
In June 2007, we sold 2,700,000 shares of our common stock registered on the shelf registration statement in a public offering at a price of $27.65 per share, for net proceeds of approximately $73.6 million after deducting the underwriting discount and the other estimated offering expenses. We used the proceeds to pay down debt and finance our loan and investment portfolio. The underwriters did not exercise their over allotment option for additional shares.
 
Since January 2005, we completed three non-recourse collateralized debt obligation (“CDO”) transactions, whereby $1.44 billion of real estate-related and other assets were contributed to three newly-formed consolidated subsidiaries, which issued $1.21 billion of investment grade-rated floating-rate notes in three separate private placements. These proceeds were used to repay outstanding debt and resulted in a decreased cost of funds relating to the CDO assets.
 
Since March 2005, we issued a total of $290.0 million of junior subordinated notes in private placements. The junior subordinated notes are unsecured, have a maturity of 24 to 27 years, pay interest quarterly at a fixed rate or floating rate of interest based on three-month LIBOR and, absent the occurrence of special events, are not redeemable during the first five years. In February 2010, we retired $114.1 million of our junior subordinated notes in exchange for the re-issuance of certain of our own CDO bonds, as well as other assets.
 
In June 2008, our external manager exercised its right to redeem its approximate 3.8 million operating partnership units in our operating partnership for shares of our common stock on a one-for-one basis. In addition, the special voting preferred shares paired with each operating partnership unit, pursuant to the pairing agreement, were redeemed simultaneously and cancelled. ACM currently holds approximately 21.2% of the voting power of our outstanding common stock.
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Our Investment Strategy
 
Our principal business objectives are to invest in bridge and mezzanine loans, including junior participating interests in first mortgages, preferred and direct equity and other real estate-related assets in the multifamily and commercial real estate markets and actively manage our investment portfolio in order to generate cash available for distribution, facilitate capital appreciation and maximize total return to our stockholders. We believe the financing of multi-family and commercial real estate offers opportunities that demand customized financing solutions. We believe we can achieve these objectives through the following business and growth strategies:
 
Provide Customized Financing.  We provide financing customized to the needs of our borrowers. We target borrowers who have demonstrated a history of enhancing the value of the properties they operate, but whose options may be limited by conventional bank financing and who may benefit from the sophisticated structured finance products we offer.
 
Execute Transactions Rapidly.  We act quickly and decisively on proposals, provide commitments and close transactions within a few weeks and sometimes days, if required. We believe that rapid execution attracts opportunities from both borrowers and other lenders that would not otherwise be available. We believe our ability to structure flexible terms and close loans in a timely manner gives us a competitive advantage over our competition.
 
Manage Credit Quality.  A critical component of our strategy in the real estate finance sector is our ability to manage the real estate risk that is underwritten by our manager and us. We actively manage the credit quality of our portfolio by using the expertise of our asset management group, which has a proven track record of structuring and repositioning structured finance investments to improve credit quality and yield.
 
Use Arbor Commercial Mortgage’s Relationships with Existing Borrowers.  We capitalize on ACM’s reputation in the commercial real estate finance industry. ACM has relationships with a large borrower base nationwide. Since ACM’s originators offer senior mortgage loans as well as our structured finance products, we are able to benefit from its existing customer base and use its senior lending business as a potential refinance vehicle for our structured finance assets.
 
Offer Broader Products and Expand Customer Base.  We have the ability to offer a larger number of financing alternatives than ACM has been able to offer to its customers in the past. Our potential borrowers are able to choose from products offering longer maturities and larger principal amounts than ACM could previously offer.
 
Leverage the Experience of Executive Officers, Arbor Commercial Mortgage and Our Employees.   Our executive officers and employees, and those of ACM, have extensive experience originating and managing structured commercial real estate investments. Our senior management team has on average over 20 years of experience in the financial services industry.
 
Our Targeted Investments
 
We pursue lending and investment opportunities with property owners and developers who need interim financing until permanent financing can be obtained. We primarily target transactions where we believe we have competitive advantages, particularly our lower cost structure and in-house underwriting capabilities. Our structured finance investments generally have maturities of two to five years, depending on type, have extension options when appropriate, and generally require a balloon payment of principal at maturity. Borrowers in the market for these types of loans include, but are not limited to, owners or developers seeking either to acquire or refurbish real estate or to pay down debt and reposition a property for permanent financing.
 
Our investment program emphasizes the following general categories of real estate-related activities:
 
Bridge Financing.  We offer bridge financing products to borrowers who are typically seeking short-term capital to be used in an acquisition of property. The borrower has usually identified an undervalued asset that has been under managed and/or is located in a recovering market. From the borrower’s perspective, shorter term bridge financing is advantageous because it allows for time to improve the property value through repositioning the property without encumbering it with restrictive long term debt.
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The bridge loans we make typically range in size from $1 million to $75 million and are predominantly secured by first mortgage liens on the property. The term of these loans typically is up to five years. Historically, interest rates have typically ranged from 1.10% to 9.00% over 30-day LIBOR, with fixed rates ranging from 1.70% to 13.00%. At December 31, 2009, interest rates typically ranged from 1.70% to 8.00% over 30-day LIBOR, with fixed rates ranging from 1.70% to 12.20%. Additional yield enhancements may include origination fees, deferred interest, yield look-backs, and participating interests, which are equity interests in the borrower that share in a percentage of the underlying cash flows of the property. Borrowers generally use the proceeds of a conventional mortgage to repay a bridge loan.
 
Junior Participation Financing.  We offer junior participation financing in the form of junior participating interest in the senior debt. Junior participation financings have the same obligations, collateral and borrower as the senior debt. The junior participation interest is subordinated to the senior debt by virtue of a contractual agreement between the senior debt lender and the junior participating interest lender.
 
Our junior participation loans typically range in size from $1 million to $60 million and have terms of up to ten years. Historically, interest rates have typically ranged from 2.30% to 9.75% over 30-day LIBOR, with fixed rates ranging from 4.70% to 12.80%. At December 31, 2009, interest rates typically ranged from 2.30% to 7.20% over 30-day LIBOR, with fixed rates ranging from 4.70% to 12.80%. As in the case with our bridge loans, the yield on these investments may be enhanced by prepaid and deferred interest payments, yield look-backs and participating interests.
 
Mezzanine Financing.  We offer mezzanine financing in the form of loans that are subordinate to a conventional first mortgage loan and senior to the borrower’s equity in a transaction. Mezzanine financing may take the form of loans secured by pledges of ownership interests in entities that directly or indirectly control the real property or subordinated loans secured by second mortgage liens on the property. We may also require additional security such as personal guarantees, letters of credit and/or additional collateral unrelated to the property.
 
Our mezzanine loans typically range in size from $1 million to $50 million and have terms of up to ten years. Historically, interest rates have typically ranged from 2.00% to 12.00% over 30-day LIBOR, with fixed rates ranging from 5.00% to 16.00%. At December 31, 2009, interest rates typically ranged from 2.00% to 10.00% over 30-day LIBOR, with fixed rates ranging from 6.00% to 16.00%. As in the case with our bridge loans, the yield on these investments may be enhanced by prepaid and deferred interest payments, yield look-backs and participating interests.
 
We hold a majority of our mezzanine loans through subsidiaries of our operating partnership that are pass-through entities for tax purposes or taxable subsidiary corporations.
 
Preferred Equity Investments.  We provide financing by making preferred equity investments in entities that directly or indirectly own real property. In cases where the terms of a first mortgage prohibit additional liens on the ownership entity, investments structured as preferred equity in the entity owning the property serve as viable financing substitutes. With preferred equity investments, we typically become a special limited partner or member in the ownership entity.
 
Our preferred equity investments typically range in size from $0.3 million to $100.0 million, have terms up to ten years and interest rates that have typically ranged from 3.75% to 6.00% over 30-day LIBOR, with fixed rates ranging from 5.00% to 15.00%. At December 31, 2009, our preferred equity investments ranged in size from $0.3 million to $96.0 million and interest rates typically ranged from 4.50% to 6.00% over 30-day LIBOR, with fixed rates ranging from 6.22% to 11.40%.
 
Real Property Acquisitions.  We have, and may in the future, acquire real estate by foreclosure or deed in lieu of foreclosure related to our loans. Our management team may identify such assets and initiate an asset-specific plan to maximize the value of the collateral, which can include appointing a third party property manager, completing the construction or renovation of the property, continuing the sale of condominium units, leasing or increasing the occupancy of the property, or selling the entire asset or a partial interest to a third party. Additionally, we may identify real estate investment opportunities such as domestic real estate for repositioning and/or renovation and then disposition at an anticipated significant return. In these situations, we
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may act solely on our own behalf or in partnership with other investors. Typically, these transactions are analyzed with the expectation that we will have the ability to sell the property within a one to three year time period, achieving a significant return on invested capital. In connection with these transactions, speed of execution is often the most critical component to success. We may seek to finance a portion of the acquisition price through short-term financing. Repayment of the short-term financing will either come from the sale of the property or conventional permanent debt.
 
Note Acquisitions.  We may acquire real estate notes from lenders in situations where the borrower wishes to restructure and reposition its short-term debt and the lender wishes, for a variety of reasons (such as risk mitigation, portfolio diversification or other strategic reasons), to divest certain assets from its portfolio. These notes may be acquired at a discount. In such cases, we intend to use our management resources to resolve any disputes concerning the note or the property securing it and to identify and resolve any existing operational or any other problems at the property. We will then either restructure the debt obligation for immediate resale or sale at a later date, or reposition it for permanent financing. In some instances, we may take title to the property underlying the real estate note.
 
Equity Securities.  We have and may, in the future, invest in equity securities such as the common stock of a commercial real estate specialty finance company. Investments in these securities have the risk of stock market fluctuations which may result in the loss of our principal investment.
 
Commercial Real Estate Collateralized Debt Obligation Bonds.  We have and may, in the future, invest in securities such as investment grade commercial real estate collateralized debt obligation bonds. These certificates are purchased at a discount to their face value which is accreted into interest income on an effective yield adjusted for actual prepayment activity over the average life of the related security as a yield adjustment. These securities have underlying credit ratings assigned by the three leading nationally recognized rating agencies (Moody’s Investor Service, Standard & Poor’s and Fitch Ratings) and are generally not insured or otherwise guaranteed.
 
Commercial Mortgage-Backed Securities.  We have and may, in the future, invest in investment grade commercial mortgage-backed securities. These securities are purchased at a discount to their face value which is accreted into interest income on an effective yield adjusted for actual prepayment activity over the average life of the related security as a yield adjustment. These securities have underlying credit ratings assigned by the three leading nationally recognized rating agencies (Moody’s Investor Service, Standard & Poor’s and Fitch Ratings) and are generally not insured or otherwise guaranteed.
 
Our Structured Finance Investments
 
We own a diversified portfolio of structured finance investments consisting primarily of real estate-related bridge, junior participation interests in first mortgages, and mezzanine loans as well as preferred equity investments and mortgage-related debt securities.
 
At December 31, 2009, we had 126 loans and investments in our portfolio, totaling $2.0 billion. These loans and investments were for 69 multi-family properties, 27 office properties, 11 hotel properties, 11 land properties, six commercial properties, one condominium property, and two retail properties. We have an allowance for loan losses of $326.3 million at December 31, 2009 related to 31 loans in our portfolio with an aggregate carrying value, before reserves, of $693.7 million. The loan loss reserves were the result of our regular quarterly risk rating review process which is based on several factors including current market conditions, values and the operating status of these properties. We continue to actively manage all loans and investments in the portfolio through our strict underwriting and active asset management with the goal of maintaining the credit quality of our portfolio and limiting potential losses. We also have at December 31, 2009, seven commercial real estate collateralized debt obligation bond investments and three commercial mortgage-backed security investments with carrying values of $48.2 million and $12.7 million, respectively.
 
The overall yield on our loan and investments portfolio in 2009 was 5.08% on average assets of $2.3 billion. This yield was computed by dividing the interest income earned during the year by the average assets during the
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year. Our cost of funds in 2009 was 4.27% on average borrowings of $1.9 billion. This cost of funds was computed by dividing the interest expense incurred during the year by the average borrowings during the year.
 
Our average net investment (average assets less average borrowings) in 2009 was $418.6 million, resulting in average leverage (average borrowings divided by average assets) of 81.8%. Including average junior subordinated notes of $283.8 million as equity, our average leverage was 69.4%. The net interest income earned in 2009 yielded an 8.7% return on our average net investment during the year. This yield was computed by dividing net interest (interest income less interest expense) earned in 2009 by average equity (computed as average assets minus average borrowings) invested during the year.
 
Our business plan contemplates that our leverage ratio, including our junior subordinated notes as equity, will be around 70% to 80% of our assets in the aggregate. However, including our junior subordinated notes as equity, our leverage is generally not to exceed 80% of the value of our assets in the aggregate when considering additional financing sources unless approval to exceed the 80% limit is obtained from our board of directors. See “Operating Policies and Strategies” below for further details. At December 31, 2009, our overall leverage ratio including the junior subordinated notes as equity was 83%, which was the result of a decrease in the carrying value of our assets due to loan loss reserves.
 
The following table set forth information regarding our loan and investment portfolio as of December 31, 2009:

 	 	 	 	 	 	 	 	 	 	 	 	 	Weighted Average
	 	
 	 	 	 	 	 	 	Unpaid Principal
	 	 	Weighted Average
	 	 	Remaining
	 	
Type	 	Asset Class	 	Number	 	 	(Dollars in Thousands)	 	 	Pay Rate(1)	 	 	Maturity (months)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Bridge Loans	 	Multi Family	 	 	25	 	 	$	477,880	 	 	 	5.60	%	 	 	23.8	 	
 	 	Office	 	 	12	 	 	 	288,280	 	 	 	5.54	%	 	 	41.0	 	
 	 	Hotel	 	 	5	 	 	 	179,028	 	 	 	3.20	%	 	 	27.7	 	
 	 	Commercial	 	 	3	 	 	 	55,375	 	 	 	4.52	%	 	 	21.6	 	
 	 	Land	 	 	10	 	 	 	241,099	 	 	 	4.69	%	 	 	7.2	 	
 	 	Retail	 	 	1	 	 	 	3,835	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	56	 	 	 	1,245,497	 	 	 	5.00	%	 	 	25.0	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mezzanine Loans	 	Multi Family	 	 	24	 	 	 	140,770	 	 	 	7.08	%	 	 	35.1	 	
 	 	Office	 	 	7	 	 	 	106,475	 	 	 	6.63	%	 	 	33.1	 	
 	 	Hotel	 	 	2	 	 	 	30,000	 	 	 	3.23	%	 	 	5.0	 	
 	 	Condo	 	 	1	 	 	 	15,869	 	 	 	2.23	%	 	 	—	 	
 	 	Commercial	 	 	1	 	 	 	38,297	 	 	 	—	 	 	 	15.0	 	
 	 	Land	 	 	1	 	 	 	9,333	 	 	 	—	 	 	 	17.0	 	
 	 	Retail	 	 	1	 	 	 	2,750	 	 	 	10.85	%	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	37	 	 	 	343,494	 	 	 	5.43	%	 	 	27.2	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Junior Participations	 	Multi Family	 	 	4	 	 	 	60,550	 	 	 	3.23	%	 	 	31.9	 	
 	 	Office	 	 	7	 	 	 	162,350	 	 	 	5.90	%	 	 	56.7	 	
 	 	Hotel	 	 	3	 	 	 	28,686	 	 	 	7.41	%	 	 	58.2	 	
 	 	Commercial	 	 	1	 	 	 	3,491	 	 	 	7.89	%	 	 	10.0	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	15	 	 	 	255,077	 	 	 	5.46	%	 	 	50.3	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Preferred Equity	 	Multi Family	 	 	16	 	 	 	78,103	 	 	 	5.47	%	 	 	86.9	 	
 	 	Office	 	 	1	 	 	 	12,500	 	 	 	9.25	%	 	 	68.0	 	
 	 	Hotel	 	 	1	 	 	 	100,364	 	 	 	—	 	 	 	90.0	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	18	 	 	 	190,967	 	 	 	2.84	%	 	 	87.3	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	 	 	126	 	 	$	2,035,035	 	 	 	4.93	%	 	 	34.4	 	

 
 	 	 	
(1)	 	“Weighted Average Pay Rate” is a weighted average, based on the unpaid principal balances of each loan in the Company’s portfolio, of the interest rate that is required to be paid monthly as stated in the individual loan agreements. Certain loans and investments that require an additional rate of interest “Accrual Rate” to be paid at the maturity are not included in the weighted average pay rate as shown in the table.	

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The following table sets forth geographic and asset class information regarding our loan and investment portfolio as of December 31, 2009:

 	 	Unpaid Principal
	 	 	 	 	 	 	 	Unpaid Principal
	 	 	 	 	
Geographic Location	 	(Dollars in Thousands)	 	 	Percentage(1)	 	 	Asset Class	 	(Dollars in Thousands)	 	 	Percentage(1)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
New York	 	$	774,235	 	 	 	38.0	%	 	Multi Family	 	$	757,303	 	 	 	37.2	%	
California	 	 	250,767	 	 	 	12.3	%	 	Office	 	 	569,605	 	 	 	28.0	%	
Florida	 	 	216,989	 	 	 	10.7	%	 	Hotel	 	 	338,078	 	 	 	16.6	%	
Maryland	 	 	91,699	 	 	 	4.5	%	 	Land	 	 	250,432	 	 	 	12.3	%	
Texas	 	 	76,577	 	 	 	3.8	%	 	Commercial	 	 	97,163	 	 	 	4.8	%	
Michigan	 	 	44,500	 	 	 	2.2	%	 	Condo	 	 	15,869	 	 	 	0.8	%	
Diversified	 	 	326,892	 	 	 	16.1	%	 	Retail	 	 	6,585	 	 	 	0.3	%	
Other(2)	 	 	253,376	 	 	 	12.4	%	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	2,035,035	 	 	 	100.0	%	 	Total	 	$	2,035,035	 	 	 	100.0	%	

 
 	 	 	
(1)	 	Based on a percentage of the total unpaid principal balance of the underlying loans.	
 	 	 	
(2)	 	No other individual state makes up more than 2% of the total.	
 
Our Investments in Available-for-Sale Securities
 
Equity Securities.  During 2007, we purchased 2,939,465 shares of common stock of Realty Finance Corporation, formerly CBRE Realty Finance, Inc., a commercial real estate specialty finance company, for $16.7 million which had a fair value of $0.1 million, at December 31, 2009. We also had a margin loan agreement with a financial institution related to the purchases of this security which was not to exceed $7.0 million, bore interest at pricing over LIBOR, and was due upon demand from the lender. In July 2008, the margin loan was repaid in full.
 
Commercial Real Estate Collateralized Debt Obligation Bonds.  At December 31, 2009, two investment grade commercial real estate (“CRE”) collateralized debt obligation bonds, with a combined fair value of $0.4 million, were reclassified from held-to-maturity to available-for-sale as we intend to sell these bonds within one year as part of a debt restructuring. See “Our Investments in Held-to-Maturity Securities” below.
 
Our Investments in Held-to-Maturity Securities
 
Commercial Real Estate Collateralized Debt Obligation Bonds.  In 2008, we purchased $82.7 million of investment grade CRE collateralized debt obligation bonds for $58.1 million, representing a $24.6 million discount to their face value. To the extent that we believe the discount is collectable, it is accreted into interest income on an effective yield adjusted for actual prepayment activity over the average life of the related security as a yield adjustment. These securities bear interest at a weighted average spread of 34 basis points over LIBOR, have a weighted average stated maturity of 34.2 years but have an estimated average remaining life of 3.7 years due to the maturities of the underlying assets. At December 31, 2009, two investment grade CRE collateralized debt obligation bonds with a combined fair value of $0.4 million were reclassified from held-to-maturity to available-for-sale, as they were exchanged in the retirement of a portion of our own junior subordinated notes in February 2010.
 
Commercial Mortgage-Backed Securities.  In 2009, we purchased $17.0 million of investment grade commercial mortgage-backed securities (“CMBS”) for $12.4 million, representing a $4.6 million discount to their face value. To the extent that we believe the discount is collectable, it is accreted into interest income on an effective yield adjusted for actual prepayment activity over the average life of the related security as a yield adjustment. These securities bear interest at a weighted average coupon rate of 5.80%, have a weighted average stated maturity of 29.6 years but have an estimated average remaining life of 6.0 years due to the maturities of the underlying assets. We did not have any CMBS investments at December 31, 2008.
 
We intend to hold these remaining bonds to maturity. For the year ended December 31, 2009, the total average yield on the above securities based on their face values was 4.62%, including the accretion of discount.
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Regulatory Aspects of Our Investment Strategy
 
Real Estate Exemption from Investment Company Act.  We believe that we conduct, and we intend to conduct, our business at all times in a manner that avoids registration as an investment company under the Investment Company Act of 1940, as amended, or the Investment Company Act. Entities that are primarily engaged in the business of purchasing or otherwise acquiring “mortgages and other liens on and interests in real estate,” are exempt from registration under the Investment Company Act if they maintain at least 55% of their assets directly in qualifying real estate assets and meet certain other requirements. Assets that qualify for purposes of this 55% test include, among other things, direct investments in real estate and mortgage loans. Our bridge loans, which are secured by first mortgage liens on the underlying properties, and our loans that are secured by second mortgage liens on the underlying properties generally qualify for purposes of this 55% test. These two types of loans constituted more than 55% of our assets as of December 31, 2009.
 
Our investment guidelines provide that no more than 15% of our assets may consist of any type of mortgage-related securities and that the percentage of our investments in mortgage-related securities as compared to our structured finance investments be monitored on a regular basis.
 
Management Agreement
 
On July 1, 2003, we and our operating partnership entered into a management agreement with ACM. On January 19, 2005, we, our operating partnership, Arbor Realty SR, Inc., one of our subsidiaries and ACM entered into an amended and restated management agreement with substantially the same terms as the original management agreement in order to add Arbor Realty SR, Inc. as a beneficiary of ACM’s services. Pursuant to the terms of the management agreement, our manager has agreed to service and manage our investments and to provide us with multi-family and commercial real estate-related structured finance investment opportunities, finance and other services necessary to operate our business. Our manager is required to provide a dedicated management team to provide these services to us, the members of which will devote such of their time to our management as our independent directors reasonably deem necessary and appropriate, commensurate with our level of activity from time to time. We rely to a significant extent on the facilities and resources of our manager to conduct our operations. For performing services under the management agreement, as amended in August 2009, ACM receives a base management fee, incentive compensation and “success-based” compensation as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 of this report.
 
Operations
 
Our Manager’s Investment Services.  Under the management agreement, ACM is responsible for sourcing originations, providing underwriting services and processing approvals for all loans and other investments in our portfolio. ACM also provides certain administrative loan servicing functions with respect to our loans and investments. We are able to capitalize on ACM’s well established operations and services in each area described below.
 
Origination.  Our manager sources the origination of most of our investments. ACM has a network of over eight sales offices located in Bloomfield Hills, Michigan; Boston, Massachusetts; Plano, Texas; Dallas, Texas; Chicago, Illinois; New York, New York; and Uniondale, New York. These offices are staffed by approximately 20 loan originators who solicit property owners, developers and mortgage loan brokers. In some instances, the originators accept loan applications meeting our underwriting criteria from a select group of mortgage loan brokers. While a large portion of ACM’s marketing effort occurs at the branch level, ACM also markets its products in national industry publications and targeted direct mailings. ACM markets structured finance products and our product offerings using the same methods. Once potential borrowers have been identified, ACM determines which financing products best meet the borrower’s needs. Loan originators in every branch office are able to offer borrowers the full array of ACM’s and our structured finance products. After identifying a suitable product, ACM works with the borrower to prepare a loan application. Upon completion by the borrower, the application is forwarded to ACM’s underwriters for due diligence.
 
Underwriting.  ACM’s loan originators work in conjunction with its underwriters who perform due diligence on all proposed transactions prior to loan approval and commitment. The underwriters analyze each loan
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application in accordance with the guidelines set forth below in order to determine the loan’s conformity with respect to such guidelines. In general, ACM’s underwriting guidelines require it to evaluate the following: the historic and current property revenues and expenses; the potential for near-term revenue growth and opportunity for expense reduction and increased operating efficiencies; the property’s location, its attributes and competitive position within its market; the proposed ownership structure, financial strength and real estate experience of the borrower and property management; third party appraisal, environmental and engineering studies; market assessment, including property inspection, review of tenant lease files, surveys of property comparables and an analysis of area economic and demographic trends; review of an acceptable mortgagee’s title policy and an “as built” survey; construction quality of the property to determine future maintenance and capital expenditure requirements; and the requirements for any reserves, including those for immediate repairs or rehabilitation, replacement reserves, tenant improvement and leasing commission costs, real estate taxes and property casualty and liability insurance. Key factors considered in credit decisions include, but are not limited to, debt service coverage, loan to value ratios and property, financial and operating performance. Consideration is also given to other factors, such as additional forms of security and identifying likely strategies to affect repayment. ACM continuously refines its underwriting criteria based upon actual loan portfolio experience and as market conditions and investor requirements evolve.
 
Investment Approval Process.  ACM applies its established investment approval process to all loans and other investments proposed for our portfolio before submitting each proposal to us for final approval. A written report is generated for every loan or other investment that is submitted to ACM’s credit committee for approval. The report includes a description of the prospective borrower and any guarantors, the collateral and the proposed use of investment proceeds, as well as borrower and property consolidated financial statements and analysis. In addition, the report includes an analysis of borrower liquidity, net worth, cash investment, income, credit history and operating experience. If the transaction is approved by a majority of ACM’s credit committee, it is presented for approval to our credit committee, which consists of our chief executive officer, chief credit officer, and executive vice president of structured finance. All transactions require the approval of a majority of the members of our credit committee. Following the approval of any such transaction, ACM’s underwriting and servicing departments, together with our asset management group, assure that all loan approval terms have been satisfied and conform with lending requirements established for that particular transaction. If our credit committee rejects the loan and our independent directors allow ACM or one of its affiliates to pursue it, ACM will have the opportunity to execute the transaction.
 
Servicing.  ACM services our loans and investments through its internal servicing operations. Our manager currently services an expanding portfolio, consisting of approximately 1,152 loans with outstanding balances of $7.3 billion through its loan administration department in Buffalo, New York. ACM’s loan servicing operations are designed to provide prompt customer service and accurate and timely information for account follow up, financial reporting and management review. Following the funding of an approved loan, all pertinent loan data is entered into ACM’s data processing system, which provides monthly billing statements, tracks payment performance and processes contractual interest rate adjustments on variable rate loans. Our manager utilizes the operations of its loan administration department to service our portfolio with the same efficiency, accuracy and promptness. ACM also works closely with our asset management group to ensure the appropriate level of customer service and monitoring of these loans.
 
Our Asset Management Operations.  Our asset management group is comprised of 23 employees. Prior to our formation, the asset management group successfully managed numerous transactions, including complex restructurings, refinancings and asset dispositions for ACM.
 
Effective asset and portfolio management is essential to maximize the performance and value of a real estate investment. The asset management group customizes an asset management plan with the loan originators and underwriters to track each investment from origination through disposition. This group monitors each investment’s operating history, local economic trends and rental and occupancy rates and evaluates the underlying property’s competitiveness within its market. This group assesses ongoing and potential operational and financial performance of each investment in order to evaluate and ultimately improve its operations and financial viability. The asset management group performs frequent onsite inspections, conducts meetings with borrowers and evaluates and participates in the budgeting process, financial and operational review and renovation plans of each of the underlying properties. As an asset and portfolio manager, the asset management group focuses on increasing the
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productivity of onsite property managers and leasing brokers. This group communicates the status of each transaction against its established asset management plan to senior management, in order to enhance and preserve capital, as well as to avoid litigation and potential exposure.
 
Timely and accurate identification of an investment’s operational and financial issues and each borrower’s objectives is essential to implementing an executable loan workout and restructuring process, if required. Since existing property management may not have the requisite expertise to manage the workout process effectively, the asset management group determines current operating and financial status of an asset or portfolio and performs liquidity analysis of properties and ownership entities and then, if appropriate, identifies and evaluates alternatives in order to maximize the value of an investment.
 
Our asset management group continues to provide its services to ACM on a limited basis pursuant to an asset management services agreement between ACM and us. The asset management services agreement will be effective throughout the term of our management agreement and during the origination period described in the management agreement. In the event the services provided by our asset management group, pursuant to this agreement, exceed more than 15% per quarter, the level anticipated by our board of directors, we will negotiate in good faith with our manager an adjustment to our manager’s base management fee under the management agreement, to reduce the scope of the services, the quantity of serviced assets or the time required to be devoted to the services by our asset management group.
 
Operating Policies and Strategies
 
Investment Guidelines.  Our board of directors has adopted general guidelines for our investments and borrowings to the effect that: (1) no investment will be made that would cause us to fail to qualify as a REIT; (2) no investment will be made that would cause us to be regulated as an investment company under the Investment Company Act; (3) no more than 25% of our equity (including junior subordinated notes as equity), determined as of the date of such investment, will be invested in any single asset; (4) no single mezzanine loan or preferred equity investment will exceed $75 million; (5) our leverage (including junior subordinated notes as equity) will generally not exceed 80% of the value of our assets, in the aggregate; (6) we will not co-invest with our manager or any of its affiliates unless such co-investment is otherwise in accordance with these guidelines and its terms are at least as favorable to us as to our manager or the affiliate making such co-investment; (7) no more than 15% of our gross assets may consist of mortgage-related securities. Any exceptions to the above general guidelines require the approval of our board of directors.
 
Financing Policies.  We finance the acquisition of our structured finance investments primarily by borrowing against or “leveraging” our existing portfolio and using the proceeds to acquire additional mortgage assets. We expect to incur debt such that we will maintain an equity to assets ratio no less than 20% (including junior subordinated notes as equity), although the actual ratio may be lower from time to time depending on market conditions and other factors deemed relevant by our manager. Our charter and bylaws do not limit the amount of indebtedness we can incur, and the board of directors has discretion to deviate from or change our indebtedness policy at any time. However, we intend to maintain an adequate capital base to protect against various business environments in which our financing and hedging costs might exceed the interest income from our investments.
 
Our investments are financed primarily by collateralized debt obligations, our junior subordinate notes, and through our floating rate term and working capital credit agreements, loan repurchase agreements and other financing facilities with institutional lenders. Although we expect that these will be the principal means of leveraging our investments, we may issue preferred stock or secured or unsecured notes of any maturity if it appears advantageous to do so.
 
Credit Risk Management Policy.  We are exposed to various levels of credit and special hazard risk depending on the nature of our underlying assets and the nature and level of credit enhancements supporting our assets. We originate or purchase mortgage loans that meet our minimum debt service coverage standards. ACM, as our manager, our chief credit officer, and our asset management group, reviews and monitors credit risk and other risks of loss associated with each investment. In addition, ACM seeks to diversify our portfolio of assets to avoid undue geographic, issuer, industry and certain other types of concentrations. Our board of directors monitors the overall portfolio risk and reviews levels of provision for loss.
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Interest Rate Risk Management Policy.  To the extent consistent with our election to qualify as a REIT, we follow an interest rate risk management policy intended to mitigate the negative effects of major interest rate changes. We minimize our interest rate risk from borrowings by attempting to structure the key terms of our borrowings to generally correspond to the interest rate term of our assets.
 
We may enter into hedging transactions to protect our investment portfolio from interest rate fluctuations and other changes in market conditions. These transactions may include interest rate swaps, the purchase or sale of interest rate collars, caps or floors, options, mortgage derivatives and other hedging instruments. These instruments may be used to hedge as much of the interest rate risk as ACM determines is in the best interest of our stockholders, given the cost of such hedges and the need to maintain our status as a REIT. In general, income from hedging transactions does not constitute qualifying income for purposes of the REIT gross income requirements. To the extent, however, that a hedging contract reduces interest rate risk on indebtedness incurred to acquire or carry real estate assets, any income that is derived from the hedging contract, while comprising non-qualifying income for purposes of the REIT 75% gross income test, would not give rise to non-qualifying income for purposes of the 95% gross income test. ACM may elect to have us bear a level of interest rate risk that could otherwise be hedged when it believes, based on all relevant facts, that bearing such risk is advisable.
 
To date, we have entered into various interest rate swaps in connection with the issuance of floating rate secured notes, the issuance of variable rate junior subordinate notes, and to hedge the interest risk on forecasted outstanding LIBOR based debt. The notional amount of each interest rate swap agreement and the related terms have been designed to protect our investment portfolio from interest rate risk and to match the payment and receipts of interest on the underlying debt instruments, where applicable.
 
Disposition Policies.  ACM evaluates our asset portfolio on a regular basis to determine if it continues to satisfy our investment criteria. Subject to certain restrictions applicable to REITs, ACM may cause us to sell our investments opportunistically and use the proceeds of any such sale for debt reduction, additional acquisitions, or working capital purposes.
 
Equity Capital Policies.  Subject to applicable law, our board of directors has the authority, without further stockholder approval, to issue additional authorized common stock and preferred stock or otherwise raise capital, including through the issuance of senior securities, in any manner and on the terms and for the consideration it deems appropriate, including in exchange for property. We may in the future issue common stock in connection with acquisitions. We also may issue units of partnership interest in our operating partnership in connection with acquisitions of property. We may, under certain circumstances, repurchase our common stock in private transactions with our stockholders, if those purchases are approved by our board of directors.
 
Conflicts of Interest Policies.  We, our executive officers, and ACM face conflicts of interests because of our relationships with each other. ACM currently has an approximate 21% voting interest in our common stock. Mr. Kaufman, our chairman and chief executive officer, is the chief executive officer of ACM and beneficially owns approximately 92% of the outstanding membership interests of ACM. Mr. Martello, one of our directors, is the chief operating officer of Arbor Management, LLC (the managing member of ACM) and a trustee of two trusts which own minority membership interests in ACM. Mr. Bishar, one of our directors, is general council to ACM. Mr. Elenio, our chief financial officer and treasurer, is the chief financial officer of ACM. Mr. Horn, our secretary and one of our directors, is the secretary of ACM. Each of Messrs. Kaufman, Martello, Elenio and Horn, as well as Mr. Weber, our executive vice president of structured finance and Mr. Kilgore, our executive vice president of structured securitization are members of ACM’s executive committee. Each of Messrs. Kaufman, Martello, Bishar, Elenio, Horn, Weber, Kilgore, own minority membership interests in ACM.
 
We have implemented several policies, through board action and through the terms of our charter and our agreements with ACM, to help address these conflicts of interest, including the following:

 	• 	Our charter requires that a majority of our board of directors be independent directors and that only our independent directors make any determination on our behalf with respect to the relationships or transactions that present a conflict of interest for our directors or officers.	
 	 	 	
 	• 	Our board of directors have adopted a policy that decisions concerning our management agreement with ACM, including termination, renewal and enforcement thereof or our participation in any transactions with	

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 	 	ACM or its affiliates outside of the management agreement, including our ability to purchase securities and mortgages or other assets from ACM, or our ability to sell securities and assets to ACM, must be reviewed and approved by a majority of our independent directors.	

 	• 	Our management agreement provides that our determinations to terminate the management agreement for cause or because the management fees are unfair to us or because of a change in control of our manager, will be made by a majority vote of our independent directors.	
 	 	 	
 	• 	Our independent directors will periodically review the general investment standards established by ACM under the management agreement.	
 	 	 	
 	• 	Our management agreement with ACM provides that ACM may not assign duties under the management agreement, except to certain affiliates of ACM, without the approval of a majority of our independent directors.	
 	 	 	
 	• 	Our management agreement provides that decisions to approve or reject investment opportunities rejected by our credit committee that ACM or Mr. Kaufman wish to pursue will be made by a majority of our independent directors.	
 
Our board of directors has approved the operating policies and the strategies set forth above. Our board of directors has the power to modify or waive these policies and strategies, or amend our agreements with ACM, without the consent of our stockholders to the extent that the board of directors (including a majority of our independent directors) determines that such modification or waiver is in the best interest of our stockholders. Among other factors, developments in the market that either affect the policies and strategies mentioned herein or that change our assessment of the market may cause our board of directors to revise its policies and strategies. However, if such modification or waiver involves the relationship of, or any transaction between, us and our manager or any affiliate of our manager, the approval of a majority of our independent directors is also required. We may not, however, amend our charter to change the requirement that a majority of our board consist of independent directors or the requirement that our independent directors approve related party transactions without the approval of two thirds of the votes entitled to be cast by our stockholders.
 
Compliance with Federal, State and Local Environmental Laws
 
Properties that we may acquire directly or indirectly through partnerships, and the properties underlying our structured finance investments and mortgage-related securities, are subject to various federal, state and local environmental laws, ordinances and regulations. Under these laws, ordinances and regulations, a current or previous owner of real estate (including, in certain circumstances, a secured lender that succeeds to ownership or control of a property) may become liable for the costs of removal or remediation of certain hazardous or toxic substances or petroleum product releases at, on, under or in its property. These laws typically impose cleanup responsibility and liability without regard to whether the owner or control party knew of or was responsible for the release or presence of the hazardous or toxic substances. The costs of investigation, remediation or removal of these substances may be substantial and could exceed the value of the property. An owner or control party of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. Certain environmental laws also impose liability in connection with the handling of or exposure to materials containing asbestos. These laws allow third parties to seek recovery from owners of real properties for personal injuries associated with materials containing asbestos. Our operating costs and the values of these assets may be adversely affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of complying with future legislation, and our income and ability to make distributions to our stockholders could be affected adversely by the existence of an environmental liability with respect to properties we may acquire. We will endeavor to ensure that these properties are in compliance in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances or petroleum products.
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Competition
 
Our net income depends, in large part, on our manager’s ability to originate structured finance investments with spreads over our borrowing costs. In originating these investments, our manager competes with other mortgage REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, other lenders, governmental bodies and other entities, some of which may have greater financial resources and lower costs of capital available to them. In addition, there are numerous mortgage REITs with asset acquisition objectives similar to ours, and others may be organized in the future. The effect of the existence of additional REITs may be to increase competition for the available supply of structured finance assets suitable for purchase by us. Competitive variables include market presence and visibility, size of loans offered and underwriting standards. To the extent that a competitor is willing to risk larger amounts of capital in a particular transaction or to employ more liberal underwriting standards when evaluating potential loans, our origination volume and profit margins for our investment portfolio could be impacted. Our competitors may also be willing to accept lower returns on their investments and may succeed in buying the assets that we have targeted for acquisition. Although management believes that we are well positioned to continue to compete effectively in each facet of our business, there can be no assurance that we will do so or that we will not encounter further increased competition in the future that could limit our ability to compete effectively.
 
Employees
 
We have 29 employees, including Messrs. Weber, Kilgore and Horn, Mr. Felletter, our Senior Vice President of Asset Management, Mr. Guziewicz, our Chief Credit Officer, and a 23 person asset management group. Mr. Kaufman, our Chief Executive Officer and Mr. Elenio, our Chief Financial Officer are full time employees of ACM and are not directly compensated by us (other than pursuant to our equity incentive plans).
 
Corporate Governance and Internet Address
 
We have adopted corporate governance guidelines and a code of business conduct and ethics, which delineate our standards for our directors, officers and employees, and the employees of our manager who provide services to us. We emphasize the importance of professional business conduct and ethics through our corporate governance initiatives.
 
Our internet address is www.arborrealtytrust.com. We make available, free of charge through a link on our site, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports, if any, as filed with the SEC as soon as reasonably practicable after such filing. Our site also contains our code of business conduct and ethics, code of ethics for chief executive and senior financial officers, corporate governance guidelines, stockholder communications with the board of directors, and the charters of the audit committee, nominating/corporate governance committee, and compensation committee of our board of directors. No information contained in or linked to our website is incorporated by reference in this report.
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ITEM 1A.  	RISK FACTORS	
 
Our business is subject to various risks, including the risks listed below. If any of these risks actually occur, our business, financial condition and results of operations could be materially adversely affected and the value of our common stock could decline.
 
Risks Related to Our Business
 
Prolonged disruptions in the financial markets could affect our ability to obtain financing on reasonable terms and have other adverse effects on us and the market price of our common stock.
 
Global stock and credit markets have experienced prolonged price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. Commercial real estate classes in general have been adversely affected by this prolonged economic downturn and liquidity crisis. These circumstances have materially impacted liquidity in the financial markets and have resulted in the scarcity of certain types of financing, and, in certain cases, making certain financing terms less attractive. If these conditions persist, lending institutions may be forced to exit markets such as repurchase lending, become insolvent or further tighten their lending standards or increase the amount of equity capital required to obtain financing, and in such event, could make it more difficult for us to obtain financing on favorable terms or at all. Our profitability will be adversely affected if we are unable to obtain cost-effective financing for our investments. A prolonged downturn in the stock or credit markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly. In addition, these factors may make it more difficult for our borrowers to repay our loans as they may experience difficulties in selling assets, increased costs of financing or obtaining financing at all. These events in the stock and credit markets may also make it more difficult or unlikely for us to raise capital through the issuance of our common stock or preferred stock. These disruptions in the financial markets also may have a material adverse effect on the market value of our common stock and other adverse effects on us or the economy in general.
 
A prolonged economic slowdown, a lengthy or severe recession, or declining real estate values could harm our operations.
 
We believe the risks associated with our business are more severe during periods of economic slowdown or recession if these periods are accompanied by declining real estate values. Declining real estate values will likely continue to minimize our level of new mortgage loan originations, since borrowers often use increases in the value of their existing properties to support the purchase or investment in additional properties. Borrowers may also be less able to pay principal and interest on our loans if the real estate economy weakens. Declining real estate values also significantly increase the likelihood that we will continue to incur losses on our loans in the event of default because the value of our collateral may be insufficient to cover our cost on the loan. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from loans in our portfolio as well as our ability to originate, sell and securitize loans, which would significantly harm our revenues, results of operations, financial condition, business prospects and our ability to make distributions to the stockholders.
 
Increases in loan loss reserves and other impairments are expected if economic conditions do not improve.
 
A further decline in economic conditions could negatively impact the credit quality of our loans and investments portfolio. If we do not see a stabilization of the financial markets and such market conditions continue to decline further, we will likely experience significant increases in loan loss reserves, potential defaults and other asset impairment charges.
 
Loan loss reserves are particularly difficult to estimate in a turbulent economic environment.
 
We perform an evaluation of loans on a quarterly basis to determine whether an impairment is necessary and adequate to absorb probable losses. The valuation process for our loans and investments portfolio requires us to make certain estimates and judgments, which are particularly difficult to determine during a recession in which the
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availability of commercial real estate credit is severely limited and commercial real estate transactions have dramatically decreased. Our estimates and judgments are based on a number of factors, including projected cash flows from the collateral securing our commercial real estate loans, loan structure, including the availability of reserves and recourse guarantees, likelihood of repayment in full at the maturity of a loan, potential for a refinancing market coming back to commercial real estate in the future and expected market discount rates for varying property types. If our estimates and judgments are not correct, our results of operations and financial condition could be severely impacted.
 
Loan repayments are less likely in the current market environment.
 
In a market in which liquidity is essential to our business, loan repayments have been a significant source of liquidity for us. However, many financial institutions have drastically curtailed new lending activity and real estate owners are having difficulty refinancing their assets at maturity. If borrowers are not able to refinance loans at their maturity, the loans could go into default and the liquidity that we would receive from such repayments will not be available. Furthermore, without a functioning commercial real estate finance market, borrowers that are performing on their loans will almost certainly extend such loans if they have that right, which will further delay our ability to access liquidity through repayments.
 
We may not be able to access the debt or equity capital markets on favorable terms, or at all, for additional liquidity, which could adversely affect our business, financial condition and operating results.
 
Additional liquidity, future equity or debt financing may not be available on terms that are favorable to us, or at all. Our ability to access additional debt and equity capital depends on various conditions in these markets, which are beyond our control. If we are able to complete future equity offerings, they could be dilutive to our existing shareholders or could result in the issuance of securities that have rights, preferences and privileges that are senior to those of our other securities. Our inability to obtain adequate capital could have a material adverse effect on our business, financial condition, liquidity and operating results.
 
We may be unable to invest excess equity capital on acceptable terms or at all, which would adversely affect our operating results.
 
We may not be able to identify investments that meet our investment criteria and we may not be successful in closing the investments that we identify. Unless and until we identify investments consistent with our investment criteria, any excess equity capital may be used to repay borrowings under our term and revolving credit agreements and repurchase agreements, which would not produce a return on capital. In addition, the investments that we acquire with our equity capital may not produce a return on capital. There can be no assurance that we will be able to identify attractive opportunities to invest our equity capital, which would adversely affect our results of operations.
 
Changes in market conditions could adversely affect the market price of our common stock.
 
As with other publicly traded equity securities, the value of our common stock depends on various market conditions which may change from time to time. Among the market conditions that may affect the value of our common stock are the following:

 	• 	the general reputation of REITs and the attractiveness of our equity securities in comparison to other equity securities, including securities issued by other real estate-based companies;	
 	 	 	
 	• 	our financial performance; and	
 	 	 	
 	• 	general stock and bond market conditions.	
 
The market value of our common stock is based primarily upon the market’s perception of our growth potential and our current and potential future earnings and dividends. Consequently, our common stock may trade at prices that are higher or lower than our book value per share of common stock. If our future earnings or dividends are less than expected, it is likely that the market price of our common stock will diminish.
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Our stock could be at risk of being delisted by the New York Stock Exchange and could have a materially adverse effects on our business
 
The price of our common stock has declined significantly and rapidly since September 2008. In the event we record additional losses, it is possible that the value of our common stock could decline further. This reduction in stock price could have materially adverse effects on our business, including reducing our ability to use our common stock as compensation or to otherwise provide incentives to employees and by reducing our ability to generate capital through stock sales or otherwise use our stock as currency with third parties.
 
In the event that the average closing price of our common stock is less than $1.00 or our market capitalization is less than $25 million over a consecutive 30 trading-day period, our stock could be delisted from the NYSE. The threat of delisting and/or a delisting of our common stock could have adverse effects by, among other things:

 	• 	Reducing the liquidity and market price of our common stock;	
 	 	 	
 	• 	Reducing the number of investors willing to hold or acquire our common stock, thereby further restricting our ability to obtain equity financing;	
 	 	 	
 	• 	Reducing our ability to retain, attract and motivate our directors, officers and employees.	
 
A declining portfolio and reductions in debt could adversely affect the returns on our investments.
 
Continued dislocations in the market will likely lead to a reduction in our loans and investments portfolio. Additionally, the majority of the proceeds received from repayments of loans are expected to be used to repay borrowings. This deleveraging will likely result in reduced returns on our investments.
 
Our investments in commercial mortgage-related securities are subject to risks relating to the particular REIT issuer of the securities, which may result in losses to us.
 
Our investments in commercial mortgage-related securities involve special risks relating to the particular issuer of the securities, including the financial condition and business outlook of the issuer. The issuers of these securities are experiencing many of the same risks resulting from continued disruptions in the financial markets and deteriorating economic conditions. In addition, our investments are also subject to the risks described above with respect to commercial real estate loans and mortgage-backed securities and similar risks, including risks of delinquency and foreclosure, the dependence upon the successful operation of, and net income from, real property, risks generally related to interests in real property, and risks that may be presented by the type and use of a particular commercial property. REITs have been severely impacted by the current economic environment and have had very little access to the capital markets or the debt markets in order to meet their existing obligations or to refinance maturing debt.
 
We depend on key personnel with long standing business relationships, the loss of whom could threaten our ability to operate our business successfully.
 
Our future success depends, to a significant extent, upon the continued services of ACM as our manager and ACM’s officers and employees. In particular, the mortgage lending experience of Mr. Kaufman and Mr. Weber and the extent and nature of the relationships they have developed with developers and owners of multi-family and commercial properties and other financial institutions are critical to the success of our business. We cannot assure their continued employment with ACM or service as our officers. The loss of services of one or more members of our or ACM’s management team could harm our business and our prospects.
 
The real estate investment business is highly competitive. Our success depends on our ability to compete with other providers of capital for real estate investments.
 
Our business is highly competitive. Competition may cause us to accept economic or structural features in our investments that we would not have otherwise accepted and it may cause us to search for investments in markets outside of our traditional product expertise. We compete for attractive investments with traditional lending sources, such as insurance companies and banks, as well as other REITs, specialty finance companies and private equity
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vehicles with similar investment objectives, which may make it more difficult for us to consummate our target investments. Many of our competitors have greater financial resources and lower costs of capital than we do, which provides them with greater operating flexibility and a competitive advantage relative to us.
 
We may not achieve our targeted rate of return on our investments.
 
We originate or acquire investments based on our estimates or projections of overall rates of return on such investments, which in turn are based upon, among other considerations, assumptions regarding the performance of assets, the amount and terms of available financing to obtain desired leverage and the manner and timing of dispositions, including possible asset recovery and remediation strategies, all of which are subject to significant uncertainty. In addition, events or conditions that we have not anticipated may occur and may have a significant effect on the actual rate of return received on an investment.
 
As we acquire or originate investments for our balance sheet portfolio, whether as new additions or as replacements for maturing investments, there can be no assurance that we will be able to originate or acquire investments that produce rates of return comparable to returns on our existing investments.
 
Our due diligence may not reveal all of a borrower’s liabilities and may not reveal other weaknesses in its business.
 
Before investing in a company or making a loan to a borrower, we will assess the strength and skills of such entity’s management and other factors that we believe are material to the performance of the investment. In making the assessment and otherwise conducting customary due diligence, we will rely on the resources available to us and, in some cases, an investigation by third parties. This process is particularly important and subjective with respect to newly organized entities because there may be little or no information publicly available about the entities. There can be no assurance that our due diligence processes will uncover all relevant facts or that any investment will be successful.
 
We invest in junior participation notes which may be subject to additional risks relating to the privately negotiated structure and terms of the transaction, which may result in losses to us.
 
We invest in junior participation loans which is a mortgage loan typically (i) secured by a first mortgage on a single commercial property or group of related properties and (ii) subordinated to a senior note secured by the same first mortgage on the same collateral. As a result, if a borrower defaults, there may not be sufficient funds remaining for the junior participation loan after payment is made to the senior note holder. Since each transaction is privately negotiated, junior participation loans can vary in their structural characteristics and risks. For example, the rights of holders of junior participation loans to control the process following a borrower default may be limited in certain investments. We cannot predict the terms of each junior participation investment. A junior participation may not be liquid and, consequently, we may be unable to dispose of underperforming or non-performing investments. The higher risks associated with a subordinate position in any investments we make could subject us to increased risk of losses.
 
We invest in mezzanine loans which are subject to a greater risk of loss than loans with a first priority lien on the underlying real estate.
 
We invest in mezzanine loans that take the form of subordinated loans secured by second mortgages on the underlying property or loans secured by a pledge of the ownership interests of either the entity owning the property or a pledge of the ownership interests of the entity that owns the interest in the entity owning the property. These types of investments involve a higher degree of risk than long-term senior mortgage lending secured by income producing real property because the investment may become unsecured as a result of foreclosure by the senior lender. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of such entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt. As a result, we may not recover some or
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all of our investment. In addition, mezzanine loans may have higher loan to value ratios than conventional mortgage loans, resulting in less equity in the property and increasing the risk of loss of principal.
 
Preferred equity investments involve a greater risk of loss than traditional debt financing.
 
We invest in preferred equity investments, which involve a higher degree of risk than traditional debt financing due to a variety of factors, including that such investments are subordinate to other loans and are not secured by property underlying the investment. Furthermore, should the issuer default on our investment, we would only be able to proceed against the partnership in which we have an interest, and not the property underlying our investment. As a result, we may not recover some or all of our investment.
 
We invest in multi-family and commercial real estate loans, which may involve a greater risk of loss than single family real estate loans.
 
Our investments include multi-family and commercial real estate loans that are considered to involve a higher degree of risk than single family residential lending because of a variety of factors, including generally larger loan balances, dependency for repayment on successful operation of the mortgaged property and tenant businesses operating therein, and loan terms that include amortization schedules longer than the stated maturity and provide for balloon payments at stated maturity rather than periodic principal payments. In addition, the value of commercial real estate can be affected significantly by the supply and demand in the market for that type of property.
 
Volatility of values of multi-family and commercial properties may adversely affect our loans and investments.
 
Multi-family and commercial property values and net operating income derived from such properties are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, events such as natural disasters, including hurricanes and earthquakes, acts of war and/or terrorism and others that may cause unanticipated and uninsured performance declines and/or losses to us or the owners and operators of the real estate securing our investment; national, regional and local economic conditions, such as what we have experienced over the past two years (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as an oversupply of housing, retail, industrial, office or other commercial space); changes or continued weakness in specific industry segments; construction quality, construction cost, age and design; demographic factors; retroactive changes to building or similar codes; and increases in operating expenses (such as energy costs). In the event a property’s net operating income decreases, a borrower may have difficulty repaying our loan, which could result in losses to us. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our loans, which could also cause us to suffer losses.
 
Many of our commercial real estate loans are funded with interest reserves and our borrowers may be unable to replenish those interest reserves once they run out.
 
Given the transitional nature of many of our commercial real estate loans, we often require borrowers to post reserves to cover interest and operating expenses until the property cash flows are projected to increase sufficiently to cover debt service costs. We also generally required the borrower to replenish reserves if they become depleted due to underperformance or if the borrower wants to exercise extension options under the loan. Despite low interest rates, revenues on the properties underlying any commercial real estate loan investments will likely continue to decrease in the current economic environment, making it more difficult for borrowers to meet their payment obligations to us. We expect that in the future some of our borrowers may continue to have difficulty servicing our debt and will not have sufficient capital to replenish reserves, which could have a significant impact on our operating results and cash flow.
 
We may not have control over certain of our loans and investments.
 
Our ability to manage our portfolio of loans and investments may be limited by the form in which they are made. In certain situations, we may acquire investments subject to rights of senior classes and servicers under inter-
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creditor or servicing agreements; acquire only a participation in an underlying investment; co-invest with third parties through partnerships, joint ventures or other entities, thereby acquiring non-controlling interests; or rely on independent third party management or strategic partners with respect to the management of an asset.
 
Therefore, we may not be able to exercise control over the loan or investment. Such financial assets may involve risks not present in investments where senior creditors, servicers or third party controlling investors are not involved. Our rights to control the process following a borrower default may be subject to the rights of senior creditors or servicers whose interests may not be aligned with ours. A third party partner or co-venturer may have financial difficulties resulting in a negative impact on such assets and may have economic or business interests or goals which are inconsistent with ours. In addition, we may, in certain circumstances, be liable for the actions of our third party partners or co-venturers.
 
The impact of any future terrorist attacks and the availability of terrorism insurance expose us to certain risks.
 
The terrorist attacks on September 11, 2001 disrupted the U.S. financial markets, including the real estate capital markets, and negatively impacted the U.S. economy in general. Any future terrorist attacks, the anticipation of any such attacks, and the consequences of any military or other response by the United States and its allies may have a further adverse impact on the U.S. financial markets and the economy generally. We cannot predict the severity of the effect that any such future events would have on the U.S. financial markets, the economy or our business. Any future terrorist attacks could adversely affect the credit quality of some of our loans and investments. Some of our loans and investments will be more susceptible to such adverse effects than others. We may suffer losses as a result of the adverse impact of any future terrorist attacks and these losses may adversely impact our results of operations.
 
In addition, the enactment of the Terrorism Risk Insurance Act of 2002, or the TRIA, and the subsequent enactment of the Terrorism Risk Insurance Program Reauthorization Act of 2007, which extended TRIA through the end of 2014, requires insurers to make terrorism insurance available under their property and casualty insurance policies in order to receive federal compensation under TRIA for insured losses. However, this legislation does not regulate the pricing of such insurance. The absence of affordable insurance coverage may adversely affect the general real estate lending market, lending volume and the market’s overall liquidity and may reduce the number of suitable investment opportunities available to us and the pace at which we are able to make investments. If the properties that we invest in are unable to obtain affordable insurance coverage, the value of those investments could decline and in the event of an uninsured loss, we could lose all or a portion of our investment.
 
We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and furnish a report on our internal control over financial reporting.
 
We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires us to assess and attest to the effectiveness of our internal control over financial reporting and requires our independent registered public accounting firm to opine as to the adequacy of our assessment and effectiveness of our internal control over financial reporting in absence of a temporary exemption currently granted to smaller reporting companies. In the future, we may not receive an unqualified opinion from our independent registered public accounting firm with regard to our internal control over financial reporting.
 
Failure to maintain an exemption from regulation as an investment company under the Investment Company Act would adversely affect our results of operations.
 
We believe that we conduct, and we intend to conduct our business in a manner that allows us to avoid being regulated as an investment company under the Investment Company Act. Pursuant to Section 3(c) (5) (C) of the Investment Company Act, entities that are primarily engaged in the business of purchasing or otherwise acquiring “mortgages and other liens on and interests in real estate” are exempted from regulation thereunder. The staff of the SEC has provided guidance on the availability of this exemption. Specifically, the staff’s position generally requires us to maintain at least 55% of our assets directly in “qualifying real estate interests.” To constitute a qualifying real estate interest under this 55% test, an interest in real estate must meet various criteria. Loans that are secured by
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equity interests in entities that directly or indirectly own the underlying real property, rather than a mortgage on the underlying property itself, and ownership of equity interests in real property owners may not qualify for purposes of the 55% test depending on the type of entity. Mortgage-related securities that do not represent all of the certificates issued with respect to an underlying pool of mortgages may also not qualify for purposes of the 55% test. Therefore, our ownership of these types of loans and equity interests may be limited by the provisions of the Investment Company Act. To the extent that we do not comply with the SEC staff’s 55% test, another exemption or exclusion from registration as an investment company under the Investment Company Act or other interpretations under the Investment Company Act, we may be deemed to be an investment company. If we fail to maintain an exemption or other exclusion from registration as an investment company we could, among other things, be required either (a) to substantially change the manner in which we conduct our operations to avoid being required to register as an investment company or (b) to register as an investment company, either of which could have an adverse effect on us and the market price of our common stock. If we were required to register as an investment company under the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the Investment Company Act), portfolio composition, including restrictions with respect to diversification and industry concentration and other matters.
 
Risks Related to Our Financing and Hedging Activities
 
We may not be able to access financing sources on favorable terms, or at all, which could adversely affect our ability to execute our business plan.
 
We finance our assets over the short and long-term through a variety of means, including repurchase agreements, term facilities, credit facilities, junior subordinated notes, CDOs and other structured financings. Our ability to execute this strategy depends on various conditions in the markets for financing in this manner that are beyond our control, including lack of liquidity and wider credit spreads, which we have seen over the past year. If these conditions continue to worsen, we cannot assure you that these sources are feasible as a means of financing our assets, as there can be no assurance that these agreements will be renewed or extended at expiration. If our strategy is not viable, we will have to find alternative forms of long-term financing for our assets, as secured revolving credit facilities and repurchase facilities may not accommodate long-term financing. This could subject us to more recourse indebtedness and the risk that debt service on less efficient forms of financing would require a larger portion of our cash flows, thereby reducing cash available for distribution to our stockholders, funds available for operations as well as for future business opportunities.
 
Our credit facilities contain restrictive covenants relating to our operations.
 
Each of our credit facilities contains various financial covenants and restrictions, including minimum net worth, minimum liquidity and debt-to-equity ratios. Other restrictive covenants contained in our credit facility agreements include covenants that prohibit us from affecting a change in control, disposing of or encumbering assets being financed and restricting us from making any material amendment to our underwriting guidelines without approval of the lender. At December 31, 2009, we were in compliance with all financial covenants and restrictions for the periods presented with the exception of a minimum tangible net worth requirement with Wachovia at December 31, 2009. Our tangible net worth was $98.6 million at December 31, 2009 and we were required to maintain a minimum tangible net worth of $150.0 million with this financial institution. We have obtained a waiver of this covenant, as well as the minimum ratio of total liabilities to tangible net worth covenant, from this financial institution for December 31, 2009 and through an extended payoff date of August 27, 2010, in conjunction with amendments to our credit facilities. We have also obtained temporary amendments thereafter until December 2010 for the quarterly minimum GAAP tangible net worth covenants, from $150.0 million to $50.0 million, and quarterly maximum ratio of total liabilities to tangible net worth covenants, from 4.5 to 1 to 5.8 to 1. However, if economic conditions continue to weaken and capital for commercial real estate remains scarce, we expect credit quality in our assets and across the commercial real estate sector to decline as well. While we remain focused on actively managing our loans and investments portfolio, a continued weak environment will make maintaining compliance with the credit facilities’ covenants more difficult. If we are not in compliance with
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any of our covenants, there can be no assurance that our lenders would waive or amend such non-compliance in the future and any such non-compliance could have a material adverse effect on us.
 
Investor demand for commercial real estate CDOs has been substantially curtailed.
 
The continued turmoil in the structured finance markets, including sub-prime residential loans and commercial real estate loans, has negatively impacted the credit markets generally. As a result, investor demand for commercial real estate CDOs has been substantially curtailed. In recent years, we have relied to a substantial extent on CDO financings to obtain match-funded financing for our investments. Until and unless the market for commercial real estate CDOs recovers, we may be unable to utilize CDOs to finance our investments and we may need to utilize less favorable sources of financing to finance our investments on a long-term basis. There can be no assurance as to when or if the demand for commercial real estate CDOs will return, what the terms of such securities investors will demand, or whether we will be able to issue CDOs to finance our investments on terms beneficial to us.
 
We may not be able to obtain the level of leverage necessary to optimize our return on investment.
 
Our return on investment depends, in part, upon our ability to grow our balance sheet portfolio of invested assets through the use of leverage at a cost of debt that is lower than the yield earned on our investments. We generally obtain leverage through the issuance of collateralized debt obligations, or CDOs, term and revolving credit agreements, repurchase agreements and other borrowings. Our future ability to obtain the necessary leverage on beneficial terms ultimately depends upon the quality of the portfolio assets that collateralize our indebtedness. Our failure to obtain and/or maintain leverage at desired levels, or to obtain leverage on attractive terms, would have a material adverse effect on our performance. Moreover, we are dependent upon a few lenders to provide financing under credit agreements and repurchase agreements for our origination or acquisition of loans and investments and there can be no assurance that these agreements will be renewed or extended at expiration. Our ability to obtain financing through CDOs is subject to conditions in the debt capital markets which are impacted by factors beyond our control that may at times be adverse and reduce the level of investor demand for such securities.
 
The credit facilities and repurchase agreements that we use to finance our investments may require us to provide additional collateral.
 
We use credit facilities and repurchase agreements to finance some of our investments. If the market value of the loans pledged or sold by us to a funding source decline in value, we may be required by the lending institution to provide additional collateral or pay down a portion of the funds advanced. We may not have the funds available to pay down our debt, which could result in defaults. Posting additional collateral to support our repurchase and credit facilities would reduce our liquidity and limit our ability to leverage our assets. In the event we do not have sufficient liquidity to meet such requirements, lending institutions can accelerate our indebtedness, increase interest rates and terminate our ability to borrow. Such a situation would likely result in a rapid deterioration of our financial condition and possibly necessitate a filing for protection under the United States Bankruptcy Code. Further, facility providers may require us to maintain a certain amount of uninvested cash or set aside unlevered assets sufficient to maintain a specified liquidity position which would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose, which could reduce our return on assets. In the event that we are unable to meet these collateral obligations, our financial condition could deteriorate rapidly.
 
Our use of leverage may create a mismatch with the duration and index of the investments that we are financing.
 
We attempt to structure our leverage such that we minimize the difference between the term of our investments and the leverage we use to finance such an investment. In the event that our leverage is shorter term than the financed investment, we may not be able to extend or find appropriate replacement leverage and that would have an adverse impact on our liquidity and our returns. In the event that our leverage is longer term than the financed investment, we may not be able to repay such leverage or replace the financed investment with an optimal substitute or at all, which will negatively impact our desired leveraged returns.
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We attempt to structure our leverage such that we minimize the difference between the index of our investments and the index of our leverage — financing floating rate investments with floating rate leverage and fixed rate investments with fixed rate leverage. If such a product is not available to us from our lenders on reasonable terms, we may use hedging instruments to effectively create such a match. For example, in the case of fixed rate investments, we may finance such an investment with floating rate leverage, but effectively convert all or a portion of the attendant leverage to fixed rate using hedging strategies.
 
Our attempts to mitigate such risk are subject to factors outside of our control, such as the availability to us of favorable financing and hedging options, which is subject to a variety of factors, of which duration and term matching are only two such factors.
 
We utilize a significant amount of debt to finance our portfolio, which may subject us to an increased risk of loss, adversely affecting the return on our investments and reducing cash available for distribution.
 
We utilize a significant amount of debt to finance our operations, which may compound losses and reduce the cash available for distributions to our stockholders. We generally leverage our portfolio through the use of bank credit facilities, repurchase agreements, and securitizations, including the issuance of CDOs and other borrowings. The leverage we employ varies depending on our ability to obtain credit facilities, the loan-to-value and debt service coverage ratios of our assets, the yield on our assets, the targeted leveraged return we expect from our portfolio and our ability to meet ongoing covenants related to our asset mix and financial performance. Substantially all of our assets are pledged as collateral for our borrowings. Our return on our investments and cash available for distribution to our stockholders may be reduced to the extent that changes in market conditions cause the cost of our financing to increase relative to the income that we can derive from the assets we acquire.
 
Our debt service payments, including payments in connection with any CDOs, reduce the net income available for distributions. Moreover, we may not be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to foreclosure or sale to satisfy our debt obligations. Currently, neither our charter nor our bylaws impose any limitations on the extent to which we may leverage our assets.
 
We may guarantee some of our leverage and contingent obligations.
 
We guarantee the performance of some of our obligations, including but not limited to some of our repurchase agreements, derivative agreements, and unsecured indebtedness. Non-performance on such obligations may cause losses to us in excess of the capital we initially may have invested/committed under such obligations and there is no assurance that we will have sufficient capital to cover any such losses.
 
We may not be able to acquire suitable investments for a CDO issuance, or we may not be able to issue CDOs on attractive terms, or at all, which may require us to utilize more costly financing for our investments.
 
We have financed, and, if the opportunities exist in the future, we may continue to finance certain of our investments through the issuance of CDOs. During the period that we are acquiring investments for eventual long-term financing through CDOs, we intend to finance these investments through repurchase and credit agreements. We use these agreements to finance our acquisition of investments until we have accumulated a sufficient quantity of investments, at which time we may refinance them through a securitization, such as a CDO issuance. As a result, we are subject to the risk that we will not be able to acquire a sufficient amount of eligible investments to maximize the efficiency of a CDO issuance. In addition, conditions in the debt capital markets may make the issuance of CDOs less attractive to us even when we do have a sufficient pool of collateral, or we may not be able to execute a CDO transaction due to substantial curtailment in demand for commercial real estate CDOs, such as currently exists. If we are unable to issue a CDO to finance these investments, we may be required to utilize other forms of potentially less attractive financing.
 
We may not be able to find suitable replacement investments for CDOs with reinvestment periods.
 
Some of our CDOs have periods where principal proceeds received from assets securing the CDO can be reinvested for a defined period of time, commonly referred to as a reinvestment period. Our ability to find suitable
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investments during the reinvestment period that meet the criteria set forth in the CDO documentation and by rating agencies may determine the success of our CDO investments. Our potential inability to find suitable investments may cause, among other things, lower returns, interest deficiencies, hyper-amortization of the senior CDO liabilities and may cause us to reduce the life of our CDOs and accelerate the amortization of certain fees and expenses.
 
The use of CDO financings with over-collateralization and interest coverage requirements may have a negative impact on our cash flow.
 
The terms of CDOs will generally provide that the principal amount of investments must exceed the principal balance of the related bonds by a certain amount and that interest income exceeds interest expense by a certain amount. Generally, CDO terms provide that, if certain delinquencies and/or losses or other factors cause a decline in collateral or cash flow levels, the cash flow otherwise payable on subordinated classes may be redirected to repay senior classes of CDOs until the issuer or the collateral is in compliance with the terms of the governing documents. Other tests (based on delinquency levels or other criteria) may restrict our ability to receive net income from assets pledged to secure CDOs. We cannot assure you that the performance tests will be satisfied. If our investments fail to perform as anticipated, our over-collateralization, interest coverage or other credit enhancement expense associated with our CDO financings will increase. With respect to future CDOs we may issue, we cannot assure you, in advance of completing negotiations with the rating agencies or other key transaction parties as to the actual terms of the delinquency tests, over-collateralization and interest coverage terms, cash flow release mechanisms or other significant factors upon which net income to us will be calculated. Failure to obtain favorable terms with regard to these matters may adversely affect the availability of net income to us.
 
We may be required to repurchase loans that we have sold or to indemnify holders of our CDOs.
 
If any of the loans we originate or acquire and sell or securitize through CDOs do not comply with representations and warranties we make about certain characteristics of the loans, the borrowers and the underlying properties, we may be required to repurchase those loans or replace them with substitute loans. In addition, in the case of loans that we have sold instead of retained, we may be required to indemnify persons for losses or expenses incurred as a result of a breach of a representation or warranty. Repurchased loans typically require a significant allocation of working capital to carry on our books, and our ability to borrow against such assets is limited. Any significant repurchases or indemnification payments could adversely affect our financial condition and operating results.
 
Our loans and investments may be subject to fluctuations in interest rates which may not be adequately protected, or protected at all, by our hedging strategies.
 
Our current balance sheet investment program emphasizes loans with both “floating” interest rates and fixed interest rates. Floating rate investments earn interest at rates that adjust from time to time (typically monthly) based upon an index (typically LIBOR), allowing this portion of our portfolio to be insulated from changes in value due specifically to changes in rates. Fixed interest rate investments, however, do not have adjusting interest rates and, as prevailing interest rates change, the relative value of the fixed cash flows from these investments will cause potentially significant changes in value. Depending on market conditions, fixed rate assets may become a greater portion of our new loan originations. We may employ various hedging strategies to limit the effects of changes in interest rates (and in some cases credit spreads), including engaging in interest rate swaps, caps, floors and other interest rate derivative products. No strategy can completely insulate us from the risks associated with interest rate changes and there is a risk that they may provide no protection at all and potentially compound the impact of changes in interest rates. Hedging transactions involve certain additional risks such as counterparty risk, the legal enforceability of hedging contracts, the early repayment of hedged transactions and the risk that unanticipated and significant changes in interest rates may cause a significant loss of basis in the contract and a change in current period expense. We cannot make assurances that we will be able to enter into hedging transactions or that such hedging transactions will adequately protect us against the foregoing risks. In addition, cash flow hedges which are not perfectly correlated (and appropriately designated and documented as such) with a variable rate financing will impact our reported income as gains, and losses on the ineffective portion of such hedges will be recorded.
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Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities and involve risks and costs.
 
The cost of using hedging instruments increases as the period covered by the instrument lengthens and during periods of rising and volatile interest rates. We may increase our hedging activity and thus increase our hedging costs during periods when interest rates are volatile or rising and hedging costs have increased.
 
In addition, hedging instruments involve risk since they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities. Consequently, there are no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying derivative transactions may depend on compliance with applicable statutory and commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in a default. Default by a party with whom we enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our resale commitments, if any, at the then current market price. Although generally we will seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract to cover our risk. We cannot assure you that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.
 
We may enter into derivative contracts that could expose us to contingent liabilities in the future.
 
Subject to maintaining our qualification as a REIT, part of our investment strategy involves entering into derivative contracts that could require us to fund cash payments in the future under certain circumstances (e.g., the early termination of the derivative agreement caused by an event of default or other early termination event, or the decision by a counterparty to request margin securities it is contractually owed under the terms of the derivative contract). The amount due would be equal to the unrealized loss of the open swap positions with the respective counterparty and could also include other fees and charges. These economic losses will be reflected in our financial results of operations, and our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time, and the need to fund these obligations could adversely impact our financial condition.
 
Changes in values of our derivative contracts could adversely affect our liquidity and financial condition.
 
Certain of our derivative contracts, which are designed to hedge interest rate risk associated with a portion of our loans and investments, could require the funding of additional cash collateral for changes in the market value of these contracts. Due to the continued volatility in the financial markets, the value of these contracts has declined substantially. As a result, as of December 31, 2009, we funded approximately $18.9 million in cash related to these contracts. If we continue to experience significant changes in the outlook of interest rates, these contracts could continue to decline in value, which would require additional cash to be funded. However, at maturity the value of these contracts return to par and all cash will be recovered. We may not have available cash to meet these requirements, which could result in the early termination of these derivatives, leaving us exposed to interest rate risk associated with these loans and investments, which could adversely impact our financial condition.
 
We are subject to certain counterparty risks related to our derivative contracts.
 
We periodically hedge a portion of our interest rate risk by entering into derivative financial instrument contracts. As a result of the global credit crisis, there is a risk that counterparties could fail, shut down, file for bankruptcy or be unable to pay out contracts. The failure of a counterparty that holds collateral that we post in connection with certain interest rate swap agreements could result in the loss of such collateral.
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Risks Related to Our Corporate and Ownership Structure
 
We are substantially controlled by ACM and Mr. Kaufman.
 
Mr. Ivan Kaufman, our chairman, chief executive officer and president and the chief executive officer of ACM, beneficially owns approximately 92% of the outstanding membership interests of ACM. ACM currently has 21.2% of the voting power of our outstanding stock. As a result of Mr. Kaufman’s beneficial ownership of stock held by ACM as well as his beneficial ownership of additional shares of our common stock, Mr. Kaufman currently has 21.7% of the voting power of our outstanding stock. Because of his position with us and our manager and his ability to effectively vote a substantial minority of our outstanding stock, Mr. Kaufman has significant influence over our policies and strategy.
 
Our charter as amended generally does not permit ownership in excess of 7.0% of our capital stock, and attempts to acquire our capital stock in excess of this limit are ineffective without prior approval from our board of directors.
 
For the purpose of preserving our REIT qualification, our charter generally prohibits direct or constructive ownership by any person of more than 7.0% (by value or by number of shares, whichever is more restrictive) of the outstanding shares of our common stock or 7.0% (by value) of our outstanding shares of capital stock. For purposes of this calculation, warrants held by such person will be deemed to have been exercised if such exercise would result in a violation. Our charter’s constructive ownership rules are complex and may cause the outstanding stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than these percentages of the outstanding stock by an individual or entity could cause that individual or entity to own constructively in excess of these percentages of the outstanding stock and thus be subject to our charter’s ownership limit. Any attempt to own or transfer shares of our common or preferred stock in excess of the ownership limit without the consent of the board of directors will result in the shares being automatically transferred to a charitable trust or otherwise voided.
 
Our staggered board and other provisions of our charter and bylaws may prevent a change in our control.
 
Our board of directors is divided into three classes of directors. The current terms of the Class I, Class II and Class III directors will expire in 2010, 2011 and 2012, respectively. Directors of each class are chosen for three year terms upon the expiration of their current terms, and each year one class of directors is elected by the stockholders. The staggered terms of our directors may reduce the possibility of a tender offer or an attempt at a change in control, even though a tender offer or change in control might be in the best interest of our stockholders. In addition, our charter and bylaws also contain other provisions that may delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
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Risks Related to Conflicts of Interest with Our Manager
 
We are dependent on our manager with whom we have conflicts of interest.
 
We have only 29 employees, including Messrs. Weber, Felletter, Horn, Guziewicz, and are dependent upon our manager to provide services to us that are vital to our operations. ACM, our manager currently has approximately 21.2% of the voting power of the outstanding shares of our capital stock and Mr. Kaufman, our chairman and chief executive officer and the chief executive officer of ACM, beneficially owns these shares. Mr. Martello, one of our directors, is the chief operating officer of Arbor Management, LLC (the managing member of ACM) and a trustee of two trusts which own minority membership interests in ACM. Mr. Elenio, our chief financial officer and treasurer, is the chief financial officer of ACM. Each of Messrs. Kaufman, Martello, Elenio, Horn, Weber, Kilgore, Felletter are members of ACM’s executive committee and own minority membership interests in ACM.
 
We may enter into transactions with ACM outside the terms of the management agreement with the approval of a majority vote of the independent members of our board of directors. Transactions required to be approved by a majority of our independent directors include, but are not limited to, our ability to purchase securities, mortgages and other assets from ACM or to sell securities and assets to ACM. ACM may from time to time provide permanent mortgage loan financing to clients of ours, which will be used to refinance bridge financing provided by us. We and ACM may also make loans to the same borrower or to borrowers that are under common control. Additionally, our policies and those of ACM may require us to enter into intercreditor agreements in situations where loans are made by us and ACM to the same borrower.
 
We have entered into a management agreement with our manager under which our manager provides us with all of the services vital to our operations other than asset management services. Certain matters relating to our organization were not approved at arm’s length and the terms of the contribution of assets to us may not be as favorable to us as if the contribution was with an unaffiliated third party.
 
The results of our operations are dependent upon the availability of, and our manager’s ability to identify and capitalize on, investment opportunities. Our manager’s officers and employees are also responsible for providing the same services for ACM’s portfolio of investments. As a result, they may not be able to devote sufficient time to the management of our business operations.
 
Our directors have approved very broad investment guidelines for our manager and do not approve each investment decision made by our manager.
 
Our manager is authorized to follow very broad investment guidelines. Our directors will periodically review our investment guidelines and our investment portfolio. However, our board does not review each proposed investment. In addition, in conducting periodic reviews, the directors rely primarily on information provided to them by our manager. Furthermore, transactions entered into by our manager may be difficult or impossible to unwind by the time they are reviewed by the directors. Our manager has great latitude within the broad investment guidelines in determining the types of assets it may decide are proper investments for us.
 
Our manager has broad discretion to invest funds and may acquire structured finance assets where the investment returns are substantially below expectations or that result in net operating losses.
 
Our manager has broad discretion, within the general investment criteria established by our board of directors, to allocate the proceeds of the concurrent offerings and to determine the timing of investment of such proceeds. Such discretion could result in allocation of proceeds to assets where the investment returns are substantially below expectations or that result in net operating losses, which would materially and adversely affect our business, operations and results.
 
The management compensation structure that we have agreed to with our manager may cause our manager to invest in high risk investments. Our manager is entitled to a base management fee, which is based on an agreed upon budget which represents the actual cost of managing the assets. Our manager is also entitled to receive incentive compensation based in part upon our achievement of targeted levels of funds from operations. In evaluating investments and other management strategies, the opportunity to earn incentive compensation based on funds from operations may lead our manager to place undue emphasis on the maximization of funds from operations at the
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expense of other criteria, such as preservation of capital, in order to achieve higher incentive compensation. Investments with higher yield potential are generally riskier or more speculative. This could result in increased risk to the value of our invested portfolio.
 
Risk Related to Our Status as a REIT
 
If we fail to remain qualified as a REIT, we will be subject to tax as a regular corporation and could face substantial tax liability.
 
We conduct our operations to qualify as a REIT under the Internal Revenue Code. However, qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent mistake could jeopardize our REIT status. Our continued qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. In addition, our ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes.
 
Furthermore, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT. If we fail to qualify as a REIT in any tax year, then:

 	• 	we would be taxed as a regular domestic corporation, which, among other things, means we would be unable to deduct distributions to stockholders in computing taxable income and would be subject to federal income tax on our taxable income at regular corporate rates;	
 	 	 	
 	• 	any resulting tax liability could be substantial and would reduce the amount of cash available for distribution to stockholders; and	
 	 	 	
 	• 	unless we were entitled to relief under applicable statutory provisions, we would be disqualified from treatment as a REIT for the subsequent four taxable years following the year during which we lost our qualification, and thus, our cash available for distribution to stockholders would be reduced for each of the years during which we did not qualify as a REIT.	
 
Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.
 
Even if we remain qualified for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes, such as mortgage recording taxes. Any of these taxes would decrease cash available for distribution to our stockholders. In addition, in order to meet the REIT qualification requirements, or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory, we may hold some of our assets through taxable subsidiary corporations.
 
The “taxable mortgage pool” rules may increase the taxes that we or our stockholders may incur, and may limit the manner in which we effect future securitizations.
 
Certain of our securitizations have resulted in the creation of taxable mortgage pools for federal income tax purposes. So long as 100% of the equity interests in a taxable mortgage pool are owned by an entity that qualifies as a REIT, including our subsidiary Arbor Realty SR, Inc., we would generally not be adversely affected by the characterization of the securitization as a taxable mortgage pool. Certain categories of stockholders, however, such as foreign stockholders eligible for treaty or other tax benefits, stockholders with net operating losses, and certain tax-exempt stockholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their dividend income from us that is attributable to the taxable mortgage pool. In addition, to the extent
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that our stock is owned by tax-exempt “disqualified organizations,” such as certain government-related entities that are not subject to tax on unrelated business income, we could incur a corporate level tax on a portion of our income from the taxable mortgage pool. In that case, we may reduce the amount of our distributions to any disqualified organization whose stock ownership gave rise to the tax. Moreover, we could be precluded from selling equity interests in these securitizations to outside investors, or selling any debt securities issued in connection with these securitizations that might be considered to be equity interests for tax purposes. These limitations may prevent us from using certain techniques to maximize our returns from securitization transactions.
 
Complying with REIT requirements may cause us to forego otherwise attractive opportunities.
 
To qualify as a REIT for federal income tax purposes we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
 
Complying with REIT requirements may force us to liquidate otherwise attractive investments.
 
To qualify as a REIT we must ensure that at the end of each calendar quarter at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investment in securities generally cannot comprise more than 10% of the outstanding voting securities, or more than 10% of the total value of the outstanding securities, of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than assets which qualify for purposes of the 75% asset test) may consist of the securities of any one issuer, and no more than 25% of the value of our total assets may be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct such failure within 30 days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments.
 
Liquidation of collateral may jeopardize our REIT status.
 
To continue to qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate investments to satisfy our obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our status as a REIT.
 
We may be unable to generate sufficient revenue from operations to pay our operating expenses and to pay dividends to our stockholders.
 
As a REIT, we are generally required to distribute at least 90% of our taxable income each year to our stockholders, though under the terms of certain financing agreements, annual dividends are limited to 100% of taxable income to common shareholders and are required to be paid in the form of our stock to the maximum extent permissible (currently 90%), with the balance payable in cash. In order to qualify for the tax benefits accorded to REITs, we intend to declare quarterly dividends and to make distributions to our stockholders in amounts such that we distribute all or substantially all of our taxable income each year, subject to certain adjustments. However, our ability to make distributions may be adversely affected by the risk factors described in this report. In the event of a downturn in our operating results and financial performance or unanticipated declines in the value of our asset portfolio, we may be unable to declare or pay quarterly dividends or make distributions to our stockholders. The timing and amount of dividends are in the sole discretion of our board of directors, which considers, among other factors, our earnings, financial condition, debt service obligations and applicable debt covenants, REIT qualification requirements and other tax considerations and capital expenditure requirements as our board may deem relevant from time to time.
 
Among the factors that could adversely affect our results of operations and impair our ability to make distributions to our stockholders are:

 	• 	our ability to make profitable structured finance investments;	
 	 	 	
 	• 	defaults in our asset portfolio or decreases in the value of our portfolio;	

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 	• 	the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates; and	
 	 	 	
 	• 	increased debt service requirements, including those resulting from higher interest rates on variable rate indebtedness.	
 
A change in any one of these factors could affect our ability to make distributions. If we are not able to comply with the restrictive covenants and financial ratios contained in our credit facilities, our ability to make distributions to our stockholders may also be impaired. We cannot assure you that we will be able to make distributions to our stockholders in the future or that the level of any distributions we make will increase over time.
 
We may need to borrow funds under our credit facilities in order to satisfy our REIT distribution requirements, and a portion of our distributions may constitute a return of capital. Debt service on any borrowings for this purpose will reduce our cash available for distribution.
 
In order to qualify as a REIT, we must generally, among other requirements, distribute at least 90% of our taxable income, subject to certain adjustments, to our stockholders each year, though under the terms of certain financing agreements, annual dividends are limited to 100% of taxable income to common shareholders and are required to be paid in the form of our stock to the maximum extent permissible (currently 90%), with the balance payable in cash. To the extent that we satisfy the distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws.
 
From time to time, we may generate taxable income greater than our net income for financial reporting purposes, or our taxable income may be greater than our cash flow available for distribution to stockholders. If we do not have other funds available in these situations we could be required to borrow funds, issue stock or sell investments and our equity securities at disadvantageous prices or find another alternative source of funds to make distributions sufficient to enable us to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year.
 
We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.
 
At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may change. Any such changes may have retroactive effect, and could adversely affect us or our stockholders. Legislation enacted in 2003 and extended in 2006 generally reduced the federal income tax rate on most dividends paid by corporations to individual investors to a maximum of 15% (through 2010). REIT dividends, with limited exceptions, will not benefit from the rate reduction, because a REIT’s income generally is not subject to corporate level tax. As such, this legislation could cause shares in non-REIT corporations to be a more attractive investment to individual investors than shares in REITs, and could have an adverse effect on the value of our common stock.
 
Restrictions on share accumulation in REITs could discourage a change of control of us.
 
In order for us to qualify as a REIT, not more than 50% of the value of our outstanding shares of capital stock may be owned, directly or indirectly, by five or fewer individuals during the last half of a taxable year.
 
In order to prevent five or fewer individuals from acquiring more than 50% of our outstanding shares and a resulting failure to qualify as a REIT, our charter provides that, subject to certain exceptions, no person, including entities, may own, or be deemed to own by virtue of the attribution provisions of the Internal Revenue Code, more than 7.0% of the aggregate value or number of shares (whichever is more restrictive) of our outstanding common stock, or more than 7.0%, by value, of our outstanding shares of capital stock of all classes, in the aggregate. For purposes of the ownership limitations, warrants held by a person will be deemed to have been exercised if such exercise would result in a violation of the charter provisions.
 
Shares of our stock that would otherwise be directly or indirectly acquired or held by a person in violation of the ownership limitations are, in general, automatically transferred to a trust for the benefit of a charitable
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beneficiary, and the purported owner’s interest in such shares is void. In addition, any person who acquires shares in excess of these limits is obliged to immediately give written notice to us and provide us with any information we may request in order to determine the effect of the acquisition on our status as a REIT.
 
While these restrictions are designed to prevent any five individuals from owning more than 50% of our shares, they could also discourage a change in control of our company. These restrictions may also deter tender offers that may be attractive to stockholders or limit the opportunity for stockholders to receive a premium for their shares if an investor makes purchases of shares to acquire a block of shares.
 
Moreover, the current level of the ownership limit that applies to our stockholders, generally 7.0%, is such that in conjunction with the exemptions described above that were granted to Mssrs. Kaufman and Kojaian, if individuals were to acquire stock in the maximum amounts thereby permitted, our ability to qualify as a REIT could be jeopardized. We believe that the actual ownership of our stock has complied with the REIT qualification requirements, and we expect to be able to maintain such compliance in the future. Nevertheless, no assurance can be given that future ownership of our stock will be such that we will be able to maintain our qualification as a REIT.
 
Complying with REIT requirements may limit our ability to hedge effectively.
 
The REIT provisions of the Internal Revenue Code may limit our ability to hedge our operations. Under current law, income that we generate from derivatives or other transactions intended to hedge various risks may be treated as non-qualifying income for purposes of the REIT income tests, unless certain requirements are met, and our position in such a hedging or derivative transaction, to the extent that it has positive value, may be treated as a non-qualifying asset for purposes of the REIT asset tests. As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur.
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ITEM 1B.  	UNRESOLVED STAFF COMMENTS	
 
Not applicable.

ITEM 2.  	PROPERTIES	
 
Arbor Commercial Mortgage, our manager, leases our shared principal executive and administrative offices, located at 333 Earle Ovington Boulevard in Uniondale, New York.

ITEM 3.  	LEGAL PROCEEDINGS	
 
We are not involved in any material litigation nor, to our knowledge, is any material litigation threatened against us.

ITEM 4.  	RESERVED	

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PART II

ITEM 5.  	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	
 
Market Information
 
Our common stock has been listed on the New York Stock Exchange under the symbol “ABR” since our initial public offering in April 2004. The following table sets forth for the indicated periods the high and low sales prices for our common stock, as reported on the New York Stock Exchange, and the dividends declared and paid with respect to such periods.

 	 	 	 	 	 	Dividends
	
 	 	High	 	Low	 	Declared	
 	 	 	 	 	 	 	 	 	 	 	 	 	
2008	 	 	 	 	 	 	 	 	 	 	 	 	
First Quarter	 	$	18.80	 	 	$	13.46	 	 	$	0.62	 	
Second Quarter	 	$	18.18	 	 	$	8.71	 	 	$	0.62	 	
Third Quarter	 	$	12.49	 	 	$	7.50	 	 	$	0.62	 	
Fourth Quarter(1)	 	$	10.25	 	 	$	1.77	 	 	$	0.24	 	
2009	 	 	 	 	 	 	 	 	 	 	 	 	
First Quarter(2)	 	$	3.50	 	 	$	0.56	 	 	$	—	 	
Second Quarter(2)	 	$	4.23	 	 	$	0.69	 	 	$	—	 	
Third Quarter(2)	 	$	3.60	 	 	$	1.50	 	 	$	—	 	
Fourth Quarter(2)	 	$	2.97	 	 	$	1.65	 	 	$	—	 	

 	 	 	
(1)	 	In January 2009, we elected not to pay a common stock distribution with respect to the quarter ended December 31, 2008 and we believe the dividends paid fully satisfy our 2008 REIT distribution requirements.	
 	 	 	
(2)	 	We elected not to pay a common stock distribution for the calendar year ended December 31, 2009.	
 
We are organized and conduct our operations to qualify as a real estate investment trust, or a REIT, which requires that we distribute at least 90% of taxable income. No assurance, however, can be given as to the amounts or timing of future distributions as such distributions are subject to our earnings, financial condition, capital requirements and such other factors as our board of directors deems relevant.
 
On March 5, 2010, the closing sale price for our common stock, as reported on the NYSE, was $2.54. As of March 5, 2010, there were 9,730 record holders of our common stock, including persons holding shares in broker accounts under street names.
 
Equity Compensation Plan Information
 
Information regarding securities authorized for issuance under our equity compensation plans which are set forth under the caption “Equity Compensation Plan Information” of the 2010 Proxy Statement is incorporated herein by reference.
 
Performance Graph
 
Set forth below is a line graph comparing the cumulative total stockholder return on shares of our common stock with the cumulative total return of the NAREIT All REIT Index and the Russell 2000 Index. The five year period commences on December 31, 2004 and ends on December 31, 2009, the end of our most recently completed fiscal year. The graph assumes an investment of $100 on January 1, 2005 and the reinvestment of any dividends. This graph is not necessarily indicative of future price performance. The information included in the graph and table below was obtained from SNL Financial LC, Charlottesville, VA. ©  2009.
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Arbor Realty Trust, Inc.
 
Total Return Performance

 
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Period Ending	
 Index	 	12/31/04	 	12/31/05	 	12/31/06	 	12/31/07	 	12/31/08	 	12/31/09	
Arbor Realty Trust, Inc. 	 	 	100.00	 	 	 	114.94	 	 	 	147.11	 	 	 	87.59	 	 	 	19.30	 	 	 	13.02	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Russell 2000	 	 	100.00	 	 	 	104.55	 	 	 	123.76	 	 	 	121.82	 	 	 	80.66	 	 	 	102.58	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
NAREIT All REIT Index	 	 	100.00	 	 	 	108.29	 	 	 	145.49	 	 	 	119.54	 	 	 	74.91	 	 	 	95.47	 	

In accordance with SEC rules, this section entitled “Performance Graph” shall not be incorporated by reference into any of our future filings under the Securities Act or the Exchange Act, and shall not be deemed to be soliciting material or to be filed under the Securities Act or the Exchange Act.
 
Recent Issuances of Unregistered Securities
 
In connection with the amendment and restructuring of our term credit agreements, revolving credit agreement and working capital facility with Wachovia on July 23, 2009, we issued warrants that entitle Wachovia to purchase one million shares of our common stock at an average strike price of $4.00. The warrants were issued without registration in reliance on the exemption provided by Section 4(2) of the 1933 Act. Of such warrants, 500,000 warrants are exercisable immediately at a price of $3.50, 250,000 warrants are exercisable after July 23, 2010 at a price of $4.00 and 250,000 warrants are exercisable after July 23, 2011 at a price of $5.00. All warrants expire on July 23, 2015 and no warrants have been exercised to date.
 
Pursuant to a registration rights agreement between the Company and Wachovia, dated as of July 23, 2009, we have agreed to file a registration statement to permit the resale by Wachovia of the shares underlying the one million warrants and to pay all expenses related to such registration. We are obligated to use our best efforts to cause any such registration statement to become effective promptly following the filing thereof and to remain effective for a period of up to two years.
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ITEM 6.  	SELECTED FINANCIAL DATA	
 
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF
ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
 
The following tables present selected historical consolidated financial information for the periods indicated. The selected historical consolidated financial information presented below under the captions “Consolidated Statement of Operations Data” and “Consolidated Balance Sheet Data” have been derived from our audited consolidated financial statements and include all adjustments, consisting only of normal recurring accruals, which management considers necessary for a fair presentation of the historical consolidated financial statements for such period. Prior period amounts have been reclassified to conform to current period presentation. In addition, since the information presented below is only a summary and does not provide all of the information contained in our historical consolidated financial statements, including the related notes, you should read it in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements, including the related notes, included elsewhere in this report.

 	 	Year Ended December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	 	2006	 	 	2005	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Consolidated Statement of Operations Data	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income	 	$	117,262,129	 	 	$	204,135,097	 	 	$	273,984,357	 	 	$	172,833,401	 	 	$	121,109,157	 	
Interest expense	 	 	80,102,075	 	 	 	108,656,702	 	 	 	147,710,194	 	 	 	92,693,419	 	 	 	45,745,424	 	
Net interest income	 	 	37,160,054	 	 	 	95,478,395	 	 	 	126,274,163	 	 	 	80,139,982	 	 	 	75,363,733	 	
Total other revenue	 	 	1,726,054	 	 	 	82,329	 	 	 	39,503	 	 	 	867,157	 	 	 	498,250	 	
Other-than-temporary impairment	 	 	10,260,555	 	 	 	17,573,980	 	 	 	—	 	 	 	—	 	 	 	—	 	
Provision for loan losses	 	 	241,328,039	 	 	 	132,000,000	 	 	 	2,500,000	 	 	 	—	 	 	 	—	 	
Loss on restructured loans	 	 	57,579,561	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Management fees — related party	 	 	15,136,170	 	 	 	3,539,854	 	 	 	25,004,975	 	 	 	12,831,791	 	 	 	12,430,546	 	
Other expenses	 	 	22,165,361	 	 	 	16,307,371	 	 	 	14,974,230	 	 	 	11,291,352	 	 	 	10,216,873	 	
Gain on exchange of profits interest	 	 	55,988,411	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Gain on extinguishment of debt	 	 	54,080,118	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Loss on termination of swaps	 	 	(8,729,408	)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
(Loss) income from equity affiliates	 	 	(438,507	)	 	 	(2,347,296	)	 	 	34,573,594	 	 	 	4,784,292	 	 	 	8,453,440	 	
Provision for income taxes	 	 	—	 	 	 	—	 	 	 	16,885,000	 	 	 	150,000	 	 	 	—	 	
Net (loss) income from continuing operations	 	 	(206,682,964	)	 	 	(76,207,777	)	 	 	16,989,177	 	 	 	11,104,481	 	 	 	11,280,981	 	
Loss from discontinued operations	 	 	(5,275,337	)	 	 	(582,294	)	 	 	—	 	 	 	—	 	 	 	—	 	
Net (loss) income	 	 	(211,958,301	)	 	 	(76,790,071	)	 	 	101,523,055	 	 	 	61,518,288	 	 	 	61,668,004	 	
Net income attributable to noncontrolling interest	 	 	18,672,855	 	 	 	4,439,773	 	 	 	16,989,177	 	 	 	11,104,481	 	 	 	11,280,981	 	
Net (loss) income attributable to Arbor Realty Trust, Inc. 	 	 	(230,631,156	)	 	 	(81,229,844	)	 	 	84,533,878	 	 	 	50,413,807	 	 	 	50,387,023	 	
(Loss) earnings from continuing operations per share, basic	 	 	(8.90	)	 	 	(3.52	)	 	 	4.44	 	 	 	2.94	 	 	 	2.99	 	
Loss from discontinued operations per share, basic	 	 	(0.21	)	 	 	(0.02	)	 	 	—	 	 	 	—	 	 	 	—	 	
(Loss) earnings per share, basic	 	 	(9.11	)	 	 	(3.54	)	 	 	4.44	 	 	 	2.94	 	 	 	2.99	 	
(Loss) earnings from continuing operations per share, diluted	 	 	(8.90	)	 	 	(3.52	)	 	 	4.44	 	 	 	2.93	 	 	 	2.98	 	
Loss from discontinued operations per share, diluted	 	 	(0.21	)	 	 	(0.02	)	 	 	—	 	 	 	—	 	 	 	—	 	
(Loss) earnings per share, diluted(1)	 	 	(9.11	)	 	 	(3.54	)	 	 	4.44	 	 	 	2.93	 	 	 	2.98	 	
Dividends declared per common share(2)(3)(4)(5)(6)	 	 	—	 	 	 	2.10	 	 	 	2.46	 	 	 	2.57	 	 	 	2.24	 	

 	 	At December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	 	2006	 	 	2005	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Consolidated Balance Sheet Data	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loans and investments, net	 	$	1,700,774,288	 	 	$	2,181,683,619	 	 	$	2,592,093,930	 	 	$	1,993,525,064	 	 	$	1,246,825,906	 	
Related party loans, net	 	 	—	 	 	 	—	 	 	 	—	 	 	 	7,752,038	 	 	 	7,749,538	 	
Total assets	 	 	2,060,774,772	 	 	 	2,579,236,489	 	 	 	2,901,493,534	 	 	 	2,204,345,211	 	 	 	1,396,075,357	 	
Repurchase agreements	 	 	2,657,332	 	 	 	60,727,789	 	 	 	244,937,929	 	 	 	395,847,359	 	 	 	413,624,385	 	
Collateralized debt obligations	 	 	1,100,515,185	 	 	 	1,152,289,000	 	 	 	1,151,009,000	 	 	 	1,091,529,000	 	 	 	299,319,000	 	
Junior subordinated notes to subsidiary trust issuing preferred securities	 	 	259,487,421	 	 	 	276,055,000	 	 	 	276,055,000	 	 	 	222,962,000	 	 	 	155,948,000	 	
Notes payable	 	 	375,219,206	 	 	 	518,435,437	 	 	 	596,160,338	 	 	 	94,574,240	 	 	 	115,400,377	 	
Note payable — related party	 	 	—	 	 	 	4,200,000	 	 	 	—	 	 	 	—	 	 	 	30,000,000	 	
Mortgage note payable — held-for-sale	 	 	41,440,000	 	 	 	41,440,000	 	 	 	—	 	 	 	—	 	 	 	—	 	
Total liabilities	 	 	1,962,140,802	 	 	 	2,298,241,821	 	 	 	2,433,376,191	 	 	 	1,842,765,882	 	 	 	1,044,775,284	 	
Total Arbor Realty Trust, Inc. stockholders’ equity	 	 	96,693,606	 	 	 	281,005,649	 	 	 	395,263,085	 	 	 	296,111,077	 	 	 	287,608,517	 	
Noncontrolling interest in operating partnership units	 	 	—	 	 	 	—	 	 	 	72,854,258	 	 	 	65,468,252	 	 	 	63,691,556	 	
Noncontrolling interest in consolidated entity	 	 	1,940,364	 	 	 	(10,981	)	 	 	—	 	 	 	—	 	 	 	—	 	
Total equity	 	 	98,633,970	 	 	 	280,994,668	 	 	 	468,117,343	 	 	 	361,579,329	 	 	 	351,300,073	 	

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 	 	Year Ended December 31,	
 	 	2009	 	2008	 	2007	 	2006	 	2005	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other Data	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total originations(7)	 	$	3,000,000	 	 	$	290,565,879	 	 	$	2,007,838,793	 	 	$	1,458,153,387	 	 	$	953,937,330	 	

 	 	 	
(1)	 	In 2009, the Company issued one million warrants as part of a debt restructuring which were anti-dilutive for the period.	
 	 	 	
(2)	 	We elected not to pay a common stock distribution for the calendar year ended December 31, 2009.	
 	 	 	
(3)	 	In January 2009, we elected not to pay a common stock distribution with respect to the quarter ended December 31, 2008 and we believe the dividends paid fully satisfy our 2008 REIT distribution requirements.	
 	 	 	
(4)	 	On January 25, 2008, our board of directors authorized and we declared a distribution to our stockholders of $0.62 per share of common stock, payable with respect to the quarter ended December 31, 2007, to stockholders of record at the close of business on February 15, 2008. We made this distribution on February 26, 2008.	
 	 	 	
(5)	 	On January 25, 2007, our board of directors authorized and we declared a distribution to our stockholders of $0.60 per share of common stock, payable with respect to the quarter ended December 31, 2006, to stockholders of record at the close of business on February 5, 2007. We made this distribution on February 20, 2007.	
 	 	 	
(6)	 	On January 11, 2006, our board of directors authorized and we declared a distribution to our stockholders of $0.70 per share of common stock, payable with respect to the quarter ended December 31, 2005, to stockholders of record at the close of business on January 23, 2006. We made this distribution on February 6, 2006.	
 	 	 	
(7)	 	Year ended December 31, 2005 originations are net of a $59.4 million participation in one of our loans.	

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ITEM 7.  	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	
 
You should read the following discussion in conjunction with the sections of this report entitled “Risk Factors”, “Forward-Looking Statements”, and “Selected Consolidated Financial Information of Arbor Realty Trust, Inc. and Subsidiaries” and the historical consolidated financial statements of Arbor Realty Trust, Inc. and Subsidiaries, including related notes, included elsewhere in this report.
 
Overview
 
We are a Maryland corporation that was formed in June 2003 to invest in multi-family and commercial real estate-related bridge loans, junior participating interests in first mortgages, mezzanine loans, preferred and direct equity and, in limited cases, discounted mortgage notes and other real estate-related assets, which we refer to collectively as structured finance investments. We have also invested in mortgage-related securities. We conduct substantially all of our operations through our operating partnership and its wholly-owned subsidiaries.
 
Our operating performance is primarily driven by the following factors:

 	• 	Net interest income earned on our investments — Net interest income represents the amount by which the interest income earned on our assets exceeds the interest expense incurred on our borrowings. If the yield earned on our assets decreases or the cost of borrowings increases, this will have a negative impact on earnings. However, if the yield earned on our assets increases or the cost of borrowings decreases, this will have a positive impact on earnings. Net interest income is also directly impacted by the size and performance of our asset portfolio. See “Current Market Conditions, Risks and Recent Trends” below for risks and trends of our net interest income.	
 	 	 	
 	• 	Credit quality of our assets — Effective asset and portfolio management is essential to maximize the performance and value of a real estate/mortgage investment. Maintaining the credit quality of our loans and investments is of critical importance. Loans that do not perform in accordance with their terms may have a negative impact on earnings and liquidity.	
 	 	 	
 	• 	Cost control — We seek to minimize our operating costs, which consist primarily of employee compensation and related costs, management fees and other general and administrative expenses. If there are increases in foreclosures and non-performing loans and investments, certain of these expenses, particularly employee compensation expenses and asset management related expenses, may increase.	
 
We are organized and conduct our operations to qualify as a real estate investment trust, or a REIT and to comply with the provisions of the Internal Revenue Code with respect thereto. A REIT is generally not subject to federal income tax on that portion of its REIT-taxable income which is distributed to its stockholders provided that at least 90% of its REIT-taxable income is distributed and provided that certain other requirements are met. Additionally, under the terms of certain financing agreements, annual dividends are required to be paid in the form of our stock to the maximum extent permissible (currently 90%), with the balance payable in cash. Certain of our assets that produce non-qualifying income may be held in taxable REIT subsidiaries. Unlike other subsidiaries of a REIT, the income of a taxable REIT subsidiary is subject to Federal and state income taxes. For the year ended December 31, 2009, we did not record a provision for income taxes related to the assets that are held in taxable REIT subsidiaries.
 
On July 1, 2003, ACM, our manager, contributed $213.1 million of structured finance assets, encumbered by $169.2 million of borrowings in exchange for an equity interest in our operating partnership represented by 3,146,724 units of limited partnership interest and 629,345 warrants to acquire additional units of limited partnership interest. In addition, certain employees of ACM became our employees. We are externally managed and advised by ACM and pay ACM a management fee in accordance with a management agreement. ACM originates, underwrites and services all structured finance assets on behalf of our operating partnership.
 
Concurrently with ACM’s asset contribution, we consummated a private placement of 1.6 million units, each consisting of five shares of our common stock and one warrant to purchase one share of common stock, for $75.00
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per unit, resulting in gross proceeds of $120.2 million. Gross proceeds from the private placement combined with the concurrent equity contribution by ACM totaled approximately $164.1 million in equity capital.
 
On April 13, 2004, we sold 6,750,000 shares of our common stock at a price to the public of $20.00 per share, for net proceeds of approximately $124.4 million after deducting the underwriting discount and other estimated offering expenses. On May 11, 2004, we issued and sold 524,200 additional shares of common stock, for net proceeds of approximately $9.8 million after deducting the underwriting discount pursuant to the exercise of a portion of the over-allotment option granted to the underwriters of our initial public offering. As of December 31, 2005, we issued 1,256,130 shares of common stock from the exercise of warrants originally issued as a component of units on July 1, 2003, for proceeds of $17.1 million. In addition, in June 2007, we issued 2,700,000 shares of common stock in a public offering at a price of $27.65 per share, for net proceeds of approximately $73.6 million.
 
Current Market Conditions, Risks and Recent Trends
 
Global stock and credit markets have experienced prolonged price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. Commercial real estate classes in general have been adversely affected by this prolonged economic downturn and liquidity crisis. If this continues, the commercial real estate sector will likely experience additional losses, challenges in complying with the terms of financing agreements, decreased net interest spreads, and additional difficulties in raising capital and obtaining investment financing with attractive terms or at all.
 
These circumstances have materially impacted liquidity in the financial markets and have resulted in the scarcity of certain types of financing, and, in some cases, making terms for available financings less attractive. If these conditions persist, lending institutions may be forced to exit markets such as repurchase lending, become insolvent, further tighten their lending standards or increase the amount of equity capital required to obtain financing, and in such event, could make it more difficult for us to obtain financing on favorable terms or at all. Our profitability will be adversely affected if we are unable to obtain cost-effective financing for our investments. A prolonged downturn in the stock or credit markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly. During the third quarter of 2009, we restructured substantially all of our short-term debt for three years at costs of financing higher than previous rates. This has and will continue to have a negative impact on our net interest margins. In addition, these factors may make it more difficult for our borrowers to repay our loans as they may experience difficulties in selling assets, increased costs of financing or obtaining financing at all. These events in the stock and credit markets may also make it more difficult or unlikely for us to raise capital through the issuance of our common stock or preferred stock. These disruptions in the financial markets also may have a material adverse effect on the market value of our common stock and other adverse effects on us or the economy in general.
 
This environment has undoubtedly had a significant impact on our business, our borrowers and real estate values throughout all asset classes and geographic locations. Declining real estate values will likely continue to minimize our level of new mortgage loan originations, since borrowers often use increases in the value of their existing properties to support the purchase or investment in additional properties. Borrowers may also be less able to pay principal and interest on our loans if the real estate economy continues to weaken. Declining real estate values also significantly increase the likelihood that we will continue to incur losses on our loans in the event of default because the value of our collateral may be insufficient to cover our cost on the loan. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from loans in our portfolio as well as our ability to originate, sell and securitize loans, which would significantly harm our revenues, results of operations, financial condition, business prospects and our ability to make distributions to the stockholders. In addition, our investments are also subject to the risks described above with respect to commercial real estate loans and mortgage-backed securities and similar risks, including risks of delinquency and foreclosure, the dependence upon the successful operation of, and net income from, real property, risks generally related to interests in real property, and risks that may be presented by the type and use of a particular commercial property. During the first, second, third and fourth quarters of fiscal year 2009, respectively, we recorded $67.5 million, $23.0 million, $51.0 million and $99.8 million of new provisions for loan losses for a total of $241.3 million, due to declining collateral values, and $9.0 million, $23.8 million, $0.3 million and $24.5 million of losses on restructured
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loans for a total of $57.6 million in 2009. During the first three quarters of fiscal year 2008, we recorded $8.0 million of provisions for loan losses and $124.0 million in the fourth quarter for a total of $132.0 million, and no loss on restructured loans was recorded in 2008. We have made, and continue to make modifications and extensions to loans when it is economically feasible to do so. In some cases, modification is a more viable alternative to foreclosure proceedings when a borrower can not comply with loan terms. In doing so, lower borrower interest rates, combined with non-performing loans, will lower our net interest margins when comparing interest income to our costs of financing. These trends may persist with a prolonged economic recession and we feel that there will be continued modifications and delinquencies in the foreseeable future, which will result in reduced net interest margins and additional losses throughout our sector.
 
Commercial real estate financing companies have been severely impacted by the current economic environment and have had very little access to the capital markets or the debt markets in order to meet their existing obligations or to refinance maturing debt. We have responded to these troubled times by decreasing investment activity for capital preservation, aggressively managing our assets through restructuring and extending our debt facilities and repurchasing our previously issued debt at discounts when economically feasible. In order to accomplish these goals, we have worked closely with our borrowers in restructuring our loans, receiving payoffs and paydowns and monetizing our investments as appropriate. Additionally, as mentioned above, we were successful in restructuring our short-term debt facilities, and, based on available liquidity and market opportunities, have from time to time repurchased our debt at a discount. Also, in 2010, we entered into an agreement with Wachovia Bank, National Association to retire our outstanding debt for $113.9 million at any time on or before an extended payoff date of August 27, 2010 and we retired $114.1 million of our junior subordinated notes for the re-issuance of certain of our own CDO bonds, as well as other assets. We will continue to remain focused on executing these strategies when appropriate and where available as this significant economic downturn persists.
 
Refer to Item 1A “Risk Factors” above and Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” below for additional risk factors.
 
Sources of Operating Revenues
 
We derive our operating revenues primarily from interest received from making real estate-related bridge, mezzanine and junior participation loans and preferred equity investments. Interest income earned on these loans and investments represented approximately 95%, 97% and 90% of our total revenues in 2009, 2008 and 2007, respectively.
 
Interest income is also derived from profits on equity participation interests. No such income was recognized in 2009. In 2008 and 2007 interest income from participation interests represented approximately 1% and 10% of total revenues, respectively.
 
We also derive interest income from our investments in commercial real estate (“CRE”) collateralized debt obligation bond securities and commercial mortgage-backed securities (“CMBS”). Interest on these investments represented 4% and 2% of our total revenues in 2009 and 2008, respectively, and less than 1% of our total revenues in 2007.
 
Property operating income is derived from our real estate owned. In 2009, property operating income represented 1% of total revenue. No such income was recognized in 2008 and 2007.
 
Additionally, we derive operating revenues from other income that represents loan structuring and defeasance fees, and miscellaneous asset management fees associated with our loans and investments portfolio. Revenue from other income represented less than 1% of our total revenues in 2009, 2008 and 2007.
 
Loss or Income from Equity Affiliates and Gain on Sale of Loans and Real Estate
 
We derive loss or income from equity affiliates relating to joint ventures that were formed with equity partners to acquire, develop and/or sell real estate assets. These joint ventures are not majority owned or controlled by us, and are not consolidated in our financial statements. These investments are recorded under either the equity or cost method of accounting as appropriate. We record our share of net income and losses from the underlying properties and any other-than-temporary impairment of these investments on a single line item in the consolidated statements
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of operations as loss or income from equity affiliates. In 2009 and 2008, loss from equity affiliates totaled $0.4 million and $2.3 million, respectively. In 2007, income from equity affiliates totaled $34.6 million.
 
We also may derive income or losses from the sale of loans and real estate. We may acquire (1) real estate for our own investment and, upon stabilization, disposition at an anticipated return and (2) real estate notes generally at a discount from lenders in situations where the borrower wishes to restructure and reposition its short-term debt and the lender wishes to divest certain assets from its portfolio. No such income or loss has been recorded to date.
 
Significant Accounting Estimates and Critical Accounting Policies
 
Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that could affect the reported amounts in our consolidated financial statements. Actual results could differ from these estimates. A summary of our significant accounting policies is presented in Note 2 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof. Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements included in this report. Certain of the accounting policies used in the preparation of these consolidated financial statements are particularly important for an understanding of the financial position and results of operations presented in the historical consolidated financial statements included in this report and require the application of significant judgment by management and, as a result, are subject to a degree of uncertainty.
 
Loans and Investments
 
At the time of purchase, we designate a security as held-to-maturity, available-for-sale, or trading depending on ability and intent to hold. We do not have any trading securities at this time. Securities available-for-sale are reported at fair value, while securities and investments held-to-maturity are reported at amortized cost. Unrealized losses that are determined to be other-than-temporary are recognized in earnings. The determination of other-than-temporary impairment is a subjective process requiring judgments and assumptions. The process may include, but is not limited to, assessment of recent market events and prospects for near term recovery, assessment of cash flows, internal review of the underlying assets securing the investments, credit of the issuer and the rating of the security, as well as our ability and intent to hold the investment. We closely monitor market conditions on which we base such decisions.
 
We also assess certain of our held-to-maturity securities, other than those of high credit quality, to determine whether significant changes in estimated cash flows or unrealized losses on these securities reflect a decline in value which is other-than-temporary; accordingly, such securities are written down to fair value against earnings. On a quarterly basis, we review these changes in estimated cash flows, which could occur due to actual prepayment and credit loss experience, to determine if an other-than-temporary impairment is deemed to have occurred. The determination of other-than-temporary impairment is a subjective process requiring judgments and assumptions. We calculate a revised yield based on the current amortized cost of the investment, including any other-than-temporary impairments recognized to date, and the revised yield is then applied prospectively to recognize interest income.
 
Loans held for investment are intended to be held-to-maturity and, accordingly, are carried at cost, net of unamortized loan origination costs and fees, loan purchase discounts, and allowance for loan losses when such loan or investment is deemed to be impaired. We invest in preferred equity interests that, in some cases, allow us to participate in a percentage of the underlying property’s cash flows from operations and proceeds from a sale or refinancing. At the inception of each such investment, management must determine whether such investment should be accounted for as a loan, joint venture or as real estate. To date, management has determined that all such investments are properly accounted for and reported as loans.
 
Impaired Loans and Allowance for Loan Losses
 
Loans are considered impaired when, based upon current information and events, it is probable that we will be unable to collect all amounts due for both principal and interest according to the contractual terms of the loan
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agreement. Specific valuation allowances are established for impaired loans based on the fair value of collateral on an individual loan basis. The fair value of the collateral is determined by selecting the most appropriate valuation methodology, or methodologies, among several generally available and accepted in the commercial real estate industry. The determination of the most appropriate valuation methodology is based on the key characteristics of the collateral type. These methodologies include the evaluation of operating cash flow from the property during the projected holding period, and estimated sales value of the collateral computed by applying an expected capitalization rate to the stabilized net operating income of the specific property, less selling costs, discounted at market discount rates.
 
If upon completion of the valuation, the fair value of the underlying collateral securing the impaired loan is less than the net carrying value of the loan, an allowance is created with a corresponding charge to the provision for loan losses. The allowance for each loan is maintained at a level believed adequate by management to absorb probable losses. We had a $326.3 million allowance for loan losses at December 31, 2009 related to 31 loans in our portfolio with an aggregate carrying value of approximately $693.7 million, before reserves. At December 31, 2008, we had a $130.5 million allowance for loan losses related to ten loans in our portfolio with an aggregate carrying value of approximately $443.2 million, before reserves.
 
Repurchase Obligations
 
In certain circumstances, we have financed the purchase of investments from a counterparty through a repurchase agreement with that same counterparty. We currently record these investments in the same manner as other investments financed with repurchase agreements, with the investment recorded as an asset and the related borrowing under the repurchase agreement as a liability on our consolidated balance sheet. Interest income earned on the investments and interest expense incurred on the repurchase obligations are reported separately on the consolidated statement of operations. These transactions may not qualify as a purchase by us under current accounting guidance, which is effective for fiscal years beginning after November 15, 2008. We would be required to present the net investment on our balance sheet as a derivative with the corresponding change in fair value of the derivative being recorded in the statement of operations when certain criteria to treat these transactions as part of the same arrangements (linked transactions) are met. The value of the derivative would reflect not only changes in the value of the underlying investment, but also changes in the value of the underlying credit provided by the counterparty. The guidance applies to prospective transactions, and no such transactions have been recorded in this manner in 2009.
 
Capitalized Interest
 
We capitalize interest related to investments (equity, loans and advances) accounted for by the equity method as qualifying assets of the investor while the investee has activities in progress necessary to commence its planned principal operations, provided that the investee’s activities include the use of funds to acquire qualifying assets for its operations. One of our joint ventures, which is accounted for using the equity method, has used funds to acquire qualifying assets for its planned principal operations. During 2007, the joint venture sold both of the acquired properties and we discontinued the capitalization of interest on its remaining investment in the joint venture. We did not capitalize interest during the years ended December 31, 2009 and 2008, and we capitalized $0.3 million of interest during the year ended December 31, 2007 relating to this investment.
 
Real Estate Owned and Held-For-Sale
 
Real estate owned, shown net of accumulated depreciation, is comprised of real property acquired by foreclosure or deed in lieu of foreclosure. Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded at the lower of the net carrying value of the loan previously collateralized by the real estate or estimated fair value of the real estate at the time of foreclosure or delivery of a deed in lieu of foreclosure. The net carrying value is the unpaid principal balance of the loan, adjusted for any unamortized deferred fees, loan loss allowances and amounts previously due to borrower.
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Costs incurred in connection with the foreclosure of the properties collateralizing the real estate loans are expensed as incurred and costs subsequently incurred to extend the life or improve the assets subsequent to foreclosure are capitalized.
 
We allocate the purchase price of operating properties to land, building, tenant improvements, deferred lease cost for the origination costs of the in-place leases and to intangibles for the value of the above or below market leases at fair value. We amortize the value allocated to the in-place leases over the remaining lease term. The value allocated to the above or below market leases are amortized over the remaining lease term as an adjustment to rental income.
 
Real estate assets, including assets acquired by foreclosure or deed in lieu of foreclosure that are operated for the production of income are depreciated using the straight-line method over their estimated useful lives. Ordinary repairs and maintenance which are not reimbursed by the tenants are expensed as incurred. Major replacements and betterments which improve or extend the life of the asset are capitalized and depreciated over their estimated useful life.
 
We recognize impairment of real estate assets operated for the production of income if the estimated undiscounted cash flows generated by the assets are less than the carrying amount of the assets. Measurement of impairment is based upon the estimated fair value of the assets. Upon evaluating a property, many factors are considered, including estimated current and expected operating cash flow from the property during the projected holding period, costs necessary to extend the life or improve the asset, expected capitalization rates, projected stabilized net operating income, selling costs, and the ability to hold and dispose of such real estate owned in the ordinary course of business. Valuation adjustments may be necessary in the event that effective interest rates, rent-up periods, future economic conditions, and other relevant factors vary significantly from those assumed in valuing the property. If future evaluations result in a diminution in the value of the property, the reduction will be recognized as an impairment charge at that time.
 
Real estate is classified as held-for-sale when management commits to a plan of sale, the asset is available for immediate sale, there is an active program to locate a buyer, and it is probable the sale will be complete within one year. Properties classified as held for sale are not depreciated and the results of their operations are shown in discontinued operations. Real estate assets that are expected to be disposed of are valued at the lower of the carrying amount or their fair value less costs to sell on an individual asset basis.
 
We recognize sales of real estate properties only upon closing. Payments received from purchasers prior to closing are recorded as deposits. Profit on real estate sold is recognized using the full accrual method upon closing when the collectability of the sale price is reasonably assured and we are not obligated to perform significant activities after the sale. Profit may be deferred in whole or in part until collectability of the sales price is reasonably assured and the earnings process is complete.
 
Revenue Recognition
 
Interest Income.  Interest income is recognized on the accrual basis as it is earned from loans, investments and securities. In many instances, the borrower pays an additional amount of interest at the time the loan is closed, an origination fee, and deferred interest upon maturity. In some cases, interest income may also include the amortization or accretion of premiums and discounts arising from the purchase or origination of the loan or security. This additional income, net of any direct loan origination costs incurred, is deferred and accreted into interest income on an effective yield or “interest” method adjusted for actual prepayment activity over the life of the related loan or security as a yield adjustment. Income recognition is suspended for loans when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. Several of the loans provide for accrual of interest at specified rates, which differ from current payment terms. Interest is recognized on such loans at the accrual rate subject to management’s determination that accrued interest and outstanding principal are ultimately collectible, based on the underlying collateral and operations of the borrower. If management cannot make this determination regarding collectability, interest income above the current pay rate is recognized only upon actual receipt. Additionally, interest income is recorded when earned from equity participation interests, referred to as equity kickers. These equity kickers have the potential to generate additional revenues to us as a result of excess
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cash flows being distributed and/or as appreciated properties are sold or refinanced. We did not record interest income on such investments for the year ended December 31, 2009, as compared to $1.0 million and $30.0 million of interest on such loans and investments for the years ended December 31, 2009 and 2008, respectively.
 
Property operating income.  Property operating income represents income associated with the operation of two commercial real estate properties recorded as real estate owned. For the years ended December 31, 2009, we recorded approximately $0.9 million of property operating income relating to real estate owned. At September 30, 2009, one of our three real estate investments was reclassified from real estate owned to real estate held-for-sale and resulted in a reclassification from property operating income into discontinued operations for the current and all prior periods. We did not have property operating income in 2008 and 2007 due to the subsequent reclassification to discontinued operations. For more details see Note 7 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof.
 
Stock-Based Compensation
 
We record stock-based compensation expense at the grant date fair value of the related stock-based award. We measure the compensation costs for these shares as of the date of the grant, with subsequent remeasurement for any unvested shares granted to non-employees with such amounts expensed against earnings, at the grant date (for the portion that vest immediately) or ratably over the respective vesting periods. The cost of these grants is amortized over the vesting term. Dividends are paid on the restricted shares as dividends are paid on shares of our common stock whether or not they are vested. Stock-based compensation was disclosed in our Consolidated Statement of Operations under “employee compensation and benefits” for employees and under “selling and administrative” expense for non-employees.
 
Income Taxes
 
We are organized and conduct our operations to qualify as a REIT and to comply with the provisions of the Internal Revenue Code with respect thereto. A REIT is generally not subject to federal income tax on taxable income which is distributed to its stockholders, provided that at least 90% of taxable income is distributed and provided that certain other requirements are met. Certain of our assets that produce non-qualifying income are held in taxable REIT subsidiaries. Unlike other subsidiaries of a REIT, the income of a taxable REIT subsidiary is subject to federal and state income taxes.
 
Current accounting guidance clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This guidance also provides clarity on derecognition, classification, interest and penalties, accounting in interim periods and disclosure.
 
Variable Interest Entities
 
Current accounting guidance requires a variable interest entity (“VIE”) to be consolidated by its primary beneficiary (“PB”). The PB is the party that absorbs a majority of the VIE’s anticipated losses and/or a majority of the expected returns.
 
On a quarterly basis, we evaluate our loans and investments, mortgage related securities and investments in equity affiliates to determine whether they are VIEs. This evaluation resulted in us determining that our bridge loans, junior participation loans, mezzanine loans, preferred equity investments and investments in equity affiliates were potential variable interests. For each of these investments, we have evaluated (1) the sufficiency of the fair value of the entities’ equity investments at risk to absorb losses, (2) that as a group the holders of the equity investments at risk have (a) the direct or indirect ability through voting rights to make decisions about the entities’ significant activities, (b) the obligation to absorb the expected losses of the entity and their obligations are not protected directly or indirectly, (c) the right to receive the expected residual return of the entity and their rights are not capped, (3) substantially all of the entities’ activities do not involve or are not conducted on behalf of an investor that has disproportionately fewer voting rights in terms of its obligation to absorb the expected losses or its right to receive expected residual returns of the entity, or both.
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Entities that issue junior subordinated notes are considered VIEs. However, it is not appropriate to consolidate these entities, as equity interests are variable interests only to the extent that the investment is considered to be at risk. Since our investments were funded by the entities that issued the junior subordinated notes, they are not considered to be at risk. In addition, we have evaluated our investments in collateralized debt obligation securities and have determined that the issuing entities are considered VIEs, but have determined that we are not the primary beneficiary.
 
We will be required to follow updated accounting guidance beginning with the first quarter of 2010, by prescribing an ongoing qualitative rather than quantitative assessment of our ability to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and our rights or obligations to receive benefits or absorb losses, in order to determine whether those entities will be required to be consolidated in our Consolidated Financial Statements. We do not expect the adoption of this guidance to have a material effect on our Consolidated Financial Statements.
 
As of December 31, 2009, we have identified 39 loans and investments which were made to entities determined to be VIEs with an aggregate carrying amount of $807.3 million. These VIE entities had exposure to real estate debt of approximately $3.3 billion at December 31, 2009. For the 39 VIEs identified, we have determined that we are not the primary beneficiaries and as such the VIEs should not be consolidated in our financial statements. For all other investments, we have determined they are not VIEs. As such, we have continued to account for these loans and investments as a loan or joint venture, as appropriate. A summary of our identified VIEs is presented in Note 10 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof.
 
Derivatives and Hedging Activities
 
The carrying values of interest rate swaps and the underlying hedged liabilities are reflected at their fair value. Changes in the fair value of these derivatives are either offset against the change in the fair value of the hedged liability through earnings or recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. Derivatives that do not qualify for cash flow hedge accounting treatment are adjusted to fair value through earnings.
 
We record all derivatives on the balance sheet at fair value. Additionally, the accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether a company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain of our risk, even though hedge accounting does not apply or we elect not to apply hedge accounting.
 
During the year ended December 31, 2009, we entered into one new interest rate swap that qualifies as a cash flow hedge with a notional value of approximately $45.1 million and paid $1.7 million, which will be amortized into interest expense over the life of the swap. During the year ended December 31, 2008, we entered into six interest rate swaps, which qualify as cash flow hedges, having a total combined notional value of approximately $121.6 million. During the year ended December 31, 2009, we terminated six interest rate swaps related to our restructured trust preferred securities, with a combined notional value of $140.0 million, for a loss of $8.7 million recorded to loss on termination of swaps on our Consolidated Statement of Operations. Refer to the section titled “Liquidity and Capital Resources — Junior Subordinated Notes” below. During the year ended December 31, 2009, we also terminated two interest rate swaps with a combined notional value of approximately $78.1 million and a $33.5 million portion of an interest rate swap with a total notional value of approximately $67.0 million. Additionally, one basis swap with a notional amount of $37.2 million matured and one basis swap and one interest rate swap had partially amortizing maturities totaling approximately $221.7 million. The remaining losses
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on termination will be amortized to interest expense over the original life of the hedging instruments. The fair value of our qualifying hedge portfolio has increased by approximately $50.8 million from December 31, 2008 as a result of the terminated and matured swaps, combined with a change in the projected LIBOR rates and credit spreads of both parties.
 
Because the valuations of our hedging activities are based on estimates, the fair value may change. For the effect of hypothetical changes in market interest rates on our interest rate swaps, see “Interest Rate Risk” in “Quantitative and Qualitative Disclosures About Market Risk”, set forth in Item 7A hereof.
 
Fair Value Measurements
 
Current accounting guidance for financial assets and liabilities defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements.
 
Fair value is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.
 
Assets and liabilities disclosed at fair value are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by the guidance and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

 	• 	Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets and liabilities carried at Level 1 fair value generally are government and agency securities, equities listed in active markets, investments in publicly traded mutual funds with quoted market prices and listed derivatives.	
 	 	 	
 	• 	Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life. Level 2 inputs include quoted market prices in markets that are not active for an identical or similar asset or liability, and quoted market prices in active markets for a similar asset or liability. Fair valued assets and liabilities that are generally included in this category are non-government securities, municipal bonds, certain hybrid financial instruments, certain mortgage and asset backed securities including CDO bonds, certain corporate debt, certain commitments and guarantees, certain private equity investments and certain derivatives.	
 	 	 	
 	• 	Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. These valuations are based on significant unobservable inputs that require a considerable amount of judgment and assumptions. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Generally, assets and liabilities carried at fair value and included in this category are certain mortgage and asset-backed securities, certain corporate debt, certain private equity investments, certain municipal bonds, certain commitments and guarantees and certain derivatives.	
 
Determining which category an asset or liability falls within the hierarchy requires significant judgment and we evaluate our hierarchy disclosures each quarter.
 
At December 31, 2009, we measured certain financial assets and financial liabilities at fair value on a recurring basis, including available-for-sale securities and derivative financial instruments. Fair values of our derivative financial instruments were approximated on current market data received from financial sources that trade such instruments and are based on prevailing market data and derived from third party proprietary models based on well
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recognized financial principles and reasonable estimates about relevant future market conditions. These items were included in other assets and other liabilities on the consolidated balance sheet. We incorporated credit valuation adjustments in the fair values of our derivative financial instruments to reflect counterparty nonperformance risk. In addition, the fair value of our available-for-sale securities were approximated on current market quotes received from financial sources that trade such securities.
 
At December 31, 2009, we measured certain financial assets and financial liabilities at fair value on a nonrecurring basis, including loans and securities held-to-maturity. Fair values of loans were estimated using discounted cash flow methodology, using discount rates, which, in the opinion of management, best reflect current market interest rates that would be offered for loans with similar characteristics and credit quality. Loans are designated as held for investment and are intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan origination costs and fees, loan purchase discounts, and net of the allowance for loan losses when such loan or investment is deemed to be impaired. We consider a loan impaired when, based upon current information and events, it is probable that we will be unable to collect all amounts due for both principal and interest according to the contractual terms of the loan agreement. We perform evaluations of our loans to determine if the fair value of the underlying collateral securing the impaired loan is less than the net carrying value of the loan, which may result in an allowance and corresponding charge to the provision for loan losses. In addition, the fair values of our securities-held-to maturity were approximated on current market quotes received from financial sources that trade such securities.
 
Recently Issued Accounting Pronouncements
 
In February 2010, the Financial Accounting Standards Board (“FASB”) issued updated guidance on subsequent events which states that disclosure of the date through which subsequent events have been evaluated, the issuance date of the financial statements, is no longer required. This guidance is effective upon issuance and its adoption did not have a material effect on our Consolidated Financial Statements.
 
In January 2010, the FASB issued updated guidance on fair value measurements and disclosures, which requires disclosure of details of significant asset or liability transfers in and out of Level 1 and Level 2 measurements within the fair value hierarchy and inclusion of gross purchases, sales, issuances, and settlements in the rollforward of assets and liabilities valued using Level 3 inputs within the fair value hierarchy. The guidance also clarifies and expands existing disclosure requirements related to the disaggregation of fair value disclosures and inputs used in arriving at fair values for assets and liabilities using Level 2 and Level 3 inputs within the fair value hierarchy. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the gross presentation of the Level 3 rollforward, which is required for annual reporting periods beginning after December 15, 2010 and for interim periods within those years. We do not expect the adoption of this guidance to have a material effect on our Consolidated Financial Statements.
 
In January 2010, the FASB issued updated guidance on accounting for distributions to shareholders with components of stock and cash, which clarifies the treatment of the stock portion of a distribution to shareholders that allows the election to receive cash or stock. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009. We do not expect the adoption of this guidance to have a material effect on our Consolidated Financial Statements.
 
In August 2009, the FASB issued updated guidance on the fair value measurement of liabilities not exchanged in an orderly transaction. This guidance is effective for the first reporting period (including interim periods) beginning after issuance. The adoption of this guidance did not have a material effect on our Consolidated Financial Statements.
 
In June 2009, the FASB issued “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles” (the “Codification”), which establishes the exclusive authoritative reference for accounting principles generally acceptable in the United States. The Codification simplifies the classification of accounting guidance into one online database under a common referencing system. Use of the Codification is effective for interim and annual periods ending after September 15, 2009. We began to use the Codification on the effective date, and it had no impact on our Consolidated Financial Statements. However, throughout this Form 10-K, all references to prior accounting pronouncements have been removed, and all non-SEC accounting guidance is referred to in terms of the applicable subject matter.
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In June 2009, the FASB issued updated guidance related to the consolidation of variable interest entities, which changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting, or similar rights, should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. This new guidance will require a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. These new requirements will be effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009. Early application is not permitted. We will adopt these new requirements effective January 1, 2010. We do not currently expect the adoption of this guidance to have a material effect on our Consolidated Financial Statements.
 
In June 2009, the FASB issued updated guidance related to the accounting for transfers of financial assets. This new guidance will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity”, changes the requirements for derecognizing financial assets and requires additional disclosures. These requirements are effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009. Early application is not permitted. We will adopt these new requirements effective January 1, 2010. We do not expect the adoption of this guidance to have a material effect on our Consolidated Financial Statements.
 
In April 2009, the FASB issued updated guidance on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This guidance applies to all assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this guidance did not have a material effect on our Consolidated Financial Statements.
 
In April 2009, the FASB issued updated guidance on determining the fair value of an asset or liability when the volume and level of activity may indicate an inactive market and when transactions are not orderly. This guidance applies to all fair value measurements prospectively and is effective for interim and annual periods ending after June 15, 2009. The adoption of this guidance did not have a material effect on our Consolidated Financial Statements.
 
Changes in Financial Condition
 
Our loan portfolio balance, including our held-to-maturity securities, decreased $473.6 million, or 21%, to $1.8 billion at December 31, 2009, with a weighted average current interest pay rate of 4.95%, as compared to $2.2 billion, with a weighted average current interest pay rate of 6.13%, at December 31, 2008. At December 31, 2009, advances on financing facilities totaled $1.8 billion, with a weighted average funding cost of 3.88%, as compared to $2.0 billion, with a weighted average funding cost of 3.51% at December 31, 2008.
 
In 2009, we purchased three CMBS investments at a discounted price of approximately $12.4 million with a face amount of approximately $17.0 million and originated three loans totaling $3.0 million. We have received full satisfaction of 11 loans totaling $157.3 million, which included $21.0 million in charge-offs against loan loss reserves, $32.8 million of losses on restructuring and $20.7 million as a reclassification from due to borrowers. We also received partial repayment on 14 loans totaling $122.8 million, which included $20.3 million in charge-offs against loan loss reserves and $24.8 million of losses on restructuring. We also refinanced and or modified 39 loans during the year totaling $1.1 billion. In addition, 22 loans totaling approximately $594.4 million were extended in accordance with the extension options of the corresponding loan agreements.
 
Since December 31, 2009, we purchased one CMBS investment at a discounted price of approximately $4.5 million with a face amount of $4.5 million and have not originated any new loans. We have also received $49.0 million for the repayment in full of one loan.
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Cash and cash equivalents increased $63.8 million to $64.6 million at December 31, 2009 compared to $0.8 million at December 31, 2008. All highly liquid investments with original maturities of three months or less are considered to be cash equivalents. The increase was primarily due to payoffs and paydowns of our loan investments as well as cash received from an increase in the value of our interest rate swaps for which we had previously posted as cash collateral against these swaps.
 
Restricted cash decreased $65.3 million, or 70%, to $27.9 million at December 31, 2009 compared to $93.2 million at December 31, 2008. Restricted cash is kept on deposit with the trustees for our collateralized debt obligations (“CDOs”), and primarily represents proceeds from loan repayments which will be used to purchase replacement loans as collateral for the CDOs. The decrease was primarily due to the redeployment of funds during 2009 from proceeds received from the full satisfaction of loans held in the CDO and the transfer of loans from other financing facilities to the CDOs.
 
Securities available-for-sale were $0.5 million at December 31, 2009 due to two investment grade CRE collateralized debt obligation bond with a total face value of $25.0 million, discount of $13.4 million and fair value of $0.4 million, reclassified from held-to-maturity to available-for-sale with an other-than-temporary impairment of $9.8 million. We exchanged these two bonds in retiring our own junior subordinated notes in February, 2010. See “Securities Held-To-Maturity” below. In 2008, an other-than-temporary impairment of $1.4 million was recognized on one of the investment grade CRE collateralized debt obligation bond. In 2009 and 2008, we also recorded $0.4 million and $16.2 million, respectively, in other-than-temporary impairment charges against our shares of common stock of Realty Finance Corporation., formerly CBRE Realty Finance, Inc., representing an adjustment to their fair value at December 31, 2009 and 2008. These securities had a fair value of $0.1 million and $0.5 million at December 31, 2009 and December 31, 2008, respectively. As of December 31, 2009, all of the securities available-for-sale have been in an unrealized loss position for more than twelve months. Generally accepted accounting principles in the United States (GAAP) require that all securities are evaluated periodically to determine whether a decline in their value is other-than-temporary, though it is not intended to indicate a permanent decline in value. We believe that based on recent market events and the unfavorable prospects for near-term recovery of value, that there is a lack of evidence to support the conclusion that the fair value decline is temporary. Prior to the third quarter of 2008, changes in the fair market value of our available-for-sale securities were considered unrealized gains or losses and were recorded as a component of other comprehensive income or loss. See Notes 4 and 5 of the “Notes to the Consolidated Financial Statements” set forth in Item 8 hereof for a further description of these transactions.
 
Securities held-to-maturity increased $2.3 million, or 4%, to $60.6 million at December 31, 2009 compared to $58.2 million at December 31, 2008, as a result of purchasing $17.0 million of investment grade CMBS for $12.4 million during 2009. The $4.6 million discount received on the purchases of these securities is accreted into interest income on an effective yield adjusted for actual prepayment activity over the estimated life remaining of the securities as a yield adjustment. Additionally, two investment grade CRE collateralized debt obligation bonds with a total face value of $25.0 million and a discount of $13.4 million were reclassified from held-to-maturity to available-for-sale. We exchanged these two bonds in the retirement of a portion of our own junior subordinated notes in February 2010, and intend to hold the remaining bonds to maturity. See “Securities Available-For-Sale” above and Notes 4 and 5 of the “Notes to the Consolidated Financial Statements” set forth in Item 8 hereof for a further description of these transactions.
 
Investment in equity affiliates increased $35.6 million to $64.9 million at December 31, 2009 compared to $29.3 million at December 31, 2008. In June 2008, we entered into an agreement to transfer our 16.67% interest in Prime Outlets Member, LLC (“POM”), in exchange for preferred and common operating partnership units of Lightstone Value Plus REIT L.P. Upon closing this transaction in March 2009, we recorded an investment of approximately $56.0 million for the preferred and common operating partnership units. This was partially offset by $13.6 million of other-than-temporary impairments on equity investments in unconsolidated joint ventures, for the remaining amounts of the investments. These other-than-temporary impairments were recorded in loss from equity affiliates in our Consolidated Statements of Operations in the second and third quarters of 2009, respectively. In addition, in May 2009, we retired $7.4 million of common equity and corresponding trust preferred securities in connection with the restructuring of our junior subordinated notes, reducing our investment in these entities to $0.6 million at December 31, 2009. In August 2009, we exchanged our remaining 7.5% equity interest in Prime
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Outlets at a value of approximately $10.7 million, in exchange for preferred and common operating partnership units of Lightstone Value Plus REIT L.P. and cash consideration. We received distributions of proceeds of $9.9 million, resulting in a net investment of $0.9 million in this unconsolidated joint venture as of September 30, 2009. See Note 6 of the “Notes to the Consolidated Financial Statements” set forth in Item 8 hereof for further details.
 
Real estate owned decreased $38.3 million to $8.2 million at December 31, 2009 compared to $46.5 million at December 31, 2008. In the second quarter of 2009, we foreclosed on a property secured by a $4.0 million bridge loan and as a result, we recorded $2.9 million on our balance sheet as real estate owned, at fair value and in the third quarter of 2009, we foreclosed on a property secured by a $9.9 million bridge loan and recorded $9.9 million on our consolidated balance sheet as real estate owned, at fair value. During the third quarter of 2009, we mutually agreed with a first mortgage lender to appoint a reciever to operate one of our real estate owned investments and we are working to assist in the transfer of title to the first mortgage lender. As a result, this investment was reclassified from real estate owned to real estate held-for-sale at a fair value of $41.4 million and property operating income and expenses for current and prior periods were reclassified to discontinued operations, as well as an impairment loss of $4.9 million was recorded. See Note 7 of the “Notes to the Consolidated Financial Statements” set forth in Item 8 hereof for a further description of these transactions.
 
Due from related party increased $12.3 million, to $15.2 million at December 31, 2009 and consisted of $7.0 of loan proceeds, which were repaid in the first quarter of 2010, $0.9 million of escrows due from ACM related to 2009 real estate asset transactions and $7.3 million reclassified from prepaid management fee — related party, related to the POM transaction which closed in 2009. See Note 6 of the “Notes to the Consolidated Financial Statements” set forth in Item 8 hereof for further details. In accordance with the August 2009 amended management agreement, since no incentive fee was earned for 2009, the prepaid management fee is to be paid back in installments of 25% due by December 31, 2010 and 75% due by June 30, 2012, with an option to make payment in both cash and Arbor Realty Trust, Inc. common stock provided that at least 50% of the payment is made in cash, and will be offset against any future incentive management fees or success-based payments earned by our manager prior to June 30, 2012. At December 31, 2008, due from related party was $2.9 million as a result of an overpayment of incentive management compensation based on the results of the twelve months ended December 31, 2008, which was repaid in the second quarter of 2009. Refer to “Management Agreement” below for further details.
 
Prepaid management fee decreased $7.3 million, or 28%, to $19.0 million at December 31, 2009 compared to $26.3 million at December 31, 2008, due to the classification to due from related party of a $7.3 million advance made to ACM for the incentive management fee paid on $33.0 million of cash received in June 2008 from the agreement to transfer 16.67% of our 24.17% interest in POM, one of our equity affiliates. Upon the closing of this transaction, which occurred in March 2009, we exchanged our 16.67% interest in POM for approximately $37.0 million of preferred and common operating partnership units in another REIT. In accordance with the August 2009 amended management agreement, since no incentive fee was earned for 2009, the management fee is to be paid back. Refer to “Due from Related Party” above and Note 6 of the “Notes to the Consolidated Financial Statements” set forth in Item 8 hereof for further details.
 
Other assets decreased $82.1 million, or 59% to $57.5 million at December 31, 2009 compared to $139.7 million at December 31, 2008. The decrease was primarily due to a $27.6 million decrease in collateral posted for a portion of our interest rate swaps whose value had increased and which includes $17.6 million in funded cash collateral from the termination of six swaps related to our restructured trust preferred securities and two other terminated interest rate swaps. The decrease was also due to a reduction of a $16.5 million third party member receivable in March 2009 in connection with the closing of the POM transaction, a $24.8 million decrease in interest receivable as a result of non-performing loans, loan repayments and paydowns, lower rates on refinanced and modified loans, lower LIBOR rates, and the effect of a decrease in LIBOR rates on a portion of our interest rate swaps, a $4.8 million reduction of margin calls related to other financing in 2008 and a $5.2 million decrease in the fair value of non-qualifying CDO basis swaps. See Item 7A “Quantitative and Qualitative Disclosures About Market Risk” for further information relating to our derivatives.
 
Due to related party increased $1.0 million, to $2.0 million at December 31, 2009 and consisted of base management fees due to ACM, which will be remitted by us in 2010. At December 31, 2008, due to related party
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was $1.0 million and consisted of $0.8 million of base management fees and $0.2 million of unearned fees and was repaid in the first quarter of 2009.
 
Other liabilities decreased $37.6 million, or 28%, to $97.0 million at December 31, 2009 compared to $134.6 million at December 31, 2008. The decrease was primarily due to a $48.9 million decrease in accrued interest payable primarily due to the increase in value of our interest rate swaps, as well as the termination of interest rate swaps, a reduction in LIBOR rates, the timing of reset dates and a decline in the outstanding balance of our financing facilities, net of a $20.5 million increase due to receiving a non-refundable deposit on the settlement of a bridge loan.
 
During the second quarter of 2009, we settled a $37.0 million repurchase financing facility for a cash payment of approximately $22.0 million, resulting in a gain on extinguishment of debt of approximately $15.0 million. In connection with this transaction, we sold a loan financed in this facility with a carrying value of $47.0 million, at a discount, for approximately $23.2 million and recorded a loss on restructuring of $23.8 million. The proceeds were used to satisfy the $22.0 million cash payment.
 
On April 21, 2009, we issued an aggregate of 245,000 shares of restricted common stock under the 2003 Stock Incentive Plan, as amended in 2005 (the “Plan”), of which 155,000 shares were awarded to certain of our and ACM employees and 90,000 shares were issued to members of the board of directors. As a means of emphasizing retention at a critical time for Arbor and due to their relatively low value, the 245,000 common shares underlying the restricted stock awards granted were fully vested as of the date of grant. In addition, on April 8, 2009, we accelerated the vesting of all unvested shares underlying restricted stock awards totaling 243,091 shares previously granted to certain of our and ACM employees and non-management members of the board. As a result of these transactions, we recorded approximately $2.1 million of expense in our Consolidated Statements of Operations during the second quarter of 2009 of which, $1.7 million was recorded in employee compensation and benefits and $0.4 million was recorded in selling and administrative.
 
In July 2009, we issued Wachovia Bank, National Association one million warrants at an average strike price of $4.00 in connection with our amended and restructured debt facilities. 500,000 warrants were exercisable immediately at a price of $3.50, 250,000 warrants are exercisable after July 23, 2010 at a price of $4.00 and 250,000 warrants are exercisable after July 23, 2011 at a price of $5.00. All warrants expire on July 23, 2015 and no warrants have been exercised to date. The warrants were valued at approximately $0.6 million using the Black-Scholes method and will be amortized into interest expense over the life of the agreement in our Consolidated Statement of Operations. Refer to “Notes Payable” below for further details.
 
In March 2009, we exchanged our 16.67% interest in POM for preferred and common operating partnership units of Lightstone Value Plus REIT L.P. at a value of approximately $37.3 million. As a result, during the first quarter of 2009, we recorded a gain on exchange of profits interest of approximately $56.0 million and income attributable to noncontrolling interest of approximately $18.7 million related to the third party member’s portion of income recorded. In August 2009, we exchanged our remaining 7.5% equity interest in Prime at a value of approximately $9.0 million, in exchange for preferred and common operating partnership units of Lightstone Value Plus REIT L.P. As a result of this transaction, during the third quarter of 2009, we recorded income from equity affiliates of $10.7 million. See Note 6 of the “Notes to the Consolidated Financial Statements” set forth in Item 8 hereof for further details.
 
In March 2009, we purchased from our manager, ACM, approximately $9.4 million of junior subordinated notes originally issued by a wholly-owned subsidiary of our operating partnership for $1.3 million. In 2009, ACM purchased these notes from third party investors for $1.3 million. We recorded a net gain on extinguishment of debt of $8.1 million and a reduction of outstanding debt totaling $9.4 million from this transaction. In addition, during the first quarter of 2009, we purchased approximately $23.7 million of investment grade rated notes originally issued by our CDO issuing entities for a price of $5.6 million and recorded a net gain on extinguishment of debt of $18.2 million and a reduction of outstanding debt totaling $23.7 million. Of the $23.7 million purchased, $8.8 million of the CDO notes were purchased from ACM for a price of $3.2 million. In 2008, ACM purchased these notes from third party investors for $3.2 million. During the second quarter of 2009, we purchased the remaining CDO notes from ACM for a price of $4.7 million and recorded a gain on extinguishment of debt of $6.5 million and a reduction of outstanding debt totaling $11.2 million. In 2008, ACM purchased these notes from
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third party investors for $5.0 million. During the third quarter of 2009, we purchased, at a discount, approximately $7.9 million of investment grade rated notes originally issued by our CDO issuing entities for a price of $1.5 million from third party investors and recorded a net gain on extinguishment of debt of $6.3 million.
 
Comparison of Results of Operations for Year Ended 2009 and 2008
 
The following table sets forth our results of operations for the years ended December 31, 2009 and 2008:

 	 	Year Ended December 31,	 	 	Increase/(Decrease)	
 	 	2009	 	 	2008	 	 	Amount	 	 	Percent	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income	 	$	117,262,129	 	 	$	204,135,097	 	 	$	(86,872,968	)	 	(43)%	
Interest expense	 	 	80,102,075	 	 	 	108,656,702	 	 	 	(28,554,627	)	 	(26)%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income	 	 	37,160,054	 	 	 	95,478,395	 	 	 	(58,318,341	)	 	(61)%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other revenue:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Property operating income	 	 	916,246	 	 	 	—	 	 	 	916,246	 	 	 nm	
Other income	 	 	809,808	 	 	 	82,329	 	 	 	727,479	 	 	 nm	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other revenue	 	 	1,726,054	 	 	 	82,329	 	 	 	1,643,725	 	 	 nm	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Employee compensation and benefits	 	 	10,154,276	 	 	 	8,110,003	 	 	 	2,044,273	 	 	25%	
Selling and administrative	 	 	10,505,013	 	 	 	8,197,368	 	 	 	2,307,645	 	 	28%	
Property operating expenses	 	 	1,411,253	 	 	 	—	 	 	 	1,411,253	 	 	 nm	
Depreciation and amortization	 	 	94,819	 	 	 	—	 	 	 	94,819	 	 	 nm	
Other-than-temporary impairment	 	 	10,260,555	 	 	 	17,573,980	 	 	 	(7,313,425	)	 	(42)%	
Provision for loan losses	 	 	241,328,039	 	 	 	132,000,000	 	 	 	109,328,039	 	 	83%	
Loss on restructured loans	 	 	57,579,561	 	 	 	—	 	 	 	57,579,561	 	 	 nm	
Management fee — related party	 	 	15,136,170	 	 	 	3,539,854	 	 	 	11,596,316	 	 	 nm	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other expenses	 	 	346,469,686	 	 	 	169,421,205	 	 	 	177,048,481	 	 	105%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss from continuing operations before gain on exchange of profits interest, gain on extinguishment of debt, loss on termination of swaps, and loss from equity affiliates	 	 	(307,583,578	)	 	 	(73,860,481	)	 	 	(233,723,097	)	 	 nm	
Gain on exchange of profits interest	 	 	55,988,411	 	 	 	—	 	 	 	55,988,411	 	 	 nm	
Gain on extinguishment of debt	 	 	54,080,118	 	 	 	—	 	 	 	54,080,118	 	 	 nm	
Loss on termination of swaps	 	 	(8,729,408	)	 	 	—	 	 	 	(8,729,408	)	 	 nm	
Loss from equity affiliates	 	 	(438,507	)	 	 	(2,347,296	)	 	 	1,908,789	 	 	(81)%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss from continuing operations	 	 	(206,682,964	)	 	 	(76,207,777	)	 	 	(130,475,187	)	 	171%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss on impairment of real estate held-for-sale	 	 	(4,898,295	)	 	 	—	 	 	 	(4,898,295	)	 	 nm	
Loss on operations of real estate held-for-sale	 	 	(377,042	)	 	 	(582,294	)	 	 	205,252	 	 	(35)%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss from discontinued operations	 	 	(5,275,337	)	 	 	(582,294	)	 	 	(4,693,043	)	 	 nm	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss	 	 	(211,958,301	)	 	 	(76,790,071	)	 	 	(135,168,230	)	 	176%	
Net income attributable to noncontrolling interest	 	 	18,672,855	 	 	 	4,439,773	 	 	 	14,233,082	 	 	 nm	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss attributable to Arbor Realty Trust, Inc. 	 	$	(230,631,156	)	 	$	(81,229,844	)	 	$	(149,401,312	)	 	184%	

 	 	 	
 	 	nm — not meaningful	

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Net Interest Income
 
Interest income decreased $86.9 million, or 43%, to $117.3 million in 2009 from $204.1 million in 2008. This decrease was primarily due to a 35% decrease in the average yield on assets from 7.80% in 2008 to 5.08% in 2009 combined with a 10% decrease in the average balance of our loans and investments from $2.5 billion for 2008 to $2.3 billion for 2009. The decrease in yield was the result of a decrease in the average LIBOR rate over the same period, along with the suspension of interest on our non-performing loans, and lower rates on refinanced and modified loans. The decrease in loans and investments was due to payoffs, paydowns and modifications. In addition, interest income from cash equivalents decreased $3.7 million to $0.7 million for 2009 compared to $4.4 million for 2008 as a result of decreased average cash balances, as well as decreases in interest rates from 2008 to 2009. Interest income in 2008 also includes $1.3 million of interest income from profits and equity interests from our investment in equity affiliates.
 
Interest expense decreased $28.6 million, or 26%, to $80.1 million in 2009 from $108.7 million in 2008. This decrease was primarily due to a 15% decrease in the average cost of these borrowings from 5.00% for 2008 to 4.27% for 2009 due to a reduction in the average LIBOR rate on the portion of our debt that was floating over the same period. In addition, there was a 13% decrease in the average balance of our debt facilities from $2.2 billion for 2008 to $1.9 billion for 2009 as a result of decreased leverage on our portfolio due to the reduction of certain outstanding indebtedness from repayment of loans, the transfer of assets to our CDO vehicles, which carry a lower cost of funds, and from available capital. The decrease was also due to $5.2 million of losses related to the recognition of mark-to-market adjustments on certain of our CDO basis swaps in 2009, compared to $4.6 million of gains recorded in 2008.
 
Other Revenue
 
Property operating income was $0.9 million in 2009. This was primarily due to the operation of two real estate investments recorded as real estate owned as of December 31, 2009. One of our real estate investments was reclassified from real estate owned to real estate held-for-sale in the third quarter of 2009, resulting in a reclassification from property operating income into discontinued operations for the current period and all prior periods presented.
 
Other income increased $0.7 million to $0.8 million in 2009 from $0.1 million in 2008. This is primarily due to excess proceeds received from the payoff of a defeased loan in the second quarter of 2009.
 
Other Expenses
 
Employee compensation and benefits expense increased $2.0 million, or 25%, to $10.2 million in 2009 from $8.1 million for in 2008. This increase was due to grants of restricted stock awards to employees and the acceleration of all previously unvested restricted stock in the second quarter of 2009. These expenses represent salaries, benefits, stock-based compensation related to employees, and incentive compensation for those employed by us during these periods.
 
Selling and administrative expense increased $2.3 million, or 28%, to $10.5 million in 2009 from $8.2 million in 2008. These costs include, but are not limited to, professional and consulting fees, marketing costs, insurance expense, director’s fees, licensing fees, travel and placement fees, and stock-based compensation relating to the cost of restricted stock granted to our directors and certain employees of our manager. This increase was primarily due to foreclosure fees associated with one of our properties incurred during 2009, as well as grants of restricted stock awards to directors and certain employees of our manager, ACM, and the acceleration of all previously unvested restricted stock. The increase was also due to an increase in general corporate legal expenses associated with the exchange of our debt restructurings in 2009.
 
Property operating expense was $1.4 million in 2009. This was primarily due to the operation of two real estate investments recorded as real estate owned as of December 31, 2009. One of our real estate investments was reclassified from real estate owned to real estate held-for-sale in the third quarter of 2009, resulting in a reclassification from property operating expense into discontinued operations for the current period and all prior periods presented.
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Depreciation and amortization expense was $0.1 million in 2009. This was primarily due to depreciation expense associated with consolidation of a hotel during 2009, which was recorded as real estate owned. One of our real estate investments was reclassified from real estate owned to real estate held-for-sale in the third quarter of 2009, resulting in a reclassification from depreciation and amortization expense into discontinued operations for the current period and all prior periods presented.
 
Other-than-temporary impairment charges of $10.3 million and $17.6 million in 2009 and 2008, respectively, represents the recognition of impairment to the fair market value of our available-for-sale securities at December 31, 2009 and 2008, respectively, that was considered other-than-temporary. GAAP accounting standards require that investments are evaluated periodically to determine whether a decline in their value is other-than-temporary, though it is not intended to indicate a permanent decline in value. See Notes 4, 5 and 6 of the “Notes to the Consolidated Financial Statements” set forth in Item 8 hereof for further details.
 
Provision for loan losses totaled $241.3 million for the year ended December 31, 2009, and $132.0 million for the year ended December 31, 2008. The provision recorded in 2009 related to 31 loans with an aggregate carrying value of $693.7 million, before reserves, that were impaired. We performed an evaluation of the loans and determined that the fair value of the underlying collateral securing the impaired loans was less than the net carrying value of the loans, resulting in us recording the above mentioned provision for loan losses. The provision recorded in 2008 related to ten loans with an aggregate carrying value of $443.2 million, before reserves, that were impaired.
 
Loss on restructured loans of $57.6 million in 2009 represents losses incurred as a result of restructuring certain of our loans and investments and included $31.1 million for the write-down of four loans and investments, $23.8 million for the settlement of a bridge loan and $2.7 million for the settlement of a junior participation loan. There were no losses on restructured loans in 2008.
 
Management fees increased $11.6 million to $15.1 million in 2009 from $3.5 million in 2008. These amounts represent compensation in the form of base management fees and incentive management fees as provided for in the management agreement with our manager. Refer to “Contractual Commitments — Management Agreement” below for further details including information related to our amended management agreement with ACM. The amended management agreement also provides for “success-based” payments to be paid to our manager upon the completion of specified corporate objectives in addition to the standard base management fee. The base management fee expense was $15.1 million in 2009, which included success-based payments for the trust preferred and Wachovia debt restructurings of $4.1 million in the third quarter of 2009 and a $3.0 million retroactive payment for 2008 costs in the second quarter of 2009, as compared to $3.5 million in 2008, in accordance with our management agreement with ACM, which was amended in August 2009. No incentive management fee was earned in 2009 or 2008.
 
Gain on exchange of profits interest of $56.0 million was due to the recognition of income attributable to the exchange of our POM profits interest in 2009. See Note 6 of the “Notes to the Consolidated Financial Statements” set forth in Item 8 hereof for further details on the POM transaction recorded in the first quarter of 2009. There were no gains on exchange of profits interest in 2008.
 
Gain on extinguishment of debt totaled $54.1 million for in 2009. During the year ended December 31, 2009, we purchased, at a discount, approximately $42.8 million of investment grade rated bonds originally issued by our three CDO issuing entities. In addition, we purchased, at a discount, approximately $9.4 million of junior subordinated notes originally issued by a wholly-owned subsidiary of our operating partnership. We recorded a net gain on early extinguishment of debt of $39.1 million related to these transactions. Also, during the second quarter of 2009, we settled a bridge loan secured by a condominium project in New York City, as well as our debt for the loan resulting in a gain on early extinguishment of the debt of $15.0 million. There were no gains on extinguishment of debt in 2008.
 
Loss on termination of swaps of $8.7 million in 2009 resulted from the exchange of our outstanding trust preferred securities for newly issued unsecured junior subordinated notes in the second quarter of 2009. Refer to “Junior Subordinated Notes” below. In connection with the original issuance of the trust preferred securities, we had entered into various interest rate swap agreements. Due to the modified interest payment structure of the newly issued unsecured junior subordinated notes, the swaps were determined to no longer be effective or necessary and were subsequently terminated, resulting in a loss of $8.7 million. There were no losses on termination of swaps in 2008.
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Loss from equity affiliates of $0.4 million in 2009 includes an $11.7 million impairment charge in the second quarter of 2009 and a $1.9 million impairment charge in the third quarter of 2009, on investments in an equity affiliates that were considered other-than-temporary. GAAP accounting standards require that investments are evaluated periodically to determine whether a decline in their value is other-than-temporary, though it is not intended to indicate a permanent decline in value. There were no other-than-temporary impairment charges on investments in an equity affiliates in 2008. This was netted with income of $10.7 million from the August 2009 exchange of our remaining 7.5% equity interest in POM. We owned the 7.5% interest through a 50% non-controlling interest in an unconsolidated joint venture, which had a 15% interest in Prime Outlets. Loss from equity affiliates also includes $1.6 million of income recorded during 2009, which reflects a portion of the joint venture’s income from our Alpine Meadows equity investment, which had $2.3 million of losses in 2008, as well as income from our other joint ventures of $0.9 million. See Note 6 of the “Notes to the Consolidated Financial Statements” set forth in Item 8 hereof for further details.
 
We are organized and conduct our operations to qualify as a REIT for federal income tax purposes. As a REIT, we are generally not subject to federal income tax on our REIT — taxable income that we distribute to our stockholders, provided that we distribute at least 90% of our REIT — taxable income and meet certain other requirements. As of December 31, 2009 and 2008, we were in compliance with all REIT requirements and, therefore, have not provided for income tax expense for the years ended December 31, 2009 and 2008. Certain of our assets that produce non-qualifying income are owned by our taxable REIT subsidiaries, the income of which is subject to federal and state income taxes. During the years ended December 31, 2009 and 2008, we did not record any provision on income from these taxable REIT subsidiaries.
 
Loss from Discontinued Operations
 
During the third quarter of 2009, we mutually agreed with a first mortgage lender to appoint a receiver to operate one of our real estate owned investments and we are working to assist in the transfer of title to the first mortgage lender. As a result, this investment was reclassified from real estate owned to real estate held-for-sale at a fair value of $41.4 million and property operating income and expenses, which netted to a loss of $0.4 million and $0.6 million in 2009 and 2008, respectively, were reclassified to discontinued operations, as well as an impairment loss of $4.9 million to write down the investment to its fair value was recorded in the third quarter of 2009. See Note 7 of the “Notes to the Consolidated Financial Statements” set forth in Item 8 hereof for further details.
 
Net Income Attributable to Noncontrolling Interest
 
Net income attributable to noncontrolling interest totaled $18.7 million in 2009 representing the portion of income allocated to the third party’s interest in a consolidated subsidiary, primarily the result of the $56.0 million gain recorded from the exchange of our profits interest in POM during the first quarter of 2009. See Note 6 of the “Notes to the Consolidated Financial Statements” set forth in Item 8 hereof. Net income attributable to noncontrolling interest totaled $4.4 million in 2008 representing the portion of our income allocated to our manager for their noncontrolling interest in our operating partnership as well as loss allocated to a third party’s interest in a consolidated subsidiary. There was no net income attributable to noncontrolling interest in our operating partnership in 2009. Our manager had a weighted average limited partnership interest of 15.3% for the six months ended June 30, 2008. In June 2008, our manager, exercised its right to redeem its 3,776,069 operating partnership units in our operating partnership for shares of our common stock on a one-for-one basis. As a result, our manager’s operating partnership ownership interest percentage was reduced to zero.
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Comparison of Results of Operations for Year Ended 2008 and 2007
 
The following table sets forth our results of operations for the years ended December 31, 2008 and 2007:

 	 	Year Ended December 31,	 	 	Increase/(Decrease)	
 	 	2008	 	 	2007	 	 	Amount	 	 	Percent	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income	 	$	204,135,097	 	 	$	273,984,357	 	 	$	(69,849,260	)	 	(25)%	
Interest expense	 	 	108,656,702	 	 	 	147,710,194	 	 	 	(39,053,492	)	 	(26)%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income	 	 	95,478,395	 	 	 	126,274,163	 	 	 	(30,795,768	)	 	(24)%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other revenue:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other income	 	 	82,329	 	 	 	39,503	 	 	 	42,826	 	 	108%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other revenue	 	 	82,329	 	 	 	39,503	 	 	 	42,826	 	 	108%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Employee compensation and benefits	 	 	8,110,003	 	 	 	9,381,055	 	 	 	(1,271,052	)	 	(14)%	
Selling and administrative	 	 	8,197,368	 	 	 	5,593,175	 	 	 	2,604,193	 	 	47%	
Other-than-temporary impairment	 	 	17,573,980	 	 	 	—	 	 	 	17,573,980	 	 	 nm	
Provision for loan losses	 	 	132,000,000	 	 	 	2,500,000	 	 	 	129,500,000	 	 	 nm	
Management fee — related party	 	 	3,539,854	 	 	 	25,004,975	 	 	 	(21,465,121	)	 	(86)%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other expenses	 	 	169,421,205	 	 	 	42,479,205	 	 	 	126,942,000	 	 	 nm	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
(Loss) income from continuing operations before (loss) income from equity affiliates and provision for income taxes	 	 	(73,860,481	)	 	 	83,834,461	 	 	 	(157,694,942	)	 	 nm	
(Loss) income from equity affiliates	 	 	(2,347,296	)	 	 	34,573,594	 	 	 	(36,920,890	)	 	 nm	
Provision for income taxes	 	 	—	 	 	 	(16,885,000	)	 	 	16,885,000	 	 	 nm	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income from continuing operations	 	 	(76,207,777	)	 	 	101,523,055	 	 	 	(177,730,832	)	 	 nm	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss from discontinued operations	 	 	(582,294	)	 	 	—	 	 	 	(582,294	)	 	 nm	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income	 	 	(76,790,071	)	 	 	101,523,055	 	 	 	(178,313,126	)	 	 nm	
Net income attributable to noncontrolling interest	 	 	4,439,773	 	 	 	16,989,177	 	 	 	(12,549,404	)	 	(74)%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income attributable to Arbor Realty Trust, Inc. 	 	$	(81,229,844	)	 	$	84,533,878	 	 	$	(165,763,722	)	 	 nm	

 	 	 	
 	 	nm — not meaningful	
 
Net Interest Income
 
Interest income decreased $69.8 million, or 25%, to $204.1 million in 2008 from $274.0 million in 2007. This decrease was due in part to the recognition of $37.6 million of interest income from profits and equity interests from our investment in equity affiliates during 2007 as compared to $1.3 million in 2008.
 
Excluding these transactions, interest income decreased $33.5 million, or 14%, compared to the same period of the prior year. This was primarily due to a 16% decrease in the average yield on the assets from 9.34% in 2007 to 7.80% in 2008. This decrease in yield was the result of a decrease in the average LIBOR rate over the same period and a reduction in the yield on new originations compared to higher yielding loan payoffs from the same period in 2007. This was partially offset by a portion of our portfolio having LIBOR floors and fixed rates of interest. In addition, interest income from cash equivalents decreased $4.5 million to $4.4 million for 2008 compared to $8.9 million for 2007 as a result of decreased average restricted and unrestricted cash balances as well as lower interest rates.
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Interest expense decreased $39.1 million, or 26%, to $108.7 million in 2008 from $147.7 million in 2007. This decrease was primarily due to a 26% decrease in the average cost of these borrowings from 6.76% for 2007 to 5.00% for 2008 due to a reduction in average LIBOR rate on the portion of our debt that was floating over the same period. This decrease was also due to $2.9 million in gains recorded in 2008 related to the recognition of mark-to-market adjustments on certain of our CDO basis swaps. In addition, there was a 1% decrease in the average balance of our debt facilities from the year ended December 31, 2007 as compared to the year ended December 31, 2008 as a result of decreased leverage on our portfolio due to the reduction of certain outstanding indebtedness from repayment of loans, the transfer of assets to our CDO vehicles which carry a lower cost of funds and from available capital.
 
Other Revenue
 
Other income increased $42,826, or 108%, to $82,329 in 2008 from $39,503 in 2007. This was primarily due to increased miscellaneous asset management fees on our loan and investment portfolio.
 
Other Expenses
 
Employee compensation and benefits expense decreased $1.3 million, or 14%, to $8.1 million in 2008 from $9.4 million in 2007. These expenses represent salaries, benefits, stock-based compensation related to employees, and incentive compensation for those employed by us during these periods. This decrease was primarily due to a decrease in employee compensation and benefits, partially offset by an increase in costs related to restricted stock awards granted to employees in 2008.
 
Selling and administrative expense increased $2.6 million, or 47%, to $8.2 million in 2008 from $5.6 million in 2007. These costs include, but are not limited to, professional and consulting fees, marketing costs, insurance expense, directors’ fees, licensing fees, travel and placement fees, and stock-based compensation relating to the cost of restricted stock granted to our directors and certain employees of our manager. The increase was primarily due to expenses related to the Prime Outlets transaction in 2008 and other increases in professional fees including general corporate legal expenses. This increase was also due to $0.4 million of losses recognized from the sales of two properties securing two bridge loans during 2008.
 
Other-than-temporary impairment charges of $17.6 million in 2008 primarily represents the recognition of a $16.2 million impairment that was considered other-than-temporary relating to the fair market value of our available-for-sale securities at December 31, 2008. Prior to September 30, 2008, changes in the fair market value of our available-for-sale securities were considered unrealized gains or losses and were recorded as a component of other comprehensive income or loss. Other-than-temporary impairment charges in 2008 also included $1.4 million for the recognition of an impairment that was considered other-than-temporary relating to one of our securities held-to-maturity, which was subsequently reclassified as available-for-sale at December 31, 2009. These securities represent common stock and a CDO bond security, both issued by Realty Finance Corporation, formerly CBRE, another commercial REIT. There were no other-than-temporary impairment charges in 2007.
 
Provision for loan losses totaled $132.0 million for the year ended December 31, 2008, and $2.5 million for the year ended December 31, 2007. The provision recorded in 2008 related to ten loans with an aggregate carrying value of $443.2 million, before reserves, became impaired. We performed quarterly evaluations of the loans and determined that the fair value of the underlying collateral securing the impaired loans was less than the net carrying value of the loan, resulting in us recording the above mentioned provision for loan losses. The provision recorded in 2007 related to two loans with an aggregate carrying value of $58.5 million, before reserves, that were impaired.
 
Management fees decreased $21.5 million, or 86%, to $3.5 million in 2008 from $25.0 million in 2007. These amounts represent compensation in the form of base management fees and incentive management fees as provided for in the management agreement with our manager. The incentive management fees decreased by $21.8 million, or 100%, to $0 in 2008 from $21.8 million in 2007. This decrease was due to losses in 2008, versus income in 2007, primarily due to $132.0 million of provisions for loan losses, along with other-than-temporary impairment charges on our available-for-sale and held-to-maturity securities totaling $17.6 million in 2008. This decrease was also due to $72.2 million of income from profits and equity interests in 2007. The base management fees increased by $0.3 million, or 10%, to $3.5 million in 2008 from $3.2 million in 2007. This increase is primarily due to increased
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average stockholders’ equity directly attributable to greater undistributed profits and capital raised from the June 2007 public offering of our common stock.
 
Loss from equity affiliates totaled $2.3 million in 2008. Income from two of our investments in equity affiliates totaled $34.6 million for 2007. The $2.3 million of loss recorded during 2008 reflects a portion of the joint venture’s losses from a $10.2 million equity investment, partially offset by $0.7 million in income from two of our other investments. The $34.6 million of income recorded in 2007 consisted of $29.6 million in gains recognized on the sale of properties within one of our equity affiliates and $5.0 million of income from excess proceeds received from the sale and refinancing of certain properties in the portfolio of another of our investments in equity affiliates.
 
We are organized and conduct our operations to qualify as a REIT for federal income tax purposes. As a REIT, we are generally not subject to federal income tax on our REIT — taxable income that we distribute to our stockholders, provided that we distribute at least 90% of our REIT — taxable income and meet certain other requirements. As of December 31, 2008 and 2007, we were in compliance with all REIT requirements and, therefore, have not provided for income tax expense for years ended December 31, 2008 and 2007. Certain of our assets that produce non-qualifying income are owned by our taxable REIT subsidiaries, the income of which is subject to federal and state income taxes. During the year ended December 31, 2007, we recorded a $16.9 million provision on income from these taxable REIT subsidiaries. No such provision was recognized for the year ended December 31, 2008. The provision for the year ended December 31, 2007 resulted from $38.3 million of pretax income from our taxable REIT subsidiaries.
 
Loss from Discontinued Operations
 
During the third quarter of 2009, we mutually agreed with a first mortgage lender to appoint a receiver to operate one of our real estate owned investments and we are working to assist in the transfer of title to the first mortgage lender. As a result, this investment was reclassified from real estate owned to real estate held-for-sale and property operating income and expenses, which netted to a loss of $0.6 million in 2008, were reclassified to discontinued operations. There were no property operating income and expenses in 2007.
 
Net Income Attributable to Noncontrolling Interest
 
Net income attributable to noncontrolling interest decreased by $12.5 million, or 74%, to $4.4 million in 2008 from $17.0 million in 2007. These amounts represent the portion of our income allocated to our manager as well as a third party’s interest in a consolidated subsidiary which holds a note payable that is accruing interest expense. This decrease was primarily due to a decrease in our manager’s limited partnership interest in us. Our manager had a weighted average limited partnership interest of 7.6% in our operating partnership in 2008 compared to 16.6% in 2007. In June 2008, our manager exercised its right to redeem its 3,776,069 operating partnership units in our operating partnership for shares of our common stock on a one-for-one basis. As a result, our manager’s operating partnership ownership interest percentage was reduced to zero at June 30, 2008. This decrease was also due to a 43% decrease in the average income before noncontrolling interest reduced by the provision for income taxes for the first two quarters of 2008 as compared to all four quarters of 2007. 2008 included a loss allocated to noncontrolling interest of $0.3 million representing a third party member’s share of a $1.0 million distribution received from a profits interest. In addition, 2008 also included a gain allocated to noncontrolling interest of $0.3 million representing the portion of loss allocated to the third party’s interest in a consolidated subsidiary, which holds a note payable that is accruing interest expense. This note payable is related to the POM transaction discussed in Note 6 of the “Notes to the Consolidated Financial Statements” set forth in Item 8 hereof.
 
Liquidity and Capital Resources
 
Sources of Liquidity
 
Liquidity is a measurement of the ability to meet potential cash requirements. Our short-term and long-term liquidity needs include ongoing commitments to repay borrowings, fund future loans and investments, fund additional cash collateral from potential declines in the value of a portion of our interest rate swaps, fund operating costs and distributions to our stockholders as well as other general business needs. Our primary sources of funds for liquidity consist of proceeds from equity offerings, debt facilities and cash flows from operations. Our equity
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sources consist of funds raised from our private equity offering in July 2003, net proceeds from our initial public offering of our common stock in April 2004, net proceeds from our public offering of our common stock in June 2007 and depending on market conditions, proceeds from capital market transactions including the future issuance of common, convertible and/or preferred equity securities. Our debt facilities include the issuance of floating rate notes resulting from our CDOs, the issuance of junior subordinated notes and borrowings under credit agreements. Net cash provided by operating activities include interest income from our loan and investment portfolio reduced by interest expense on our debt facilities, cash from equity participation interests, repayments of outstanding loans and investments and funds from junior loan participation arrangements.
 
We believe our existing sources of funds will be adequate for purposes of meeting our short-term and long-term liquidity needs. Our loans and investments are financed under existing credit facilities and their credit status is continuously monitored; therefore, these loans and investments are expected to generate a generally stable return. Our ability to meet our long-term liquidity and capital resource requirements is subject to obtaining additional debt and equity financing. If we are unable to renew our sources of financing on substantially similar terms or at all, it would have an adverse effect on our business and results of operations. Any decision by our lenders and investors to enter into such transactions with us will depend upon a number of factors, such as our financial performance, compliance with the terms of our existing credit arrangements, industry or market trends, the general availability of and rates applicable to financing transactions, such lenders’ and investors’ resources and policies concerning the terms under which they make such capital commitments and the relative attractiveness of alternative investment or lending opportunities.
 
Current conditions in the capital and credit markets have made certain forms of financing less attractive and, in certain cases, less available, therefore we will continue to rely on cash flows provided by operating and investing activities for working capital.
 
To maintain our status as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our REIT — taxable income. These distribution requirements limit our ability to retain earnings and thereby replenish or increase capital for operations. However, we believe that our capital resources and access to financing will provide us with financial flexibility and market responsiveness at levels sufficient to meet current and anticipated capital requirements. In December 2008, the IRS issued “Revenue Procedure 2008-68” that allows listed REITs to offer shareholders elective stock dividends, which are paid in a combination of cash and common stock with at least 10% of the total distribution paid in cash, to satisfy future dividend requirements.
 
Equity Offerings
 
Our authorized capital provides for the issuance of up to 500 million shares of common stock, par value $0.01 per share, and 100 million shares of preferred stock, par value $0.01 per share.
 
In March 2007, we filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933 (the “1933 Act”) with respect to an aggregate of $500.0 million of debt securities, common stock, preferred stock, depositary shares and warrants that may be sold by us from time to time pursuant to Rule 415 of the 1933 Act. On April 19, 2007, the Commission declared this shelf registration statement effective.
 
In June 2007, we sold 2,700,000 shares of our common stock registered on the shelf registration statement in a public offering at a price of $27.65 per share, for net proceeds of approximately $73.6 million after deducting the underwriting discount and the other estimated offering expenses. We used the proceeds to pay down debt and finance our loan and investment portfolio. The underwriters did not exercise their over allotment option for additional shares.
 
In August 2008, we entered into an equity placement program sales agreement with a securities agent whereby we may issue and sell up to three million shares of our common stock through the agent who agrees to use its commercially reasonable efforts to sell such shares during the term of the agreement and under the terms set forth therein. To date, we have not utilized this equity placement program.
 
At December 31, 2009, we had $425.3 million available under the shelf registration described above and 25,387,410 shares outstanding.
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Debt Facilities
 
We also currently maintain liquidity through a term credit agreement, which has a revolving component, two master repurchase agreements, one working capital facility, one note payable and three junior loan participations with five different financial institutions or companies. In addition, we have issued three collateralized debt obligations or CDOs and 13 separate junior subordinated notes. London inter-bank offered rate, or LIBOR, refers to one-month LIBOR unless specifically stated. As of December 31, 2009, these facilities had an aggregate capacity of $1.8 billion and borrowings were approximately $1.7 billion.
 
The following is a summary of our debt facilities as of December 31, 2009:

 	 	At December 31, 2009	
 	 	 	 	 	Debt
	 	 	 	 	 	Maturity
	
Debt Facilities	 	Commitment	 	 	Carrying Value	 	 	Available	 	 	Dates	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Repurchase agreements. Interest is variable based on pricing over LIBOR	 	$	2,657,332	 	 	$	2,657,332	 	 	$	—	 	 	2010	
Collateralized debt obligations. Interest is variable based on pricing over three-month LIBOR	 	 	1,113,815,185	 	 	 	1,100,515,185	 	 	 	13,300,000	 	 	2011 - 2013	
Junior subordinated notes. Interest is variable based on pricing over three-month LIBOR(1)	 	 	259,487,421	 	 	 	259,487,421	 	 	 	—	 	 	2034 - 2037	
Notes payable. Interest is variable based on pricing over LIBOR(2)	 	 	410,490,201	 	 	 	375,219,206	 	 	 	35,270,995	 	 	2010 - 2016	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	1,786,450,139	 	 	$	1,737,879,144	 	 	$	48,570,995	 	 	 	

 
 	 	 	
(1)	 	Represents a total face amount of $290.0 million less a total deferred amount of $30.5 million.	
 	 	 	
(2)	 	In July 2009, we amended and restructured our term credit agreements, revolving credit agreement and working capital facility with Wachovia Bank, National Association as discussed below.	
 
These debt facilities are described in further detail in Note 8 of the “Notes to the Consolidated Financial Statements” set forth in Item 8 hereof.
 
Repurchase Agreements
 
Repurchase obligation financings provide us with a revolving component to our debt structure. Repurchase agreements provide stand alone financing for certain assets and interim, or warehouse financing, for assets that we plan to contribute to our CDOs. At December 31, 2009, the aggregate outstanding balance under these facilities was $2.7 million.
 
We had a $200.0 million repurchase agreement with a financial institution that expired in 2009 and had interest at pricing over LIBOR, varying on the type of asset financed. In June 2009, this facility, with approximately $37.0 million outstanding, was satisfied at a discount for $22.0 million resulting in a $15.0 million gain on extinguishment of debt. In connection with this transaction, we sold a bridge loan financed in this facility with a carrying value of $47.0 million, at a discount, for approximately $23.2 million and recorded a loss on restructuring of $23.8 million. The proceeds were used to satisfy the $22.0 million cash payment.
 
We have a repurchase agreement with a second financial institution that bears interest at 250 basis points over LIBOR and had a term expiring in June 2009. In June 2009, we amended this facility extending the maturity to June 2010, with a one year extension option. In addition, the amendment includes the removal of all financial covenants and a reduction of the committed amount to $2.4 million reflecting the one asset currently financed in this facility. During the year ended December 31, 2009, we paid down approximately $13.1 million of this facility. At December 31, 2009, the outstanding balance under this facility was $2.4 million with a current weighted average note rate of 2.77%.
 
We have an uncommitted master repurchase agreement with a third financial institution, effective April 2008, entered into for the purpose of financing our CRE CDO bond securities. The agreement has a term expiring in May
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2010 and bears interest at pricing over LIBOR, varying on the type of asset financed. During the year ended December 31, 2009, we paid down approximately $1.3 million of this facility, due to a decrease in values associated with a change in market interest rate spreads and an additional $6.7 million of principal. At December 31, 2009, the outstanding balance under this facility was $0.2 million with a current weighted average note rate of 1.52%. In January 2010, the facility was repaid in full.
 
CDOs
 
We completed three separate CDOs since 2005 by issuing to third party investors, tranches of investment grade collateralized debt obligations through newly-formed wholly-owned subsidiaries (the “Issuers”). The Issuers hold assets, consisting primarily of real-estate related assets and cash which serve as collateral for the CDOs. The assets pledged as collateral for the CDOs were contributed from our existing portfolio of assets. By contributing these real estate assets to the various CDOs, these transactions resulted in a decreased cost of funds relating to the corresponding CDO assets and created capacity in our existing credit facilities.
 
The Issuers issued tranches of investment grade floating-rate notes of approximately $305.0 million, $356.0 million and $447.5 million for CDO I, CDO II and CDO III, respectively. CDO III also has a $100.0 million revolving note which was not drawn upon at the time of issuance. The revolving note facility has a commitment fee of 0.22% per annum on the undrawn portion of the facility. The tranches were issued with floating rate coupons based on three-month LIBOR plus pricing of 0.44% — 0.77%. Proceeds from the sale of the investment grade tranches issued in CDO I, CDO II and CDO III of $267.0 million, $301.0 million and $317.1 million, respectively, were used to repay higher costing outstanding debt under our repurchase agreements and notes payable. The CDOs may be replenished with substitute collateral for loans that are repaid during the first four years for CDO I and the first five years for CDO II and CDO III, subject to certain customary provisions. Thereafter, the outstanding debt balance will be reduced as loans are repaid. Proceeds from the repayment of assets which serve as collateral for the CDOs must be retained in its structure as restricted cash until such collateral can be replaced and therefore not available to fund current cash needs. If such cash is not used to replenish collateral, it could have a negative impact on our anticipated returns. Proceeds from CDO II are distributed quarterly with approximately $1.1 million being paid to investors as a reduction of the CDO liability. As of April 15, 2009, CDO I reached the end of its replenishment date and will no longer make quarterly amortization payments to investors. Investor capital will be repaid quarterly from proceeds received from loan repayments held as collateral in accordance with the terms of the CDO. Proceeds distributed will be recorded as a reduction of the CDO liability. For accounting purposes, CDOs are consolidated in our financial statements.
 
During the year ended December 31, 2009, we purchased, at a discount, approximately $42.8 million of investment grade rated notes originally issued by our CDO issuing entities for a price of $11.8 million. We recorded a net gain on extinguishment of debt of $31.0 million and a reduction of outstanding debt totaling $42.8 million from these transactions in our 2009 financial statements.
 
In the first quarter of 2010, we purchased, at a discount, approximately $4.5 million of investment grade rated notes originally issued by our CDO I issuing entity for a price of $1.6 million, $7.9 million of investment grade rated notes originally issued by our CDO II issuing entity for a price of $1.6 million and $7.0 million originally issued by our CDO III issuing entity for a price of $1.4 million from third party investors. We will record a net gain on extinguishment of debt of $14.9 million from these transactions in our 2010 Consolidated Statements of Operations.
 
In February 2010, we re-issued the CDO bonds we had acquired throughout 2009 with an aggregate face amount of $42.8 million, as well as CDO bonds from other issuers acquired in the second quarter of 2008 with an aggregate face amount of $25.0 million and a carrying value of $0.4 million, and $10.5 million in cash, in exchange for the retirement of $114.1 million of our junior subordinated notes. See “Junior Subordinated Notes” below.
 
At December 31, 2009, the outstanding note balance under CDO I, CDO II and CDO III was $254.1 million, $329.5 million and $516.9 million, respectively.
 
The continued turmoil in the structured finance markets, in particular the sub-prime residential loan market, has negatively impacted the credit markets generally, and, as a result, investor demand for commercial real estate collateralized debt obligations has been substantially curtailed. In recent years, we have relied to a substantial extent
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on CDO financings to obtain match funded financing for our investments. Until the market for commercial real estate CDOs recovers, we may be unable to utilize CDOs to finance our investments and we may need to utilize less favorable sources of financing to finance our investments on a long-term basis. There can be no assurance as to when demand for commercial real estate CDOs will return or the terms of such securities investors will demand or whether we will be able to issue CDOs to finance our investments on terms beneficial to us.
 
Our CDO bonds contain interest coverage and asset over collateralization covenants that must be met as of the waterfall distribution date in order for us to receive such payments. If we fail these covenants in any of our CDOs, all cash flows from the applicable CDO would be diverted to repay principal and interest on the outstanding CDO bonds and we would not receive any residual payments until that CDO regained compliance with such tests. We were in compliance with all such covenants as of December 31, 2009. In the event of a breach of the CDO covenants that could not be cured in the near-term, we would be required to fund our non-CDO expenses, including management fees and employee costs, distributions required to maintain REIT status, debt costs, and other expenses with (i) cash on hand, (ii) income from any CDO not in breach of a covenant test, (iii) income from real property and unencumbered loan assets, (iv) sale of assets, (v) or accessing the equity or debt capital markets, if available. We have the ability to cure covenant breaches which would resume normal residual payments to us by purchasing non-performing loans out of the CDOs. However, we may not have sufficient liquidity available to do so at such time. The chart below is a summary of our CDO compliance tests as of the most recent distribution date:

Cash Flow Triggers	 	CDO I	 	CDO II	 	CDO III	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Overcollateralization(1)	 	 	 	 	 	 	 	 	 	 	 	 	
Current	 	 	194.40	%	 	 	177.72	%	 	 	111.28	%	
Limit	 	 	184.00	%	 	 	169.50	%	 	 	105.60	%	
Pass/Fail	 	 	Pass	 	 	 	Pass	 	 	 	Pass	 	
Interest Coverage(2)	 	 	 	 	 	 	 	 	 	 	 	 	
Current	 	 	653.93	%	 	 	575.81	%	 	 	686.74	%	
Limit	 	 	160.00	%	 	 	147.30	%	 	 	105.60	%	
Pass/Fail	 	 	Pass	 	 	 	Pass	 	 	 	Pass	 	

 	 	 	
(1)	 	The overcollateralization ratio divides the total principal balance of all collateral in the CDO by the total bonds outstanding for the classes senior to those retained by us. To the extent an asset is considered a defaulted security, the asset’s principal balance is multiplied by the asset’s recovery rate which is determined by the rating agencies.	
 	 	 	
(2)	 	The interest coverage ratio divides interest income by interest expense for the classes senior to those retained by us.	
 
Junior Subordinated Notes
 
In May 2009, we exchanged $247.1 million of our outstanding trust preferred securities, consisting of $239.7 million of junior subordinated notes issued to third party investors and $7.4 million of common equity issued to us in exchange for $268.4 million of newly issued unsecured junior subordinated notes, representing 112% of the original face amount. The new notes bear a fixed interest rate of 0.50% per annum until April 30, 2012 (the “Modification Period”), and then interest is to be paid at the rates set forth in the existing trust agreements until maturity, equal to a weighted average three month LIBOR plus 2.90%. We paid a transaction fee of approximately $1.2 million to the issuers of the junior subordinated notes related to this restructuring.
 
In July 2009, we restructured the remaining $18.7 million of trust preferred securities that were not exchanged from the May 2009 restructuring transaction previously disclosed. We amended the $18.7 million of junior subordinated notes to $20.9 million of unsecured junior subordinated notes, representing 112% of the original face amount. The amended notes bear a fixed interest rate of 0.50% per annum for a period of approximately three years, the modification period. Thereafter, interest is to be paid at the rates set forth in the existing trust agreements until maturity, equal to a weighted average three month LIBOR plus 2.74%. We paid a transaction fee of approximately $0.1 million to the issuers of the junior subordinated notes related to this restructuring.
 
During the Modification Period, we will be permitted to make distributions of up to 100% of taxable income to common shareholders. We have agreed that such distributions will be paid in the form of our stock to the maximum
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extent permissible under the Internal Revenue Service rules and regulations in effect at the time of such distribution, with the balance payable in cash. This requirement regarding distributions in stock can be terminated by us at any time, provided that we pay the note holders the original rate of interest from the time of such termination.
 
The junior subordinated notes are unsecured, have a maturity of 25 to 28 years, pay interest quarterly at a fixed rate or floating rate of interest based on three-month LIBOR and, absent the occurrence of special events, are not redeemable during the first two years. In connection with the issuance of the original variable rate junior subordinated notes, we had entered into various interest rate swap agreements which were subsequently terminated upon the exchange discussed above. As a result, in 2009, we recorded a loss of $8.7 million, which was recorded to loss on termination of swaps on our Consolidated Statement of Operations. See Item 7A “Quantitative and Qualitative Disclosures About Market Risk” for further information relating to our derivatives.
 
In March 2009, we purchased, at a discount, approximately $9.4 million of investment grade rated junior subordinated notes originally issued by a wholly-owned subsidiary of our operating partnership for $1.3 million. We recorded a net gain on extinguishment of debt of $8.1 million and a reduction of outstanding debt totaling $9.4 million from this transaction in our first quarter 2009 financial statements. In connection with this transaction, during the second quarter of 2009, we retired approximately $0.3 million of common equity related to these junior subordinated notes.
 
In February 2010, we retired $114.1 million of our junior subordinated notes, with a carrying value of $102.1 million, in exchange for the re-issuance of our own CDO bonds we had acquired throughout 2009 with an aggregate face amount of $42.8 million, CDO bonds from other issuers acquired in the second quarter of 2008 with an aggregate face amount of $25.0 million and a carrying value of $0.4 million, and $10.5 million in cash. In the first quarter of 2010, this transaction is expected to result in recording $65.3 million of additional CDO debt, of which $42.3 million represents the portion of our CDO bonds that were exchanged and $23.0 million represents the estimated interest due on the bonds through their maturity, a reduction to securities available-for-sale of $0.4 million representing the fair value of CDO bonds of other issuers, and a gain on extinguishment of debt of approximately $26.0 million.
 
At December 31, 2009, the aggregate carrying value under these facilities was $259.5 million with a current weighted average pay rate of 0.50%, however, based upon the accounting treatment for the restructure, the effective rate was 3.96% at December 31, 2009.
 
Notes Payable
 
At December 31, 2009, notes payable consisted of a term credit agreement with a revolving credit component, a working capital facility, a note payable and three junior loan participations, and the aggregate outstanding balance under these facilities was $375.2 million.
 
In July 2009, we amended and restructured our term credit agreements, revolving credit agreement and working capital facility with Wachovia Bank, National Association as follows:

 	• 	The term revolving credit agreement with an outstanding balance of $64.0 million was combined into the term debt facility with an outstanding balance of $237.7 million, along with a portion of the term debt facility with an outstanding balance of $30.3 million, and $15.3 million of this term debt facility was combined into the working capital line with an outstanding balance of $41.9 million. This debt restructuring resulted in the consolidation of these four facilities into one term debt facility with an outstanding balance of $316.7 million at the time of the agreement, which contains a revolving component with $35.3 million of availability, and one working capital facility with an outstanding balance of $57.2 million at the time of the agreement.	
 	 	 	
 	• 	The maturity dates of the facilities were extended for three years, with a working capital facility maturity of June 8, 2012 and a term debt facility maturity of July 23, 2012.	
 	 	 	
 	• 	The term loan facility requires a $48.1 million reduction over the three-year term, with approximately $8.0 million in reductions due every six months beginning in December 2009.	
 	 	 	
 	• 	Margin call provisions relating to collateral value of the underlying assets have been eliminated, as long as the term loan reductions are met, with the exception of limited margin call capability related to foreclosed or real estate-owned assets.	

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 	• 	The working capital facility requires quarterly amortization of up to $3.0 million per quarter, $1.0 million per CDO, only if both (a) the CDO is cash flowing to us and (b) we have a minimum quarterly liquidity level of $27.5 million.	
 	 	 	
 	• 	Interest rate of LIBOR plus 350 basis points for the term loan facility, compared to LIBOR plus approximately 200 basis points previously and LIBOR plus 800 basis points for the working capital facility, compared to LIBOR plus 500 basis points previously. We have also agreed to pay a commitment fee of 1.00% payable over 3 years.	
 	 	 	
 	• 	We issued Wachovia one million warrants at an average strike price of $4.00. 500,000 warrants are exercisable immediately at a price of $3.50, 250,000 warrants are exercisable after July 23, 2010 at a price of $4.00 and 250,000 warrants are exercisable after July 23, 2011 at a price of $5.00. All warrants expire on July 23, 2015.	
 	 	 	
 	• 	Annual dividends are limited to 100% of taxable income to common shareholders and are required to be paid in the form of our stock to the maximum extent permissible (currently 90%), with the balance payable in cash. We will be permitted to pay 100% of taxable income in cash if the term loan facility balance is reduced to $210.0 million, the working capital facility is reduced to $30.0 million and we maintain $35.0 million of minimum liquidity.	
 	 	 	
 	• 	Our CEO and Chairman, Ivan Kaufman, is required to remain an officer or director of us for the term of the facilities.	
 
In addition, the financial covenants have been reduced to the following (see “Restrictive Covenants” section below for further details):

 	• 	Minimum quarterly liquidity of $7.5 million in cash and cash equivalents.	
 	 	 	
 	• 	Minimum quarterly GAAP net worth of $150.0 million.	
 	 	 	
 	• 	Ratio of total liabilities to tangible net worth shall not exceed 4.5 to 1 quarterly.	
 
As a result of the above mentioned amendment, at December 31, 2009, we have one term credit agreement with Wachovia, which contains a revolving component with $35.3 million of availability. The facility has a commitment period of three years to July 2012, bears an interest rate of LIBOR plus 350 basis points and margin call provisions relating to collateral value of the underlying assets have been eliminated, as long as the term loan reductions are met, with the exception of limited margin call capability related to foreclosed or real estate-owned assets. During the six months ended December 31, 2009, we made net paydowns to the facility of $47.4 million, reducing the $48.1 million balance reduction requirements to $0.7 million and satisfying the balance reduction requirements until June 2012. The outstanding balance under this facility was $269.3 million at December 31, 2009, with a current weighted average note rate of 4.38%.
 
We have a working capital facility with Wachovia with a maturity of June 2012 and an interest rate of LIBOR plus 800 basis points. At December 31, 2009, the outstanding balance under this facility was $49.5 million with a current weighted average note rate of 8.35%.
 
We had a $70.0 million bridge loan warehousing credit agreement with a financial institution, with a maturity date of October 2009, to provide financing for bridge loans. In May 2009, we amended this facility, extending the maturity to May 2010 with a one year extension option and reducing the committed amount to $13.5 million. This agreement bore a rate of interest, payable monthly, based on one month LIBOR plus 3.75%. In July 2009, the facility was repaid in full.
 
We have a $50.2 million note payable related to the POM transaction. During the second quarter of 2008, we recorded a $49.5 million note payable related to the POM exchange of profits interest transaction. The note was initially secured by our interest in POM, matures in July 2016 and bore interest at a fixed rate of 4% with payment deferred until the closing of the transaction. Upon the closing of the POM transaction in March 2009, the note balance was increased to $50.2 million, bears interest at a fixed rate of 4% and is secured by our investment in common and preferred operating partnership units in Lightstone Value Plus REIT, L.P.
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We have three junior loan participations with a total outstanding balance at December 31, 2009 of $6.3 million. These participation borrowings have a maturity date equal to the corresponding mortgage loan and are secured by the participant’s interest in the mortgage loans. Interest expense is based on a portion of the interest received from the loans.
 
In 2010, we entered into an agreement with Wachovia Bank, National Association, owned by Wells Fargo Bank, National Association, to retire all of our $335.6 million of then outstanding debt for $176.2 million, representing 52.5% of the face amount of the debt. The $335.6 million of indebtedness was comprised of $286.1 million of term debt and a $49.5 million working capital facility, representing the outstanding balances in each facility at the time the parties began to negotiate the agreement. The agreement can be closed at any time on or before May 31, 2010 and also has two consecutive 45 day extension options which would extend the payoff date to August 27, 2010. The agreement provides the ability to apply paydowns in the Wachovia facilities against the discounted payoff amount during the term of the agreement and accordingly, we have made payments of $62.3 million towards the initial discounted payoff amount, leaving $113.9 million payable to Wachovia to close this agreement. The closing of this transaction is subject to certain closing conditions and our ability to obtain the necessary capital. We can make no assurances that we will be able to access sufficient capital under acceptable terms and conditions. In addition, we have obtained a waiver of our minimum tangible net worth covenant, as well as our minimum ratio of total liabilities to tangible net worth covenant, from this financial institution for December 31, 2009 through the extended payoff date of August 27, 2010. We have also obtained temporary amendments thereafter until December 2010 for the quarterly minimum GAAP tangible net worth covenants, from $150.0 million to $50.0 million, and quarterly maximum ratio of total liabilities to tangible net worth covenants, from 4.5 to 1 to 5.8 to 1. See “Restrictive Covenants” below for further details

Mortgage Note Payable —	Held-For-Sale	
 
During the second quarter of 2008, we recorded a $41.4 million first lien mortgage related to the foreclosure of an entity in which we had a $5.0 million mezzanine loan. The real estate investment was originally classified as real estate owned and was reclassified as real estate held-for-sale in the third quarter of 2009. The mortgage bears interest at a fixed rate, has a maturity date of June 2012 and the outstanding balance of this mortgage was $41.4 million at December 31, 2009.

Note Payable —	Related Party	
 
During the fourth quarter of 2008, we borrowed $4.2 million from our manager, ACM. At December 31, 2008, we had outstanding borrowings due to ACM totaling $4.2 million, which was recorded in notes payable — related party. In January 2009, the loan was repaid in full.
 
The term credit agreement, working capital facility and the master repurchase agreements require that we pay interest monthly, based on pricing over LIBOR. The amount of our pricing over these rates varies depending upon the structure of the loan or investment financed pursuant to the specific agreement.
 
These facilities also require that we pay down borrowings based on balance reduction requirements or pro-rata as principal payments on our loans and investments are received. In addition, if upon maturity of a loan or investment we decide to grant the borrower an extension option, the financial institutions have the option to extend the borrowings or request payment in full on the outstanding borrowings of the loan or investment extended.
 
Restrictive Covenants
 
Each of the credit facilities contains various financial covenants and restrictions, including minimum net worth, minimum liquidity and debt-to-equity ratios. In addition to the financial terms and capacities described above, our credit facilities generally contain covenants that prohibit us from effecting a change in control, disposing of or encumbering assets being financed and restrict us from making any material amendment to our underwriting guidelines without approval of the lender. If we violate these covenants in any of our credit facilities, we could be required to pledge more collateral, or repay all or a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms, if at all. If we are unable to retire our borrowings in such a situation, (i) we may need to prematurely sell the assets securing such debt, (ii) the lenders could accelerate the debt and foreclose on the assets that are pledged as collateral to such lenders, (iii) such lenders could force us into bankruptcy, (iv) such lenders could force us to take other actions to protect the value of their
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collateral and (v) our other debt financings could become immediately due and payable. Any such event would have a material adverse effect on our liquidity, the value of our common stock, our ability to make distributions to our stockholders and our ability to continue as a going concern. Violations of these covenants may also result in our being unable to borrow unused amounts under our credit facilities, even if repayment of some or all borrowings is not required. Additionally, to the extent that we were to realize additional losses relating to our loans and investments, it would put additional pressure on our ability to continue to meet these covenants. We were in compliance with all financial covenants and restrictions for the periods presented with the exception of a minimum tangible net worth requirement with Wachovia at December 31, 2009. Our tangible net worth was $98.6 million at December 31, 2009 and we were required to maintain a minimum tangible net worth of $150.0 million with this financial institution. We have obtained a waiver of this covenant, as well as the minimum ratio of total liabilities to tangible net worth covenant, from this financial institution for December 31, 2009 and through an extended payoff date of August 27, 2010, in conjunction with amendments to our credit facilities. We have also obtained temporary amendments thereafter until December 2010 for the quarterly minimum GAAP tangible net worth covenants, from $150.0 million to $50.0 million, and quarterly maximum ratio of total liabilities to tangible net worth covenants, from 4.5 to 1 to 5.8 to 1.
 
We also have certain cross-default provisions whereby accelerated re-payment would occur under the Wachovia Term Credit and Working Capital facilities if any party defaults under any indebtedness in a principal amount of at least $5.0 million in the aggregate beyond any applicable grace period regardless of whether the default has been or is waived. Also, a default under the Junior Subordinated Indentures or any of the CDO’s would trigger a default under our Wachovia debt agreements, but not vice versa, and no payment due under the Junior Subordinated Indentures may be paid if there is a default under any senior debt and the senior lender has sent notice to the trustee. The Junior Subordinated Indentures are also cross-defaulted with each other.
 
Cash Flow From Operations
 
We continually monitor our cash position to determine the best use of funds to both maximize our return on funds and maintain an appropriate level of liquidity. Historically, in order to maximize the return on our funds, cash generated from operations has generally been used to temporarily pay down borrowings under credit facilities whose primary purpose is to fund our new loans and investments. Consequently, when making distributions in the past, we have borrowed the required funds by drawing on credit capacity available under our credit facilities. However, given current market conditions, we may have to maintain adequate liquidity from operations to make any future distributions.
 
Contractual Commitments
 
As of December 31, 2009, we had the following material contractual obligations (payments in thousands):

 	 	Payments Due by Period(1)	 	
Contractual Obligations	 	2010	 	 	2011	 	 	2012	 	 	2013	 	 	2014	 	 	Thereafter	 	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Notes payable	 	$	1,300	 	 	$	5,000	 	 	$	318,761	 	 	$	—	 	 	$	—	 	 	$	50,158	 	 	$	375,219	 	
Collateralized debt obligations(2)	 	 	96,202	 	 	 	75,686	 	 	 	366,627	 	 	 	217,416	 	 	 	206,481	 	 	 	138,103	 	 	 	1,100,515	 	
Repurchase agreements	 	 	2,657	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	2,657	 	
Junior subordinated notes(3)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	289,958	 	 	 	289,958	 	
Mortgage note payable — held-for-sale	 	 	—	 	 	 	—	 	 	 	41,440	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	41,440	 	
Outstanding unfunded commitments(4)	 	 	47,909	 	 	 	15,644	 	 	 	1,269	 	 	 	436	 	 	 	436	 	 	 	348	 	 	 	66,042	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Totals	 	$	148,068	 	 	$	96,330	 	 	$	728,097	 	 	$	217,852	 	 	$	206,917	 	 	$	478,567	 	 	$	1,875,831	 	

 
 	 	 	
(1)	 	Represents principal amounts due based on contractual maturities. Does not include total projected interest payments on our debt obligations of $49.1 million in 2010, $44.7 million in 2011, $41.0 million in 2012, $25.2 million in 2013, $20.3 million in 2014 and $190.5 million thereafter based on current LIBOR rates.	

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(2)	 	Comprised of $254.1 million of CDO I debt, $329.5 million of CDO II debt and $516.9 million of CDO III debt with an estimated weighted average remaining maturity of 2.08, 3.35 and 3.15 years, respectively, as of December 31, 2009. In 2009, we purchased, at a discount, approximately $42.8 million of investment grade notes originally issued by our CDO I, CDO II and CDO III issuers and recorded a reduction of the outstanding debt balance of $42.8 million. In the first quarter of 2010, we purchased, at a discount, approximately $19.4 million of investment grade notes originally issued by our CDO I, CDO II and CDO III issuers and recorded a reduction of the outstanding debt balance of $19.4 million. In February 2010, we re-issued the CDO bonds we had acquired throughout 2009 with an aggregate face amount of $42.8 million in exchange for the retirement of a portion of our junior subordinated notes.	
 	 	 	
(3)	 	Represents the face amount due upon maturity. The carrying value is $259.3 million, which is net of a deferred amount of $30.5 million. In 2009, we repurchased, at a discount, approximately $9.4 million of investment grade rated junior subordinated notes originally issued by our issuing entity and recorded a reduction of the outstanding debt balance of $9.4 million. In February 2010, we retired $114.1 million of our junior subordinated notes in exchange for the re-issuance of certain of our own CDO bonds, as well as other assets.	
 	 	 	
(4)	 	In accordance with certain loans and investments, we have outstanding unfunded commitments of $66.0 million as of December 31, 2009, that we are obligated to fund as the borrowers meet certain requirements. Specific requirements include, but are not limited to, property renovations, building construction, and building conversions based on criteria met by the borrower in accordance with the loan agreements. In relation to the $66.0 million outstanding balance at December 31, 2009, our restricted cash balance and CDO III revolver capacity contained approximately $15.2 million of cash and $13.3 million of capacity available to fund the portion of the unfunded commitments for loans financed by our CDO vehicles.	
 
Off-Balance-Sheet Arrangements
 
At December 31, 2009, we did not have any off-balance-sheet arrangements.
 
Management Agreement
 
On August 6, 2009, we amended our management agreement with ACM. The amendment was negotiated by a special committee of our Board of Directors, consisting solely of independent directors and approved unanimously by all of the independent directors. JMP Securities LLC served as financial advisor to the special committee and Skadden, Arps, Slate, Meagher & Flom LLP served as its special counsel. The agreement includes the following new terms, effective as of January 1, 2009:

 	• 	The existing base management fee structure, which is calculated as a percentage of our equity, was replaced with an arrangement whereby we will reimburse the manager for its actual costs incurred in managing our business based on the parties’ agreement in advance on an annual budget with subsequent quarterly true-ups to actual costs. This change was adopted retroactively to January 1, 2009 and we estimated the 2009 base management fee would be in the range of $8.0 million to $8.5 million. The 2010 base management fee is estimated to be in the same range. Concurrent with this change, all future origination fees on investments will be retained by us, whereas under the prior agreement, origination fees up to 1% of the loan were retained by ACM. In addition, we made a $3.0 million payment to the manager in consideration of expenses incurred by the manager in 2008 in managing our business and certain other services. These changes were accounted for prospectively as a change in accounting estimate.	
 	 	 	
 	• 	The percentage hurdle for the incentive fee will be applied on a per share basis to the greater of $10.00 and the average gross proceeds per share, whereas the previous management agreement provided for such percentage hurdle to be applied only to the average gross proceeds per share. In addition, only 60% of any loan loss and other reserve recoveries will be eligible to be included in the incentive fee calculation, which will be spread over a three year period, whereas the previous management agreement did not limit the inclusion of such recoveries in the incentive fee calculation.	
 	 	 	
 	• 	The amended management agreement allows us to consider, from time to time, the payment of additional fees to the manager for accomplishing certain specified corporate objectives. In accordance with the agreement, “success-based” payments were paid for the trust preferred and Wachovia debt restructurings totaling $4.1 million in the third quarter of 2009.	
 	 	 	
 	• 	The amended management agreement modifies and simplifies the provisions related to the termination of the agreement and any related fees payable in such instances, including for internalization, with a	

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 	 	termination fee of $10.0 million, rather than payment based on a multiple of base and incentive fees as previously existed.	

 	• 	The amended management agreement will remain in effect until December 31, 2010, and will be renewed automatically for successive one-year terms thereafter.	
 
For performing services under the management agreement, we previously paid ACM an annual base management fee payable monthly in cash as a percentage of ARLP’s equity and equal to 0.75% per annum of the equity up to $400 million, 0.625% per annum of the equity from $400 million to $800 million and 0.50% per annum of the equity in excess of $800 million. For purposes of calculating the base management fee, equity equaled the month end value computed in accordance with GAAP of (1) total partners’ equity in ARLP, plus or minus (2) any unrealized gains, losses or other items that do not affect realized net income. With respect to all loans and investments originated during the term of the management agreement, we had also agreed to pay ACM an amount equal to 100% of the origination fees paid by the borrower up to 1% of the loan’s principal amount.
 
We also paid ACM incentive compensation on a quarterly basis, calculated as (1) 25% of the amount by which (a) ARLP’s funds from operations per unit of partnership interest in ARLP, adjusted for certain gains and losses, exceeds (b) the product of (x) 9.5% per annum or the Ten Year U.S. Treasury Rate plus 3.5%, whichever is greater, and (y) the weighted average of book value of the net assets contributed by ACM to ARLP per ARLP partnership unit, the offering price per share of our common equity in the private offering on July 1, 2003 and subsequent offerings and the issue price per ARLP partnership unit for subsequent contributions to ARLP, multiplied by (2) the weighted average of ARLP’s outstanding partnership units.
 
We incurred $15.1 million, or $0.60 per basic and diluted common share, of base management fees for services rendered in 2009. The $15.1 million consisted of $8.0 million in budgeted base management fees, a $3.0 million retroactive payment for 2008 costs, and the new fee structure also provides for “success-based” payments to be paid to our manager upon the completion of specified corporate objectives in addition to the standard base management fee, thus the third quarter of 2009 base management fee included “success-based” payments for the trust preferred and Wachovia debt restructurings totaling $4.1 million. We incurred $3.5 million and $3.2 million of base management fees for services rendered in 2008 and 2007, respectively.
 
In 2009, ACM did not earn an incentive compensation fee. In 2008, ACM did not earn an incentive compensation fee and the overpayment of the incentive fee for the trailing twelve months in the amount of $2.9 million, of which $1.4 million was paid in 116,680 shares of common stock and $1.5 million paid in cash, was recorded and included in due from related party. In June, 2009, ACM repaid the $2.9 million in accordance with the amended management agreement described above. In addition, we recorded a $7.3 million deferred management fee recorded in the second quarter of 2008 related to the incentive compensation fee recognized from the monetization of the POM transaction in June 2008, which subsequently closed in the second quarter of 2009. In 2008, the $7.3 million deferred incentive compensation fee was paid in 355,903 shares of common stock and $4.1 million paid in cash, and was reclassified to prepaid management fees. In accordance with the amended management agreement, installments of the annual incentive compensation are subject to quarterly recalculation and potential reconciliation at the end of the fiscal year and any overpayments are required to be repaid in accordance with the management agreement. Since no incentive fee was earned for 2009, the prepaid management fee is to be paid back in installments of 25% due by December 31, 2010 and 75% due by June 30, 2012, with an option to make payment in both cash and Arbor Realty Trust, Inc. common stock provided that at least 50% of the payment is made in cash, and will be offset against any future incentive management fees or success-based payments earned by our manager prior to June 30, 2012. See Note 6 and Note 17 of the “Notes to the Consolidated Financial Statements” set forth in Item 8 hereof for further details.
 
In 2007, ACM earned an incentive compensation installment totaling $40.8 million, of which $13.7 million was elected by ACM to be paid in 556,631 shares of common stock and $27.1 million paid in cash. Included in the $40.8 million of incentive compensation was $21.8 million recorded as management fee expense and $19.0 million recorded as prepaid management fees related to the incentive compensation management fee on the deferred revenue recognized on the transfer of control of the 450 West 33 rd  Street property of one of our equity affiliates. As of December 31, 2007, ACM’s fourth quarter installment of $2.9 million was included in due to related party. As provided for in the management agreement, ACM elected to be paid its fourth quarter incentive compensation
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management fee partially in 86,772 shares of common stock with the remainder to be paid in cash totaling $1.5 million, which was subsequently paid in February 2008.
 
We pay the annual incentive compensation in four installments, each within 60 days of the end of each fiscal quarter. The calculation of each installment is based on results for the 12 months ending on the last day of the fiscal quarter for which the installment is payable. These installments of the annual incentive compensation are subject to recalculation and potential reconciliation at the end of such fiscal year, and any overpayments are required to be repaid in accordance with the amended management agreement. Subject to the ownership limitations in our charter, at least 25% of this incentive compensation is payable to our manager in shares of our common stock having a value equal to the average closing price per share for the last 20 days of the fiscal quarter for which the incentive compensation is being paid.
 
The incentive compensation is accrued as it is earned. The expense incurred for incentive compensation paid in common stock is determined using the valuation method described above and the quoted market price of our common stock on the last day of each quarter. At December 31 of each year, we remeasure the incentive compensation paid to our manager in the form of common stock in accordance with current accounting guidance, which discusses how to measure at the measurement date when certain terms are not known prior to the measurement date. Accordingly, the expense recorded for such common stock is adjusted to reflect the fair value of the common stock on the measurement date when the final calculation of the annual incentive compensation is determined. In the event that the annual incentive compensation calculated as of the measurement date is less than the four quarterly installments of the annual incentive compensation paid in advance, our manager will refund the amount of such overpayment in cash and we would record a negative incentive compensation expense in the quarter when such overpayment is determined.
 
Origination Fees:  Origination fees paid by borrowers for loans or investments made by us, less any payments to unaffiliated third party brokers or other unaffiliated third party costs in connection with the origination of these investments, would be retained by us or otherwise reduce the base management fee installment for that month.
 
Term and Termination.  The amended management agreement has an initial term up to December 31, 2010 and is renewable automatically for an additional one year period every year thereafter, unless terminated with six months’ prior written notice. If we terminate or elect not to renew the management agreement without cause, we are required to pay a termination fee of $10.0 million.
 
Inflation
 
Changes in the general level of interest rates prevailing in the economy in response to changes in the rate of inflation generally have little effect on our income because the majority of our interest-earning assets and interest-bearing liabilities have floating rates of interest. However, the significant decline in interest rates during the latter part of 2007, 2008 and 2009 triggered LIBOR floors on certain of our variable rate interest-earning assets. This resulted in an increase in interest rate spreads as the rates we pay on variable rate interest-bearing liabilities declined at a greater pace than the rates we earned on our variable rate interest-earning assets. Additionally, we have various fixed rate loans in our portfolio which are financed with variable rate LIBOR borrowings. In connection with these loans, we have entered into various interest swaps to hedge our exposure to the interest rate risk on our variable rate LIBOR borrowings as it relates to certain fixed rate loans in our portfolio. However, the value of our interest-earning assets, our ability to realize gains from the sale of assets, and the average life of our interest-earning assets, among other things, may be affected. See Item 7A — “Quantitative and Qualitative Disclosures about Market Risk.”
 
Related Party Transactions
 
Due from related party was $15.2 million at December 31, 2009 and consisted of $7.0 million for a loan paydown received by ACM in December 2009, which was repaid in the first quarter of 2010, $0.9 million of escrows due from ACM related to 2009 real estate asset transactions and $7.3 million reclassified from prepaid management fee — related party, related to the POM transaction which closed in 2009. See Note 6 of the “Notes to the Consolidated Financial Statements” set forth in Item 8 hereof for further details. In accordance with the August 2009 amended management agreement, since no incentive fee was earned for 2009, the prepaid management fee is to be paid back in installments of 25% due by December 31, 2010 and 75% due by June 30, 2012, with an option to
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make payment in both cash and Arbor Realty Trust, Inc. common stock provided that at least 50% of the payment is made in cash, and will be offset against any future incentive management fees or success-based payments earned by our manager prior to June 30, 2012. At December 31, 2008, due from related party was $2.9 million as a result of an overpayment of incentive management compensation based on the results of the twelve months ended December 31, 2008, which was repaid in the second quarter of 2009. Refer to the section “Management Agreement” above for further details.
 
Due to related party was $2.0 million at December 31, 2009 and consisted primarily of base management fees due to ACM, which will be remitted by us in 2010. At December 31, 2008, due to related party was $1.0 million and consisted of $0.8 million of base management fees and $0.2 million of unearned fees that were remitted by us in February 2009.
 
During 2009, we purchased from ACM, approximately $20.0 million of investment grade rated bonds originally issued by two of our three CDO issuing entities and approximately $9.4 million of junior subordinated notes originally issued by a wholly-owned subsidiary of our operating partnership for $9.1 million and recorded a net gain on early extinguishment of debt of $20.3 million. ACM had purchased the CDO notes from third party investors for $8.2 million in 2008, and the junior subordinated notes from third party investors for $1.3 million in 2009.
 
During the fourth quarter of 2008, we borrowed $4.2 million from our manager, ACM. At December 31, 2008, we had outstanding borrowings due to ACM totaling $4.2 million, which was recorded in notes payable — related party. In January 2009, the loan was repaid in full.
 
During 2006, we originated a $7.2 million bridge loan and a $0.3 million preferred equity investment secured by garden-style and townhouse apartments in South Carolina. We also had a 25.0% carried profits interest in the borrowing entity. In January 2008, the borrowing entity refinanced the property through ACM’s Fannie Mae program and we received $0.3 million for our profits interest as well as full repayment of the $0.3 million preferred equity investment and the $7.0 million outstanding balance on the bridge loan. We retained the 25% carried profits interest.
 
At December 31, 2006, we had a $7.75 million first mortgage loan that bore interest at a variable rate of one month LIBOR plus 4.25% and was scheduled to mature in March 2006. In March 2006, this loan was extended for one year with no other change in terms. The underlying property was sold to a third party in March 2007. We provided the financing to the third party and, in conjunction with the sale, the original loan was repaid in full in March 2007. The original loan was made to a not-for-profit corporation that holds and manages investment property from the endowment of a private academic institution. Two of our directors are members of the board of trustees of the original borrower and the private academic institution. Interest income recorded from the original loan for the year ended December 31, 2007 was approximately $0.1 million.
 
Other Related Party Transactions
 
ACM contributed the majority of its structured finance portfolio to our operating partnership pursuant to a contribution agreement. The contribution agreement contains representations and warranties concerning the ownership and terms of the structured finance assets it contributed and other customary matters. In exchange for ACM’s asset contribution, we issued to ACM approximately 3.1 million operating partnership units, each of which ACM could redeem for one share of our common stock or an equivalent amount in cash, at our election, and 629,345 warrants, each of which entitled ACM to purchase one additional operating partnership unit at an initial exercise price of $15.00. The operating partnership units and warrants for additional operating partnership units issued to ACM were valued at approximately $43.9 million at July 1, 2003, based on the price offered to investors in our units in the private placement, adjusted for the initial purchaser’s discount. We also granted ACM certain demand and other registration rights with respect to the shares of common stock issuable upon redemption of its operating partnership units. In 2004, ACM exercised all of its warrants for a total of 629,345 operating partnership units and proceeds of $9.4 million.
 
Each of the approximately 3.8 million operating partnership units owned by ACM was paired with one share of our special voting preferred stock that entitles the holder to one vote on all matters submitted to a vote of our
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stockholders. As operating partnership units were redeemed for shares of our common stock or cash an equivalent number of shares of special voting preferred stock would be redeemed and cancelled. As a result of the ACM asset contribution and the related formation transactions, ACM owned approximately a 16% limited partnership interest in our operating partnership and the remaining 84% interest in our operating partnership was owned by us.
 
In June 2008, our external manager exercised its right to redeem its approximate 3.8 million operating partnership units in our operating partnership for shares of our common stock on a one-for-one basis. In addition, the special voting preferred shares paired with each operating partnership unit, pursuant to a pairing agreement, were redeemed simultaneously and cancelled. ACM currently holds approximately 21% of the voting power of our outstanding common stock.
 
We and our operating partnership have entered into a management agreement with ACM, as amended in August 2009, pursuant to which ACM has agreed to provide us with structured finance investment opportunities and loan servicing as well as other services necessary to operate our business. As discussed above in “Contractual Commitments — Management Agreement,” we have agreed to pay our manager a base management fee monthly, based on an annual budget, and an incentive management fee when earned.
 
Under the terms of the management agreement, ACM has also granted us a right of first refusal with respect to all structured finance investment opportunities in the multi-family and commercial real estate markets that are identified by ACM or its affiliates.
 
In addition, Mr. Kaufman has entered into a non-competition agreement with us pursuant to which he has agreed not to pursue structured finance investment opportunities in the multi-family and commercial real estate markets, except as approved by our board of directors.
 
We are dependent upon our manager (ACM), with whom we have a conflict of interest, to provide services to us that are vital to our operations. Our chairman, chief executive officer and president, Mr. Ivan Kaufman, is also the chief executive officer and president of our manager, and, our chief financial officer and treasurer, Mr. Paul Elenio, is the chief financial officer of our manager. In addition, Mr. Kaufman and the Kaufman entities together beneficially own approximately 92% of the outstanding membership interests of ACM and certain of our employees and directors, also hold an ownership interest in ACM. Furthermore, one of our directors also serves as the trustee of one of the Kaufman entities that holds a majority of the outstanding membership interests in ACM and co-trustee of another Kaufman entity that owns an equity interest in our manager.
 
We and our operating partnership have also entered into a services agreement with ACM pursuant to which our asset management group provides asset management services to ACM. In the event the services provided by our asset management group pursuant to the agreement exceed by more than 15% per quarter the level of activity anticipated by our board of directors, we will negotiate in good faith with our manager an adjustment to our manager’s base management fee under the management agreement, to reflect the scope of the services, the quantity of serviced assets or the time required to be devoted to the services by our asset management group. See “Management Agreement” above.
 
Funds from Operations
 
We are presenting funds from operations (“FFO”) because we believe it to be an important supplemental measure of our operating performance in that it is frequently used by analysts, investors and other parties in the evaluation of real estate investment trusts (REITs). The revised White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT, in April 2002 defines FFO as net income (loss) attributable to Arbor Realty Trust, Inc. (computed in accordance with generally accepted accounting principles in the United States (“GAAP”)), excluding gains (losses) from sales of depreciated real properties, plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. We consider gains and losses on the sales of undepreciated real estate investments to be a normal part of our recurring operating activities in accordance with GAAP and should not be excluded when calculating FFO. To date, we have not sold any previously depreciated operating properties, which would be excluded from the FFO calculation. In accordance with the revised white paper, losses from discontinued operations are not excluded when calculating FFO.
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FFO is not intended to be an indication of our cash flow from operating activities (determined in accordance with GAAP) or a measure of our liquidity, nor is it entirely indicative of funding our cash needs, including our ability to make cash distributions. Our calculation of FFO may be different from the calculation used by other companies and, therefore, comparability may be limited.
 
FFO for the years ended December 31, 2009, 2008 and 2007 are as follows:

 	 	For the Year Ended December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income attributable to Arbor Realty Trust Inc., GAAP basis	 	$	(230,631,156	)	 	$	(81,229,844	)	 	$	84,533,877	 	
Add:	 	 	 	 	 	 	 	 	 	 	 	 	
Noncontrolling interest in operating partnership	 	 	—	 	 	 	—	 	 	 	16,989,177	 	
Depreciation — real estate owned and held-for-sale	 	 	755,704	 	 	 	751,859	 	 	 	—	 	
Depreciation — investment in equity affiliates	 	 	419,923	 	 	 	1,193,507	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Funds from operations (“FFO”)	 	$	(229,455,529	)	 	$	(79,284,478	)	 	$	101,523,054	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted FFO per common share	 	$	(9.06	)	 	$	(3.46	)	 	$	4.44	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted weighted average shares outstanding	 	 	25,313,574	 	 	 	22,916,648	 	 	 	22,870,159	 	

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ITEM 7A.  	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	
 
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and real estate values. The primary market risks that we are exposed to are real estate risk and interest rate risk.
 
Market Conditions
 
We are subject to market changes in the debt and secondary mortgage markets. These markets are currently experiencing disruptions, which could have an adverse impact on our earnings and financial condition.
 
Current conditions in the debt markets include reduced liquidity and increased risk adjusted premiums. These conditions may increase the cost and reduce the availability of debt. We attempt to mitigate the impact of debt market disruptions by obtaining adequate debt facilities from a variety of financing sources. There can be no assurance, however, that we will be successful in these efforts, that such debt facilities will be adequate or that the cost of such debt facilities will be at similar terms.
 
The secondary mortgage markets are also currently experiencing disruptions resulting from reduced investor demand for collateralized debt obligations and increased investor yield requirements for these obligations. In light of these conditions, we currently expect to finance our loan and investment portfolio with our current capital and debt facilities.
 
Real Estate Risk
 
Commercial mortgage assets may be viewed as exposing an investor to greater risk of loss than residential mortgage assets since such assets are typically secured by larger loans to fewer obligors than residential mortgage assets. Multi-family and commercial property values and net operating income derived from such properties are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, events such as natural disasters including hurricanes and earthquakes, acts of war and/or terrorism (such as the events of September 11, 2001) and others that may cause unanticipated and uninsured performance declines and/or losses to us or the owners and operators of the real estate securing our investment; national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as an oversupply of housing, retail, industrial, office or other commercial space); changes or continued weakness in specific industry segments; construction quality, construction delays, construction cost, age and design; demographic factors; retroactive changes to building or similar codes; and increases in operating expenses (such as energy costs). In the event net operating income decreases, a borrower may have difficulty repaying our loans, which could result in losses to us. In addition, decreases in property values reducing the value of collateral, and a lack of liquidity in the market, could reduce the potential proceeds available to a borrower to repay our loans, which could also cause us to suffer losses. Even when the net operating income is sufficient to cover the related property’s debt service, there can be no assurance that this will continue to be the case in the future.
 
Interest Rate Risk
 
Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.
 
Our operating results will depend in large part on differences between the income from our loans and our borrowing costs. Most of our loans and borrowings are variable-rate instruments, based on LIBOR. The objective of this strategy is to minimize the impact of interest rate changes on our net interest income. In addition, we have various fixed rate loans in our portfolio, which are financed with variable rate LIBOR borrowings. We have entered into various interest swaps (as discussed below) to hedge our exposure to interest rate risk on our variable rate LIBOR borrowings as it relates to our fixed rate loans. Many of our loans and borrowings are subject to various interest rate floors. As a result, the impact of a change in interest rates may be different on our interest income than it is on our interest expense.
 
One month LIBOR approximated 0.25% at December 31, 2009 and 0.5% at December 31, 2008.
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Based on our loans, securities held-to-maturity and liabilities as of December 31, 2009, and assuming the balances of these loans, securities and liabilities remain unchanged for the subsequent twelve months, a 0.25% increase in LIBOR would decrease our annual net income and cash flows by approximately $0.1 million. This is primarily due to various interest rate floors that are in effect at a rate that is above a 0.25% increase in LIBOR which would limit the effect of a 0.25% increase, and increased expense on variable rate debt, partially offset by our interest rate swaps that effectively convert a portion of the variable rate LIBOR based debt, as it relates to certain fixed rate assets, to a fixed basis that is not subject to a 0.25% increase. Based on the loans, securities held-to-maturity and liabilities as of December 31, 2009, and assuming the balances of these loans, securities and liabilities remain unchanged for the subsequent twelve months, a 0.25% decrease in LIBOR would increase our annual net income and cash flows by approximately $0.1 million. This is primarily due to various interest rate floors which limit the effect of a decrease on interest income and decreased expense on variable rate debt, partially offset by our interest rate swaps that effectively converted a portion of the variable rate LIBOR based debt, as it relates to certain fixed rate assets, to a fixed basis that is not subject to a 0.25% decrease.
 
Based on our loans, securities held-to-maturity and liabilities as of December 31, 2008, and assuming the balances of these assets and liabilities remain unchanged for the subsequent twelve months, a 0.5% increase in LIBOR would decrease our annual net income and cash flows by approximately $2.6 million. This is primarily due to various interest rate floors that are in effect at a rate that is above a 0.5% increase in LIBOR which would limit the effect of a 0.5% increase, and increased expense on variable rate debt, partially offset by our interest rate swaps that effectively convert a portion of the variable rate LIBOR based debt, as it relates to certain fixed rate assets, to a fixed basis that is not subject to a 0.5% increase. Based on the loans, securities held-to-maturity and liabilities as of December 31, 2008, and assuming the balances of these loans and liabilities remain unchanged for the subsequent twelve months, a 0.5% decrease in LIBOR would increase our annual net income and cash flows by approximately $1.8 million. This is primarily due to various interest rate floors which limit the effect of a decrease on interest income and decreased expense on variable rate debt, partially offset by our interest rate swaps that effectively converted a portion of the variable rate LIBOR based debt, as it relates to certain fixed rate assets, to a fixed basis that is not subject to a decrease.
 
In the event of a significant rising interest rate environment and/or economic downturn, defaults could increase and result in credit losses to us, which could adversely affect our liquidity and operating results. Further, such delinquencies or defaults could have an adverse effect on the spreads between interest-earning assets and interest-bearing liabilities.
 
In connection with our CDOs described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we entered into interest rate swap agreements to hedge the exposure to the risk of changes in the difference between three-month LIBOR and one-month LIBOR interest rates. These interest rate swaps became necessary due to the investor’s return being paid based on a three-month LIBOR index while the assets contributed to the CDOs are yielding interest based on a one-month LIBOR index. As of December 31, 2009 and 2008, we had nine and ten of these interest rate swap agreements outstanding that have combined notional values of $1.1 billion and $1.3 billion, respectively. The market value of these interest rate swaps is dependent upon existing market interest rates and swap spreads, which change over time. If there were a 25 basis point and 50 basis point increase in forward interest rates as of December 31, 2009 and 2008, respectively, the value of these interest rate swaps would have decreased by approximately $0.1 million for both periods. If there were a 25 basis point and 50 basis point decrease in forward interest rates as of December 31, 2009 and 2008, respectively, the value of these interest rate swaps would have increased by approximately $0.1 million for both periods.
 
As of December 31, 2009, we had 34 interest rate swap agreements outstanding that have a combined notional value of $708.2 million. As of December 31, 2008 we had 33 interest rate swap agreements outstanding with a combined notional value of $689.9 million to hedge current and outstanding LIBOR based debt relating to certain fixed rate loans within our portfolio. The fair market value of these interest rate swaps is dependent upon existing market interest rates and swap spreads, which change over time. If there had been a 25 basis point and 50 basis point increase in forward interest rates as of December 31, 2009 and 2008, respectively, the fair market value of these interest rate swaps would have increased by approximately $6.1 million and $15.7 million, respectively. If there were a 25 basis point and 50 basis point decrease in forward interest rates as of December 31, 2009 and 2008,
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respectively, the fair market value of these interest rate swaps would have decreased by approximately $6.0 million and $16.2 million, respectively.
 
We have, in the past, entered into various interest rate swap agreements in connection with the issuance of variable rate junior subordinated notes. These swaps had total notional values of $236.5 million as of December 31, 2008. We no longer utilize interest rate swaps for the newly issued junior subordinated notes exchanged for the aforementioned junior subordinated notes due to the modified interest payment structure. If there had been a 50 basis point increase in forward interest rates as of December 31, 2008, the fair market value of these interest rate swaps would have increased by approximately $3.3 million. If there were a 50 basis point decrease in forward interest rates as of December 31, 2008, the fair market value of these interest rate swaps would have decreased by approximately $3.4 million.
 
Certain of our interest rate swaps, which are designed to hedge interest rate risk associated with a portion of our loans and investments, could require the funding of additional cash collateral for changes in the market value of these swaps. Due to the prolonged volatility in the financial markets that began in 2007, the value of these interest rate swaps has declined substantially. As a result, at December 31, 2009 and 2008, we funded approximately $18.9 million and $46.5 million, respectively, in cash related to these swaps. If we continue to experience significant changes in the outlook of interest rates, these contracts could continue to decline in value, which would require additional cash to be funded. However, at maturity the value of these contracts return to par and all cash will be recovered. If we do not have available cash to meet these requirements, this could result in the early termination of these interest rate swaps, leaving us exposed to interest rate risk associated with these loans and investments, which could adversely impact our financial condition.
 
Our hedging transactions using derivative instruments also involve certain additional risks such as counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in the contract. The counterparties to our derivative arrangements are major financial institutions with high credit ratings with which we and our affiliates may also have other financial relationships. As a result, we do not anticipate that any of these counterparties will fail to meet their obligations. There can be no assurance that we will be able to adequately protect against the foregoing risks and will ultimately realize an economic benefit that exceeds the related amounts incurred in connection with engaging in such hedging strategies.
 
We utilize interest rate swaps to limit interest rate risk. Derivatives are used for hedging purposes rather than speculation. We do not enter into financial instruments for trading purposes.
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ITEM 8.  	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	
 
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

 	 	Page	
 	 	 	 	 	
Report of Independent Registered Public Accounting Firm	 	 	76	 	
Consolidated Balance Sheets at December 31, 2009 and 2008	 	 	77	 	
Consolidated Statements of Operations for the Years Ended December 31, 2009, 2008, and 2007	 	 	78	 	
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2009, 2008 and 2007	 	 	79	 	
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007	 	 	80	 	
Notes to Consolidated Financial Statements	 	 	82	 	
Schedule IV — Loans and Other Lending Investments	 	 	136	 	
 
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
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Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders of
Arbor Realty Trust, Inc. and Subsidiaries
 
We have audited the accompanying consolidated balance sheets of Arbor Realty Trust, Inc. and Subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule listed in the Index at Item 8. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
As discussed in Note 2 to the consolidated financial statements, the Company retrospectively changed its method of accounting for noncontrolling interests in consolidated entity due to the adoption of the guidance originally issued in FASB Statement No. 160,  Noncontrolling Interests in Consolidated Financial Statements  (codified in FASB ASC Topic 810,  Consolidation ).
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 8, 2010 expressed an unqualified opinion thereon.

 	/s/ ERNST & YOUNG LLP	
 
New York, New York
March 8, 2010
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 	 	December 31,
	 	 	December 31,
	 	
 	 	2009	 	 	2008	 	
 	 	 	 	 	 	 	 	 	
ASSETS:	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	$	64,624,275	 	 	$	832,041	 	
Restricted cash	 	 	27,935,470	 	 	 	93,219,133	 	
Loans and investments, net	 	 	1,700,774,288	 	 	 	2,181,683,619	 	
Available-for-sale securities, at fair value	 	 	488,184	 	 	 	529,104	 	
Securities held-to-maturity, net	 	 	60,562,808	 	 	 	58,244,348	 	
Investment in equity affiliates	 	 	64,910,949	 	 	 	29,310,953	 	
Real estate owned, net	 	 	8,205,510	 	 	 	46,478,994	 	
Real estate held-for-sale, net	 	 	41,440,000	 	 	 	—	 	
Due from related party	 	 	15,240,255	 	 	 	2,933,344	 	
Prepaid management fee — related party	 	 	19,047,949	 	 	 	26,340,397	 	
Other assets	 	 	57,545,084	 	 	 	139,664,556	 	
 	 	 	 	 	 	 	 	 	
Total assets	 	$	2,060,774,772	 	 	$	2,579,236,489	 	
 	 	 	 	 	 	 	 	 	
LIABILITIES AND EQUITY:	 	 	 	 	 	 	 	 	
Repurchase agreements	 	$	2,657,332	 	 	$	60,727,789	 	
Collateralized debt obligations	 	 	1,100,515,185	 	 	 	1,152,289,000	 	
Junior subordinated notes to subsidiary trust issuing preferred securities	 	 	259,487,421	 	 	 	276,055,000	 	
Notes payable	 	 	375,219,206	 	 	 	518,435,437	 	
Note payable — related party	 	 	—	 	 	 	4,200,000	 	
Mortgage note payable — held-for-sale	 	 	41,440,000	 	 	 	41,440,000	 	
Due to related party	 	 	1,997,629	 	 	 	993,192	 	
Due to borrowers	 	 	6,676,544	 	 	 	32,330,603	 	
Deferred revenue	 	 	77,123,133	 	 	 	77,123,133	 	
Other liabilities	 	 	97,024,352	 	 	 	134,647,667	 	
 	 	 	 	 	 	 	 	 	
Total liabilities	 	 	1,962,140,802	 	 	 	2,298,241,821	 	
 	 	 	 	 	 	 	 	 	
Commitments and contingencies	 	 	—	 	 	 	—	 	
Equity:	 	 	 	 	 	 	 	 	
Arbor Realty Trust, Inc. stockholders’ equity:	 	 	 	 	 	 	 	 	
Preferred stock, $0.01 par value: 100,000,000 shares authorized; no shares issued or outstanding	 	 	—	 	 	 	—	 	
Common stock, $0.01 par value: 500,000,000 shares authorized; 25,666,810 shares issued, 25,387,410 shares outstanding at December 31, 2009 and 25,421,810 shares issued, 25,142,410 shares outstanding at December 31, 2008	 	 	256,668	 	 	 	254,218	 	
Additional paid-in capital	 	 	450,376,782	 	 	 	447,321,186	 	
Treasury stock, at cost — 279,400 shares	 	 	(7,023,361	)	 	 	(7,023,361	)	
Accumulated deficit	 	 	(293,585,378	)	 	 	(62,939,722	)	
Accumulated other comprehensive loss	 	 	(53,331,105	)	 	 	(96,606,672	)	
 	 	 	 	 	 	 	 	 	
Total Arbor Realty Trust, Inc. stockholders’ equity	 	 	96,693,606	 	 	 	281,005,649	 	
 	 	 	 	 	 	 	 	 	
Noncontrolling interest in consolidated entity	 	 	1,940,364	 	 	 	(10,981	)	
 	 	 	 	 	 	 	 	 	
Total equity	 	 	98,633,970	 	 	 	280,994,668	 	
 	 	 	 	 	 	 	 	 	
Total liabilities and equity	 	$	2,060,774,772	 	 	$	2,579,236,489	 	

See Notes to Consolidated Financial Statements.
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 	 	For The Year Ended December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income	 	$	117,262,129	 	 	$	204,135,097	 	 	$	273,984,357	 	
Interest expense	 	 	80,102,075	 	 	 	108,656,702	 	 	 	147,710,194	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income	 	 	37,160,054	 	 	 	95,478,395	 	 	 	126,274,163	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Other revenue:	 	 	 	 	 	 	 	 	 	 	 	 	
Property operating income	 	 	916,246	 	 	 	—	 	 	 	—	 	
Other income	 	 	809,808	 	 	 	82,329	 	 	 	39,503	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other revenue	 	 	1,726,054	 	 	 	82,329	 	 	 	39,503	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Other expenses:	 	 	 	 	 	 	 	 	 	 	 	 	
Employee compensation and benefits	 	 	10,154,276	 	 	 	8,110,003	 	 	 	9,381,055	 	
Selling and administrative	 	 	10,505,013	 	 	 	8,197,368	 	 	 	5,593,175	 	
Property operating expenses	 	 	1,411,253	 	 	 	—	 	 	 	—	 	
Depreciation and amortization	 	 	94,819	 	 	 	—	 	 	 	—	 	
Other-than-temporary impairment	 	 	10,260,555	 	 	 	17,573,980	 	 	 	—	 	
Provision for loan losses	 	 	241,328,039	 	 	 	132,000,000	 	 	 	2,500,000	 	
Loss on restructured loans	 	 	57,579,561	 	 	 	—	 	 	 	—	 	
Management fee — related party	 	 	15,136,170	 	 	 	3,539,854	 	 	 	25,004,975	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other expenses	 	 	346,469,686	 	 	 	169,421,205	 	 	 	42,479,205	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
(Loss) income from continuing operations before gain on exchange of profits interest, gain on extinguishment of debt, loss on termination of swaps, (loss) income from equity affiliates and provision for income taxes	 	 	(307,583,578	)	 	 	(73,860,481	)	 	 	83,834,461	 	
Gain on exchange of profits interest	 	 	55,988,411	 	 	 	—	 	 	 	—	 	
Gain on extinguishment of debt	 	 	54,080,118	 	 	 	—	 	 	 	—	 	
Loss on termination of swaps	 	 	(8,729,408	)	 	 	—	 	 	 	—	 	
(Loss) income from equity affiliates	 	 	(438,507	)	 	 	(2,347,296	)	 	 	34,573,594	 	
Provision for income taxes	 	 	—	 	 	 	—	 	 	 	(16,885,000	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income from continuing operations	 	 	(206,682,964	)	 	 	(76,207,777	)	 	 	101,523,055	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss on impairment of real estate held-for-sale	 	 	(4,898,295	)	 	 	—	 	 	 	—	 	
Loss on operations of real estate held-for-sale	 	 	(377,042	)	 	 	(582,294	)	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss from discontinued operations	 	 	(5,275,337	)	 	 	(582,294	)	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income	 	 	(211,958,301	)	 	 	(76,790,071	)	 	 	101,523,055	 	
Net income attributable to noncontrolling interest	 	 	18,672,855	 	 	 	4,439,773	 	 	 	16,989,177	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income attributable to Arbor Realty Trust, Inc. 	 	$	(230,631,156	)	 	$	(81,229,844	)	 	$	84,533,878	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic (loss) earnings per common share:	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income from continuing operations, net of noncontrolling interest	 	$	(8.90	)	 	$	(3.52	)	 	$	4.44	 	
Loss from discontinued operations	 	 	(0.21	)	 	 	(0.02	)	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income attributable to Arbor Realty Trust, Inc. 	 	$	(9.11	)	 	$	(3.54	)	 	$	4.44	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted (loss) earnings per common share:	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income from continuing operations, net of noncontrolling interest	 	$	(8.90	)	 	$	(3.52	)	 	$	4.44	 	
Loss from discontinued operations	 	 	(0.21	)	 	 	(0.02	)	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income attributable to Arbor Realty Trust, Inc. 	 	$	(9.11	)	 	$	(3.54	)	 	$	4.44	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends declared per common share	 	$	—	 	 	$	2.10	 	 	$	2.46	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average number of shares of common stock outstanding:	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	 	25,313,574	 	 	 	22,916,648	 	 	 	19,022,616	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted	 	 	25,313,574	 	 	 	22,916,648	 	 	 	22,870,159	 	

See Notes to Consolidated Financial Statements.
78

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Total Arbor
	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	Preferred
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(Accumulated
	 	 	Accumulated
	 	 	Realty
	 	 	 	 	 	 	 	
 	 	 	 	 	Preferred
	 	 	Stock
	 	 	Common
	 	 	Common
	 	 	Additional
	 	 	Treasury
	 	 	 	 	 	Deficit)/
	 	 	Other
	 	 	Trust, Inc.
	 	 	Non-
	 	 	 	 	
 	 	Comprehensive
	 	 	Stock
	 	 	Par
	 	 	Stock
	 	 	Stock
	 	 	Paid-in
	 	 	Stock
	 	 	Treasury
	 	 	Retained
	 	 	Comprehensive
	 	 	Stockholders’
	 	 	controlling
	 	 	 	 	
 	 	Income/(Loss)	 	 	Shares	 	 	Value	 	 	Shares	 	 	Par Value	 	 	Capital	 	 	Shares	 	 	Stock	 	 	Earnings	 	 	Income/(Loss)	 	 	Equity	 	 	Interest	 	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance-December 31, 2006	 	 	 	 	 	 	3,776,069	 	 	$	37,761	 	 	 	17,388,770	 	 	$	173,888	 	 	$	273,037,744	 	 	 	(279,400	)	 	$	(7,023,361	)	 	$	27,732,489	 	 	$	2,152,556	 	 	$	296,111,077	 	 	$	65,468,252	 	 	$	361,579,329	 	
Issuance of common stock	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2,700,000	 	 	 	27,000	 	 	 	73,599,068	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	73,626,068	 	 	 	 	 	 	 	73,626,068	 	
Issuance of common stock for management incentive fee	 	 	 	 	 	 	 	 	 	 	 	 	 	 	590,864	 	 	 	5,909	 	 	 	15,971,516	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	15,977,425	 	 	 	 	 	 	 	15,977,425	 	
Deferred compensation	 	 	 	 	 	 	 	 	 	 	 	 	 	 	119,101	 	 	 	1,190	 	 	 	(1,190	)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	—	 	 	 	 	 	 	 	—	 	
Stock-based compensation	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2,454,957	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2,454,957	 	 	 	 	 	 	 	2,454,957	 	
Distributions — common stock	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(46,585,916	)	 	 	 	 	 	 	(46,585,916	)	 	 	 	 	 	 	(46,585,916	)	
Distributions — preferred stock of private REIT	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(14,500	)	 	 	 	 	 	 	(14,500	)	 	 	 	 	 	 	(14,500	)	
Adjustment to noncontrolling interest from decreased ownership in ARLP	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	314,041	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	314,041	 	 	 	(314,041	)	 	 	—	 	
Net income	 	$	101,523,055	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	84,533,878	 	 	 	 	 	 	 	84,533,878	 	 	 	16,989,177	 	 	 	101,523,055	 	
Distribution to noncontrolling interest	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(9,289,130	)	 	 	(9,289,130	)	
Net unrealized loss on securities available-for-sale	 	 	(1,018,841	)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(1,018,841	)	 	 	(1,018,841	)	 	 	 	 	 	 	(1,018,841	)	
Reclass adjustment of net loss on securities available-for-sale realized in net income	 	 	98,376	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	98,376	 	 	 	98,376	 	 	 	 	 	 	 	98,376	 	
Unrealized loss on derivative financial instruments	 	 	(27,847,260	)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(27,847,260	)	 	 	(27,847,260	)	 	 	 	 	 	 	(27,847,260	)	
Reclassification of net realized loss on derivatives designated as cash flow hedges into earnings	 	 	(2,386,220	)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(2,386,220	)	 	 	(2,386,220	)	 	 	 	 	 	 	(2,386,220	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance-December 31, 2007	 	$	70,369,110	 	 	 	3,776,069	 	 	$	37,761	 	 	 	20,798,735	 	 	$	207,987	 	 	$	365,376,136	 	 	 	(279,400	)	 	$	(7,023,361	)	 	$	65,665,951	 	 	$	(29,001,389	)	 	$	395,263,085	 	 	$	72,854,258	 	 	$	468,117,343	 	
Issuance of common stock for management incentive fee	 	 	 	 	 	 	 	 	 	 	 	 	 	 	559,354	 	 	 	5,594	 	 	 	5,970,661	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	5,976,255	 	 	 	 	 	 	 	5,976,255	 	
Redemption of operating partnership units for common stock	 	 	 	 	 	 	(3,776,069	)	 	 	(37,761	)	 	 	3,776,069	 	 	 	37,761	 	 	 	72,622,686	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	72,622,686	 	 	 	(72,622,686	)	 	 	—	 	
Deferred compensation	 	 	 	 	 	 	 	 	 	 	 	 	 	 	300,740	 	 	 	3,007	 	 	 	(3,007	)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	—	 	 	 	 	 	 	 	—	 	
Forfeiture of unvested restricted stock	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(13,088	)	 	 	(131	)	 	 	131	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	—	 	 	 	 	 	 	 	—	 	
Stock-based compensation	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	3,354,579	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	3,354,579	 	 	 	 	 	 	 	3,354,579	 	
Distributions — common stock	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(47,361,290	)	 	 	 	 	 	 	(47,361,290	)	 	 	 	 	 	 	(47,361,290	)	
Distributions — preferred stock of private REIT	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(14,539	)	 	 	 	 	 	 	(14,539	)	 	 	 	 	 	 	(14,539	)	
Net (loss) income	 	$	(76,790,071	)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(81,229,844	)	 	 	 	 	 	 	(81,229,844	)	 	 	4,439,773	 	 	 	(76,790,071	)	
Distribution to noncontrolling interest	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(4,682,326	)	 	 	(4,682,326	)	
Reclass adjustment of unrealized net loss on securities available-for-sale realized in net loss	 	 	1,018,841	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	1,018,841	 	 	 	1,018,841	 	 	 	 	 	 	 	1,018,841	 	
Unrealized loss on derivative financial instruments	 	 	(81,206,105	)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(81,206,105	)	 	 	(81,206,105	)	 	 	 	 	 	 	(81,206,105	)	
Reclassification of net realized loss on derivatives designated as cash flow hedges into earnings	 	 	12,581,981	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	12,581,981	 	 	 	12,581,981	 	 	 	 	 	 	 	12,581,981	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance-December 31, 2008	 	$	(144,395,354	)	 	 	—	 	 	$	—	 	 	 	25,421,810	 	 	$	254,218	 	 	$	447,321,186	 	 	 	(279,400	)	 	$	(7,023,361	)	 	$	(62,939,722	)	 	$	(96,606,672	)	 	$	281,005,649	 	 	$	(10,981	)	 	$	280,994,668	 	
Stock-based compensation	 	 	 	 	 	 	 	 	 	 	 	 	 	 	245,000	 	 	 	2,450	 	 	 	2,412,346	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2,414,796	 	 	 	 	 	 	 	2,414,796	 	
Issuance of warrants in conjunction with debt restructuring	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	643,250	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	643,250	 	 	 	 	 	 	 	643,250	 	
Distributions — preferred stock of private REIT	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(14,500	)	 	 	 	 	 	 	(14,500	)	 	 	 	 	 	 	(14,500	)	
Net (loss) income	 	$	(211,958,301	)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(230,631,156	)	 	 	 	 	 	 	(230,631,156	)	 	 	18,672,855	 	 	 	(211,958,301	)	
Distribution to noncontrolling interest	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(16,721,510	)	 	 	(16,721,510	)	
Unrealized gain on derivative financial instruments	 	 	4,929,124	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	4,929,124	 	 	 	4,929,124	 	 	 	 	 	 	 	4,929,124	 	
Reclassification of net realized loss on derivatives designated as cash flow hedges into earnings	 	 	38,346,443	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	38,346,443	 	 	 	38,346,443	 	 	 	 	 	 	 	38,346,443	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance-December 31, 2009	 	$	(168,682,734	)	 	 	—	 	 	$	—	 	 	 	25,666,810	 	 	$	256,668	 	 	$	450,376,782	 	 	 	(279,400	)	 	$	(7,023,361	)	 	$	(293,585,378	)	 	$	(53,331,105	)	 	$	96,693,606	 	 	$	1,940,364	 	 	$	98,633,970	 	

See Notes to Consolidated Financial Statements.
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 	 	For the Year Ended December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income	 	$	(211,958,301	)	 	$	(76,790,071	)	 	$	101,523,055	 	
Adjustments to reconcile net (loss) income to cash provided by operating activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Depreciation and amortization	 	 	755,703	 	 	 	751,859	 	 	 	—	 	
Stock-based compensation	 	 	2,414,796	 	 	 	3,047,479	 	 	 	2,454,957	 	
Other-than-temporary impairment	 	 	10,260,555	 	 	 	17,573,980	 	 	 	—	 	
Gain on exchange of profits interest	 	 	(55,988,411	)	 	 	—	 	 	 	—	 	
Gain on extinguishment of debt	 	 	(54,080,118	)	 	 	—	 	 	 	—	 	
Provision for loan losses	 	 	241,328,039	 	 	 	132,000,000	 	 	 	2,500,000	 	
Loss on restructured loans	 	 	57,579,561	 	 	 	—	 	 	 	—	 	
Loss on termination of swaps	 	 	8,729,408	 	 	 	—	 	 	 	—	 	
Loss on impairment of real estate held-for-sale	 	 	4,898,295	 	 	 	—	 	 	 	—	 	
Amortization and accretion of interest and fees	 	 	6,147,222	 	 	 	(1,180,796	)	 	 	142,681	 	
Change in fair value of non-qualifying swaps	 	 	5,190,704	 	 	 	4,649,349	 	 	 	1,691,116	 	
Non-cash incentive compensation to manager — related party	 	 	—	 	 	 	1,385,918	 	 	 	9,146,905	 	
Loss (earnings) from equity affiliates	 	 	438,507	 	 	 	2,347,296	 	 	 	(24,150,787	)	
Gain on sale of securities available-for-sale	 	 	—	 	 	 	—	 	 	 	(30,182	)	
Changes in operating assets and liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	
Other assets	 	 	26,596,827	 	 	 	(91,125,760	)	 	 	(8,710,086	)	
Distributions of operations from equity affiliates	 	 	9,879,000	 	 	 	—	 	 	 	—	 	
Prepaid management fee — related party	 	 	—	 	 	 	(4,100,000	)	 	 	(14,460,587	)	
Deferred income taxes	 	 	—	 	 	 	—	 	 	 	(2,200,000	)	
Deferred revenue	 	 	—	 	 	 	—	 	 	 	77,123,133	 	
Other liabilities	 	 	(9,908,752	)	 	 	62,999,714	 	 	 	12,475,857	 	
Deferred fees	 	 	2,851,909	 	 	 	1,815,483	 	 	 	1,493,699	 	
Due from/to related party	 	 	4,280,341	 	 	 	(2,971,372	)	 	 	688,620	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash provided by operating activities	 	$	49,415,285	 	 	$	50,403,079	 	 	$	159,688,381	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Investing activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Loans and investments funded, originated and purchased, net	 	 	(8,569,643	)	 	 	(401,391,738	)	 	 	(1,926,833,770	)	
Payoffs and paydowns of loans and investments	 	 	123,759,512	 	 	 	679,855,282	 	 	 	1,336,775,919	 	
Deposits received relating to loan held-for-sale	 	 	20,500,000	 	 	 	—	 	 	 	—	 	
Proceeds from sale of loans	 	 	32,050,000	 	 	 	—	 	 	 	—	 	
Due to borrowers	 	 	(8,574,898	)	 	 	14,064,697	 	 	 	2,198,611	 	
Purchases of securities available-for-sale	 	 	—	 	 	 	—	 	 	 	(16,715,584	)	
Purchases of securities held-to-maturity	 	 	(12,412,500	)	 	 	(58,062,500	)	 	 	—	 	
Principal collection on securities held-to-maturity	 	 	2,710,012	 	 	 	—	 	 	 	—	 	
Investment in real estate owned, net	 	 	(59,986	)	 	 	(1,231,577	)	 	 	—	 	
Prepayments on securities available-for-sale	 	 	—	 	 	 	—	 	 	 	3,358,184	 	
Proceeds from sales of securities available-for-sale	 	 	—	 	 	 	—	 	 	 	18,792,594	 	
Contributions to equity affiliates	 	 	(295,330	)	 	 	(3,000,000	)	 	 	(24,455,557	)	
Distributions from equity affiliates	 	 	2,614,710	 	 	 	931,941	 	 	 	51,250,063	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash provided by/(used in) investing activities	 	$	151,721,877	 	 	$	231,166,105	 	 	$	(555,629,540	)	

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)

 	 	For the Year Ended December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Financing activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Proceeds from notes payable and repurchase agreements	 	 	33,878,700	 	 	 	269,996,534	 	 	 	807,615,891	 	
Payoffs and paydowns of notes payable and repurchase agreements	 	 	(215,375,061	)	 	 	(531,931,575	)	 	 	(456,939,223	)	
Payoff of junior subordinated notes to subsidiary trust issuing preferred securities	 	 	(1,265,625	)	 	 	—	 	 	 	—	 	
Payoff of notes payable — related party	 	 	(4,200,000	)	 	 	4,200,000	 	 	 	—	 	
Proceeds from collateralized debt obligations	 	 	500,000	 	 	 	56,000,000	 	 	 	72,200,000	 	
Payoffs and paydowns of collateralized debt obligations	 	 	(21,307,941	)	 	 	(54,720,000	)	 	 	(12,720,000	)	
Change in restricted cash	 	 	65,283,663	 	 	 	45,916,972	 	 	 	(54,364,043	)	
Payments on margin calls related to repurchase agreements	 	 	—	 	 	 	(4,845,810	)	 	 	—	 	
Proceeds from issuance of junior subordinated notes	 	 	—	 	 	 	—	 	 	 	53,093,000	 	
Payments on swaps to hedge counterparties	 	 	(70,320,588	)	 	 	(175,190,000	)	 	 	(41,840,000	)	
Receipts on swaps to hedge counterparties	 	 	80,345,000	 	 	 	140,550,000	 	 	 	29,980,000	 	
Proceeds from issuance of common stock	 	 	—	 	 	 	—	 	 	 	74,655,000	 	
Offering expenses paid	 	 	—	 	 	 	—	 	 	 	(1,001,795	)	
Distributions paid to noncontrolling interest	 	 	(221,510	)	 	 	(4,682,326	)	 	 	(9,289,130	)	
Distributions paid on stock	 	 	(14,500	)	 	 	(47,375,829	)	 	 	(46,600,416	)	
Payment of deferred financing costs	 	 	(4,647,066	)	 	 	(874,650	)	 	 	(4,385,441	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash (used in)/provided by financing activities	 	$	(137,344,928	)	 	$	(302,956,684	)	 	$	410,403,843	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net increase/(decrease) in cash and cash equivalents	 	$	63,792,234	 	 	$	(21,387,500	)	 	$	14,462,684	 	
Cash and cash equivalents at beginning of period	 	 	832,041	 	 	 	22,219,541	 	 	 	7,756,857	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash and cash equivalents at end of period	 	$	64,624,275	 	 	$	832,041	 	 	$	22,219,541

Supplemental cash flow information:	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash used to pay interest, net of capitalized interest	 	$	58,214,170	 	 	$	116,916,357	 	 	$	151,577,313	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash (received)/used for taxes	 	$	(354,279	)	 	$	86,214	 	 	$	19,032,748	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Supplemental schedule of non-cash investing and financing activities:	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Investment in equity affiliates	 	$	—	 	 	$	—	 	 	$	6,856,960	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Investment transferred to real estate held-for-sale, net	 	$	41,440,000	 	 	$	—	 	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Investment in real estate owned, net	 	$	8,525,428	 	 	$	45,247,417	 	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Investments transferred to available-for-sale securities, at fair value	 	$	400,000	 	 	$	—	 	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan origination	 	$	500,000	 	 	$	—	 	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Margin calls applied to repurchase agreements	 	$	4,845,810	 	 	$	—	 	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Termination of swaps	 	$	17,034,929	 	 	$	—	 	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Retirement of common equity in trust preferred securities	 	$	7,727,000	 	 	$	—	 	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Collateral on swaps to hedge counterparties	 	$	(3,500,000	)	 	$	3,500,000	 	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Assumption of mortgage note payable	 	$	—	 	 	$	41,440,000	 	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Redemption of operating partnership units for common stock	 	$	—	 	 	$	72,622,686	 	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Issuance of common stock for management incentive fee	 	$	—	 	 	$	5,976,255	 	 	$	15,977,425	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Issuance of warrents	 	$	643,250	 	 	$	—	 	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan paydown received by related party	 	$	6,990,698	 	 	$	—	 	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Reclassification from due to borrowers to loans	 	$	20,684,387	 	 	$	—	 	 	$	—	 	

See Notes to Consolidated Financial Statements.
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
 
Note 1 — Description of Business / Form of Ownership
 
Arbor Realty Trust, Inc. (the “Company”) is a Maryland corporation that was formed in June 2003 to invest in a diversified portfolio of multi-family and commercial real estate-related assets, primarily consisting of bridge loans, mezzanine loans, junior participating interests in first mortgage loans, and preferred and direct equity. The Company may also directly acquire real property and invest in real estate-related notes and certain mortgage-related securities. The Company conducts substantially all of its operations through its operating partnership, Arbor Realty Limited Partnership (“ARLP”), and ARLP’s wholly-owned subsidiaries. The Company is externally managed and advised by Arbor Commercial Mortgage, LLC (“ACM”).
 
The Company is organized and conducts its operations to qualify as a real estate investment trust (“REIT”) for federal income tax purposes. A REIT is generally not subject to federal income tax on its REIT taxable income that it distributes to its stockholders, provided that it distributes at least 90% of that income and meets certain other requirements for qualification as a REIT. Additionally, the IRS has issued guidance that temporarily allows listed REITs to offer shareholders elective dividends which are paid in a combination of cash and common stock, even if the amount payable in cash is capped, so long as that cap is not less than 10% of the total dividend. Certain of our assets or operations that would not otherwise comply with the REIT requirements, are owned or conducted by our taxable REIT subsidiaries, the income of which is subject to federal and state income taxes.
 
The Company’s charter provides for the issuance of up to 500 million shares of common stock, with a par value of $0.01 per share, and 100 million shares of preferred stock, with a par value of $0.01 per share. The Company was incorporated in June 2003 and was initially capitalized through the sale of 67 shares of common stock for $1,005.
 
On July 1, 2003, ACM contributed $213.1 million of structured finance assets and $169.2 million of borrowings supported by $43.9 million of equity in exchange for a commensurate equity ownership in ARLP. In addition, certain employees of ACM were transferred to ARLP. These assets, liabilities and employees represent a substantial portion of ACM’s structured finance business (the “SF Business”). The Company is externally managed and advised by ACM and pays ACM a management fee in accordance with a management agreement. ACM also sources originations, provides underwriting services, and services all structured finance assets on behalf of ARLP and its wholly owned subsidiaries.
 
On July 1, 2003, the Company completed a private equity offering of 1,610,000 units (including an overallotment option), each consisting of five shares of common stock and one warrant to purchase one share of common stock at $75.00 per unit. The Company sold 8,050,000 shares of common stock in the offering. Gross proceeds from the private equity offering totaled $120.2 million. Gross proceeds from the private equity offering combined with the concurrent equity contribution by ACM totaled approximately $164.1 million in equity capital. The Company paid and accrued offering expenses of $10.1 million resulting in stockholders’ equity and minority interest of $154.0 million as a result of the private placement.
 
In April 2004, the Company sold 6,750,000 shares of its common stock in a public offering at a price of $20.00 per share, for net proceeds of approximately $124.4 million after deducting the underwriting discount and other estimated offering expenses. The Company used the proceeds to pay down indebtedness. In May 2004, the underwriters exercised a portion of their over-allotment option, which resulted in the issuance of 524,200 additional shares. The Company received net proceeds of approximately $9.8 million after deducting the underwriting discount. In October 2004, ARLP received proceeds of approximately $9.4 million from the exercise of warrants for 629,345 operating partnership units. Additionally, in 2004 and 2005, the Company issued 973,354 and 282,776 shares of common stock, respectively, from the exercise of warrants under its Warrant Agreement, dated July 1, 2003, and received net proceeds of $12.9 million and $4.2 million, respectively.
 
In March 2007, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended (the “1933 Act”) with respect to an aggregate of $500.0 million of debt securities, common stock, preferred stock, depositary shares and warrants, that may be sold
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
 
by the Company from time to time pursuant to Rule 415 of the 1933 Act. On April 19, 2007, the Commission declared this shelf registration statement effective.
 
In June 2007, the Company completed a public offering in which it sold 2,700,000 shares of its common stock registered for $27.65 per share, and received net proceeds of approximately $73.6 million after deducting the underwriting discount and the other estimated offering expenses. The Company used the proceeds to pay down debt and finance its loan and investment portfolio. The underwriters did not exercise their over allotment option for additional shares. At December 31, 2009, the Company had $425.3 million remaining under the previously mentioned shelf registration.
 
In June 2008, the Company’s external manager exercised its right to redeem its approximate 3.8 million operating partnership units in the Company’s operating partnership for shares of the Company’s common stock on a one-for-one basis. In addition, the special voting preferred shares paired with each operating partnership unit, pursuant to a pairing agreement, were redeemed simultaneously and cancelled by the Company.
 
The Company had 25,387,410 shares outstanding at December 31, 2009 and 25,142,410 shares outstanding at December 31, 2008.

Note 2 —	Summary of Significant Accounting Policies	
 
Basis of Presentation and Principles of Consolidation
 
The accompanying consolidated financial statements include the financial statements of the Company, its wholly owned subsidiaries, and partnerships or other joint ventures in which the Company owns a voting interest of greater than 50 percent. Entities in which the Company owns a voting interest of 20 percent to 50 percent and entities that are variable interest entities, of which the Company is not the primary beneficiary, are accounted for primarily under the equity method. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All significant inter-company transactions and balances have been eliminated in consolidation.
 
The preparation of consolidated financial statements in conformity with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification TM , the authoritative reference for accounting principles generally acceptable in the United States (“GAAP”), requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Further, in connection with preparation of the consolidated financial statements, the Company evaluated events subsequent to the balance sheet date of December 31, 2009 through the issuance of the Consolidated Financial Statements.
 
Certain prior year amounts have been reclassified to conform to current period presentation. Noncontrolling interest in consolidated entity is classified in the Company’s Consolidated Balance Sheet in the “Equity” section of the current year’s presentation and was disclosed as a separate mezzanine section in prior year’s presentation and net (loss) income is split out between noncontrolling interest and Arbor Realty Trust, Inc. and was disclosed as one line in prior presentations. Interest income and interest expense were also netted on the Company’s Consolidated Statements of Operations in accordance with Article 9 of Regulation S-X due to the relevance in understanding its operations. In addition, at September 30, 2009, one of our real estate investments was reclassified from real estate owned to real estate held-for-sale, net, and resulted in a reclassification from property operating income and expenses to discontinued operations for the current and all prior period presentations.
 
Cash and Cash Equivalents
 
All highly liquid investments with original maturities of three months or less are considered to be cash equivalents. The Company places its cash and cash equivalents in high quality financial institutions. The
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December 31, 2009
 
consolidated account balances at each institution periodically exceeds the Federal Deposit Insurance Corporation (“FDIC”) insurance coverage and the Company believes that this risk is not significant.
 
Restricted Cash
 
At December 31, 2009 and 2008, the Company had restricted cash of $27.9 million and $93.2 million, respectively, on deposit with the trustees for the Company’s collateralized debt obligations (“CDOs”), see Note 8 — “Debt Obligations.” Restricted cash primarily represents proceeds from loan repayments which will be used to purchase replacement loans as collateral for the CDOs and interest payments received from loans in the CDOs which are remitted to the Company quarterly in the month following the quarter end.
 
Loans and Investments
 
At the time of purchase, the Company designates a security as held-to-maturity, available-for-sale, or trading depending on ability and intent to hold. The Company does not have any securities designated as trading at this time. Securities available-for-sale are reported at fair value with the net unrealized gains or losses reported as a component of accumulated other comprehensive loss, while securities and investments held-to-maturity are reported at amortized cost. Unrealized losses determined to be other-than-temporary are recognized in earnings. The determination of other-than-temporary impairment is a subjective process requiring judgments and assumptions. The process may include, but is not limited to, assessment of recent market events and prospects for near term recovery, assessment of cash flows, internal review of the underlying assets securing the investments, credit of the issuer and the rating of the security, as well as the Company’s ability and intent to hold the investment. Management closely monitors market conditions on which it bases such decisions.
 
Current accounting guidance provides greater clarity about the credit and noncredit component of an other-than-temporary impairment event, more effectively communicates when it has occurred, and requires the recording of a cumulative-effect adjustment as of the beginning of the period of adoption to reclassify the noncredit component of a previously recognized other-than-temporary impairment on debt securities from retained earnings to accumulated other comprehensive income. The adoption of this guidance in the second quarter of 2009 did not have a material effect on the Company’s Consolidated Financial Statements and no such reclassification was necessary.
 
The Company also assesses certain of its held-to-maturity securities, other than those of high credit quality, to determine whether significant changes in estimated cash flows or unrealized losses on these securities reflect a decline in value which is other-than-temporary; accordingly, such securities are written down to fair value against earnings. On a quarterly basis, the Company reviews these changes in estimated cash flows, which could occur due to actual prepayment and credit loss experience, to determine if an other-than-temporary impairment is deemed to have occurred. The determination of other-than-temporary impairment is a subjective process requiring judgments and assumptions. The Company calculates a revised yield based on the current amortized cost of the investment, including any other-than-temporary impairments recognized to date, and then applies the revised yield prospectively to recognize interest income.
 
Loans held for investment are intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan origination costs and fees, purchase discounts, and allowance for loan losses when such loan or investment is deemed to be impaired. The Company invests in preferred equity interests that, in some cases, allow the Company to participate in a percentage of the underlying property’s cash flows from operations and proceeds from a sale or refinancing. At the inception of each such investment, management must determine whether such investment should be accounted for as a loan, joint venture or as real estate. To date, management has determined that all such investments are properly accounted for and reported as loans.
 
From time to time the Company may enter into an agreement to sell a loan. These loans are classified as held-for-sale and are valued at the lower of the loan’s carrying amount or fair value. For the sale of loans, recognition occurs when ownership passes to the buyer.
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December 31, 2009
 
Impaired Loans and Allowance for Loan Losses
 
The Company considers a loan impaired when, based upon current information and events, it is probable that it will be unable to collect all amounts due for both principal and interest according to the contractual terms of the loan agreement. Specific valuation allowances are established for impaired loans based on the fair value of collateral on an individual loan basis. The fair value of the collateral is determined by selecting the most appropriate valuation methodology, or methodologies, among several generally available and accepted in the commercial real estate industry. The determination of the most appropriate valuation methodology is based on the key characteristics of the collateral type. These methodologies include the evaluation of operating cash flow from the property during the projected holding period and the estimated sales value of the collateral computed by applying an expected capitalization rate to the stabilized net operating income of the specific property, less selling costs, discounted at market discount rates.
 
If upon completion of the valuation, the fair value of the underlying collateral securing the impaired loan is less than the net carrying value of the loan, an allowance is created with a corresponding charge to the provision for loan losses. The allowance for each loan is maintained at a level believed adequate by management to absorb probable losses. The Company had an allowance for loan losses of $326.3 million at December 31, 2009 relating to 31 loans with an aggregate carrying value, before reserves, of approximately $693.7 million. At December 31, 2008, the Company had an allowance for loan losses of $130.5 million relating to ten loans with an aggregate carrying value, before reserves, of approximately $443.2 million and at December 31, 2007, the Company had an allowance for loan losses of $2.5 million relating to two loans with an aggregate carrying value, before reserves, of approximately $58.5 million.
 
Real Estate Owned and Held-For-Sale
 
Real estate owned, shown net of accumulated depreciation, is comprised of real property acquired by foreclosure or deed in lieu of foreclosure. Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded at the lower of the net carrying value of the loan previously collateralized by the real estate or estimated fair value of the real estate at the time of foreclosure or delivery of a deed in lieu of foreclosure. The net carrying value is the unpaid principal balance of the loan, adjusted for any unamortized deferred fees, loan loss allowances and amounts previously due to borrower.
 
Costs incurred in connection with the foreclosure of the properties collateralizing the real estate loans are expensed as incurred and costs subsequently incurred to extend the life or improve the assets subsequent to foreclosure are capitalized.
 
The Company allocates the purchase price of operating properties to land, building, tenant improvements, deferred lease cost for the origination costs of the in-place leases and to intangibles for the value of the above or below market leases at fair value. The Company amortizes the value allocated to the in-place leases over the remaining lease term. The value allocated to the above or below market leases are amortized over the remaining lease term as an adjustment to rental income.
 
Real estate assets, including assets acquired by foreclosure or deed in lieu of foreclosure, that are operated for the production of income, are depreciated using the straight-line method over their estimated useful lives. Ordinary repairs and maintenance not reimbursed by the tenants are expensed as incurred. Major replacements and betterments that improve or extend the life of the asset are capitalized and depreciated over their estimated useful life.
 
The Company recognizes impairment if the undiscounted estimated cash flows to be generated by the assets are less than the carrying amount of those assets. Measurement of impairment is based upon the estimated fair value of the asset. Upon evaluating a property, many factors are considered, including estimated current and expected operating cash flow from the property during the projected holding period, costs necessary to extend the life or
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improve the asset, expected capitalization rates, projected stabilized net operating income, selling costs, and the ability to hold and dispose of such real estate owned in the ordinary course of business. Valuation adjustments may be necessary in the event that effective interest rates, rent-up periods, future economic conditions, and other relevant factors vary significantly from those assumed in valuing the property. If future evaluations result in a diminution in the value of the property, the reduction will be recognized as an impairment charge at that time.
 
Real estate is classified as held-for-sale when management commits to a plan of sale, the asset is available for immediate sale, there is an active program to locate a buyer, and it is probable the sale will be complete within one year. Properties classified as held-for-sale are not depreciated and the results of their operations are shown in discontinued operations. Real estate assets that are expected to be disposed of are valued, on an individual asset basis, at the lower of the carrying amount or their fair value less costs to sell.
 
The Company recognizes sales of real estate properties upon closing. Payments received from purchasers prior to closing are recorded as deposits. Profit on real estate sold is recognized upon closing using the full accrual method when the collectability of the sale price is reasonably assured and the Company is not obligated to perform significant activities after the sale. Profit may be deferred in whole or in part until collectability of the sales price is reasonably assured and the earnings process is complete.
 
Capitalized Interest
 
The Company capitalizes interest related to investments (equity, loans and advances) accounted for by the equity method as qualifying assets of the investor while the investee has activities in progress necessary to commence its planned principal operations, provided that the investee’s activities include the use of funds to acquire qualifying assets for its operations. One of the Company’s joint ventures, which was accounted for using the equity method, acquired qualifying assets for its planned principal operations. During 2007, the joint venture sold both of the acquired properties and the Company discontinued the capitalization of interest on its remaining investment in the joint venture. During the year ended December 31, 2007, the Company capitalized $0.3 million of interest relating to this investment. The Company did not capitalize interest during the years ended December 31, 2009 and 2008.
 
Revenue Recognition
 
Interest Income — Interest income is recognized on the accrual basis as it is earned from loans, investments and securities. In many instances, the borrower pays an additional amount of interest at the time the loan is closed, an origination fee, and deferred interest upon maturity. In some cases interest income may also include the amortization or accretion of premiums and discounts arising from the purchase or origination of the loan or security. This additional income, net of any direct loan origination costs incurred, is deferred and accreted into interest income on an effective yield or “interest” method adjusted for actual prepayment activity over the life of the related loan or security as a yield adjustment. Income recognition is suspended for loans when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current and performance is resumed. Several of the loans provide for accrual of interest at specified rates, which differ from current payment terms. Interest is recognized on such loans at the accrual rate subject to management’s determination that accrued interest and outstanding principal are ultimately collectible, based on the underlying collateral and operations of the borrower. If management cannot make this determination, interest income above the current pay rate is recognized only upon actual receipt. Additionally, interest income is recorded when earned from equity participation interests, referred to as equity kickers. These equity kickers have the potential to generate additional revenues for the Company as a result of excess cash flow distributions and/or as appreciated properties are sold or refinanced. The Company did not record interest income from such investments for the year ended December 31, 2009. For the years ended December 31, 2008 and 2007, the Company recorded $1.0 million and $30.0 million of interest from such loans and investments, respectively. These amounts represent interest collected in accordance with the contractual agreement with the borrower.
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December 31, 2009
 
Property operating income — Property operating income represents income associated with the operation of two commercial real estate properties recorded as real estate owned. We generate property operating income from hotel room rental and other hotel related activities at our commercial real estate owned properties. We recognize revenue for these activities when the fees are fixed or determinable, or evidenced by an arrangement, collection is reasonably assured and the services under the arrangement have been provided. For the year ended December 31, 2009, the Company recorded approximately $0.9 million of property operating income relating to the Company’s real estate owned. During the third quarter of 2009, one of the Company’s three real estate investments was reclassified from real estate owned to real estate held-for-sale and resulted in a reclassification from property operating income to discontinued operations for the current and all prior periods. As a result, the Company did not have property operating income for the year ended December 31, 2008 due to the subsequent reclassification to discontinued operations. There was no property operating income in 2007. See Note 7 — “Real Estate Owned and Held-for-Sale” for further details.
 
Other income — Other income represents fees received for loan structuring and defeasance fees, and miscellaneous asset management fees associated with the Company’s loans and investments portfolio. The Company recognizes these forms of income when the fees are fixed or determinable, are evidenced by an arrangement, collection is reasonably assured and the services under the arrangement have been provided.
 
Investment in Equity Affiliates
 
The Company invests in joint ventures that are formed to acquire, develop and/or sell real estate assets. These joint ventures are not majority owned or controlled by the Company, and are not consolidated in its financial statements. These investments are recorded under either the equity or cost method of accounting as deemed appropriate. The Company records its share of the net income and losses from the underlying properties and any other-than-temporary impairment on these investments on a single line item in the Consolidated Statements of Operations as income or losses from equity affiliates.
 
Stock Based Compensation
 
The Company records stock-based compensation expense at the grant date fair value of the related stock-based award. The Company measures the compensation costs for these shares as of the date of the grant, with subsequent remeasurement for any unvested shares granted to non-employees of the Company with such amounts expensed against earnings, at the grant date (for the portion that vests immediately) or ratably over the respective vesting periods. Dividends are paid on the restricted shares as dividends are paid on shares of the Company’s common stock whether or not they are vested. Stock based compensation is disclosed in the Company’s Consolidated Statements of Operations under “employee compensation and benefits” for employees and under “selling and administrative” expense for non-employees.
 
Income Taxes
 
The Company is organized and conducts its operations to qualify as a REIT and to comply with the provisions of the Internal Revenue Code with respect thereto. A REIT is generally not subject to federal income tax on taxable income which is distributed to its stockholders, provided that the Company distributes at least 90% of taxable income and meets certain other requirements. Certain of our assets or operations that would not otherwise comply with the REIT requirements, are owned or conducted by our taxable REIT subsidiaries, the income of which is subject to federal and state income taxes.
 
Current accounting guidance clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
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December 31, 2009
 
This guidance also provides clarity on derecognition, classification, interest and penalties, accounting in interim periods and disclosure.
 
Other Comprehensive Income / (Loss)
 
The Company divides comprehensive income or loss into net income (loss) and other comprehensive income (loss), which includes unrealized gains and losses on available-for-sale securities. In addition, to the extent the Company’s derivative instruments qualify as hedges, net unrealized gains or losses are reported as a component of accumulated other comprehensive income/(loss), see “Derivatives and Hedging Activities” below. At December 31, 2009, accumulated other comprehensive loss was $53.3 million and consisted of net unrealized losses on derivatives designated as cash flow hedges. At December 31, 2008, accumulated other comprehensive loss was $96.6 million and consisted of net unrealized losses on derivatives designated as cash flow hedges.
 
Earnings (Loss) Per Share
 
The Company presents both basic and diluted earnings (loss) per share. Basic earnings (loss) per share excludes dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, where such exercise or conversion would result in a lower per share amount.
 
Derivatives and Hedging Activities
 
The Company recognizes all derivatives as either assets or liabilities at fair value and these amounts are recorded in other assets or other liabilities in the Consolidated Balance Sheets. Additionally, the fair value adjustments will affect either accumulated other comprehensive income (loss) until the hedged item is recognized in earnings or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity. The Company utilizes quotations from a third party to assist in determining these fair values.
 
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether a company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
 
In the normal course of business, the Company may use a variety of derivative financial instruments to manage, or hedge, interest rate risk. These derivative financial instruments must be effective in reducing its interest rate risk exposure in order to qualify for hedge accounting. When the terms of an underlying transaction are modified, or when the underlying hedged item ceases to exist, all changes in the fair value of the instrument are marked-to-market with changes in value included in net income (loss) for each period until the derivative instrument matures or is settled. Any derivative instrument used for risk management that does not meet the hedging criteria is marked-to-market with the changes in value included in net income (loss). Derivatives are used for hedging purposes rather than speculation. See Note 11 — “Derivative Financial Instruments” for further details.
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December 31, 2009
 
Variable Interest Entities
 
The Company has evaluated its loans and investments, mortgage related securities and investments in equity affiliates in order to determine if they are Variable Interest Entities (“VIE”). This evaluation resulted in the Company determining that its bridge loans, junior participation loans, mezzanine loans, preferred equity investments and investments in equity affiliates were potential variable interests. For each of these investments, the Company has evaluated (1) the sufficiency of the fair value of the entities’ equity investments at risk to absorb losses, (2) that, as a group, the holders of the equity investments at risk have (a) the direct or indirect ability through voting rights to make decisions about the entities’ significant activities, (b) the obligation to absorb the expected losses of the entity and their obligations are not protected directly or indirectly, and (c) the right to receive the expected residual return of the entity and their rights are not capped, and (3) substantially all of the entities’ activities do not involve or are not conducted on behalf of an investor that has disproportionately fewer voting rights in terms of its obligation to absorb the expected losses or its right to receive expected residual returns of the entity, or both. In addition, the Company has evaluated its investments in debt securities and has determined that the issuing entities are VIEs, but has determined that the Company is not the primary beneficiary because it does not absorb a majority of any of the VIE’s anticipated losses and/or a majority of the expected returns. As of December 31, 2009, the Company has identified 39 loans and investments made to entities determined to be VIEs with an aggregate carrying amount of $807.3 million. These VIEs had exposure to real estate debt of approximately $3.3 billion at December 31, 2009.
 
For the 39 VIEs identified, the Company has determined that it is not the primary beneficiary, and as such the VIEs should not be consolidated in the Company’s financial statements. The Company’s maximum exposure to loss would not exceed the carrying amount of such investments. For all other investments, the Company has determined they are not VIEs. As such, the Company has continued to account for these loans and investments as loans or investments in equity affiliates, as appropriate.
 
Entities that issue junior subordinated notes are considered VIEs. However, it is not appropriate to consolidate these entities because the equity interests are variable interests only to the extent that the investment is considered to be at risk. Since the Company’s investments were funded by the entities that issued the junior subordinated notes, they are not considered to be at risk.
 
The Company will be required to follow updated accounting guidance beginning with the first quarter of 2010, by providing an ongoing qualitative rather than quantitative assessment of its ability to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and its rights or obligations to receive benefits or absorb losses, in order to determine whether those entities will be required to be consolidated in the Company’s Consolidated Financial Statements. See “Recently Issued Accounting Pronouncements” below for further details.
 
Recently Issued Accounting Pronouncements
 
In February 2010, the FASB issued updated guidance on subsequent events which states that disclosure of the date through which subsequent events have been evaluated, the issuance date of the financial statements, is no longer required. This guidance is effective upon issuance and its adoption did not have a material effect on the Company’s Consolidated Financial Statements.
 
In January 2010, the FASB issued updated guidance on fair value measurements and disclosures, which requires disclosure of details of significant asset or liability transfers in and out of Level 1 and Level 2 measurements within the fair value hierarchy and inclusion of gross purchases, sales, issuances, and settlements in the rollforward of assets and liabilities valued using Level 3 inputs within the fair value hierarchy. The guidance also clarifies and expands existing disclosure requirements related to the disaggregation of fair value disclosures and inputs used in arriving at fair values for assets and liabilities using Level 2 and Level 3 inputs within the fair value hierarchy. This guidance is effective for interim and annual reporting periods beginning after December 15,
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December 31, 2009
 
2009, except for the gross presentation of the Level 3 rollforward, which is required for annual reporting periods beginning after December 15, 2010 and for interim periods within those years. The Company does not expect the adoption of this guidance to have a material effect on its Consolidated Financial Statements.
 
In January 2010, the FASB issued updated guidance on accounting for distributions to shareholders with components of stock and cash, which clarifies the treatment of the stock portion of a distribution to shareholders that allows the election to receive cash or stock. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009. The Company does not expect the adoption of this guidance to have a material effect on its Consolidated Financial Statements.
 
In August 2009, the FASB issued updated guidance on the fair value measurement of liabilities not exchanged in an orderly transaction. This guidance is effective for the first reporting period (including interim periods) beginning after issuance. The adoption of this guidance did not have a material effect on the Company’s Consolidated Financial Statements.
 
In June 2009, the FASB issued “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles” (the “Codification”), which establishes the exclusive authoritative reference for accounting principles generally acceptable in the United States. The Codification simplifies the classification of accounting guidance into one online database under a common referencing system. Use of the Codification is effective for interim and annual periods ending after September 15, 2009. The Company began to use the Codification on the effective date, and it had no impact on its Consolidated Financial Statements. However, throughout this Form 10-K, all references to prior accounting pronouncements have been removed, and all non-SEC accounting guidance is referred to in terms of the applicable subject matter.
 
In June 2009, the FASB issued updated guidance related to the consolidation of variable interest entities, which changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting, or similar rights, should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. This new guidance will require a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. These new requirements will be effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009. Early application is not permitted. The Company will adopt these new requirements effective January 1, 2010. The Company does not currently expect the adoption of this guidance to have a material effect on its Consolidated Financial Statements.
 
In June 2009, the FASB issued updated guidance related to the accounting for transfers of financial assets. This new guidance will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity”, changes the requirements for derecognizing financial assets and requires additional disclosures. These requirements are effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009. Early application is not permitted. The Company will adopt these new requirements effective January 1, 2010. The Company does not expect the adoption of this guidance to have a material effect on its Consolidated Financial Statements.
 
In April 2009, the FASB issued updated guidance on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This guidance applies to all assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this guidance did not have a material effect on the Company’s Consolidated Financial Statements.
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In April 2009, the FASB issued updated guidance on determining the fair value of an asset or liability when the volume and level of activity may indicate an inactive market and when transactions are not orderly. This guidance applies to all fair value measurements prospectively and is effective for interim and annual periods ending after June 15, 2009. The adoption of this guidance did not have a material effect on the Company’s Consolidated Financial Statements.

Note 3 —	Loans and Investments	
 
The following table sets forth the composition of the Company’s loan and investment portfolio at December 31, 2009:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	Wtd. Avg.
	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	Remaining
	 	
 	 	December 31,
	 	 	Percent of
	 	 	Loan
	 	 	Wtd. Avg.
	 	 	Months to
	 	
 	 	2009	 	 	Total	 	 	Count	 	 	Pay Rate(1)	 	 	Maturity	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Bridge loans	 	$	1,245,497,015	 	 	 	61	%	 	 	56	 	 	 	5.00	%	 	 	25.0	 	
Mezzanine loans	 	 	343,494,118	 	 	 	17	%	 	 	37	 	 	 	5.43	%	 	 	27.2	 	
Junior participation loans	 	 	255,076,554	 	 	 	13	%	 	 	15	 	 	 	5.46	%	 	 	50.3	 	
Preferred equity investments	 	 	190,967,267	 	 	 	9	%	 	 	18	 	 	 	2.84	%	 	 	87.3	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	2,035,034,954	 	 	 	100	%	 	 	126	 	 	 	4.93	%	 	 	34.4	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Unearned revenue	 	 	(7,932,627	)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Allowance for loan losses	 	 	(326,328,039	)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loans and investments, net	 	$	1,700,774,288	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	

 
 	 	 	
 	 	nm — not meaningful	
 	 	 	
(1)	 	“Weighted Average Pay Rate” is a weighted average, based on the unpaid principal balances of each loan in the Company’s portfolio, of the interest rate that is required to be paid monthly as stated in the individual loan agreements. Certain loans and investments that require an additional rate of interest “Accrual Rate” to be paid at the maturity are not included in the weighted average pay rate as shown in the table.	
 
The following table sets forth the composition of the Company’s loan and investment portfolio at December 31, 2008:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	Wtd. Avg.
	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	Remaining
	 	
 	 	December 31,
	 	 	Percent of
	 	 	Loan
	 	 	Wtd. Avg.
	 	 	Months to
	 	
 	 	2008	 	 	Total	 	 	Count	 	 	Pay Rate(1)	 	 	Maturity	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Bridge loans	 	$	1,441,846,251	 	 	 	62	%	 	 	58	 	 	 	6.22	%	 	 	16.9	 	
Mezzanine loans	 	 	364,937,818	 	 	 	16	%	 	 	42	 	 	 	7.03	%	 	 	32.7	 	
Junior participation loans	 	 	298,278,363	 	 	 	13	%	 	 	16	 	 	 	6.60	%	 	 	48.0	 	
Preferred equity investments	 	 	205,247,126	 	 	 	9	%	 	 	18	 	 	 	4.05	%	 	 	99.5	 	
Other	 	 	12,418,110	 	 	 	nm	 	 	 	2	 	 	 	8.73	%	 	 	101.0	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	2,322,727,668	 	 	 	100	%	 	 	136	 	 	 	6.22	%	 	 	31.1	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Unearned revenue	 	 	(10,544,049	)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Allowance for loan losses	 	 	(130,500,000	)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loans and investments, net	 	$	2,181,683,619	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	

 
 	 	 	
 	 	nm — not meaningful	
 	 	 	
(1)	 	“Weighted Average Pay Rate” is a weighted average, based on the unpaid principal balances of each loan in the Company’s portfolio, of the interest rate that is required to be paid monthly as stated in the individual loan agreements. Certain loans and investments that require an additional rate of interest “Accrual Rate” to be paid at the maturity are not included in the weighted average pay rate as shown in the table.	

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December 31, 2009

Bridge loans are loans to borrowers who are typically seeking short-term capital to be used in an acquisition of property and are predominantly secured by first mortgage liens on the property.
 
Mezzanine loans and junior participating interests in senior debt are loans that are subordinate to a conventional first mortgage loan and senior to the borrower’s equity in a transaction. Mezzanine financing may take the form of loans secured by pledges of ownership interests in entities that directly or indirectly control the real property or subordinated loans secured by second mortgage liens on the property.
 
A preferred equity investment is another method of financing in which preferred equity investments in entities that directly or indirectly own real property are formed. In cases where the terms of a first mortgage prohibit additional liens on the ownership entity, investments structured as preferred equity in the entity owning the property serve as viable financing substitutes. With preferred equity investments, the Company typically becomes a special limited partner or member in the ownership entity.
 
Concentration of Credit Risk
 
Loans and investments can potentially subject the Company to concentrations of credit risk. The Company is subject to concentration risk in that the unpaid principal balance related to 32 loans with five unrelated borrowers represented approximately 31% of total assets as of December 31, 2009. At December 31, 2008, the unpaid principal balance related to 34 loans with five unrelated borrowers represented approximately 28% of total assets. As of December 31, 2009 and 2008, the Company had 126 and 136 loans and investments, respectively.
 
In addition, in 2009 and 2008, no single loan or investment represented 10% of the Company’s total assets. In 2009, 2008 and 2007, the Company generated approximately 12%, 9% and 6%, respectively, of revenue from Ezra Beyman.
 
Geographic Concentration Risk
 
As of December 31, 2009, 38%, 13%, and 11% of the outstanding balance of the Company’s loans and investments portfolio had underlying properties in New York, California and Florida, respectively. As of December 31, 2008, 40%, 12%, and 10% of the outstanding balance of the Company’s loans and investments portfolio had underlying properties in New York, California and Florida, respectively.
 
Impaired Loans and Allowance for Loan Losses
 
The Company considers a loan impaired when, based upon current information and events, it is probable that it will be unable to collect both principal and interest according to the contractual terms of the loan agreement. As a result of the Company’s normal loan review during the year, it was determined that 31 loans with an aggregate carrying value, before reserves, of $693.7 million were impaired at December 31, 2009. At December 31, 2008, ten loans with an aggregate carrying value, before reserves, of $443.2 million were impaired and at December 31, 2007, two loans with an aggregate carrying value, before reserves, of $58.5 million were impaired.
 
The Company performed an evaluation of the impaired loans and determined that the fair value of the underlying collateral securing the loans was less than the net carrying value of the loans, resulting in a $241.3 million provision for loan losses for the year ended December 31, 2009. Of the $241.3 million of loan loss reserves recorded during the year ended December 31, 2009, $77.5 million was on loans on which the Company had previously recorded reserves, while $163.8 million of reserves related to other loans in the Company’s portfolio. During the years ended December 31, 2008 and 2007, the Company recorded provisions for loan losses of $132.0 million and $2.5 million, respectively.
 
As a result of the loan review process at December 31, 2009, the Company identified loans and investments that it considers higher-risk loans that had a carrying value, before reserves, of approximately $632.3 million and a weighted average loan-to-value (“LTV”) ratio after reserves of 99%, compared to lower-risk loans with a carrying value, before reserves, of $1.4 billion and a weighted average LTV ratio of 88%. There were no loans for which the collateral securing the loan was less than the carrying value of the loan for which the Company had not recorded a provision for loan loss as of December 31, 2009 and 2008.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
 
A summary of the changes in the allowance for loan losses is as follows:

 	 	For the Twelve
	 	 	For the Twelve
	 	
 	 	Months Ended
	 	 	Months Ended
	 	
 	 	December 31, 2009	 	 	December 31, 2008	 	
 	 	 	 	 	 	 	 	 	
Allowance at beginning of the period	 	$	130,500,000	 	 	$	2,500,000	 	
Provision for loan losses	 	 	241,328,039	 	 	 	132,000,000	 	
Charge-offs	 	 	(41,250,000	)	 	 	(2,500,000	)	
Reclassified to real estate owned, net	 	 	(4,250,000	)	 	 	(1,500,000	)	
 	 	 	 	 	 	 	 	 	
Allowance at end of the period	 	$	326,328,039	 	 	$	130,500,000	 	

During the year ended December 31, 2009, the Company wrote down five loans with an aggregate carrying value of $240.8 million to $198.7 million and sold two loans with a carrying value of $80.1 million, at a discount, for approximately $32.5 million. The Company also settled a loan with a carrying value of $1.5 million, at a discount, for approximately $1.2 million, and received $11.8 million in principal paydowns on two loans with a total carrying value of $22.9 million. The Company recorded charge-offs to reserves of $41.3 million and losses on restructurings totaling $57.6 million related to these transactions.
 
During the fourth quarter of 2009, the Company entered into an agreement to sell one of its bridge loans for $35.0 million. The Company received $20.5 million in non-refundable deposits from the purchaser during the fourth quarter of 2009, which was recorded in other liabilities on the Company’s Consolidated Balance Sheet as of December 31, 2009. The remaining purchase price is due to be collected at the close of the transaction, which is expected to occur in April 2010. As a result, the Company recorded this loan at its fair value, equal to the purchase price of the loan less expected costs to complete the sale, in loans and investments on the Company’s Consolidated Balance Sheet as of December 31, 2009.
 
The Company also reclassified a $4.3 million loan loss reserve related to a bridge loan on a property that was acquired through foreclosure and recorded to real estate owned. See Note 7 — “Real Estate Owned and Held-For-Sale” for further details.
 
As of December 31, 2009, 13 loans with a net carrying value of approximately $110.8 million, net of related loan loss reserves of $115.0 million, were classified as non-performing. The Company had previously established loan loss reserves on all of these loans. Income is recognized on a cash basis only to the extent it is received. Full income recognition will resume when the loan becomes contractually current and performance has recommenced. As of December 31, 2008, four loans with a net carrying value of approximately $113.0 million, net of related loan loss reserves of $20.5 million, were classified as non-performing for which income recognition had been suspended, of which one loan with a carrying value of approximately $38.3 million did not have a loan loss reserve. There were no non-performing loans at December 31, 2007.
 
At December 31, 2009, the Company does not have any loans contractually past due 90 days or more that are still accruing interest, or any loans which are considered “troubled debt restructuring” that are not included above.

Note 4 —	Available-For-Sale Securities	
 
The following is a summary of the Company’s available-for-sale securities at December 31, 2009:

 	 	 	 	 	 	 	 	Other-Than-
	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	Temporary
	 	 	Unrealized
	 	 	Estimated
	 	
 	 	Face value	 	 	Amortized Cost	 	 	Impairment	 	 	Loss	 	 	Fair Value	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Common equity securities	 	$	—	 	 	$	529,104	 	 	$	(440,920	)	 	$	       —	 	 	$	88,184	 	
Collateralized debt obligation bonds	 	 	25,000,000	 	 	 	11,607,136	 	 	 	(11,207,136	)(1)	 	 	—	 	 	 	400,000	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total available-for-sale securities	 	$	25,000,000	 	 	$	12,136,240	 	 	$	(11,648,056	)	 	$	—	 	 	$	488,184	 	

 	 	 	
(1)	 	Cumulative total includes $9.8 million in 2009 and $1.4 million in 2008.	

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December 31, 2009

The following is a summary of the Company’s available-for-sale securities at December 31, 2008:

 	 	 	 	 	Other-Than-
	 	 	 	 	 	 	 	
 	 	 	 	 	Temporary
	 	 	Unrealized
	 	 	Estimated
	 	
 	 	Amortized Cost	 	 	Impairment	 	 	Loss	 	 	Fair Value	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Common equity securities	 	$	16,715,584	 	 	$	(16,186,480	)	 	$	       —	 	 	$	529,104	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total available-for-sale securities	 	$	16,715,584	 	 	$	(16,186,480	)	 	$	—	 	 	$	529,104	 	

The following is a summary of the underlying credit rating of the Company’s collateralized debt obligation bonds available-for-sale at December 31, 2009:

 	 	At December 31, 2009	 	
 	 	 	 	 	Amortized
	 	 	Percent
	 	
Rating(1)	 	#	 	 	Cost	 	 	of Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
BBB+	 	 	1	 	 	$	10,219,636	 	 	 	88	%	
B	 	 	1	 	 	 	1,387,500	 	 	 	12	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	2	 	 	$	11,607,136	 	 	 	100	%	

 
 	 	 	
(1)	 	Based on the rating published by Standard & Poor’s for each security.	
 
During 2007, the Company purchased 2,939,465 shares of common stock of Realty Finance Corporation, formerly CBRE Realty Finance, Inc., a commercial real estate specialty finance company, for $16.7 million, which had a fair value of $0.1 million and $0.5 million, at December 31, 2009 and December 31, 2008, respectively.
 
At December 31, 2009, a BBB+ rated investment grade commercial real estate (“CRE”) collateralized debt obligation bond, with a face value of $20.0 million and a discount of $9.8 million, and a B rated investment grade CRE collateralized debt obligation bond, with a face value of $5.0 million and a discount of $3.6 million, were reclassified from held-to-maturity to available-for-sale. The Company exchanged these two bonds in the retirement of a portion of its own junior subordinated notes in February 2010. See Note 8 — “Debt Obligations — Junior Subordinated Notes” for further details. These securities bear interest at a weighted average spread of 56 basis points over LIBOR, have a weighted average stated maturity of 42.3 years, but have an estimated average remaining life of 7.3 years due to the maturities of the underlying assets. See Note 5 — “Securities Held-To-Maturity” below.
 
As of December 31, 2009, all of the available-for-sale securities have been in an unrealized loss position for more than twelve months. Current accounting guidance requires these securities to be evaluated periodically to determine whether a decline in their value is other-than-temporary, though it is not intended to indicate a permanent decline in value. Management closely monitors market conditions on which it bases such decisions. During the years ended December 31, 2009 and 2008, the Company believed that, based on market events and the unfavorable prospects for near-term recovery of value, there was a lack of evidence to support the conclusion that the fair value decline was temporary. Therefore, the Company concluded that the common equity securities were other-than-temporarily impaired and recorded $0.4 million and $16.2 million of impairment charges to the Consolidated Statements of Operations during the years ended December 31, 2009 and 2008, respectively. During the fourth quarter of 2009, an other-than-temporary impairment of $9.8 million was recognized upon reclassifying the BBB+ rated CRE collateralized debt obligation bond from held-to-maturity to available-for-sale. During the fourth quarter of 2008, the Company determined that the B rated CRE collateralized debt obligation bond, with an amortized cost of approximately $1.4 million, was other-than-temporarily impaired, resulting in a $1.4 million impairment charge to the Company’s 2008 Consolidated Financial Statements. No such impairment charges were recorded in 2007.
 
The Company had a margin loan agreement with a financial institution related to the purchases of the common equity securities. In July 2008, the margin loan was repaid in full.
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December 31, 2009
 
These securities are carried at their estimated fair value with unrealized gains and losses reported in accumulated other comprehensive loss. At December 31, 2009 and 2008, all losses in fair value were recorded as other-than-temporary impairments and recognized in earnings.

Note 5 —	Securities Held-To-Maturity	
 
The following is a summary of the Company’s securities held-to-maturity at December 31, 2009:

 	 	 	 	 	 	 	 	Other-Than-
	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Face
	 	 	Amortized
	 	 	Temporary
	 	 	Carrying
	 	 	Unrealized
	 	 	Unrealized
	 	 	Estimated
	 	
 	 	Value	 	 	Cost	 	 	Impairment	 	 	Value	 	 	Gain	 	 	Loss(1)	 	 	Fair Value	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Collateralized debt obligation bonds	 	$	54,989,988	 	 	$	47,823,843	 	 	$	    —	 	 	$	47,823,843	 	 	$	—	 	 	$	(31,154,843	)	 	$	16,669,000	 	
Commercial mortgage-backed securities	 	 	17,000,000	 	 	 	12,738,965	 	 	 	—	 	 	 	12,738,965	 	 	 	2,366,955	 	 	 	—	 	 	 	15,105,920	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total securities held-to-maturity	 	$	71,989,988	 	 	$	60,562,808	 	 	$	—	 	 	$	60,562,808	 	 	$	2,366,955	 	 	$	(31,154,843	)	 	$	31,774,920	 	

 
 	 	 	
(1)	 	All four collateralized debt obligation bonds were in an unrealized loss position at December 31, 2009.	
 
The following is a summary of the Company’s securities held-to-maturity at December 31, 2008:

 	 	 	 	 	 	 	 	Other-Than-
	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Face
	 	 	Amortized
	 	 	Temporary
	 	 	Carrying
	 	 	Unrealized
	 	 	Unrealized
	 	 	Estimated
	 	
 	 	Value	 	 	Cost	 	 	Impairment	 	 	Value	 	 	Gain	 	 	Loss	 	 	Fair Value(1)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Collateralized debt obligation bonds	 	$	82,700,000	 	 	$	59,631,848	 	 	$	(1,387,500	)	 	$	58,244,348	 	 	$	175,000	 	 	$	(39,684,348	)	 	$	18,735,000	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total securities held-to-maturity	 	$	82,700,000	 	 	$	59,631,848	 	 	$	(1,387,500	)	 	$	58,244,348	 	 	$	175,000	 	 	$	(39,684,348	)	 	$	18,735,000	 	

 
 	 	 	
(1)	 	The aggregate estimated fair value of five collateralized debt obligation bonds in an unrealized loss position at December 31, 2008 was $18,560,000.	
 
The following is a summary of the underlying credit rating of the Company’s securities held-to-maturity at December 31, 2009 and 2008:

 	 	At December 31, 2009	 	 	At December 31, 2008	 	
 	 	 	 	 	Amortized
	 	 	Percent
	 	 	 	 	 	Amortized
	 	 	Percent
	 	
Rating(1)	 	#	 	 	Cost	 	 	of Total	 	 	#	 	 	Cost	 	 	of Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
AAA	 	 	3	 	 	$	32,355,109	 	 	 	53	%	 	 	3	 	 	$	41,097,282	 	 	 	69	%	
AA+	 	 	–	 	 	 	—	 	 	 	–	 	 	 	1	 	 	 	7,659,013	 	 	 	13	%	
AA	 	 	1	 	 	 	10,787,743	 	 	 	18	%	 	 	–	 	 	 	—	 	 	 	–	 	
AA-	 	 	1	 	 	 	7,910,558	 	 	 	13	%	 	 	1	 	 	 	9,488,053	 	 	 	16	%	
BBB	 	 	1	 	 	 	9,509,398	 	 	 	16	%	 	 	–	 	 	 	—	 	 	 	–	 	
BB+	 	 	–	 	 	 	—	 	 	 	–	 	 	 	1	 	 	 	1,387,500	 	 	 	2	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	6	 	 	$	60,562,808	 	 	 	100	%	 	 	6	 	 	$	59,631,848	 	 	 	100	%	

 
 	 	 	
(1)	 	Based on the rating published by Standard & Poor’s for each security at December 31, 2009 and 2008.	
 
During the second quarter of 2008, the Company purchased $82.7 million of investment grade CRE collateralized debt obligation bonds for $58.1 million, representing a $24.6 million discount to their face value. The discount is accreted into interest income using an effective yield adjusted for actual prepayment activity over
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December 31, 2009
 
the average life of the related security as a yield adjustment. For the years ended December 31, 2009 and 2008, the Company accreted approximately $2.5 million and $1.6 million of this discount into interest income, representing accretion on approximately $21.0 million of the total discount, respectively. These securities bear interest at a weighted average spread of 34 basis points over LIBOR and have a weighted average stated maturity of 34.2 years, but have an estimated average remaining life of 3.7 years due to the maturities of the underlying assets. During the year ended December 31, 2009, the Company received repayments of principal of $2.7 million on one of the Company’s CDO bond securities held-to-maturity.
 
During 2009, the Company purchased $17.0 million of investment grade commercial mortgage-backed securities (“CMBS”) for $12.4 million plus accrued interest, representing a $4.6 million discount to their face value. This discount is accreted into interest income using an effective yield adjusted for actual prepayment activity over the average life of the related security as a yield adjustment. For the year ended December 31, 2009, the Company accreted approximately $0.3 million of this discount into interest income. These securities bear interest at a weighted average coupon rate of 5.80%, have a weighted average stated maturity of 29.6 years but have an estimated average remaining life of 6.0 years due to the maturities of the underlying assets.
 
At December 31, 2009, a BBB+ rated investment grade CRE collateralized debt obligation bond, with a face value of $20.0 million and a discount of $9.8 million, and a B rated investment grade CRE collateralized debt obligation bond, with a face value of $5.0 million and a discount of $3.6 million, were reclassified from held-to-maturity to available-for-sale. The Company exchanged these two bonds in the retirement of a portion of its own junior subordinated notes in February 2010. See Note 4 — “Securities Available-For-Sale” above.
 
For the periods ended December 31, 2009 and 2008, the total average yield on these securities based on their face values was 4.62% and 6.41%, respectively, including the accretion of discount. The Company did not have any securities held-to-maturity at December 31, 2007.
 
Securities held to maturity are carried at cost, net of unamortized premiums and discounts, which are recognized in interest income using an effective yield or “interest” method. GAAP requires held-to-maturity securities to be evaluated periodically to determine whether a decline in their value is other-than-temporary, though it is not intended to indicate a permanent decline in value. The Company’s evaluation is based on its assessment of cash flows, which is supplemented by third-party research reports, internal review of the underlying assets securing the investments, levels of subordination and the rating of the securities and the underlying collateral. As of December 31, 2009, all of the Company’s CDO bond investments were in an unrealized loss position for more than twelve months, as the Company’s carrying value was in excess of their market value. However, based on its analysis as of December 31, 2009, the Company expects to fully recover the carrying value of these investments and has concluded that these held-for-sale investments are not other-than-temporarily impaired. In addition, the Company’s CMBS investments were not in an unrealized loss position for more than twelve months and were not determined to be other-than-temporarily impaired. The Company’s estimation of cash flows expected to be generated by the securities portfolio is based upon an internal review of the underlying mortgage loans securing the investments both on an absolute basis and compared to the Company’s initial underwriting for each investment. The Company’s efforts are supplemented by third party research reports, third party market assessments and dialogue with market participants. As of December 31, 2009 the Company does not intend to sell these remaining securities, nor does the Company believe it is more likely than not that the Company will be required to sell the securities before recovery of the amortized cost basis, which may be at maturity. This combined with the Company’s assessment of cash flows, is the basis for the conclusion that these investments are not impaired despite the differences between estimated fair value and book value. The Company attributes the difference between book value and estimated fair value to the current market dislocation and a general negative bias against structured financial products such as CMBS and CDOs.
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December 31, 2009

 	 	
Note 6 —	Investment in Equity Affiliates	
 
As of December 31, 2009 and 2008, the Company had approximately $64.9 million and $29.3 million of investments in equity affiliates, respectively, which are described below:

 	 	 	 	 	Outstanding Loan
	 	
 	 	 	 	 	Balance to Equity
	 	
 	 	Investment in Equity Affiliates at	 	 	Affiliates at	 	
 	 	December 31,
	 	 	December 31,
	 	 	December 31,
	 	
Equity Affiliates	 	2009	 	 	2008	 	 	2009	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
930 Flushing & 80 Evergreen	 	$	491,975	 	 	$	491,975	 	 	$	24,374,583	 	
450 West 33rd Street	 	 	1,136,960	 	 	 	1,136,960	 	 	 	50,000,000	 	
1107 Broadway	 	 	5,720,000	 	 	 	5,720,000	 	 	 	—	 	
Alpine Meadows	 	 	—	 	 	 	10,157,018	 	 	 	34,000,000	 	
St. John’s Development	 	 	144,605	 	 	 	3,500,000	 	 	 	25,000,000	 	
Lightstone Value Plus REIT L.P.	 	 	55,988,409	 	 	 	—	 	 	 	—	 	
JT Prime	 	 	851,000	 	 	 	—	 	 	 	—	 	
Issuers of Junior Subordinated Notes	 	 	578,000	 	 	 	8,305,000	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	64,910,949	 	 	$	29,310,953	 	 	$	133,374,583	 	

The Company accounts for the 450 West 33rd Street and Lightstone Value Plus REIT L.P. investments under the cost method of accounting and the remaining investments under the equity method.
 
930 Flushing & 80 Evergreen
 
In June 2003, ACM invested approximately $0.8 million in exchange for a 12.5% preferred interest in a joint venture that owns and operates two commercial properties. The Company purchased this investment from ACM in August 2003. As of December 31, 2007, the Company had contributed an additional $1.2 million to this joint venture.
 
The Company had a $4.8 million bridge loan and a $3.5 million mezzanine loan outstanding to affiliated entities of the joint venture. The loans required monthly interest payments based on one month LIBOR and matured in November 2006 and June 2006, respectively. The bridge loan was extended for two one-year periods and during the second quarter of 2008, the Company was repaid in full. In addition, in August 2005, the joint venture refinanced one of these properties with a $25.0 million amortizing bridge loan provided by the Company. The loan matures in August 2010, has a fixed rate of 6.45%, and has an outstanding principal balance of $24.4 million at December 31, 2009. Proceeds from this loan were used to pay off senior debt as well as the Company’s $3.5 million mezzanine loan. Excess proceeds were distributed to each of the members in accordance with the operating agreement of which the Company received $1.3 million, which was recorded as a return of capital in 2005. In addition, during 2008, the Company received a $0.2 million return of capital from contribution made in 2007. As a result, the Company had a $0.5 million investment as of December 31, 2009 and 2008.
 
450 West 33rd Street
 
In May 2007, the Company, as part of an investor group for the 450 West 33rd Street partnership, transferred control of the underlying property (an office building) to Broadway Partners for a value of approximately $664.0 million. The investor group, on a pro-rata basis, retained an approximate 2% ownership interest in the property and 50% of the property’s air rights which resulted in the Company retaining an investment in equity affiliates of approximately $1.1 million related to its 29% interest in the 2% retained ownership. In accordance with this transaction, the joint venture members agreed to guarantee $258.1 million of the $517.0 million of new debt outstanding on the property. The guarantee expires at the earlier of maturity or prepayment of the debt and was
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allocated to the members in accordance with their ownership percentages. The guarantee is callable, on a pro-rata basis, if the market value of the property declines below the $258.1 million of guaranteed debt. The Company’s portion of the guarantee is $76.3 million. The transaction was structured to provide for a tax deferral for an estimated period of seven years. The Company recorded deferred revenue of approximately $77.1 million as a result of the guarantee on a portion of the new debt, and $19.0 million as prepaid management fees related to the incentive compensation management fee on the deferred revenue recognized on the transfer of control of the 450 West 33 rd  Street property. See Note 17 — “Management Agreement” for further details.
 
In July 2007, the Company purchased a $50.0 million mezzanine loan secured by this property which has a maturity of July 2010 and bears interest at LIBOR plus 4.35%. The outstanding balance on this loan was $50.0 million at December 31, 2009.
 
1107 Broadway
 
In 2005, the Company invested $10.0 million in exchange for a 20% ownership interest in 200 Fifth LLC, which owned two properties in New York City. In May 2007, the Company, as part of an investor group in the 200 Fifth LLC holding partnership, sold the 200 Fifth Avenue property for net proceeds of approximately $450.0 million and the investor group, on a pro-rata basis, retained an adjacent building located at 1107 Broadway. The partnership used the net proceeds from the sale to repay the $402.5 million outstanding debt on both the 200 Fifth Avenue and the 1107 Broadway properties, and used the remaining proceeds as a return of invested capital to the partners. As a result of the transaction, the Company received $9.5 million in proceeds as a return on invested capital and was repaid in full on its $137.0 million mezzanine debt, including all applicable interest. The Company recorded approximately $11.4 million, net, in income before minority interest related to its 20% equity interest, which consisted of a $24.2 million gain recorded as income from equity affiliates, a $9.0 million provision for income taxes, and a $3.8 million incentive management fee paid to the Company’s manager. The partnership retained the 1107 Broadway property. In December 2007, the Company received a $0.6 million distribution from escrow funds related to its interest in the 200 Fifth Avenue property, which was recorded as income from equity affiliates.
 
In October 2007, the partnership sold 50% of its economic interest in the 1107 Broadway property. The partnership was recapitalized with financing of approximately $343.0 million, of which approximately $203.0 million was funded with the unfunded portion to be used to develop the property. The Company received net proceeds of approximately $39.0 million from this transaction as a return on invested capital. The investor group, on a pro-rata basis, retains a 50% economic interest in the property, representing approximately $29.0 million of capital. The Company recorded approximately $2.3 million, net in income before minority interest related to its 20% equity interest, which consisted of $4.8 million as income from equity affiliates, a $1.8 million provision for income taxes, and a $0.7 million incentive management fee paid to the Company’s manager. The Company also recorded a $5.7 million investment in equity affiliate and a net deferred gain of $3.5 million related to its 10% retained interest in the 1107 Broadway property. The partnership is in the process of developing this property into a mix of residential and retail uses.
 
Alpine Meadows
 
In July 2007, the Company invested $13.2 million in exchange for a 39% profits interest with an 18% preferred return in the Alpine Meadows ski resort, which consists of approximately 2,163 total acres in northwestern Lake Tahoe, California. The Company’s invested capital represents 65% of the total equity of the transaction and the Company would be allocated 65% of the profits and losses. The Company also provided a $30.5 million first mortgage loan which was extended during 2009 to September 2012 and bears a fixed rate of interest. For the years ended December 31, 2009 and 2008, the Company recorded net income of $1.6 million and $3.1 million in losses from this equity investment, respectively. This amount reflects Arbor’s portion of the joint venture’s income and losses, net of depreciation expense, and was recorded in (loss) income from equity affiliates and as an increase or
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reduction to the Company’s investment in equity affiliates on the balance sheet. In the second quarter of 2009, the Company recorded an other-than-temporary impairment of $11.7 million for the remaining amount of this investment in loss from equity affiliates in the Company’s Consolidated Statements of Operations. Current accounting guidance requires these investments to be evaluated periodically to determine whether a decline in their value is other-than-temporary, though it is not intended to indicate a permanent decline in value.
 
In the fourth quarter of 2009, the Company increased by $3 million its first mortgage loan to $33.5 million and decreased the invested capital by $3 million to $10.2 million, as well as providing a $0.5 million revolver loan. As a result of this modification, the Company’s profits interest was reduced from 39.0% to 35.4% and the invested capital and allocated percentage of profits and losses was reduced from 65.0% to 58.9%.
 
St. John’s Development
 
In December 2006, the Company originated a $25.0 million bridge loan with a maturity date in September 2007 with two three-month extensions that bore interest at a fixed rate of 12%. The loan is secured by 20.5 acres of usable land and 2.3 acres of submerged land located on the banks of the St. John’s River in downtown Jacksonville, Florida and is currently zoned for the development of up to 60 dwellings per acre. In October 2007, the borrower sold the property to an investor group, in which the Company has a 50% non-controlling interest, for $25.0 million. The investor group assumed the $25.0 million mortgage which matured in October 2009 and had an interest rate of LIBOR plus 6.48%, with a LIBOR floor of 4.50%. In connection with this transaction, the Company contributed $0.5 million to cover other operational costs of acquiring and maintaining the property. During the fourth quarter of 2009, the mortgage loan was modified to extend the maturity date to January 2010 and modified the interest rate to LIBOR plus 6.48%. Subsequent to December 31, 2009, the mortgage loan was modified to a current maturity date of April 2010 and modified the interest rate to LIBOR plus 2.00%.
 
The managing member of the investor group is an experienced real estate developer who retains a 50% interest in the partnership and funded a $2.9 million interest reserve for the first year. The Company was required to contribute $2.9 million to fund the interest reserve for the second year and made an additional capital contribution of $0.1 million during 2008. Interest received on the $25.0 million loan will be recorded as a return of capital and reduction of the Company’s equity investment. During the six months ended June 30, 2009, the Company received $1.6 million of such interest, reducing the Company’s investment to $1.9 million. In the third quarter of 2009, the Company recorded an other-than-temporary impairment of $1.9 million for the remaining amount of the investment which was recorded in loss from equity affiliates in the Company’s Consolidated Statements of Operations. Current accounting guidance requires these investments to be evaluated periodically to determine whether a decline in their value is other-than-temporary, though it is not intended to indicate a permanent decline in value. In the fourth quarter of 2009, the Company was able to recover $0.6 million of the loss and $0.1 million is still to be received, representing the balance of the investment at December 31, 2009. No income from this equity interest was recognized for the year ended December 31, 2008. The Company accounts for this investment under the equity method.
 
Lightstone Value Plus REIT L.P./Prime Outlets/JT Prime
 
In December 2003, the Company invested approximately $2.1 million in exchange for a 50% non-controlling interest in an unconsolidated joint venture, JT Prime, which owned 15% of Prime Outlets Member, LLC (“POM”), a real estate holding company that owns and operates a portfolio of factory outlet shopping centers. The Company accounted for this investment under the equity method. Additionally, the Company owned a 16.67% carried profits interest through a consolidated entity which has a 25% interest in POM with a third party member owning the remaining 8.33%.
 
In 2007, the Company received distributions from POM of $16.2 million as a result of excess proceeds from refinancing and sales activities on certain assets in the POM portfolio. The excess proceeds were distributed to each of the partners in accordance with POM’s operating agreement. The Company recorded $11.2 million as interest income, representing the portion attributable to the 16.7% carried profits interest, and $5.0 million as income from equity affiliates, representing the portion attributable to the 7.5% equity interest.
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In June 2008, the Company entered into an agreement (“the agreement”) to transfer its 16.67% interest in POM, at a value of approximately $37.2 million, in exchange for preferred and common operating partnership units of Lightstone Value Plus REIT L.P.
 
In connection with the agreement, the Company borrowed from Lightstone Value Plus Real Estate Investment Trust, Inc. approximately $33.0 million, which was initially secured by its 16.67% interest in POM, has an eight year term, and bears interest at a fixed rate of 4% with payment of the interest deferred until the closing of the transaction. As a result, during the second quarter of 2008, the Company recorded approximately $33.0 million of cash, $49.5 million of debt related to the proceeds received from the loan secured by the consolidated entity’s 25% interest in POM, which was recorded in notes payable, a $16.5 million receivable from the third party member share of the consolidated entity’s 25% interest, which was recorded in other assets, and a deferred expense related to the incentive management fee of approximately $7.3 million.
 
In addition, the Company prepaid the $7.3 million in incentive management fees to its manager in 2008 related to this transaction, of which 50% was paid in cash and 50% was paid in Arbor Realty Trust, Inc. common stock. In accordance with the amended management agreement, installments of the annual incentive fee are subject to potential reconciliation at the end of the fiscal year. Since no incentive fee was earned for 2009, the prepaid management fee is to be paid back in installments of 25% due by December 31, 2010 and 75% due by June 30, 2012, with an option to make payment in both cash and Arbor Realty Trust, Inc. common stock provided that at least 50% of the payment is made in cash, and will be offset against any future incentive management fees or success-based payments earned by our manager prior to June 30, 2012. See Note 17 — “Management Agreement” for further details.
 
In the fourth quarter 2008, the Company received a $1.0 million distribution from POM related to its 24.17% equity and profits interest, the result of excess proceeds from the operation of the business. Of the distribution received by the Company, $1.0 million was recorded as interest income, representing the distribution received from the 25% profits interest, $0.3 million was recorded as net income attributable to noncontrolling interest relating to a third party member’s 8.33% minority interest share of the profits interest and $0.3 million was recorded as income netted in loss from equity affiliates, representing the portion received from the Company’s 7.5% equity interest. In accordance with the agreement, $0.7 million of the distribution relating to the 16.67% profits interest was used to pay down a portion of the $33.0 million debt and reduced the value of the Company’s interest when exchanged for preferred and common operating partnership units at closing, thereby reducing the Company’s gain.
 
In March 2009, the Company exchanged its 16.67% interest in POM for approximately $37.3 million of preferred and common operating partnership units in Lightstone Value Plus REIT L.P. and the $33.4 million loan is now secured by these preferred and common operating partnership units. The Company accounts for its Lightstone Value Plus REIT L.P. investment under the cost method. In June 2013, the preferred units may be redeemed by Lightstone Value Plus REIT L.P. for cash and the loan would become due upon such redemption. The preferred operating partnership units yield 4.63% and the loan bears interest at a rate of 4%. The Company retained its 7.5% equity interest in POM. During the year ended December 31, 2009, the Company recorded $2.0 million of dividends from the preferred and common operating partnership units which were reflected in interest income in the Company’s Consolidated Statement of Operations.
 
Through the consolidated entity that owned the 16.67% interest, the Company recorded in its first quarter 2009 financial statements an investment of approximately $56.0 million for the preferred and common operating partnership units, gain on exchange of profits interest of approximately $56.0 million, net income attributable to noncontrolling interest of approximately $18.7 million related to the third party members portion of income recorded, noncontrolling interest due to the third party member of approximately $2.1 million and a reduction of a $16.5 million receivable from the third party member which was previously recorded in other assets. The gain of $56.0 million reflects the fair value of the investment in preferred and operating partnership units received in exchange for the 16.67% profits interest. The Company’s profits interest had no cost basis at the time of the exchange.
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As a result of the $1.0 million of interest expense and $1.0 million of interest income recorded in 2008 from the consolidated entity that holds the 25% profits interest in POM, the Company recorded $(10,981) of noncontrolling interest in consolidated entity on the Company’s Consolidated Balance Sheet at December 31, 2008. Due to the POM transaction in March 2009, the Company recorded an additional $18.7 million of net income attributable to the noncontrolling interest holder and a distribution to the noncontrolling interest of $16.6 million, resulting in a balance of noncontrolling interest in consolidated entity of $1.9 million on the Company’s Consolidated Balance Sheet at December 31, 2009.
 
In August 2009, the Company exchanged its remaining 7.5% equity interest in POM for preferred and common operating partnership units of Lightstone Value Plus REIT L.P. JT Prime received preferred and common operating units valued at approximately $17.0 million, as well as additional cash consideration of approximately $4.4 million. As there was no remaining basis in the interest in POM held by the unconsolidated joint venture, the unconsolidated joint venture recorded a gain of $21.4 million equal to the value of the operating partnership units and cash received. In connection with this transaction, JT Prime borrowed approximately $15.3 million from Lightstone Value Plus Real Estate Investment Trust, Inc., which is secured by the preferred and common operating partnership units and has an eight-year term. In August 2014, the preferred units may be redeemed by Lightstone Value Plus REIT L.P. for cash and the loan would become due upon such redemption. The preferred operating partnership units yield 4.63% and the loan bears interest at a rate of 4.00%. The unconsolidated joint venture recorded a nominal amount of dividends from the preferred and common operating partnership units and interest expense related to the note. The Company accounts for their investment in JT Prime under the equity method. As a result of this transaction, the Company recorded income from equity affiliates of $10.7 million, representing the Company’s share of the net income recorded by the unconsolidated joint venture, in its third quarter 2009 financial statements. The Company received distributions totaling $9.9 million, representing their share of the proceeds from the note and additional consideration received from Lightstone by the unconsolidated joint venture. As of December 31, 2009, the carrying value of the Company’s investment in JT Prime is $0.9 million. The Company has no continuing involvement with POM after the exchange.
 
Issuance of Junior Subordinated Notes
 
As of December 31, 2008, the Company had invested a total of $8.3 million for 100% of the common shares of nine affiliate entities of the Company, which were formed to facilitate the issuance of $276.1 million of junior subordinated notes. These entities pay dividends on both the common shares and preferred securities on a quarterly basis at fixed and variable rates based on three-month LIBOR.
 
In March 2009, the Company purchased from its manager, ACM, approximately $9.4 million of junior subordinated notes originally issued by a wholly-owned subsidiary of the Company’s operating partnership for $1.3 million. In addition, in May 2009, the Company exchanged $247.1 million of its outstanding trust preferred securities, consisting of $239.7 million of junior subordinated notes issued to third party investors and $7.4 million of common equity issued to the Company, which were recorded in investment in equity affiliates, in exchange for $268.4 million of newly issued unsecured junior subordinated notes. As a result of these transactions, the Company retired its $7.7 million of common equity and corresponding trust preferred securities reducing its investment in these entities to $0.6 million during the second quarter of 2009. In July 2009, the Company restructured its remaining $18.7 million of trust preferred securities that were not exchanged previously, however, the transaction did not retire the remaining common equity of $0.6 million, which remains as of December 31, 2009. See Note 8 — “Debt Obligations” for further information relating to these transactions.
 
Unconsolidated Financial Statements
 
The Company has no unconsolidated investments in equity affiliates accounted for under the equity method that, either individually or in the aggregate, have assets greater than 10% of total consolidated assets or (loss) income greater than 10% of total consolidated (loss) income from continuing operations before income taxes.
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Note 7 —	Real Estate Owned and Held-For-Sale	
 
The Company had a $9.9 million bridge loan secured by a motel located in Long Beach, California that matured in 2008 and bore interest at a variable rate of LIBOR plus 4.00%. During 2008, the Company established a $2.5 million provision for loan loss related to this property reducing the carrying value to $7.4 million as of June 2009. During the third quarter of 2009, the Company recorded an additional $1.8 million provision for loan loss related to this property reducing the carrying amount to $5.6 million. In August 2009, the Company was the winning bidder at a UCC foreclosure sale of the property securing this loan, which was recorded as real estate owned. The carrying value represented the fair value of the underlying collateral at the time of the sale. For the year ended December 31, 2009, the Company recorded property operating income of $0.2 million and property operating expenses of $0.2 million. At December 31, 2009, this investment’s balance sheet was comprised of land and building, net of accumulated depreciation, totaling $5.5 million, other assets of $0.1 million and other liabilities of $0.1 million.
 
The Company had a $4.0 million bridge loan secured by a hotel located in St. Louis, Missouri that matured in 2009 and bore interest at a variable rate of LIBOR plus 5.00%. In April 2009, the Company foreclosed on the property securing the loan. As a result, during the second quarter of 2009 the Company recorded this investment on its balance sheet as real estate owned at a fair value of $2.9 million. The carrying value represented the fair value of the underlying collateral at the time of the foreclosure. For the year ended December 31, 2009, the Company recorded property operating income of $0.7 million and property operating expenses of $1.2 million. At December 31, 2009, this investment’s balance sheet was comprised of land and building net of depreciation totaling $2.7 million, other assets of $0.1 million and other liabilities of $0.3 million.
 
The Company had a $5.0 million mezzanine loan secured by an office building located in Indianapolis, Indiana that was scheduled to mature in June 2012 and bore interest at a fixed rate of 10.72%. During the first quarter of 2008, the Company established a $1.5 million provision for loan loss related to this property, reducing the carrying value to $3.5 million at March 31, 2008. In April 2008, the Company was the winning bidder at a UCC foreclosure sale of the entity which owns the equity interest in the property securing this loan and a $41.4 million first mortgage on the property. As a result, during the second quarter of 2008, the Company recorded this investment on its balance sheet as real estate owned at fair value, which included the Company’s $3.5 million carrying value of the loan and $41.4 million first lien in mortgage notes payable. During the third quarter of 2009, the Company mutually agreed with a first mortgage lender to appoint a receiver to operate the property and we are working to assist in the transfer of title to the first mortgage lender. As a result, the Company reclassified this investment from real estate owned to real estate held-for-sale at a fair value of $41.4 million, reclassified property operating income and expenses for current and prior periods to discontinued operations in the Company’s Consolidated Financial Statements, and recorded an impairment loss of $4.9 million. The Company plans to sell the property to the first mortgage lender within one year of the date of this transaction.
 
For the year ended December 31, 2009, loss from discontinued operations consisted of property operating income of $3.3 million, property operating expenses of $3.0 million and depreciation and amortization of $0.7 million and the investment held-for-sale consisted of land, building and leasehold improvements net of depreciation and allowances totaling $41.4 million as of December 31, 2009. At December 31, 2009 the Company also had a mortgage note payable held-for-sale of $41.4 million and other liabilities of $1.2 million. For the year ended December 31, 2008, the Company previously recorded property operating income of $1.4 million, property operating expenses of $1.4 million and depreciation and amortization of $0.4 million to earnings. At December 31, 2008, this investment’s balance sheet was comprised of land of $6.2 million, building and leasehold improvements of $40.3 million, cash of $0.3 million, other assets of $0.2 million, mortgage note payable of $41.4 million, and other liabilities of $1.2 million. In addition, discontinued operations have not been segregated in the Company’s Consolidated Statements of Cash Flows.
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Note 8 —	Debt Obligations	
 
The Company utilizes repurchase agreements, a term credit agreement with a revolving component, a working capital line, loan participations, collateralized debt obligations and junior subordinated notes to finance certain loans and investments. Borrowings underlying these arrangements are primarily secured by a significant amount of the Company’s loans and investments.
 
Repurchase Agreements
 
The following table outlines borrowings under the Company’s repurchase agreements as of December 31, 2009 and 2008:

 	 	December 31, 2009	 	 	December 31, 2008	 	
 	 	Debt
	 	 	Collateral
	 	 	Debt
	 	 	Collateral
	 	
 	 	Carrying
	 	 	Carrying
	 	 	Carrying
	 	 	Carrying
	 	
 	 	Value	 	 	Value	 	 	Value	 	 	Value	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Repurchase agreement, financial institution, $200 million committed line, terminated in June 2009, interest was variable based on one-month LIBOR, the weighted average note rate was 1.50%	 	$	—	 	 	$	—	 	 	$	36,961,289	 	 	$	49,547,947	 	
Repurchase agreement, financial institution, $2.4 million committed line at December 31, 2009, expiration June 2010, interest is variable based on one-month LIBOR; the weighted average note rate was 2.77% and 3.07%, respectively	 	 	2,435,332	 	 	 	4,123,938	 	 	 	15,554,000	 	 	 	19,240,188	 	
Repurchase agreement, financial institution, an uncommitted line, expiration May 2010, interest is variable based on one and three-month LIBOR; the weighted average note rate was 1.52% and 2.48%, respectively	 	 	222,000	 	 	 	10,219,636	 	 	 	8,212,500	 	 	 	12,089,904	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total repurchase agreements	 	$	2,657,332	 	 	$	14,343,574	 	 	$	60,727,789	 	 	$	80,878,039	 	

At December 31, 2009, the aggregate weighted average note rate for the Company’s repurchase agreements was 2.66%. There were no interest rate swaps on these repurchase agreements at December 31, 2009.
 
The Company had a $200.0 million repurchase agreement with a financial institution which had a term expiring in October 2009 and bore interest at pricing over LIBOR, varying on the type of asset financed. In June 2009, this facility, with approximately $37.0 million outstanding, was satisfied, at a discount, for $22.0 million, resulting in a $15.0 million gain on extinguishment of debt. In connection with this transaction, the Company sold a bridge loan financed in this facility with a carrying value of $47.0 million, at a discount, for approximately $23.2 million and recorded a loss on restructuring of $23.8 million. The proceeds were used to satisfy the $22.0 million cash payment.
 
The Company has a repurchase agreement that bears interest at 250 basis points over LIBOR. In June 2009, the Company amended this facility extending the maturity to June 2010, with a one year extension option. In addition, the amendment includes the removal of all financial covenants and a reduction of the committed amount to $2.4 million reflecting the one asset currently financed in this facility. During the year ended December 31, 2009, the Company paid down approximately $13.1 million of this facility. At December 31, 2009, the outstanding balance under this facility was $2.4 million.
 
In April 2008, the Company entered into an uncommitted master repurchase agreement with a financial institution for the purpose of financing its CRE CDO bond securities. The facility has a term expiring in May 2010 and bears interest at pricing over LIBOR, varying on the type of asset financed. During the year ended December 31,
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December 31, 2009
 
2009, the Company paid down approximately $1.3 million of this debt, due to a decrease in values associated with a change in the market interest rate spreads and an additional $6.7 million of principal. At December 31, 2009, the outstanding balance in this facility was approximately $0.2 million. In January 2010, the facility was repaid in full.
 
In certain circumstances, the Company has financed the purchase of investments from a counterparty through a repurchase agreement with that same counterparty. The Company currently records these investments in the same manner as other investments financed with repurchase agreements, with the investment recorded as an asset and the related borrowing under the repurchase agreement as a liability on the Company’s Consolidated Balance Sheet. Interest income earned on the investments and interest expense incurred on the repurchase obligations are reported separately on the Consolidated Statement of Operations. These transactions may not qualify as a purchase by the Company under current accounting guidance, which is effective for fiscal years beginning after November 15, 2008. The Company would be required to present the net investment on the balance sheet as a derivative with the corresponding change in fair value of the derivative being recorded in the statement of operations when certain criteria to treat these transactions not as part of the same arrangements (linked transactions) are not met. The value of the derivative would reflect not only changes in the value of the underlying investment, but also changes in the value of the underlying credit provided by the counterparty. However, the guidance applies to prospective transactions, and no such transactions have been recorded in this manner in 2009.
 
Collateralized Debt Obligations
 
The following table outlines borrowings under the Company’s collateralized debt obligations as of December 31, 2009 and 2008:

 	 	December 31, 2009	 	 	December 31, 2008	 	
 	 	Debt
	 	 	Collateral
	 	 	Debt
	 	 	Collateral
	 	
 	 	Carrying
	 	 	Carrying
	 	 	Carrying
	 	 	Carrying
	 	
 	 	Value	 	 	Value	 	 	Value	 	 	Value	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
CDO I — Issued four investment grade tranches January 19, 2005. Reinvestment period through April 2009. Stated maturity date of February 2040. Interest is variable based on three-month LIBOR; the weighted average note rate was 4.22% and 2.41%, respectively	 	$	254,101,853	 	 	$	445,473,298	 	 	$	275,319,000	 	 	$	426,002,310	 	
CDO II — Issued nine investment grade tranches January 11, 2006. Reinvestment period through April 2011. Stated maturity date of April 2038. Interest is variable based on three-month LIBOR; the weighted average note rate was 3.28% and 3.03%, respectively	 	 	329,549,487	 	 	 	486,142,072	 	 	 	343,270,000	 	 	 	468,850,451	 	
CDO III — Issued 10 investment grade tranches December 14, 2006. Reinvestment period through January 2012. Stated maturity date of January 2042. Interest is variable based on three-month LIBOR; the weighted average note rate was 1.76% and 1.65%, respectively	 	 	516,863,845	 	 	 	612,279,760	 	 	 	533,700,000	 	 	 	595,213,450	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total CDOs	 	$	1,100,515,185	 	 	$	1,543,895,130	 	 	$	1,152,289,000	 	 	$	1,490,066,211	 	

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
 
At December 31, 2009, the aggregate weighted average effective rate for the Company’s collateralized debt obligations, including the cost of interest rate swaps on assets financed in these facilities, was 2.79%. Excluding the effect of swaps, the weighted average note rate at December 31, 2009 was 0.79%.
 
On January 19, 2005, the Company completed its first collateralized debt obligation, issuing to third party investors four tranches of investment grade collateralized debt obligations (“CDO I”) through a newly-formed wholly-owned subsidiary, Arbor Realty Mortgage Securities Series 2004-1, Ltd. (“the Issuer”). At inception, the Issuer held assets, consisting primarily of bridge loans, mezzanine loans and cash totaling approximately $469.0 million, which serve as collateral for CDO I. The Issuer issued investment grade notes with an initial principal amount of approximately $305.0 million and a wholly-owned subsidiary of the Company purchased the preferred equity interests of the Issuer. The four investment grade tranches were issued with floating rate coupons with an initial combined weighted average rate of three-month LIBOR plus 0.77%. CDO I was replenished with substitute collateral for loans that were repaid during the first four years of CDO I, up until April 2009. Thereafter, the outstanding debt balance will be reduced as loans are repaid. The Company incurred approximately $7.2 million of issuance costs which is being amortized on a level yield basis over the average estimated life of CDO I. As of April 15, 2009, CDO I has reached the end of its replenishment date and will no longer make the $2.0 million amortization payments to investors. Investor capital will be repaid quarterly from proceeds received from loan repayments held as collateral in accordance with the terms of the CDO. Proceeds distributed will be recorded as a reduction of the CDO liability. Proceeds of $5.1 million and $8.0 million were distributed in 2009 and 2008, respectively. The CDO liability is also reduced as the investment grade notes are purchased by the Company — see below. The outstanding note balance for CDO I was $254.1 million and $275.3 million at December 31, 2009 and 2008, respectively.
 
On January 11, 2006, the Company completed its second collateralized debt obligation, issuing to third party investors nine tranches of investment grade collateralized debt obligations (“CDO II”) through a newly-formed wholly-owned subsidiary, Arbor Realty Mortgage Securities Series 2005-1, Ltd. (“the Issuer II”). At inception, the Issuer II held assets, consisting primarily of bridge loans, mezzanine loans and cash totaling approximately $475.0 million, which serve as collateral for CDO II. The Issuer II issued investment grade notes with an initial principal amount of approximately $356.0 million and a wholly-owned subsidiary of the Company purchased the preferred equity interests of the Issuer II. The nine investment grade tranches were issued with floating rate coupons with an initial combined weighted average rate of three-month LIBOR plus 0.74%. CDO II may be replenished with substitute collateral for loans that are repaid during the first five years. Thereafter, the outstanding debt balance will be reduced as loans are repaid. The Company incurred approximately $6.2 million of issuance costs which is being amortized on a level yield basis over the average life of CDO II. Proceeds from CDO II are distributed quarterly with approximately $1.2 million being paid to investors as a reduction of their capital invested. Proceeds of $4.7 million were distributed and recorded as a reduction of the CDO II liability during both 2009 and 2008, respectively. The CDO liability is also reduced as the investment grade notes are purchased by the Company — see below. The outstanding note balance for CDO II was $329.5 million and $343.3 million at December 31, 2009 and 2008, respectively.
 
On December 14, 2006, the Company completed its third collateralized debt obligation, issuing to third party investors 10 tranches of investment grade collateralized debt obligations (“CDO III”) through a newly-formed wholly-owned subsidiary, Arbor Realty Mortgage Securities Series 2006-1, Ltd. (“the Issuer III”). At inception, the Issuer III held assets, consisting primarily of bridge loans, mezzanine loans, junior participation loans, preferred equity investments and cash totaling approximately $500.0 million, which serve as collateral for CDO III. The Issuer III issued investment grade notes with an initial principal amount of approximately $547.5 million, including a $100.0 million revolving note class that provides a revolving note facility and a wholly-owned subsidiary of the Company purchased the preferred equity interests of the Issuer III. The 10 investment grade tranches were issued with floating rate coupons with an initial combined weighted average rate of three-month LIBOR plus 0.44% and the revolving note facility has a commitment fee of 0.22% per annum on the undrawn portion of the facility. CDO
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
 
III may be replenished with substitute collateral for loans that are repaid during the first five years. Thereafter, the outstanding debt balance will be reduced as loans are repaid. The Company incurred approximately $9.7 million of issuance costs which is being amortized on a level yield basis over the average life of CDO III. The outstanding note balance for CDO III was $516.9 million and $533.7 million at December 31, 2009 and 2008, respectively. CDO III has $100.0 million revolving note class that provides a revolving note facility. The CDO liability is also reduced as the investment grade notes are purchased by the Company — see below. The outstanding revolving note facility for CDO III was $86.7 million and $86.2 million at December 31, 2009 and 2008, respectively.
 
Proceeds from the sale of the 23 investment grade tranches issued in CDO I, CDO II and CDO III were used to repay outstanding debt under the Company’s repurchase agreements and notes payable. The assets pledged as collateral were contributed from the Company’s existing portfolio of assets.
 
The Company intends to own these portfolios of real estate-related assets until maturity and accounts for these transactions on its balance sheet as financing facilities. For accounting purposes, these CDOs are consolidated in the Company’s financial statements. The investment grade tranches are treated as secured financings, and are non-recourse to the Company.
 
During the year ended December 31, 2009, the Company purchased, at a discount, approximately $16.1 million of investment grade rated notes originally issued by the Company’s CDO I issuing entity for a price of $3.3 million, $9.3 million originally issued by the Company’s CDO II issuing entity for a price of $3.1 million, and $17.3 million originally issued by the Company’s CDO III issuing entity for a price of $5.4 million, for a total purchase of $42.8 million of notes in 2009. Approximately $20.0 million of the CDO notes were purchased from the Company’s manager, ACM, for a price of $7.8 million. In 2008, ACM purchased these notes from third party investors for $8.2 million. The remaining notes were purchased from third party investors. The Company recorded a net gain on extinguishment of debt of $31.0 million from these transactions in its Consolidated Statements of Operations.
 
In the first quarter of 2010, the Company purchased, at a discount, approximately $4.5 million of investment grade rated notes originally issued by our CDO I issuing entity for a price of $1.6 million, $7.9 million of investment grade rated notes originally issued by the Company’s CDO II issuing entity for a price of $1.6 million and $7.0 million originally issued by the Company’s CDO III issuing entity for a price of $1.4 million from third party investors. The Company will record a net gain on extinguishment of debt of $14.9 million from these transactions in its 2010 Consolidated Statements of Operations.
 
In February 2010, the Company re-issued its own CDO bonds it had acquired throughout 2009 with an aggregate face amount of $42.8 million as part of an exchange for the retirement of $114.1 million of its junior subordinated notes. See “Junior Subordinated Notes” below for further details.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
 
Junior Subordinated Notes
 
The following table outlines borrowings under the Company’s junior subordinated notes as of December 31, 2009 and 2008:

 	 	December 31, 2009	 	 	December 31, 2008	 	
 	 	Debt
	 	 	Debt
	 	
 	 	Carrying
	 	 	Carrying
	 	
 	 	Value	 	 	Value	 	
 	 	 	 	 	 	 	 	 	
Junior subordinated notes, maturity March 2034, unsecured, face amount of $29.4 million and $27.1 million, respectively, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 0.50% and 5.25%, respectively	 	$	26,291,219	 	 	$	27,070,000	 	
Junior subordinated notes, maturity March 2034, unsecured, face amount of $28.0 million and $25.8 million, respectively, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 0.50% and 8.32%, respectively	 	 	25,057,081	 	 	 	25,780,000	 	
Junior subordinated notes, maturity April 2035, unsecured, face amount of $7.0 million and $25.8 million, respectively, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 0.50% and 7.42%, respectively	 	 	6,245,736	 	 	 	25,774,000	 	
Junior subordinated notes, maturity March 2034, unsecured, face amount of $28.0 million and $25.8 million, respectively, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 0.50% and 6.85%, respectively	 	 	25,057,081	 	 	 	25,774,000	 	
Junior subordinated notes, maturity March 2034, unsecured, face amount of $27.3 million and $51.6 million, respectively, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 0.50% and 6.85%, respectively	 	 	24,430,653	 	 	 	51,550,000	 	
Junior subordinated notes, maturity March 2034, unsecured, face amount of $28.0 million and $51.6 million, respectively, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 0.50% and 7.93%, respectively	 	 	25,057,081	 	 	 	51,550,000	 	
Junior subordinated notes, maturity June 2036, unsecured, face amount of $14.6 million and $15.5 million, respectively, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 0.50% and 7.86%, respectively	 	 	13,055,465	 	 	 	15,464,000	 	
Junior subordinated notes, maturity April 2037, unsecured, face amount of $15.7 million and $14.4 million, respectively, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 0.50% and 7.22%, respectively	 	 	14,028,497	 	 	 	14,433,000	 	
Junior subordinated notes, maturity April 2037, unsecured, face amount of $31.5 million and $38.7 million, respectively, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 0.50% and 7.22%, respectively	 	 	28,182,248	 	 	 	38,660,000	 	
Junior subordinated notes, maturity March 2034, unsecured, face amount of $28.0 million, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 0.50%	 	 	25,057,081	 	 	 	—	 	

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009

 	 	December 31, 2009	 	 	December 31, 2008	 	
 	 	Debt
	 	 	Debt
	 	
 	 	Carrying
	 	 	Carrying
	 	
 	 	Value	 	 	Value	 	
 	 	 	 	 	 	 	 	 	
Junior subordinated notes, maturity March 2034, unsecured, face amount of $28.7 million, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 0.50%	 	 	25,683,687	 	 	 	—	 	
Junior subordinated notes, maturity April 2035, unsecured, face amount of $21.2 million, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 0.50%	 	 	18,987,535	 	 	 	—	 	
Junior subordinated notes, maturity June 2036, unsecured, face amount of $2.6 million, interest rate fixed until 2012 then variable based on three-month LIBOR, the weighted average note rate was 0.50%	 	 	2,354,057	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	
Total junior subordinated notes	 	$	259,487,421	 	 	$	276,055,000	 	

In May 2009, the Company exchanged $247.1 million of its outstanding trust preferred securities, consisting of $239.7 million of junior subordinated notes issued to third party investors and $7.4 million of common equity issued to the Company, in exchange for $268.4 million of newly issued unsecured junior subordinated notes, representing 112% of the original face amount. The new notes bear a fixed interest rate of 0.50% per annum until April 30, 2012 (the “Modification Period”). Thereafter, interest is to be paid at the rates set forth in the existing trust agreements until maturity, equal to three month LIBOR plus a weighted average spread of 2.90%. The Company paid transaction fees of approximately $1.2 million to the issuers of the junior subordinated notes related to this restructuring which will be amortized on an effective yield over the life of the notes. Furthermore, the 12% increase to the face amount due upon maturity will be amortized into expense over the life of the notes in accordance with the interest method of accounting.
 
In July 2009, the Company restructured its remaining $18.7 million of trust preferred securities that were not exchanged from the May 2009 restructuring transaction discussed above. The Company amended the $18.7 million of junior subordinated notes to $20.9 million of unsecured junior subordinated notes, representing 112% of the original face amount. The amended notes bear a fixed interest rate of 0.50% per annum for a period of approximately three years, the modification period. Thereafter, interest is to be paid at the rates set forth in the existing trust agreements until maturity, equal to three month LIBOR plus a weighted average spread of 2.74%. The Company paid a transaction fee of approximately $0.1 million to the issuers of the junior subordinated notes related to this restructuring. Furthermore, the 12% increase to the face amount due upon maturity will be amortized into expense over the life of the notes in accordance with the interest method of accounting.
 
During the Modification Periods, the Company will be permitted to make distributions of up to 100% of taxable income to common shareholders. The Company has agreed that such distributions will be paid in the form of the Company’s stock to the maximum extent permissible under the Internal Revenue Service rules and regulations in effect at the time of such distribution, with the balance payable in cash. This requirement regarding distributions in stock can be terminated by the Company at any time, provided that the Company pays the note holders the original rate of interest from the time of such termination.
 
The junior subordinated notes are unsecured, have a maturity of 25 to 28 years, pay interest quarterly at a fixed rate or floating rate of interest based on three-month LIBOR and, absent the occurrence of special events, are not redeemable during the first two years. In connection with the issuance of the original variable rate junior subordinated notes, the Company had entered into various interest rate swap agreements which were subsequently terminated upon the exchange discussed above, resulting in a loss on termination of swaps of $8.7 million in 2009. See Note 11 — “Derivative Financial Instruments” for further information relating to these derivatives.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
 
In March 2009, the Company purchased from its manager, ACM, approximately $9.4 million of junior subordinated notes originally issued by a wholly-owned subsidiary of the Company’s operating partnership for $1.3 million. ACM purchased these notes from third party investors for $1.3 million in March 2009. The Company recorded a net gain on extinguishment of debt of $8.1 million and a reduction of outstanding debt totaling $9.4 million from this transaction. In connection with this transaction, the Company retired approximately $0.3 million of common equity related to these junior subordinated notes.
 
The carrying value under these facilities was $259.5 million at December 31, 2009 and $276.1 million at December 31, 2008. The current weighted average note rate was 0.50% and 7.21% at December 31, 2009 and 2008, respectively. However, based upon the accounting treatment for the restructure, the effective rate was 3.96% at December 31, 2009. The impact of these variable interest entities with respect to consolidation is discussed in Note 10 — “Variable Interest Entities.”
 
In February 2010, the Company retired $114.1 million of its junior subordinated notes, with a carrying value of $102.1 million, in exchange for the re-issuance of its own CDO bonds it had acquired throughout 2009 with an aggregate face amount of $42.8 million, CDO bonds of other issuers it had acquired in the second quarter of 2008 with an aggregate face amount of $25.0 million and a carrying value of $0.4 million, and $10.5 million in cash. In the first quarter of 2010, this transaction is expected to result in recording $65.3 million of additional CDO debt, of which $42.3 million represents the portion of the Company’s CDO bonds that were exchanged and $23.0 million represents the estimated interest due on the bonds through their maturity, a reduction to securities available-for-sale of $0.4 million representing the fair value of CDO bonds of other issuers, and a gain on extinguishment of debt of approximately $26.0 million.
 
Notes Payable
 
The following table outlines borrowings under the Company’s notes payable as of December 31, 2009 and 2008:

 	 	December 31, 2009	 	 	December 31, 2008	 	
 	 	Debt
	 	 	Collateral
	 	 	Debt
	 	 	Collateral
	 	
 	 	Carrying
	 	 	Carrying
	 	 	Carrying
	 	 	Carrying
	 	
 	 	Value	 	 	Value	 	 	Value	 	 	Value	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Term credit agreement, Wachovia Bank, National Association, $269.3 million committed line, $35.3 million revolving component, expiration July 2012, interest is variable based on one-month LIBOR; the weighted average note rate was 4.38% and 3.34%, respectively(1)	 	$	269,256,270	 	 	$	393,875,807	 	 	$	280,182,244	 	 	$	476,593,594	 	
Revolving credit agreement, Wachovia Bank, National Association, interest was variable based on one-month LIBOR; the weighted average note rate was 3.08%(1)	 	 	—	 	 	 	—	 	 	 	64,834,510	 	 	 	101,260,891	 	
Term credit agreement, Wachovia Bank, National Association, interest was variable based on one-month LIBOR; the weighted average note rate was 2.98%(1)	 	 	—	 	 	 	—	 	 	 	32,948,717	 	 	 	29,604,167	 	

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009

 	 	December 31, 2009	 	 	December 31, 2008	 	
 	 	Debt
	 	 	Collateral
	 	 	Debt
	 	 	Collateral
	 	
 	 	Carrying
	 	 	Carrying
	 	 	Carrying
	 	 	Carrying
	 	
 	 	Value	 	 	Value	 	 	Value	 	 	Value	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Working capital facility, Wachovia Bank, National Association; $49.5 million committed line, expiration June 2012, interest is variable based on one-month LIBOR, the weighted average note rate was 8.35% and 5.51%, respectively(1)	 	 	49,505,228	 	 	 	—	 	 	 	41,907,965	 	 	 	—	 	
Bridge loan warehouse, financial institution, $13.5 million committed line, expiration May 2010, interest rate was variable based on LIBOR or Prime, the weighted average note rate was 5.15%(2)	 	 	—	 	 	 	—	 	 	 	43,762,001	 	 	 	53,828,592	 	
Note payable relating to investment in equity affiliates, $50.2 million, expiration July 2016, interest is fixed, the weighted average note rate was 4.06%, respectively	 	 	50,157,708	 	 	 	55,988,411	 	 	 	48,500,000	 	 	 	—	 	
Junior loan participations, maturity of July 2011, secured by the Company’s interest in first mortgage loans with principal balances totaling $5.0 million, participation interest based on a portion of the interest received from the loans which have fixed rates of 16.00%	 	 	5,000,000	 	 	 	5,000,000	 	 	 	5,000,000	 	 	 	5,000,000	 	
Junior loan participation, maturity of May 2010, secured by the Company’s interest in a first mortgage loan with a principal balance of $1.3 million, participation interest was based on a portion of the interest received from the loan which has a fixed rate of 9.57%	 	 	1,300,000	 	 	 	1,300,000	 	 	 	1,300,000	 	 	 	1,300,000	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total notes payable	 	$	375,219,206	 	 	$	456,164,218	 	 	$	518,435,437	 	 	$	667,587,244	 	

 
 	 	 	
(1)	 	In July 2009, the Company amended and restructured its term credit agreements, revolving credit agreement and working capital facility with Wachovia Bank, National Association as discussed below.	
 	 	 	
(2)	 	In July 2009, this facility was paid off as discussed below.	
 
At December 31, 2009, the aggregate weighted average effective rate for the Company’s notes payable, including the cost of interest rate swaps on assets financed in these facilities, was 4.98%. Excluding the effect of swaps, the weighted average note rate at December 31, 2009 was 4.57%.
 
In July 2009, the Company amended and restructured its term credit agreements, revolving credit agreement and working capital facility with Wachovia Bank, National Association as follows:

 	• 	The term revolving credit agreement, with an outstanding balance of $64.0 million, was combined with the term debt facility with an outstanding balance of $237.7 million, along with a portion of the term debt facility with an outstanding balance of $30.3 million, and $15.3 million of this term debt facility was	
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December 31, 2009

 	 	combined with the working capital line with an outstanding balance of $41.9 million. This debt restructuring resulted in the consolidation of these four facilities into one term debt facility with an outstanding balance of $316.7 million at the time of the agreement, which contains a revolving component with $35.3 million of availability, and one working capital facility with an outstanding balance of $57.2 million at the time of the agreement.	

 	• 	The maturity dates of the facilities were extended for three years, with a working capital facility maturity of June 8, 2012 and a term debt facility maturity of July 23, 2012.	
 	 	 	
 	• 	The term debt facility requires a $48.1 million reduction over the three-year term, with approximately $8.0 million in reductions due every six months beginning in December 2009.	
 	 	 	
 	• 	Margin call provisions relating to collateral value of the underlying assets have been eliminated, as long as the term loan reductions are met, with the exception of limited margin call capability related to foreclosed or real estate-owned assets.	
 	 	 	
 	• 	The working capital facility requires quarterly amortization of up to $3.0 million per quarter, $1.0 million per CDO, only if both (a) the CDO is cash flowing to the Company and (b) the Company has a minimum quarterly liquidity level of $27.5 million.	
 	 	 	
 	• 	Interest rate of LIBOR plus 350 basis points for the term loan facility, compared to LIBOR plus approximately 200 basis points previously and LIBOR plus 800 basis points for the working capital facility, compared to LIBOR plus 500 basis points previously. The Company has also agreed to pay a commitment fee of 1.00% payable over 3 years.	
 	 	 	
 	• 	The Company issued Wachovia one million warrants at an average strike price of $4.00. 500,000 warrants are exercisable immediately at a price of $3.50, 250,000 warrants are exercisable after July 23, 2010 at a price of $4.00 and 250,000 warrants are exercisable after July 23, 2011 at a price of $5.00. All warrants expire on July 23, 2015.	
 	 	 	
 	• 	Annual dividends are limited to 100% of taxable income to common shareholders and are required to be paid in the form of the Company’s stock to the maximum extent permissible (currently 90%), with the balance payable in cash. The Company will be permitted to pay 100% of taxable income in cash if the term loan facility balance is reduced to $210.0 million, the working capital facility is reduced to $30.0 million and the Company maintains $35.0 million of minimum liquidity.	
 	 	 	
 	• 	The Company’s CEO and Chairman, Ivan Kaufman, is required to remain an officer or director of the Company for the term of the facilities.	
 
In addition, the financial covenants were been reduced to the following (see “Debt Covenants” section below for further details):

 	• 	Minimum quarterly liquidity of $7.5 million in cash and cash equivalents.	
 	 	 	
 	• 	Minimum quarterly GAAP net worth of $150.0 million.	
 	 	 	
 	• 	Ratio of total liabilities to tangible net worth shall not exceed 4.5 to 1 quarterly.	
 
As a result of the above mentioned amendment, at December 31, 2009, the Company has one term credit agreement with Wachovia, which contains a revolving component with $35.3 million of availability. The facility has a commitment period of three years to July 2012 and bears an interest rate of LIBOR plus 350 basis points. Margin call provisions relating to collateral value of the underlying assets have been eliminated, as long as the term loan reductions are met, with the exception of limited margin call capability related to foreclosed or real estate-owned assets. Subsequent to the amendment, the Company made net paydowns to the facility of $47.4 million,
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December 31, 2009
 
reducing the $48.1 million balance reduction requirements to $0.7 million and satisfying the requirements until June 2012. The outstanding balance under this facility was $269.3 million at December 31, 2009.
 
In 2010, the Company entered into an agreement with Wachovia Bank, National Association, owned by Wells Fargo Bank, National Association, to retire all of its $335.6 million of then outstanding debt for $176.2 million, representing 52.5% of the face amount of the debt. The $335.6 million of indebtedness is comprised of $286.1 million of term debt and a $49.5 million working capital facility, representing the outstanding balances in each facility at the time the parties began to negotiate the agreement. The agreement can be closed at any time on or before May 31, 2010 and also has two consecutive 45 day extension options which would extend the payoff date to August 27, 2010. The agreement provides the ability to apply paydowns in the Wachovia facilities against the discounted payoff amount during the term of the agreement and accordingly, the Company has made payments of $62.3 million towards the initial discounted payoff amount, leaving $113.9 million payable to Wachovia to close this agreement. The closing of this transaction is subject to certain closing conditions and the ability to obtain the necessary capital. The Company can make no assurances that it will be able to access sufficient capital under acceptable terms and conditions. In addition, the Company has obtained a waiver of its minimum tangible net worth covenant, as well as the minimum ratio of total liabilities to tangible net worth covenant, from this financial institution for December 31, 2009 through the extended payoff date of August 27, 2010. The Company has also obtained temporary amendments thereafter until December 2010 for the quarterly minimum GAAP tangible net worth covenants, from $150.0 million to $50.0 million, and quarterly maximum ratio of total liabilities to tangible net worth covenants, from 4.5 to 1 to 5.8 to 1. See “Debt Covenants” below for further details.
 
The working capital facility with Wachovia has a maturity of June 2012 and an interest rate of LIBOR plus 800 basis points. At December 31, 2009, the outstanding balance under this facility was $49.5 million.
 
The Company had a $70.0 million bridge loan warehouse agreement which had a maturity date of October 2009. In May 2009, the Company amended this facility, extending the maturity to May 2010, with a one year extension option, and reduced the committed amount to $13.5 million. This agreement bore a rate of interest, payable monthly, based on LIBOR plus 3.75%. In July 2009, this facility was repaid in full.
 
In 2008, the Company recorded a $49.5 million note payable related to the POM exchange of profits interest transaction, which was paid down to $48.5 million as of December 31, 2008. The note was initially secured by the Company’s interest in POM, matures in July 2016, and bore interest at a fixed rate of 4% with payment deferred until the closing of the transaction. Upon the closing of the POM transaction in March 2009, the note balance was increased to $50.2 million, bears interest at a fixed rate of 4% and is secured by the Company’s investment in common and preferred operating partnership units in Lightstone Value Plus REIT, L.P. See Note 6 — “Investment in Equity Affiliates” for further details. At December 31, 2009, the outstanding balance of this note was $50.2 million.
 
The Company has three junior loan participations with a total outstanding balance at December 31, 2009 of $6.3 million. These participation borrowings have a maturity date equal to the corresponding mortgage loan and are secured by the participant’s interest in the mortgage loan. Interest expense is based on a portion of the interest received from the loans.

Mortgage Note Payable —	Held-For-Sale	
 
During the second quarter of 2008, the Company recorded a $41.4 million interest-only first lien mortgage related to the foreclosure of an entity in which the Company had a $5.0 million mezzanine loan. The real estate investment was originally classified as real estate owned and was reclassified as real estate held-for-sale in September 2009. The mortgage bears interest at a fixed rate, has a maturity date of June 2012 and was recorded in mortgage note payable — held-for-sale. The outstanding balance of this mortgage was $41.4 million at December 31, 2009.
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December 31, 2009

 	 	
Note Payable —	Related Party	
 
During the fourth quarter of 2008, the Company borrowed $4.2 million from the Company’s manager, ACM. At December 31, 2008, the Company had outstanding borrowings due to ACM totaling $4.2 million, which was recorded in notes payable — related party. In January 2009, the loan was repaid in full.
 
Debt Covenants
 
Each of the credit facilities contains various financial covenants and restrictions, including minimum net worth, minimum liquidity and debt-to-equity ratios. The Company was in compliance with all financial covenants and restrictions for the periods presented with the exception of a minimum tangible net worth requirement with Wachovia at December 31, 2009. The Company’s tangible net worth was $98.6 million at December 31, 2009 and the Company was required to maintain a minimum tangible net worth of $150.0 million with this financial institution. The Company has obtained a waiver of this covenant, as well as the minimum ratio of total liabilities to tangible net worth covenant, from this financial institution for December 31, 2009 and through an extended payoff date of August 27, 2010, in conjunction with amendments to its credit facilities. The Company has also obtained temporary amendments thereafter until December 2010 for the quarterly minimum GAAP tangible net worth covenants, from $150.0 million to $50.0 million, and quarterly maximum ratio of total liabilities to tangible net worth covenants, from 4.5 to 1 to 5.8 to 1.
 
The Company’s CDO bonds contain interest coverage and asset overcollateralization covenants that must be met as of the waterfall distribution date in order for the Company to receive such payments. If the Company fails these covenants in any of its CDOs, all cash flows from the applicable CDO would be diverted to repay principal and interest on the outstanding CDO bonds and the Company would not receive any residual payments until that CDO regained compliance with such tests. The Company was in compliance with all such covenants as of December 31, 2009. In the event of a breach of the CDO covenants that could not be cured in the near-term, the Company would be required to fund its non-CDO expenses, including management fees and employee costs, distributions required to maintain REIT status, debt costs, and other expenses with (i) cash on hand, (ii) income from any CDO not in breach of a CDO covenant test, (iii) income from real property and unencumbered loan assets, (iv) sale of assets, (v) or accessing the equity or debt capital markets, if available. The chart below is a summary of the Company’s CDO compliance tests as of the most recent distribution date:

Cash Flow Triggers	 	CDO I	 	CDO II	 	CDO III	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Overcollateralization (1)	 	 	 	 	 	 	 	 	 	 	 	 	
Current	 	 	194.40	%	 	 	177.72	%	 	 	111.28	%	
Limit	 	 	184.00	%	 	 	169.50	%	 	 	105.60	%	
Pass/Fail	 	 	Pass	 	 	 	Pass	 	 	 	Pass	 	
Interest Coverage (2)	 	 	 	 	 	 	 	 	 	 	 	 	
Current	 	 	653.93	%	 	 	575.81	%	 	 	686.74	%	
Limit	 	 	160.00	%	 	 	147.30	%	 	 	105.60	%	
Pass/Fail	 	 	Pass	 	 	 	Pass	 	 	 	Pass	 	

 	 	 	
(1)	 	The overcollateralization ratio divides the total principal balance of all collateral in the CDO by the total bonds outstanding for the classes senior to those retained by the Company. To the extent an asset is considered a defaulted security, the asset’s principal balance is multiplied by the asset’s recovery rate which is determined by the rating agencies.	
 	 	 	
(2)	 	The interest coverage ratio divides interest income by interest expense for the classes senior to those retained by the Company.	
 
The Company also has certain cross-default provisions whereby accelerated repayment would occur under the Wachovia Term Credit and Working Capital facilities if any party defaults under any indebtedness in a principal amount of at least $5.0 million in the aggregate beyond any applicable grace period regardless of whether the
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December 31, 2009
 
default has been or is waived. Also, a default under the Junior Subordinated Indentures or any of the CDOs would trigger a default under the Company’s Wachovia debt agreements, but not vice versa, and no payment due under the Junior Subordinated Indentures may be paid if there is a default under any senior debt and the senior lender has sent notice to the trustee. The Junior Subordinated Indentures are also cross-defaulted with each other.

Note 9 —	Noncontrolling Interest	
 
Noncontrolling interest in a consolidated entity on the Company’s Consolidated Balance Sheet, with a balance of $1.9 million and $(10,981), respectively, as of December 31, 2009 and 2008, represents a third party’s interest in the equity of a consolidated subsidiary, and is related to the POM transaction discussed in Note 6 — “Investment in Equity Affiliates.” As a result of the POM transaction in March 2009, the Company recorded $18.7 million of net income attributable to the noncontrolling interest holder and a distribution to the noncontrolling interest of $16.6 million. For the year ended December 31, 2008, $4.4 million of net income attributable to the noncontrolling interest on the Company’s Consolidated Statements of Operations primarily represented income allocated to ACM’s noncontrolling interest in the operating partnership discussed below.
 
On July 1, 2003, ACM contributed $213.1 million of structured finance assets and $169.2 million of borrowings supported by $43.9 million of equity in exchange for a commensurate equity ownership in ARLP, the Company’s operating partnership. This transaction was accounted for as noncontrolling interest and initially entitled ACM to a 28% interest in ARLP. ACM’s noncontrolling interest in ARLP was represented by operating partnership units and was adjusted at the end of each reporting period to an amount equal to ACM’s ownership percentage of ARLP’s net equity. In April 2004, the Company issued 6,750,000 shares of its common stock in an initial public offering and a concurrent offering to one of the Company’s directors. In May 2004, the underwriters of the initial public offering exercised a portion of their over-allotment option, which resulted in the issuance of 524,200 additional shares. In addition, the Company issued 2,700,000 common shares in a public offering in June 2007.
 
At December 31, 2007, noncontrolling interest in the Company’s operating partnership was $72.9 million reflecting ACM’s 15.5% limited partnership interest in ARLP. In June 2008, ACM exercised its right to redeem its 3,776,069 operating partnership units (“OP units”) in the Company’s operating partnership for shares of the Company’s common stock on a one-for-one basis. As a result, ACM’s operating partnership ownership interest in the Company and the balance of noncontrolling interest in the operating partnership were reduced to zero as of June 30, 2008. The redemption of the noncontrolling interest in operating partnership in exchange for the Company’s common stock was recorded at book value and recorded directly to equity in additional paid-in capital. In addition, the special voting preferred shares paired with each OP unit, pursuant to a pairing agreement, were redeemed simultaneously and cancelled by the Company. In connection with this transaction, the Company’s Board of Directors approved a resolution under the Company’s charter allowing Ivan Kaufman and ACM, in relation to Mr. Kaufman’s controlling equity interest, to own more than the 7% ownership limitation.
 
Updated accounting guidance clarifies the classification of noncontrolling interests in consolidated statements of financial position and the accounting for and reporting of transactions between the Company and holders of such noncontrolling interests. Under the updated accounting guidance, noncontrolling interests are considered equity and should be reported as an element of consolidated equity. Net income encompasses the total income of all consolidated subsidiaries and requires separate disclosure on the face of the statements of operations of income attributable to the controlling and noncontrolling interests. When a subsidiary is deconsolidated, any retained, noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary must be measured at fair value. The presentation and disclosure requirements have been applied retrospectively for all periods presented.
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December 31, 2009

 	 	
Note 10 —	Variable Interest Entities	
 
Current accounting guidance requires a variable interest entity (“VIE”) to be consolidated by its primary beneficiary (“PB”). The PB is the party that absorbs a majority of the VIE’s anticipated losses and/or a majority of the expected returns.
 
The Company has used significant judgment and assumptions in evaluating its loans and investments, mortgage-related securities and investments in equity affiliates to determine whether they are VIEs. This evaluation resulted in the Company determining that its bridge loans, junior participation loans, mezzanine loans, preferred equity investments and investments in equity affiliates were potential variable interests. For each of these investments, the Company has evaluated (1) the sufficiency of the fair value of the entities’ equity investments at risk to absorb losses, (2) that as a group the holders of the equity investments at risk have (a) the direct or indirect ability through voting rights to make decisions about the entities’ significant activities, (b) the obligation to absorb the expected losses of the entity and their obligations are not protected directly or indirectly, (c) the right to receive the expected residual return of the entity and their rights are not capped, (3) substantially all of the entities’ activities do not involve or are not conducted on behalf of an investor that has disproportionately fewer voting rights in terms of its obligation to absorb the expected losses or its right to receive expected residual returns of the entity, or both. In addition, the Company has evaluated its investments in collateralized debt obligation securities and has determined that the issuing entities are considered VIEs, but has determined that the Company is not the primary beneficiary. As of December 31, 2009, the Company has identified 39 loans and investments which were made to entities determined to be VIEs with an aggregate carrying amount of $807.3 million. These VIEs had exposure to real estate debt of approximately $3.3 billion at December 31, 2009. See Note 3 — “Loans and Investments”, Note 5 — “Securities Held-To-Maturity” and Note 6 — “Investment in Equity Affiliates” for further details.
 
Entities that issue junior subordinated notes are considered VIEs. However, it is not appropriate to consolidate these entities, as equity interests are variable interests only to the extent that the investment is considered to be at risk. Since the Company’s investments were funded by the entities that issued the junior subordinated notes, they are not considered to be at risk.
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December 31, 2009
 
The following is a summary of the identified VIEs as of December 31, 2009:

 	 	Origination
	 	Carrying
	 	 	 	 	 	
Type	 	Date	 	Amount(1)	 	 	Property	 	Location	
 	 	 	 	 	 	 	 	 	 	 	
Loan and investment	 	Dec-03	 	$	51,136,960	 	 	Office	 	New York	
Loan	 	Aug-05	 	 	17,050,000	 	 	Office	 	New York	
Loan	 	Jan-06	 	 	1,600,000	 	 	Multifamily	 	New York	
Loan	 	Mar-06	 	 	10,000,000	 	 	Office	 	Pennsylvania	
Loan	 	Jun-06	 	 	97,812,445	 	 	Land	 	California	
Loan	 	Aug-06	 	 	5,452,137	 	 	Multifamily	 	Indiana	
Loan	 	Aug-06	 	 	6,996,434	 	 	Office	 	Texas	
Loan	 	Sep-06	 	 	2,800,000	 	 	Office	 	Rhode Island	
Loan	 	Oct-06	 	 	1,349,992	 	 	Multifamily	 	South Carolina	
Loan	 	Oct-06	 	 	2,031,012	 	 	Multifamily	 	North Carolina	
Loan	 	May-08	 	 	12,416,980	 	 	Multifamily	 	Florida	
Loan	 	Dec-06	 	 	63,885,000	 	 	Multifamily	 	New York	
Loan	 	Jan-07	 	 	4,123,938	 	 	Multifamily	 	Texas	
Loan	 	Mar-07	 	 	1,960,000	 	 	Office	 	South Carolina	
Loan	 	Mar-07	 	 	67,000,000	 	 	Office	 	New York	
Loan	 	Apr-08	 	 	5,924,306	 	 	Multifamily	 	Indiana	
Loan	 	Feb-07	 	 	64,928,626	 	 	Multifamily	 	Florida	
Loan	 	Mar-07	 	 	2,000,000	 	 	Multifamily	 	Florida	
Loan	 	Mar-07	 	 	6,625,103	 	 	Multifamily	 	Indiana	
Loan	 	Mar-07	 	 	3,686,066	 	 	Hotel	 	Arizona	
Loan	 	Mar-07	 	 	44,500,000	 	 	Multifamily	 	Michigan	
Loan	 	Jun-07	 	 	100,364,308	 	 	Hotel	 	Various	
Loan	 	Jun-07	 	 	9,678,584	 	 	Office	 	Florida	
Loan	 	Jun-07	 	 	27,510,000	 	 	Multifamily	 	Arizona	
Loan	 	Jul-07	 	 	10,938,092	 	 	Multifamily	 	Texas	
Loan	 	Jul-07	 	 	9,471,765	 	 	Multifamily	 	Texas	
Loan	 	Jul-07	 	 	4,654,941	 	 	Multifamily	 	Texas	
Loan	 	Jul-07	 	 	21,017,324	 	 	Hotel	 	California	
Loan	 	Nov-07	 	 	4,509,994	 	 	Land	 	Hawaii	
Loan	 	Feb-08	 	 	56,800,000	 	 	Multifamily	 	California	
Loan	 	Jul-08	 	 	27,500,000	 	 	Multifamily	 	Maryland	
Investment	 	Apr-08	 	 	20,117,755	 	 	CDO bond	 	N/A	
Investment	 	May-08	 	 	8,310,558	 	 	CDO bond	 	N/A	
Investment	 	May-08	 	 	9,007,787	 	 	CDO bond	 	N/A	
Investment	 	May-08	 	 	10,787,743	 	 	CDO bond	 	N/A	
Investment	 	Apr-09	 	 	9,509,398	 	 	CDO bond	 	N/A	
Investment	 	Apr-09	 	 	3,229,568	 	 	CDO bond	 	N/A	
Investment	 	Apr-05	 	 	187,000	 	 	Junior subordinated notes(2)	 	N/A	
Investment	 	Jun-06	 	 	391,000	 	 	Junior subordinated notes(2)	 	N/A	
 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	 	$	807,264,816	 	 	 	 	 	

 
 	 	 	
(1)	 	The Company’s maximum exposure to loss would not exceed the carrying amount of its investment. At December 31, 2009, $396.2 million of loans to VIEs had corresponding loan loss reserves of approximately $193.6 million and $61.8 million of loans to VIEs were related to loans classified as non-performing. See Note 3 — “Loans and Investments” for further details.	
 	 	 	
(2)	 	These entities that issued the junior subordinated notes are VIEs. It is not appropriate to consolidate these entities as equity interests are variable interests only to the extent that the investment is considered to be at risk. Since the Company’s investments were funded by the entities that issued the junior subordinated notes, it is not considered to be at risk.	
 
For the 39 VIEs identified, the Company has determined that it is not the primary beneficiary and, accordingly, the VIEs should not be consolidated in the Company’s financial statements. The Company’s maximum exposure to loss would not exceed the carrying amount of such investments. For all other investments, the Company has determined they are not VIEs. As such, the Company has continued to account for these loans and investments as a loan or investment in equity affiliate, as appropriate.
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December 31, 2009
 
The Company earns interest income from VIEs classified as loans, CDO bonds, and junior subordinated notes, and shares in the profits and losses of VIEs accounted for under the equity method.
 
The Company will be required to follow updated accounting guidance beginning with the first quarter of 2010, by providing an ongoing qualitative rather than quantitative assessment of its ability to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and its rights or obligations to receive benefits or absorb losses, in order to determine whether those entities will be required to be consolidated in the Company’s Consolidated Financial Statements. The Company does not expect the adoption of this guidance to have a material effect on its Consolidated Financial Statements. See “Recently Issued Accounting Pronouncements” in Note 2 — Summary of Significant Accounting Policies above for further details.

Note 11 —	Derivative Financial Instruments	
 
The Company recognizes all derivatives as either assets or liabilities in the Consolidated Balance Sheets and measures those instruments at fair value. Additionally, the fair value adjustments will affect either accumulated other comprehensive loss until the hedged item is recognized in earnings, or net (loss) income attributable to Arbor Realty Trust, Inc., depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.
 
In connection with the Company’s interest rate risk management, the Company periodically hedges a portion of its interest rate risk by entering into derivative financial instrument contracts. Specifically, the Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of its expected cash receipts and its expected cash payments principally related to its investments and borrowings. The Company’s objectives in using interest rate derivatives are to add stability to net interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company has entered into various interest rate swap agreements to hedge its exposure to interest rate risk on (i) variable rate borrowings as it relates to fixed rate loans; and (ii) the difference between the CDO investor return being based on the three-month LIBOR index while the supporting assets of the CDO are based on the one-month LIBOR index.
 
Derivative financial instruments must be effective in reducing the Company’s interest rate risk exposure in order to qualify for hedge accounting. When the terms of an underlying transaction are modified, or when the underlying hedged item ceases to exist, all changes in the fair value of the instrument are marked-to-market with changes in value included in net income for each period until the derivative instrument matures or is settled. Any derivative instrument used for risk management that does not meet the hedging criteria is marked-to-market with the changes in value included in net income. The Company does not use derivatives for trading or speculative purposes.
 
The following is a summary of the derivative financial instruments held by the Company as of December 31, 2009 and 2008 (dollars in thousands):

 	 	 	 	 	 	 	Notional Value	 	 	 	 	 	 	 	Fair Value	 	
Designation\
	 	 	 	 	 	 	December 31,
	 	 	December 31,
	 	 	Expiration
	 	 	Balance
	 	December 31,
	 	 	December 31,
	 	
Cash Flow	 	Derivative	 	Count	 	 	2009	 	 	2008	 	 	Date	 	 	Sheet Location	 	2009	 	 	2008	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Non-Qualifying	 	Basis Swaps	 	 	9	 	 	$	1,061,781	 	 	$	1,303,631	 	 	 	2012 - 2015	 	 	Other Assets	 	$	2,002	 	 	$	7,193	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Qualifying	 	Interest Rate Swaps	 	 	1	 	 	$	45,118	 	 	$	—	 	 	 	2016    	 	 	Other Assets	 	$	514	 	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Qualifying	 	Interest Rate Swaps	 	 	33	 	 	$	663,093	 	 	$	926,428	 	 	 	2010 - 2017	 	 	Other Liabilities	 	$	(47,886	)	 	$	(98,162	)	

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December 31, 2009
 
The fair value of Non-Qualifying Hedges was $2.0 million and $7.2 million as of December 31, 2009 and December 31, 2008, respectively, and is recorded in other assets in the Consolidated Balance Sheet. These basis swaps are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet hedge accounting requirements. The Company is exposed to changes in the fair value of certain of its fixed rate obligations due to changes in benchmark interest rates and uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the benchmark interest rate. These interest rate swaps designated as fair value hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable rate payments over the life of the agreements without the exchange of the underlying notional amount. For the year ended December 31, 2009 and 2008, the change in fair value of the Non-Qualifying Swaps was $(5.2) million and $4.7 million, respectively and was recorded in interest expense on the Consolidated Statements of Operations.
 
The fair value of Qualifying Cash Flow Hedges as of December 31, 2009 and 2008 was $(47.4) million and $(98.2) million, respectively, and was recorded in other liabilities in the amount of $(47.9) million and in other assets in the amount of $0.5 million at December 31, 2009, and other liabilities at December 31, 2008, and the change in accumulated other comprehensive loss in the Consolidated Balance Sheet. These interest rate swaps are used to hedge the variable cash flows associated with existing variable-rate debt, and amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the year ended December 31, 2009, the Company entered into one new interest rate swap that qualifies as a cash flow hedge with a notional value of approximately $45.1 million and paid $1.7 million, which will be amortized into interest expense over the life of the swap. During the year ended December 31, 2009, the Company terminated six interest rate swaps related to the Company’s restructured trust preferred securities, with a combined notional value of $140.0 million, for a loss of $8.7 million recorded to loss on termination of swaps. During the year ended December 31, 2009, the Company also terminated two interest rate swaps with a combined notional value of approximately $78.1 million and a $33.5 million portion of an interest rate swap with a total notional value of approximately $67.0 million. Additionally, one basis swap with a notional amount of $37.2 million matured and one basis swap and one interest rate swap had partially amortizing maturities totaling approximately $221.7 million. As of December 31, 2009, the Company expects to reclassify approximately $(29.1) million of other comprehensive loss from Qualifying Cash Flow Hedges to interest expense over the next twelve months assuming interest rates on that date are held constant.
 
Gains and losses on terminated swaps are recognized in earnings over the original life of the hedging instruments as the hedged item was designated as current and future outstanding LIBOR based debt, which has an indeterminate life, and the hedged transaction is still more likely than not to occur. The Company deferred, through accumulated other comprehensive loss, approximately $3.3 million of such loss on the termination of an interest rate swap agreement in the second quarter of 2009 and $5.0 million of such loss on the termination of an interest rate swap agreement in the first quarter of 2009. As of December 31, 2009, the Company has a net loss of $6.0 million in accumulated other comprehensive loss. As of December 31, 2008, the Company had a net gain of $1.6 million in accumulated other comprehensive loss. The Company recorded $1.1 million as additional interest expense related to the amortization of the loss for the year ended December 31, 2009 and $0.3 million as a reduction to interest expense related to the accretion of the net gains for both the years ended December 31, 2009 and 2008. The Company expects to record approximately $1.5 million of net deferred loss to interest expense over the next twelve months. The Company also recorded a loss of $8.7 million on the termination of the interest rate swaps related to the restructured trust preferred securities directly to loss on terminated swaps in the second quarter of 2009 as interest rate swaps were determined to no longer be effective or necessary due to the modified interest payment structure of the newly issued unsecured junior subordinated notes.
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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
 
The following table presents the effect of the Company’s derivative financial instruments on the Statements of Operations as of December 31, 2009 and 2008 (dollars in thousands):

 	 	 	 	 	 	 	Amount of
	 	 	Amount of
	 	 	 	 	
 	 	 	 	 	 	 	Gain or (Loss)
	 	 	Gain or (Loss)
	 	 	 	 	
 	 	 	 	Amount of
	 	 	Reclassified from
	 	 	Reclassified from
	 	 	 	 	
 	 	 	 	Gain or (Loss)
	 	 	Accumulated Other
	 	 	Accumulated Other
	 	 	Amount of
	 	
 	 	 	 	Recognized in
	 	 	Comprehensive
	 	 	Comprehensive
	 	 	Gain or (Loss)
	 	
 	 	 	 	Other
	 	 	Loss into
	 	 	Loss into Loss
	 	 	Recognized in
	 	
 	 	 	 	Comprehensive Loss
	 	 	Interest Expense
	 	 	on Terminated Swaps
	 	 	Interest Expense
	 	
 	 	 	 	(Effective Portion)
	 	 	(Effective Portion)
	 	 	(Ineffective Portion)
	 	 	(Ineffective Portion)
	 	
 	 	 	 	For the Year Ended	 	 	For the Year Ended	 	 	For the Year Ended	 	 	For the Year Ended	 	
 	 	 	 	December 31,
	 	 	December 31,
	 	 	December 31,
	 	 	December 31,
	 	 	December 31,
	 	 	December 31,
	 	 	December 31,
	 	 	December 31,
	 	
Designation\Cash Flow	 	Derivative	 	2009	 	 	2008	 	 	2009	 	 	2008	 	 	2009	 	 	2008	 	 	2009	 	 	2008	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Non-Qualifying	 	Basis Swaps	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	  —	 	 	$	2,538	 	 	$	11,623	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Qualifying	 	Interest Rate Swaps	 	$	43,276	 	 	$	(68,624	)	 	$	(29,616	)	 	$	(12,582	)	 	$	(8,730	)	 	$	—	 	 	$	—	 	 	$	—	 	

The cumulative amount of other comprehensive loss related to net unrealized losses on derivatives designated as Cash Flow Hedges as of December 31, 2009 and 2008 of $(53.3) million and $(96.6) million, respectively, is a combination of the fair value of qualifying cash flow hedges of $(47.4) million and $(98.2) million, respectively, deferred losses on terminated interest swaps of $(7.2) million as of December 31, 2009, and deferred net gains on termination of interest swaps of $1.2 million and $1.6 million as of December 31, 2009 and December 31, 2008, respectively.
 
The Company has agreements with certain derivative counterparties that contain a provision whereby if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. As of December 31, 2009, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $(18.0) million. As of December 31, 2009, the Company has minimum collateral posting thresholds with certain derivative counterparties and has posted collateral of $18.9 million. If the Company had breached any of these provisions as of December 31, 2009, it could have been required to settle its obligations under the agreements at their termination value of $(18.0) million, which is $0.9 million less than the posted collateral.

Note 12 —	Commitments and Contingencies	
 
As of December 31, 2009, the Company had the following material contractual obligations (dollars in thousands):

 	 	Payments Due by Period(1)	 	
Contractual Obligations	 	2010	 	 	2011	 	 	2012	 	 	 2013 	 	 	 2014 	 	 	Thereafter	 	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Notes payable	 	$	1,300	 	 	$	5,000	 	 	$	318,761	 	 	$	—	 	 	$	—	 	 	$	50,158	 	 	$	375,219	 	
Collateralized debt obligations(2)	 	 	96,202	 	 	 	75,686	 	 	 	366,627	 	 	 	217,416	 	 	 	206,481	 	 	 	138,103	 	 	 	1,100,515	 	
Repurchase agreements	 	 	2,657	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	2,657	 	
Junior subordinated notes(3)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	289,958	 	 	 	289,958	 	
Mortgage note payable - held-for-sale	 	 	—	 	 	 	—	 	 	 	41,440	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	41,440	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Totals	 	$	100,159	 	 	$	80,686	 	 	$	726,828	 	 	$	217,416	 	 	$	206,481	 	 	$	478,219	 	 	$	1,809,789	 	

 
 	 	 	
(1)	 	Represents principal amounts due based on contractual maturities	

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009

 	 	 	
(2)	 	Comprised of $254.1 million of CDO I debt, $329.5 million of CDO II debt and $516.9 million of CDO III debt with an estimated weighted average remaining maturity of 2.08, 3.35 and 3.15 years, respectively, as of December 31, 2009. In 2009, the Company repurchased, at a discount, approximately $42.8 million of investment grade notes originally issued by the Company’s CDO I, CDO II and CDO III issuers and recorded a reduction of the outstanding debt balance of $42.8 million. In the first quarter of 2010, the Company purchased, at a discount, approximately $19.4 million of investment grade notes originally issued by our CDO I, CDO II and CDO III issuers and recorded a reduction of the outstanding debt balance of $19.4. million. In February 2010, the Company re-issued the CDO bonds it had acquired throughout 2009 with an aggregate face amount of $42.8 million in exchange for the retirement of a portion of its junior subordinated notes.	
 	 	 	
(3)	 	Represents the face amount due upon maturity. The carrying value is $259.5 million, which is net of a deferred amount of $30.5 million. In 2009, the Company repurchased, at a discount, approximately $9.4 million of investment grade rated junior subordinated notes originally issued by the Company’s issuing entity and recorded a reduction of the outstanding debt balance of $9.4 million. In February 2010, the Company retired $114.1 million of its junior subordinated notes in exchange for the re-issuance of certain of its own CDO bonds, as well as other assets.	
 
In accordance with certain loans and investments, the Company has outstanding unfunded commitments of $66.0 million as of December 31, 2009, that the Company is obligated to fund as the borrowers meet certain requirements. Specific requirements include, but are not limited to, property renovations, building construction, and building conversions based on criteria met by the borrower in accordance with the loan agreements. In relation to the $66.0 million outstanding balance at December 31, 2009, the Company’s restricted cash balance and CDO III revolver capacity contained approximately $15.2 million of cash and $13.3 million of capacity available to fund the portion of the unfunded commitments for loans financed by the Company’s CDO vehicles.
 
Litigation
 
The Company currently is neither subject to any material adverse litigation nor, to management’s knowledge, is any material adverse litigation currently threatened against the company.

Note 13 —	Stockholders’ Equity	
 
Preferred Stock
 
Concurrent with the formation of the Company, ACM contributed a portfolio of structured finance investments and related debt to ARLP, the operating partnership of the Company, in exchange for 3,146,724 units of limited partnership interest in ARLP and warrants to purchase an additional 629,345 operating partnership units which were exercised in 2004. Concurrently, the Company, ARLP and ACM entered into a pairing agreement. Pursuant to the pairing agreement, each operating partnership unit issued to ACM and issuable to ACM upon the subsequent exercise of its warrants for additional operating partnership units was paired with one share of the Company’s special voting preferred stock. Each share of special voting preferred stock entitled the holder to one vote on all matters submitted to a vote of the Company’s stockholders. In June 2008, ACM exercised its right to redeem its 3,776,069 OP units in the Company’s operating partnership for shares of the Company’s common stock on a one-for-one basis. As a result, the special voting preferred shares paired with each OP unit, pursuant to a pairing agreement, were simultaneously redeemed and cancelled by the Company. At December 31, 2009 and 2008, the Company had no preferred shares or OP units outstanding.
 
Common Stock
 
The Company’s charter provides for the issuance of up to 500 million shares of common stock, par value $0.01 per share, and 100 million shares of preferred stock, par value $0.01 per share. The Company was incorporated in June 2003 and was initially capitalized through the sale of 67 shares of common stock for $1,005.
 
In March 2007, the Company filed a shelf registration statement on Form S-3 with the SEC under the 1933 Act with respect to an aggregate of $500.0 million of debt securities, common stock, preferred stock, depositary shares and warrants, that may be sold by the Company from time to time pursuant to Rule 415 of the 1933 Act. On April 19, 2007, the Commission declared this shelf registration statement effective. In June 2007, the Company sold 2,700,000 shares of its common stock registered on the shelf registration statement in a public offering at a price of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
 
$27.65 per share, for net proceeds of approximately $73.6 million after deducting the underwriting discount and the other estimated offering expenses. The Company used the proceeds to pay down debt and finance its loan and investment portfolio. The underwriters did not exercise their over allotment option for additional shares. At December 31, 2009, the Company had $425.3 million available under this shelf registration.
 
In June 2008, the Company issued 3,776,069 common shares upon the exchange of OP units by ACM on a one-for-one basis. As a result, the special voting preferred shares paired with each OP unit, pursuant to a pairing agreement, were simultaneously redeemed and cancelled by the Company. In connection with this transaction, the Company’s Board of Directors approved a resolution of the Company’s charter allowing ACM and Ivan Kaufman to own more than the 7% ownership limitation of the Company’s outstanding common stock.
 
In August 2008, the Company entered into an equity placement program sales agreement with a securities agent whereby the Company may issue and sell up to 3 million shares of its common stock through the agent who agrees to use its commercially reasonable efforts to sell such shares during the term of the agreement and under the terms set forth therein. To date, the Company has not utilized this equity placement program.
 
The Company had 25,387,410 and 25,142,410 shares of common stock outstanding at December 31, 2009 and 2008, respectively.
 
Deferred Compensation
 
The Company has a stock incentive plan, under which the board of directors has the authority to issue shares of stock to certain directors, officers, and employees of the Company and ACM. As of December 31, 2008, there were 326,453 unvested shares of restricted common stock issued under this plan with a weighted average grant date fair value of $19.91 per share. On April 21, 2009, the Company issued an aggregate of 245,000 shares of restricted common stock under the Plan, with a grant date fair value of $1.36 per share of which 155,000 shares were awarded to certain employees of the Company and ACM and 90,000 shares were issued to members of the board of directors. As a means of emphasizing retention at a critical time for the Company and due to their relatively low value, the 245,000 common shares underlying the restricted stock awards granted were fully vested as of the date of grant. In addition, in April 2009, 83,362 shares of previously unvested restricted common stock vested and the Company accelerated the vesting of all remaining unvested shares underlying restricted stock awards totaling 243,091 shares previously granted to certain employees of the Company and ACM and non-management members of the board. All of the shares that vested in 2009 had a weighted average grant date fair value of $19.91 per share. As a result of these transactions, the Company recorded approximately $2.1 million of expense in the Company’s Consolidated Statements of Operations during the second quarter of 2009 of which, $1.7 million was recorded in employee compensation and benefits and $0.4 million was recorded in selling and administrative. In May 2009, the Company’s shareholders approved an amendment to the Plan to authorize the grant of stock options, as well as the authorization of an additional 1,250,000 shares of the Company’s common stock to be reserved for issuance under the Plan.
 
Dividends paid on restricted shares are recorded as dividends on shares of the Company’s common stock whether or not they are vested. For accounting purposes, the Company measures the compensation costs for these shares as of the date of the grant, with subsequent remeasurement for any unvested shares granted to non-employees of the Company with such amounts expensed against earnings, at the grant date (for the portion that vest immediately) or ratably over the respective vesting periods. For the years ended December 31, 2009, 2008 and 2007, compensation expense related to this plan totaled $2.6 million, $3.0 million and $2.5 million, respectively. Such amounts appear on the Company’s Consolidated Statement of Operations under “employee compensation and benefits” for employees and under “selling and administrative” expense for non-employees.
 
Warrants
 
In connection with the amended and restructured term credit agreements, revolving credit agreement and working capital facility with Wachovia Bank, National Association, the Company issued Wachovia one million
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
 
warrants at an average strike price of $4.00. 500,000 warrants were exercisable immediately at a price of $3.50, 250,000 warrants are exercisable after July 23, 2010 at a price of $4.00 and 250,000 warrants are exercisable after July 23, 2011 at a price of $5.00. All of the warrants expire on July 23, 2015 and no warrants have been exercised to date. The warrants were valued at approximately $0.6 million using the Black-Scholes method and will be amortized into interest expense over the life of the agreement in the Company’s Consolidated Statement of Operations. See Note 8 — “Debt Obligations” for further information relating to this transaction.

Note 14 —	(Loss) Earnings Per Share	
 
Basic (loss) earnings per share (“EPS”) is calculated by dividing net (loss) income attributable to Arbor Realty Trust, Inc. by the weighted average number of shares of common stock outstanding during each period inclusive of unvested restricted stock which participate fully in dividends. Diluted EPS is calculated by dividing income adjusted for noncontrolling interest in the operating partnership by the weighted average number of shares of common stock outstanding plus the additional dilutive effect of common stock equivalents during each period. The Company’s common stock equivalents are the potential shares from settlement of incentive management fees in common stock, ARLP’s operating partnership units prior to the redemption for common stock in June 2008, and outstanding warrants.
 
During the first six months of 2008, ACM, the manager of the Company, earned incentive management fees totaling $10.2 million, of which $7.3 million was prepaid relating to the incentive management fee earned from the monetization of the POM equity kicker transaction in June 2008. Based on the terms of the management agreement, ACM elected to receive its incentive management fees partially in cash totaling $5.6 million and partially in common shares totaling 472,582, all of which were issued in 2008. In addition, in June 2008, ACM exercised its right to redeem its 3,776,069 OP units in the Company’s operating partnership for shares of the Company’s common stock on a one-for-one basis. For the full year December 31, 2008, these common stock equivalents were considered anti-dilutive and excluded from diluted earnings per share, as periods with a net loss cannot be diluted.
 
In 2007, ACM earned incentive management fees totaling $40.8 million. Based on the terms of the management agreement, ACM elected to be paid its incentive management fees partially in cash totaling $27.1 million and partially in common shares totaling 556,631 of which 86,772 were issued in 2008. A portion of these shares were considered dilutive for the period in which they were earned but not yet issued.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
 
The following is a reconciliation of the numerator and denominator of the basic and diluted net (loss) earnings per share computations for the years ended December 31, 2009, 2008, and 2007, respectively.

 	 	For the Year Ended December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	
 	 	Basic	 	 	Diluted(1)	 	 	Basic	 	 	Diluted	 	 	Basic	 	 	Diluted	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income from continuing operations, net of non-controlling interest	 	$	(225,355,819	)	 	$	(225,355,819	)	 	$	(80,647,550	)	 	$	(80,647,550	)	 	$	84,533,878	 	 	$	84,533,878	 	
Add: net income attributable to noncontrolling interest in operating partnership	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	16,989,177	 	
Net loss from discontinued operations	 	 	(5,275,337	)	 	 	(5,275,337	)	 	 	(582,294	)	 	 	(582,294	)	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
(Loss) earnings allocable to common stock	 	$	(230,631,156	)	 	$	(230,631,156	)	 	$	(81,229,844	)	 	$	(81,229,844	)	 	$	84,533,878	 	 	$	101,523,055	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average number of common shares outstanding	 	 	25,313,574	 	 	 	25,313,574	 	 	 	22,916,648	 	 	 	22,916,648	 	 	 	19,022,616	 	 	 	19,022,616	 	
Weighted average number of operating partnership units	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	3,776,069	 	
Dilutive effect of incentive management fee shares	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	71,474	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total weighted average common shares outstanding	 	 	25,313,574	 	 	 	25,313,574	 	 	 	22,916,648	 	 	 	22,916,648	 	 	 	19,022,616	 	 	 	22,870,159	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income from continuing operations, net of noncontrolling interest, per common share	 	$	(8.90	)	 	$	(8.90	)	 	$	(3.52	)	 	$	(3.52	)	 	$	4.44	 	 	$	4.44	 	
Loss from discontinued operations per common share	 	 	(0.21	)	 	 	(0.21	)	 	 	(0.02	)	 	 	(0.02	)	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income attributable to Arbor Realty Trust, Inc. per common share	 	$	(9.11	)	 	$	(9.11	)	 	$	(3.54	)	 	$	(3.54	)	 	$	4.44	 	 	$	4.44	 	

 
 	 	 	
(1)	 	As of December 31, 2009, diluted net loss per share excludes one million warrants, which were anti-dilutive for the period.	

Note 15 —	Related Party Transactions	
 
Due from related party was $15.2 million at December 31, 2009 and consisted of $7.0 million for a loan paydown received by ACM in December 2009, which was repaid in the first quarter of 2010, $0.9 million of escrows due from ACM related to 2009 real estate asset transactions and $7.3 million reclassified from prepaid management fee — related party, related to the POM transaction that closed in 2009. See Note 6 — “Investment in Equity Affiliates” for further details. In accordance with the August 2009 amended management agreement, since no incentive fee was earned for 2009, the prepaid management fee is to be paid back in installments of 25% due by December 31, 2010 and 75% due by June 30, 2012, with an option to make payment in both cash and Arbor Realty Trust, Inc. common stock provided that at least 50% of the payment is made in cash, and will be offset against any future incentive management fees or success-based payments earned by our manager prior to June 30, 2012. At
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
 
December 31, 2008, due from related party was $2.9 million as a result of an overpayment of incentive management compensation based on the results of the twelve months ended December 31, 2008. During the second quarter of 2009, ACM repaid the $2.9 million overpayment in full. See Note 17 — “Management Agreement” for further details.
 
At December 31, 2009, due to related party was $2.0 million and consisted primarily of base management fees due to ACM, which will be remitted by the Company in 2010. At December 31, 2008, due to related party was $1.0 million and consisted of $0.8 million of base management fees and $0.2 million of unearned fees due to ACM that were remitted by the Company in February 2009.
 
During 2009, the Company purchased from ACM, approximately $20.0 million of investment grade rated bonds originally issued by two of its three CDO issuing entities and approximately $9.4 million of junior subordinated notes originally issued by a wholly-owned subsidiary of the Company’s operating partnership for $9.1 million and recorded a net gain on early extinguishment of debt of $20.3 million. ACM had purchased the CDO notes from third party investors for $8.2 million in 2008, and the junior subordinated notes from third party investors for $1.3 million in 2009. See Note 8 — “Debt Obligations” for further details.
 
At December 31, 2008, the Company had outstanding borrowings from ACM totaling $4.2 million. In January 2009, the loan was repaid in full. See Note 8 — “Debt Obligations” for further details.
 
During 2006, the Company originated a $7.2 million bridge loan and a $0.3 million preferred equity investment secured by garden-style and townhouse apartments in South Carolina. The Company also had a 25.0% carried profits interest in the borrowing entity. In January 2008, the borrowing entity refinanced the property through ACM’s Fannie Mae program and the Company received $0.3 million for its profits interest as well as full repayment of the $0.3 million preferred equity investment and the $7.0 million outstanding balance on the bridge loan. The Company retained the 25% carried profits interest.
 
At December 31, 2006, the Company had a $7.75 million first mortgage loan that bore interest at a variable rate of one month LIBOR plus 4.25% and was scheduled to mature in March 2006. In March 2006, this loan was extended for one year with no other change in terms. The underlying property was sold to a third party in March 2007. The Company provided the financing to the third party and, in conjunction with the sale, the original loan was repaid in full in March 2007. The original loan was made to a not-for-profit corporation that holds and manages investment property from the endowment of a private academic institution. Two of the Company’s directors are members of the board of trustees of the original borrower and the private academic institution. Interest income recorded from the original loan for the year ended December 31, 2007 was approximately $0.1 million.
 
The Company is dependent upon its manager (ACM), with whom it has a conflict of interest, to provide services to the Company that are vital to its operations. The Company’s chairman, chief executive officer and president, Mr. Ivan Kaufman, is also the chief executive officer and president of ACM, and, the Company’s chief financial officer and treasurer, Mr. Paul Elenio, is the chief financial officer of ACM. In addition, Mr. Kaufman and the Kaufman entities together beneficially own approximately 92% of the outstanding membership interests of ACM and certain of the Company’s employees and directors, also hold an ownership interest in ACM. Furthermore, one of the Company’s directors also serves as the trustee of one of the Kaufman entities that holds a majority of the outstanding membership interests in ACM and co-trustee of another Kaufman entity that owns an equity interest in ACM. ACM currently holds approximately 5.4 million common shares, representing 21.2% of the voting power of the Company’s outstanding stock as of December 31, 2009.

Note 16 —	Distributions	
 
The Company must currently distribute at least 90% of its taxable income in order to qualify as a REIT and must distribute 100% of its taxable income in order not to be subject to corporate federal income taxes on retained income. Additionally, the IRS has issued guidance that temporarily allows listed REITs to offer shareholders
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
 
elective dividends which are paid in a combination of cash and common stock, even if the amount payable in cash is capped, so long as that cap is not less than 10% of the total dividend. The Company anticipates it will distribute all of its taxable income to its stockholders. Because taxable income differs from cash flow from operations due to non-cash revenues or expenses (such as depreciation), in certain circumstances, the Company may generate operating cash flow in excess of its distributions or, alternatively, may be required to borrow to make sufficient distribution payments.
 
The following table presents dividends paid by the Company on its common stock for the years ended December 31, 2009, 2008 and 2007:

 	 	 	 	 	 	For Tax Purposes	
 	 	 	 	 	 	Dividend Classified
	 	 	 	 	 	Dividend Classified
	
 	 	 	 	 	 	as Ordinary Income	 	Capital Gain Distribution	 	as Return of Capital	
 	 	 	 	Dividend
	 	 	 	Dividend
	 	 	 	 	 	Dividend
	 	 	 	Dividend
	
 	 	Total
	 	Paid
	 	 	 	Paid
	 	Qualified
	 	 	 	Paid
	 	 	 	Paid
	
 	 	Dividends
	 	Per
	 	 	 	Per
	 	Dividend
	 	 	 	Per
	 	 	 	Per
	
Year	 	Paid	 	Share	 	Percent	 	Share	 	Income(1)	 	Percent	 	Share	 	Percent	 	Share	
 	 	(In thousands)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2009	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
2008	 	$	47,361	 	 	$	2.10	 	 	 	99.05	%	 	$	2.08	 	 	 	—	 	 	 	0.95	%	 	$	0.02	 	 	 	—	 	 	 	—	 	
2007	 	$	46,586	 	 	$	2.46	 	 	 	94.31	%	 	$	2.32	 	 	 	18.10	%	 	 	5.69	%	 	$	0.14	 	 	 	—	 	 	 	—	 	

 	 	 	
(1)	 	Qualified dividend income is eligible for reduced dividend rates.	
 
The Company declared and paid distributions of $14,500, $14,539 and $14,500 for the years ended December 31, 2009, 2008 and 2007, respectively, representing the 12.5% return on the preferred shares issued to third parties by its subsidiary REIT.
 
Under the terms of certain financing agreements, annual dividends are limited to 100% of taxable income to common shareholders and are required to be paid in the form of the Company’s stock to the maximum extent permissible (currently 90%), with the balance payable in cash. The Company will be permitted to pay 100% of taxable income in cash if certain conditions are met, as previously disclosed. See Note 8 — “Debt Obligations” for further details.
 
Based on the continued difficult economic environment, the Board of Directors and the Company have elected not to pay a common stock dividend for the year ended December 31, 2009. In January 2009, the Board of Directors elected not to pay a common stock distribution with respect to the quarter ended December 31, 2008. The dividends paid in 2008 fully satisfy its 2008 REIT distribution requirements.

Note 17 —	Management Agreement	
 
The Company, ARLP and Arbor Realty SR, Inc. have entered into a management agreement with ACM, which provides that the Company will pay ACM a base management fee and incentive compensation fee for performing services under the management agreement.
 
The Company’s chief executive officer is also ACM’s chief executive officer and controlling equity owner and the Company’s chief financial officer and treasurer is also ACM’s chief financial officer. ACM has agreed to provide the Company with structured finance investment opportunities and loan servicing as well as other services necessary to operate its business. The Company relies to a significant extent on the facilities and resources of ACM to conduct its operations. ACM’s management of the Company is under the direction or supervision of the Company’s board of directors. The management agreement requires ACM to manage the business affairs in conformity with the policies and the general investment guidelines that are approved and monitored by the Company’s board of directors.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
 
On August 6, 2009, the Company amended its management agreement with ACM. The amendment was negotiated by a special committee of the Company’s Board of Directors, consisting solely of independent directors and approved unanimously by all of the independent directors. JMP Securities LLC served as financial advisor to the special committee and Skadden, Arps, Slate, Meagher & Flom LLP served as its special counsel. The significant components of the amendment, effective as of January 1, 2009, were as follows:

 	• 	The existing base management fee structure, which was calculated as a percentage of the Company’s equity, was replaced with an arrangement whereby the Company will reimburse ACM for its actual costs incurred in managing the Company’s business based on the parties’ agreement in advance on an annual budget with subsequent quarterly true-ups to actual costs. This change was adopted retroactively to January 1, 2009 and the Company estimated the 2009 base management fee would be in the range of $8.0 million to $8.5 million. The 2010 base management fee is estimated to be in the same range. Concurrent with this change, all future origination fees on investments will be retained by the Company, whereas under the prior agreement, origination fees up to 1% of the loan were retained by ACM. In addition, the Company made a $3.0 million payment to the manager in consideration of expenses incurred by the manager in 2008 in managing the Company’s business and certain other services. These changes were accounted for prospectively as a change in accounting estimate.	
 	 	 	
 	• 	The percentage hurdle for the incentive fee will be applied on a per share basis to the greater of $10.00 and the average gross proceeds per share, whereas the previous management agreement provided for such percentage hurdle to be applied only to the average gross proceeds per share. In addition, only 60% of any loan loss and other reserve recoveries will be eligible to be included in the incentive fee calculation, which will be spread over a three year period, whereas the previous management agreement did not limit the inclusion of such recoveries in the incentive fee calculation.	
 	 	 	
 	• 	The amended management agreement allows the Company to consider, from time to time, the payment of additional fees to the manager for accomplishing certain specified corporate objectives. In accordance with the agreement, “success-based” payments were paid in the third quarter of 2009 totaling $4.1 million, for the trust preferred and Wachovia debt restructurings.	
 	 	 	
 	• 	The amended management agreement modifies and simplifies the provisions related to the termination of the agreement and any related fees payable in such instances, including for internalization, with a termination fee of $10.0 million, rather than payment based on a multiple of base and incentive fees as previously existed.	
 	 	 	
 	• 	The amended management agreement will remain in effect until December 31, 2010, and will be renewed automatically for successive one-year terms thereafter.	
 
The amended management agreement has an initial term up to December 31, 2010 and is renewable automatically for an additional one year period every year thereafter, unless terminated with six months’ prior written notice. If the Company terminates or elects not to renew the management agreement without cause, it is required to pay a termination fee of $10.0 million.
 
For performing services under the management agreement, the Company previously paid ACM an annual base management fee payable monthly in cash as a percentage of ARLP’s equity and equal to 0.75% per annum of the equity up to $400.0 million, 0.625% per annum of the equity from $400.0 million to $800.0 million and 0.50% per annum of the equity in excess of $800.0 million. For purposes of calculating the base management fee, equity equaled the month end value computed in accordance with GAAP of (1) total partners’ equity in ARLP, plus or minus (2) any unrealized gains, losses or other items that do not affect realized net income. With respect to all loans and investments originated during the term of the management agreement, the Company had also agreed to pay ACM an amount equal to 100% of the origination fees paid by the borrower up to 1% of the loan’s principal amount.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
 
The Company also paid ACM incentive compensation on a quarterly basis, calculated as (1) 25% of the amount by which (a) ARLP’s funds from operations per unit of partnership interest in ARLP, adjusted for certain gains and losses, exceeds (b) the product of (x) 9.5% per annum or the Ten Year U.S. Treasury Rate plus 3.5%, whichever is greater, and (y) the weighted average of book value of the net assets contributed by ACM to ARLP per ARLP partnership unit, the offering price per share of the Company’s common equity in the private offering on July 1, 2003 and subsequent offerings and the issue price per ARLP partnership unit for subsequent contributions to ARLP, multiplied by (2) the weighted average of ARLP’s outstanding partnership units.
 
The incentive compensation is measured annually in arrears; provided, however, ACM shall receive quarterly installments thereof in advance. The quarterly installments are calculated based on the results for the period of twelve months ending on the last day of the fiscal quarter with respect to which such installment is payable. Each quarterly installment payment is deemed to be an advance of a portion of the incentive fee payable for the year. At least 25% of this incentive compensation fee is paid to ACM in shares of the Company’s common stock, subject to ownership limitations in the Company’s charter. For purposes of determining the number of shares that are paid to ACM to satisfy the common stock portion of the incentive management fee from and after the date the Company’s common shares are publicly traded, each common share shall have a value equal to the average closing price per common share based on the last twenty days of the fiscal quarter with respect to which the incentive fee is being paid. The incentive compensation fee is accrued as it is earned. The expense incurred for incentive fee paid in common stock is determined using the amount of stock calculated as noted above and the quoted market price of the stock on the last day of each quarter. At December 31, the Company remeasures the incentive fee expense paid to ACM in shares of the company’s common stock in accordance with current accounting guidance, which discusses how to measure at the measurement date when certain terms are not known prior to the measurement date. Accordingly, expense recorded related to common stock issued as a portion of incentive fee is adjusted to reflect the fair value of the stock on the measurement date when the final calculation of total incentive fee is determined. In the event the calculated incentive compensation for the full year is an amount less than the total of the installment payments made to ACM for the year, ACM will refund to the Company the amount of such overpayment in cash regardless of whether such installments were paid in cash or common stock. In such case, the Company would record a negative incentive fee expense in the quarter when such overpayment is determined.
 
ACM is responsible for all costs incident to the performance of its duties under the management agreement, including compensation of its employees, rent for facilities and other “overhead” expenses. The Company is required to pay ACM management fees as well as reimburse ACM for all expenses incurred on behalf of the Company in connection with the raising of capital or the incurrence of debt, interest expenses, taxes and license fees, litigation and extraordinary or non recurring expenses.
 
ACM, pursuant to the management agreement with the Company, and Mr. Kaufman, pursuant to his non-competition agreement with the Company, have granted the Company a right of first refusal to pursue all opportunities identified by them or their affiliates to invest in multifamily and commercial mortgage loans and customized financing transactions, including bridge loans, mezzanine loans, preferred equity investments, note acquisitions and participation interests in owners of real properties (collectively, “Structured Finance Investments”) as long as such investment opportunities are consistent with the Company’s investment objectives and guidelines and such investments would not adversely affect the Company’s status as a REIT. These agreements also provide that ACM or Mr. Kaufman, as the case may be, may pursue any opportunity in Structured Finance Investments if the opportunity is rejected by both the Company’s credit committee and a majority of the Company’s independent directors.
 
Pursuant to the management agreement and Mr. Kaufman’s non-competition agreement, the Company has agreed not to pursue, and to allow ACM and its affiliates, including Mr. Kaufman, to pursue opportunities to invest in multi-family and commercial mortgage loans that meet the underwriting and approval guidelines of Fannie Mae, the Federal Housing Administration and conduit commercial lending programs secured by first liens on real property (collectively, the “Manager Target Investments”). In addition to its exclusive right to pursue Manager
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
 
Target Investments, ACM and its affiliates may pursue any other type of investment (except Structured Finance Investments) without the Company’s consent.
 
The following table sets forth the Company’s base and incentive compensation management fees for the periods indicated:

 	 	For the Year Ended December 31,	 	
Management Fees:	 	2009	 	 	2008	 	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Base	 	$	15,136,170	 	 	$	3,539,854	 	 	$	3,207,116	 	
Incentive	 	 	—	 	 	 	—	 	 	 	21,797,859	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total expensed	 	$	15,136,170	 	 	$	3,539,854	 	 	$	25,004,975	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Incentive compensation — prepaid	 	 	—	 	 	 	7,292,448	 	 	 	19,047,949	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total management fee	 	$	15,136,170	 	 	$	10,832,302	 	 	$	44,052,924	 	

For the year ended December 31, 2009, as a result of the amended management agreement, the Company recorded base management fees of $15.1 million , or $0.60 per basic and diluted common share. For the years ended December 31, 2008 and 2007 ACM earned $3.5 million, and $3.2 million, respectively in base management fees. The new fee structure also provides for “success-based” payments to be paid to the Company’s manager upon the completion of specified corporate objectives in addition to the standard base management fee. In the third quarter of 2009, the base management fee included success-based payments which were paid for the trust preferred and Wachovia debt restructurings totaling an additional $4.1 million. Of the base management fees recorded, approximately $2.3 million, $0.8 million, and $0.3 million was included in due to related party at December 31, 2009, 2008 and 2007, respectively. These amounts are paid in the quarters subsequent to each respective year end.
 
Installments of the annual incentive compensation are subject to quarterly recalculation and potential reconciliation at the end of the fiscal year, and any overpayments are required to be repaid in accordance with the management agreement. For the year ended December 31, 2009, ACM did not earn an incentive compensation installment. During 2008, the Company paid incentive compensation installments totaling $2.9 million, of which $1.4 million was elected by ACM to be paid in 116,680 shares of common stock and $1.5 million paid in cash. For the year ended December 31, 2008, ACM did not earn an incentive compensation fee and the overpayment of $2.9 million was recorded and included in due from related party. In June 2009, ACM repaid the $2.9 million in accordance with the amended management agreement described above.
 
In addition, the Company recorded a $7.3 million deferred management fee related to the incentive compensation fee earned from the monetization of the POM equity kicker transaction in June 2008, which was subsequently paid and reclassified to prepaid management fees. The transaction closed in the second quarter of 2009. See Note 6 — “Investment in Equity Affiliates” for further details. The $7.3 million incentive compensation fee was elected by ACM to be paid in 355,903 shares of common stock and $4.1 million paid in cash. In accordance with the amended management agreement, since no incentive fee was earned for 2009, the prepaid management fee is to be paid back in installments of 25% due by December 31, 2010 and 75% due by June 30, 2012, with an option to make payment in both cash and Arbor Realty Trust, Inc. common stock provided that at least 50% of the payment is made in cash, and will be offset against any future incentive management fees or success-based payments earned by our manager prior to June 30, 2012.
 
In 2007, ACM earned an incentive compensation installment totaling $40.8 million, of which $13.7 million was elected by ACM to be paid in 556,631 shares of common stock and $27.1 million paid in cash. Included in the $40.8 million of incentive compensation was $21.8 million recorded as management fee expense and $19.0 million recorded as prepaid management fees related to the incentive compensation management fee on the deferred revenue recognized on the transfer of control of the 450 West 33 rd  Street property of one of the Company’s equity affiliates. As provided for in the management agreement, ACM elected to be paid its fourth quarter incentive
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
 
compensation management fee partially in 86,772 shares of common stock with the remainder to be paid in cash totaling $1.5 million, which was subsequently paid in February 2008.

Note 18 —	Income Taxes	
 
The Company is organized and conducts its operations to qualify as a real estate investment trust (“REIT”) and to comply with the provisions of the Internal Revenue Code with respect thereto. A REIT is generally not subject to federal income tax on taxable income which is distributed to its stockholders, provided that at least 90% of taxable income is distributed and provided that certain other requirements are met. Since the Company did not have REIT-taxable income for the year ended December 31, 2009, and distributed 100% of its 2008 and 2007 REIT taxable income, no provision has been made for federal income taxes in the accompanying Consolidated Financial Statements. Certain of the Company’s assets or operations that would not otherwise comply with the REIT requirements, are owned or conducted by its taxable REIT subsidiaries, the income of which is subject to federal and state income taxes. The Company did not record a provision for income taxes related to the assets that are held in taxable REIT subsidiaries for the years ended December 31, 2009 and 2008, but did record a provision in 2007.
 
The taxable REIT subsidiaries’ provision for income taxes was comprised as follows:

 	 	Year Ended December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Current tax provision:	 	 	 	 	 	 	 	 	 	 	 	 	
Federal	 	$	          —	 	 	$	          —	 	 	$	11,949,193	 	
State	 	 	—	 	 	 	—	 	 	 	7,135,807	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total current tax provision	 	 	—	 	 	 	—	 	 	 	19,085,000	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Deferred tax provision:	 	 	 	 	 	 	 	 	 	 	 	 	
Federal	 	 	—	 	 	 	—	 	 	 	(1,380,415	)	
State	 	 	—	 	 	 	—	 	 	 	(819,585	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total deferred tax provision	 	 	—	 	 	 	—	 	 	 	(2,200,000	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total provision	 	$	—	 	 	$	—	 	 	$	16,885,000	 	

The taxable REIT subsidiaries’ effective income tax rate as a percentage of pretax income differed from the U.S. federal statutory rate as follows:

 	 	Year Ended December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
U.S. federal statutory rate	 	 	35.0	%	 	 	35.0	%	 	 	35.0	%	
State and local income taxes, net of federal tax benefit	 	 	5.7	 	 	 	6.0	 	 	 	11.3	 	
Change in valuation allowance	 	 	(40.7	)	 	 	(41.0	)	 	 	(2.1	)	
Other	 	 	—	 	 	 	—	 	 	 	(0.6	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Effective income tax rate	 	 	—	%	 	 	—	%	 	 	43.6	%	

The Company’s effective tax rate for 2009, 2008 and 2007 represents the tax on individual taxable REIT subsidiaries, some of which are in a net income or net loss position that are not combined for tax reporting purposes, but have been aggregated here for financial statement reporting purposes.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
 
The significant components of deferred tax assets (liabilities) were as follows:

 	 	December 31,	 	
 	 	2009	 	 	2008	 	
 	 	 	 	 	 	 	 	 	
Deferred tax assets (liabilities):	 	 	 	 	 	 	 	 	
Expenses not currently deductible	 	$	5,253,373	 	 	$	494,565	 	
Net operating loss carryforwards	 	 	5,238,973	 	 	 	3,377,198	 	
Interest in equity affiliates — net	 	 	(2,270,411	)	 	 	233,121	 	
 	 	 	 	 	 	 	 	 	
Deferred tax assets	 	 	8,221,935	 	 	 	4,104,884	 	
Valuation allowance	 	 	(6,021,935	)	 	 	(1,904,884	)	
 	 	 	 	 	 	 	 	 	
Net deferred tax assets	 	$	2,200,000	 	 	$	2,200,000	 	

Deferred tax assets, net of deferred tax liabilities, are included in other assets in the Consolidated Balance Sheet. At December 31, 2009, the Company has approximately $10.5 million of deferred tax assets consisting of net operating loss carryforwards and expenses not currently deductible. In addition, the Company has approximately $2.2 million of deferred tax assets resulting from the Company’s investment in equity affiliates. The Company’s deferred tax assets are offset in part by approximately $4.5 million of deferred tax liabilities resulting from timing differences relating to investments in equity affiliates, and a valuation allowance of approximately $6.0 million.
 
At December 31, 2008, the Company has approximately $3.9 million of deferred tax assets consisting of net operating loss carry forwards and expenses not currently deductible. In addition, the Company has approximately $2.2 million of deferred tax assets resulting from our investment in equity affiliates. The Company’s deferred tax assets are offset in part by approximately $2.0 million of deferred tax liabilities resulting from timing differences relating to investments in equity affiliates, and a valuation allowance of approximately $1.9 million.
 
The taxable REIT subsidiaries have federal and state net operating loss carryforwards as of December 31, 2009 and 2008 of approximately $12.8 million and $8.2 million, respectively, which will expire through 2029 and 2028, respectively. The Company has concluded that it is more likely than not that the net operating losses will not be utilized during the carryforward period, and as such, net of deferred tax liabilities, the Company has established a valuation allowance against these net deferred tax assets.
 
As of December 31, 2009, the Company had approximately $87.0 million of federal and state net operating losses and approximately $63.0 million of capital losses. The net operating losses will expire through 2029 and the capital losses will expire through 2014.
 
The Company has assessed its tax positions for all open tax years, which includes 2006 to 2009, and concluded the there were no material uncertainties to be recognized. The Company’s accounting policy with respect to interest and penalties related to tax uncertainties is to classify these amounts as provision for income taxes. The Company has not recognized any interest and penalties related to tax uncertainties for the years ended December 31, 2009, 2008 and 2007.

Note 19 —	Due to Borrowers	
 
Due to borrowers represents borrowers’ funds held by the Company to fund certain expenditures or to be released at the Company’s discretion upon the occurrence of certain pre-specified events, and to serve as additional collateral for borrowers’ loans. While retained, these balances earn interest in accordance with the specific loan terms with which they are associated.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009

 	 	
Note 20 —	Fair Value	
 
Fair Value of Financial Instruments
 
Fair value estimates are dependent upon subjective assumptions and involve significant uncertainties resulting in variability in estimates with changes in assumptions. The following table summarizes the carrying values and the estimated fair values of financial instruments as of December 31, 2009 and 2008:

 	 	December 31, 2009	 	December 31, 2008	
 	 	 	 	Estimated
	 	 	 	Estimated
	
 	 	Carrying Value	 	Fair Value	 	Carrying Value	 	Fair Value	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Financial assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loans and investments, net	 	$	1,700,774,288	 	 	$	1,403,364,710	 	 	$	2,181,683,619	 	 	$	1,886,787,988	 	
Available-for-sale securities	 	 	488,184	 	 	 	488,184	 	 	 	529,104	 	 	 	529,104	 	
Securities held-to-maturity	 	 	60,562,808	 	 	 	31,774,920	 	 	 	58,244,348	 	 	 	18,735,000	 	
Derivative financial instruments	 	 	2,516,424	 	 	 	2,516,424	 	 	 	7,192,967	 	 	 	7,192,967	 	
Financial liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Repurchase agreements	 	$	2,657,332	 	 	$	2,637,909	 	 	$	60,727,789	 	 	$	58,390,888	 	
Collateralized debt obligations	 	 	1,100,515,185	 	 	 	408,149,036	 	 	 	1,152,289,000	 	 	 	324,796,811	 	
Junior subordinated notes	 	 	259,487,421	 	 	 	80,083,264	 	 	 	276,055,000	 	 	 	66,061,690	 	
Notes payable	 	 	375,219,206	 	 	 	216,637,119	 	 	 	518,435,437	 	 	 	499,254,876	 	
Note payable - related party	 	 	—	 	 	 	—	 	 	 	4,200,000	 	 	 	4,177,373	 	
Mortgage note payable - held-for-sale	 	 	41,440,000	 	 	 	40,510,962	 	 	 	41,440,000	 	 	 	40,893,904	 	
Derivative financial instruments	 	 	47,886,372	 	 	 	47,886,372	 	 	 	98,161,523	 	 	 	98,161,523	 	
 
The following methods and assumptions were used by the Company in estimating the fair value of each class of financial instrument:
 
Loans and investments, net:  Fair values of loans and investments are estimated using discounted cash flow methodology, using discount rates, which, in the opinion of management, best reflect current market interest rates that would be offered for loans with similar characteristics and credit quality.
 
Available-for-sale securities:  Fair values are approximated based on current observed prices received from markets that trade such securities.
 
Securities held-to-maturity:  Fair values are approximated on current market quotes received from financial sources that trade such securities and are based on prevailing market data and derived from third party proprietary models based on well recognized financial principles and reasonable estimates about relevant future market conditions.
 
Derivative financial instruments:  Fair values are approximated on current market data received from financial sources that trade such instruments and are based on prevailing market data and derived from third party proprietary models based on well recognized financial principles and reasonable estimates about relevant future market conditions. These items are included in other assets and other liabilities on the Consolidated Balance Sheet. The Company incorporates credit valuation adjustments in the fair values of its derivative financial instruments to reflect counterparty nonperformance risk.
 
Repurchase agreements, notes payable and mortgage note payable — held-for-sale:  Fair values are estimated using discounted cash flow methodology, using discount rates, which, in the opinion of management, best reflect current market interest rates for financing with similar characteristics and credit quality. Due to their reasonably short-term nature, the differences between fair values and carrying values were relatively small.
 
Collateralized debt obligations:  Fair values are estimated based on broker quotations, representing the discounted expected future cash flows at a yield which reflects current market interest rates and credit spreads.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
 
Junior subordinated notes:  Fair values are estimated based on broker quotations, representing the discounted expected future cash flows at a yield which reflects current market interest rates and credit spreads.
 
Fair Value Measurement
 
Fair value is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.
 
Assets and liabilities disclosed at fair value are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities are as follows:

 	• 	Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets and liabilities carried at Level 1 fair value generally are government and agency securities, equities listed in active markets, investments in publicly traded mutual funds with quoted market prices and listed derivatives.	
 	 	 	
 	• 	Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life. Level 2 inputs include quoted market prices in markets that are not active for an identical or similar asset or liability, and quoted market prices in active markets for a similar asset or liability. Fair valued assets and liabilities that are generally included in this category are non-government securities, municipal bonds, certain hybrid financial instruments, certain mortgage and asset-backed securities including CDO bonds, certain corporate debt, certain commitments and guarantees, certain private equity investments and certain derivatives.	
 	 	 	
 	• 	Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. These valuations are based on significant unobservable inputs that require a considerable amount of judgment and assumptions. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Generally, assets and liabilities carried at fair value and included in this category are certain mortgage and asset-backed securities, certain corporate debt, certain private equity investments, certain municipal bonds, certain commitments and guarantees and certain derivatives.	
 
Determining which category an asset or liability falls within the hierarchy requires significant judgment and the Company evaluates its hierarchy disclosures each quarter.
 
The Company measures certain financial assets and financial liabilities at fair value on a recurring basis, including available-for-sale securities and derivative financial instruments. The fair value of these financial assets and liabilities was determined using the following inputs as of December 31, 2009:

 	 	 	 	 	 	Fair Value Measurements
	
 	 	Carrying
	 	Fair
	 	Using Fair Value Hierarchy	
 	 	Value	 	Value	 	Level 1	 	Level 2	 	Level 3	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Financial assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Available-for-sale securities(1)(2)	 	$	488,184	 	 	$	488,184	 	 	$	488,184	 	 	$	—	 	 	$	—	 	
Derivative financial instruments	 	 	2,516,424	 	 	 	2,516,424	 	 	 	—	 	 	 	2,516,424	 	 	 	—	 	
Financial liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative financial instruments	 	 	47,886,372	 	 	 	47,886,372	 	 	 	—	 	 	 	47,886,372	 	 	 	—	 	

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009

 	 	 	
(1)	 	During the year ended December 31, 2008, the Company’s Realty Finance Corporation, formerly CBRE, common stock securities were written to their fair value of $0.5 million, resulting in the recognition of a $16.2 million impairment that was considered other-than-temporary and included in operations for the period. An additional impairment charge of $0.4 million was recorded to the Consolidated Statements of Operations during the year ended December 31, 2009 to reflect the investment at its market value as of December 31, 2009.	
 	 	 	
(2)	 	During the year ended December 31, 2008, one of the Company’s Realty Finance Corporation, formerly CBRE, CDO bond securities was written down resulting in the recognition of a $1.4 million impairment that was considered other-than-temporary and included in earnings for the period. An additional impairment charge of $9.8 million was recorded to the Consolidated Statements of Operations during the year ended December 31, 2009 to reflect the reclassification of another Realty Finance Corporation, formerly CBRE, CDO bond investment from held-to-maturity to available-for-sale at market value as of December 31, 2009.	
 
Available-for-sale securities:  Fair values are approximated on current market quotes received from financial sources that trade such securities.
 
Derivative financial instruments:  Fair values are approximated based on current market data received from financial sources that trade such instruments and are based on prevailing market data and derived from third party proprietary models based on well recognized financial principles and reasonable estimates about relevant future market conditions. These items are included in other assets and other liabilities on the Consolidated Balance Sheet. The Company incorporates credit valuation adjustments in the fair values of its derivative financial instruments to reflect counterparty nonperformance risk.
 
The Company measures certain financial assets and financial liabilities at fair value on a nonrecurring basis, such as loans. The fair value of these financial assets and liabilities was determined using the following inputs as of December 31, 2009:

 	 	 	 	 	 	Fair Value Measurements
	
 	 	Carrying
	 	Fair
	 	Using Fair Value Hierarchy	
 	 	Value	 	Value	 	Level 1	 	Level 2	 	Level 3	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Financial assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Impaired loans, net(1)	 	$	367,339,444	 	 	$	326,560,321	 	 	$	—	 	 	$	—	 	 	$	326,560,321	 	

 	 	 	
(1)	 	The Company had an allowance for loan losses of $326.3 million relating to 31 loans with an aggregate carrying value, before reserves, of approximately $693.7 million at December 31, 2009.	
 
Loan impairment assessments:  Fair values of loans are estimated using discounted cash flow methodology, using discount rates, which, in the opinion of management, best reflect current market interest rates that would be offered for loans with similar characteristics and credit quality. Loans held for investment are intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan origination costs and fees, loan purchase discounts, and net of the allowance for loan losses when such loan or investment is deemed to be impaired. The Company considers a loan impaired when, based upon current information and events, it is probable that it will be unable to collect all amounts due for both principal and interest according to the contractual terms of the loan agreement. The Company performs evaluations of its loans to determine if the value of the underlying collateral securing the impaired loan is less than the net carrying value of the loan, which may result in an allowance and corresponding charge to the provision for loan losses.

Note 21 —	Summary Quarterly Consolidated Financial Information — Unaudited	
 
The following tables represent summarized quarterly financial data of the Company for the years ended December 31, 2009 and 2008 which, in the opinion of management, reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s results of operations.
 
Net (loss) income shown agrees with the Company’s quarterly report(s) on Form 10-Q as filed with the Securities and Exchange Commission. However, in 2008, individual line items vary from such reports due to the presentation of discontinued operations being retroactively reclassified from property operating income and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009
 
expenses due to reclassifying real estate owned to real estate held-for-sale in 2009, noncontrolling interest being retroactively reclassified from net (loss) income attributable to Arbor Realty Trust, Inc. in 2009 due to updated accounting guidance and interest income and interest expense were netted in accordance with Article 9 of Regulation S-X due to the relevance in understanding the Company’s operations.

 	 	For the Three Months Ended	 	
 	 	December 31,
	 	 	September 30,
	 	 	June 30,
	 	 	March 31,
	 	
 	 	2009	 	 	2009	 	 	2009	 	 	2009	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income	 	$	5,594,783	 	 	$	9,619,201	 	 	$	10,596,863	 	 	$	11,349,207	 	
Total other revenue	 	 	349,213	 	 	 	386,969	 	 	 	973,622	 	 	 	16,250	 	
Total other expenses	 	 	140,439,824	 	 	 	64,328,844	 	 	 	59,967,401	 	 	 	81,733,617	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss from continuing operations before gain on exchange of profits interest, gain on extinguishment of debt, loss on termination of swaps, income (loss) from equity affiliates and provision for income taxes	 	 	(134,495,828	)	 	 	(54,322,674	)	 	 	(48,396,916	)	 	 	(70,368,160	)	
Gain on exchange of profits Interest	 	 	—	 	 	 	—	 	 	 	—	 	 	 	55,988,411	 	
Gain on extinguishment of debt	 	 	—	 	 	 	6,348,128	 	 	 	21,464,957	 	 	 	26,267,033	 	
Loss on termination of swaps	 	 	—	 	 	 	—	 	 	 	(8,729,408	)	 	 	—	 	
Income (loss) from equity affiliates	 	 	862,451	 	 	 	8,856,060	 	 	 	(12,664,152	)	 	 	2,507,134	 	
Provision for income taxes	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income from continuing operations	 	 	(133,633,377	)	 	 	(39,118,486	)	 	 	(48,325,519	)	 	 	14,394,418	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss on impairment of real estate held-for-sale	 	 	—	 	 	 	(4,898,295	)	 	 	—	 	 	 	—	 	
Loss on operations of real estate held-for-sale	 	 	—	 	 	 	(59,487	)	 	 	(174,184	)	 	 	(143,371	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss from discontinued operations	 	 	—	 	 	 	(4,957,782	)	 	 	(174,184	)	 	 	(143,371	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income	 	 	(133,633,377	)	 	 	(44,076,268	)	 	 	(48,499,703	)	 	 	14,251,047	 	
Net income attributable to noncontrolling interest	 	 	52,084	 	 	 	58,694	 	 	 	57,292	 	 	 	18,504,785	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss attributable to Arbor Realty Trust, Inc	 	$	(133,685,461	)	 	$	(44,134,962	)	 	$	(48,556,995	)	 	$	(4,253,738	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic (loss) earnings per common share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income from continuing operations, net of noncontrolling interest	 	$	(5.27	)	 	$	(1.54	)	 	$	(1.91	)	 	$	(0.16	)	
Loss from discontinued operations	 	 	—	 	 	 	(0.20	)	 	 	(0.01	)	 	 	(0.01	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income attributable to Arbor Realty Trust, Inc.	 	$	(5.27	)	 	$	(1.74	)	 	$	(1.92	)	 	$	(0.17	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted (loss) earnings per common share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income from continuing operations, net of noncontrolling interest	 	$	(5.27	)	 	$	(1.54	)	 	$	(1.91	)	 	$	(0.16	)	
Loss from discontinued operations	 	 	—	 	 	 	(0.20	)	 	 	(0.01	)	 	 	(0.01	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income attributable to Arbor Realty Trust, Inc.	 	$	(5.27	)	 	$	(1.74	)	 	$	(1.92	)	 	$	(0.17	)	

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2009

 	 	For the Three Months Ended	 	
 	 	December 31,
	 	 	September 30,
	 	 	June 30,
	 	 	March 31,
	 	
 	 	2008	 	 	2008	 	 	2008	 	 	2008	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income	 	$	24,129,205	 	 	$	23,225,117	 	 	$	24,011,842	 	 	$	24,112,231	 	
Total other revenue	 	 	15,799	 	 	 	17,208	 	 	 	28,629	 	 	 	20,693	 	
Total other expenses	 	 	131,846,141	 	 	 	19,018,133	 	 	 	9,462,089	 	 	 	9,094,842	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
(Loss) income from continuing operations before loss from equity affiliates and provision for income taxes	 	 	(107,701,137	)	 	 	4,224,192	 	 	 	14,578,382	 	 	 	15,038,082	 	
Loss from equity affiliates	 	 	(178,791	)	 	 	(1,606,505	)	 	 	(562,000	)	 	 	—	 	
Provision for income taxes	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income from continuing operations	 	 	(107,879,928	)	 	 	2,617,687	 	 	 	14,016,382	 	 	 	15,038,082	 	

Loss on operations of real estate held-for-sale	 	 	(191,748	)	 	 	(219,634	)	 	 	(170,912	)	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss from discontinued operations	 	 	(191,748	)	 	 	(219,634	)	 	 	(170,912	)	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income	 	 	(108,071,676	)	 	 	2,398,053	 	 	 	13,845,470	 	 	 	15,038,082	 	
Net income (loss) attributable to noncontrolling interest	 	 	166,852	 	 	 	(177,833	)	 	 	2,117,464	 	 	 	2,333,290	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income attributable to Arbor Realty Trust, Inc.	 	$	(108,238,528	)	 	$	2,575,886	 	 	$	11,728,006	 	 	$	12,704,792	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic (loss) earnings per common share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income from continuing operations, net of noncontrolling interest	 	$	(4.29	)	 	$	0.11	 	 	$	0.57	 	 	$	0.62	 	
Loss from discontinued operations	 	 	(0.01	)	 	 	(0.01	)	 	 	(0.01	)	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income attributable to Arbor Realty Trust, Inc.	 	$	(4.30	)	 	$	0.10	 	 	$	0.56	 	 	$	0.62	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted (loss) earnings per common share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income from continuing operations, net of noncontrolling interest	 	$	(4.29	)	 	$	0.11	 	 	$	0.57	 	 	$	0.62	 	
Loss from discontinued operations	 	 	(0.01	)	 	 	(0.01	)	 	 	(0.01	)	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income attributable to Arbor Realty Trust, Inc.	 	$	(4.30	)	 	$	0.10	 	 	$	0.56	 	 	$	0.62	 	

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
SCHEDULE IV — LOANS AND OTHER LENDING INVESTMENTS
DECEMBER 31, 2009

 	 	 	 	 	Periodic
	 	 	 	 	Interest Pay
	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	Payment
	 	 	Maturity
	 	Rate
	 	 	 	 	Face
	 	 	Carrying
	 	
Type	 	Location	 	 	Terms(1)	 	 	Date(2)	 	Index(3)	 	Prior Liens	 	 	Amount	 	 	Amount(4)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Bridge Loans:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Bridge loans in excess of 3% of carrying amount of total loans:	
Office	 	 	NY	 	 	 	IO	 	 	Mar-13	 	LIBOR + 3.50%	 	$	88,500,000	 	 	$	95,000,000	 	 	$	95,000,000	 	
Multi-family	 	 	CA	 	 	 	IO	 	 	Aug-13	 	LIBOR + 5.00%	 	 	—	 	 	 	56,800,000	 	 	 	56,800,000	 	
Hotel	 	 	FL	 	 	 	IO	 	 	Jul-14	 	LIBOR + 2.09%	 	 	—	 	 	 	60,000,000	 	 	 	60,000,000	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	88,500,000	 	 	 	211,800,000	 	 	 	211,800,000	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Bridge loans less than 3% of carrying amount of total loans:	
Commercial	 	 	Various	 	 	 	IO / PI	 	 	2010-2012	 	Fixed 3.00% − 12.00%	 	 	33,500,000	 	 	 	55,374,583	 	 	 	55,374,583	 	
Hotel	 	 	Various	 	 	 	IO / PI	 	 	2010-2013	 	LIBOR + 1.79% − 6.87%
Floor 4.00%	 	 	55,000,000	 	 	 	119,027,684	 	 	 	108,543,460	 	
Land	 	 	Various	 	 	 	IO	 	 	2010-2016	 	LIBOR + 1.83% − 6.48%
Floor 5.32%
Fixed 1.77% − 12.21%	 	 	—	 	 	 	241,098,809	 	 	 	169,949,868	 	
Multi-family	 	 	Various	 	 	 	IO	 	 	2010-2015	 	LIBOR + 2.00% − 8.00%
Floor 0.31% − 5.61%
Fixed 1.10% − 11.40%	 	 	—	 	 	 	421,080,435	 	 	 	394,266,559	 	
Office	 	 	Various	 	 	 	IO	 	 	2010-2016	 	LIBOR + 1.80% − 4.50%
Floor 4.00% − 5.50%
Fixed 6.29% − 7.50%	 	 	—	 	 	 	193,279,868	 	 	 	192,798,540	 	
Retail	 	 	PA	 	 	 	IO	 	 	2010	 	LIBOR + 4.50%	 	 	—	 	 	 	3,835,636	 	 	 	3,235,636	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	88,500,000	 	 	 	1,033,697,015	 	 	 	924,168,646	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Bridge Loans	 	 	 	 	 	 	 	 	 	 	177,000,000	 	 	 	1,245,497,015	 	 	 	1,135,968,646	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mezzanine Loans:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mezzanine loans less than 3% of carrying amount of total loans:	
Commercial	 	 	NY	 	 	 	IO	 	 	2011	 	LIBOR + 3.65%	 	 	431,276,256	 	 	 	38,297,087	 	 	 	28,298,906	 	
Condo	 	 	CA	 	 	 	IO	 	 	2010	 	LIBOR + 2.0%	 	 	84,302,321	 	 	 	15,869,227	 	 	 	1,369,227	 	
Hotel	 	 	Various	 	 	 	IO	 	 	2010	 	LIBOR + 2.50% − 3.50%	 	 	595,000,000	 	 	 	30,000,000	 	 	 	24,000,000	 	
Land	 	 	CA	 	 	 	IO	 	 	2011	 	—	 	 	88,479,477	 	 	 	9,332,969	 	 	 	9,332,969	 	
Multi-family	 	 	Various	 	 	 	IO / PI	 	 	2010-2042	 	LIBOR + 2.0% − 10.0%
Floor 0.48% − 5.50%
Fixed 6.9% − 16.0%	 	 	1,804,756,547	 	 	 	140,769,817	 	 	 	93,654,223	 	
Office	 	 	Various	 	 	 	IO / PI	 	 	2010-2017	 	LIBOR + 3.25% − 5.45%
Fixed 9.33% − 10.50%	 	 	1,859,475,928	 	 	 	106,475,018	 	 	 	99,313,942	 	
Retail	 	 	KY	 	 	 	IO	 	 	2010	 	LIBOR + 7.00%
Floor 3.85%	 	 	14,279,924	 	 	 	2,750,000	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Mezzanine Loans	 	 	 	 	 	 	 	 	 	 	 	 	 	 	4,877,570,453	 	 	 	343,494,118	 	 	 	255,969,267	 	

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
SCHEDULE IV — LOANS AND OTHER LENDING INVESTMENTS — (Continued)
DECEMBER 31, 2009

 	 	 	 	 	Periodic
	 	 	 	 	Interest Pay
	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	Payment
	 	 	Maturity
	 	Rate
	 	 	 	 	 	 	 	Carrying
	 	
Type	 	Location	 	 	Terms(1)	 	 	Date(2)	 	Index(3)	 	Prior Liens	 	 	Face Amount	 	 	Amount(4)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Junior Participations:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Junior participation loans in excess of 3% of carrying amount of total loans:	
Office	 	 	NY	 	 	 	IO	 	 	Mar- 17	 	Fixed 7.58%	 	 	1,072,000,000	 	 	 	67,000,000	 	 	 	67,045,364	 	
Junior participation loans less than 3% of carrying amount of total loans:	
Commercial	 	 	CT	 	 	 	PI	 	 	2010	 	Fixed 7.89%	 	 	—	 	 	 	3,490,948	 	 	 	3,502,728	 	
Hotel	 	 	Various	 	 	 	IO / PI	 	 	2014-2017	 	LIBOR + 6.80% − 7.26%
Fixed 9.35%	 	 	166,607,053	 	 	 	28,686,066	 	 	 	28,686,066	 	
Multi-family	 	 	Various	 	 	 	IO	 	 	2010-2014	 	LIBOR + 3.00%
Fixed 4.72% − 10.04%	 	 	347,637,078	 	 	 	60,549,540	 	 	 	41,922,627	 	
Office	 	 	Various	 	 	 	IO	 	 	2010-2016	 	LIBOR + 2.33% − 3.00%
Fixed 5.32% − 12.80%	 	 	1,192,950,000	 	 	 	95,350,000	 	 	 	75,633,829	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Junior Participations	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2,779,194,131	 	 	 	255,076,554	 	 	 	216,790,614	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Preferred Equity Loans:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Preferred equity loans less than 3% of carrying amount of total loans:	
Hotel	 	 	Various	 	 	 	IO	 	 	2017	 	Fixed 10.00%	 	 	7,395,305,000	 	 	 	100,364,308	 	 	 	2,364,308	 	
Multi-family	 	 	Various	 	 	 	IO	 	 	2011-2017	 	LIBOR + 4.50% − 6.00%
Floor 4.53% − 5.32%
Fixed 6.22% −11.40%	 	 	3,416,255,728	 	 	 	78,102,959	 	 	 	77,181,453	 	
Office	 	 	NY	 	 	 	IO	 	 	2015	 	LIBOR + 5.00%
Floor 4.25%	 	 	119,612,012	 	 	 	12,500,000	 	 	 	12,500,000	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Preferred Equity Loans	 	 	 	 	 	 	 	 	 	 	10,931,172,740	 	 	 	190,967,267	 	 	 	92,045,761	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Loans	 	 	 	 	 	 	 	 	 	$	18,764,937,324	 	 	$	2,035,034,954	 	 	$	1,700,774,288	 	

 
 	 	 	
(1)	 	IO = Interest Only, PI = Principal and Interest.	
 	 	 	
(2)	 	Maturity date does not include possible extensions.	
 	 	 	
(3)	 	References to LIBOR are to one-month LIBOR unless specifically stated otherwise.	
 	 	 	
(4)	 	The federal income tax basis is approximately $2.0 billion.	

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ARBOR REALTY TRUST, INC. AND SUBSIDIARIES
SCHEDULE IV — LOANS AND OTHER LENDING INVESTMENTS — (Continued)
DECEMBER 31, 2009
 
The following table reconciles the Company’s loans and investments carrying amounts for the periods indicated:

 	 	For the Year Ended December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at beginning of year	 	$	2,181,683,619	 	 	$	2,592,093,930	 	 	$	2,001,277,102	 	
Additions during period:	 	 	 	 	 	 	 	 	 	 	 	 	
New loan originations	 	 	3,000,000	 	 	 	290,763,795	 	 	 	2,007,838,793	 	
Funding of unfunded loan commitments(1)	 	 	6,081,260	 	 	 	125,431,745	 	 	 	183,090,231	 	
Accretion of unearned revenue	 	 	2,098,833	 	 	 	3,333,929	 	 	 	4,207,915	 	
Reclassification of allowance for loan loss to real estate owned	 	 	4,250,000	 	 	 	1,500,000	 	 	 	—	 	
Loan charge-offs	 	 	41,250,000	 	 	 	2,500,000	 	 	 	—	 	
Deductions during period:	 	 	 	 	 	 	 	 	 	 	 	 	
Loan payoffs	 	 	(46,802,008	)	 	 	(512,419,785	)	 	 	(1,211,825,279	)	
Loan partial payoffs	 	 	(83,948,202	)	 	 	(167,435,497	)	 	 	(124,950,640	)	
Loss on restructured loans	 	 	(57,579,561	)	 	 	—	 	 	 	—	 	
Reclassification from due to borrowers	 	 	(20,684,387	)	 	 	—	 	 	 	—	 	
Proceeds and receivables from sale of loan	 	 	(32,648,188	)	 	 	—	 	 	 	—	 	
Use of loan charge-offs	 	 	(41,250,000	)	 	 	(2,500,000	)	 	 	—	 	
Loans converted to real estate owned	 	 	(13,850,000	)	 	 	(5,000,000	)	 	 	—	 	
Provision for loan losses	 	 	(241,328,039	)	 	 	(132,000,000	)	 	 	(2,500,000	)	
Unfunded loan commitments(1)	 	 	(11,617	)	 	 	(9,708,019	)	 	 	(263,477,563	)	
Unearned revenue and costs	 	 	512,578	 	 	 	(4,876,479	)	 	 	(1,566,629	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at end of year	 	$	1,700,774,288	 	 	$	2,181,683,619	 	 	$	2,592,093,930	 	

 
 	 	 	
(1)	 	In accordance with certain loans and investments, the Company has outstanding unfunded commitments that it is obligated to fund as the borrowers meet certain requirements. Specific requirements include but are not limited to property renovations, building construction, and building conversions based on criteria met by the borrower in accordance with the loan agreements.	

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ITEM 9.  	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	
 
Not applicable.

ITEM 9A.  	CONTROLS AND PROCEDURES	
 
Under the direction of our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2009. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of December 31, 2009.
 
No change in internal control over financial reporting occurred during the quarter ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.
 
Management’s Report on Internal Control Over Financial Reporting
 
Management of Arbor Realty Trust, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 	• 	pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;	
 	 	 	
 	• 	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with the authorization of management and directors of the Company; and	
 	 	 	
 	• 	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.	
 
Because of its inherent limitations, internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework.
 
Based on this assessment, management concluded that, as of December 31, 2009, the Company’s internal control over financial reporting is effective.
 
The Company’s independent registered public accounting firm has issued a report on management’s assessment of the Company’s internal control over financial reporting. This report appears on the following page of this annual report on Form 10-K.
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Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders of
Arbor Realty Trust, Inc. and Subsidiaries
 
We have audited Arbor Realty Trust, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Arbor Realty Trust, Inc. and Subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, Arbor Realty Trust, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Arbor Realty Trust, Inc. and Subsidiaries as of December 31, 2009 and 2008 and the related consolidated statements of operations, changes in equity and cash flows for each of the three years in the period ended December 31, 2009 of Arbor Realty Trust, Inc. and Subsidiaries and our report dated March 8, 2010 expressed an unqualified opinion thereon.
 
/s/ Ernst & Young LLP
 
New York, New York
March 8, 2010

ITEM 9B.  	OTHER INFORMATION	
 
Not applicable.
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PART III

ITEM 10.  	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	
 
The information regarding our directors and executive officers set forth under the captions “Board of Directors” and “Executive Officers” of the 2010 Proxy Statement is incorporated herein by reference.
 
The information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the 2010 Proxy Statement is incorporated herein by reference.
 
The information regarding our code of ethics for our chief executive and other senior financial officers under the caption “Senior Officer Code of Ethics and Code of Business Conduct and Ethics” in the 2010 Proxy Statement is incorporated herein by reference.
 
The information regarding our audit committee under the caption “Audit Committee” in the 2010 Proxy Statement is incorporated herein by reference.

ITEM 11.  	EXECUTIVE COMPENSATION	
 
The information contained in the section captioned “Executive Compensation” of the 2010 Proxy Statement is incorporated herein by reference.

ITEM 12.  	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	
 
The information contained in the section captioned “Security Ownership of Certain Beneficial Owners and Management” of the 2010 Proxy Statement is incorporated herein by reference.

ITEM 13.  	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE	
 
The information contained in the section captioned “Certain Relationships and Related Transactions” and “Director Independence” of the 2010 Proxy Statement is incorporated herein by reference.

ITEM 14.  	PRINCIPAL ACCOUNTING FEES AND SERVICES	
 
The information regarding our independent accountant’s fees and services in the sections captioned “Independent Accountants’ Fees” and “Audit Committee Pre-Approval Policy” of the 2010 Proxy Statement is incorporated herein by reference.
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PART IV

ITEM 15.  	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	

(a) 	and (c) Financial Statements and Schedules.	
 
See the “Index to the Consolidated Financial Statements of Arbor Realty Trust, Inc. and Subsidiaries” included in Item 8 of this report.

(b) 	Exhibits.	
 
In reviewing the agreements included as exhibits to this Annual Report on Form 10-K, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about Arbor or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:

 	• 	should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;	
 	 	 	
 	• 	have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;	
 	 	 	
 	• 	may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and	
 	 	 	
 	• 	were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.	
 
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about Arbor may be found elsewhere in this report and Arbor’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.

Exhibit
	 	 	
Number	 	Description	
 	 	 	 	 	
 	3	.1	 	Articles of Incorporation of Arbor Realty Trust, Inc.*	
 	3	.2	 	Articles of Amendment to Articles of Incorporation of Arbor Realty Trust, Inc.5	
 	3	.3	 	Articles Supplementary of Arbor Realty Trust, Inc.*	
 	3	.4	 	Amended and Restated Bylaws of Arbor Realty Trust, Inc.55	
 	4	.1	 	Form of Certificate for Common Stock.*	
 	4	.2	 	Common Stock Purchase Warrant, Certificate No. W-1, dated July 23, 2009, issued to Wachovia Bank, National Association.	
 	4	.3	 	Common Stock Purchase Warrant, Certificate No. W-2, dated July 23, 2009, issued to Wachovia Bank, National Association.	
 	4	.4	 	Common Stock Purchase Warrant, Certificate No. W-3, dated July 23, 2009, issued to Wachovia Bank, National Association.	
 	10	.1	 	Second Amended and Restated Management Agreement, dated August 6, 2009, by and among Arbor Realty Trust, Inc., Arbor Commercial Mortgage, LLC, Arbor Realty Limited Partnership and Arbor Realty SR, Inc. vvv	
 	10	.2	 	Services Agreement, dated July 1, 2003, by and among Arbor Realty Trust, Inc., Arbor Commercial Mortgage, LLC and Arbor Realty Limited Partnership.*	
 	10	.3	 	Non-Competition Agreement, dated July 1, 2003, by and among Arbor Realty Trust, Inc., Arbor Realty Limited Partnership and Ivan Kaufman.*	
 	10	.4	 	Second Amended and Restated Agreement of Limited Partnership of Arbor Realty Limited Partnership, dated January 18, 2005, by and among Arbor Commercial Mortgage, LLC, Arbor Realty Limited Partnership, Arbor Realty LPOP, Inc. and Arbor Realty GPOP, Inc.†	

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Exhibit
	 	 	
Number	 	Description	
 	 	 	 	 	
 	10	.5	 	Registration Rights Agreement, dated July 1, 2003, between Arbor Realty Trust, Inc. and Arbor Commercial Mortgage, LLC.*	
 	10	.6	 	Pairing Agreement, dated July 1, 2003, by and among Arbor Realty Trust, Inc., Arbor Commercial Mortgage, LLC, Arbor Realty Limited Partnership, Arbor Realty LPOP, Inc. and Arbor Realty GPOP, Inc.*	
 	10	.7	 	2003 Omnibus Stock Incentive Plan, (as amended and restated on June 18, 2009).vvv	
 	10	.8	 	Form of Restricted Stock Agreement.*	
 	10	.9	 	Benefits Participation Agreement, dated July 1, 2003, between Arbor Realty Trust, Inc. and Arbor Management, LLC.*	
 	10	.10	 	Form of Indemnification Agreement.*	
 	10	.11	 	Structured Facility Warehousing Credit and Security Agreement, dated July 1, 2003, between Arbor Realty Limited Partnership and Residential Funding Corporation.*	
 	10	.12	 	Amended and Restated Loan Purchase and Repurchase Agreement, dated July 12, 2004, by and among Arbor Realty Funding LLC, as seller, Wachovia Bank, National Association, as purchaser, and Arbor Realty Trust, Inc., as guarantor.**	
 	10	.13	 	Master Repurchase Agreement, dated as of November 18, 2002, by and between Nomura Credit and Capital, Inc. and Arbor Commercial Mortgage, LLC.*	
 	10	.14	 	Revolving Credit Facility Agreement, dated as of December 7, 2004, by and between Arbor Realty Trust, Inc., Arbor Realty Limited Partnership and Watershed Administrative LLC and the lenders named therein.†	
 	10	.15	 	Indenture, dated January 19, 2005, by and between Arbor Realty Mortgage Securities Series 2004-1, Ltd., Arbor Realty Mortgage Securities Series 2004-1 LLC, Arbor Realty SR, Inc. and LaSalle Bank National Association.†	
 	10	.16	 	Indenture, dated January 11, 2006, by and between Arbor Realty Mortgage Securities Series 2005-1, Ltd., Arbor Realty Mortgage Securities Series 2005-1 LLC, Arbor Realty SR, Inc. and LaSalle Bank National Association. ‡	
 	10	.17	 	Master Repurchase Agreement, dated as of October 26, 2006, by and between Column Financial, Inc. and Arbor Realty SR, Inc. and Arbor TRS Holding Company Inc., as sellers, Arbor Realty Trust, Inc., Arbor Realty Limited Partnership, as guarantors, and Arbor Realty Mezzanine LLC.‡‡	
 	10	.18	 	Note Purchase Agreement, dated January 19, 2005, by and between Arbor Realty Mortgage Securities Series 2004-1, Ltd., Arbor Realty Mortgage Securities Series 2004-1 LLC and Wachovia Capital Markets, LLC.†	
 	10	.19	 	Note Purchase Agreement, dated January 11, 2006, by and between Arbor Realty Mortgage Securities Series 2005-1, Ltd., Arbor Realty Mortgage Securities Series 2005-1 LLC and Wachovia Capital Markets, LLC. ‡	
 	10	.20	 	Indenture, dated December 14, 2006, by and between Arbor Realty Mortgage Securities Series 2006-1, Ltd., Arbor Realty Mortgage Securities Series 2006-1 LLC, Arbor Realty SR, Inc. and Wells Fargo Bank, National Association. u	
 	10	.21	 	Note Purchase and Placement Agreement, dated December 14, 2006, by and between Arbor Realty Mortgage Securities Series 2006-1, Ltd., Arbor Realty Mortgage Securities Series 2006-1 LLC and Wachovia Capital Markets, LLC and Credit Suisse Securities (USA) LLC. u	
 	10	.22	 	Note Purchase Agreement, dated December 14, 2006, by and between Arbor Realty Mortgage Securities Series 2006-1, Ltd., Arbor Realty Mortgage Securities Series 2006-1 LLC and Wells Fargo Bank, National Association. u	
 	10	.23	 	Master Repurchase Agreement, dated as of March 30, 2007, by and between Variable Funding Capital Company LLC, as purchaser, Wachovia Bank, National Association, as swingline purchaser, Wachovia Capital Markets, LLC, as deal agent, Arbor Realty Funding LLC, Arbor Realty Limited Partnership and ARSR Tahoe, LLC, as sellers, Arbor Realty Trust, Inc., Arbor Realty Limited Partnership and Arbor Realty SR, Inc., as guarantors. uu	
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Exhibit
	 	 	
Number	 	Description	
 	 	 	 	 	
 	10	.24	 	Credit Agreement, dated November 6, 2007, by and between Arbor Realty Funding, LLC, ARSR Tahoe, LLC, Arbor Realty Limited Partnership, and ART 450 LLC, as Borrowers, Arbor Realty Trust, Inc., Arbor Realty Limited Partnership, and Arbor Realty SR, Inc., as Guarantors, and Wachovia Bank, National Association, as Administrative Agent. uuu	
 	10	.25	 	Equity Placement Program Sales Agreement, dated August 15, 2008, between Arbor Realty Trust, Inc. and JMP Securities LLC. v	
 	10	.26	 	Junior Subordinated Indenture, dated May 6, 2009, between Arbor Realty SR, Inc. and The Bank of New York Mellon Trust Company, National Association, as Trustee relating to $29,400,000 aggregate principal amount of Junior Subordinated Notes due 2034. vv	
 	10	.27	 	Junior Subordinated Indenture, dated May 6, 2009, between Arbor Realty SR, Inc. and The Bank of New York Mellon Trust Company, National Association, as Trustee relating to $168,000,000 aggregate principal amount of Junior Subordinated Notes due 2034. vv	
 	10	.28	 	Junior Subordinated Indenture, dated May 6, 2009, among Arbor Realty SR, Inc. Arbor Realty Trust, Inc., as Guarantor, and Wilmington Trust Company, as Trustee, relating to $21,224,000 aggregate principal amount of Junior Subordinated Notes due 2035. vv	
 	10	.29	 	Junior Subordinated Indenture, dated May 6, 2009, among Arbor Realty SR, Inc. Arbor Realty Trust, Inc., as Guarantor, and Wilmington Trust Company, as Trustee, relating to $2,632,000 aggregate principal amount of Junior Subordinated Notes due 2036. vv	
 	10	.30	 	Junior Subordinated Indenture, dated May 6, 2009, among Arbor Realty SR, Inc. Arbor Realty Trust, Inc., as Guarantor, and Wilmington Trust Company, as Trustee, relating to $47,180,000 aggregate principal amount of Junior Subordinated Notes due 2037. vv	
 	10	.31	 	Exchange Agreement, dated May 6, 2009, among Arbor Realty Trust, Inc., Arbor Realty SR, Inc., Kodiak CDO II, Ltd., Attentus CDO I, Ltd. and Attentus CDO III, Ltd. vv	
 	10	.32	 	Exchange Agreement, dated May 6, 2009, among Arbor Realty SR, Inc., Arbor Realty Trust, Inc., Taberna Preferred Funding I, Ltd., Taberna Preferred Funding II, Ltd., Taberna Preferred Funding III, Ltd., Taberna Preferred Funding IV, Ltd., Taberna Preferred Funding V, Ltd., Taberna Preferred Funding VII, Ltd. and Taberna Preferred Funding VIII, Ltd. vv	
 	10	.33	 	First Amended and Restated Credit Agreement, dated as of July 23, 2009, among Arbor Realty Funding, LLC, a Delaware limited liability company, as a Borrower, ARSR Tahoe, LLC, a Delaware limited liability company, as a Borrower, Arbor ESH II LLC, a Delaware limited liability company, as a Borrower, Arbor Realty Limited Partnership, a Delaware limited partnership, as a Borrower and a Guarantor, ART 450 LLC, a Delaware limited liability company, as a Borrower, Arbor Realty Trust, Inc., a Maryland corporation, as a Guarantor, Arbor Realty SR, Inc., a Maryland corporation, as a Borrower and a Guarantor, the several Lenders from time to time a party thereto, and Wachovia Bank, National Association, a national banking association, as administrative agent for the Lenders thereunder. vvv	
 	10	.34	 	First Amended and Restated Revolving Loan Agreement, dated as of July 23, 2009, among Arbor Realty Trust, Inc., a Maryland corporation, Arbor Realty GPOP, Inc., a Delaware corporation, Arbor Realty LPOP, Inc., a Delaware corporation, Arbor Realty Limited Partnership, a Delaware limited partnership, Arbor Realty SR, Inc., a Maryland corporation, Arbor Realty Collateral Management, LLC, as Borrowers, the several Lenders from time to time a party thereto, and Wachovia Bank, National Association, a national banking association, as administrative agent for the Lenders thereunder and initial lender. vvv	
 	10	.35	 	Registration Rights Agreement, dated as of July 23, 2009, by and between Arbor Realty Trust, Inc. and Wachovia Bank, National Association, a national banking association.	
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Exhibit
	 	 	
Number	 	Description	
 	 	 	 	 	
 	10	.36	 	First Amendment to First Amended and Restated Credit Agreement, dated as of December 16, 2009, among Arbor Realty Funding, LLC, a Delaware limited liability company, as a Borrower, ARSR Tahoe, LLC, a Delaware limited liability company, as a Borrower, Arbor ESH II LLC, a Delaware limited liability company, as a Borrower, Arbor Realty Limited Partnership, a Delaware limited partnership, as a Borrower and a Guarantor, ART 450 LLC, a Delaware limited liability company, as a Borrower, Arbor Realty Trust, Inc., a Maryland corporation, as a Guarantor, Arbor Realty SR, Inc., a Maryland corporation, as a Borrower and a Guarantor, the several Lenders from time to time a party thereto, and Wachovia Bank, National Association, a national banking association, as administrative agent for the Lenders thereunder.	
 	10	.37	 	Second Amendment to First Amended and Restated Credit Agreement, dated as of December 24, 2009, among Arbor Realty Funding, LLC, a Delaware limited liability company, as a Borrower, ARSR Tahoe, LLC, a Delaware limited liability company, as a Borrower, Arbor ESH II LLC, a Delaware limited liability company, as a Borrower, Arbor Realty Limited Partnership, a Delaware limited partnership, as a Borrower and a Guarantor, ART 450 LLC, a Delaware limited liability company, as a Borrower, Arbor Realty Trust, Inc., a Maryland corporation, as a Guarantor, Arbor Realty SR, Inc., a Maryland corporation, as a Borrower and a Guarantor, the several Lenders from time to time a party thereto, and Wachovia Bank, National Association, a national banking association, as administrative agent for the Lenders and Wells Fargo Bank, National Association, a national banking association, as the custodian.	
 	10	.38	 	First Amendment to Revolving Loan Agreement, dated as of December 24, 2009, among Arbor Realty Trust, Inc., a Maryland corporation, Arbor Realty GPOP, Inc., a Delaware corporation, Arbor Realty LPOP, Inc., a Delaware corporation, Arbor Realty Limited Partnership, a Delaware limited partnership, Arbor Realty SR, Inc., a Maryland corporation, Arbor Realty Collateral Management, LLC, as Borrowers, the several Lenders from time to time a party thereto, and Wachovia Bank, National Association, a national banking association, as administrative agent for the Lenders thereunder and initial lender.	
 	10	.39	 	Third Amendment and Waiver to First Amended and Restated Credit Agreement, dated as of January 20, 2010, among Arbor Realty Funding, LLC, a Delaware limited liability company, as a Borrower, ARSR Tahoe, LLC, a Delaware limited liability company, as a Borrower, Arbor ESH II LLC, a Delaware limited liability company, as a Borrower, Arbor Realty Limited Partnership, a Delaware limited partnership, as a Borrower and a Guarantor, ART 450 LLC, a Delaware limited liability company, as a Borrower, Arbor Realty Trust, Inc., a Maryland corporation, as a Guarantor, Arbor Realty SR, Inc., a Maryland corporation, as a Borrower and a Guarantor, the several Lenders from time to time a party thereto, and Wachovia Bank, National Association, a national banking association, as administrative agent for the Lenders thereunder.	
 	10	.40	 	Waiver to First Amended and Restated Revolving Loan Agreement, dated as of January 20, 2010, among Arbor Realty Trust, Inc., a Maryland corporation, Arbor Realty GPOP, Inc., a Delaware corporation, Arbor Realty LPOP, Inc., a Delaware corporation, Arbor Realty Limited Partnership, a Delaware limited partnership, Arbor Realty SR, Inc., a Maryland corporation, Arbor Realty Collateral Management, LLC, as Borrowers, the several Lenders from time to time a party thereto, and Wachovia Bank, National Association, a national banking association, as administrative agent for the Lenders thereunder and initial lender.	
 	10	.41	 	Second Amendment and Waiver to First Amended and Restated Revolving Loan Agreement, dated as of February 2, 2010, among Arbor Realty Trust, Inc., a Maryland corporation, Arbor Realty GPOP, Inc., a Delaware corporation, Arbor Realty LPOP, Inc., a Delaware corporation, Arbor Realty Limited Partnership, a Delaware limited partnership, Arbor Realty SR, Inc., a Maryland corporation, Arbor Realty Collateral Management, LLC, as Borrowers, the several Lenders from time to time a party thereto, and Wachovia Bank, National Association, a national banking association, as administrative agent for the Lenders thereunder and initial lender.	
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Exhibit
	 	 	
Number	 	Description	
 	 	 	 	 	
 	10	.42	 	Fourth Amendment and Waiver to First Amended and Restated Credit Agreement, dated as of February 2, 2010, among Arbor Realty Funding, LLC, a Delaware limited liability company, as a Borrower, ARSR Tahoe, LLC, a Delaware limited liability company, as a Borrower, Arbor ESH II LLC, a Delaware limited liability company, as a Borrower, Arbor Realty Limited Partnership, a Delaware limited partnership, as a Borrower and a Guarantor, ART 450 LLC, a Delaware limited liability company, as a Borrower, Arbor Realty Trust, Inc., a Maryland corporation, as a Guarantor, Arbor Realty SR, Inc., a Maryland corporation, as a Borrower and a Guarantor, the several Lenders from time to time a party thereto, and Wachovia Bank, National Association, a national banking association, as administrative agent for the Lenders thereunder.	
 	10	.43	 	Exchange Agreement, dated as of February 26, 2010, among Arbor Realty SR, Inc. and Taberna Preferred Funding I, Ltd., Taberna Preferred Funding V, Ltd., Taberna Preferred Funding VII, Ltd. and Taberna Preferred Funding VIII, Ltd.	
 	21	.1	 	List of Subsidiaries of Arbor Realty Trust, Inc.	
 	23	.1	 	Consent of Ernst & Young LLP, independent registered public accounting firm.	
 	31	.1	 	Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14.	
 	31	.2	 	Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14.	
 	32	.1	 	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	
 	32	.2	 	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	

 	 	 	
 	 	Exhibit Index	
 	 	 	
5	 	Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.	
 	 	 	
55	 	Incorporated by reference to Exhibit 99.2 of the Registrant’s Current Report on Form 8-K (No. 001-32136) which was filed with the Securities and Exchange Commission on December 11, 2007.	
 	 	 	
* 	 	Incorporated by reference to the Registrant’s Registration Statement on Form S-11 (Registration No. 333-110472), as amended. Such registration statement was originally filed with the Securities and Exchange Commission on November 13, 2003.	
 	 	 	
**	 	Incorporated by reference to the Registrant’s Quarterly Report of Form 10-Q for the quarter ended September 30, 2004.	
 	 	 	
† 	 	Incorporated by reference to the Registrant’s Annual Report of Form 10-K for the year ended December 31, 2004.	
 	 	 	
‡ 	 	Incorporated by reference to the Registrant’s Annual Report of Form 10-K for the year ended December 31, 2005.	
 	 	 	
‡‡	 	Incorporated by reference to the Registrant’s Quarterly Report of Form 10-Q for the quarter ended September 30, 2006.	
 	 	 	
u	 	Incorporated by reference to the Registrant’s Annual Report of Form 10-K for the year ended December 31, 2006.	
 	 	 	
uu	 	Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007.	
 	 	 	
uuu	 	Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007.	
 	 	 	
v	 	Incorporated by reference to Exhibit 1.1 of the Registrant’s Current Report on Form 8-K (No. 001-32136) which was filed with the Securities and Exchange Commission on August 15, 2008.	
 	 	 	
vv	 	Incorporated by reference to the Registrant’s Quarterly Report of Form 10-Q for the quarter ended March 31, 2009.	
 	 	 	
vvv	 	Incorporated by reference to the Registrant’s Quarterly Report of Form 10-Q for the quarter ended June 30, 2009.	
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In reviewing the agreements included as exhibits to this Annual Report on Form 10-K, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about Arbor or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:

 	• 	should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;	
 	 	 	
 	• 	have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;	
 	 	 	
 	• 	may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and	
 	 	 	
 	• 	were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.	
 
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about Arbor may be found elsewhere in this report and Arbor’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.
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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on March 8, 2010.
 
ARBOR REALTY TRUST, INC.

 	By: 	/s/  Ivan Kaufman	
Name:     Ivan Kaufman
 	 	 	
 	Title: 	Chief Executive Officer	
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below on behalf of the Registrant in the capacities and on the dates indicated.

Signature	 	Title	 	Date	

/s/  Ivan Kaufman

Ivan Kaufman	 	Chairman of the Board of Directors,
Chief Executive Officer and President (Principal Executive Officer)	 	March 8, 2010	
 	 	 	 	 	
/s/  Paul Elenio

Paul Elenio	 	Chief Financial Officer
(Principal Financial Officer)	 	March 8, 2010	
 	 	 	 	 	
/s/  John Bishar

John Bishar	 	Director	 	March 8, 2010	
 	 	 	 	 	
/s/  Archie R. Dykes

Archie R. Dykes	 	Director	 	March 8, 2010	
 	 	 	 	 	
/s/  Karen Edwards

Karen Edwards	 	Director	 	March 8, 2010	
 	 	 	 	 	
/s/  William Helmreich

William Helmreich	 	Director	 	March 8, 2010	
 	 	 	 	 	
/s/  Walter K. Horn

Walter K. Horn	 	Director	 	March 8, 2010	
 	 	 	 	 	
/s/  C. Michael Kojaian

C. Michael Kojaian	 	Director	 	March 8, 2010	
 	 	 	 	 	
/s/  Melvin F. Lazar

Melvin F. Lazar	 	Director	 	March 8, 2010	
 	 	 	 	 	
/s/  Joseph Martello

Joseph Martello	 	Director	 	March 8, 2010	
 	 	 	 	 	
/s/  Kyle Permut

Kyle Permut	 	Director	 	March 8, 2010	

148

Exhibit 4.2
THIS COMMON STOCK PURCHASE WARRANT AND THE SHARES THAT MAY BE PURCHASED HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER THE SECURITIES LAWS OF ANY STATE. THIS COMMON STOCK PURCHASE WARRANT HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO DISTRIBUTION, AND THIS COMMON STOCK PURCHASE WARRANT AND THE SHARES THAT MAY BE PURCHASED HEREUNDER MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AND REGISTRATION OR QUALIFICATION UNDER APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL THAT THE PROPOSED TRANSACTION DOES NOT VIOLATE THE SECURITIES ACT OF 1933, AND APPLICABLE STATE SECURITIES LAWS.
ARBOR REALTY TRUST, INC.
COMMON STOCK PURCHASE WARRANT
 	 	
Date of Issuance: July 23, 2009	Certificate No. W-1	
THIS IS TO CERTIFY that WACHOVIA BANK, NATIONAL ASSOCIATION, a national banking association (together with its transferees, successors and assigns, the “ Holder ”), for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, is entitled to purchase from  ARBOR REALTY TRUST, INC. , a Maryland corporation (the “ Company ”), at the price of $3.50 per share (the “ Exercise Price ”), at any time after the date hereof (the “ Commencement Date ”) and expiring on July 23, 2015 (the “ Expiration Date ”), 500,000 shares of fully paid and nonassessable common stock, par value $0.01 per share (“ Common Stock ”) of the Company (as such number may be adjusted as provided herein). The 500,000 shares of Common Stock which may be purchased pursuant to this Warrant are referred to herein as the “ Aggregate Number ”. This common stock purchase warrant (this “ Warrant ”) is issued under and in connection with that certain First Amended and Restated Credit Agreement, dated as of July 23, 2009 (as the same may be amended, modified, restated, replaced, waived, substituted, supplemented or extended from time to time, the “ Credit Agreement ”), among Arbor Realty Funding, LLC, a Delaware limited liability company, as a borrower, ARSR Tahoe, LLC, a Delaware limited liability company, as a borrower, Arbor ESH II LLC, a Delaware limited liability company, as a borrower, Arbor Realty Limited Partnership, a Delaware limited partnership, as a borrower and a guarantor, ART 450 LLC, a Delaware limited liability company, as a borrower, the Company, as a guarantor, Arbor Realty SR, Inc., a Maryland corporation, as a borrower and a guarantor, the several banks and other financial institutions as are, or may from time to time become parties thereto, and Wachovia Bank, National Association, a national banking association, as administrative agent for the lenders thereunder.
     The Aggregate Number and Exercise Price set forth above shall also be adjusted under certain conditions specified in Section 5  of this Warrant, including, but not limited to, a Stock Dividend, Stock

 
Subdivision or Stock Combination. Capitalized terms used herein shall have the meanings ascribed to such terms in Section 11 hereof unless otherwise defined herein.
     SECTION 1.The Warrant; Transfer and Exchange.
     (a) The Warrant. This Warrant and the rights and privileges of the Holder hereunder may be exercised by the Holder in whole or in part as provided herein, shall survive any termination of the Credit Agreement and, as more fully set forth in  Sections 1(b) and  7  hereof, subject to the terms of this Warrant, may be transferred by the Holder to any other Person or Persons who meet the requirements set forth herein at any time or from time to time, in whole or in part, regardless of whether the Holder retains any or all rights under the Credit Agreement.
     (b) Transfer and Exchanges. The Company shall initially record this Warrant on a register to be maintained by the Company and, subject to  Section 7  hereof, from time to time thereafter shall reflect the transfer of this Warrant on such register when surrendered for transfer in accordance with the terms hereof and properly endorsed, accompanied by appropriate instructions, and further accompanied by payment in cash or by check, bank draft or money order payable to the order of the Company, in United States currency, of an amount equal to any stamp or other tax or governmental charge or fee required to be paid in connection with the transfer thereof. Upon any such transfer, a new warrant or warrants shall be issued to the transferee and the Holder (in the event this Warrant is only partially transferred) and the surrendered warrant shall be canceled. This Warrant may be exchanged at the option of the Holder, when surrendered at the Principal Office of the Company, for another warrant or other warrants of like tenor and representing in the aggregate the right to purchase a like number of shares of Common Stock.
     SECTION 2.Exercise.
     (a) Right to Exercise. At any time after the Commencement Date and on or before the Expiration Date, the Holder, in accordance with the terms hereof, may exercise this Warrant, in whole at any time or in part from time to time, by delivering this Warrant to the Company during normal business hours on any Business Day at the Company’s Principal Office, together with the Notice of Exercise, in the form attached hereto as  Exhibit A  and made a part hereof (the “ Notice of Exercise ”), duly executed, and payment of the Exercise Price per share for each share purchased, as specified in the Notice of Exercise. The aggregate Exercise Price (the “ Aggregate Exercise Price ”) to be paid for the shares to be purchased (the “ Exercise Amount ”) shall equal the product of (i) the Exercise Amount multiplied by (ii) the Exercise Price. If the Expiration Date is not a Business Day, then this Warrant may be exercised on the next succeeding Business Day.
     (b) Payment of the Aggregate Exercise Price. Payment of the Aggregate Exercise Price shall be made to the Company in cash or other immediately available funds or as provided in  Section 2(c ), or a combination thereof. In the case of payment of all or a portion of the Aggregate Exercise Price pursuant to  Section 2(c ), the direction by the Holder to make a “Cashless Exercise” shall serve as accompanying payment for that portion of the Exercise Price.
     (c) Cashless Exercise. The Holder shall have the right to pay all or a portion of the Aggregate Exercise Price by making a “Cashless Exercise”, in which case the portion of the Aggregate Exercise Price to be so paid shall be paid by reducing the number of shares of Common Stock otherwise issuable pursuant to the Notice of Exercise by an amount equal to (i) the Aggregate Exercise Price to be so paid divided by (ii) the Fair Market Value Per Share.
     (d) Issuance of Shares of Common Stock. Upon receipt by the Company of this Warrant at its Principal Office in proper form for exercise, and accompanied by the Notice of Exercise and payment
2

 
of the Aggregate Exercise Price as aforesaid, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that certificates representing such shares of Common Stock may not then be actually delivered. Within five (5) Business Days after such surrender of this Warrant, delivery of the Notice of Exercise and payment of the Aggregate Exercise Price as aforesaid, the Company shall issue and cause to be delivered to, or upon the written order of, the Holder (and in such name or names as the Holder may designate) a certificate or certificates for the Exercise Amount, subject to any reduction as provided in  Section 2(c ) for a Cashless Exercise.
     (e) Fractional Shares. The Company may, but shall not be required to, deliver fractions of shares of Common Stock upon exercise of this Warrant. If any fraction of a share of Common Stock would be deliverable upon an exercise of this Warrant, the Company may, in lieu of delivering such fraction of a share of Common Stock, make a cash payment to the Holder in an amount equal to the same fraction of the Fair Market Value Per Share determined as of the Business Day immediately preceding the date of exercise of this Warrant.
     (f) Partial Exercise. In the event of a partial exercise of this Warrant, the Company shall issue to the Holder a Warrant in like form for the unexercised portion thereof which has not expired.
     SECTION 3.Payment of Taxes. The Company shall pay all stamp taxes attributable to the initial issuance of shares or other securities issuable upon the exercise of this Warrant or issuable pursuant to  Section 5  hereof, excluding any tax or taxes which may be payable because of the transfer involved in the issuance or delivery of any certificates for shares or other securities in a name other than that of the Holder in respect of which such shares or securities are issued.
     SECTION 4.Replacement Warrant. In case this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue and deliver in exchange and substitution for and upon cancellation of the mutilated Warrant, or in lieu of and in substitution for this Warrant lost, stolen or destroyed, a new Warrant of like tenor and representing an equivalent right or interest, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction of such Warrant and upon receipt of indemnity reasonably satisfactory to the Company and the Holder;  provided ,  that  if the Holder is a financial institution, business development company or other institutional or fund investor, its own indemnity agreement shall be satisfactory and no third party indemnity shall be required.
     SECTION 5.Adjustments to the Aggregate Number and the Exercise Price.
     Under certain conditions, the Aggregate Number and the Exercise Price are subject to adjustment as set forth in this Section 5.
     (a) Adjustments. The Aggregate Number, after taking into consideration any prior adjustments pursuant to this Section 5, shall be subject to adjustment from time to time as follows and, thereafter, as adjusted, shall be deemed to be the Aggregate Number hereunder.
     (i) Stock Dividends; Subdivisions and Combinations. In case at any time or from time to time the Company shall:
     (A) issue to the holders of its shares of Common Stock a dividend payable in, or other distribution of, shares of Common Stock (a “ Stock Dividend ”);
     (B) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, including, without limitation, by means of a stock split (a “ Stock Subdivision ”); or
3

 
     (C) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock (a “ Stock Combination ”);
then the Aggregate Number in effect immediately prior thereto shall be (1) proportionately increased in the case of a Stock Dividend or a Stock Subdivision and (2) proportionately decreased in the case of a Stock Combination, and the Exercise Price shall be proportionately adjusted. In the event the Company shall declare or pay, without consideration, any dividend on the shares of Common Stock payable in any right to acquire shares of Common Stock for no consideration, then the Company shall be deemed to have made a Stock Dividend in an amount of shares equal to the maximum number of shares issuable upon exercise of such rights to acquire shares of Common Stock.
     (b) Notices.
     (i) Notice of Proposed Actions. In case the Company shall propose (A) to pay any dividend payable in stock of any class to the holders of its Common Stock or to make any other distribution to the holders of its Common Stock, (B) to offer to the holders of its Common Stock rights to subscribe for or to purchase any Convertible Securities, rights to acquire Convertible Securities or capital stock or additional shares of Common Stock or shares of stock of any class or any other securities, warrants, rights or options, (C) to effect any reclassification of its Common Stock, (D) to effect any recapitalization, stock subdivision, stock combination or other capital reorganization, (E) to effect any consolidation or merger, share exchange, or sale, lease or other disposition of all or substantially all of its property, assets or business, (F) to effect the liquidation, dissolution or winding up of the Company, (G) to initiate any transaction or be a party to any transaction (including, without limitation, a merger, consolidation, share exchange, sale, lease or other disposition of all or substantially all of the Company’s assets, liquidation, recapitalization or reclassification of the Common Stock) in connection with which the previous Outstanding Common Stock shall be changed into or exchanged for different securities of the Company or capital stock or other securities of another corporation or interests in a non-corporate entity or other property (including cash) or any combination of the foregoing or (H) to effect any other action which would require an adjustment under this  Section 5 , then in each such case the Company shall give to the Holder written notice of such proposed action, which shall specify the proposed date on which a record is to be taken for the purposes of such stock dividend, distribution or rights, or the proposed date on which such reclassification, reorganization, consolidation, merger, share exchange, sale, transfer, disposition, liquidation, dissolution, winding up or other transaction is to take place and the date of participation therein by the holders of Common Stock, if any such date is to be fixed, or the proposed date on which the transfer of Common Stock is to occur, and shall also set forth such facts with respect thereto as shall be reasonably necessary to indicate the effect of such action on the Common Stock and on the Aggregate Number after giving effect to any adjustment which will be required as a result of such action. Such notice shall be so given in the case of any action covered by clause (A) or (B) above at least twenty (20) calendar days prior to the record date for determining holders of the Common Stock for purposes of such action and, in the case of any other such action, at least twenty (20) calendar days prior to the earlier of the date of the taking of such proposed action or the date of participation therein by the holders of Common Stock.
     (ii) Adjustment Notice. Whenever the Aggregate Number is to be adjusted pursuant to this Section 5, unless otherwise agreed by the Holder, the Company shall promptly (and in any event within ten (10) Business Days after the event requiring the adjustment) prepare and deliver to the Holder a certificate signed by the chief financial officer of the Company, setting forth, in reasonable detail, the event requiring the adjustment and the method by which such adjustment is
4

 
to be calculated. The certificate shall set forth, if applicable, a description of the basis on which the board of directors in good faith determined, as applicable, the Fair Market Value Per Share, the fair market value of any evidences of indebtedness, shares of stock, other securities, warrants, other subscription or purchase rights, or other property or the equitable nature of any adjustment under  Section 5(b ) or ( c ) hereof, the new Aggregate Number and, if applicable, any new securities or property to which the Holder is entitled. Any other determination of fair market value shall first be determined in good faith by the board of directors and be based upon an arm’s length sale of such indebtedness, shares of stock, other securities, warrants, other subscription or purchase rights or other property, such sale being between a willing buyer and a willing seller. In the case of any such determination of fair market value, the Holder may object to the determination in such certificate by giving written notice within ten (10) Business Days of the receipt of such certificate and, if the Holder and the Company cannot agree to the fair market value within ten (10) Business Days of the date of the Holder’s objection, the fair market value shall be determined by a disinterested appraiser (which may be national or regional investment bank or a national accounting firm) mutually selected by the Holder and the Company, the fees and expenses of which shall be paid by the Company.
     SECTION 6.No Dilution or Impairment. The Company will not, by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, share exchange, dissolution or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, including, without limitation, the adjustments required under  Section 5  hereof, and will at all times in good faith assist in the carrying out of all such terms and in taking of all such action as may be necessary or appropriate to protect the rights of the Holder against dilution or other impairment. Without limiting the generality of the foregoing and notwithstanding any other provision of this Warrant to the contrary (including by way of implication), the Company (a) will not increase the par value of any shares of Common Stock receivable on the exercise of this Warrant above the amount payable therefor on such exercise and (b) will take all such action as may be necessary or appropriate so that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant.
     SECTION 7.Transfers of this Warrant. (a) Generally. Subject to the restrictions set forth in this Section 7, the Holder may at any time and from time to time freely transfer this Warrant and the Warrant Shares in whole or in part to any Person. This Warrant has not been, and the Warrant Shares at the time of their issuance may not be, registered under the Securities Act and, except as provided in the Registration Rights Agreement, nothing herein contained shall be deemed to require the Company to so register this Warrant and the Warrant Shares. This Warrant and the Warrant Shares are issued or issuable subject to the provisions and conditions contained herein and to the provisions and conditions contained in the Registration Rights Agreement, and every Holder hereof by accepting the same agrees with the Company to such provisions and conditions, and represents to the Company that this Warrant has been acquired and the Warrant Shares will be acquired for the account of the Holder for investment and not with a view to or for sale in connection with any distribution thereof.
     (b) Compliance with Securities Laws. The Holder agrees that this Warrant and the Warrant Shares may not be sold or otherwise disposed of except pursuant to an effective registration statement under the Securities Act and other applicable Securities Laws or pursuant to an applicable exemption from the registration requirements of the Securities Act and such other applicable Securities Laws. In the event that the Holder transfers this Warrant or the Warrant Shares pursuant to an applicable exemption from registration, the Company may request, at its expense, that the Holder deliver an opinion of counsel
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reasonably acceptable to the Company that the proposed transfer does not violate the Securities Act or other applicable Securities Laws.
     (c) Restrictive Securities Legend. (i) The certificate representing the Warrant Shares shall bear the restrictive legends set forth below:
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE. NO TRANSFER, SALE OR OTHER DISPOSITION OF THIS WARRANT MAY BE MADE UNLESS A REGISTRATION STATEMENT WITH RESPECT TO THIS WARRANT HAS BECOME EFFECTIVE UNDER SAID ACT, AND SUCH REGISTRATION OR QUALIFICATION AS MAY BE NECESSARY UNDER THE SECURITIES LAWS OF ANY STATE HAS BECOME EFFECTIVE, OR BORROWER HAS BEEN FURNISHED WITH AN OPINION OF COUNSEL SATISFACTORY TO BORROWER THAT SUCH REGISTRATION IS NOT REQUIRED.
     (ii) Certificates evidencing the Warrant Shares shall not contain any legend: (1) while a registration statement (including the Registration Statement) covering the resale of the Warrant Shares is effective under the Securities Act, or (2) following any sale of the Shares pursuant to Rule 144 (other than sales to an Affiliate of Holder), or (3) if such Warrant Shares are eligible for sale under Rule 144(b), or (4) if such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission). If a legend is not otherwise required under applicable requirements of the Securities Act (including judicial interpretations thereof) then any certificates representing the Warrant Shares shall be issued free of all legends. The Company agrees that following the effective date of the Registration Statement or at such time as such legend is no longer required under this  Section 7 , it will, no later than five (5) Business Days following the delivery by the Holder to the Company’s transfer agent of a certificate representing the Warrant Shares issued with a restrictive legend, deliver or cause to be delivered to the Holder a certificate representing such Warrant Shares that is free from all restrictive and other legends. Unless required by law, the Company may not make any notation on its records or give instructions to any transfer agent of the Company that enlarge the restrictions on transfer set forth in this Section 7 .
     (d) Right of First Refusal.
     (i) Holder may not Transfer this Warrant or any portion hereof unless it has complied with this Section 7(d). If Holder proposes to Transfer this Warrant (or portion hereof), then Holder shall promptly give written notice (the “ Sale Notice ”) to the Company at least twenty (20) days prior to the closing of such Transfer. The Notice shall describe in reasonable detail the proposed Transfer including, without limitation, the portion of this Warrant to be Transferred (the “ Transfer Amount ”), the nature of such Transfer, the consideration to be paid, and the name and address of each prospective purchaser or transferee.
     (ii) For a period of ten (10) days following receipt of any Sale Notice, the Company shall have the right to purchase all, but not less than all, of the Transfer Amount subject to such Sale Notice on the same terms and conditions as set forth therein. The Company’s purchase right shall be exercised by written notice signed by an officer of the Company (the “ Company Notice ”) and delivered to the Holder within such ten (10) day period. The Company shall effect the purchase of the Transfer Amount, including payment of the purchase price, not more than five (5)
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business days after delivery of the Company’s Notice, and at such time the Holder shall deliver to the Company this Warrant, properly endorsed for transfer. To the extent that the Company does not elect to exercise its purchase right pursuant to this  Section 7(d) , the Holder may, not later than thirty (30) days following delivery to the Company of the Sale Notice, enter into an agreement providing for the closing of the Transfer of the Transfer Amount covered by the Sale Notice within thirty (30) days of such agreement on the terms and conditions described in the Sale Notice. Any subsequent proposed Transfer of this Warrant by the Holder, shall again be subject to the first refusal rights of the Company and shall require compliance by the Holder with the procedures described in this  Section 7(d) .
     (iii) Notwithstanding the foregoing, the purchase rights of the Company set forth in this Section 7(d) shall not apply to (i) any Transfer by a Holder to an Eligible Assignee, (ii) any pledge of this Warrant made pursuant to a bona fide loan transaction that creates a mere security, (iii) any Transfer by Holder in connection with the sale of all or a portion of any outstanding indebtedness of the Company held by Holder or its Affiliates pursuant to the Credit Agreement, or (iv) any Transfer that is a bona fide gift approved by the Holder’s Board of Directors;  provided , in each case, that the pledgee, transferee or donee shall enter into a written agreement to be bound by and comply with all provisions of this Warrant as if it were an original Holder hereunder.
     (iv) Any purported Transfer by a Holder of this Warrant (or portion thereof) in violation of this Section 7(d) shall be voidable, and the Company will not effect such Transfer nor will it treat any alleged transferee as the holder of this Warrant.
     (v) By its execution of this Agreement, Wachovia Bank, National Association, as the Lender under the Credit Agreement, hereby consents to any purchase by the Company of this Warrant upon the exercise of its rights under this  Section 7(d) , and acknowledges and agrees that notwithstanding any provision of the Credit Agreement to the contrary, any such purchase shall not constitute a breach of any provision of the Credit Agreement.
     SECTION 8.Covenants.
     The Company hereby covenants to the Holder that so long as Holder holds any Warrant Securities:
     (a) Limitation on Certain Restrictions. Without the prior written consent of the Required Holders, the Company will not, and will not permit or cause any of its Subsidiaries, directly or indirectly, to create or otherwise cause or suffer to exist or become effective any restriction or encumbrance on the ability of the Company and any such Subsidiaries to perform and comply with their respective obligations under this Warrant.
     (b) Regulatory Requirements and Restrictions. In the event of any reasonable determination by the Holder that, by reason of any existing or future federal or state law, statute, rule, regulation, guideline, order, court or administrative ruling, request or directive (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) (collectively, a “ Regulatory Requirement ”), the Holder is effectively restricted or prohibited from holding this Warrant or the Warrant Shares (including any shares of capital stock or other securities distributable to the Holder in any merger, reorganization, readjustment or other reclassification), or otherwise realizing upon or receiving the benefits intended under this Warrant, the Company shall take such action as the Holder and the Company shall jointly agree in good faith to be necessary to permit the Holder to comply with such Regulatory
7

 
Requirement. The reasonable costs of taking such action, whether by the Company, the Holder or otherwise, shall be borne by the Holder.
     (c) Reservation of Shares. The Company shall at all times reserve and keep available out of the aggregate of its authorized but unissued shares, free of preemptive rights, such number of its duly authorized shares of Common Stock as shall be sufficient to enable the Company to issue Common Stock upon exercise of this Warrant.
     (d) Affirmative Actions to Permit Exercise and Realization of Benefits. If any shares of Common Stock reserved or to be reserved for the purpose of the exercise of this Warrant, or any shares or other securities reserved or to be reserved for the purpose of issuance pursuant to  Section 5  hereof, require registration with or approval of any Governmental Authority under any federal or state law (other than securities laws) before such shares or other securities may be validly delivered upon exercise of this Warrant, then the Company covenants that it will, at its sole expense, secure such registration or approval, as the case may be (including but not limited to approvals or expirations of waiting periods required under the Hart-Scott-Rodino Antitrust Improvements Act).
     (e) Validly Issued Shares. All shares of Common Stock that may be issued upon exercise of this Warrant, assuming full payment of the Aggregate Exercise Price (including those issued pursuant to  Section 5  hereof) shall, upon delivery by the Company, be duly authorized and validly issued, fully paid and nonassessable, free from all stamp taxes, liens and charges with respect to the issue or delivery thereof and otherwise free of all other security interests, encumbrances and claims of any nature whatsoever (other than security interests, encumbrances and claims to which the Holder is subject prior to the issuance of this Warrant and other transfer restrictions described herein).
     (f) Furnishing of Information; Compliance with Rule 144. The Company shall timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to the Exchange Act. So long as the Warrant Shares are not registered under an effective registration statement, upon the request of the Holder, the Company shall deliver to the Holder a written certification of a duly authorized officer as to whether it has complied with the preceding sentence. As long as the Holder owns any of the Warrant Shares, if the Company is not required to file reports pursuant to such laws, it will prepare and furnish to the Holder and make publicly available in accordance with Rule 144 such information as is required for the Holder to sell the Warrant Shares under Rule 144. So long as the Warrant Shares are not registered under an effective registration statement, the Company further covenants that it will take such further action as the Holder may reasonably request, all to the extent required from time to time to enable the Holder to sell such Warrant Shares without registration under the Securities Act within the limitation of the exemptions provided by Rule 144.
     (g) Integration. The Company shall not, and shall use its commercially reasonable efforts to ensure that no Affiliate of the Company shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of this Warrant in a manner that would require the registration under the Securities Act of the sale of the Warrant to the Holder, or that would be integrated with the offer or sale of the Warrant Shares for purposes of the rules and regulations of any Principal Market.
     (h) Listing of the Warrant Shares. The Company shall: (i) take all steps necessary to cause the Warrant Shares to be approved for listing on the Principal Market as soon as possible after the Commencement Date, (ii) provide to the Holder evidence of such listing, and (iii) use reasonable efforts to maintain the listing of the Warrant Shares on such Principal Market or another Principal Market.
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     (i) Securities Laws Disclosure; Publicity. The Company shall issue a press release or timely file a report on Form 8-K reasonably acceptable to the Holder disclosing all material terms of the transactions contemplated hereby. The Company and the Holder shall consult with each other in issuing any press releases with respect to the transactions contemplated hereby. Notwithstanding the foregoing, other than in the Registration Statement, the Company shall not publicly disclose the name of the Holder or the terms hereof, or include the name of the Holder or the terms hereof in any filing with the Commission or any regulatory agency or Principal Market, without the prior written consent of such Holder, except to the extent such disclosure is required by law or Principal Market regulations. The Holder acknowledges that such disclosure may be required by law in the Company’s proxy statement, annual report on Form 10-K, quarterly report on Form 10-Q, and filings related thereto and will be incorporated by reference to such filings in currently effective registration statements filed by the Company and will be included in registration statements that may be filed by the Company in the future.
     SECTION 9.No Effect Upon Lending Relationship. Notwithstanding anything herein to the contrary, nothing contained in this Warrant shall affect, limit or impair the rights and remedies of the Holder or any of its Affiliates in its capacity as a lender to the Company pursuant to any agreement under which the Company has borrowed money from the Holder. Without limiting the generality of the foregoing, the Holder, in exercising its rights as a lender, including making its decision on whether to foreclose on any collateral security, will have no duty to consider (i) its status or the status of any of its Affiliates as a direct or indirect equity holder of the Company, (ii) the equity of the Company or (iii) any duty it may have to any other direct or indirect equity holder of the Company, except as may be required under the applicable loan documents or by commercial law applicable to creditors generally.
     SECTION 10.Events of Non-Compliance and Remedies.
     (a) Events of Non-Compliance. If the Company fails to keep and fully and promptly perform and observe in all material respects any of the terms, covenants or representations contained or referenced herein within twenty (20) calendar days from the earlier to occur of (i) written notice from the Holder specifying what failure has occurred, or requesting that a specified failure be remedied or (ii) the Company becoming aware of such failure (an “ Event of Non-Compliance ”), the Holder shall be entitled to the remedies set forth in subsection (b) hereof.
     (b) Remedies. On the occurrence of an Event of Non-Compliance, in addition to any remedies the Holder may have under any Requirement of Law, the Holder may bring any action for injunctive relief or specific performance of any term or covenant contained herein, the Company hereby acknowledging that an action for money damages may not be adequate to protect the interests of the Holder hereunder.
     SECTION 11.Definitions.
     As used herein, in addition to the terms defined elsewhere herein, the following terms shall have the following meanings. Capitalized terms not appearing below and not otherwise defined herein shall have the meaning ascribed to them in the Credit Agreement.
     “Affiliate” has the meaning set forth in the Credit Agreement.
     “Aggregate Exercise Price” has the meaning set forth in Section 2(a).
     “Aggregate Number” has the meaning set forth in the Preamble.
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     “Approved Fund” shall mean any Fund that is administered, managed or underwritten by (a) Holder, (b) an Affiliate of Holder or (c) an entity or an Affiliate of an entity that administers or manages Holder.
     “Articles of Incorporation” means the Articles of Incorporation of the Company, as in effect on the date hereof.
     “Business Day” has the meaning set forth in the Credit Agreement.
     “Commencement Date” has the meaning set forth in the Preamble.
     “Commission” means the Securities and Exchange Commission or any similar agency then having jurisdiction to enforce the Securities Act or the Exchange Act.
     “Common Stock” includes (a) the Common Stock of the Company, par value $0.01 per share, as described in the Articles of Incorporation, (b) any other class of capital stock hereafter authorized having the right to share in distributions either of earnings or assets without limit as to amount or percentage or (c) any other capital stock into which such Common Stock is reclassified or reconstituted.
     “Company” has the meaning set forth in the Preamble.
     “Company Notice” has the meaning set forth in Section 7(d)(ii).
     “Convertible Securities” means evidences of indebtedness, shares of stock or other securities (including, but not limited to options and warrants) which are directly or indirectly convertible, exercisable or exchangeable, with or without payment of additional consideration in cash or property, for shares of Common Stock, either immediately or upon the onset of a specified date or the happening of a specified event.
     “Credit Agreement” has the meaning set forth in the Preamble.
     “Eligible Assignee” shall mean (a) an Affiliate of Holder, and (b) an Approved Fund.
     “Event of Non-Compliance” has the meaning set forth in Section 10(a).
     “Exchange Act” has the meaning set forth in the Credit Agreement.
     “Exercise Amount” has the meaning set forth in Section 2(a).
     “Exercise Price” has the meaning set forth in the Preamble.
     “Expiration Date” has the meaning set forth in the Preamble.
     “Fair Market Value Per Share” means the value, on a particular date, of a share of Common Stock determined as follows:
     (i) If the Common Stock is listed or admitted to trading on such date on the Principal Market, the mean of the high and low sales prices of a share of Common Stock on the date immediately prior to such date of determination as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on such Principal Market (if there were no sales on such date
10

 
reported as provided above, the respective prices on the most recent prior day on which a sale of a share of Common Stock took place); or
     (ii) If the Common Stock is not publicly traded, (a) the fair market value of the Outstanding Common Stock based upon an arm’s length sale of the Company on such date (including its ownership interest in all Persons) as an entirety, such sale being between a willing buyer and a willing seller and determined without reference to any discount for minority interest, restrictions on transfer, disparate voting rights among classes of capital stock or lack of marketability with respect to capital stock divided by  (b) the aggregate number of shares of Outstanding Common Stock. The Fair Market Value Per Share shall be determined by the disinterested members of the Board of Directors of the Company in good faith within ten (10) Business Days of any event for which such determination is required and such determination (including the basis therefor) shall be promptly provided to the Holder. Such determination shall be binding on the Holder unless the Holder objects thereto in writing within ten (10) Business Days of receipt. In the event the Holder objects to the determination of “Fair Market Value Per Share” by the board of directors of the Company (such objection to be made within ten (10) Business Days of the Holder’s receipt of written notice of such determination), then the Fair Market Value Per Share shall be determined by a disinterested appraiser (which may be a national or regional investment bank or national accounting firm) mutually selected by the Company and the Holder, the fees and expenses of which shall be paid by the Company. Any selection of a disinterested appraiser shall be made in good faith within five (5) Business Days after the Holder provides written notice to the Company of its objection to the determination of Fair Market Value Per Share and any determination of Fair Market Value Per Share by a disinterested appraiser shall be made within ten (10) Business Days of the date of selection.
     “Fund” has the meaning set forth in the Credit Agreement.
     “Governmental Authority” has the meaning set forth in the Credit Agreement.
     “Holder” has the meaning set forth in the Preamble.
     “Lenders” has the meaning set forth in the Credit Agreement.
     “Notice of Exercise” has the meaning set forth in Section 2(a).
     “Outstanding Common Stock” of the Company means, as of the date of determination, the sum (without duplication) of the following: (a) the number of shares of Common Stock then outstanding at the date of determination, (b) the number of shares of Common Stock then issuable upon the exercise of this Warrant (as such number of shares may be adjusted pursuant to the terms hereof) and (c) the number of shares of Common Stock then issuable upon the exercise or conversion of Convertible Securities and any warrants, options or other rights to subscribe for or purchase Common Stock or Convertible Securities (but excluding any unvested options and securities not then exercisable for or convertible into Common Stock).
     “Person” has the meaning set forth in the Credit Agreement.
     “Principal Market” initially means the New York Stock Exchange and any successor exchange thereto and shall also include the NASDAQ Global Select Market, the NASDAQ Global Market, NASDAQ Capital Market, the American Stock Exchange or the OTC Bulletin Board, whichever is at the time the principal trading exchange or market for the Common Stock, based upon share volume.
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     “Principal Office” means the Company’s principal office as set forth in Section 16 hereof or such other principal office of the Company in the United States of America the address of which first shall have been set forth in a notice to the Holder.
     “Registration Statement” means the registration statements required to be filed under the Registration Rights Agreement.
     “Registration Rights Agreement” has the meaning set forth in the Credit Agreement.
     “Regulatory Requirement” has the meaning set forth in Section 8(c).
     “Required Holders” means the holders of at least 51.0% of the Warrant Shares then outstanding.
     “Requirement of Law” has the meaning set forth in the Credit Agreement.
     “Sale Notice” has the meaning set forth in Section 7(d)(i).
     “Securities Act” has the meaning set forth in the Credit Agreement.
     “Securities Laws” has the meaning set forth in the Credit Agreement.
     “Stock Combination” has the meaning set forth in Section 5(a)(i)(C).
     “Stock Dividend” has the meaning set forth in Section 5(a)(i)(A).
     “Stock Subdivision” has the meaning set forth in Section 5(a)(i)(B).
     “Subsidiary” has the meaning set forth in the Credit Agreement.
     “Transfer” means and includes any sale, assignment, encumbrance, hypothecation, pledge, conveyance in trust, gift, transfer by request, devise or descent, or other transfer or disposition of any kind, including, but not limited to, transfers to receivers, levying creditors, trustees or receivers in bankruptcy proceedings or general assignees for the benefit of creditors, whether voluntary or by operation of law, directly or indirectly, of this Warrant.
     “Transfer Amount” has the meaning set forth in Section 7(d)(i).
     “Warrant” has the meaning set forth in the Preamble.
     “Warrant Securities” means this Warrant and the Warrant Shares, collectively.
     “Warrant Shares” means (a) the shares of Common Stock issued or issuable upon exercise of this Warrant in accordance with its terms and (b) all other shares of the Company’s capital stock issued with respect to such shares by way of stock dividend, stock split or other reclassification or in connection with any merger, consolidation, recapitalization or other reorganization affecting the Company’s capital stock.
     SECTION 12.Survival of Provisions. Notwithstanding the full exercise by the Holder of its rights to purchase Common Stock hereunder, the provisions of  Sections 8(f)  and  (h)  of this Warrant shall survive such exercise and the Expiration Date until such time as the Holder no longer holds any Warrant Shares.
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     SECTION 13.Delays, Omissions and Indulgences. It is agreed that no delay or omission to exercise any right, power or remedy accruing to the Holder upon any breach or default of the Company under this Warrant shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach or default, or any acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character on the Holder’s part of any breach or default under this Warrant, or any waiver on the Holder’s part of any provisions or conditions of this Warrant must be in writing and that all remedies, either under this Warrant, or by Requirement of Law or otherwise afforded to the Holder, shall be cumulative and not alternative.
     SECTION 14.Rights of Transferees. Subject to Section 7, the rights granted to the Holder hereunder of this Warrant shall pass to and inure to the benefit of all subsequent transferees of all or any portion of this Warrant (provided that the Holder and any transferee shall hold such rights in proportion to their respective ownership of this Warrant and Warrant Shares) until extinguished pursuant to the terms hereof.
     SECTION 15.Section Headings. The titles and captions of the Sections and other provisions of this Warrant are for convenience of reference only and are not to be considered in construing this Warrant.
     SECTION 16.Notices.
     (a) Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in paragraph (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopier as follows:
 	 	 	
 	 	if to the Company:	
 	 	 	
 	 	Arbor Realty Trust, Inc.	
 	 	c/o Arbor Commercial Mortgage LLC	
 	 	333 Earle Ovington Boulevard	
 	 	Uniondale, New York 11553	
 	 	Attention: Guy Milone, Esq.	
 	 	Facsimile No.: (516) 832–6431	
 	 	 	
 	 	with a copy to:	
 	 	 	
 	 	Arbor Commercial Mortgage LLC	
 	 	333 Earle Ovington Boulevard	
 	 	Uniondale, New York 11553	
 	 	Attention: John Natalone	
 	 	Phone No.: (516) 832–7409	
 	 	Facsimile No.: (516) 832-6409	
 	 	 	
 	 	if to the Holder:	
 	 	 	
 	 	Wachovia Bank, National Association	
 	 	One Wachovia Center, NC0166	
 	 	301 South College Street	
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 	 	Charlotte, North Carolina 28288	
 	 	Attention: John Nelson	
 	 	Facsimile No.: (704) 715–0066	
 	 	 	
 	 	with a copy to:	
 	 	 	
 	 	Moore & Van Allen PLLC	
 	 	100 North Tryon Street	
 	 	Suite 4700	
 	 	Charlotte, NC 28202	
 	 	Attention: Kenneth P. Kerr, Esq.	
 	 	Telecopy No.: (704) 378–2097	
     Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices sent by telecopier shall be deemed to have been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next Business Day for the recipient). Notices delivered through electronic communications to the extent provided in paragraph (b) below shall be effective as provided in said paragraph (b).
     (b) Notices and other communications to the Holder hereunder may be delivered or furnished by electronic communication (including e-mail and internet or intranet websites) pursuant to procedures approved by the Holder. The Holder or the Company may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it,  provided  that approval of such procedures may be limited to particular notices or communications.
     Unless the Holder otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement),  provided  that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next Business Day for the recipient, and (ii) notices or communications posted to an internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor.
     (c) Any party hereto may change its address or telecopier number for notices and other communications hereunder by notice to the other parties hereto.
     SECTION 17.Successors and Assigns. This Warrant shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided that the Company shall have no right to assign its rights, or to delegate its obligations, hereunder without the prior written consent of the Holder.
     SECTION 18.Amendments. Neither this Warrant nor any term hereof may be amended, changed, waived, discharged or terminated without the prior written consent of the Holder and the Company.
     SECTION 19.Severability. Any provision of this Warrant which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such
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prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
     SECTION 20.Governing Law. This Warrant shall be governed by, and construed in accordance with, the law of the State of New York.
     SECTION 21.Entire Agreement. This Warrant and the Registration Rights Agreement are intended by the parties as a final expression of their agreement and are intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein.
     SECTION 22.Rules of Construction. Unless the context otherwise requires “or” is not exclusive, and references to sections or subsections refer to sections or subsections of this Warrant. All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require.
[Remainder of Page Intentionally Omitted.]
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     IN WITNESS WHEREOF, the Company has caused this Warrant to be issued and executed in its corporate name by a duly authorized officer or director as of the date first written above.
 	 	 	 	 	
 	ARBOR REALTY TRUST, INC., a Maryland
corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
S-1

 
 	 	 	 	 	
EXHIBIT A
NOTICE OF EXERCISE
 	 	 	 	 	
To:	 	 	 	 	

 	 	 	 	 	
 	 	 	 	 	
     1. The undersigned, pursuant to the provisions of the attached Warrant, hereby elects to exercise this Warrant with respect to                      shares of Common Stock (the “Exercise Amount”). Capitalized terms used but not otherwise defined herein have the meanings ascribed thereto in the attached Warrant.
     2. The undersigned herewith tenders payment for such shares in the following manner (please check type, or types, of payment and indicate the portion of the Exercise Price to be paid by each type of payment):
                                             Exercise for Cash
                                             Cashless Exercise
     3. Please issue a certificate or certificates representing the shares issuable in respect hereof under the terms of the attached Warrant, as follows:

 	 	(Name of Record Holder/Transferee)	
and deliver such certificate or certificates to the following address:

 	 	(Address of Record Holder/Transferee)	
     4. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares.
     5. If the Exercise Amount is less than all of the shares of Common Stock purchasable hereunder, please issue a new warrant representing the remaining balance of such shares, as follows:

 	 	(Name of Record Holder/Transferee)	
and deliver such warrant to the following address:

 	 	(Address of Record Holder/Transferee)	

 

 	 	(Signature)	
  (Date)	 	 	

Exhibit 4.3
THIS COMMON STOCK PURCHASE WARRANT AND THE SHARES THAT MAY BE PURCHASED HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER THE SECURITIES LAWS OF ANY STATE. THIS COMMON STOCK PURCHASE WARRANT HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO DISTRIBUTION, AND THIS COMMON STOCK PURCHASE WARRANT AND THE SHARES THAT MAY BE PURCHASED HEREUNDER MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AND REGISTRATION OR QUALIFICATION UNDER APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL THAT THE PROPOSED TRANSACTION DOES NOT VIOLATE THE SECURITIES ACT OF 1933, AND APPLICABLE STATE SECURITIES LAWS.
ARBOR REALTY TRUST, INC.
COMMON STOCK PURCHASE WARRANT
 	 	 	
Date of Issuance: July 23, 2009	 	Certificate No. W-2     	
THIS IS TO CERTIFY that WACHOVIA BANK, NATIONAL ASSOCIATION, a national banking association (together with its transferees, successors and assigns, the “ Holder ”), for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, is entitled to purchase from  ARBOR REALTY TRUST, INC. , a Maryland corporation (the “ Company ”), at the price of $5.00 per share (the “ Exercise Price ”), at any time after July 23, 2011 (the “ Commencement Date ”) and expiring on July 23, 2015 (the “ Expiration Date ”), 250,000 shares of fully paid and nonassessable common stock, par value $0.01 per share (“ Common Stock ”) of the Company (as such number may be adjusted as provided herein). The 250,000 shares of Common Stock which may be purchased pursuant to this Warrant are referred to herein as the “ Aggregate Number ”. This common stock purchase warrant (this “ Warrant ”) is issued under and in connection with that certain First Amended and Restated Credit Agreement, dated as of July 23, 2009 (as the same may be amended, modified, restated, replaced, waived, substituted, supplemented or extended from time to time, the “ Credit Agreement ”), among Arbor Realty Funding, LLC, a Delaware limited liability company, as a borrower, ARSR Tahoe, LLC, a Delaware limited liability company, as a borrower, Arbor ESH II LLC, a Delaware limited liability company, as a borrower, Arbor Realty Limited Partnership, a Delaware limited partnership, as a borrower and a guarantor, ART 450 LLC, a Delaware limited liability company, as a borrower, the Company, as a guarantor, Arbor Realty SR, Inc., a Maryland corporation, as a borrower and a guarantor, the several banks and other financial institutions as are, or may from time to time become parties thereto, and Wachovia Bank, National Association, a national banking association, as administrative agent for the lenders thereunder.
     The Aggregate Number and Exercise Price set forth above shall also be adjusted under certain conditions specified in Section 5  of this Warrant, including, but not limited to, a Stock Dividend, Stock

 
Subdivision or Stock Combination. Capitalized terms used herein shall have the meanings ascribed to such terms in Section 11 hereof unless otherwise defined herein.
     SECTION 1.The Warrant; Transfer and Exchange.
     (a) The Warrant. This Warrant and the rights and privileges of the Holder hereunder may be exercised by the Holder in whole or in part as provided herein, shall survive any termination of the Credit Agreement and, as more fully set forth in  Sections 1(b) and  7  hereof, subject to the terms of this Warrant, may be transferred by the Holder to any other Person or Persons who meet the requirements set forth herein at any time or from time to time, in whole or in part, regardless of whether the Holder retains any or all rights under the Credit Agreement.
     (b) Transfer and Exchanges. The Company shall initially record this Warrant on a register to be maintained by the Company and, subject to  Section 7  hereof, from time to time thereafter shall reflect the transfer of this Warrant on such register when surrendered for transfer in accordance with the terms hereof and properly endorsed, accompanied by appropriate instructions, and further accompanied by payment in cash or by check, bank draft or money order payable to the order of the Company, in United States currency, of an amount equal to any stamp or other tax or governmental charge or fee required to be paid in connection with the transfer thereof. Upon any such transfer, a new warrant or warrants shall be issued to the transferee and the Holder (in the event this Warrant is only partially transferred) and the surrendered warrant shall be canceled. This Warrant may be exchanged at the option of the Holder, when surrendered at the Principal Office of the Company, for another warrant or other warrants of like tenor and representing in the aggregate the right to purchase a like number of shares of Common Stock.
     SECTION 2.Exercise.
     (a) Right to Exercise. At any time after the Commencement Date and on or before the Expiration Date, the Holder, in accordance with the terms hereof, may exercise this Warrant, in whole at any time or in part from time to time, by delivering this Warrant to the Company during normal business hours on any Business Day at the Company’s Principal Office, together with the Notice of Exercise, in the form attached hereto as  Exhibit A  and made a part hereof (the “ Notice of Exercise ”), duly executed, and payment of the Exercise Price per share for each share purchased, as specified in the Notice of Exercise. The aggregate Exercise Price (the “ Aggregate Exercise Price ”) to be paid for the shares to be purchased (the “ Exercise Amount ”) shall equal the product of (i) the Exercise Amount multiplied by (ii) the Exercise Price. If the Expiration Date is not a Business Day, then this Warrant may be exercised on the next succeeding Business Day.
     (b) Payment of the Aggregate Exercise Price. Payment of the Aggregate Exercise Price shall be made to the Company in cash or other immediately available funds or as provided in  Section 2(c ), or a combination thereof. In the case of payment of all or a portion of the Aggregate Exercise Price pursuant to  Section 2(c ), the direction by the Holder to make a “Cashless Exercise” shall serve as accompanying payment for that portion of the Exercise Price.
     (c) Cashless Exercise. The Holder shall have the right to pay all or a portion of the Aggregate Exercise Price by making a “Cashless Exercise”, in which case the portion of the Aggregate Exercise Price to be so paid shall be paid by reducing the number of shares of Common Stock otherwise issuable pursuant to the Notice of Exercise by an amount equal to (i) the Aggregate Exercise Price to be so paid divided by (ii) the Fair Market Value Per Share.
     (d) Issuance of Shares of Common Stock. Upon receipt by the Company of this Warrant at its Principal Office in proper form for exercise, and accompanied by the Notice of Exercise and payment
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of the Aggregate Exercise Price as aforesaid, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that certificates representing such shares of Common Stock may not then be actually delivered. Within five (5) Business Days after such surrender of this Warrant, delivery of the Notice of Exercise and payment of the Aggregate Exercise Price as aforesaid, the Company shall issue and cause to be delivered to, or upon the written order of, the Holder (and in such name or names as the Holder may designate) a certificate or certificates for the Exercise Amount, subject to any reduction as provided in  Section 2(c ) for a Cashless Exercise.
     (e) Fractional Shares. The Company may, but shall not be required to, deliver fractions of shares of Common Stock upon exercise of this Warrant. If any fraction of a share of Common Stock would be deliverable upon an exercise of this Warrant, the Company may, in lieu of delivering such fraction of a share of Common Stock, make a cash payment to the Holder in an amount equal to the same fraction of the Fair Market Value Per Share determined as of the Business Day immediately preceding the date of exercise of this Warrant.
     (f) Partial Exercise. In the event of a partial exercise of this Warrant, the Company shall issue to the Holder a Warrant in like form for the unexercised portion thereof which has not expired.
     SECTION 3.Payment of Taxes. The Company shall pay all stamp taxes attributable to the initial issuance of shares or other securities issuable upon the exercise of this Warrant or issuable pursuant to  Section 5  hereof, excluding any tax or taxes which may be payable because of the transfer involved in the issuance or delivery of any certificates for shares or other securities in a name other than that of the Holder in respect of which such shares or securities are issued.
     SECTION 4.Replacement Warrant. In case this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue and deliver in exchange and substitution for and upon cancellation of the mutilated Warrant, or in lieu of and in substitution for this Warrant lost, stolen or destroyed, a new Warrant of like tenor and representing an equivalent right or interest, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction of such Warrant and upon receipt of indemnity reasonably satisfactory to the Company and the Holder;  provided ,  that  if the Holder is a financial institution, business development company or other institutional or fund investor, its own indemnity agreement shall be satisfactory and no third party indemnity shall be required.
     SECTION 5.Adjustments to the Aggregate Number and the Exercise Price.
     Under certain conditions, the Aggregate Number and the Exercise Price are subject to adjustment as set forth in this Section 5.
     (a) Adjustments. The Aggregate Number, after taking into consideration any prior adjustments pursuant to this Section 5, shall be subject to adjustment from time to time as follows and, thereafter, as adjusted, shall be deemed to be the Aggregate Number hereunder.
     (i) Stock Dividends; Subdivisions and Combinations. In case at any time or from time to time the Company shall:
     (A) issue to the holders of its shares of Common Stock a dividend payable in, or other distribution of, shares of Common Stock (a “ Stock Dividend ”);
     (B) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, including, without limitation, by means of a stock split (a “ Stock Subdivision ”); or
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     (C) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock (a “ Stock Combination ”);
then the Aggregate Number in effect immediately prior thereto shall be (1) proportionately increased in the case of a Stock Dividend or a Stock Subdivision and (2) proportionately decreased in the case of a Stock Combination, and the Exercise Price shall be proportionately adjusted. In the event the Company shall declare or pay, without consideration, any dividend on the shares of Common Stock payable in any right to acquire shares of Common Stock for no consideration, then the Company shall be deemed to have made a Stock Dividend in an amount of shares equal to the maximum number of shares issuable upon exercise of such rights to acquire shares of Common Stock.
     (b) Notices.
     (i) Notice of Proposed Actions. In case the Company shall propose (A) to pay any dividend payable in stock of any class to the holders of its Common Stock or to make any other distribution to the holders of its Common Stock, (B) to offer to the holders of its Common Stock rights to subscribe for or to purchase any Convertible Securities, rights to acquire Convertible Securities or capital stock or additional shares of Common Stock or shares of stock of any class or any other securities, warrants, rights or options, (C) to effect any reclassification of its Common Stock, (D) to effect any recapitalization, stock subdivision, stock combination or other capital reorganization, (E) to effect any consolidation or merger, share exchange, or sale, lease or other disposition of all or substantially all of its property, assets or business, (F) to effect the liquidation, dissolution or winding up of the Company, (G) to initiate any transaction or be a party to any transaction (including, without limitation, a merger, consolidation, share exchange, sale, lease or other disposition of all or substantially all of the Company’s assets, liquidation, recapitalization or reclassification of the Common Stock) in connection with which the previous Outstanding Common Stock shall be changed into or exchanged for different securities of the Company or capital stock or other securities of another corporation or interests in a non-corporate entity or other property (including cash) or any combination of the foregoing or (H) to effect any other action which would require an adjustment under this  Section 5 , then in each such case the Company shall give to the Holder written notice of such proposed action, which shall specify the proposed date on which a record is to be taken for the purposes of such stock dividend, distribution or rights, or the proposed date on which such reclassification, reorganization, consolidation, merger, share exchange, sale, transfer, disposition, liquidation, dissolution, winding up or other transaction is to take place and the date of participation therein by the holders of Common Stock, if any such date is to be fixed, or the proposed date on which the transfer of Common Stock is to occur, and shall also set forth such facts with respect thereto as shall be reasonably necessary to indicate the effect of such action on the Common Stock and on the Aggregate Number after giving effect to any adjustment which will be required as a result of such action. Such notice shall be so given in the case of any action covered by clause (A) or (B) above at least twenty (20) calendar days prior to the record date for determining holders of the Common Stock for purposes of such action and, in the case of any other such action, at least twenty (20) calendar days prior to the earlier of the date of the taking of such proposed action or the date of participation therein by the holders of Common Stock.
     (ii) Adjustment Notice. Whenever the Aggregate Number is to be adjusted pursuant to this Section 5, unless otherwise agreed by the Holder, the Company shall promptly (and in any event within ten (10) Business Days after the event requiring the adjustment) prepare and deliver to the Holder a certificate signed by the chief financial officer of the Company, setting forth, in reasonable detail, the event requiring the adjustment and the method by which such adjustment is
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to be calculated. The certificate shall set forth, if applicable, a description of the basis on which the board of directors in good faith determined, as applicable, the Fair Market Value Per Share, the fair market value of any evidences of indebtedness, shares of stock, other securities, warrants, other subscription or purchase rights, or other property or the equitable nature of any adjustment under  Section 5(b ) or ( c ) hereof, the new Aggregate Number and, if applicable, any new securities or property to which the Holder is entitled. Any other determination of fair market value shall first be determined in good faith by the board of directors and be based upon an arm’s length sale of such indebtedness, shares of stock, other securities, warrants, other subscription or purchase rights or other property, such sale being between a willing buyer and a willing seller. In the case of any such determination of fair market value, the Holder may object to the determination in such certificate by giving written notice within ten (10) Business Days of the receipt of such certificate and, if the Holder and the Company cannot agree to the fair market value within ten (10) Business Days of the date of the Holder’s objection, the fair market value shall be determined by a disinterested appraiser (which may be national or regional investment bank or a national accounting firm) mutually selected by the Holder and the Company, the fees and expenses of which shall be paid by the Company.
     SECTION 6.No Dilution or Impairment. The Company will not, by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, share exchange, dissolution or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, including, without limitation, the adjustments required under  Section 5  hereof, and will at all times in good faith assist in the carrying out of all such terms and in taking of all such action as may be necessary or appropriate to protect the rights of the Holder against dilution or other impairment. Without limiting the generality of the foregoing and notwithstanding any other provision of this Warrant to the contrary (including by way of implication), the Company (a) will not increase the par value of any shares of Common Stock receivable on the exercise of this Warrant above the amount payable therefor on such exercise and (b) will take all such action as may be necessary or appropriate so that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant.
     SECTION 7.Transfers of this Warrant.
     (a) Generally. Subject to the restrictions set forth in this Section 7, the Holder may at any time and from time to time freely transfer this Warrant and the Warrant Shares in whole or in part to any Person. This Warrant has not been, and the Warrant Shares at the time of their issuance may not be, registered under the Securities Act and, except as provided in the Registration Rights Agreement, nothing herein contained shall be deemed to require the Company to so register this Warrant and the Warrant Shares. This Warrant and the Warrant Shares are issued or issuable subject to the provisions and conditions contained herein and to the provisions and conditions contained in the Registration Rights Agreement, and every Holder hereof by accepting the same agrees with the Company to such provisions and conditions, and represents to the Company that this Warrant has been acquired and the Warrant Shares will be acquired for the account of the Holder for investment and not with a view to or for sale in connection with any distribution thereof.
     (b) Compliance with Securities Laws. The Holder agrees that this Warrant and the Warrant Shares may not be sold or otherwise disposed of except pursuant to an effective registration statement under the Securities Act and other applicable Securities Laws or pursuant to an applicable exemption from the registration requirements of the Securities Act and such other applicable Securities Laws. In the event that the Holder transfers this Warrant or the Warrant Shares pursuant to an applicable exemption from registration, the Company may request, at its expense, that the Holder deliver an opinion of counsel
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reasonably acceptable to the Company that the proposed transfer does not violate the Securities Act or other applicable Securities Laws.
     (c) Restrictive Securities Legend. (i) The certificate representing the Warrant Shares shall bear the restrictive legends set forth below:
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE. NO TRANSFER, SALE OR OTHER DISPOSITION OF THIS WARRANT MAY BE MADE UNLESS A REGISTRATION STATEMENT WITH RESPECT TO THIS WARRANT HAS BECOME EFFECTIVE UNDER SAID ACT, AND SUCH REGISTRATION OR QUALIFICATION AS MAY BE NECESSARY UNDER THE SECURITIES LAWS OF ANY STATE HAS BECOME EFFECTIVE, OR BORROWER HAS BEEN FURNISHED WITH AN OPINION OF COUNSEL SATISFACTORY TO BORROWER THAT SUCH REGISTRATION IS NOT REQUIRED.
     (ii) Certificates evidencing the Warrant Shares shall not contain any legend: (1) while a registration statement (including the Registration Statement) covering the resale of the Warrant Shares is effective under the Securities Act, or (2) following any sale of the Shares pursuant to Rule 144 (other than sales to an Affiliate of Holder), or (3) if such Warrant Shares are eligible for sale under Rule 144(b), or (4) if such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission). If a legend is not otherwise required under applicable requirements of the Securities Act (including judicial interpretations thereof) then any certificates representing the Warrant Shares shall be issued free of all legends. The Company agrees that following the effective date of the Registration Statement or at such time as such legend is no longer required under this  Section 7 , it will, no later than five (5) Business Days following the delivery by the Holder to the Company’s transfer agent of a certificate representing the Warrant Shares issued with a restrictive legend, deliver or cause to be delivered to the Holder a certificate representing such Warrant Shares that is free from all restrictive and other legends. Unless required by law, the Company may not make any notation on its records or give instructions to any transfer agent of the Company that enlarge the restrictions on transfer set forth in this Section 7 .
     (d) Right of First Refusal.
     (i) Holder may not Transfer this Warrant or any portion hereof unless it has complied with this Section 7(d). If Holder proposes to Transfer this Warrant (or portion hereof), then Holder shall promptly give written notice (the “ Sale Notice ”) to the Company at least twenty (20) days prior to the closing of such Transfer. The Notice shall describe in reasonable detail the proposed Transfer including, without limitation, the portion of this Warrant to be Transferred (the “ Transfer Amount ”), the nature of such Transfer, the consideration to be paid, and the name and address of each prospective purchaser or transferee.
     (ii) For a period of ten (10) days following receipt of any Sale Notice, the Company shall have the right to purchase all, but not less than all, of the Transfer Amount subject to such Sale Notice on the same terms and conditions as set forth therein. The Company’s purchase right shall be exercised by written notice signed by an officer of the Company (the “ Company Notice ”) and delivered to the Holder within such ten (10) day period. The Company shall effect the purchase of the Transfer Amount, including payment of the purchase price, not more than five (5)
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business days after delivery of the Company’s Notice, and at such time the Holder shall deliver to the Company this Warrant, properly endorsed for transfer. To the extent that the Company does not elect to exercise its purchase right pursuant to this  Section 7(d) , the Holder may, not later than thirty (30) days following delivery to the Company of the Sale Notice, enter into an agreement providing for the closing of the Transfer of the Transfer Amount covered by the Sale Notice within thirty (30) days of such agreement on the terms and conditions described in the Sale Notice. Any subsequent proposed Transfer of this Warrant by the Holder, shall again be subject to the first refusal rights of the Company and shall require compliance by the Holder with the procedures described in this  Section 7(d) .
     (iii) Notwithstanding the foregoing, the purchase rights of the Company set forth in this Section 7(d) shall not apply to (i) any Transfer by a Holder to an Eligible Assignee, (ii) any pledge of this Warrant made pursuant to a bona fide loan transaction that creates a mere security, (iii) any Transfer by Holder in connection with the sale of all or a portion of any outstanding indebtedness of the Company held by Holder or its Affiliates pursuant to the Credit Agreement, or (iv) any Transfer that is a bona fide gift approved by the Holder’s Board of Directors;  provided , in each case, that the pledgee, transferee or donee shall enter into a written agreement to be bound by and comply with all provisions of this Warrant as if it were an original Holder hereunder.
     (iv) Any purported Transfer by a Holder of this Warrant (or portion thereof) in violation of this Section 7(d) shall be voidable, and the Company will not effect such Transfer nor will it treat any alleged transferee as the holder of this Warrant.
     (v) By its execution of this Agreement, Wachovia Bank, National Association, as the Lender under the Credit Agreement, hereby consents to any purchase by the Company of this Warrant upon the exercise of its rights under this  Section 7(d) , and acknowledges and agrees that notwithstanding any provision of the Credit Agreement to the contrary, any such purchase shall not constitute a breach of any provision of the Credit Agreement.
     SECTION 8.Covenants.
     The Company hereby covenants to the Holder that so long as Holder holds any Warrant Securities:
     (a) Limitation on Certain Restrictions. Without the prior written consent of the Required Holders, the Company will not, and will not permit or cause any of its Subsidiaries, directly or indirectly, to create or otherwise cause or suffer to exist or become effective any restriction or encumbrance on the ability of the Company and any such Subsidiaries to perform and comply with their respective obligations under this Warrant.
     (b) Regulatory Requirements and Restrictions. In the event of any reasonable determination by the Holder that, by reason of any existing or future federal or state law, statute, rule, regulation, guideline, order, court or administrative ruling, request or directive (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) (collectively, a “ Regulatory Requirement ”), the Holder is effectively restricted or prohibited from holding this Warrant or the Warrant Shares (including any shares of capital stock or other securities distributable to the Holder in any merger, reorganization, readjustment or other reclassification), or otherwise realizing upon or receiving the benefits intended under this Warrant, the Company shall take such action as the Holder and the Company shall jointly agree in good faith to be necessary to permit the Holder to comply with such Regulatory
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Requirement. The reasonable costs of taking such action, whether by the Company, the Holder or otherwise, shall be borne by the Holder.
     (c) Reservation of Shares. The Company shall at all times reserve and keep available out of the aggregate of its authorized but unissued shares, free of preemptive rights, such number of its duly authorized shares of Common Stock as shall be sufficient to enable the Company to issue Common Stock upon exercise of this Warrant.
     (d) Affirmative Actions to Permit Exercise and Realization of Benefits. If any shares of Common Stock reserved or to be reserved for the purpose of the exercise of this Warrant, or any shares or other securities reserved or to be reserved for the purpose of issuance pursuant to  Section 5  hereof, require registration with or approval of any Governmental Authority under any federal or state law (other than securities laws) before such shares or other securities may be validly delivered upon exercise of this Warrant, then the Company covenants that it will, at its sole expense, secure such registration or approval, as the case may be (including but not limited to approvals or expirations of waiting periods required under the Hart-Scott-Rodino Antitrust Improvements Act).
     (e) Validly Issued Shares. All shares of Common Stock that may be issued upon exercise of this Warrant, assuming full payment of the Aggregate Exercise Price (including those issued pursuant to  Section 5  hereof) shall, upon delivery by the Company, be duly authorized and validly issued, fully paid and nonassessable, free from all stamp taxes, liens and charges with respect to the issue or delivery thereof and otherwise free of all other security interests, encumbrances and claims of any nature whatsoever (other than security interests, encumbrances and claims to which the Holder is subject prior to the issuance of this Warrant and other transfer restrictions described herein).
     (f) Furnishing of Information; Compliance with Rule 144. The Company shall timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to the Exchange Act. So long as the Warrant Shares are not registered under an effective registration statement, upon the request of the Holder, the Company shall deliver to the Holder a written certification of a duly authorized officer as to whether it has complied with the preceding sentence. As long as the Holder owns any of the Warrant Shares, if the Company is not required to file reports pursuant to such laws, it will prepare and furnish to the Holder and make publicly available in accordance with Rule 144 such information as is required for the Holder to sell the Warrant Shares under Rule 144. So long as the Warrant Shares are not registered under an effective registration statement, the Company further covenants that it will take such further action as the Holder may reasonably request, all to the extent required from time to time to enable the Holder to sell such Warrant Shares without registration under the Securities Act within the limitation of the exemptions provided by Rule 144.
     (g) Integration. The Company shall not, and shall use its commercially reasonable efforts to ensure that no Affiliate of the Company shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of this Warrant in a manner that would require the registration under the Securities Act of the sale of the Warrant to the Holder, or that would be integrated with the offer or sale of the Warrant Shares for purposes of the rules and regulations of any Principal Market.
     (h) Listing of the Warrant Shares. The Company shall: (i) take all steps necessary to cause the Warrant Shares to be approved for listing on the Principal Market as soon as possible after the Commencement Date, (ii) provide to the Holder evidence of such listing, and (iii) use reasonable efforts to maintain the listing of the Warrant Shares on such Principal Market or another Principal Market.
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     (i) Securities Laws Disclosure; Publicity. The Company shall issue a press release or timely file a report on Form 8-K reasonably acceptable to the Holder disclosing all material terms of the transactions contemplated hereby. The Company and the Holder shall consult with each other in issuing any press releases with respect to the transactions contemplated hereby. Notwithstanding the foregoing, other than in the Registration Statement, the Company shall not publicly disclose the name of the Holder or the terms hereof, or include the name of the Holder or the terms hereof in any filing with the Commission or any regulatory agency or Principal Market, without the prior written consent of such Holder, except to the extent such disclosure is required by law or Principal Market regulations. The Holder acknowledges that such disclosure may be required by law in the Company’s proxy statement, annual report on Form 10-K, quarterly report on Form 10-Q, and filings related thereto and will be incorporated by reference to such filings in currently effective registration statements filed by the Company and will be included in registration statements that may be filed by the Company in the future.
     SECTION 9.No Effect Upon Lending Relationship. Notwithstanding anything herein to the contrary, nothing contained in this Warrant shall affect, limit or impair the rights and remedies of the Holder or any of its Affiliates in its capacity as a lender to the Company pursuant to any agreement under which the Company has borrowed money from the Holder. Without limiting the generality of the foregoing, the Holder, in exercising its rights as a lender, including making its decision on whether to foreclose on any collateral security, will have no duty to consider (i) its status or the status of any of its Affiliates as a direct or indirect equity holder of the Company, (ii) the equity of the Company or (iii) any duty it may have to any other direct or indirect equity holder of the Company, except as may be required under the applicable loan documents or by commercial law applicable to creditors generally.
     SECTION 10.Events of Non-Compliance and Remedies.
     (a) Events of Non-Compliance. If the Company fails to keep and fully and promptly perform and observe in all material respects any of the terms, covenants or representations contained or referenced herein within twenty (20) calendar days from the earlier to occur of (i) written notice from the Holder specifying what failure has occurred, or requesting that a specified failure be remedied or (ii) the Company becoming aware of such failure (an “ Event of Non-Compliance ”), the Holder shall be entitled to the remedies set forth in subsection (b) hereof.
     (b) Remedies. On the occurrence of an Event of Non-Compliance, in addition to any remedies the Holder may have under any Requirement of Law, the Holder may bring any action for injunctive relief or specific performance of any term or covenant contained herein, the Company hereby acknowledging that an action for money damages may not be adequate to protect the interests of the Holder hereunder.
     SECTION 11.Definitions.
     As used herein, in addition to the terms defined elsewhere herein, the following terms shall have the following meanings. Capitalized terms not appearing below and not otherwise defined herein shall have the meaning ascribed to them in the Credit Agreement.
     “Affiliate” has the meaning set forth in the Credit Agreement.
     “Aggregate Exercise Price” has the meaning set forth in Section 2(a).
     “Aggregate Number” has the meaning set forth in the Preamble.
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     “Approved Fund” shall mean any Fund that is administered, managed or underwritten by (a) Holder, (b) an Affiliate of Holder or (c) an entity or an Affiliate of an entity that administers or manages Holder.
     “Articles of Incorporation” means the Articles of Incorporation of the Company, as in effect on the date hereof.
     “Business Day” has the meaning set forth in the Credit Agreement.
     “Commencement Date” has the meaning set forth in the Preamble.
     “Commission” means the Securities and Exchange Commission or any similar agency then having jurisdiction to enforce the Securities Act or the Exchange Act.
     “Common Stock” includes (a) the Common Stock of the Company, par value $0.01 per share, as described in the Articles of Incorporation, (b) any other class of capital stock hereafter authorized having the right to share in distributions either of earnings or assets without limit as to amount or percentage or (c) any other capital stock into which such Common Stock is reclassified or reconstituted.
     “Company” has the meaning set forth in the Preamble.
     “Company Notice” has the meaning set forth in Section 7(d)(ii).
     “Convertible Securities” means evidences of indebtedness, shares of stock or other securities (including, but not limited to options and warrants) which are directly or indirectly convertible, exercisable or exchangeable, with or without payment of additional consideration in cash or property, for shares of Common Stock, either immediately or upon the onset of a specified date or the happening of a specified event.
     “Credit Agreement” has the meaning set forth in the Preamble.
     “Eligible Assignee” shall mean (a) an Affiliate of Holder, and (b) an Approved Fund.
     “Event of Non-Compliance” has the meaning set forth in Section 10(a).
     “Exchange Act” has the meaning set forth in the Credit Agreement.
     “Exercise Amount” has the meaning set forth in Section 2(a).
     “Exercise Price” has the meaning set forth in the Preamble.
     “Expiration Date” has the meaning set forth in the Preamble.
     “Fair Market Value Per Share” means the value, on a particular date, of a share of Common Stock determined as follows:
     (i) If the Common Stock is listed or admitted to trading on such date on the Principal Market, the mean of the high and low sales prices of a share of Common Stock on the date immediately prior to such date of determination as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on such Principal Market (if there were no sales on such date
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reported as provided above, the respective prices on the most recent prior day on which a sale of a share of Common Stock took place); or
     (ii) If the Common Stock is not publicly traded, (a) the fair market value of the Outstanding Common Stock based upon an arm’s length sale of the Company on such date (including its ownership interest in all Persons) as an entirety, such sale being between a willing buyer and a willing seller and determined without reference to any discount for minority interest, restrictions on transfer, disparate voting rights among classes of capital stock or lack of marketability with respect to capital stock divided by  (b) the aggregate number of shares of Outstanding Common Stock. The Fair Market Value Per Share shall be determined by the disinterested members of the Board of Directors of the Company in good faith within ten (10) Business Days of any event for which such determination is required and such determination (including the basis therefor) shall be promptly provided to the Holder. Such determination shall be binding on the Holder unless the Holder objects thereto in writing within ten (10) Business Days of receipt. In the event the Holder objects to the determination of “Fair Market Value Per Share” by the board of directors of the Company (such objection to be made within ten (10) Business Days of the Holder’s receipt of written notice of such determination), then the Fair Market Value Per Share shall be determined by a disinterested appraiser (which may be a national or regional investment bank or national accounting firm) mutually selected by the Company and the Holder, the fees and expenses of which shall be paid by the Company. Any selection of a disinterested appraiser shall be made in good faith within five (5) Business Days after the Holder provides written notice to the Company of its objection to the determination of Fair Market Value Per Share and any determination of Fair Market Value Per Share by a disinterested appraiser shall be made within ten (10) Business Days of the date of selection.
     “Fund” has the meaning set forth in the Credit Agreement.
     “Governmental Authority” has the meaning set forth in the Credit Agreement.
     “Holder” has the meaning set forth in the Preamble.
     “Lenders” has the meaning set forth in the Credit Agreement.
     “Notice of Exercise” has the meaning set forth in Section 2(a).
     “Outstanding Common Stock” of the Company means, as of the date of determination, the sum (without duplication) of the following: (a) the number of shares of Common Stock then outstanding at the date of determination, (b) the number of shares of Common Stock then issuable upon the exercise of this Warrant (as such number of shares may be adjusted pursuant to the terms hereof) and (c) the number of shares of Common Stock then issuable upon the exercise or conversion of Convertible Securities and any warrants, options or other rights to subscribe for or purchase Common Stock or Convertible Securities (but excluding any unvested options and securities not then exercisable for or convertible into Common Stock).
     “Person” has the meaning set forth in the Credit Agreement.
     “Principal Market” initially means the New York Stock Exchange and any successor exchange thereto and shall also include the NASDAQ Global Select Market, the NASDAQ Global Market, NASDAQ Capital Market, the American Stock Exchange or the OTC Bulletin Board, whichever is at the time the principal trading exchange or market for the Common Stock, based upon share volume.
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     “Principal Office” means the Company’s principal office as set forth in Section 16 hereof or such other principal office of the Company in the United States of America the address of which first shall have been set forth in a notice to the Holder.
     “Registration Statement” means the registration statements required to be filed under the Registration Rights Agreement.
     “Registration Rights Agreement” has the meaning set forth in the Credit Agreement.
     “Regulatory Requirement” has the meaning set forth in Section 8(c).
     “Required Holders” means the holders of at least 51.0% of the Warrant Shares then outstanding.
     “Requirement of Law” has the meaning set forth in the Credit Agreement.
     “Sale Notice” has the meaning set forth in Section 7(d)(i).
     “Securities Act” has the meaning set forth in the Credit Agreement.
     “Securities Laws” has the meaning set forth in the Credit Agreement.
     “Stock Combination” has the meaning set forth in Section 5(a)(i)(C).
     “Stock Dividend” has the meaning set forth in Section 5(a)(i)(A).
     “Stock Subdivision” has the meaning set forth in Section 5(a)(i)(B).
     “Subsidiary” has the meaning set forth in the Credit Agreement.
     “Transfer” means and includes any sale, assignment, encumbrance, hypothecation, pledge, conveyance in trust, gift, transfer by request, devise or descent, or other transfer or disposition of any kind, including, but not limited to, transfers to receivers, levying creditors, trustees or receivers in bankruptcy proceedings or general assignees for the benefit of creditors, whether voluntary or by operation of law, directly or indirectly, of this Warrant.
     “Transfer Amount” has the meaning set forth in Section 7(d)(i).
     “Warrant” has the meaning set forth in the Preamble.
     “Warrant Securities” means this Warrant and the Warrant Shares, collectively.
     “Warrant Shares” means (a) the shares of Common Stock issued or issuable upon exercise of this Warrant in accordance with its terms and (b) all other shares of the Company’s capital stock issued with respect to such shares by way of stock dividend, stock split or other reclassification or in connection with any merger, consolidation, recapitalization or other reorganization affecting the Company’s capital stock.
     SECTION 12.Survival of Provisions. Notwithstanding the full exercise by the Holder of its rights to purchase Common Stock hereunder, the provisions of  Sections 8(f)  and  (h)  of this Warrant shall survive such exercise and the Expiration Date until such time as the Holder no longer holds any Warrant Shares.
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     SECTION 13.Delays, Omissions and Indulgences. It is agreed that no delay or omission to exercise any right, power or remedy accruing to the Holder upon any breach or default of the Company under this Warrant shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach or default, or any acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character on the Holder’s part of any breach or default under this Warrant, or any waiver on the Holder’s part of any provisions or conditions of this Warrant must be in writing and that all remedies, either under this Warrant, or by Requirement of Law or otherwise afforded to the Holder, shall be cumulative and not alternative.
     SECTION 14.Rights of Transferees. Subject to Section 7, the rights granted to the Holder hereunder of this Warrant shall pass to and inure to the benefit of all subsequent transferees of all or any portion of this Warrant (provided that the Holder and any transferee shall hold such rights in proportion to their respective ownership of this Warrant and Warrant Shares) until extinguished pursuant to the terms hereof.
     SECTION 15.Section Headings. The titles and captions of the Sections and other provisions of this Warrant are for convenience of reference only and are not to be considered in construing this Warrant.
     SECTION 16.Notices.
     (a) Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in paragraph (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopier as follows:
if to the Company:
Arbor Realty Trust, Inc.
c/o Arbor Commercial Mortgage LLC
333 Earle Ovington Boulevard
Uniondale, New York 11553
Attention:        Guy Milone, Esq.
Facsimile No.: (516) 832—6431
with a copy to:
Arbor Commercial Mortgage LLC
333 Earle Ovington Boulevard
Uniondale, New York 11553
Attention:        John Natalone
Phone No.:      (516) 832—7409
Facsimile No.: (516) 832-6409
if to the Holder:
Wachovia Bank, National Association
One Wachovia Center, NC0166
301 South College Street
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Charlotte, North Carolina 28288
Attention:        John Nelson
Facsimile No.: (704) 715—0066
with a copy to:
Moore & Van Allen PLLC
100 North Tryon Street
Suite 4700
Charlotte, NC 28202
Attention: Kenneth P. Kerr, Esq.
Telecopy No.: (704) 378—2097
     Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices sent by telecopier shall be deemed to have been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next Business Day for the recipient). Notices delivered through electronic communications to the extent provided in paragraph (b) below shall be effective as provided in said paragraph (b).
     (b) Notices and other communications to the Holder hereunder may be delivered or furnished by electronic communication (including e-mail and internet or intranet websites) pursuant to procedures approved by the Holder. The Holder or the Company may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it,  provided  that approval of such procedures may be limited to particular notices or communications.
     Unless the Holder otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement),  provided  that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next Business Day for the recipient, and (ii) notices or communications posted to an internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor.
     (c) Any party hereto may change its address or telecopier number for notices and other communications hereunder by notice to the other parties hereto.
     SECTION 17.Successors and Assigns. This Warrant shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided that the Company shall have no right to assign its rights, or to delegate its obligations, hereunder without the prior written consent of the Holder.
     SECTION 18.Amendments. Neither this Warrant nor any term hereof may be amended, changed, waived, discharged or terminated without the prior written consent of the Holder and the Company.
     SECTION 19.Severability. Any provision of this Warrant which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such
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prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
     SECTION 20.Governing Law. This Warrant shall be governed by, and construed in accordance with, the law of the State of New York.
     SECTION 21.Entire Agreement. This Warrant and the Registration Rights Agreement are intended by the parties as a final expression of their agreement and are intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein.
     SECTION 22.Rules of Construction. Unless the context otherwise requires “or” is not exclusive, and references to sections or subsections refer to sections or subsections of this Warrant. All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require.
[Remainder of Page Intentionally Omitted.]
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     IN WITNESS WHEREOF, the Company has caused this Warrant to be issued and executed in its corporate name by a duly authorized officer or director as of the date first written above.
 	 	 	 	 	
 	ARBOR REALTY TRUST, INC., a Maryland
corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
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EXHIBIT A
NOTICE OF EXERCISE
 	 	 	 	 	
To:	 	 	 	 	

 	 	 	 	 	

 	 	 	 	 	
 	 	 	 	 	
     1. The undersigned, pursuant to the provisions of the attached Warrant, hereby elects to exercise this Warrant with respect to                       shares of Common Stock (the “Exercise Amount”). Capitalized terms used but not otherwise defined herein have the meanings ascribed thereto in the attached Warrant.
     2. The undersigned herewith tenders payment for such shares in the following manner (please check type, or types, of payment and indicate the portion of the Exercise Price to be paid by each type of payment):
 	 	 	 	 	
 	 	 	 	Exercise for Cash	
 	 	 	 	Cashless Exercise	
     3. Please issue a certificate or certificates representing the shares issuable in respect hereof under the terms of the attached Warrant, as follows:

 	 	(Name of Record Holder/Transferee)	
and deliver such certificate or certificates to the following address:

 	 	(Address of Record Holder/Transferee)	
     4. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares.
     5. If the Exercise Amount is less than all of the shares of Common Stock purchasable hereunder, please issue a new warrant representing the remaining balance of such shares, as follows:

 	 	(Name of Record Holder/Transferee)	
and deliver such warrant to the following address:

 	 	(Address of Record Holder/Transferee)	

 

 	 	(Signature)	
(Date)

Exhibit 4.4
THIS COMMON STOCK PURCHASE WARRANT AND THE SHARES THAT MAY BE PURCHASED HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER THE SECURITIES LAWS OF ANY STATE. THIS COMMON STOCK PURCHASE WARRANT HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO DISTRIBUTION, AND THIS COMMON STOCK PURCHASE WARRANT AND THE SHARES THAT MAY BE PURCHASED HEREUNDER MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AND REGISTRATION OR QUALIFICATION UNDER APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL THAT THE PROPOSED TRANSACTION DOES NOT VIOLATE THE SECURITIES ACT OF 1933, AND APPLICABLE STATE SECURITIES LAWS.
ARBOR REALTY TRUST, INC.
COMMON STOCK PURCHASE WARRANT
 	 	 	
Date of Issuance: July 23, 2009	 	Certificate No. W-3	
THIS IS TO CERTIFY that WACHOVIA BANK, NATIONAL ASSOCIATION, a national banking association (together with its transferees, successors and assigns, the “ Holder ”), for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, is entitled to purchase from  ARBOR REALTY TRUST, INC. , a Maryland corporation (the “ Company ”), at the price of $5.00 per share (the “ Exercise Price ”), at any time after July 23, 2011 (the “ Commencement Date ”) and expiring on July 23, 2015 (the “ Expiration Date ”), 250,000 shares of fully paid and nonassessable common stock, par value $0.01 per share (“ Common Stock ”) of the Company (as such number may be adjusted as provided herein). The 250,000 shares of Common Stock which may be purchased pursuant to this Warrant are referred to herein as the “ Aggregate Number ”. This common stock purchase warrant (this “ Warrant ”) is issued under and in connection with that certain First Amended and Restated Credit Agreement, dated as of July 23, 2009 (as the same may be amended, modified, restated, replaced, waived, substituted, supplemented or extended from time to time, the “ Credit Agreement ”), among Arbor Realty Funding, LLC, a Delaware limited liability company, as a borrower, ARSR Tahoe, LLC, a Delaware limited liability company, as a borrower, Arbor ESH II LLC, a Delaware limited liability company, as a borrower, Arbor Realty Limited Partnership, a Delaware limited partnership, as a borrower and a guarantor, ART 450 LLC, a Delaware limited liability company, as a borrower, the Company, as a guarantor, Arbor Realty SR, Inc., a Maryland corporation, as a borrower and a guarantor, the several banks and other financial institutions as are, or may from time to time become parties thereto, and Wachovia Bank, National Association, a national banking association, as administrative agent for the lenders thereunder.
     The Aggregate Number and Exercise Price set forth above shall also be adjusted under certain conditions specified in Section 5  of this Warrant, including, but not limited to, a Stock Dividend, Stock

 
Subdivision or Stock Combination. Capitalized terms used herein shall have the meanings ascribed to such terms in Section 11 hereof unless otherwise defined herein.
     SECTION 1.The Warrant; Transfer and Exchange.
     (a) The Warrant. This Warrant and the rights and privileges of the Holder hereunder may be exercised by the Holder in whole or in part as provided herein, shall survive any termination of the Credit Agreement and, as more fully set forth in  Sections 1(b) and  7  hereof, subject to the terms of this Warrant, may be transferred by the Holder to any other Person or Persons who meet the requirements set forth herein at any time or from time to time, in whole or in part, regardless of whether the Holder retains any or all rights under the Credit Agreement.
     (b) Transfer and Exchanges. The Company shall initially record this Warrant on a register to be maintained by the Company and, subject to  Section 7  hereof, from time to time thereafter shall reflect the transfer of this Warrant on such register when surrendered for transfer in accordance with the terms hereof and properly endorsed, accompanied by appropriate instructions, and further accompanied by payment in cash or by check, bank draft or money order payable to the order of the Company, in United States currency, of an amount equal to any stamp or other tax or governmental charge or fee required to be paid in connection with the transfer thereof. Upon any such transfer, a new warrant or warrants shall be issued to the transferee and the Holder (in the event this Warrant is only partially transferred) and the surrendered warrant shall be canceled. This Warrant may be exchanged at the option of the Holder, when surrendered at the Principal Office of the Company, for another warrant or other warrants of like tenor and representing in the aggregate the right to purchase a like number of shares of Common Stock.
     SECTION 2.Exercise.
     (a) Right to Exercise. At any time after the Commencement Date and on or before the Expiration Date, the Holder, in accordance with the terms hereof, may exercise this Warrant, in whole at any time or in part from time to time, by delivering this Warrant to the Company during normal business hours on any Business Day at the Company’s Principal Office, together with the Notice of Exercise, in the form attached hereto as  Exhibit A  and made a part hereof (the “ Notice of Exercise ”), duly executed, and payment of the Exercise Price per share for each share purchased, as specified in the Notice of Exercise. The aggregate Exercise Price (the “ Aggregate Exercise Price ”) to be paid for the shares to be purchased (the “ Exercise Amount ”) shall equal the product of (i) the Exercise Amount multiplied by (ii) the Exercise Price. If the Expiration Date is not a Business Day, then this Warrant may be exercised on the next succeeding Business Day.
     (b) Payment of the Aggregate Exercise Price. Payment of the Aggregate Exercise Price shall be made to the Company in cash or other immediately available funds or as provided in  Section 2(c ), or a combination thereof. In the case of payment of all or a portion of the Aggregate Exercise Price pursuant to  Section 2(c ), the direction by the Holder to make a “Cashless Exercise” shall serve as accompanying payment for that portion of the Exercise Price.
     (c) Cashless Exercise. The Holder shall have the right to pay all or a portion of the Aggregate Exercise Price by making a “Cashless Exercise”, in which case the portion of the Aggregate Exercise Price to be so paid shall be paid by reducing the number of shares of Common Stock otherwise issuable pursuant to the Notice of Exercise by an amount equal to (i) the Aggregate Exercise Price to be so paid divided by (ii) the Fair Market Value Per Share.
     (d) Issuance of Shares of Common Stock. Upon receipt by the Company of this Warrant at its Principal Office in proper form for exercise, and accompanied by the Notice of Exercise and payment
2

 
of the Aggregate Exercise Price as aforesaid, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that certificates representing such shares of Common Stock may not then be actually delivered. Within five (5) Business Days after such surrender of this Warrant, delivery of the Notice of Exercise and payment of the Aggregate Exercise Price as aforesaid, the Company shall issue and cause to be delivered to, or upon the written order of, the Holder (and in such name or names as the Holder may designate) a certificate or certificates for the Exercise Amount, subject to any reduction as provided in  Section 2(c ) for a Cashless Exercise.
     (e) Fractional Shares. The Company may, but shall not be required to, deliver fractions of shares of Common Stock upon exercise of this Warrant. If any fraction of a share of Common Stock would be deliverable upon an exercise of this Warrant, the Company may, in lieu of delivering such fraction of a share of Common Stock, make a cash payment to the Holder in an amount equal to the same fraction of the Fair Market Value Per Share determined as of the Business Day immediately preceding the date of exercise of this Warrant.
     (f) Partial Exercise. In the event of a partial exercise of this Warrant, the Company shall issue to the Holder a Warrant in like form for the unexercised portion thereof which has not expired.
     SECTION 3.Payment of Taxes. The Company shall pay all stamp taxes attributable to the initial issuance of shares or other securities issuable upon the exercise of this Warrant or issuable pursuant to  Section 5  hereof, excluding any tax or taxes which may be payable because of the transfer involved in the issuance or delivery of any certificates for shares or other securities in a name other than that of the Holder in respect of which such shares or securities are issued.
     SECTION 4.Replacement Warrant. In case this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue and deliver in exchange and substitution for and upon cancellation of the mutilated Warrant, or in lieu of and in substitution for this Warrant lost, stolen or destroyed, a new Warrant of like tenor and representing an equivalent right or interest, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction of such Warrant and upon receipt of indemnity reasonably satisfactory to the Company and the Holder;  provided ,  that  if the Holder is a financial institution, business development company or other institutional or fund investor, its own indemnity agreement shall be satisfactory and no third party indemnity shall be required.
     SECTION 5.Adjustments to the Aggregate Number and the Exercise Price.
     Under certain conditions, the Aggregate Number and the Exercise Price are subject to adjustment as set forth in this Section 5.
     (a) Adjustments. The Aggregate Number, after taking into consideration any prior adjustments pursuant to this Section 5, shall be subject to adjustment from time to time as follows and, thereafter, as adjusted, shall be deemed to be the Aggregate Number hereunder.
     (i) Stock Dividends; Subdivisions and Combinations. In case at any time or from time to time the Company shall:
     (A) issue to the holders of its shares of Common Stock a dividend payable in, or other distribution of, shares of Common Stock (a “ Stock Dividend ”);
     (B) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, including, without limitation, by means of a stock split (a “ Stock Subdivision ”); or
3

 
     (C) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock (a “ Stock Combination ”);
then the Aggregate Number in effect immediately prior thereto shall be (1) proportionately increased in the case of a Stock Dividend or a Stock Subdivision and (2) proportionately decreased in the case of a Stock Combination, and the Exercise Price shall be proportionately adjusted. In the event the Company shall declare or pay, without consideration, any dividend on the shares of Common Stock payable in any right to acquire shares of Common Stock for no consideration, then the Company shall be deemed to have made a Stock Dividend in an amount of shares equal to the maximum number of shares issuable upon exercise of such rights to acquire shares of Common Stock.
     (b) Notices.
     (i) Notice of Proposed Actions. In case the Company shall propose (A) to pay any dividend payable in stock of any class to the holders of its Common Stock or to make any other distribution to the holders of its Common Stock, (B) to offer to the holders of its Common Stock rights to subscribe for or to purchase any Convertible Securities, rights to acquire Convertible Securities or capital stock or additional shares of Common Stock or shares of stock of any class or any other securities, warrants, rights or options, (C) to effect any reclassification of its Common Stock, (D) to effect any recapitalization, stock subdivision, stock combination or other capital reorganization, (E) to effect any consolidation or merger, share exchange, or sale, lease or other disposition of all or substantially all of its property, assets or business, (F) to effect the liquidation, dissolution or winding up of the Company, (G) to initiate any transaction or be a party to any transaction (including, without limitation, a merger, consolidation, share exchange, sale, lease or other disposition of all or substantially all of the Company’s assets, liquidation, recapitalization or reclassification of the Common Stock) in connection with which the previous Outstanding Common Stock shall be changed into or exchanged for different securities of the Company or capital stock or other securities of another corporation or interests in a non-corporate entity or other property (including cash) or any combination of the foregoing or (H) to effect any other action which would require an adjustment under this  Section 5 , then in each such case the Company shall give to the Holder written notice of such proposed action, which shall specify the proposed date on which a record is to be taken for the purposes of such stock dividend, distribution or rights, or the proposed date on which such reclassification, reorganization, consolidation, merger, share exchange, sale, transfer, disposition, liquidation, dissolution, winding up or other transaction is to take place and the date of participation therein by the holders of Common Stock, if any such date is to be fixed, or the proposed date on which the transfer of Common Stock is to occur, and shall also set forth such facts with respect thereto as shall be reasonably necessary to indicate the effect of such action on the Common Stock and on the Aggregate Number after giving effect to any adjustment which will be required as a result of such action. Such notice shall be so given in the case of any action covered by clause (A) or (B) above at least twenty (20) calendar days prior to the record date for determining holders of the Common Stock for purposes of such action and, in the case of any other such action, at least twenty (20) calendar days prior to the earlier of the date of the taking of such proposed action or the date of participation therein by the holders of Common Stock.
     (ii) Adjustment Notice. Whenever the Aggregate Number is to be adjusted pursuant to this Section 5, unless otherwise agreed by the Holder, the Company shall promptly (and in any event within ten (10) Business Days after the event requiring the adjustment) prepare and deliver to the Holder a certificate signed by the chief financial officer of the Company, setting forth, in reasonable detail, the event requiring the adjustment and the method by which such adjustment is
4

 
to be calculated. The certificate shall set forth, if applicable, a description of the basis on which the board of directors in good faith determined, as applicable, the Fair Market Value Per Share, the fair market value of any evidences of indebtedness, shares of stock, other securities, warrants, other subscription or purchase rights, or other property or the equitable nature of any adjustment under  Section 5(b ) or ( c ) hereof, the new Aggregate Number and, if applicable, any new securities or property to which the Holder is entitled. Any other determination of fair market value shall first be determined in good faith by the board of directors and be based upon an arm’s length sale of such indebtedness, shares of stock, other securities, warrants, other subscription or purchase rights or other property, such sale being between a willing buyer and a willing seller. In the case of any such determination of fair market value, the Holder may object to the determination in such certificate by giving written notice within ten (10) Business Days of the receipt of such certificate and, if the Holder and the Company cannot agree to the fair market value within ten (10) Business Days of the date of the Holder’s objection, the fair market value shall be determined by a disinterested appraiser (which may be national or regional investment bank or a national accounting firm) mutually selected by the Holder and the Company, the fees and expenses of which shall be paid by the Company.
     SECTION 6.No Dilution or Impairment. The Company will not, by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, share exchange, dissolution or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, including, without limitation, the adjustments required under  Section 5  hereof, and will at all times in good faith assist in the carrying out of all such terms and in taking of all such action as may be necessary or appropriate to protect the rights of the Holder against dilution or other impairment. Without limiting the generality of the foregoing and notwithstanding any other provision of this Warrant to the contrary (including by way of implication), the Company (a) will not increase the par value of any shares of Common Stock receivable on the exercise of this Warrant above the amount payable therefor on such exercise and (b) will take all such action as may be necessary or appropriate so that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant.
     SECTION 7.Transfers of this Warrant.
     (a) Generally. Subject to the restrictions set forth in this Section 7, the Holder may at any time and from time to time freely transfer this Warrant and the Warrant Shares in whole or in part to any Person. This Warrant has not been, and the Warrant Shares at the time of their issuance may not be, registered under the Securities Act and, except as provided in the Registration Rights Agreement, nothing herein contained shall be deemed to require the Company to so register this Warrant and the Warrant Shares. This Warrant and the Warrant Shares are issued or issuable subject to the provisions and conditions contained herein and to the provisions and conditions contained in the Registration Rights Agreement, and every Holder hereof by accepting the same agrees with the Company to such provisions and conditions, and represents to the Company that this Warrant has been acquired and the Warrant Shares will be acquired for the account of the Holder for investment and not with a view to or for sale in connection with any distribution thereof.
     (b) Compliance with Securities Laws. The Holder agrees that this Warrant and the Warrant Shares may not be sold or otherwise disposed of except pursuant to an effective registration statement under the Securities Act and other applicable Securities Laws or pursuant to an applicable exemption from the registration requirements of the Securities Act and such other applicable Securities Laws. In the event that the Holder transfers this Warrant or the Warrant Shares pursuant to an applicable exemption from registration, the Company may request, at its expense, that the Holder deliver an opinion of counsel
5

 
reasonably acceptable to the Company that the proposed transfer does not violate the Securities Act or other applicable Securities Laws.
     (c) Restrictive Securities Legend. (i) The certificate representing the Warrant Shares shall bear the restrictive legends set forth below:
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE. NO TRANSFER, SALE OR OTHER DISPOSITION OF THIS WARRANT MAY BE MADE UNLESS A REGISTRATION STATEMENT WITH RESPECT TO THIS WARRANT HAS BECOME EFFECTIVE UNDER SAID ACT, AND SUCH REGISTRATION OR QUALIFICATION AS MAY BE NECESSARY UNDER THE SECURITIES LAWS OF ANY STATE HAS BECOME EFFECTIVE, OR BORROWER HAS BEEN FURNISHED WITH AN OPINION OF COUNSEL SATISFACTORY TO BORROWER THAT SUCH REGISTRATION IS NOT REQUIRED.
     (ii) Certificates evidencing the Warrant Shares shall not contain any legend: (1) while a registration statement (including the Registration Statement) covering the resale of the Warrant Shares is effective under the Securities Act, or (2) following any sale of the Shares pursuant to Rule 144 (other than sales to an Affiliate of Holder), or (3) if such Warrant Shares are eligible for sale under Rule 144(b), or (4) if such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission). If a legend is not otherwise required under applicable requirements of the Securities Act (including judicial interpretations thereof) then any certificates representing the Warrant Shares shall be issued free of all legends. The Company agrees that following the effective date of the Registration Statement or at such time as such legend is no longer required under this  Section 7 , it will, no later than five (5) Business Days following the delivery by the Holder to the Company’s transfer agent of a certificate representing the Warrant Shares issued with a restrictive legend, deliver or cause to be delivered to the Holder a certificate representing such Warrant Shares that is free from all restrictive and other legends. Unless required by law, the Company may not make any notation on its records or give instructions to any transfer agent of the Company that enlarge the restrictions on transfer set forth in this Section 7 .
     (d) Right of First Refusal.
     (i) Holder may not Transfer this Warrant or any portion hereof unless it has complied with this Section 7(d). If Holder proposes to Transfer this Warrant (or portion hereof), then Holder shall promptly give written notice (the “ Sale Notice ”) to the Company at least twenty (20) days prior to the closing of such Transfer. The Notice shall describe in reasonable detail the proposed Transfer including, without limitation, the portion of this Warrant to be Transferred (the “ Transfer Amount ”), the nature of such Transfer, the consideration to be paid, and the name and address of each prospective purchaser or transferee.
     (ii) For a period of ten (10) days following receipt of any Sale Notice, the Company shall have the right to purchase all, but not less than all, of the Transfer Amount subject to such Sale Notice on the same terms and conditions as set forth therein. The Company’s purchase right shall be exercised by written notice signed by an officer of the Company (the “ Company Notice ”) and delivered to the Holder within such ten (10) day period. The Company shall effect the purchase of the Transfer Amount, including payment of the purchase price, not more than five (5)
6

 
business days after delivery of the Company’s Notice, and at such time the Holder shall deliver to the Company this Warrant, properly endorsed for transfer. To the extent that the Company does not elect to exercise its purchase right pursuant to this  Section 7(d) , the Holder may, not later than thirty (30) days following delivery to the Company of the Sale Notice, enter into an agreement providing for the closing of the Transfer of the Transfer Amount covered by the Sale Notice within thirty (30) days of such agreement on the terms and conditions described in the Sale Notice. Any subsequent proposed Transfer of this Warrant by the Holder, shall again be subject to the first refusal rights of the Company and shall require compliance by the Holder with the procedures described in this  Section 7(d) .
     (iii) Notwithstanding the foregoing, the purchase rights of the Company set forth in this Section 7(d) shall not apply to (i) any Transfer by a Holder to an Eligible Assignee, (ii) any pledge of this Warrant made pursuant to a bona fide loan transaction that creates a mere security, (iii) any Transfer by Holder in connection with the sale of all or a portion of any outstanding indebtedness of the Company held by Holder or its Affiliates pursuant to the Credit Agreement, or (iv) any Transfer that is a bona fide gift approved by the Holder’s Board of Directors;  provided , in each case, that the pledgee, transferee or donee shall enter into a written agreement to be bound by and comply with all provisions of this Warrant as if it were an original Holder hereunder.
     (iv) Any purported Transfer by a Holder of this Warrant (or portion thereof) in violation of this Section 7(d) shall be voidable, and the Company will not effect such Transfer nor will it treat any alleged transferee as the holder of this Warrant.
     (v) By its execution of this Agreement, Wachovia Bank, National Association, as the Lender under the Credit Agreement, hereby consents to any purchase by the Company of this Warrant upon the exercise of its rights under this  Section 7(d) , and acknowledges and agrees that notwithstanding any provision of the Credit Agreement to the contrary, any such purchase shall not constitute a breach of any provision of the Credit Agreement.
     SECTION 8.Covenants.
     The Company hereby covenants to the Holder that so long as Holder holds any Warrant Securities:
     (a) Limitation on Certain Restrictions. Without the prior written consent of the Required Holders, the Company will not, and will not permit or cause any of its Subsidiaries, directly or indirectly, to create or otherwise cause or suffer to exist or become effective any restriction or encumbrance on the ability of the Company and any such Subsidiaries to perform and comply with their respective obligations under this Warrant.
     (b) Regulatory Requirements and Restrictions. In the event of any reasonable determination by the Holder that, by reason of any existing or future federal or state law, statute, rule, regulation, guideline, order, court or administrative ruling, request or directive (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) (collectively, a “ Regulatory Requirement ”), the Holder is effectively restricted or prohibited from holding this Warrant or the Warrant Shares (including any shares of capital stock or other securities distributable to the Holder in any merger, reorganization, readjustment or other reclassification), or otherwise realizing upon or receiving the benefits intended under this Warrant, the Company shall take such action as the Holder and the Company shall jointly agree in good faith to be necessary to permit the Holder to comply with such Regulatory
7

 
Requirement. The reasonable costs of taking such action, whether by the Company, the Holder or otherwise, shall be borne by the Holder.
     (c) Reservation of Shares. The Company shall at all times reserve and keep available out of the aggregate of its authorized but unissued shares, free of preemptive rights, such number of its duly authorized shares of Common Stock as shall be sufficient to enable the Company to issue Common Stock upon exercise of this Warrant.
     (d) Affirmative Actions to Permit Exercise and Realization of Benefits. If any shares of Common Stock reserved or to be reserved for the purpose of the exercise of this Warrant, or any shares or other securities reserved or to be reserved for the purpose of issuance pursuant to  Section 5  hereof, require registration with or approval of any Governmental Authority under any federal or state law (other than securities laws) before such shares or other securities may be validly delivered upon exercise of this Warrant, then the Company covenants that it will, at its sole expense, secure such registration or approval, as the case may be (including but not limited to approvals or expirations of waiting periods required under the Hart-Scott-Rodino Antitrust Improvements Act).
     (e) Validly Issued Shares. All shares of Common Stock that may be issued upon exercise of this Warrant, assuming full payment of the Aggregate Exercise Price (including those issued pursuant to  Section 5  hereof) shall, upon delivery by the Company, be duly authorized and validly issued, fully paid and nonassessable, free from all stamp taxes, liens and charges with respect to the issue or delivery thereof and otherwise free of all other security interests, encumbrances and claims of any nature whatsoever (other than security interests, encumbrances and claims to which the Holder is subject prior to the issuance of this Warrant and other transfer restrictions described herein).
     (f) Furnishing of Information; Compliance with Rule 144. The Company shall timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to the Exchange Act. So long as the Warrant Shares are not registered under an effective registration statement, upon the request of the Holder, the Company shall deliver to the Holder a written certification of a duly authorized officer as to whether it has complied with the preceding sentence. As long as the Holder owns any of the Warrant Shares, if the Company is not required to file reports pursuant to such laws, it will prepare and furnish to the Holder and make publicly available in accordance with Rule 144 such information as is required for the Holder to sell the Warrant Shares under Rule 144. So long as the Warrant Shares are not registered under an effective registration statement, the Company further covenants that it will take such further action as the Holder may reasonably request, all to the extent required from time to time to enable the Holder to sell such Warrant Shares without registration under the Securities Act within the limitation of the exemptions provided by Rule 144.
     (g) Integration. The Company shall not, and shall use its commercially reasonable efforts to ensure that no Affiliate of the Company shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of this Warrant in a manner that would require the registration under the Securities Act of the sale of the Warrant to the Holder, or that would be integrated with the offer or sale of the Warrant Shares for purposes of the rules and regulations of any Principal Market.
     (h) Listing of the Warrant Shares. The Company shall: (i) take all steps necessary to cause the Warrant Shares to be approved for listing on the Principal Market as soon as possible after the Commencement Date, (ii) provide to the Holder evidence of such listing, and (iii) use reasonable efforts to maintain the listing of the Warrant Shares on such Principal Market or another Principal Market.
8

 
     (i) Securities Laws Disclosure; Publicity. The Company shall issue a press release or timely file a report on Form 8-K reasonably acceptable to the Holder disclosing all material terms of the transactions contemplated hereby. The Company and the Holder shall consult with each other in issuing any press releases with respect to the transactions contemplated hereby. Notwithstanding the foregoing, other than in the Registration Statement, the Company shall not publicly disclose the name of the Holder or the terms hereof, or include the name of the Holder or the terms hereof in any filing with the Commission or any regulatory agency or Principal Market, without the prior written consent of such Holder, except to the extent such disclosure is required by law or Principal Market regulations. The Holder acknowledges that such disclosure may be required by law in the Company’s proxy statement, annual report on Form 10-K, quarterly report on Form 10-Q, and filings related thereto and will be incorporated by reference to such filings in currently effective registration statements filed by the Company and will be included in registration statements that may be filed by the Company in the future.
     SECTION 9.No Effect Upon Lending Relationship. Notwithstanding anything herein to the contrary, nothing contained in this Warrant shall affect, limit or impair the rights and remedies of the Holder or any of its Affiliates in its capacity as a lender to the Company pursuant to any agreement under which the Company has borrowed money from the Holder. Without limiting the generality of the foregoing, the Holder, in exercising its rights as a lender, including making its decision on whether to foreclose on any collateral security, will have no duty to consider (i) its status or the status of any of its Affiliates as a direct or indirect equity holder of the Company, (ii) the equity of the Company or (iii) any duty it may have to any other direct or indirect equity holder of the Company, except as may be required under the applicable loan documents or by commercial law applicable to creditors generally.
     SECTION 10.Events of Non-Compliance and Remedies.
     (a) Events of Non-Compliance. If the Company fails to keep and fully and promptly perform and observe in all material respects any of the terms, covenants or representations contained or referenced herein within twenty (20) calendar days from the earlier to occur of (i) written notice from the Holder specifying what failure has occurred, or requesting that a specified failure be remedied or (ii) the Company becoming aware of such failure (an “ Event of Non-Compliance ”), the Holder shall be entitled to the remedies set forth in subsection (b) hereof.
     (b) Remedies. On the occurrence of an Event of Non-Compliance, in addition to any remedies the Holder may have under any Requirement of Law, the Holder may bring any action for injunctive relief or specific performance of any term or covenant contained herein, the Company hereby acknowledging that an action for money damages may not be adequate to protect the interests of the Holder hereunder.
     SECTION 11.Definitions.
     As used herein, in addition to the terms defined elsewhere herein, the following terms shall have the following meanings. Capitalized terms not appearing below and not otherwise defined herein shall have the meaning ascribed to them in the Credit Agreement.
     “Affiliate” has the meaning set forth in the Credit Agreement.
     “Aggregate Exercise Price” has the meaning set forth in Section 2(a).
     “Aggregate Number” has the meaning set forth in the Preamble.
9

 
     “Approved Fund” shall mean any Fund that is administered, managed or underwritten by (a) Holder, (b) an Affiliate of Holder or (c) an entity or an Affiliate of an entity that administers or manages Holder.
     “Articles of Incorporation” means the Articles of Incorporation of the Company, as in effect on the date hereof.
     “Business Day” has the meaning set forth in the Credit Agreement.
     “Commencement Date” has the meaning set forth in the Preamble.
     “Commission” means the Securities and Exchange Commission or any similar agency then having jurisdiction to enforce the Securities Act or the Exchange Act.
     “Common Stock” includes (a) the Common Stock of the Company, par value $0.01 per share, as described in the Articles of Incorporation, (b) any other class of capital stock hereafter authorized having the right to share in distributions either of earnings or assets without limit as to amount or percentage or (c) any other capital stock into which such Common Stock is reclassified or reconstituted.
     “Company” has the meaning set forth in the Preamble.
     “Company Notice” has the meaning set forth in Section 7(d)(ii).
     “Convertible Securities” means evidences of indebtedness, shares of stock or other securities (including, but not limited to options and warrants) which are directly or indirectly convertible, exercisable or exchangeable, with or without payment of additional consideration in cash or property, for shares of Common Stock, either immediately or upon the onset of a specified date or the happening of a specified event.
     “Credit Agreement” has the meaning set forth in the Preamble.
     “Eligible Assignee” shall mean (a) an Affiliate of Holder, and (b) an Approved Fund.
     “Event of Non-Compliance” has the meaning set forth in Section 10(a).
     “Exchange Act” has the meaning set forth in the Credit Agreement.
     “Exercise Amount” has the meaning set forth in Section 2(a).
     “Exercise Price” has the meaning set forth in the Preamble.
     “Expiration Date” has the meaning set forth in the Preamble.
     “Fair Market Value Per Share” means the value, on a particular date, of a share of Common Stock determined as follows:
     (i) If the Common Stock is listed or admitted to trading on such date on the Principal Market, the mean of the high and low sales prices of a share of Common Stock on the date immediately prior to such date of determination as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on such Principal Market (if there were no sales on such date
10

 
reported as provided above, the respective prices on the most recent prior day on which a sale of a share of Common Stock took place); or
     (ii) If the Common Stock is not publicly traded, (a) the fair market value of the Outstanding Common Stock based upon an arm’s length sale of the Company on such date (including its ownership interest in all Persons) as an entirety, such sale being between a willing buyer and a willing seller and determined without reference to any discount for minority interest, restrictions on transfer, disparate voting rights among classes of capital stock or lack of marketability with respect to capital stock divided by  (b) the aggregate number of shares of Outstanding Common Stock. The Fair Market Value Per Share shall be determined by the disinterested members of the Board of Directors of the Company in good faith within ten (10) Business Days of any event for which such determination is required and such determination (including the basis therefor) shall be promptly provided to the Holder. Such determination shall be binding on the Holder unless the Holder objects thereto in writing within ten (10) Business Days of receipt. In the event the Holder objects to the determination of “Fair Market Value Per Share” by the board of directors of the Company (such objection to be made within ten (10) Business Days of the Holder’s receipt of written notice of such determination), then the Fair Market Value Per Share shall be determined by a disinterested appraiser (which may be a national or regional investment bank or national accounting firm) mutually selected by the Company and the Holder, the fees and expenses of which shall be paid by the Company. Any selection of a disinterested appraiser shall be made in good faith within five (5) Business Days after the Holder provides written notice to the Company of its objection to the determination of Fair Market Value Per Share and any determination of Fair Market Value Per Share by a disinterested appraiser shall be made within ten (10) Business Days of the date of selection.
     “Fund” has the meaning set forth in the Credit Agreement.
     “Governmental Authority” has the meaning set forth in the Credit Agreement.
     “Holder” has the meaning set forth in the Preamble.
     “Lenders” has the meaning set forth in the Credit Agreement.
     “Notice of Exercise” has the meaning set forth in Section 2(a).
     “Outstanding Common Stock” of the Company means, as of the date of determination, the sum (without duplication) of the following: (a) the number of shares of Common Stock then outstanding at the date of determination, (b) the number of shares of Common Stock then issuable upon the exercise of this Warrant (as such number of shares may be adjusted pursuant to the terms hereof) and (c) the number of shares of Common Stock then issuable upon the exercise or conversion of Convertible Securities and any warrants, options or other rights to subscribe for or purchase Common Stock or Convertible Securities (but excluding any unvested options and securities not then exercisable for or convertible into Common Stock).
     “Person” has the meaning set forth in the Credit Agreement.
     “Principal Market” initially means the New York Stock Exchange and any successor exchange thereto and shall also include the NASDAQ Global Select Market, the NASDAQ Global Market, NASDAQ Capital Market, the American Stock Exchange or the OTC Bulletin Board, whichever is at the time the principal trading exchange or market for the Common Stock, based upon share volume.
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     “Principal Office” means the Company’s principal office as set forth in Section 16 hereof or such other principal office of the Company in the United States of America the address of which first shall have been set forth in a notice to the Holder.
     “Registration Statement” means the registration statements required to be filed under the Registration Rights Agreement.
     “Registration Rights Agreement” has the meaning set forth in the Credit Agreement.
     “Regulatory Requirement” has the meaning set forth in Section 8(c).
     “Required Holders” means the holders of at least 51.0% of the Warrant Shares then outstanding.
     “Requirement of Law” has the meaning set forth in the Credit Agreement.
     “Sale Notice” has the meaning set forth in Section 7(d)(i).
     “Securities Act” has the meaning set forth in the Credit Agreement.
     “Securities Laws” has the meaning set forth in the Credit Agreement.
     “Stock Combination” has the meaning set forth in Section 5(a)(i)(C).
     “Stock Dividend” has the meaning set forth in Section 5(a)(i)(A).
     “Stock Subdivision” has the meaning set forth in Section 5(a)(i)(B).
     “Subsidiary” has the meaning set forth in the Credit Agreement.
     “Transfer” means and includes any sale, assignment, encumbrance, hypothecation, pledge, conveyance in trust, gift, transfer by request, devise or descent, or other transfer or disposition of any kind, including, but not limited to, transfers to receivers, levying creditors, trustees or receivers in bankruptcy proceedings or general assignees for the benefit of creditors, whether voluntary or by operation of law, directly or indirectly, of this Warrant.
     “Transfer Amount” has the meaning set forth in Section 7(d)(i).
     “Warrant” has the meaning set forth in the Preamble.
     “Warrant Securities” means this Warrant and the Warrant Shares, collectively.
     “Warrant Shares” means (a) the shares of Common Stock issued or issuable upon exercise of this Warrant in accordance with its terms and (b) all other shares of the Company’s capital stock issued with respect to such shares by way of stock dividend, stock split or other reclassification or in connection with any merger, consolidation, recapitalization or other reorganization affecting the Company’s capital stock.
     SECTION 12.Survival of Provisions. Notwithstanding the full exercise by the Holder of its rights to purchase Common Stock hereunder, the provisions of  Sections 8(f)  and  (h)  of this Warrant shall survive such exercise and the Expiration Date until such time as the Holder no longer holds any Warrant Shares.
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     SECTION 13.Delays, Omissions and Indulgences. It is agreed that no delay or omission to exercise any right, power or remedy accruing to the Holder upon any breach or default of the Company under this Warrant shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach or default, or any acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character on the Holder’s part of any breach or default under this Warrant, or any waiver on the Holder’s part of any provisions or conditions of this Warrant must be in writing and that all remedies, either under this Warrant, or by Requirement of Law or otherwise afforded to the Holder, shall be cumulative and not alternative.
     SECTION 14.Rights of Transferees. Subject to Section 7, the rights granted to the Holder hereunder of this Warrant shall pass to and inure to the benefit of all subsequent transferees of all or any portion of this Warrant (provided that the Holder and any transferee shall hold such rights in proportion to their respective ownership of this Warrant and Warrant Shares) until extinguished pursuant to the terms hereof.
     SECTION 15.Section Headings. The titles and captions of the Sections and other provisions of this Warrant are for convenience of reference only and are not to be considered in construing this Warrant.
     SECTION 16.Notices.
     (a) Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in paragraph (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopier as follows:
if to the Company:
Arbor Realty Trust, Inc.
c/o Arbor Commercial Mortgage LLC
333 Earle Ovington Boulevard
Uniondale, New York 11553
Attention: Guy Milone, Esq.
Facsimile No.: (516) 832—6431
with a copy to:
Arbor Commercial Mortgage LLC
333 Earle Ovington Boulevard
Uniondale, New York 11553
Attention: John Natalone
Phone No.: (516) 832—7409
Facsimile No.: (516) 832-6409
if to the Holder:
Wachovia Bank, National Association
One Wachovia Center, NC0166
301 South College Street
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Charlotte, North Carolina 28288
Attention: John Nelson
Facsimile No.: (704) 715—0066
with a copy to:
Moore & Van Allen PLLC
100 North Tryon Street
Suite 4700
Charlotte, NC 28202
Attention: Kenneth P. Kerr, Esq.
Telecopy No.: (704) 378—2097
     Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices sent by telecopier shall be deemed to have been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next Business Day for the recipient). Notices delivered through electronic communications to the extent provided in paragraph (b) below shall be effective as provided in said paragraph (b).
     (b) Notices and other communications to the Holder hereunder may be delivered or furnished by electronic communication (including e-mail and internet or intranet websites) pursuant to procedures approved by the Holder. The Holder or the Company may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it,  provided  that approval of such procedures may be limited to particular notices or communications.
     Unless the Holder otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement),  provided  that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next Business Day for the recipient, and (ii) notices or communications posted to an internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor.
     (c) Any party hereto may change its address or telecopier number for notices and other communications hereunder by notice to the other parties hereto.
     SECTION 17.Successors and Assigns. This Warrant shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided that the Company shall have no right to assign its rights, or to delegate its obligations, hereunder without the prior written consent of the Holder.
     SECTION 18.Amendments. Neither this Warrant nor any term hereof may be amended, changed, waived, discharged or terminated without the prior written consent of the Holder and the Company.
     SECTION 19.Severability. Any provision of this Warrant which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such
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prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
     SECTION 20.Governing Law. This Warrant shall be governed by, and construed in accordance with, the law of the State of New York.
     SECTION 21.Entire Agreement. This Warrant and the Registration Rights Agreement are intended by the parties as a final expression of their agreement and are intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein.
     SECTION 22.Rules of Construction. Unless the context otherwise requires “or” is not exclusive, and references to sections or subsections refer to sections or subsections of this Warrant. All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require.
[Remainder of Page Intentionally Omitted.]
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     IN WITNESS WHEREOF, the Company has caused this Warrant to be issued and executed in its corporate name by a duly authorized officer or director as of the date first written above.
 	 	 	 	 	
 	ARBOR REALTY TRUST, INC., a Maryland
corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
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EXHIBIT A
NOTICE OF EXERCISE
 	 	 	 	 	
To:	 	 	 	 	

 	 	 	 	 	
 	 	 	 	 	
     1. The undersigned, pursuant to the provisions of the attached Warrant, hereby elects to exercise this Warrant with respect to ___shares of Common Stock (the “Exercise Amount”). Capitalized terms used but not otherwise defined herein have the meanings ascribed thereto in the attached Warrant.
     2. The undersigned herewith tenders payment for such shares in the following manner (please check type, or types, of payment and indicate the portion of the Exercise Price to be paid by each type of payment):
 	 	 	 	 	
 	 	 	 	Exercise for Cash 	
 	 	 	 	Cashless Exercise 	
     3. Please issue a certificate or certificates representing the shares issuable in respect hereof under the terms of the attached Warrant, as follows:
 	 	 	 	 	
 	 	  (Name of Record Holder/Transferee)	 	 	
and deliver such certificate or certificates to the following address:
 	 	 	 	 	
 	 	  (Address of Record Holder/Transferee)	 	 	
     4. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares.
     5. If the Exercise Amount is less than all of the shares of Common Stock purchasable hereunder, please issue a new warrant representing the remaining balance of such shares, as follows:
 	 	 	 	 	
 	 	(Name of Record Holder/Transferee)	 	 	
and deliver such warrant to the following address:
 	 	 	 	 	
 	 	(Address of Record Holder/Transferee)	 	 	

 
 	 	 	 	 	
 	 	  (Signature)	 	 	

  (Date)	 	 	

EXHIBIT 10.35
EXECUTION VERSION
REGISTRATION RIGHTS AGREEMENT
BY AND BETWEEN
ARBOR REALTY TRUST, INC.
AND
WACHOVIA BANK, NATIONAL ASSOCIATION
DATED
JULY 23, 2009

 
ARBOR REALTY TRUST, INC.
REGISTRATION RIGHTS AGREEMENT
     THIS REGISTRATION RIGHTS AGREEMENT (this “Agreement”) is made and entered into as of July 23, 2009, by and between  ARBOR REALTY TRUST, INC. , a Maryland corporation (the “ Company ”), and WACHOVIA BANK, NATIONAL ASSOCIATION , a national banking association (“ Holder ”).
     This Agreement is made pursuant to that certain Credit Agreement, dated as of the date hereof by and among the Company and Holder (the “ Credit Agreement ”).
     The Company and Holder hereby agree as follows:
     1. Definitions
     Capitalized terms used and not otherwise defined herein that are defined in the Credit Agreement shall have the meanings given such terms in the Credit Agreement. As used in this Agreement, the following terms shall have the following meanings:
     “Advice” shall have the meaning set forth in Section 7(e) hereof.
     “Capital Stock” means the Company’s Common Stock and any other class of securities which the Company’s Common Stock is converted or reclassified into or any other securities created by the Company in the future.
     “Commission” means the Securities and Exchange Commission.
     “Effectiveness Date” means the 90th calendar day following the Closing Date with respect to the 2009 Warrant, the first anniversary of the Closing Date with respect to the 2010 Warrant, the second anniversary of the Closing Date with respect to the 2011 Warrant, and, with respect to any additional Registration Statements which may be required pursuant to Section 3(b), the 45 th  calendar day following the date on which the Company first knows, or reasonably should have known, that such additional Registration Statement is required hereunder;  provided ,  however , in the event the Company is notified by the Commission that one of the above Registration Statements will not be reviewed or is no longer subject to further review and comments, the Effectiveness Date as to such Registration Statement shall be the fifth Trading Day following the date on which the Company is so notified if such date precedes the dates required above.
     “Effectiveness Period” shall have the meaning set forth in Section 2(a) hereof.
     “Filing Date” means the 45th calendar day following the Closing Date with respect to the 2009 Warrant, 45 days prior to the first anniversary of the Closing Date with respect to the 2010 Warrant, 45 days prior to the second anniversary of the Closing Date with respect to the 2011 Warrant, and with respect to any additional Registration Statements which may be required pursuant to  Section 3(b) , the 10 th  day following the
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date on which the Company first knows, or reasonably should have known, that such additional Registration Statement is required hereunder.
     “Holder” or “Holders” means the holder or holders, as the case may be, from time to time of Registrable Securities.
     “Indemnified Party” shall have the meaning set forth in Section 5(c) hereof.
     “Indemnifying Party” shall have the meaning set forth in Section 5(c) hereof.
     “Losses” shall have the meaning set forth in Section 5(a) hereof.
     “Proceeding” shall mean any threatened, pending or completed claim, action, suit, arbitration, alternate dispute resolution process, investigation, administrative hearing, appeal, or any other proceeding, whether civil, criminal, administrative or investigative, whether formal or informal, including a proceeding initiated by an Indemnified Party pursuant to  Section 5 hereof to enforce such Indemnified Party’s rights hereunder.
     “Prospectus” means the prospectus included in a Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by a Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus.
     “Registrable Securities” means (i) any Capital Stock issued or issuable to Holder pursuant to any Warrant (ii) any Capital Stock issued or issuable with respect to the Capital Stock referred to in clause (i) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization and (iii) all other shares of Capital Stock held by (or issued, pursuant to clause (ii) above, to) Holder.
     “Registration Statement” means the registration statements required to be filed hereunder and any additional registration statements contemplated by  Section 3(b) , including (in each case) the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement.
     “Rule 415” means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same purpose and effect as such rule.
     “Rule 424” means Rule 424 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or
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regulation hereafter adopted by the Commission having substantially the same purpose and effect as such rule.
     “Stock Exchange” means the New York Stock Exchange, NASDAQ or any other nationally recognized stock exchange.
     “Suspension Period” shall have the meaning set forth in Section 3(b) hereof.
     “Trading Day” means, a day on which the Company’s Common Stock is traded on the applicable Stock Exchange.
     “Violation” shall have the meaning set forth in Section 5(a) hereof.
     “Warrants” means any of: (i) the common stock purchase warrant, of even date herewith and fully exercisable as of the date hereof, issued by the Company to Holder, initially to acquire 500,000 shares of the Company’s Common Stock (the “ 2009 Warrant ”); (ii) the common stock purchase warrant, of even date herewith and fully exercisable as of the first anniversary of the Closing Date, issued by the Company to Holder, initially to acquire 250,000 shares of the Company’s Common Stock (the “ 2010 Warrant ”) and (iii) the common stock purchase warrant, of even date herewith and fully exercisable as of the second anniversary of the Closing Date, issued by the Company to Holder, initially to acquire 250,000 shares of the Company’s Common Stock (the “ 2011 Warrant ”).
     2. Shelf Registration
     (a) On or prior to each Filing Date, the Company shall prepare and file with the Commission a “Shelf” Registration Statement covering the resale of the Registrable Securities outstanding on such Filing Date for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on Form S-3 (unless the Company is not then eligible to register the Registrable Securities for resale on Form S-3, in which case such registration shall be on another appropriate form in accordance herewith) and shall contain (unless otherwise directed by Holders and except to the extent the Company determines that modifications thereto are required under applicable law) substantially the “Plan of Distribution” attached hereto as  Annex A . Subject to the terms of this Agreement, the Company shall use its best efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event prior to the applicable Effectiveness Date, and shall use its best efforts to keep such Registration Statement continuously effective under the Securities Act until the date which is two years after the date that such Registration Statement is declared effective by the Commission or such earlier date when all Registrable Securities covered by such Registration Statement have been sold or may be sold without volume restrictions pursuant to Rule 144 as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company’s transfer agent and the affected Holders (the “ Effectiveness Period ”).
     (b) The Company shall not be required to effect a registration pursuant to Section 2(a) and shall have the right to defer the filing of any Registration Statement if
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the Company shall furnish to Holders a certificate signed by the Chairman of the Board of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such registration statement to be effected at such time, in which event the Company shall have the right to defer such filing for a period of not more than ninety (90) days after the applicable Filing Date; provided that such right to delay a request shall be exercised by the Company not more than once in any twelve (12) month period.
     (c) It shall be a condition precedent to the obligations of the Company to take any action pursuant to Sections 2(a) that the Holders shall furnish to the Company such information regarding themselves, the Registrable Securities held by them and the intended method of disposition of such securities as shall be reasonably required to effect the registration of their Registrable Securities.
     3. Registration Procedures
     In connection with the Company’s registration obligations hereunder, the Company shall:
     (a) Not less than five Trading Days prior to the filing of each Registration Statement or any related Prospectus or any amendment or supplement thereto (excluding any document that would be incorporated or deemed incorporated therein by reference), (i) furnish to each Holder copies of all such documents proposed to be filed, which documents (other than those incorporated or deemed to be incorporated by reference) will be subject to the review of such Holders, and (ii) cause its officers and directors, counsel and independent certified public accountants to respond to such inquiries as shall be necessary, in the reasonable opinion of respective counsel to conduct a reasonable investigation within the meaning of the Securities Act. The Company shall not file the Registration Statement or any such Prospectus or any amendments or supplements thereto to which Holders of a majority of the Registrable Securities shall reasonably and in good faith object, provided, the Company is notified of such objection in writing no later than 5 Trading Days after Holders have been so furnished copies of such documents. In the event of any such objection, the Filing Date and the Effectiveness Date shall be extended on a day by day basis until such objection has been resolved.
     (b) (i) Prepare and file with the Commission such amendments, including post-effective amendments, to a Registration Statement and the Prospectus used in connection therewith as may be necessary to keep a Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period and prepare and file with the Commission such additional Registration Statements as may be necessary in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement (subject to the terms of this Agreement), and as so supplemented or amended to be filed pursuant to Rule 424; (iii) respond as promptly as reasonably possible, and in any event within 15 Trading Days, to any comments received from the Commission with respect to a Registration Statement or any amendment thereto and as promptly as reasonably possible provide Holders true and complete copies of all correspondence from and to the Commission relating to a Registration Statement; and (iv) comply in all material respects with the provisions of the Securities Act and the
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Exchange Act with respect to the disposition of all Registrable Securities covered by a Registration Statement during the applicable period in accordance (subject to the terms of this Agreement) with the intended methods of disposition by Holders thereof set forth in such Registration Statement as so amended or in such Prospectus as so supplemented.
     Notwithstanding the foregoing, at any time, upon written notice to the Holders and for a period not to exceed sixty (60) days thereafter (the “ Suspension Period ”), the Company may delay the filing or effectiveness of any Registration Statement or suspend the use or effectiveness of any Registration Statement (and the Holders hereby agree not to offer or sell any Registrable Securities pursuant to such registration statement during the Suspension Period) if the Company reasonably believes that there is or may be in existence material nonpublic information or events involving the Company, the failure of which to be disclosed in the prospectus included in the registration statement could result in a Violation. In the event that the Company shall exercise its right to delay or suspend the filing or effectiveness of a registration hereunder, the applicable time period during which the Registration Statement is to remain effective shall be extended by a period of time equal to the duration of the Suspension Period. The Company may extend the Suspension Period for an additional consecutive sixty (60) days with the consent of the holders of a majority of the Registrable Securities registered under the applicable registration statement, which consent shall not be unreasonably withheld. No more than one (1) such Suspension Period shall occur in any twelve (12) month period.
     (c) Notify Holders of Registrable Securities to be sold (which notice shall, pursuant to clauses (ii) through (vi) hereof be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made) as promptly as reasonably possible (and, in the case of (i)(A) below, not less than five Trading Days prior to such filing) and (if requested by any such Person) confirm such notice in writing no later than one Trading Day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to a Registration Statement is proposed to be filed; (B) when the Commission notifies the Company whether there will be a “review” of such Registration Statement and whenever the Commission comments in writing on such Registration Statement (the Company shall provide true and complete copies thereof and all written responses thereto to each of Holders); and (C) with respect to a Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to a Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of a Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; (v) of the occurrence of any event or passage of time that makes the financial statements included in a Registration Statement ineligible for inclusion therein or any statement made in a Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to a Registration Statement, Prospectus or other documents so that, in the case of a Registration Statement or the Prospectus, as the case may be, it will not contain any
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untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and (vi) the occurrence or existence of any pending corporate development with respect to the Company that the Company believes may be material and that, in the determination of the Company, makes it not in the best interests of the Company to allow continued availability or the Registration Statement or Prospectus.
     (d) Promptly deliver to each Holder, without charge, an electronic copy of the Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto. Filing on the Commission’s EDGAR system shall be deemed to satisfy such delivery requirement. Subject to the terms of this Agreement, the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto.
     (e) Use commercially reasonable efforts to register or qualify the resale of such Registrable Securities as required under applicable securities or Blue Sky laws of each State within the United States as any Holder requests in writing, and to keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period; provided, that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or subject the Company to any material tax in any such jurisdiction where it is not then so subject.
     (f) Cooperate with Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be delivered to a transferee pursuant to a Registration Statement, which certificates shall be free, to the extent permitted by the applicable Warrant, of all restrictive legends, and in such denominations and registered in such names as any such Holders may request.
     (g) Upon the occurrence of any event contemplated in Section 3(c)(ii)-(vi), as promptly as reasonably possible, prepare a supplement or amendment including a post-effective amendment; to a Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither a Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Company notifies Holders in accordance with clauses (ii) through (v) of  Section 3(c)  above to suspend the use of any Prospectus until the requisite changes to such Prospectus have been made, or the Company otherwise notifies Holders of its election to suspend the availability of a Registration Statement and Prospectus pursuant to clause (vi) of  Section 3(c) , then Holders shall suspend use of such Prospectus. The Company will use its best efforts to ensure that the use of the Prospectus may be resumed as promptly as is practicable, except that in the case of suspension of the availability of a Registration Statement and Prospectus pursuant to clause (vi) of  Section 3(c) , the Company shall not be required to take such action until such time as it shall determine
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that the continued availability of the Registration Statement and Prospectus is no longer not in the best interests of the Company.
     (h) Comply with all applicable rules and regulations of the Commission.
     (i) Use its best efforts to avoid the issuance of, or, if issued, obtain the withdrawal of, (i) any order suspending the effectiveness of a Registration Statement, or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment.
     (j) Require each Holder to furnish to the Company a statement as to the number of shares of the Company’s Common Stock beneficially owned by such Holder and, if requested by the Commission, the controlling Person thereof.
     4. Registration Expenses. All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall be borne by the Company whether or not any Registrable Securities are sold pursuant to the Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with the Stock Exchange, and (B) in compliance with applicable state securities or Blue Sky laws (including, without limitation, fees and disbursements of counsel for the Company in connection with Blue Sky qualifications or exemptions of the Registrable Securities and determination of the eligibility of the Registrable Securities for investment under the laws of such jurisdictions as requested by Holders )); (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities and of printing prospectuses requested by Holders; (iii) messenger, telephone and delivery expenses; (iv) fees and disbursements of counsel for the Company; and (v) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. In addition, the Company shall be responsible for (i) all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit and the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder and (ii) reasonable fees and expenses of one counsel to Holders in connection with this Agreement. In no event shall the Company be responsible for any broker or similar commissions or, except to the extent provided for in the Credit Documents or other agreements between the parties, any legal fees or other costs of Holders.
     5. Indemnification
     (a) Indemnification by the Company. The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless each Holder, the officers, directors, agents, brokers (including brokers who offer and sell Registrable Securities as principal as a result of a pledge or any failure to perform under a margin call of the Company’s Common Stock), investment advisors and employees of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of each such controlling Person, to the fullest extent permitted by applicable
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law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, costs of preparation and reasonable attorneys’ fees) and expenses (collectively, “ Losses ”), as incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact contained in a Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading (a “ Violation ”), except to the extent, but only to the extent, that (1) such untrue statements or omissions or alleged untrue statements or omissions are based upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder’s proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in a Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto or (2) in the case of an occurrence of an event of the type specified in Section 3(c)(ii)-(vi), such Holder used an outdated or defective Prospectus after the Company had notified such Holder in writing that the Prospectus was outdated or defective and prior to the receipt by such Holder of the Advice contemplated in Section 7(e) . The Company shall notify Holders promptly of the institution, threat or assertion of any Proceeding arising from or in connection with the transactions contemplated by this Agreement of which the Company is aware.
     (b) Indemnification by Holders. Each Holder shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses (as determined by a court of competent jurisdiction in a final judgment not subject to appeal or review) arising out of or based upon any untrue statement of a material fact contained in any Registration Statement, any Prospectus, or any form of prospectus, or in any amendment or supplement thereto, or arising out of or based upon: (i) such Holder’s failure to comply with the prospectus delivery requirements of the Securities Act or (ii) any untrue statement of a material fact contained in a Registration Statement, any Prospectus or in any amendment or supplement thereto, or arising out of or relating to any omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading to the extent but only to the extent, such untrue statement or omission is contained in any information so furnished in writing by such Holder to the Company specifically for inclusion in such Registration Statement or such Prospectus or to the extent that (1) such untrue statements or omissions are based upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent such information relates to such Holder or such Holder’s proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto or (2) in the case of an occurrence of an event of the type specified in  Section 3(c)(ii)-(vi) , such Holder used an
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outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus was outdated or defective and prior to the receipt by such Holder of the Advice contemplated in  Section 8(e) . In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation.
     (c) Conduct of Indemnification Proceedings. If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an “ Indemnified Party ”), such Indemnified Party shall promptly notify the Person from whom indemnity is sought (the “ Indemnifying Party ”) in writing, and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that such failure shall have prejudiced the Indemnifying Party.
     An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; or (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that a material conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and the expense of one such counsel for each Holder shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding.
     Subject to the terms of this Agreement, all fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this  Section 5(c) ) shall be paid to the Indemnified Party, as incurred, within ten Trading Days of written notice thereof to the Indemnifying Party (regardless of whether it is ultimately determined that an Indemnified Party is not entitled to indemnification hereunder; provided, that the Indemnifying Party may require such Indemnified Party to
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undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder).
     (d) Contribution. If a claim for indemnification under Section 5(a) or 5(b) is unavailable to an Indemnified Party (by reason of public policy or otherwise), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in  Section 5(c) , any reasonable attorneys’ or other reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section were available to such party in accordance with its terms.
     The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this  Section 5(d) , no Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the proceeds actually received by such Holder from the sale of the Registrable Securities subject to the Proceeding exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission.
     The indemnity and contribution agreements contained in this Section 5 are in addition to any liability that the Indemnifying Parties may otherwise have to the Indemnified Parties.
     6. Reporting.
     (a) Reports Under The Exchange Act. With a view to making available to Holders the benefits of Rule 144 promulgated under the Securities Act or any other similar rule or regulation of the Commission that may at any time permit Holders to sell securities of the Company to the public without registration (“ Rule 144 ”), the Company shall use reasonable efforts to:
     (i) make and keep current public information available, as those terms are understood and defined in Rule 144;
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     (ii) file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and
     (iii) furnish to each Holder, so long as such Holder owns Registrable Securities, promptly upon request, (A) a written statement by the Company, if true, that it has complied with the applicable reporting requirements of Rule 144, the Securities Act and the Exchange Act, (B) a copy of the most recent annual or quarterly report of the Company and copies of such other reports and documents so filed by the Company, and (C) such other information as may be reasonably requested to permit Holders to sell such securities pursuant to Rule 144 without registration.
     (b) Rule 144A Information. If applicable, the Company shall, upon request of any Holder, make available to such Holder the information required by Rule 144A(d)(4) (or any successor rule), under the Securities Act, if any.
     7. Miscellaneous.
     (a) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and all of Holders of the then outstanding Registrable Securities. Notwithstanding the foregoing, a waiver or consent to depart from the provisions, hereof with respect to a matter that relates exclusively to the rights of certain Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of all of the Registrable Securities to which such waiver or consent relates;  provided, however , that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence.
     (b) No Inconsistent Agreements. Neither the Company nor any of its Subsidiaries has entered, as of the date hereof, nor shall the Company or any of its Subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its securities, that would have the effect of impairing the rights granted to Holders in this Agreement or otherwise conflicts with the provisions hereof. Except as and to the extent specified in  Schedule 7(b)  hereto, neither the Company nor any of its Subsidiaries has previously entered into any agreement granting any registration rights with respect to any of its securities to any Person that have not been satisfied in full.
     (c) Compliance. Each Holder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to the Registration Statement.
     (d) Discontinued Disposition. Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in  Sections 3(c)(ii) ,  (iii)  or  (vi) , such Holder will forthwith discontinue disposition of such Registrable Securities under a Registration
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Statement until such Holder’s receipt of the copies of the supplemented Prospectus and/or amended Registration Statement contemplated by  Section 3(g) , or until it is advised in writing (the “ Advice ”) by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. The Company may provide appropriate stop orders to enforce the provisions of this paragraph.
     (e) Piggy-Back Registrations. If at any time during the Effectiveness Period there is not an effective Registration Statement covering all of the Registrable Securities and the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, then the Company shall send to each Holder written notice of such determination and, if within fifteen days after receipt of such notice, any such Holder shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities such Holder requests to be registered; provided, that, the Company shall not be required to register any Registrable Securities pursuant to this  Section 7(e)  that are then eligible for resale pursuant to Rule 144(b) promulgated under the Securities Act.
     (f) Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be delivered as set forth in the applicable Warrant.
     (g) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign its rights or obligations hereunder without the prior written consent of all of Holders of the then-outstanding Registrable Securities. Each Holder may assign its respective rights hereunder in the manner and to the Persons as permitted under the applicable Warrant.
     (h) Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, and all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile signature were the original thereof.
     (i) Governing Law; Venue. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof or of any other jurisdiction. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST THE PARTIES WITH RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN ANY STATE OR
13

 
FEDERAL COURT OF COMPETENT JURISDICTION IN THE CITY OF NEW YORK IN THE STATE OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE PARTIES ACCEPTS, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT FROM WHICH NO APPEAL HAS BEEN TAKEN OR IS AVAILABLE. EACH OF THE PARTIES IRREVOCABLY AGREES THAT ALL SERVICE OF PROCESS IN ANY SUCH PROCEEDINGS IN ANY SUCH COURT MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO IT AT ITS ADDRESS OR AT SUCH OTHER ADDRESS OF WHICH THE PARTIES SHALL HAVE BEEN NOTIFIED PURSUANT THERETO, SUCH SERVICE BEING HEREBY ACKNOWLEDGED BY THE PARTIES TO BE EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH JURISDICTION. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF HOLDER TO BRING PROCEEDINGS AGAINST THE PARTIES IN THE COURT OF ANY OTHER JURISDICTION. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. If any party shall commence a Proceeding to enforce any provisions of this Agreement, then the prevailing party in such Proceeding shall be reimbursed by the other party for its attorneys fees and other costs and expenses incurred in connection with the investigation, preparation and prosecution of such Proceeding.
     (j) Cumulative Remedies. The remedies provided herein are cumulative and not exclusive of any remedies provided by law.
     (k) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.
14

 
     (l) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.
[Signature pages follow.]
15

 
     IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.
 	 	 	 	 	
 	COMPANY:	 	
 	 	 	 	 	
 	ARBOR REALTY TRUST, INC.
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
S-1

 

 	HOLDER:	 	
 	 	 	 	 	
 	WACHOVIA BANK, NATIONAL ASSOCIATION
 	 	
 	By:  	/s/ Olga V. Kelly  	 	
 	 	Name:  	Olga V. Kelly 	 	
 	 	Title:  	Director 	 	
S-2

 
 	 	 	 	 	
Annex A
Plan of Distribution
     The selling shareholders and any of their pledgees, donees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling shareholders may use any one or more of the following methods when selling shares:
 	•	 	ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;	
 	 	 	 	
 	•	 	block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;	
 	 	 	 	
 	•	 	purchases by a broker-dealer as principal and resale by the broker-dealer for its account;	
 	 	 	 	
 	•	 	an exchange distribution in accordance with the rules of the applicable exchange;	
 	 	 	 	
 	•	 	privately negotiated transactions;	
 	 	 	 	
 	•	 	settlement of short sales;	
 	 	 	 	
 	•	 	the sales pursuant to an agreement of the selling shareholders with broker-dealers, of a specified number of such shares at a stipulated price per share;	
 	 	 	 	
 	•	 	a combination of any such methods of sale; and	
 	 	 	 	
 	•	 	any other method permitted pursuant to applicable law.	
     The selling shareholders may also sell shares under Rule 144 of the Securities Act, if available, rather than under this prospectus. Broker-dealers engaged by the selling shareholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling shareholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The selling shareholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved.
     The selling shareholders may from time to time pledge or grant a security interest in some or all of the shares owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling shareholders to include the pledgee, transferee or other successors in interest as selling shareholders under this prospectus.
Annex A-1

 
     The selling shareholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledges, donees, assignees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.
     The selling shareholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. The selling shareholders have informed the Company that none of them have any agreement or understanding, directly or indirectly, with any person to distribute the common stock.
     The Company is required to pay all fees and expenses incurred by the Company incident to the registration of the shares. The Company has agreed to indemnify the selling shareholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.
Annex A-2

 
Schedules
Schedule 7(b) – None.
Schedule 7(c) – None.

EXHIBIT 10.36
EXECUTION VERSION
FIRST AMENDMENT TO
FIRST AMENDED AND RESTATED CREDIT AGREEMENT AND OTHER CREDIT DOCUMENTS
(Wachovia/Arbor)
     THIS FIRST AMENDMENT TO FIRST AMENDED AND RESTATED CREDIT AGREEMENT AND OTHER CREDIT DOCUMENTS , dated as of December 16, 2009 (this “ Amendment No. 1 ”), is entered into by and among  ARBOR REALTY FUNDING LLC , a Delaware limited liability company (together with its successors and permitted assigns, “ Arbor Realty Funding ”), as a borrower,  ARSR TAHOE, LLC , a Delaware limited liability company (together with its successors and permitted assigns, “ ARSR Tahoe ”), as a borrower,  ARBOR REALTY LIMITED PARTNERSHIP , a Delaware limited partnership (together with its successors and permitted assigns, “ Arbor Realty ”), as a borrower,  ART 450 LLC , a Delaware limited liability company (together with its successors and permitted assigns, “ ART 450 ”), as a borrower,  ARBOR REALTY SR, INC. , a Maryland corporation (together with its successors and permitted assigns, “ ARSR ”), as a borrower, ARBOR ESH II LLC (together with its successors and permitted assigns, “ Arbor ESH ” and, together with Arbor Realty Funding, ARSR Tahoe, Arbor Realty and ARSR, each individually referred to herein as a “ Borrower ” and collectively referred to herein as the “ Borrowers ”), as a borrower,  ARBOR REALTY TRUST, INC. , a Maryland corporation (together with its successors and permitted assigns, “ ART ”), as a guarantor, Arbor Realty, as a guarantor, ARSR, as a guarantor (ARSR, together with ART and Arbor Realty, the “ Guarantors ”), the several banks and other financial institutions party to the Credit Agreement (each, together with its successors and assigns, a “ Lender ” and, collectively, the “ Lenders ”), and  WACHOVIA BANK, NATIONAL ASSOCIATION,  a national banking association, as administrative agent for the Lenders (together with its successors and assigns in such capacity, the “ Administrative Agent ”), and consented to by ARSR, as the pledgor (together with its successors and permitted assigns, the “ Pledgor ”). Capitalized terms used and not otherwise defined herein shall have the meanings given to such terms in the Credit Agreement (as defined below and as amended hereby).
RECITALS
     WHEREAS, the Borrowers, the Guarantors, the Lenders and the Administrative Agent are parties to that certain First Amended and Restated Credit Agreement, dated as of July 23, 2009 (as amended, modified, restated, replaced, waived, substituted, supplemented or extended from time to time, including by this Amendment No. 1, the “ Credit Agreement ”);
     WHEREAS, the Borrowers and the Guarantors desire to make certain modifications to the Credit Agreement and the other Credit Documents;
     WHEREAS, the Administrative Agent and the Lenders are willing to modify the Credit Agreement and the other Credit Documents as requested by the Borrowers and the Guarantors on the terms and conditions specified herein;
     WHEREAS, each Guarantor desires to evidence its agreement to the amendments and modifications set forth herein and to reaffirm its obligations under the Guaranty; and
First Amendment to Credit Agreement and other Credit Documents
(Wachovia/Arbor)

 
     WHEREAS, the Pledgor is a party to other Credit Documents and related agreements that may be affected, directly or indirectly, by this Amendment No. 1 and desires to evidence its agreement to the amendments and modifications set forth herein.
     NOW THEREFORE, in consideration of the foregoing recitals, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:
     Section 1.Amendments to Credit Agreement.
     (a) The following new definitions are added to Section 1.1 of the Credit Agreement (to be inserted in the correct alphabetical order):
     ““Amendment No. 1” means that certain First Amendment to First Amended and Restated Credit Agreement, dated as of December 16, 2009, by and among the Borrowers, the Guarantors, the Administrative Agent and the lenders party thereto, as consented to by the Pledgor and Custodian.”
     ““Golf Terrace Mortgage Asset” means the Mezzanine Loan known as Golf Terrace in the original face amount of $5,921,700, as amended, modified, waived, supplemented, extended, restated or replaced from time to time.”
     ““Golf Terrace Intercreditor Agreement” means the Intercreditor Agreement, dated as of November 30, 2005, by and among Arbor Commercial Funding, LLC, Arbor Realty Funding, Park at Laurel Oaks Associates LLC, Laurel Oaks, LLC, TTF VI REIT, Randy Ferreira and Reuven Odel, as amended, modified, waived, supplemented, extended, restated or replaced from time to time.”
     ““Lake Shore Mortgage Asset” means the Junior Interest (Participation A-1 Interest) known as Lake Shore in the original face amount of $17,000,000, as amended, modified, waived, supplemented, extended, restated or replaced from time to time.”
     ““Lexford Mortgage Asset” means the Mortgage Asset known as Lexford in the original face amount of $30,000,000, as amended, modified, waived, supplemented, extended, restated or replaced from time to time.”
     ““Substituted Assets” means the Golf Terrace Mortgage Asset and the Lake Shore Mortgage Asset, as such Mortgage Assets are substituted in accordance with Section 2.2(e) of the Credit Agreement.”
     (b) Section 2.2(e) of the Credit Agreement is hereby amended and restated in its entirety as follows:
     “(e) Notwithstanding anything set forth in the Credit Documents to the contrary, on the date of Amendment No. 1., each Term Loan Lender and the Administrative Agent shall permit the Borrowers to substitute the Lexford Mortgage Asset with the Substituted Assets. In connection therewith, the Borrowers shall execute and deliver a Confirmation with respect to each such Substituted Asset and otherwise satisfy the requirements of Section 2.2 and the Credit Documents in connection with the making of a Term Loan. Upon satisfaction of such conditions, the Substituted Assets shall be “Pledged Mortgage Assets” for all purposes of this Agreement and the other Credit Documents. Following the satisfaction of such conditions and such other conditions as the Administrative Agent may require in its discretion, the Administrative Agent shall release the Lexford Mortgage Asset from the Lien created by
First Amendment to Credit Agreement
(Wachovia/Arbor)
2

 
the Security Documents. For the avoidance of doubt, the Borrowers have no right to substitute any Pledged Mortgage Asset without the prior written consent of the Administrative Agent, which consent may be withheld in the discretion of the Administrative Agent.”
     (c) A new Section 2.4(b)(ix) is hereby added to the Credit Agreement as follows:
     “Notwithstanding anything set forth in the Credit Documents to the contrary, if the Lake Shore Mortgage Asset is subject to a Collateral Default prior to the occurrence of an Asset Valuation Period, the Borrowers shall pay to the Administrative Agent, within one (1) Business Day of the occurrence of such Collateral Default, fifty percent (50%) of the Allocated Term Loan Amount for the Lake Shore Mortgage Asset and, if either (A) such Collateral Default is not resolved to the Administrative Agent’s satisfaction in its discretion within ninety (90) calendar days of the occurrence of such Collateral Default or (B) (1) the Administrative Agent makes any recommendations (regardless of whether the Administrative Agent or the Borrowers have the right to make such recommendations) regarding the matters set forth in Sections 3(e) or 3(g) of the Amended and Restated Participation and Servicing Agreement, dated as of February 15, 2008 (the “ Lake Shore Participation Agreement ”), among Arbor Realty Participation, LLC, as the seller, Arbor Realty SR, Inc., as the participant A, and Arbor Realty Participation, LLC, as the participant B (as such agreement is modified or amended from time to time), which are not followed or (2) the Administrative Agent does not approve of an action taken by the “Seller” or any “Qualified Servicer” (in each case, as defined in the Lake Shore Participation Agreement) with respect to the Lake Shore Mortgage Asset (the actions referred to in clauses (A) and (B) hereinafter referred to as “ Non-Approved Actions ”), the Borrowers shall, within one (1) Business Day of the occurrence of any Non-Approved Actions, pay to the Administrative Agent the balance of the Allocated Term Loan Amount for the Lake Shore Mortgage Asset plus accrued and unpaid interest and other amounts owed with respect to the Lake Shore Mortgage Asset. If the Lake Shore Mortgage Asset is subject to a Collateral Default during an Asset Valuation Period, then the provisions of Section 2.5(b)(v) of this Agreement shall apply.”
     (d) A new Section 5.30 is hereby added to the Credit Agreement as follows:
     “Section 5.30 Golf Terrace. Within ninety (90) days of the date of Amendment No. 1, the Borrowers shall obtain the written consent from the “Senior Lender” (as defined in the Golf Terrace Intercreditor Agreement) with respect to the applicable Borrower’s pledge of the Golf Terrace Mortgage Asset to the Administrative Agent and its successors and assigns in accordance with the terms of this Agreement and the other Credit Documents, which consent shall also include confirmation that the Administrative Agent (together with its successors and assigns) is a “Loan Pledgee” under paragraph 15 of the Golf Terrace Intercreditor Agreement, as such consent is required by the terms of the Golf Terrace Intercreditor Agreement.”
     Section 2.Amendments to the Fee Letter.
     Schedule 1-B to the Fee Letter is amended and restated in its entirety with Exhibit A attached hereto.
     Section 3.Credit Documents in Full Force and Effect as Modified.
     Except as specifically modified hereby, the Credit Documents shall remain in full force and effect in accordance with their terms. All references to any Credit Document shall be deemed to mean each Credit Document as modified by this Amendment No. 1. This Amendment No. 1 shall not constitute a novation of the Credit Documents, but shall constitute modifications thereof. The parties hereto agree to be bound by the terms and conditions of the Credit Documents, as modified by this Amendment No. 1, as
First Amendment to Credit Agreement
(Wachovia/Arbor)
3

 
though such terms and conditions were set forth herein. Each of the Borrowers, the Guarantors and the Pledgor hereby ratifies the Credit Agreement and the other Credit Documents and acknowledges and reaffirms (a) that it is bound by all terms of the Credit Agreement and the other Credit Documents applicable to it and (b) that it is responsible for the observance and full performance of its respective Obligations. This Amendment No. 1 is a Credit Document executed pursuant to the Credit Agreement and shall be construed, administered and applied in accordance with the terms and provisions of the Credit Agreement.
     Section 4.Representations.
     Each of the Borrowers, the Guarantors and the Pledgor represents and warrants, as of the date of this Amendment No. 1, as follows:
     (a) it is duly incorporated or organized, validly existing and in good standing under the laws of its jurisdiction of organization and each jurisdiction where it conducts business;
     (b) the execution, delivery and performance by it of this Amendment No. 1 is within its corporate, company or partnership powers, has been duly authorized and does not contravene (1) its Authority Documents or its applicable resolutions, (2) any Requirements of Law or (3) any Contractual Obligation, Indebtedness or Guarantee Obligation;
     (c) no consent, license, permit, approval or authorization of, or registration, filing or declaration with, any Governmental Authority or other Person is required in connection with the execution, delivery, performance, validity or enforceability by or against it of this Amendment No. 1 or the Fee Letter;
     (d) this Amendment No. 1 has been duly executed and delivered by it;
     (e) this Amendment No. 1 and each of the Credit Documents as modified thereby constitute its legal, valid and binding obligation, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally or by general principles of equity;
     (f) the Security Documents continue to create a valid security interest in, and Lien upon, the Collateral, in favor of the Administrative Agent, for the benefit of the Secured Parties, which security interests and Liens are perfected in accordance with the terms of the Security Documents and prior to all Liens subject to Permitted Liens;
     (g) no Default or Event of Default exists or will exist after giving effect to this Amendment No. 1;
     (h) each of the Credit Documents is in full force and effect and neither the Borrowers, the Guarantors nor the Pledgor has any defense, offset, counterclaim, abatement, right of rescission or other claims, actions, causes of action, demands, damages or liabilities of any kind or nature, in all cases whether legal or equitable, available to the Borrowers, the Guarantors, the Pledgor or any other Person with respect to (i) this Amendment No. 1, the Credit Agreement, the Credit Documents or any other instrument, document and/or agreement described herein or therein, as modified and amended hereby, (ii) the obligation of the Borrowers and the Guarantors to repay the Obligations and other amounts due under the Credit Documents or (iii) the Administrative Agent, the Lenders or the Administrative Agent’s or the Lenders’ respective officers, employees, representatives, agents, counsel or directors arising out of or
First Amendment to Credit Agreement
(Wachovia/Arbor)
4

 
from or in any way related to or in connection with the Credit Agreement or the Credit Documents, including, without limitation, any action by such Persons, or failure of such Persons to act, under the Credit Agreement or the other Credit Documents on or prior to the date hereof; and
     (i) except as specifically provided in this Amendment No. 1, the Obligations are not reduced or modified by this Amendment No. 1.
     Section 5.Conditions Precedent.
     The effectiveness of this Amendment No. 1 is subject to the following conditions precedent: (i) delivery to the Administrative Agent of this Amendment No. 1 duly executed by each of the parties hereto; (ii) the payment of all legal fees and expenses of Moore & Van Allen PLLC, as counsel to the Administrative Agent, in the amount to be set forth on a separate invoice; (iii) execution and delivery of Confirmations with respect to the Substituted Assets; and (iv) delivery to the Administrative Agent of such other documents, agreements or certifications as the Administrative Agent may reasonably require.
     Section 6.Miscellaneous.
     (a) This Amendment No. 1 may be executed in any number of counterparts (including by facsimile), and by the different parties hereto on the same or separate counterparts, each of which shall be deemed to be an original instrument but all of which together shall constitute one and the same agreement.
     (b) The descriptive headings of the various sections of this Amendment No. 1 are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof.
     (c) This Amendment No. 1 may not be amended or otherwise modified, waived or supplemented except as provided in the Credit Agreement.
     (d) The interpretive provisions of Sections 1.2 through 1.8 of the Credit Agreement are incorporated herein mutatismutandis.
     (e) This Amendment No. 1 and the Fee Letter represents the final agreement among the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements between the parties. There are no unwritten oral agreements between the parties.
     (f) THIS AMENDMENT NO. 1 AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT NO. 1 SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
     (g) Each provision of this Amendment No. 1 shall be valid, binding and enforceable to the fullest extent permitted by Requirements of Law. In case any provision in or obligation under this Amendment No. 1 shall be invalid, illegal or unenforceable in any jurisdiction (either in its entirety or as applied to any Person, fact, circumstance, action or inaction), the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction or as applied to any Person, fact, circumstance, action or inaction, shall not in any way be affected or impaired thereby.
First Amendment to Credit Agreement
(Wachovia/Arbor)
5

 
     (h) In consideration of the Lenders and the Administrative Agent entering into this Amendment No. 1, each of the Borrowers, each of the Guarantors and the Pledgor hereby waives, releases and discharges the Administrative Agent, the Lenders and the Administrative Agent’s and the Lenders’ respective officers, employees, representatives, agents, counsel and directors from any and all actions, causes of action, claims, demands, damages and liabilities of whatever kind or nature, in law or in equity, now known or unknown, suspected or unsuspected to the extent that any of the foregoing arises out of or from or in any way relating to or in connection with the Credit Agreement or the Credit Documents, including but not limited to, any action or failure to act under the Credit Agreement or the other Credit Documents on or prior to the date hereof, except, with respect to any such Person being released hereby, any actions, causes of action, claims, demands, damage and liabilities arising out of such Person’s gross negligence or willful misconduct in connection with the Credit Agreement or the other Credit Documents.
     (i) Each Guarantor (i) agrees to and consents to the terms and provisions of this Amendment No. 1, (ii) acknowledges and confirms that the Guaranty remains in full force and effect notwithstanding this Amendment No. 1, and (iii) reaffirms its obligations under the Guaranty.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
First Amendment to Credit Agreement
(Wachovia/Arbor)
6

 
     IN WITNESS WHEREOF, the parties have caused this Amendment No. 1 to be executed by their respective officers thereunto duly authorized, as of the date first above written.
 	 	 	 	 	
BORROWERS:	ARBOR REALTY FUNDING, LLC, a Delaware limited liability company
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARSR TAHOE, LLC, a Delaware limited liability company
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR REALTY LIMITED PARTNERSHIP, a Delaware limited partnership
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ART 450 LLC, a Delaware limited liability company
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR REALTY SR, INC., a Maryland corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR ESH II LLC, a Delaware limited liability company
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
[Signatures Continued on the Following Page]
First Amendment to Credit Agreement
(Wachovia/Arbor)

 
 	 	 	 	 	
GUARANTORS:	ARBOR REALTY TRUST, INC.,
a Maryland corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR REALTY LIMITED PARTNERSHIP,
a Delaware limited partnership
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR REALTY SR, INC.,
a Maryland corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
[Signatures Continued on the Following Page]
First Amendment to Credit Agreement
(Wachovia/Arbor)

 
 	 	 	 	 	
ADMINISTRATIVE AGENT:	WACHOVIA BANK, NATIONAL ASSOCIATION,
as Administrative Agent on behalf of the Lenders
 	 	
 	By:  	/s/ John Nelson  	 	
 	 	Name:  	John Nelson 	 	
 	 	Title:  	Managing Director 	 	
 	
LENDER:	WACHOVIA BANK, NATIONAL ASSOCIATION,
as Lender
 	 	
 	By:  	/s/ John Nelson  	 	
 	 	Name:  	John Nelson 	 	
 	 	Title:  	Managing Director 	 	
 	
[Signatures Continued on the Following Page]
First Amendment to Credit Agreement
(Wachovia/Arbor)

 
CONSENTED TO BY:
 	 	 	 	 	
PLEDGOR:	ARBOR REALTY SR, INC.,
a Maryland corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
First Amendment to Credit Agreement
(Wachovia/Arbor)

 
Exhibit A
Schedule 1–B
ESH Release Amounts
 	 	 	
ASSET	 	ESH RELEASE AMOUNT	
26 Broadway	 	$2,000,000	
5 Times Square	 	$953,343.53	
1760 Third Avenue	 	$750,000	
James Hotel Chicago	 	$500,000	
DRA	 	$375,000	
Alpine Asset	 	$9,000,000	
Water Street	 	$500,000	
First Amendment to Credit Agreement
(Wachovia/Arbor)

EXHIBIT 10.37
EXECUTION COPY
SECOND AMENDMENT TO
FIRST AMENDED AND RESTATED CREDIT AGREEMENT
(Wachovia/Arbor)
     THIS SECOND AMENDMENT TO FIRST AMENDED AND RESTATED CREDIT AGREEMENT, dated as of December 24, 2009 (this “ Amendment No. 2 ”), is entered into by and among  ARBOR REALTY FUNDING LLC , a Delaware limited liability company (together with its successors and permitted assigns, “ Arbor Realty Funding ”), as a borrower,  ARSR TAHOE, LLC , a Delaware limited liability company (together with its successors and permitted assigns, “ ARSR Tahoe ”), as a borrower,  ARBOR REALTY LIMITED PARTNERSHIP , a Delaware limited partnership (together with its successors and permitted assigns, “ Arbor Realty ”), as a borrower,  ART 450 LLC , a Delaware limited liability company (together with its successors and permitted assigns, “ ART 450 ”), as a borrower,  ARBOR REALTY SR, INC. , a Maryland corporation (together with its successors and permitted assigns, “ ARSR ”), as a borrower, ARBOR ESH II LLC (together with its successors and permitted assigns, “ Arbor ESH ” and, together with Arbor Realty Funding, ARSR Tahoe, Arbor Realty and ARSR, each individually referred to herein as a “ Borrower ” and collectively referred to herein as the “ Borrowers ”), as a borrower,  ARBOR REALTY TRUST, INC. , a Maryland corporation (together with its successors and permitted assigns, “ ART ”), as a guarantor, Arbor Realty, as a guarantor, ARSR, as a guarantor (ARSR, together with ART and Arbor Realty, the “ Guarantors ”), the several banks and other financial institutions party to the Credit Agreement (each, together with its successors and assigns, a “ Lender ” and, collectively, the “ Lenders ”), and  WACHOVIA BANK, NATIONAL ASSOCIATION,  a national banking association, as administrative agent for the Lenders (together with its successors and assigns in such capacity, the “ Administrative Agent ”), and consented to by ARSR, as the pledgor (together with its successors and permitted assigns, the “ Pledgor ”), and  WELLS FARGO BANK, NATIONAL ASSOCIATION , a national banking association (together with its successors and permitted assigns, “ Custodian ”), as the custodian. Capitalized terms used and not otherwise defined herein shall have the meanings given to such terms in the Credit Agreement (as defined below and as amended hereby).
RECITALS
     WHEREAS, the Borrowers, the Guarantors, the Lenders and the Administrative Agent are parties to that certain First Amended and Restated Credit Agreement, dated as of July 23, 2009 (as amended, modified, restated, replaced, waived, substituted, supplemented or extended from time to time, including pursuant to that First Amendment to First Amended and Restated Credit Agreement and Other Credit Documents, dated as of December 16, 2009 and by this Amendment No. 2, the “ Credit Agreement ”);
     WHEREAS, concurrently herewith, the Borrowers, the Guarantors and the Administrative Agent are entering into that certain Second Amended and Restated Fee Letter, dated as of the date hereof;
     WHEREAS, the Borrowers and the Guarantors desire to make certain modifications to the Credit Agreement;
Second Amendment to Credit Agreement
(Wachovia/Arbor)

 
     WHEREAS, the Administrative Agent and the Lenders are willing to modify the Credit Agreement as requested by the Borrowers and the Guarantors on the terms and conditions specified herein;
     WHEREAS, each Guarantor desires to evidence its agreement to the amendments and modifications set forth herein and to reaffirm its obligations under the Guaranty; and
     WHEREAS, the Pledgor is a party to other Credit Documents and related agreements that may be affected, directly or indirectly, by this Amendment No. 2 and desires to evidence its agreement to the amendments and modifications set forth herein.
     NOW THEREFORE, in consideration of the foregoing recitals, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:
     Section 1.Amendments to Credit Agreement.
     (a) The following new definitions are added to Section 1.1 of the Credit Agreement (to be inserted in the correct alphabetical order):
     ““Amendment No. 2” means that certain Second Amendment to First Amended and Restated Credit Agreement, dated as of December 24, 2009, by and among the Borrowers, the Guarantors, the Administrative Agent and the lenders party thereto, as consented to by the Pledgor and Custodian.”
     “Credit Obligations” means the outstanding obligations under the Loans, the Credit Agreement, the Notes and any other Credit Document and the Aggregate Unpaids (as defined in the Working Capital Facility). For the avoidance of doubt, “Credit Obligations” does not include any Credit Party-Related Obligation that does not arise under the Credit Agreement or the other Credit Documents or under the Working Capital Facility.”
 	 	““Discounted Payoff Amount” shall have the meaning set forth in the Fee Letter.”	
     ““Excess Principal Amount” means the difference (if positive) between the amount of any principal payment or prepayment received from an Obligor with respect to a Pledged Mortgage Asset and the Release Amount for such Pledged Mortgage Asset.”
 	 	““Payoff Extension Amount” shall have the meaning set forth in the Fee Letter.”	
     (b) The definition of “Fee Letter” contained in Section 1.1 of the Credit Agreement is hereby amended and restated in its entirety as follows:
     “Fee Letter” shall mean the Second Amended and Restated Fee Letter, dated as of December 24, 2009, by the Administrative Agent, as acknowledged and agreed by the Borrowers and the Guarantors, as amended, modified, extended, restated, replaced, or supplemented from time to time.
     (c) Clause (EIGHTH) of Subsection 2.9(a)(ii) of the Credit Agreement is hereby amended and restated in its entirety as follows, new clauses (NINTH) and (TENTH) are hereby added to  Subsection 2.9(a)(ii)  of the Credit Agreement and the proviso appearing at the end of  Subsection 2.9(a)(ii)  of the Credit Agreement is hereby amended and restated in its entirety:
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     “EIGHTH, to the extent amounts owed pursuant to clauses FIRST through SEVENTH above have been paid in full from all sources of Income (including, but not limited to, the application of principal payments and prepayments received from Obligors) to the Borrowers, any remaining Excess Principal Amount with respect to any Pledged Mortgage Asset deposited into the Collection Account since the previous Payment Date;
     NINTH, pari passu and pro rata (based on the amounts owed to such Persons under this clause), to the principal amount of the Loans outstanding and not repaid pursuant to clauses “FIRST” through “SEVENTH” above and the Aggregate Outstanding Principal (as defined in the Working Capital Facility), in each case, in such manner and order as the Administrative Agent shall determine in its discretion; and
     TENTH, pari passu and pro rata (based on the amounts owed to such Persons under this clause) to the payment of the surplus, if any, to whoever may be lawfully entitled to receive such surplus;
     provided, however, that if a Default or Event of Default has occurred and is continuing or a mandatory prepayment under Section 2.5 is due but the applicable time period for payment of such amount has not expired, amounts available pursuant to clause “EIGHTH” or “TENTH” shall not be transferred to the Borrowers but shall remain in the Collection Account and be applied (i) in the case of a mandatory prepayment under Sections 2.2 or 2.5, in reduction of such mandatory prepayments when due and payable, with the balance being remitted to the Borrowers, and (ii) in the case of a Default or Event of Default, in reduction of the Obligations in accordance with Section 2.9(b).”
     (d)The following new Section 2.18 is hereby added to the Credit Agreement:
     “Section 2.18 Discounted Payoff Amount.
     (a) Notwithstanding anything set forth in the Credit Documents to the contrary, subject to the terms of this Section 2.18, Lender will accept the Discounted Payoff Amount in full satisfaction of the Credit Obligations  provided , that (i) no Event of Default has occurred and is continuing, (ii) the Lender has received the Discounted Payoff Amount in immediately available funds on or before May 31, 2010 (as such date may be extended as set forth in clause (b) below, the “ Payoff Date ”), (iii) the Borrowers and the Guarantors deliver to the Lender and the Administrative Agent on or before the Payoff Date an executed agreement terminating the Credit Documents (subject to any provisions which by the terms expressly survive termination) other than the Warrant Agreements and Registration Rights Agreement, which shall continue in full force and effect, in the form of  Exhibit A  attached hereto, and (iv) the conditions set forth in Section 2.16(a) of the Working Capital Facility Loan Agreement have been satisfied.
     (b) Upon written notice by the Borrowers to the Administrative Agent delivered to the Administrative Agent no later than ten (10) calendar days prior to the Payoff Date, provided no Event of Default has occurred and is continuing and the Borrowers pay the Payoff Extension Amount before the effective date of the extension, the Borrowers shall be entitled to up to two 45 day extensions of the Payoff Date. To the extent applicable, the first extension shall extend the Payoff Date to July 15, 2010 and shall be effective, provided no Event of Default has occurred and is continuing, upon the payment of the Payoff Extension Amount no later than May 28, 2010, which amount shall be applied to the principal amount of the Loans outstanding and the Aggregate Outstanding Principal (as defined in the Working Capital Facility) in such order and manner as the Administrative Agent determines in its discretion and credited against the Discounted Payoff Amount. To the extent applicable, the second extension shall
Second Amendment to Credit Agreement
(Wachovia/Arbor)
3

 
extend the Payoff Date to August 27, 2010 and shall be effective, provided no Event of Default has occurred and is continuing, upon the payment of the Payoff Extension Amount no later than July 14, 2010, which amount shall be applied to the principal amount of the Loans outstanding and the Aggregate Outstanding Principal (as defined in the Working Capital Facility) in such order and manner as the Administrative Agent determines in its discretion and credited against the Discounted Payoff Amount.
     (c) In the event that any of the conditions set forth in this Section 2.18 are not satisfied on or before Payoff Date (as the same may be extended in accordance with the terms hereof), the Lender shall have no obligation whatsoever under this Section 2.18 or otherwise to accept the Discounted Payoff Amount in satisfaction of the outstanding Credit Obligations. For the avoidance of doubt, until the conditions precedent set forth in this Section 2.18 are satisfied, the Lender and the Administrative Agent shall have the right to exercise all of its rights and remedies under the Credit Documents, the Loan Documents (as defined in the Working Capital Facility) and Requirements of Law. Notwithstanding anything set forth in the Credit Documents, the Administrative Agent shall apply any amounts received under this Section 2.18 to the principal amount of the Loans outstanding and the Aggregate Outstanding Principal (as defined in the Working Capital Facility) in such order and manner as the Administrative Agent determines in its discretion. For the avoidance of doubt, until the Borrowers pay the Discounted Payoff Amount and comply with the other provisions of this Section 2.18, all obligations, duties and agreements of the Borrowers and Guarantors continue to remain in full force and effect.
     (d) All principal payments received and applied to the outstanding principal under the Credit Documents or the Loan Documents (as defined in the Working Capital Facility) on and after December 11, 2009 shall be credited against the Discounted Payoff Amount.
     (e) The parties acknowledge that pursuant to Transactions on December 11, 2009 and December 16, 2009, the Borrowers have made principal payments in the net aggregate amount of $16,854,428, which amount shall be credited against the Discounted Payoff Amount.
     (f) Promptly after application by the Administrative Agent of payments to reduce the Release Amounts of any Collateral pursuant to the terms hereof, the Administrative Agent shall give the Borrowers notice of the Pledged Mortgage Assets to which such payments have been applied.”
     (e) Section 10.2(a)(i) f the Credit Agreement is hereby amended and restated in its entirety as follows:
               ”(i) If to the Borrowers or any other Credit Party:
c/o Arbor Commercial Mortgage LLC
333 Earle Ovington Boulevard
Uniondale, New York 11553
Attention: John Bishar, Esq.
Phone No.: (516) 506-4590
Facsimile No.: (516) 542-2561
With a copy to:
Arbor Commercial Mortgage LLC
333 Earle Ovington Boulevard
Uniondale, New York 11553
Attention: John Natalone
Phone No.: (516) 506-4409
Facsimile No.: (516) 832-6409”
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(Wachovia/Arbor)
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     Section 2.Credit Documents in Full Force and Effect as Modified.
     Except as specifically modified hereby or the Fee Letter, the Credit Documents shall remain in full force and effect in accordance with their terms. All references to any Credit Document shall be deemed to mean each Credit Document as modified by this Amendment No. 2 and the Fee Letter. This Amendment No. 2 and the Fee Letter shall not constitute a novation of the Credit Documents, but shall constitute modifications thereof. The parties hereto agree to be bound by the terms and conditions of the Credit Documents, as modified by this Amendment No. 2 and the Fee Letter, as though such terms and conditions were set forth herein. Each of the Borrowers, the Guarantors and the Pledgor hereby ratifies the Credit Agreement and the other Credit Documents and acknowledges and reaffirms (a) that it is bound by all terms of the Credit Agreement and the other Credit Documents applicable to it and (b) that it is responsible for the observance and full performance of its respective Obligations. This Amendment No. 2 is a Credit Document executed pursuant to the Credit Agreement and shall be construed, administered and applied in accordance with the terms and provisions of the Credit Agreement.
     Section 3.Representations.
     Each of the Borrowers, the Guarantors and the Pledgor represents and warrants, as of the date of this Amendment No. 2, as follows:
     (a) it is duly incorporated or organized, validly existing and in good standing under the laws of its jurisdiction of organization and each jurisdiction where it conducts business;
     (b) the execution, delivery and performance by it of this Amendment No. 2 and the Fee Letter is within its corporate, company or partnership powers, has been duly authorized and does not contravene (1) its Authority Documents or its applicable resolutions, (2) any Requirements of Law or (3) any Contractual Obligation, Indebtedness or Guarantee Obligation;
     (c) no consent, license, permit, approval or authorization of, or registration, filing or declaration with, any Governmental Authority or other Person is required in connection with the execution, delivery, performance, validity or enforceability by or against it of this Amendment No. 2 or the Fee Letter;
     (d) this Amendment No. 2 and the Fee Letter have been duly executed and delivered by it;
     (e) this Amendment No. 2, the Fee Letter and each of the Credit Documents as modified thereby constitute its legal, valid and binding obligation, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally or by general principles of equity;
     (f) the Security Documents continue to create a valid security interest in, and Lien upon, the Collateral, in favor of the Administrative Agent, for the benefit of the Secured Parties, which security interests and Liens are perfected in accordance with the terms of the Security Documents and prior to all Liens subject to Permitted Liens;
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     (g) no Default or Event of Default exists or will exist after giving effect to this Amendment No. 2;
     (h) each of the Credit Documents is in full force and effect and neither the Borrowers, the Guarantors nor the Pledgor has any defense, offset, counterclaim, abatement, right of rescission or other claims, actions, causes of action, demands, damages or liabilities of any kind or nature, in all cases whether legal or equitable, available to the Borrowers, the Guarantors, the Pledgor or any other Person with respect to (i) this Amendment No. 2, the Credit Agreement, the Credit Documents or any other instrument, document and/or agreement described herein or therein, as modified and amended hereby, (ii) the obligation of the Borrowers and the Guarantors to repay the Obligations and other amounts due under the Credit Documents or (iii) the Administrative Agent, the Lenders or the Administrative Agent’s or the Lenders’ respective officers, employees, representatives, agents, counsel or directors arising out of or from or in any way related to or in connection with the Credit Agreement or the Credit Documents, including, without limitation, any action by such Persons, or failure of such Persons to act, under the Credit Agreement or the other Credit Documents on or prior to the date hereof; and
     (i) except as specifically provided in this Amendment No. 2, the Obligations are not reduced or modified by this Amendment No. 2.
     Section 4.Conditions Precedent.
     The effectiveness of this Amendment No. 2 and the Fee Letter is subject to the following conditions precedent: (i) delivery to the Administrative Agent of this Amendment No. 2 and the Fee Letter duly executed by each of the parties hereto; (ii) the payment of all legal fees and expenses of Moore & Van Allen PLLC, as counsel to the Administrative Agent, in the amount to be set forth on a separate invoice; and (iii) delivery to the Administrative Agent of such other documents, agreements or certifications as the Administrative Agent may reasonably require.
     Section 5.Miscellaneous.
     (a) This Amendment No. 2 may be executed in any number of counterparts (including by facsimile), and by the different parties hereto on the same or separate counterparts, each of which shall be deemed to be an original instrument but all of which together shall constitute one and the same agreement.
     (b) The descriptive headings of the various sections of this Amendment No. 2 are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof.
     (c) This Amendment No. 2 may not be amended or otherwise modified, waived or supplemented except as provided in the Credit Agreement.
     (d) The interpretive provisions of Sections 1.2 through 1.8 of the Credit Agreement are incorporated herein mutatismutandis.
     (e) This Amendment No. 2 and the Fee Letter represents the final agreement among the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements between the parties. There are no unwritten oral agreements between the parties.
Second Amendment to Credit Agreement
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     (f) THIS AMENDMENT NO. 2 AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT NO. 2 SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
     (g) Each provision of this Amendment No. 2 shall be valid, binding and enforceable to the fullest extent permitted by Requirements of Law. In case any provision in or obligation under this Amendment No. 2 shall be invalid, illegal or unenforceable in any jurisdiction (either in its entirety or as applied to any Person, fact, circumstance, action or inaction), the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction or as applied to any Person, fact, circumstance, action or inaction, shall not in any way be affected or impaired thereby.
     (h) In consideration of the Lenders and the Administrative Agent entering into this Amendment No. 2, each of the Borrowers, each of the Guarantors and the Pledgor hereby waives, releases and discharges the Administrative Agent, the Lenders and the Administrative Agent’s and the Lenders’ respective officers, employees, representatives, agents, counsel and directors from any and all actions, causes of action, claims, demands, damages and liabilities of whatever kind or nature, in law or in equity, now known or unknown, suspected or unsuspected to the extent that any of the foregoing arises out of or from or in any way relating to or in connection with the Credit Agreement or the Credit Documents, including but not limited to, any action or failure to act under the Credit Agreement or the other Credit Documents on or prior to the date hereof, except, with respect to any such Person being released hereby, any actions, causes of action, claims, demands, damage and liabilities arising out of such Person’s gross negligence or willful misconduct in connection with the Credit Agreement or the other Credit Documents.
     (i) Each Guarantor (i) agrees to and consents to the terms and provisions of this Amendment No. 2, (ii) acknowledges and confirms that the Guaranty remains in full force and effect notwithstanding this Amendment No. 2, and (iii) reaffirms its obligations under the Guaranty.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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     IN WITNESS WHEREOF, the parties have caused this Amendment No. 2 to be executed by their respective officers thereunto duly authorized, as of the date first above written.
 	 	 	
BORROWERS:	 	ARBOR REALTY FUNDING, LLC, a Delaware	
 	 	limited liability company	

 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARSR TAHOE, LLC, a Delaware limited liability company
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR REALTY LIMITED PARTNERSHIP, a Delaware limited
partnership
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ART 450 LLC, a Delaware limited liability company
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR REALTY SR, INC., a Maryland corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR ESH II LLC, a Delaware limited liability company
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
[Signatures Continued on the Following Page]
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GUARANTORS:	 	ARBOR REALTY TRUST, INC.,	
 	 	a Maryland corporation	

 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR REALTY LIMITED PARTNERSHIP,
a Delaware limited partnership
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR REALTY SR, INC.,
a Maryland corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
[Signatures Continued on the Following Page]
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ADMINISTRATIVE AGENT:	 	WACHOVIA BANK, NATIONAL ASSOCIATION,	
 	 	as Administrative Agent on behalf of the Lenders	

 	By:  	/s/ John Nelson  	 	
 	 	Name:  	John Nelson 	 	
 	 	Title:  	Managing Director 	 	

 	 	 	
LENDER:	 	WACHOVIA BANK, NATIONAL ASSOCIATION,	
 	 	as Lender	

 	By:  	/s/ John Nelson  	 	
 	 	Name:  	John Nelson 	 	
 	 	Title:  	Managing Director 	 	
 	
[Signatures Continued on the Following Page]
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CONSENTED TO BY:
 	 	 	
PLEDGOR:	 	ARBOR REALTY SR, INC.,	
 	 	a Maryland corporation	

 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
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CONSENTED TO BY:
 	 	 	
THE CUSTODIAN:	 	WELLS FARGO BANK, NATIONAL ASSOCIATION	

 	By:  	/s/ Kathleen Marshall  	 	
 	 	Name:  	Kathleen Marshall 	 	
 	 	Title:  	Vice President 	 	

 	 	 	 	 	 	 	
 	 	Address for Notices:	 	 	 	 	
 	 	Wells Fargo Bank, National Association	
 	 	1055 10th Avenue SE	 	 	 	 	
 	 	Minneapolis, Minnesota 55414	
 	 	Attention:	 	Kathleen Marshall	 	 	
 	 	 	 	Vice President	 	 	
 	 	Facsimile No:	 	(612) 466–5416	 	 	
 	 	Confirmation No:	 	(612) 667-8032	 	 	
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Exhibit A
Form of Release Agreement
TERMINATION AND RELEASE AGREEMENT
(Wachovia/Arbor)
     THIS TERMINATION AND RELEASE AGREEMENT, dated as of [                                        ], 2010 (this “ Release Agreement ”), is entered into by and among  ARBOR REALTY FUNDING LLC , a Delaware limited liability company (together with its successors and permitted assigns, “ Arbor Realty Funding ”), as a borrower, ARSR TAHOE, LLC , a Delaware limited liability company (together with its successors and permitted assigns, “ ARSR Tahoe ”), as a borrower,  ARBOR REALTY LIMITED PARTNERSHIP , a Delaware limited partnership (together with its successors and permitted assigns, “ Arbor Realty ”), as a borrower,  ART 450 LLC , a Delaware limited liability company (together with its successors and permitted assigns, “ ART 450 ”), as a borrower,  ARBOR REALTY SR, INC. , a Maryland corporation (together with its successors and permitted assigns, “ ARSR ”), as a borrower and as pledgor,  ARBOR ESH II LLC  (together with its successors and permitted assigns, “ Arbor ESH ” and, together with Arbor Realty Funding, ARSR Tahoe, Arbor Realty and ARSR, each individually referred to herein as a “ Borrower ” and collectively referred to herein as the “ Borrowers ”), as a borrower,  ARBOR REALTY TRUST, INC. , a Maryland corporation (together with its successors and permitted assigns, “ ART ”), as a guarantor, Arbor Realty, as a guarantor, ARSR, as a guarantor (ARSR, together with ART and Arbor Realty, the “ Guarantors ”), the several banks and other financial institutions party to the Credit Agreement (each, together with its successors and assigns, a “ Lender ” and, collectively, the “ Lenders ”),  WACHOVIA BANK, NATIONAL ASSOCIATION,  a national banking association, as administrative agent for the Lenders (together with its successors and assigns in such capacity, the “ Administrative Agent ”), and  WELLS FARGO BANK, NATIONAL ASSOCIATION , a national banking association (together with its successors and permitted assigns, “ Custodian ”), as the custodian. Capitalized terms used and not otherwise defined herein shall have the meanings given to such terms in the Credit Agreement (as defined below).
RECITALS
     WHEREAS, the Borrowers, the Guarantors, the Lenders and the Administrative Agent are parties to that certain First Amended and Restated Credit Agreement, dated as of July 23, 2009 (as amended, modified, restated, replaced, waived, substituted, supplemented or extended from time to time, including, but not limited to, pursuant to that First Amendment to First Amended and Restated Credit Agreement and Other Credit Documents, dated as of December 16, 2009, and that Second Amendment to First Amended and Restated Credit Agreement, dated as of December 24, 2009 (the “ Second Amendment ”), the “ Credit Agreement ”);
     WHEREAS, the Borrower has requested, and the Lender and the Administrative Agent have agreed, subject to all covenants, terms and conditions provided for in the Second Amendment, to accept the Discounted Payoff Amount, which amount is less than the outstanding principal amount of the Loan, in full satisfaction of the Credit Obligations,  provided  that the Borrowers pay to the Lender such Discounted Payoff Amount and the other amounts required under the Second Amendment in a timely manner, the Borrowers, the Guarantors and the Pledgors execute this Release Agreement and the other requirements of the Second Amendment are satisfied;
Termination and Release Agreement
(Wachovia/Arbor)

 
     WHEREAS, the Custodian is party to a Credit Document and desires to evidence its agreement to the termination set forth herein; and
     WHEREAS, the Borrowers, the Guarantors, the Pledgors, the Lender, the Administrative Agent and the Custodian desire to terminate their rights, duties and obligations under the Credit Agreement and the other Credit Documents (other than the Warrant Agreements and Registration Rights Agreement, which shall continue in full force and effect) (such terminated documents hereinafter referred to as the “ Terminated Documents ”; for the avoidance of doubt, agreements evidencing or relating to Credit-Party-Related Obligations which are unrelated to the Credit Agreement and/or Credit Documents are not being terminated hereby and are not part of the Terminated Documents).
     NOW THEREFORE, in consideration of the foregoing recitals, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:
     Section 1.Release of Lender and Administrative Agent.
     Each of the Borrowers, the Guarantors and the Pledgor hereby waives, releases and discharges the Lender, the Administrative Agent and the Lender’s and the Administrative Agent’s successors, assigns, affiliates, officers, employees, representatives, agents, counsel and directors from any and all actions, causes of action, claims, demands, damages, liabilities, controversies, duties, covenants, responsibilities, obligations, costs, losses and /or expenses of whatever kind or nature, in law or in equity, now known or unknown, suspected or unsuspected, whether existing now or hereafter, arising out of, from or in any way relating to or in connection with, directly or indirectly, the Credit Agreement or the other Credit Documents including, but not limited to, any action or failure to act under the Credit Agreement or the other Credit Documents, on or prior to the date hereof.
     Section 2.Termination of Credit Documents.
     (a) Subject to Section 4 of this Release Agreement, the rights, duties and obligations (except those rights, duties and obligations that expressly survive termination, as set forth in the Terminated Documents) of each party under the Credit Agreement and the other Terminated Documents, are hereby terminated, and each of the parties hereto agrees that all duties and obligations (except such duties and obligations that expressly survive termination, as set forth in the Credit Agreement and the other Terminated Documents) of each party shall be released hereby.
     (b) On and after the effective date of this Release Agreement, the Borrowers and the Custodian shall execute and/or deliver such other certifications, documents and agreements as the Administrative Agent shall from time to time reasonably require to give effect to this Release Agreement.
     Section 3.Representations.
     Each of the Borrowers, the Guarantors and the Pledgor represents and warrants, as of the date of this Release Agreement, as follows:
     (a) it is duly incorporated or organized, validly existing and in good standing under the laws of its jurisdiction of organization and each jurisdiction where it conducts business;
     (b) the execution, delivery and performance by it of this Release Agreement is within its corporate, company or partnership powers, has been duly authorized and does not contravene (1) its
Termination and Release Agreement
(Wachovia/Arbor)
Exh A - 2

 
Authority Documents or its applicable resolutions, (2) any Requirements of Law or (3) any Contractual Obligation, Indebtedness or Guarantee Obligation;
     (c) no consent, license, permit, approval or authorization of, or registration, filing or declaration with, any Governmental Authority or other Person is required in connection with the execution, delivery, performance, validity or enforceability by or against it of this Release Agreement;
     (d) this Release Agreement has been duly executed and delivered by it;
     (e) this Release Agreement constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally or by general principles of equity;
     (f) neither the Borrowers, the Guarantors nor the Pledgor has any defense, offset, counterclaim, abatement, right of rescission or other claims, actions, causes of action, demands, damages or liabilities of any kind or nature, in all cases whether legal or equitable, available to the Borrowers, the Guarantors, the Pledgor or any other Person with respect to (i) this Release Agreement, the Credit Agreement, the Credit Documents or any other instrument, document and/or agreement described herein or therein, as modified and amended hereby, or (ii) the Administrative Agent, the Lenders or the Administrative Agent’s or the Lenders’ respective officers, employees, representatives, agents, counsel or directors arising out of or from or in any way related to or in connection with the Credit Agreement or the Credit Documents, including, without limitation, any action by such Persons, or failure of such Persons to act, under the Credit Agreement or the other Credit Documents on or prior to the date hereof; and
     (g) the Recitals set forth herein are true and correct.
     Section 4. Conditions Precedent.
     The effectiveness of this Release Agreement is subject to the following conditions precedent: (i) delivery to the Administrative Agent of this Release Agreement duly executed by each of the parties hereto and the Termination and Release Agreement, dated as of the date hereof (the “ Working Capital Facility Release ”), by and among ART, as a borrower, Arbor Realty GPOP, Inc., as a borrower, Arbor Realty LPOP, Inc., as a borrower, Arbor Realty, as a borrower, ARSR, as a borrower, Arbor Realty Collateral Management, LLC, as a borrower, Wachovia Bank, National Association, as a lender and administrative agent, and Wells Fargo Bank, National Association, as the custodian, which agreements shall be held in escrow by the Administrative Agent’s counsel pending satisfaction of the other conditions set forth in this Section 4; (ii) payment to the Lender and the Administrative Agent of the Discounted Payoff Amount in a timely manner and the Borrowers’ satisfaction of all other conditions contained in the Second Amendment; (iii) the representations and warranties set forth in  Section 3  are true and correct in all material respects; (iv) the payment of all legal fees and expenses of Moore & Van Allen PLLC, as counsel to the Administrative Agent, in the amount to be set forth on a separate invoice; and (v) delivery to the Administrative Agent of such other documents, agreements or certifications as the Administrative Agent may reasonably require. Upon satisfaction of the foregoing conditions, which satisfaction must be confirmed in writing by the Administrative Agent and the Administrative Agent’s release from escrow to all parties copies of this Release Agreement and the Working Capital Facility Release executed by all parties, the Borrowers are authorized (at the Borrowers’ expense) to terminate the relevant UCC financing statements filed against the Borrowers and the Pledgor in connection with the Terminated Documents and the Custodian is authorized to release to the Borrowers all Mortgage Asset Files and other documents held pursuant to the Custodial Agreement.
Termination and Release Agreement
(Wachovia/Arbor)
Exh A - 3

 
     Section 5.Miscellaneous.
     (a) This Release Agreement may be executed in any number of counterparts (including by facsimile), and by the different parties hereto on the same or separate counterparts, each of which shall be deemed to be an original instrument but all of which together shall constitute one and the same agreement.
     (b) The descriptive headings of the various sections of this Release Agreement are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof.
     (c) This Release Agreement may not be amended or otherwise modified, waived or supplemented except as provided in the Credit Agreement.
     (d) The interpretive provisions of Sections 1.2 through 1.8 of the Credit Agreement are incorporated herein mutatismutandis.
     (e) This Release Agreement represents the final agreement among the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements between the parties. There are no unwritten oral agreements between the parties.
     (f) THIS RELEASE AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS RELEASE AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
     (g) Each provision of this Release Agreement shall be valid, binding and enforceable to the fullest extent permitted by Requirements of Law. In case any provision in or obligation under this Release Agreement shall be invalid, illegal or unenforceable in any jurisdiction (either in its entirety or as applied to any Person, fact, circumstance, action or inaction), the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction or as applied to any Person, fact, circumstance, action or inaction, shall not in any way be affected or impaired thereby.
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Termination and Release Agreement
(Wachovia/Arbor)
Exh A - 4

 
     IN WITNESS WHEREOF, the parties have caused this Release Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written.
 	 	 	
BORROWERS:	 	ARBOR REALTY FUNDING, LLC, a Delaware	
 	 	limited liability company	

 	By:  	 	 	
 	 	Name:  	 	 	
 	 	Title:  	 	 	
 	
 	ARSR TAHOE, LLC, a Delaware limited liability company
 	 	
 	By:  	 	 	
 	 	Name:  	 	 	
 	 	Title:  	 	 	
 	
 	ARBOR REALTY LIMITED PARTNERSHIP, a Delaware limited partnership
 	 	
 	By:  	 	 	
 	 	Name:  	 	 	
 	 	Title:  	 	 	
 	
 	ART 450 LLC, a Delaware limited liability company
 	 	
 	By:  	 	 	
 	 	Name:  	 	 	
 	 	Title:  	 	 	
 	
 	ARBOR REALTY SR, INC., a Maryland corporation
 	 	
 	By:  	 	 	
 	 	Name:  	 	 	
 	 	Title:  	 	 	
 	
 	ARBOR ESH II LLC, a Delaware limited liability company
 	 	
 	By:  	 	 	
 	 	Name:  	 	 	
 	 	Title:  	 	 	
 	
[Signatures Continued on the Following Page]
Termination and Release Agreement
(Wachovia/Arbor)
Exh A - 1

 
 	 	 	
GUARANTORS:	 	ARBOR REALTY TRUST, INC.,	
 	 	a Maryland corporation	

 	By:  	 	 	
 	 	Name:  	 	 	
 	 	Title:  	 	 	
 	
 	ARBOR REALTY LIMITED PARTNERSHIP,
a Delaware limited partnership
 	 	
 	By:  	 	 	
 	 	Name:  	 	 	
 	 	Title:  	 	 	
 	
 	ARBOR REALTY SR, INC.,
a Maryland corporation
 	 	
 	By:  	 	 	
 	 	Name:  	 	 	
 	 	Title:  	 	 	

 	 	 	
PLEDGOR:	 	ARBOR REALTY SR, INC.,	
 	 	a Maryland corporation	

 	By:  	 	 	
 	 	Name:  	 	 	
 	 	Title:  	 	 	
 	
[Signatures Continued on the Following Page]
Termination and Release Agreement
(Wachovia/Arbor)
Exh A - 2

 
 	 	 	
ADMINISTRATIVE AGENT:	 	WACHOVIA BANK, NATIONAL ASSOCIATION,	
 	 	as Administrative Agent on behalf of the Lenders	

 	By:  	 	 	
 	 	Name:  	John Nelson 	 	
 	 	Title:  	Managing Director 	 	

 	 	 	
LENDER:	 	WACHOVIA BANK, NATIONAL ASSOCIATION,	
 	 	as Lender	

 	By:  	 	 	
 	 	Name:  	John Nelson 	 	
 	 	Title:  	Managing Director 	 	
 	
[Signatures Continued on the Following Page]
Termination and Release Agreement
(Wachovia/Arbor)
Exh A - 3

 
 	 	 	
THE CUSTODIAN:	 	WELLS FARGO BANK, NATIONAL ASSOCIATION	

 	By:  	 	 	
 	 	Name:  	 	
 	 	Title:  	 	

 	 	 	 	 	 	 	
 	 	Address for Notices:	 	 	 	 	
 	 	 	 	 	 	 	
 	 	Wells Fargo Bank, National Association	
 	 	1055 10th Avenue SE	 	 	 	 	
 	 	Minneapolis, Minnesota 55414	
 	 	Attention:	 	Karolyn Kleingartner	 	 	
 	 	 	 	Trust Officer	 	 	
 	 	Facsimile No:	 	(612) 466–5416	 	 	
 	 	Confirmation No:	 	(612) 466–5895	 	 	
Termination and Release Agreement
(Wachovia/Arbor)
Exh A - 4

EXHIBIT 10.38
EXECUTION VERSION
FIRST AMENDMENT TO REVOLVING LOAN AGREEMENT
(Wachovia/Arbor)
     THIS FIRST AMENDMENT TO REVOLVING LOAN AGREEMENT, dated as of December 24, 2009 (this “ Amendment No. 1 ”), is entered into by and among  ARBOR REALTY TRUST, INC. , a Maryland corporation, as a borrower (together with its successors and permitted assigns, “ ART ”),  ARBOR REALTY GPOP, INC. , a Delaware corporation, as a borrower (together with its successors and permitted assigns, “ GPOP ”),  ARBOR REALTY LPOP, INC. , a Delaware corporation, as a borrower (together with its successors and permitted assigns, “ LPOP ”),  ARBOR REALTY LIMITED PARTNERSHIP , a Delaware limited partnership, as a borrower (together with its successors and permitted assigns, “ ARLP ”),  ARBOR REALTY SR, INC. , a Maryland corporation, as a borrower (together with its successors and permitted assigns, “ ARSR ”),  ARBOR REALTY COLLATERAL MANAGEMENT, LLC , a Delaware limited liability company, as a borrower (together with its successors and permitted assigns, “ ARCM ”, and, together with ART, GPOP, LPOP, ARLP and ARSR, each as the “ Borrower ”),  WACHOVIA BANK, NATIONAL ASSOCIATION , a national banking association (together with its successors and assigns, “ Wachovia ”), in its capacity as initial lender (together with its successors and assigns in such capacity, the “ Lender ”) and in its capacity as administrative agent (together with its successors and assigns in such capacity, the “ Administrative Agent ”). Capitalized terms used and not otherwise defined herein shall have the meanings given to such terms in the Loan Agreement (as defined below).
RECITALS
     WHEREAS, the Borrower, the Lender and the Administrative Agent are parties to that certain First Amended and Restated Revolving Loan Agreement, dated as of July 23, 2009, as amended by this Amendment No. 1, the “ Loan Agreement ”;
     WHEREAS, the Borrower desires to make certain modifications to the Loan Documents; and
     WHEREAS, the Lender and the Administrative Agent are willing to modify the Loan Documents as requested by the Borrower on the terms and conditions specified herein.
     NOW THEREFORE, in consideration of the foregoing recitals, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:
     Section 1.Amendment to Loan Agreement.
     (a) The following definition of “Credit Obligations” is hereby added to Subsection 1.1 of the Loan Agreement:
     ““Credit Obligations”: Defined in the Arbor Credit Agreement.”
     (b) The following definition of “Discounted Payoff Amount” is hereby added to Subsection 1.1 of the Loan Agreement:

 
     ““Discounted Payoff Amount”: Defined in the Arbor Credit Agreement.”
     (c)The following new Section 2.16 is hereby added to the Credit Agreement:
     “Section 2.16 Discounted Payoff Amount.
     (a) Notwithstanding anything set forth in the Loan Documents to the contrary, subject to the terms of this Section 2.16, Lender will accept the Discounted Payoff Amount in full satisfaction of the Credit Obligations  provided , that (i) no Event of Default has occurred and is continuing, (ii) the Lender has received the Discounted Payoff Amount in immediately available funds on or before May 31, 2010 (as such date may be extended as set forth in Section 2.18(b) of the Arbor Credit Agreement, the “ Payoff Date ”), (iii) the Borrowers and the Guarantors deliver to the Lender and the Administrative Agent on or before the Payoff Date an executed agreement terminating the Loan Documents (subject to any provisions which by the terms expressly survive termination) in the form of  Exhibit A  attached hereto, and (iv) the conditions set forth in Section 2.18(a) of the Arbor Credit Agreement have been satisfied.
     (b) In the event that any of the conditions set forth in this Section 2.16 are not satisfied on or before Payoff Date (as the same may be extended in accordance with the terms hereof), the Lender shall have no obligation whatsoever under this Section 2.16 or otherwise to accept the Discounted Payoff Amount in satisfaction of the outstanding Credit Obligations. For the avoidance of doubt, until the conditions precedent set forth in this Section 2.16 are satisfied, the Lender and the Administrative Agent shall have the right to exercise all of its rights and remedies under the Arbor Loan Documents, the Loan Documents and Requirements of Law. For the avoidance of doubt, until the Borrowers pay the Discounted Payoff Amount and comply with the other provisions of this Section 2.16, all obligations, duties and agreements of the Borrowers and Guarantors continue to remain in full force and effect.”
     Section 2. [Reserved].
     Section 3. Loan Documents in Full Force and Effect as Modified.
     Except as specifically modified hereby, the Loan Documents shall remain in full force and effect. All references to any Loan Document shall be deemed to mean each Loan Document as modified by this Amendment No. 1. This Amendment No. 1 shall not constitute a novation of the Loan Documents, but shall constitute a modification thereof. The parties hereto agree to be bound by the terms and conditions of the Loan Documents, as modified by this Amendment No. 1, as though such terms and conditions were set forth herein.
     Section 4.Representations.
     Each Borrower represents and warrants, as of the date of this Amendment No. 1, as follows:
     (a) it is duly incorporated or organized, validly existing and in good standing under the laws of its jurisdiction of organization and each jurisdiction where it conducts business;
     (b) the execution, delivery and performance by it of this Amendment No. 1 is within its corporate, company or partnership powers, has been duly authorized and does not contravene (1) its Authority Documents or its applicable resolutions, (2) any Applicable Law or (3) any Contractual Obligation, Indebtedness or Guarantee Obligation;
Amendment No. 1 to
Revolving Loan Agreement
(Wachovia/Arbor)
2

 
     (c) no consent, license, permit, approval or authorization of, or registration, filing or declaration with, any Governmental Authority or other Person is required in connection with the execution, delivery, performance, validity or enforceability by or against it of this Amendment No. 1;
     (d) this Amendment No. 1 has been duly executed and delivered by it;
     (e) this Amendment No. 1, as well as each of the Loan Documents as modified by this Amendment No. 1, constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally or by general principles of equity;
     (f) no Default or Event of Default exists or will exist after giving effect to this Amendment No. 1; and
     (g) each of the Loan Documents is in full force and effect and no Borrower has any defense, offset, counterclaim, abatement, right of rescission or other claims, actions, causes of action, demands, damages or liabilities of any kind or nature, in all cases whether legal or equitable, available to the Borrower or any other Person with respect to (i) this Amendment No. 1, the Loan Agreement, the Loan Documents or any other instrument, document and/or agreement described herein or therein, as modified and amended hereby, (ii) the obligation of the Borrowers to repay the Obligations and other amounts due under the Loan Documents or (iii) the Administrative Agent, the Lenders or the Administrative Agent’s or the Lenders’ respective officers, employees, representatives, agents, counsel or directors arising out of or from or in any way related to or in connection with the Loan Agreement or the Loan Documents, including, without limitation, any action by such Persons, or failure of such Persons to act, under the Loan Agreement or the other Loan Documents on or prior to the date hereof.
     Section 5.Conditions Precedent.
     The effectiveness of this Amendment No. 1 is subject to the following conditions precedent: (i) delivery to the Administrative Agent of this Amendment No. 1 duly executed by each of the parties hereto; (ii) the payment of all reasonable legal fees and expenses of Moore & Van Allen PLLC, as counsel to the Administrative Agent, in the amount to be set forth on a separate invoice; and (iii) delivery to the Administrative Agent of such other documents, agreements or certifications as the Administrative Agent may reasonably require.
     Section 6.Miscellaneous.
     (a) This Amendment No. 1 may be executed in any number of counterparts (including by facsimile), and by the different parties hereto on the same or separate counterparts, each of which shall be deemed to be an original instrument but all of which together shall constitute one and the same agreement.
     (b) The descriptive headings of the various sections of this Amendment No. 1 are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof.
Amendment No. 1 to
Revolving Loan Agreement
(Wachovia/Arbor)
3

 
     (c) This Amendment No. 1 may not be amended or otherwise modified, waived or supplemented except as provided in the Loan Agreement.
     (d) The interpretive provisions of Sections 1.2, 1.3 and 1.4 of the Loan Agreement are incorporated herein mutatismutandis.
     (e) This Amendment No. 1 represents the final agreement among the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements between the parties. There are no unwritten oral agreements between the parties.
     (f) THIS AMENDMENT NO. 1 AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT NO. 1 SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
Amendment No. 1 to
Revolving Loan Agreement
(Wachovia/Arbor)
4

 
     IN WITNESS WHEREOF, the parties have caused this Amendment No. 1 to be executed by their respective officers thereunto duly authorized, as of the date first above written.
 	 	 	 	 	
THE BORROWERS: 	ARBOR REALTY TRUST, INC.,
a Maryland corporation

 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	

 	ARBOR REALTY GPOP, INC.,
a Delaware corporation

 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	

 	ARBOR REALTY LPOP, INC.,
a Delaware corporation

 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	

 	ARBOR REALTY LIMITED PARTNERSHIP,
a Delaware limited partnership

 	By:  	Arbor Realty GPOP, Inc.,  	 	
 	 	its General Partner 	 	

 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
[Signatures Continued on the Following Page]
Amendment No. 1 to
Revolving Loan Agreement
(Wachovia/Arbor)
S-1

 
 	 	 	 	 	
THE BORROWERS (cont.):  	ARBOR REALTY SR, INC.,
a Maryland corporation

 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 

 	
 	ARBOR REALTY COLLATERAL MANAGEMENT, LLC,
a Delaware limited liability company

 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
[Signatures Continued on the Following Page]
Amendment No. 1 to
Revolving Loan Agreement
(Wachovia/Arbor)
S-2

 
 	 	 	 	 	
THE LENDER: 	WACHOVIA BANK, NATIONAL ASSOCIATION,
a national banking association

 	By:  	/s/ John Nelson  	 	
 	 	Name:  	John Nelson 	 	
 	 	Title:  	Managing Director 	 	

THE ADMINISTRATIVE AGENT: 	WACHOVIA BANK, NATIONAL ASSOCIATION,
a national banking association

 	By:  	/s/ John Nelson  	 	
 	 	Name:  	John Nelson 	 	
 	 	Title:  	Managing Director 	 	
 	
Amendment No. 1 to
Revolving Loan Agreement
(Wachovia/Arbor)
S-3

 
Form of Release Agreement
TERMINATION AND RELEASE AGREEMENT
(Wachovia/Arbor Working Capital Facility)
     THIS TERMINATION AND RELEASE AGREEMENT, dated as of [__________], 2010 (this “Release Agreement ”), is entered into by and among  ARBOR REALTY TRUST, INC. , a Maryland corporation, as a borrower (together with its successors and permitted assigns, “ ART ”),  ARBOR REALTY GPOP, INC. , a Delaware corporation, as a borrower (together with its successors and permitted assigns, “ GPOP ”),  ARBOR REALTY LPOP, INC. , a Delaware corporation, as a borrower (together with its successors and permitted assigns, “ LPOP ”), ARBOR REALTY LIMITED PARTNERSHIP , a Delaware limited partnership, as a borrower (together with its successors and permitted assigns, “ ARLP ”),  ARBOR REALTY SR, INC. , a Maryland corporation, as a borrower (together with its successors and permitted assigns, “ ARSR ”),  ARBOR REALTY COLLATERAL MANAGEMENT, LLC , a Delaware limited liability company, as a borrower (together with its successors and permitted assigns, “ ARCM ”, and, together with ART, GPOP, LPOP, ARLP and ARSR, each as the “ Borrower ”),  WACHOVIA BANK, NATIONAL ASSOCIATION , a national banking association (together with its successors and assigns, “ Wachovia ”), in its capacity as initial lender (together with its successors and assigns in such capacity, the “ Lender ”) and in its capacity as administrative agent (together with its successors and assigns in such capacity, the “ Administrative Agent ”), and  WELLS FARGO BANK, NATIONAL ASSOCIATION , a national banking association (together with its successors and permitted assigns, “ Custodian ”), as the custodian. Capitalized terms used and not otherwise defined herein shall have the meanings given to such terms in the Loan Agreement (as defined below).
RECITALS
     WHEREAS, the Borrower, the Lender and the Administrative Agent are parties to that certain First Amended and Restated Revolving Loan Agreement, dated as of July 23, 2009 (as amended, modified, restated, replaced, waived, substituted, supplemented or extended from time to time, including, but not limited to, pursuant to that First Amendment to First Amended and Restated Revolving Loan Agreement dated as of December 24, 2009 (the “ First Amendment ”), the “ Loan Agreement ”);
     WHEREAS, the Borrower has requested, and the Lender and the Administrative Agent have agreed, subject to all covenants, terms and conditions provided for in the First Amendment, to accept the Discounted Payoff Amount, which amount is less than the outstanding principal amount of the Loan, in full satisfaction of the Credit Obligations,  provided  that the Borrowers pay to the Lender such Discounted Payoff Amount and the other amounts required under the First Amendment in a timely manner, the Borrowers execute this Release Agreement and the other requirements of the First Amendment are satisfied;
     WHEREAS, the Custodian is party to a Loan Document and desires to evidence its agreement to the termination set forth herein; and
     WHEREAS, the Borrowers, the Lender, the Administrative Agent and the Custodian desire to terminate their rights, duties and obligations under the Loan Agreement and the other Loan Documents (such terminated documents hereinafter referred to as the “ Terminated Documents ”; for the avoidance of doubt, agreements evidencing or relating to Borrower-Related Obligations which are unrelated to the
Termination and Release Agreement
(Wachovia/Arbor)

 
Loan Agreement and/or Loan Documents are not being terminated hereby and are not part of the Terminated Documents).
     NOW THEREFORE, in consideration of the foregoing recitals, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:
     Section 1.Release of Lender and Administrative Agent.
     Each Borrower hereby waives, releases and discharges the Lender, the Administrative Agent and the Lender’s and the Administrative Agent’s successors, assigns, affiliates, officers, employees, representatives, agents, counsel and directors from any and all actions, causes of action, claims, demands, damages, liabilities, controversies, duties, covenants, responsibilities, obligations, costs, losses and /or expenses of whatever kind or nature, in law or in equity, now known or unknown, suspected or unsuspected, whether existing now or hereafter, arising out of, from or in any way relating to or in connection with, directly or indirectly, the Loan Agreement or the other Loan Documents including, but not limited to, any action or failure to act under the Loan Agreement or the other Loan Documents, on or prior to the date hereof.
     Section 2.Termination of Loan Documents.
     (a) Subject to Section 4 of this Release Agreement, the rights, duties and obligations (except those rights, duties and obligations that expressly survive termination, as set forth in the Terminated Documents) of each party under the Loan Agreement and the other Terminated Documents, are hereby terminated, and each of the parties hereto agrees that all duties and obligations (except such duties and obligations that expressly survive termination, as set forth in the Loan Agreement and the other Terminated Documents) of each party shall be released hereby.
     (b) On and after the effective date of this Release Agreement, the Borrowers and the Custodian shall execute and/or deliver such other certifications, documents and agreements as the Administrative Agent shall from time to time reasonably require to give effect to this Release Agreement.
     Section 3.Representations.
     Each Borrower represents and warrants, as of the date of this Release Agreement, as follows:
     (a) it is duly incorporated or organized, validly existing and in good standing under the laws of its jurisdiction of organization and each jurisdiction where it conducts business;
     (b) the execution, delivery and performance by it of this Release Agreement is within its corporate, company or partnership powers, has been duly authorized and does not contravene (1) its Authority Documents or its applicable resolutions, (2) any Requirements of Law or (3) any Contractual Obligation, Indebtedness or Guarantee Obligation;
     (c) no consent, license, permit, approval or authorization of, or registration, filing or declaration with, any Governmental Authority or other Person is required in connection with the execution, delivery, performance, validity or enforceability by or against it of this Release Agreement;
     (d) this Release Agreement has been duly executed and delivered by it;
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     (e) this Release Agreement constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally or by general principles of equity;
     (f) no Borrower has any defense, offset, counterclaim, abatement, right of rescission or other claims, actions, causes of action, demands, damages or liabilities of any kind or nature, in all cases whether legal or equitable, available to any Borrower or any other Person with respect to (i) this Release Agreement, the Loan Agreement, the Loan Documents or any other instrument, document and/or agreement described herein or therein, as modified and amended hereby, or (ii) the Administrative Agent, the Lenders or the Administrative Agent’s or the Lenders’ respective officers, employees, representatives, agents, counsel or directors arising out of or from or in any way related to or in connection with the Loan Agreement or the Loan Documents, including, without limitation, any action by such Persons, or failure of such Persons to act, under the Loan Agreement or the other Loan Documents on or prior to the date hereof; and
     (g) the Recitals set forth herein are true and correct.
     Section 4. Conditions Precedent.
     The effectiveness of this Release Agreement is subject to the following conditions precedent: (i) delivery to the Administrative Agent of this Release Agreement duly executed by each of the parties hereto and the Termination and Release Agreement, dated as of the date hereof (the “ Credit Agreement Release ”), by and among Arbor Realty Funding LLC, as a borrower, ARSR Tahoe, LLC, as a borrower, ARLP, as a borrower and guarantor , ART 450 LLC, as a borrower, ARSR, as a borrower, pledgor and guarantor, Arbor ESH II LLC, as a borrower, ART, as a gurantor, Wachovia Bank, National Association, as a lender and the administrative agent, and Wells Fargo Bank, National Association, as custodian, which agreements shall be held in escrow by the Administrative Agent’s counsel pending satisfaction of the other conditions set forth in this Section 4; (ii) payment to the Lender and the Administrative Agent of the Discounted Payoff Amount in a timely manner and the Borrowers’ satisfaction of all other conditions contained in the First Amendment; (iii) the representations and warranties set forth in  Section 3  are true and correct in all material respects; (iv) the payment of all legal fees and expenses of Moore & Van Allen PLLC, as counsel to the Administrative Agent, in the amount to be set forth on a separate invoice; and (v) delivery to the Administrative Agent of such other documents, agreements or certifications as the Administrative Agent may reasonably require. Upon satisfaction of the foregoing conditions, which satisfaction must be confirmed in writing by the Administrative Agent and the Administrative Agent’s release from escrow to all parties copies of this Release Agreement and the Credit Agreement Release executed by all parties, the Borrowers are authorized (at the Borrowers’ expense) to terminate the relevant UCC financing statements filed against the Borrowers in connection with the Terminated Documents and the Custodian is authorized to release to the Borrowers all Mortgage Asset Files and other documents held pursuant to the Custodial Agreement.
     Section 5.Miscellaneous.
     (a) This Release Agreement may be executed in any number of counterparts (including by facsimile), and by the different parties hereto on the same or separate counterparts, each of which shall be deemed to be an original instrument but all of which together shall constitute one and the same agreement.
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     (b) The descriptive headings of the various sections of this Release Agreement are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof.
     (c) This Release Agreement may not be amended or otherwise modified, waived or supplemented except as provided in the Loan Agreement.
     (d) The interpretive provisions of Sections 1.2, 1.3 and 1.4 of the Loan Agreement are incorporated herein mutatismutandis.
     (e) This Release Agreement represents the final agreement among the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements between the parties. There are no unwritten oral agreements between the parties.
     (f) THIS RELEASE AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS RELEASE AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
     (g) Each provision of this Release Agreement shall be valid, binding and enforceable to the fullest extent permitted by Requirements of Law. In case any provision in or obligation under this Release Agreement shall be invalid, illegal or unenforceable in any jurisdiction (either in its entirety or as applied to any Person, fact, circumstance, action or inaction), the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction or as applied to any Person, fact, circumstance, action or inaction, shall not in any way be affected or impaired thereby.
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     IN WITNESS WHEREOF, the parties have caused this Release Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written.
 	 	 	 	 	
THE BORROWERS: 	ARBOR REALTY TRUST, INC.,
a Maryland corporation

 	By:  	 	 	
 	 	Name:  	 	 	
 	 	Title:  	 	 	

 	ARBOR REALTY GPOP, INC.,
a Delaware corporation

 	By:  	 	 	
 	 	Name:  	 	 	
 	 	Title:  	 	 	

 	ARBOR REALTY LPOP, INC.,
a Delaware corporation

 	By:  	 	 	
 	 	Name:  	 	 	
 	 	Title:  	 	 	

 	ARBOR REALTY LIMITED PARTNERSHIP,
a Delaware limited partnership

 	By:  	Arbor Realty GPOP, Inc.,  	 	
 	 	its General Partner 	 	

 	By:  	 	 	
 	 	Name:  	 	 	
 	 	Title:  	 	 	
 	
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THE BORROWERS (cont.): 	ARBOR REALTY SR, INC.,
a Maryland corporation

 	By:  	 	 	
 	 	Name:  	 	 	
 	 	Title:  	 	 	

 	ARBOR REALTY COLLATERAL MANAGEMENT, LLC,
a Delaware limited liability company

 	By:  	 	 	
 	 	Name:  	 	 	
 	 	Title:  	 	 	
 	
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THE LENDER:	WACHOVIA BANK, NATIONAL ASSOCIATION,
a national banking association

 	By:  	 	 	
 	 	Name:  	John Nelson 	 	
 	 	Title:  	Managing Director 	 	

THE ADMINISTRATIVE AGENT:	WACHOVIA BANK, NATIONAL ASSOCIATION,
a national banking association

 	By:  	 	 	
 	 	Name:  	John Nelson 	 	
 	 	Title:  	Managing Director 	 	
 	
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THE CUSTODIAN: 	WELLS FARGO BANK, NATIONAL ASSOCIATION

 	By:  	 	 	
 	 	Name:  	 	 	
 	 	Title:  	 	 	

 	 	 	 	 	
 	 	Address for Notices:

 	 	Wells Fargo Bank, National Association	
 	 	1055 10th Avenue SE	
 	 	Minneapolis, Minnesota 55414	
 	 	Attention:	 	Karolyn Kleingartner	
 	 	 	 	Trust Officer	
 	 	Facsimile No:	 	(612) 466—5416	
 	 	Confirmation No:	 	(612) 466—5895	
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EXHIBIT 10.39
EXECUTION VERSION
THIRD AMENDMENT AND WAIVER TO
FIRST AMENDED AND RESTATED CREDIT AGREEMENT
(Wachovia/Arbor)
     THIS THIRD AMENDMENT AND WAIVER TO FIRST AMENDED AND RESTATED CREDIT AGREEMENT, dated as of January 20, 2010 (this “ Amendment No. 3 ”), is entered into by and among  ARBOR REALTY FUNDING LLC , a Delaware limited liability company (together with its successors and permitted assigns, “ Arbor Realty Funding ”), as a borrower,  ARSR TAHOE, LLC , a Delaware limited liability company (together with its successors and permitted assigns, “ ARSR Tahoe ”), as a borrower,  ARBOR REALTY LIMITED PARTNERSHIP , a Delaware limited partnership (together with its successors and permitted assigns, “ Arbor Realty ”), as a borrower,  ART 450 LLC , a Delaware limited liability company (together with its successors and permitted assigns, “ ART 450 ”), as a borrower,  ARBOR REALTY SR, INC. , a Maryland corporation (together with its successors and permitted assigns, “ ARSR ”), as a borrower, ARBOR ESH II LLC (together with its successors and permitted assigns, “ Arbor ESH ” and, together with Arbor Realty Funding, ARSR Tahoe, Arbor Realty and ARSR, each individually referred to herein as a “ Borrower ” and collectively referred to herein as the “ Borrowers ”), as a borrower, ARBOR REALTY TRUST, INC. , a Maryland corporation (together with its successors and permitted assigns, “ ART ”), as a guarantor, Arbor Realty, as a guarantor, ARSR, as a guarantor (ARSR, together with ART and Arbor Realty, the “ Guarantors ”), the several banks and other financial institutions party to the Credit Agreement (each, together with its successors and assigns, a “ Lender ” and, collectively, the “ Lenders ”), and WACHOVIA BANK, NATIONAL ASSOCIATION,  a national banking association, as administrative agent for the Lenders (together with its successors and assigns in such capacity, the “ Administrative Agent ”), and consented to by ARSR, as the pledgor (together with its successors and permitted assigns, the “ Pledgor ”). Capitalized terms used and not otherwise defined herein shall have the meanings given to such terms in the Credit Agreement (as defined below and as amended hereby).
RECITALS
     WHEREAS, the Borrowers, the Guarantors, the Lenders and the Administrative Agent are parties to that certain First Amended and Restated Credit Agreement, dated as of July 23, 2009 (as amended, modified, restated, replaced, waived, substituted, supplemented or extended from time to time, including pursuant to that First Amendment to First Amended and Restated Credit Agreement and Other Credit Documents, dated as of December 16, 2009, that Second Amendment to First Amended and Restated Credit Agreement, dated as of December 24, 2009 and by this Amendment No. 3, the " Credit Agreement ”);
     WHEREAS, the Borrowers and the Guarantors desire to make certain modifications to the Credit Agreement;
     WHEREAS, the Borrowers and the Guarantors have requested that the Administrative Agent and the Lenders waive certain provisions in the Credit Agreement;
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     WHEREAS, the Administrative Agent and the Lenders are willing to waive certain provisions of and modify the Credit Agreement as requested by the Borrowers and the Guarantors on the terms and conditions specified herein;
     WHEREAS, each Guarantor desires to evidence its agreement to the amendments and modifications set forth herein and to reaffirm its obligations under the Guaranty; and
     WHEREAS, the Pledgor is a party to other Credit Documents and related agreements that may be affected, directly or indirectly, by this Amendment No. 3 and desires to evidence its agreement to the amendments and modifications set forth herein.
     NOW THEREFORE, in consideration of the foregoing recitals, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:
     Section 1.Waiver.
     The Borrowers and the Guarantors acknowledge and agree that ART has not complied with the Financial Covenant related to Tangible Net Worth contained in  Subsection 5.9(b)  of the Credit Agreement for the Test Period ending December 31, 2009 and may not comply with such Financial Covenant in 2010 (the “ Acknowledged Non-Compliance ”). Notwithstanding such Acknowledged Non-Compliance, the Administrative Agent and the Lenders hereby agree to waive, solely through the Payoff Date, the Acknowledged Non-Compliance. All parties acknowledge and agree that the Administrative Agent’s and the Lenders’ one-time waiver of the Acknowledged Non-Compliance as set forth herein shall not be deemed to be a waiver of any other term, provision, duty, obligation, liability, right, power, remedy or covenant of any party to the Credit Documents or a waiver of any other non-compliance with  Subsection 5.9(b)  of the Credit Agreement or any other Financial Covenant for any other period of time. The waiver set forth herein shall be effective only to the extent specifically set forth herein and shall not (a) be construed as a waiver of any breach or default other than as specifically waived herein nor as a waiver of any breach or default of which the Administrative Agent or the Lenders have not been informed by the Borrowers, the Guarantors or the Pledgor, (b) affect the right of the Administrative Agent and/or the Lenders to demand compliance by the Borrowers, the Guarantors and the Pledgor with all terms and conditions of the Credit Documents, except as specifically modified or waived by this Amendment No. 3, (c) be deemed a waiver of any transaction or future action on the part of the Borrowers, the Guarantors or the Pledgor requiring the Administrative Agent’s, the Lenders’ or the Required Lenders’ consent or approval under the Credit Documents, or (d) except as waived hereby, be deemed or construed to be a waiver or release of, or a limitation upon, the Administrative Agent’s or the Lenders’ exercise of any rights or remedies under the Credit Agreement or any other Credit Document, whether arising as a consequence of any Event of Default which may now exist or otherwise, all such rights and remedies hereby being expressly reserved.
     Section 2.Amendments to Credit Agreement.
     (a) The definition of “Excess Principal Amount” contained in Section 1.1 of the Credit Agreement is hereby amended and restated in its entirety as follows:
     ““Excess Principal Amount” means the excess, if any, of (a) the amount of any repayment or prepayment (in whole or in part) received by the Borrower from or on behalf of the related Obligor in connection with, or purchase price paid by a third party (which may be an Affiliate of the Borrower) for
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all or a portion of, a Pledged Mortgage Asset over (b) the amount the Borrowers are required to pay to the Lender in connection with such repayment, prepayment or release in accordance with Section 2.5(b)(vi).”
     (b) Clauses (FOURTH), (FIFTH) and (SIXTH) of Subsection 2.9(a)(ii) of the Credit Agreement are hereby amended and restated in its entirety as:
     “FOURTH, without limiting the Borrowers’ obligations to make mandatory prepayments or other principal payments under Section 2.2(b), Section 2.5(b) or any other provision of the Credit Documents in a timely manner as provided in this Article II,  pari passu  and pro rata (based on the amounts owed to such Persons under this clause) for the payment of the amounts and Loans provided for in Section 2.2(b), Section 2.5(b) or any other provision of the Credit Documents;
     FIFTH, [reserved];
     “SIXTH, [reserved];”
     Section 3.Credit Documents in Full Force and Effect as Modified.
     Except as specifically modified hereby, the Credit Documents shall remain in full force and effect in accordance with their terms. All references to any Credit Document shall be deemed to mean each Credit Document as modified by this Amendment No. 3. This Amendment No. 3 shall not constitute a novation of the Credit Documents, but shall constitute modifications thereof. The parties hereto agree to be bound by the terms and conditions of the Credit Documents, as modified by this Amendment No. 3, as though such terms and conditions were set forth herein. Each of the Borrowers, the Guarantors and the Pledgor hereby ratifies the Credit Agreement and the other Credit Documents and acknowledges and reaffirms (a) that it is bound by all terms of the Credit Agreement and the other Credit Documents applicable to it and (b) that it is responsible for the observance and full performance of its respective Obligations. This Amendment No. 3 is a Credit Document executed pursuant to the Credit Agreement and shall be construed, administered and applied in accordance with the terms and provisions of the Credit Agreement.
     Section 4.Representations.
     Each of the Borrowers, the Guarantors and the Pledgor represents and warrants, as of the date of this Amendment No. 3, as follows:
     (a) it is duly incorporated or organized, validly existing and in good standing under the laws of its jurisdiction of organization and each jurisdiction where it conducts business;
     (b) the execution, delivery and performance by it of this Amendment No. 3 is within its corporate, company or partnership powers, has been duly authorized and does not contravene (1) its Authority Documents or its applicable resolutions, (2) any Requirements of Law or (3) any Contractual Obligation, Indebtedness or Guarantee Obligation;
     (c) no consent, license, permit, approval or authorization of, or registration, filing or declaration with, any Governmental Authority or other Person is required in connection with the execution, delivery, performance, validity or enforceability by or against it of this Amendment No. 3;
     (d) this Amendment No. 3 have been duly executed and delivered by it;
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     (e) this Amendment No. 3 and each of the Credit Documents as modified thereby constitute its legal, valid and binding obligation, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally or by general principles of equity;
     (f) the Security Documents continue to create a valid security interest in, and Lien upon, the Collateral, in favor of the Administrative Agent, for the benefit of the Secured Parties, which security interests and Liens are perfected in accordance with the terms of the Security Documents and prior to all Liens subject to Permitted Liens;
     (g) no Default or Event of Default exists or will exist after giving effect to this Amendment No. 3;
     (h) each of the Credit Documents is in full force and effect and neither the Borrowers, the Guarantors nor the Pledgor has any defense, offset, counterclaim, abatement, right of rescission or other claims, actions, causes of action, demands, damages or liabilities of any kind or nature, in all cases whether legal or equitable, available to the Borrowers, the Guarantors, the Pledgor or any other Person with respect to (i) this Amendment No. 3, the Credit Agreement, the Credit Documents or any other instrument, document and/or agreement described herein or therein, as modified and amended hereby, (ii) the obligation of the Borrowers and the Guarantors to repay the Obligations and other amounts due under the Credit Documents or (iii) the Administrative Agent, the Lenders or the Administrative Agent’s or the Lenders’ respective officers, employees, representatives, agents, counsel or directors arising out of or from or in any way related to or in connection with the Credit Agreement or the Credit Documents, including, without limitation, any action by such Persons, or failure of such Persons to act, under the Credit Agreement or the other Credit Documents on or prior to the date hereof; and
     (i) except as specifically provided in this Amendment No. 3, the Obligations are not reduced or modified by this Amendment No. 3.
     Section 5.Conditions Precedent.
     The effectiveness of this Amendment No. 3 is subject to the following conditions precedent: (i) delivery to the Administrative Agent of this Amendment No. 3 duly executed by each of the parties hereto; (ii) the payment of all legal fees and expenses of Moore & Van Allen PLLC, as counsel to the Administrative Agent, in the amount to be set forth on a separate invoice; and (iii) delivery to the Administrative Agent of such other documents, agreements or certifications as the Administrative Agent may reasonably require.
     Section 6.Miscellaneous.
     (a) This Amendment No. 3 may be executed in any number of counterparts (including by facsimile), and by the different parties hereto on the same or separate counterparts, each of which shall be deemed to be an original instrument but all of which together shall constitute one and the same agreement.
     (b) The descriptive headings of the various sections of this Amendment No. 3 are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof.
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     (c) This Amendment No. 3 may not be amended or otherwise modified, waived or supplemented except as provided in the Credit Agreement.
     (d) The interpretive provisions of Sections 1.2 through 1.8 of the Credit Agreement are incorporated herein mutatismutandis.
     (e) This Amendment No. 3 represents the final agreement among the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements between the parties. There are no unwritten oral agreements between the parties.
     (f) THIS AMENDMENT NO. 3 AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT NO. 3 SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
     (g) Each provision of this Amendment No. 3 shall be valid, binding and enforceable to the fullest extent permitted by Requirements of Law. In case any provision in or obligation under this Amendment No. 3 shall be invalid, illegal or unenforceable in any jurisdiction (either in its entirety or as applied to any Person, fact, circumstance, action or inaction), the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction or as applied to any Person, fact, circumstance, action or inaction, shall not in any way be affected or impaired thereby.
     (h) In consideration of the Lenders and the Administrative Agent entering into this Amendment No. 3, each of the Borrowers, each of the Guarantors and the Pledgor hereby waives, releases and discharges the Administrative Agent, the Lenders and the Administrative Agent’s and the Lenders’ respective officers, employees, representatives, agents, counsel and directors from any and all actions, causes of action, claims, demands, damages and liabilities of whatever kind or nature, in law or in equity, now known or unknown, suspected or unsuspected to the extent that any of the foregoing arises out of or from or in any way relating to or in connection with the Credit Agreement or the Credit Documents, including but not limited to, any action or failure to act under the Credit Agreement or the other Credit Documents on or prior to the date hereof, except, with respect to any such Person being released hereby, any actions, causes of action, claims, demands, damage and liabilities arising out of such Person’s gross negligence or willful misconduct in connection with the Credit Agreement or the other Credit Documents.
     (i) Each Guarantor (i) agrees to and consents to the terms and provisions of this Amendment No. 3, (ii) acknowledges and confirms that the Guaranty remains in full force and effect notwithstanding this Amendment No. 3, and (iii) reaffirms its obligations under the Guaranty.
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     IN WITNESS WHEREOF, the parties have caused this Amendment No. 3 to be executed by their respective officers thereunto duly authorized, as of the date first above written.
 	 	 	 	 	
BORROWERS:	ARBOR REALTY FUNDING, LLC, a Delaware
limited liability company
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARSR TAHOE, LLC, a Delaware limited liability company
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR REALTY LIMITED PARTNERSHIP, a Delaware limited partnership
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ART 450 LLC, a Delaware limited liability company
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR REALTY SR, INC., a Maryland corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR ESH II LLC, a Delaware limited liability company
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
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GUARANTORS:	ARBOR REALTY TRUST, INC.,
a Maryland corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR REALTY LIMITED PARTNERSHIP,
a Delaware limited partnership
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR REALTY SR, INC.,
a Maryland corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
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ADMINISTRATIVE AGENT:	WACHOVIA BANK, NATIONAL ASSOCIATION,
as Administrative Agent on behalf of the Lenders
 	 	
 	By:  	/s/ John Nelson  	 	
 	 	Name:  	John Nelson 	 	
 	 	Title:  	Managing Director 	 	

LENDER:	WACHOVIA BANK, NATIONAL ASSOCIATION, as Lender

 	By:  	/s/ John Nelson  	 	
 	 	Name:  	John Nelson 	 	
 	 	Title:  	Managing Director 	 	
 	
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CONSENTED TO BY:
 	 	 	 	 	
PLEDGOR:	ARBOR REALTY SR, INC.,
a Maryland corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
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EXHIBIT 10.40
EXECUTION VERSION
WAIVER TO FIRST AMENDED AND RESTATED REVOLVING LOAN AGREEMENT
(Wachovia/Arbor)
     THIS WAIVER TO FIRST AMENDED AND RESTATED REVOLVING LOAN AGREEMENT, dated as of January 20, 2010 (this “ Waiver ”), “), is entered into by and among  ARBOR REALTY TRUST, INC. , a Maryland corporation, as a borrower (together with its successors and permitted assigns, “ ART ”),  ARBOR REALTY GPOP, INC. , a Delaware corporation, as a borrower (together with its successors and permitted assigns, “ GPOP ”),  ARBOR REALTY LPOP, INC. , a Delaware corporation, as a borrower (together with its successors and permitted assigns, “ LPOP ”),  ARBOR REALTY LIMITED PARTNERSHIP , a Delaware limited partnership, as a borrower (together with its successors and permitted assigns, “ ARLP ”),  ARBOR REALTY SR, INC. , a Maryland corporation, as a borrower (together with its successors and permitted assigns, “ ARSR ”),  ARBOR REALTY COLLATERAL MANAGEMENT, LLC , a Delaware limited liability company, as a borrower (together with its successors and permitted assigns, “ ARCM ”, and, together with ART, GPOP, LPOP, ARLP and ARSR, each as the “ Borrower ”),  WACHOVIA BANK, NATIONAL ASSOCIATION , a national banking association (together with its successors and assigns, “ Wachovia ”), in its capacity as initial lender (together with its successors and assigns in such capacity, the “ Lender ”) and in its capacity as administrative agent (together with its successors and assigns in such capacity, the “ Administrative Agent ”). Capitalized terms used and not otherwise defined herein shall have the meanings given to such terms in the Loan Agreement (as defined below).
RECITALS
     WHEREAS, the Borrower, the Lender and the Administrative Agent are parties to that certain First Amended and Restated Revolving Loan Agreement, dated as of July 23, 2009, as amended by that certain First Amendment to First Amended and Restated Revolving Loan Agreement, dated as of December 24, 2009, the “ Loan Agreement ”;
     WHEREAS, the Borrowers have requested that the Administrative Agent and the Lenders waive certain provisions in the Loan Agreement;
     WHEREAS, the Administrative Agent and the Lenders have agreed to do so, pursuant to the terms and conditions set forth herein.
     NOW THEREFORE, in consideration of the foregoing recitals, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:
     Section 1.Waiver.
     The Borrowers and the Guarantors acknowledge and agree that ART has not complied with the Financial Covenant related to Tangible Net Worth contained in  Subsection 5.1(w)(ii)  of the Loan Agreement for the Test Period ending December 31, 2009 and may not comply with such Financial Covenant in 2010 (the “ Acknowledged Non-Compliance ”). Notwithstanding such Acknowledged Non-Compliance, the Administrative Agent and the Lenders hereby agree to waive, solely through the Payoff Date, the Acknowledged Non-Compliance. All parties acknowledge and agree that the Administrative

 
Agent’s and the Lenders’ one-time waiver of the Acknowledged Non-Compliance as set forth herein shall not be deemed to be a waiver of any other term, provision, duty, obligation, liability, right, power, remedy or covenant of any party to the Loan Documents or a waiver of any other non-compliance with  Subsection 5.1(w)(ii)  of the Loan Agreement or any other Financial Covenant for any other period of time. The waiver set forth herein shall be effective only to the extent specifically set forth herein and shall not (a) be construed as a waiver of any breach or default other than as specifically waived herein nor as a waiver of any breach or default of which the Administrative Agent or the Lenders have not been informed by the Borrowers, the Guarantors or the Pledgor, (b) affect the right of the Administrative Agent and/or the Lenders to demand compliance by the Borrowers, the Guarantors and the Pledgor with all terms and conditions of the Loan Documents, except as specifically modified or waived by this Waiver, (c) be deemed a waiver of any transaction or future action on the part of the Borrowers, the Guarantors or the Pledgor requiring the Administrative Agent’s, the Lenders’ or the Required Lenders’ consent or approval under the Loan Documents, or (d) except as waived hereby, be deemed or construed to be a waiver or release of, or a limitation upon, the Administrative Agent’s or the Lenders’ exercise of any rights or remedies under the Loan Agreement or any other Loan Document, whether arising as a consequence of any Event of Default which may now exist or otherwise, all such rights and remedies hereby being expressly reserved.
     Section 2.[Reserved].
     Section 3.Loan Documents in Full Force and Effect as Modified.
     Except as specifically modified hereby, the Loan Documents shall remain in full force and effect in accordance with their terms. All references to any Loan Document shall be deemed to mean each Loan Document as modified by this Waiver. This Waiver shall not constitute a novation of the Loan Documents, but shall constitute modifications thereof. The parties hereto agree to be bound by the terms and conditions of the Loan Documents, as modified by this Waiver, as though such terms and conditions were set forth herein. Each Borrower hereby ratifies the Loan Agreement and the other Loan Documents and acknowledges and reaffirms (a) that it is bound by all terms of the Loan Agreement and the other Loan Documents applicable to it and (b) that it is responsible for the observance and full performance of its respective Obligations. This Waiver is a Loan Document executed pursuant to the Loan Agreement and shall be construed, administered and applied in accordance with the terms and provisions of the Loan Agreement.
     Section 4.Representations.
     Each Borrower represents and warrants, as of the date of this Waiver, as follows:
     (a) it is duly incorporated or organized, validly existing and in good standing under the laws of its jurisdiction of organization and each jurisdiction where it conducts business;
     (b) the execution, delivery and performance by it of this Waiver is within its corporate, company or partnership powers, has been duly authorized and does not contravene (1) its Authority Documents or its applicable resolutions, (2) any Applicable Law or (3) any Contractual Obligation, Indebtedness or Guarantee Obligation;
     (c) no consent, license, permit, approval or authorization of, or registration, filing or declaration with, any Governmental Authority or other Person is required in connection with the execution, delivery, performance, validity or enforceability by or against it of this Waiver;
Waiver to
First Amended and Restated Revolving Loan Agreement
(Wachovia/Arbor)
2

 
     (d) this Waiver has been duly executed and delivered by it;
     (e) this Waiver, as well as each of the Loan Documents as modified by this Waiver, constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally or by general principles of equity;
     (f) no Default or Event of Default exists or will exist after giving effect to this Waiver; and
     (g) each of the Loan Documents is in full force and effect and no Borrower has any defense, offset, counterclaim, abatement, right of rescission or other claims, actions, causes of action, demands, damages or liabilities of any kind or nature, in all cases whether legal or equitable, available to the Borrower or any other Person with respect to (i) this Waiver, the Loan Agreement, the Loan Documents or any other instrument, document and/or agreement described herein or therein, as modified and amended hereby, (ii) the obligation of the Borrowers to repay the Obligations and other amounts due under the Loan Documents or (iii) the Administrative Agent, the Lenders or the Administrative Agent’s or the Lenders’ respective officers, employees, representatives, agents, counsel or directors arising out of or from or in any way related to or in connection with the Loan Agreement or the Loan Documents, including, without limitation, any action by such Persons, or failure of such Persons to act, under the Loan Agreement or the other Loan Documents on or prior to the date hereof.
     Section 5.Conditions Precedent.
     The effectiveness of this Waiver is subject to the following conditions precedent: (i) delivery to the Administrative Agent of this Waiver duly executed by each of the parties hereto; (ii) the payment of all reasonable legal fees and expenses of Moore & Van Allen PLLC, as counsel to the Administrative Agent, in the amount to be set forth on a separate invoice; and (iii) delivery to the Administrative Agent of such other documents, agreements or certifications as the Administrative Agent may reasonably require.
     Section 6.Miscellaneous.
     (a) This Waiver may be executed in any number of counterparts (including by facsimile), and by the different parties hereto on the same or separate counterparts, each of which shall be deemed to be an original instrument but all of which together shall constitute one and the same agreement.
     (b) The descriptive headings of the various sections of this Waiver are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof.
     (c) This Waiver may not be amended or otherwise modified, waived or supplemented except as provided in the Loan Agreement.
     (d) The interpretive provisions of Section 1.2, 1.3 and 1.4 of the Loan Agreement are incorporated herein mutatismutandis.
Waiver to
First Amended and Restated Revolving Loan Agreement
(Wachovia/Arbor)
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     (e) This Waiver and the other Loan Documents represent the final agreement among the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements between the parties. There are no unwritten oral agreements between the parties.
     (f) THIS WAIVER AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS WAIVER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
     (g) In consideration of the Administrative Agent and the Lender entering into this Waiver, each Borrower hereby waives, releases and discharges the Administrative Agent and the Lender and the Administrative Agent’s and the Lender’s respective officers, employees, representatives, agents, counsel and directors from any and all actions, causes of action, claims, demands, damages and liabilities of whatever kind or nature, in law or in equity, now known or unknown, suspected or unsuspected to the extent that any of the foregoing arises out of or from or in any way relating to or in connection with the Loan Agreement or the Loan Documents, including but not limited to, any action or failure to act under the Loan Agreement or the other Loan Documents on or prior to the date hereof, except, with respect to any such Person being released hereby, any actions, causes of action, claims, demands, damage and liabilities arising out of such Person’s gross negligence or willful misconduct in connection with the Loan Agreement or the other Loan Documents.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
Waiver to
First Amended and Restated Revolving Loan Agreement
(Wachovia/Arbor)
4

 
     IN WITNESS WHEREOF, the parties have caused this Waiver to be executed by their respective officers thereunto duly authorized, as of the date first above written.
 	 	 	 	 	
THE BORROWERS:	ARBOR REALTY TRUST, INC.,
a Maryland corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR REALTY GPOP, INC.,
a Delaware corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR REALTY LPOP, INC.,
a Delaware corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR REALTY LIMITED PARTNERSHIP,
a Delaware limited partnership
 	 	
 	By:  	Arbor Realty GPOP, Inc.,  	 	
 	 	its General Partner 	 	

 	 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
[Signatures Continued on the Following Page]
Waiver to
First Amended and Restated Revolving Loan Agreement
(Wachovia/Arbor)
S-1

 
 	 	 	 	 	
THE BORROWERS (cont.):	ARBOR REALTY SR, INC.,
a Maryland corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR REALTY COLLATERAL
MANAGEMENT, LLC,  a Delaware limited liability company  	 	
 	 	 	 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
[Signatures Continued on the Following Page]
Waiver to
First Amended and Restated Revolving Loan Agreement
(Wachovia/Arbor)
S-2

 
 	 	 	 	 	
THE LENDER:	WACHOVIA BANK, NATIONAL ASSOCIATION,
a national banking association
 	 	
 	By:  	/s/ John Nelson  	 	
 	 	Name:  	John Nelson 	 	
 	 	Title:  	Managing Director 	 	
 	
THE ADMINISTRATIVE AGENT:	WACHOVIA BANK, NATIONAL ASSOCIATION,
a national banking association
 	 	
 	By:  	/s/ John Nelson  	 	
 	 	Name:  	John Nelson 	 	
 	 	Title:  	Managing Director 	 	
 	
Waiver to
First Amended and Restated Revolving Loan Agreement
(Wachovia/Arbor)
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EXHIBIT 10.41
EXECUTION VERSION
SECOND AMENDMENT AND WAIVER TO
FIRST AMENDED AND RESTATED REVOLVING LOAN AGREEMENT
(Wachovia/Arbor)
     THIS SECOND AMENDMENT AND WAIVER TO FIRST AMENDED AND RESTATED REVOLVING LOAN AGREEMENT , dated as of February 2, 2010 (this “ Amendment No. 2 ”), is entered into by and among  ARBOR REALTY TRUST, INC. , a Maryland corporation, as a borrower (together with its successors and permitted assigns, “ ART ”),  ARBOR REALTY GPOP, INC. , a Delaware corporation, as a borrower (together with its successors and permitted assigns, “ GPOP ”),  ARBOR REALTY LPOP, INC. , a Delaware corporation, as a borrower (together with its successors and permitted assigns, “ LPOP ”),  ARBOR REALTY LIMITED PARTNERSHIP , a Delaware limited partnership, as a borrower (together with its successors and permitted assigns, “ ARLP ”),  ARBOR REALTY SR, INC. , a Maryland corporation, as a borrower (together with its successors and permitted assigns, “ ARSR ”),  ARBOR REALTY COLLATERAL MANAGEMENT, LLC , a Delaware limited liability company, as a borrower (together with its successors and permitted assigns, “ ARCM ”, and, together with ART, GPOP, LPOP, ARLP and ARSR, each as the “ Borrower ”),  WACHOVIA BANK, NATIONAL ASSOCIATION , a national banking association (together with its successors and assigns, “ Wachovia ”), in its capacity as initial lender (together with its successors and assigns in such capacity, the “ Lender ”) and in its capacity as administrative agent (together with its successors and assigns in such capacity, the “ Administrative Agent ”). Capitalized terms used and not otherwise defined herein shall have the meanings given to such terms in the Loan Agreement (as defined below).
RECITALS
     WHEREAS, the Borrower, the Lender and the Administrative Agent are parties to that certain First Amended and Restated Revolving Loan Agreement, dated as of July 23, 2009 (as amended, modified, restated, replaced, waived, substituted, supplemented or extended from time to time, including pursuant to that certain First Amendment to First Amended and Restated Revolving Loan Agreement, dated as of December 24, 2009, that certain Waiver to First Amended and Restated Revolving Loan Agreement, dated as of January 20, 2010 and this Amendment No. 2, the “ Loan Agreement );
     WHEREAS, the Borrowers desire to make certain modifications to the Loan Agreement;
     WHEREAS, the Borrowers have requested that the Administrative Agent and the Lenders waive certain provisions in the Loan Agreement; and
     WHEREAS, the Administrative Agent and the Lenders are willing to waive certain provisions of and modify the Loan Agreement as requested by the Borrowers on the terms and conditions specified herein.
     NOW THEREFORE, in consideration of the foregoing recitals, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:
Second Amendment and Waiver to Loan Agreement
(Wachovia/Arbor)

 
     Section 1.Waiver.
     The Borrowers and the Guarantors acknowledge and agree that ART may not comply with the Financial Covenant related to the ratio of its Net Total Liabilities to Adjusted Tangible Net Worth contained in  Section 5.1(w)(iii)  of the Loan Agreement for the Test Period ending December 31, 2009 and may not comply with such Financial Covenant in 2010 (the “ Acknowledged Non-Compliance ”). Notwithstanding such Acknowledged Non-Compliance, the Administrative Agent and the Lenders hereby agree to waive, solely through the Payoff Date, the Acknowledged Non-Compliance. All parties acknowledge and agree that the Administrative Agent’s and the Lenders’ one-time waiver of the Acknowledged Non-Compliance as set forth herein shall not be deemed to be a waiver of any other term, provision, duty, obligation, liability, right, power, remedy or covenant of any party to the Loan Documents or a waiver of any other non-compliance with  Section 5.1(w)(iii)  of the Loan Agreement or any other Financial Covenant for any other period of time. The waiver set forth herein shall be effective only to the extent specifically set forth herein and shall not (a) be construed as a waiver of any breach or default other than as specifically waived herein nor as a waiver of any breach or default of which the Administrative Agent or the Lenders have not been informed by the Borrowers, the Guarantors or the Pledgor, (b) affect the right of the Administrative Agent and/or the Lenders to demand compliance by the Borrowers, the Guarantors and the Pledgor with all terms and conditions of the Loan Documents, except as specifically modified or waived by this Amendment No. 2, (c) be deemed a waiver of any transaction or future action on the part of the Borrowers, the Guarantors or the Pledgor requiring the Administrative Agent’s, the Lenders’ or the Required Lenders’ consent or approval under the Loan Documents, or (d) except as waived hereby, be deemed or construed to be a waiver or release of, or a limitation upon, the Administrative Agent’s or the Lenders’ exercise of any rights or remedies under the Loan Agreement or any other Loan Document, whether arising as a consequence of any Event of Default which may now exist or otherwise, all such rights and remedies hereby being expressly reserved.
     Section 2.Amendments to Loan Agreement.
     (a) The following new definition is added to Section 1.1 of the Loan Agreement (to be inserted in the correct alphabetical order):
““Payoff Date” shall have the meaning set forth in Section 2.18 of the Arbor Credit Agreement Agreement.”
     (b) Sections 5.w(ii) and (iii) of the Loan Agreement are hereby amended and restated in their entirety as follows:
     “(ii) Maintenance of Tangible Net Worth. (i) For any Test Period other than the Test Periods ending on September 30, 2010 and December 31, 2010, ART shall not permit Tangible Net Worth at any time to be less than $150,000,000, and, (ii) for the Tests Periods ending on September 30, 2010 and December 31, 2010, ART shall not permit Tangible Net Worth at any time to be less than $50,000,000.
     (iii) Maintenance of Ratio of Net Total Liabilities to Adjusted Tangible Net Worth. (i) For any Test Period other than the Test Periods ending on September 30, 2010 and December 31, 2010, ART shall not permit the ratio of its Net Total Liabilities to Adjusted Tangible Net Worth at any time to be greater than 4.5 to 1.0, and, (ii) for the Tests Periods ending on September 30, 2010 and December 31, 2010, ART shall not permit the ratio of its Net Total Liabilities to Adjusted Tangible Net Worth at any time to be greater than 5.8 to 1.0.”
Second Amendment and Waiver to Loan Agreement
(Wachovia/Arbor)
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     Section 3.Loan Documents in Full Force and Effect as Modified.
     Except as specifically modified hereby, the Loan Documents shall remain in full force and effect in accordance with their terms. All references to any Loan Document shall be deemed to mean each Loan Document as modified by this Amendment No. 2. This Amendment No. 2 shall not constitute a novation of the Loan Documents, but shall constitute modifications thereof. The parties hereto agree to be bound by the terms and conditions of the Loan Documents, as modified by this Amendment No. 2, as though such terms and conditions were set forth herein. Each Borrower hereby ratifies the Loan Agreement and the other Loan Documents and acknowledges and reaffirms (a) that it is bound by all terms of the Loan Agreement and the other Loan Documents applicable to it and (b) that it is responsible for the observance and full performance of its respective Obligations. This Amendment No. 2 is a Loan Document executed pursuant to the Loan Agreement and shall be construed, administered and applied in accordance with the terms and provisions of the Loan Agreement.
     Section 4.Representations.
     Each Borrower represents and warrants, as of the date of this Amendment No. 2, as follows:
     (a) it is duly incorporated or organized, validly existing and in good standing under the laws of its jurisdiction of organization and each jurisdiction where it conducts business;
     (b) the execution, delivery and performance by it of this Amendment No. 2 is within its corporate, company or partnership powers, has been duly authorized and does not contravene (1) its Authority Documents or its applicable resolutions, (2) any Applicable Law or (3) any Contractual Obligation, Indebtedness or Guarantee Obligation;
     (c) no consent, license, permit, approval or authorization of, or registration, filing or declaration with, any Governmental Authority or other Person is required in connection with the execution, delivery, performance, validity or enforceability by or against it of this Amendment No. 2;
     (d) this Amendment No. 2 has been duly executed and delivered by it;
     (e) this Amendment No. 2, as well as each of the Loan Documents as modified by this Amendment No. 2, constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally or by general principles of equity;
     (f) no Default or Event of Default exists or will exist after giving effect to this Amendment No. 2; and
     (g) each of the Loan Documents is in full force and effect and no Borrower has any defense, offset, counterclaim, abatement, right of rescission or other claims, actions, causes of action, demands, damages or liabilities of any kind or nature, in all cases whether legal or equitable, available to the Borrower or any other Person with respect to (i) this Amendment No. 2, the Loan Agreement, the Loan Documents or any other instrument, document and/or agreement described herein or therein, as modified and amended hereby, (ii) the obligation of the Borrowers to repay the Obligations and other amounts due under the Loan Documents or (iii) the Administrative Agent, the Lenders or the Administrative Agent’s or the Lenders’ respective officers, employees, representatives, agents, counsel or directors arising out of or from or in any way related to or in connection with the Loan Agreement or the Loan Documents,
Second Amendment and Waiver to Loan Agreement
(Wachovia/Arbor)
3

 
including, without limitation, any action by such Persons, or failure of such Persons to act, under the Loan Agreement or the other Loan Documents on or prior to the date hereof.
     Section 5.Conditions Precedent.
     The effectiveness of this Amendment No. 2 is subject to the following conditions precedent: (i) delivery to the Administrative Agent of this Amendment No. 2 duly executed by each of the parties hereto; (ii) the payment of all legal fees and expenses of Moore & Van Allen PLLC, as counsel to the Administrative Agent, in the amount to be set forth on a separate invoice; and (iii) delivery to the Administrative Agent of such other documents, agreements or certifications as the Administrative Agent may reasonably require.
     Section 6.Miscellaneous.
     (a) This Amendment No. 2 may be executed in any number of counterparts (including by facsimile), and by the different parties hereto on the same or separate counterparts, each of which shall be deemed to be an original instrument but all of which together shall constitute one and the same agreement.
     (b) The descriptive headings of the various sections of this Amendment No. 2 are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof.
     (c) This Amendment No. 2 may not be amended or otherwise modified, waived or supplemented except as provided in the Loan Agreement.
     (d) The interpretive provisions of Section 1.2, 1.3 and 1.4 of the Loan Agreement are incorporated herein mutatismutandis.
     (e) This Amendment No. 2 and the other Loan Documents represent the final agreement among the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements between the parties. There are no unwritten oral agreements between the parties.
     (f) THIS AMENDMENT NO. 2 AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT NO. 2 SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
     (g) In consideration of the Administrative Agent and the Lender entering into this Amendment No. 2, each Borrower hereby waives, releases and discharges the Administrative Agent and the Lender and the Administrative Agent’s and the Lender’s respective officers, employees, representatives, agents, counsel and directors from any and all actions, causes of action, claims, demands, damages and liabilities of whatever kind or nature, in law or in equity, now known or unknown, suspected or unsuspected to the extent that any of the foregoing arises out of or from or in any way relating to or in connection with the Loan Agreement or the Loan Documents, including but not limited to, any action or failure to act under the Loan Agreement or the other Loan Documents on or prior to the date hereof, except, with respect to any such Person being released hereby, any actions, causes of action, claims, demands, damage and liabilities arising out of such Person’s gross negligence or willful misconduct in connection with the Loan Agreement or the other Loan Documents.
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Second Amendment and Waiver to Loan Agreement
(Wachovia/Arbor)
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     IN WITNESS WHEREOF, the parties have caused this Amendment No. 2 to be executed by their respective officers thereunto duly authorized, as of the date first above written.
 	 	 	 	 	
THE BORROWERS:	ARBOR REALTY TRUST, INC.,
a Maryland corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR REALTY GPOP, INC.,
a Delaware corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR REALTY LPOP, INC.,
a Delaware corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR REALTY LIMITED PARTNERSHIP,
a Delaware limited partnership
 	 	
 	By:  	Arbor Realty GPOP, Inc.,  	 	
 	 	its General Partner 	 	

 	 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
[Signatures Continued on the Following Page]
Second Amendment and Waiver to Loan Agreement
(Wachovia/Arbor)
S-1

 
 	 	 	 	 	
THE BORROWERS (cont.):	ARBOR REALTY SR, INC.,
a Maryland corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR REALTY COLLATERAL MANAGEMENT, LLC,
a Delaware limited liability company
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
[Signatures Continued on the Following Page]
Second Amendment and Waiver to Loan Agreement
(Wachovia/Arbor)
S-2

 
 	 	 	 	 	
THE LENDER:	WACHOVIA BANK, NATIONAL ASSOCIATION,
a national banking association
 	 	
 	By:  	/s/ John Nelson  	 	
 	 	Name:  	John Nelson 	 	
 	 	Title:  	Managing Director 	 	
 	
THE ADMINISTRATIVE AGENT:	WACHOVIA BANK, NATIONAL ASSOCIATION,
a national banking association
 	 	
 	By:  	/s/ John Nelson  	 	
 	 	Name:  	John Nelson 	 	
 	 	Title:  	Managing Director 	 	
 	
Second Amendment and Waiver to Loan Agreement
(Wachovia/Arbor)
S-3

EXHIBIT 10.42
EXECUTION VERSION
FOURTH AMENDMENT AND WAIVER TO
FIRST AMENDED AND RESTATED CREDIT AGREEMENT
(Wachovia/Arbor)
     THIS FOURTH AMENDMENT AND WAIVER TO FIRST AMENDED AND RESTATED CREDIT AGREEMENT, dated as of February 2, 2010 (this “ Amendment No. 4 ”), is entered into by and among  ARBOR REALTY FUNDING LLC , a Delaware limited liability company (together with its successors and permitted assigns, “ Arbor Realty Funding ”), as a borrower,  ARSR TAHOE, LLC , a Delaware limited liability company (together with its successors and permitted assigns, “ ARSR Tahoe ”), as a borrower,  ARBOR REALTY LIMITED PARTNERSHIP , a Delaware limited partnership (together with its successors and permitted assigns, “ Arbor Realty ”), as a borrower,  ART 450 LLC , a Delaware limited liability company (together with its successors and permitted assigns, “ ART 450 ”), as a borrower,  ARBOR REALTY SR, INC. , a Maryland corporation (together with its successors and permitted assigns, “ ARSR ”), as a borrower, ARBOR ESH II LLC (together with its successors and permitted assigns, “ Arbor ESH ” and, together with Arbor Realty Funding, ARSR Tahoe, Arbor Realty and ARSR, each individually referred to herein as a “ Borrower ” and collectively referred to herein as the “ Borrowers ”), as a borrower, ARBOR REALTY TRUST, INC. , a Maryland corporation (together with its successors and permitted assigns, “ ART ”), as a guarantor, Arbor Realty, as a guarantor, ARSR, as a guarantor (ARSR, together with ART and Arbor Realty, the “ Guarantors ”), the several banks and other financial institutions party to the Credit Agreement (each, together with its successors and assigns, a “ Lender ” and, collectively, the “ Lenders ”), and WACHOVIA BANK, NATIONAL ASSOCIATION,  a national banking association, as administrative agent for the Lenders (together with its successors and assigns in such capacity, the “ Administrative Agent ”), and consented to by ARSR, as the pledgor (together with its successors and permitted assigns, the “ Pledgor ”). Capitalized terms used and not otherwise defined herein shall have the meanings given to such terms in the Credit Agreement (as defined below and as amended hereby).
RECITALS
     WHEREAS, the Borrowers, the Guarantors, the Lenders and the Administrative Agent are parties to that certain First Amended and Restated Credit Agreement, dated as of July 23, 2009 (as amended, modified, restated, replaced, waived, substituted, supplemented or extended from time to time, including pursuant to that First Amendment to First Amended and Restated Credit Agreement and Other Credit Documents, dated as of December 16, 2009, that Second Amendment to First Amended and Restated Credit Agreement, dated as of December 24, 2009, that Third Amendment and Waiver to First Amended and Restated Credit Agreement, dated as of January 20, 2010 and by this Amendment No. 4, the “ Credit Agreement ”);
     WHEREAS, the Borrowers and the Guarantors desire to make certain modifications to the Credit Agreement;
     WHEREAS, the Borrowers and the Guarantors have requested that the Administrative Agent and the Lenders waive certain provisions in the Credit Agreement;
Fourth Amendment and Waiver to Credit Agreement
(Wachovia/Arbor)

 
     WHEREAS, the Administrative Agent and the Lenders are willing to waive certain provisions of and modify the Credit Agreement as requested by the Borrowers and the Guarantors on the terms and conditions specified herein;
     WHEREAS, each Guarantor desires to evidence its agreement to the amendments and modifications set forth herein and to reaffirm its obligations under the Guaranty; and
     WHEREAS, the Pledgor is a party to other Credit Documents and related agreements that may be affected, directly or indirectly, by this Amendment No. 4 and desires to evidence its agreement to the amendments and modifications set forth herein.
     NOW THEREFORE, in consideration of the foregoing recitals, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:
     Section 1.Waiver.
     The Borrowers and the Guarantors acknowledge and agree that ART may not comply with the Financial Covenant related to the ratio of its Net Total Liabilities to Adjusted Tangible Net Worth contained in  Subsection 5.9(c)  of the Credit Agreement for the Test Period ending December 31, 2009 and may not comply with such Financial Covenant in 2010 (the “ Acknowledged Non-Compliance ”). Notwithstanding such Acknowledged Non-Compliance, the Administrative Agent and the Lenders hereby agree to waive, solely through the Payoff Date, the Acknowledged Non-Compliance. All parties acknowledge and agree that the Administrative Agent’s and the Lenders’ one-time waiver of the Acknowledged Non-Compliance as set forth herein shall not be deemed to be a waiver of any other term, provision, duty, obligation, liability, right, power, remedy or covenant of any party to the Credit Documents or a waiver of any other non-compliance with Subsection 5.9(c)  of the Credit Agreement or any other Financial Covenant for any other period of time. The waiver set forth herein shall be effective only to the extent specifically set forth herein and shall not (a) be construed as a waiver of any breach or default other than as specifically waived herein nor as a waiver of any breach or default of which the Administrative Agent or the Lenders have not been informed by the Borrowers, the Guarantors or the Pledgor, (b) affect the right of the Administrative Agent and/or the Lenders to demand compliance by the Borrowers, the Guarantors and the Pledgor with all terms and conditions of the Credit Documents, except as specifically modified or waived by this Amendment No. 4, (c) be deemed a waiver of any transaction or future action on the part of the Borrowers, the Guarantors or the Pledgor requiring the Administrative Agent’s, the Lenders’ or the Required Lenders’ consent or approval under the Credit Documents, or (d) except as waived hereby, be deemed or construed to be a waiver or release of, or a limitation upon, the Administrative Agent’s or the Lenders’ exercise of any rights or remedies under the Credit Agreement or any other Credit Document, whether arising as a consequence of any Event of Default which may now exist or otherwise, all such rights and remedies hereby being expressly reserved.
     Section 2.Amendments to Credit Agreement.
     (a) The following new definition is added to Section 1.1 of the Credit Agreement (to be inserted in the correct alphabetical order):
““Payoff Date” shall have the meaning set forth in Section 2.18 of the Credit Agreement.”
     (b) Sections 5.9(b) and (c) of the Credit Agreement are hereby amended and restated in their entirety as follows:
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     “(b) Maintenance of Tangible Net Worth. (i) For any Test Period other than the Test Periods ending on September 30, 2010 and December 31, 2010, ART shall not permit Tangible Net Worth at any time to be less than $150,000,000, and, (ii) for the Tests Periods ending on September 30, 2010 and December 31, 2010, ART shall not permit Tangible Net Worth at any time to be less than $50,000,000.
     (c) Maintenance of Ratio of Net Total Liabilities to Adjusted Tangible Net Worth. (i) For any Test Period other than the Test Periods ending on September 30, 2010 and December 31, 2010, ART shall not permit the ratio of its Net Total Liabilities to Adjusted Tangible Net Worth at any time to be greater than 4.5 to 1.0, and, (ii) for the Tests Periods ending on September 30, 2010 and December 31, 2010, ART shall not permit the ratio of its Net Total Liabilities to Adjusted Tangible Net Worth at any time to be greater than 5.8 to 1.0.”
     Section 3.Credit Documents in Full Force and Effect as Modified.
     Except as specifically modified hereby, the Credit Documents shall remain in full force and effect in accordance with their terms. All references to any Credit Document shall be deemed to mean each Credit Document as modified by this Amendment No. 4. This Amendment No. 4 shall not constitute a novation of the Credit Documents, but shall constitute modifications thereof. The parties hereto agree to be bound by the terms and conditions of the Credit Documents, as modified by this Amendment No. 4, as though such terms and conditions were set forth herein. Each of the Borrowers, the Guarantors and the Pledgor hereby ratifies the Credit Agreement and the other Credit Documents and acknowledges and reaffirms (a) that it is bound by all terms of the Credit Agreement and the other Credit Documents applicable to it and (b) that it is responsible for the observance and full performance of its respective Obligations. This Amendment No. 4 is a Credit Document executed pursuant to the Credit Agreement and shall be construed, administered and applied in accordance with the terms and provisions of the Credit Agreement.
     Section 4.Representations.
     Each of the Borrowers, the Guarantors and the Pledgor represents and warrants, as of the date of this Amendment No. 4, as follows:
     (a) it is duly incorporated or organized, validly existing and in good standing under the laws of its jurisdiction of organization and each jurisdiction where it conducts business;
     (b) the execution, delivery and performance by it of this Amendment No. 4 is within its corporate, company or partnership powers, has been duly authorized and does not contravene (1) its Authority Documents or its applicable resolutions, (2) any Requirements of Law or (3) any Contractual Obligation, Indebtedness or Guarantee Obligation;
     (c) no consent, license, permit, approval or authorization of, or registration, filing or declaration with, any Governmental Authority or other Person is required in connection with the execution, delivery, performance, validity or enforceability by or against it of this Amendment No. 4;
     (d) this Amendment No. 4 have been duly executed and delivered by it;
     (e) this Amendment No. 4 and each of the Credit Documents as modified thereby constitute its legal, valid and binding obligation, enforceable against it in accordance with its terms, except as
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enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally or by general principles of equity;
     (f) the Security Documents continue to create a valid security interest in, and Lien upon, the Collateral, in favor of the Administrative Agent, for the benefit of the Secured Parties, which security interests and Liens are perfected in accordance with the terms of the Security Documents and prior to all Liens subject to Permitted Liens;
     (g) no Default or Event of Default exists or will exist after giving effect to this Amendment No. 4;
     (h) each of the Credit Documents is in full force and effect and neither the Borrowers, the Guarantors nor the Pledgor has any defense, offset, counterclaim, abatement, right of rescission or other claims, actions, causes of action, demands, damages or liabilities of any kind or nature, in all cases whether legal or equitable, available to the Borrowers, the Guarantors, the Pledgor or any other Person with respect to (i) this Amendment No. 4, the Credit Agreement, the Credit Documents or any other instrument, document and/or agreement described herein or therein, as modified and amended hereby, (ii) the obligation of the Borrowers and the Guarantors to repay the Obligations and other amounts due under the Credit Documents or (iii) the Administrative Agent, the Lenders or the Administrative Agent’s or the Lenders’ respective officers, employees, representatives, agents, counsel or directors arising out of or from or in any way related to or in connection with the Credit Agreement or the Credit Documents, including, without limitation, any action by such Persons, or failure of such Persons to act, under the Credit Agreement or the other Credit Documents on or prior to the date hereof; and
     (i) except as specifically provided in this Amendment No. 4, the Obligations are not reduced or modified by this Amendment No. 4.
     Section 5.Conditions Precedent.
     The effectiveness of this Amendment No. 4 is subject to the following conditions precedent: (i) delivery to the Administrative Agent of this Amendment No. 4 duly executed by each of the parties hereto; (ii) the payment of all legal fees and expenses of Moore & Van Allen PLLC, as counsel to the Administrative Agent, in the amount to be set forth on a separate invoice; and (iii) delivery to the Administrative Agent of such other documents, agreements or certifications as the Administrative Agent may reasonably require.
     Section 6.Miscellaneous.
     (a) This Amendment No. 4 may be executed in any number of counterparts (including by facsimile), and by the different parties hereto on the same or separate counterparts, each of which shall be deemed to be an original instrument but all of which together shall constitute one and the same agreement.
     (b) The descriptive headings of the various sections of this Amendment No. 4 are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof.
     (c) This Amendment No. 4 may not be amended or otherwise modified, waived or supplemented except as provided in the Credit Agreement.
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     (d) The interpretive provisions of Sections 1.2 through 1.8 of the Credit Agreement are incorporated herein mutatismutandis.
     (e) This Amendment No. 4 represents the final agreement among the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements between the parties. There are no unwritten oral agreements between the parties.
     (f) THIS AMENDMENT NO. 4 AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT NO. 4 SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
     (g) Each provision of this Amendment No. 4 shall be valid, binding and enforceable to the fullest extent permitted by Requirements of Law. In case any provision in or obligation under this Amendment No. 4 shall be invalid, illegal or unenforceable in any jurisdiction (either in its entirety or as applied to any Person, fact, circumstance, action or inaction), the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction or as applied to any Person, fact, circumstance, action or inaction, shall not in any way be affected or impaired thereby.
     (h) In consideration of the Lenders and the Administrative Agent entering into this Amendment No. 4, each of the Borrowers, each of the Guarantors and the Pledgor hereby waives, releases and discharges the Administrative Agent, the Lenders and the Administrative Agent’s and the Lenders’ respective officers, employees, representatives, agents, counsel and directors from any and all actions, causes of action, claims, demands, damages and liabilities of whatever kind or nature, in law or in equity, now known or unknown, suspected or unsuspected to the extent that any of the foregoing arises out of or from or in any way relating to or in connection with the Credit Agreement or the Credit Documents, including but not limited to, any action or failure to act under the Credit Agreement or the other Credit Documents on or prior to the date hereof, except, with respect to any such Person being released hereby, any actions, causes of action, claims, demands, damage and liabilities arising out of such Person’s gross negligence or willful misconduct in connection with the Credit Agreement or the other Credit Documents.
     (i) Each Guarantor (i) agrees to and consents to the terms and provisions of this Amendment No. 4, (ii) acknowledges and confirms that the Guaranty remains in full force and effect notwithstanding this Amendment No. 4, and (iii) reaffirms its obligations under the Guaranty.
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     IN WITNESS WHEREOF, the parties have caused this Amendment No. 4 to be executed by their respective officers thereunto duly authorized, as of the date first above written.
 	 	 	 	 	
BORROWERS:	ARBOR REALTY FUNDING, LLC, a Delaware limited liability company
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARSR TAHOE, LLC, a Delaware limited liability company
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR REALTY LIMITED PARTNERSHIP,
a Delaware limited partnership

 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ART 450 LLC, a Delaware limited liability company
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR REALTY SR, INC., a Maryland corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR ESH II LLC, a Delaware limited liability company
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
[Signatures Continued on the Following Page]
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GUARANTORS:	ARBOR REALTY TRUST, INC.,
a Maryland corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR REALTY LIMITED PARTNERSHIP,
a Delaware limited partnership
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
 	ARBOR REALTY SR, INC.,
a Maryland corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
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ADMINISTRATIVE AGENT:	WACHOVIA BANK, NATIONAL ASSOCIATION,
as Administrative Agent on behalf of the Lenders
 	 	
 	By:  	/s/ John Nelson  	 	
 	 	Name:  	John Nelson 	 	
 	 	Title:  	Managing Director 	 	
 	
LENDER:	WACHOVIA BANK, NATIONAL ASSOCIATION,
as Lender
 	 	
 	By:  	/s/ John Nelson  	 	
 	 	Name:  	John Nelson 	 	
 	 	Title:  	Managing Director 	 	
 	
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CONSENTED TO BY:
 	 	 	 	 	
PLEDGOR:	ARBOR REALTY SR, INC.,
a Maryland corporation
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
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Exhibit 10.43

EXCHANGE AGREEMENT
among
ARBOR REALTY SR, INC.
and
TABERNA PREFERRED FUNDING I, LTD.,
TABERNA PREFERRED FUNDING V, LTD.,
TABERNA PREFERRED FUNDING VII, LTD.,
and
TABERNA PREFERRED FUNDING VIII, LTD.
Dated as of February 26, 2010

 

 
EXCHANGE AGREEMENT
     THIS EXCHANGE AGREEMENT, dated as of February 26, 2010 (this “Agreement”), is entered into by and among ARBOR REALTY SR, INC., a Maryland corporation (the “ Company ”), and TABERNA PREFERRED FUNDING I, LTD. (“ Taberna I ”), TABERNA PREFERRED FUNDING V, LTD. (“ Taberna V ”), TABERNA PREFERRED FUNDING VII, LTD. (“ Taberna VII ”) and TABERNA PREFERRED FUNDING VIII, LTD. (“ Taberna VIII ”, together with Taberna I, Taberna V and Taberna VII, collectively, “ Taberna ”).
R E C I T A L:
     A. Reference is made to (i) that certain Junior Subordinated Indenture I dated as of May 6, 2009 (“Indenture I”) and (ii) that certain Junior Subordinated Indenture II dated as of May 6, 2009 (“ Indenture II ,” together with Indenture I, collectively, the “ Existing Indentures ”), each by and between the Company, Arbor Realty Trust, Inc., as guarantor, and The Bank of New York Mellon Trust Company, National Association (“ BNYM ”), as trustee (the “ Existing Indenture Trustee ”).
     B. Taberna I is the holder of a junior subordinated note in the aggregate principal amount of $29,400,000 issued by the Company pursuant to Indenture I, a copy of which is attached hereto as  Ehibit A-1  (“ Note 1 ”).
     C. Taberna V is the holder of a junior subordinated note in the aggregate principal amount of $28,000,000 issued by the Company pursuant to Indenture II, a copy of which is attached hereto as  Exhibit A-2  ( “ Note 2 ”).
     D. Taberna VII is the holder of a junior subordinated note in the aggregate principal amount of $28,000,000 issued by the Company pursuant to Indenture II, a copy of which is attached hereto as  Exhibit A-3  ( “ Note 3 ”).
     E. Taberna VIII is the holder of a junior subordinated note in the aggregate principal amount of $28,700,000 issued by the Company pursuant to Indenture II, a copy of which is attached hereto as  Exhibit A-4  ( “ Note 4 ”; and together with Note 1, Note 2 and Note 3, collectively, the “ Notes ”).
     F. On the terms and subject to the conditions set forth in this Agreement, the Company and Taberna have agreed to exchange the Notes for (x) certain bonds currently owned by the Company, a schedule of which is set forth on  Exhibit B  attached hereto (the “ Bonds ”), and (y) cash in the amount of Nine Million Two Hundred Sixty-Seven Thousand Eight Hundred Seventy-One and 08/100 Dollars ($9,267,871.08) (the “ Cash Payment ”), in each case to be allocated and distributed to the Taberna entities pro rata based on the outstanding principal balance of each of the Notes as specified on Exhibit B .
     NOW, THEREFORE, in consideration of the mutual agreements and subject to the terms and conditions herein set forth, the parties hereto agree as follows:
     1. Definitions. All capitalized terms used but not defined in this Agreement shall have the respective meanings ascribed thereto in the Existing Indentures.

 
     “Bankruptcy Code” means the Bankruptcy Reform Act of 1978, 11 U.S.C. §§101 et seq., as amended.
     “BNYM” has the meaning set forth in the Recitals.
     “Bonds” has the meaning set forth in the Recitals.
     “Cash Payment” has the meaning set forth in the Recitals.
     “CDO Trustee” has the meaning set forth in Section 2(b)(i).
     “Closing Date” has the meaning set forth in Section 2(b).
     “Closing Room” has the meaning set forth in Section 2(b).
     “Company” has the meaning set forth in the introductory paragraph hereof.
     “Company Counsel” has the meaning set forth in Section 3(b).
     “Exchange” has the meaning set forth in Section 2(b).
     “Exchange Act” means the Securities Exchange Act of 1934.
     “Existing Indentures” has the meaning set forth in the Recitals.
     “Existing Indenture Trustee” has the meaning set forth in the Recitals.
     “Financial Statements” means the audited consolidated financial statements (including the notes thereto) and schedules of the Company for the fiscal year ended December 31 2008.
     “Governmental Entities” has the meaning set forth in Section 4(f).
     “Indemnified Party” has the meaning set forth in Section 8(b). “Indemnified Parties” shall have the correlative meaning.
     “Indenture I” has the meaning set forth in the Recitals.
     “Indenture II” has the meaning set forth in the Recitals.
     “Lien” means any pledge, security interest, claim, lien or other encumbrance of any kind.
     “Material Adverse Effect” means a material adverse effect on the condition (financial or otherwise), earnings, business, liabilities or assets of the Company and its Significant Subsidiaries taken as a whole.
     “Memorandum” means that certain Memorandum dated January 27, 2010 between the Company and Taberna Capital Management, LLC (as collateral manager for each of the Taberna entities).
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     “Note 1” has the meaning set forth in the Recitals.
     “Note 2” has the meaning set forth in the Recitals.
     “Note 3” has the meaning set forth in the Recitals.
     “Note 4” has the meaning set forth in the Recitals.
     “Notes” has the meaning set forth in the Recitals.
     “Securities Act” means the Securities Act of 1933, 15 U.S.C. §§77a etseq., as amended, and the rules and regulations promulgated under it.
     “Taberna” has the meaning set forth in the introductory paragraph hereof.
     “Taberna I” has the meaning set forth in the introductory paragraph hereof.
     “Taberna V” has the meaning set forth in the introductory paragraph hereof.
     “Taberna VII” has the meaning set forth in the introductory paragraph hereof.
     “Taberna VIII” has the meaning set forth in the introductory paragraph hereof.
     “Taberna Transferred Rights” means any and all of each Taberna entity’s right, title, and interest in, to and under the Notes, together with the following:
               (i) the Existing Indentures;
               (ii) all amounts payable to Taberna under the Notes and the Existing Indentures;
               (iii) all claims (including “claims” as defined in Bankruptcy Code §101(5)), suits, causes of action, and any other right of Taberna, whether known or unknown, against the Company or any of its affiliates, agents, representatives, contractors, advisors, or any other entity that in any way is based upon, arises out of or is related to any of the foregoing, including all claims (including contract claims, tort claims, malpractice claims, and claims under any law governing the exchange of, purchase and sale of, or indentures for, securities), suits, causes of action, and any other right of Taberna against any attorney, accountant, financial advisor, or other entity arising under or in connection with the Notes, the Existing Indentures or the transactions related thereto or contemplated thereby;
               (iv) all guarantees and all collateral and security of any kind for or in respect of the foregoing;
               (v) all cash, securities, or other property, and all setoffs and recoupments, to be received, applied, or effected by or for the account of Taberna under the Notes, other than fees, costs and expenses payable to Taberna hereunder and all cash,
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securities, interest, dividends, and other property that may be exchanged for, or distributed or collected with respect to, any of the foregoing; and
               (vi) all proceeds of the foregoing.
     2. Exchange of Notes for the Bonds.
          (a) The Company has requested that Taberna accept the Bonds and Cash Payment in exchange for, and discharge of, the Notes and Taberna hereby accepts such Bonds and Cash Payment in exchange for, and discharge of, the Notes upon the terms and conditions set forth herein.
          (b) The closing of the exchange contemplated herein shall occur at the offices of Nixon Peabody, LLP in New York, New York (the “ Closing Room ”), or such other place as the parties hereto and BNYM shall agree, at 11:00 a.m. New York time, on February 26, 2010 or such later date as the parties may agree (such date and time of delivery the “ Closing Date ”). The Company and Taberna hereby agree that the exchange (the “ Exchange ”) will occur in accordance with the following requirements:
               (i) Taberna Capital Management, LLC (as collateral manager for each of the Taberna entities) shall have delivered an issuer order instructing each trustee (in each such capacity, a “ CDO Trustee ”) under the applicable indenture pursuant to which such CDO Trustee serves as trustee for the holders of the Notes, to exchange the Notes for the Bonds and Cash Payment.
               (ii) The Company shall have provided instructions through its DTC participant to transfer the Bonds to the applicable CDO Trustee. The CDO Trustee shall have confirmed through its DTC participant that such transfer has occurred.
               (iii) The Company shall have paid to the Existing Indenture Trustee, for applications upon the Notes and for distribution to the applicable Taberna entities holding such Notes pursuant to the terms of the Existing Indentures, all accrued interest for the period commencing on the most recent interest payment date under the Notes and continuing through and including the day immediately preceding the Closing Date in the amounts set forth on Exhibit D.
               (iv) The Company shall have paid to each CDO Trustee, by wire transfer, its applicable portion of the Cash Payment.
               (v) All of BNYM’s legal fees, costs and other expenses in connection with the Exchange shall have been paid in accordance with Section 7 hereof.
               (vi) Upon satisfaction of all the requirements set forth in this Section 2, and the other requirements set forth herein (including Section 3 hereof), (A) each Taberna entity holding a Note irrevocably transfers, assigns, grants and conveys the related Taberna Transferred Rights to the Company, and the Company assumes all rights and obligations of Taberna with respect to the applicable Note and the Taberna Transferred Rights, and (B) the Company irrevocably transfers, assigns, grants and conveys to the
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CDO Trustee, on behalf of the Taberna entities, (pro rata based on the outstanding principal balance of the Notes), all of the rights, title and interest to the Bonds.
          (c) Concurrently upon completion of the Exchange the Company shall transmit Note 1 to BNYM, acting as Existing Indenture Trustee under Indenture I, and shall direct BNYM to cancel Note 1 in accordance with Section 3.8 of Indenture I. The form of direction letter to be used by the Company shall be substantially similar to the form attached as Exhibit E. Following cancellation of Note 1, the Company shall provide such other documentation to the Existing Indenture Trustee as may be necessary or advisable to discharge Indenture 1. Concurrently upon completion of the Exchange, the Company shall transmit Note 2, Note 3 and Note 4 to BNYM, acting as Existing Indenture Trustee under Indenture II, and shall direct BNYM to cancel Note 2, Note 3 and Note 4 in accordance with Section 3.8 of Indenture II. The form of direction letter to be used by the Company shall be substantially similar to the form attached as Exhibit E.
     3. Conditions Precedent. The obligations of the parties under this Agreement are subject to the following conditions precedent:
          (a) The representations and warranties contained herein shall be accurate as of the Closing Date.
          (b) Cooley, Godward, Kronish LLP, counsel for the Company (the “Company Counsel”), shall have delivered an opinion, dated the Closing Date, addressed to each Taberna entity and its successors and assigns and to the CDO Trustee, in substantially the form set out in  Annex A-1  hereto and the Company shall have delivered opinions of the Company’s General Counsel addressed to each Taberna entity and its successors and assigns and to the CDO Trustee, in substantially the form set out in  Annex A-2  hereto. In rendering its opinion, the Company Counsel may rely as to factual matters upon certificates or other documents furnished by officers, directors and trustees of the Company and by government officials; provided ,  however , that copies of any such certificates or documents are delivered to the Taberna entities) and by and upon such other documents as such counsel may, in its reasonable opinion, deem appropriate as a basis for the Company Counsel’s opinion. The Company Counsel may specify the jurisdictions in which it is admitted to practice and that it is not admitted to practice in any other jurisdiction and is not an expert in the law of any other jurisdiction. Such Company Counsel Opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991).
          (c) The Company shall have furnished to the Taberna entities a certificate of the Company, signed by the Chief Executive Officer, President or an Executive Vice President, and Chief Financial Officer, Treasurer or Assistant Treasurer of the Company, dated as of the Closing Date, certifying that the representations and warranties in this Agreement are true and correct on and as of the Closing Date, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date.
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          (d) Prior to the Closing Date, the Company shall have furnished to the Taberna entities and their counsel such further information, certificates and documents as the Taberna entities or such counsel may reasonably request.
          (e) The requirements set forth in Section 2(b) are satisfied on the Closing Date.
     If any of the conditions specified in this Section 3 shall not have been fulfilled when and as provided in this Agreement, or if any of the opinions, certificates and documents mentioned above or elsewhere in this Agreement shall not be reasonably satisfactory in form and substance to the Taberna entities or their counsel, this Agreement and any obligations of Taberna hereunder, may be canceled at, or at any time prior to, the Closing Date by Taberna. Notice of such cancellation shall be given to the Company in writing or by telephone and confirmed in writing, or by e-mail or facsimile.
     Each certificate signed by any officer of the Company and delivered to the Taberna entities or their counsel in connection with this Agreement and the transactions contemplated hereby shall be deemed to be a representation and warranty of the Company and not by such officer in any individual capacity.
     4. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with the Taberna, and its successors and assigns, as follows:
          (a) It (i) is duly organized and validly existing under the laws of its jurisdiction of organization or incorporation, (ii) is in good standing under such laws and (iii) has full power and authority to execute, deliver and perform its obligations under this Agreement.
          (b) The Exchange, is not and may not be void or voidable as an actual or constructive fraudulent transfer. The Company has no current intention to initiate any bankruptcy or insolvency proceedings. The Company (i) has not entered into the Exchange with the actual intent to hinder, delay, or defraud any creditor and (ii) received reasonably equivalent value in exchange for its obligations under this Exchange Agreement. The Company does not intend to incur debt and liabilities (including contingent liabilities and other commitments) beyond its ability to pay such debt and liabilities as they mature.
          (c) It (i) is a sophisticated entity with respect to the Exchange, (ii) has such knowledge and experience, and has made investments of a similar nature, so as to be aware of the risks and uncertainties inherent in the Exchange and (iii) has independently and without reliance upon Taberna, Taberna Capital Management, LLC, the Existing Indenture Trustee or the CDO Trustee or any of their affiliates, and based on such information as it has deemed appropriate, made its own analysis and decision to enter into this Agreement, except that it has relied upon Taberna’s express representations, warranties, covenants and agreements in this Agreement. The Company acknowledges that none of Taberna, Taberna Capital Management, LLC or the Existing Indenture Trustee or any of their affiliates has given it any investment advice, credit information or opinion on whether the Exchange is prudent.
          (d) It has not engaged any broker, finder or other entity acting under the authority of it or any of its affiliates that is entitled to any broker’s commission or other fee in
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connection with the transaction for which Taberna, the Existing Indenture Trustee or any of their affiliates could be responsible.
          (e) Each of this Agreement and the consummation of the transactions contemplated herein and therein have been duly authorized by the Company and, on the Closing Date, will have been duly executed and delivered by the Company, and, assuming due authorization, execution and delivery by Taberna, will be a legal, valid and binding obligations of the Company enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors’ rights generally and to general principles of equity.
          (f) None of the exchange of the Bonds and Cash Payment for the Notes, the cancellation of the Notes nor the execution and delivery of and compliance with this Agreement by the Company, (i) will conflict with or constitute a violation or breach of (x) the charter or bylaws or similar organizational documents of the Company or any subsidiary of the Company or (y) any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, governmental authority, agency or instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries or their respective properties or assets (collectively, the “ Governmental Entities ”), or (ii) will conflict with or constitute a violation or breach of any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound.
          (g) Neither the Company nor any of its subsidiaries is (i) in violation of its respective charter or by-laws or similar organizational documents or (ii) in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument to which the Company or any such subsidiary is a party or by which it or any of them may be bound or to which any of the property or assets of any of them is subject, except, in the case of clause (ii), where such violation or default would not, singly or in the aggregate, have a Material Adverse Effect.
          (h) There is no action, suit or proceeding before or by any Governmental Entity, arbitrator or court, domestic or foreign, now pending or, to the knowledge of the Company after due inquiry, threatened against or affecting the Company or any of its subsidiaries, except for such actions, suits or proceedings that, if adversely determined, would not, singly or in the aggregate, adversely affect the consummation of the transactions contemplated by this Agreement or have a Material Adverse Effect.
          (i) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any Governmental Entity, other than those that have been made or obtained, is necessary or required for the performance by the Company of its obligations hereunder.
          (j) The Company has good and marketable title to the Bonds free and clear of all Liens and defects to the title thereof.
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          (k) The information provided by the Company pursuant to this Agreement does not, as of the date hereof, and will not as of the Closing Date, contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.
     Except as expressly stated herein or any of the other documents delivered by the company in connection herewith, the Company makes no representations or warranties, express or implied, with respect to the Exchange or any other matter.
     5. Representations and Warranties of Taberna. Each Taberna entity, for itself, represents and warrants to, and agrees with, the Company as follows:
          (a) It is a company duly formed, validly existing and in good standing under the laws of the jurisdiction in which it is organized with all requisite (i) power and authority to execute, deliver and perform under this Agreement, to make the representations and warranties specified herein and to consummate the transactions contemplated herein.
          (b) This Agreement and the consummation of the transactions contemplated herein has been duly authorized by it and, on the Closing Date, will have been duly executed and delivered by it and, assuming due authorization, execution and delivery by the Company of this Agreement, will be a legal, valid and binding obligation of such Taberna, enforceable against such Taberna in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors’ rights generally and to general principles of equity.
          (c) No filing with, or authorization, approval, consent, license, order registration, qualification or decree of, any Governmental Entity or any other Person, other than those that have been made or obtained, is necessary or required for the performance by such Taberna of its obligations under this Agreement or to consummate the transactions contemplated herein.
          (d) Taberna I is the legal and beneficial owner of Note 1 and the related Taberna Transferred Rights and shall deliver Note 1 and the related Taberna Transferred Rights free and clear of any Lien.
          (e) Taberna V is the legal and beneficial owner of Note 2 and the related Taberna Transferred Rights and shall deliver Note 2 and the related Taberna Transferred Rights free and clear of any Lien.
          (f) Taberna VII is the legal and beneficial owner of Note 3 and the related Taberna Transferred Rights and shall deliver Note 3 and the related Taberna Transferred Rights free and clear of any Lien.
          (g) Taberna VIII is the legal and beneficial owner of Note 4 and the related Taberna Transferred Rights and shall deliver Note 4 and the related Taberna Transferred Rights free and clear of any Lien.
          (h) There is no action, suit or proceeding before or by any Governmental Entity, arbitrator or court, domestic or foreign, now pending or, to its knowledge, threatened
-8-

 
against or affecting it, except for such actions, suits or proceedings that, if adversely determined, would not, singly or in the aggregate, adversely affect the consummation of the transactions contemplated by this Agreement.
          (i) The outstanding principal amount of its respective Notes is the face amount as set forth in such Notes.
          (j) It has not engaged any broker, finder or other entity acting under its authority that is entitled to any broker’s commission or other fee in connection with this Agreement and the consummation of transactions contemplated in this Agreement for which the Company could be responsible.
          (k) It (i) is a sophisticated entity with respect to the Exchange, (ii) has such knowledge and experience, and has made investments of a similar nature, so as to be aware of the risks and uncertainties inherent in the Exchange and (iii) has independently and without reliance upon the Company or any of their affiliates, and based on such information as it has deemed appropriate, made its own analysis and decision to enter into this Agreement, except that it has relied upon the Company’s express representations, warranties, covenants and agreements in this Agreement and the other documents delivered by the Company in connection therewith. It acknowledges that none of the Company or the Existing Indenture Trustee or any of their affiliates has given it any investment advice, credit information or opinion on whether the Exchange is prudent. It further acknowledges that neither the Company nor any of the Company’s affiliates have made any representation or warranty as to the value of the Bonds (or the underlying collateral for the Bonds) or as to the collectability or marketability of the Bonds.
          (l) None of the exchange of the Bonds and Cash Payment for the Notes, the discharge of the Notes nor the execution and delivery of and compliance with this Agreement by it will conflict with or constitute a violation or breach of (x) its charter or bylaws or similar organizational documents or (y) any applicable law, statute, rule, regulation, judgment, order, writ or decree of any Governmental Entities.
          (m) It is not (i) in violation of its respective charter or by-laws or similar organizational documents or (ii) in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument to which it is a party or by which it may be bound or to which any of the property or assets is subject, except, in the case of clause (ii), where such violation or default would not, singly or in the aggregate, have a Material Adverse Effect.
          (n) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any Governmental Entity, other than those that have been made or obtained, is necessary or required for the performance by it of its obligations hereunder.
          (o) The information provided by it pursuant to this Agreement does not, as of the date hereof, and will not as of the Closing Date, contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
- 9 -

 
     Except as expressly stated in this Agreement, Taberna make no representations or warranties, express or implied, with respect to the Exchange, the Taberna Transferred Rights, the Notes, the Existing Indentures, or any other matter.
     6. Covenants and Agreements .
          (a) The Company agrees with the Taberna entities and their successors and assigns as follows:
               (i) The Company has taken all action reasonably necessary or appropriate to cause its representations and warranties contained in  Section 4  hereof to be true as of the Closing Date and after giving effect to the Exchange.
               (ii) The Company will not identify BNYM, Taberna, Taberna Capital Management, LLC, Taberna Securities, LLC and their respective affiliates, in a press release or any other public statement without the prior written consent of such Indemnified Party.
          (b) The Taberna entities agree with the Company and its successors and assigns as follows:
               (i) The Taberna entities have taken all action reasonably necessary or appropriate to cause their representations and warranties contained in Section 5 hereof to be true as of the Closing Date and after giving effect to the Exchange.
     7. Payment of Expenses. On or before the Closing Date, the Company shall have paid the Expense Payment (as defined in the Memorandum) to Taberna Capital Management, LLC. In consideration of the payment of the Expense Payment, Taberna agrees to pay all costs and expenses incident to the performance of the obligations of Taberna under this Agreement and all costs and expenses of the Existing Indenture Trustee and each CDO Trustee in connection with the Exchange, including all costs and expenses incident to (i) the transfer and delivery of the Bonds; (ii) the fees and expenses of counsel, accountants and any other experts or advisors retained by Taberna; and (iii) the fees and all reasonable expenses of the Existing Indenture Trustee and each CDO Trustee, including the fees and disbursements of counsel for such trustee.
     8. Intentionally Omitted.
     9. Representations and Indemnities to Survive. The respective agreements, representations, warranties, indemnities and other statements of the Company and/or its officers set forth in or made pursuant to this Agreement will remain in full force and effect and will survive the Exchange. The provisions of Sections 7 and 8 shall survive the termination or cancellation of this Agreement.
     10. Amendments. This Agreement may not be modified, amended, altered or supplemented, except upon the execution and delivery of a written agreement by each of the parties hereto.
- 10 -

 
     11. Notices. All communications hereunder will be in writing and effective only on receipt, and will be mailed, delivered by hand or courier or sent by facsimile and confirmed or by any other reasonable means of communication, including by electronic mail, to the relevant party at its address specified in  Exhibit C .
     12. Successors and Assigns. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person other than the parties hereto and the affiliates, directors, officers, employees, agents and controlling persons referred to in Section 8 hereof and their successors, assigns, heirs and legal representatives, any right or obligation hereunder. None of the rights or obligations of the Company under this Agreement may be assigned, whether by operation of law or otherwise, without Taberna’s prior written consent. The rights and obligations of the Taberna entities under this Agreement may be assigned by the Taberna entities without the Company’s consent; provided that the assignee assumes the obligations of any such Taberna entity under this Agreement.
     13. Applicable Law. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF LAW (OTHER THAN SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW).
     14. Submission to Jurisdiction. ANY LEGAL ACTION OR PROCEEDING BY OR AGAINST ANY PARTY HERETO OR WITH RESPECT TO OR ARISING OUT OF THIS AGREEMENT MAY BE BROUGHT IN OR REMOVED TO THE COURTS OF THE STATE OF NEW YORK, IN AND FOR THE COUNTY OF NEW YORK, OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK (IN EACH CASE SITTING IN THE BOROUGH OF MANHATTAN). BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PARTY ACCEPTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS (AND COURTS OF APPEALS THEREFROM) FOR LEGAL PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT.
     15. Counterparts and Facsimile. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. This Agreement may be executed by any one or more of the parties hereto by facsimile.
     16. Entire Agreement. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof.
[Signature Page Follows]
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     IN WITNESS WHEREOF, this Agreement has been entered into as of the date first written above.
 	 	 	 	 	
 	ARBOR REALTY SR, INC.
 	 	
 	By:  	/s/ John Natalone  	 	
 	 	Name:  	John Natalone 	 	
 	 	Title:  	Executive Vice President 	 	
 	
(Signatures continue on the next page)
-12-

 
 	 	 	 	 	
 	TABERNA:

TABERNA PREFERRED FUNDING I LTD.
 	 	
 	By:  	/s/ Mora Goddard  	 	
 	 	Name:  	Mora Goddard 	 	
 	 	Title:  	Director 	 	
 	
 	TABERNA PREFERRED FUNDING V, LTD.
 	 	
 	By:  	/s/ Mora Goddard  	 	
 	 	Name:  	Mora Goddard 	 	
 	 	Title:  	Director 	 	
 	
 	TABERNA PREFERRED FUNDING VII, LTD.
 	 	
 	By:  	/s/ Mora Goddard  	 	
 	 	Name:  	Mora Goddard 	 	
 	 	Title:  	Director 	 	
 	
 	TABERNA PREFERRED FUNDING VIII, LTD.
 	 	
 	By:  	/s/ Mora Goddard  	 	
 	 	Name:  	Mora Goddard 	 	
 	 	Title:  	Director 	 	
- 13 -

 
 	 	 	 	 	
EXHIBIT A-1
Copy of Note 1
Indenture I — TPF I

 
THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND SUCH SECURITIES, AND ANY INTEREST THEREIN, MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF ANY SECURITIES IS HEREBY NOTIFIED THAT THE SELLER OF THE SECURITIES MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A UNDER THE SECURITIES ACT.
THE HOLDER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITIES MAY BE OFFERED, RESOLD OR OTHERWISE TRANSFERRED ONLY (I) TO THE COMPANY OR (II) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A “QUALIFIED PURCHASER” (AS DEFINED IN SECTION 2(a)(51) OF THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED), AND (B) THE HOLDER WILL NOTIFY ANY PURCHASER OF ANY SECURITIES FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.
THE SECURITIES WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING AN AGGREGATE PRINCIPAL AMOUNT OF NOT LESS THAN $100,000. TO THE FULLEST EXTENT PERMITTED BY LAW, ANY ATTEMPTED TRANSFER OF SECURITIES, OR ANY INTEREST THEREIN, IN A BLOCK HAVING AN AGGREGATE PRINCIPAL AMOUNT OF LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. TO THE FULLEST EXTENT PERMITTED BY LAW, ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF SUCH SECURITIES FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF PRINCIPAL OF OR INTEREST ON SUCH SECURITIES, OR ANY INTEREST THEREIN, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN SUCH SECURITIES.
THE HOLDER OF THIS SECURITY, OR ANY INTEREST THEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED (“ERISA ” ), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE “CODE”) (EACH A “PLAN”), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE “PLAN ASSETS” BY REASON OF ANY PLAN’S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING “PLAN ASSETS” OF ANY PLAN MAY ACQUIRE OR HOLD THIS SECURITY OR ANY INTEREST THEREIN. ANY PURCHASER OR HOLDER OF THE SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT IT IS NOT
Indenture I — TPF I

 
AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE. ”
Indenture I — TPF I

 
ARBOR REALTY SR, INC.
Junior Subordinated Note due 2034
 	 	 	
No. 1	 	$29,400,000	
Arbor Realty SR, Inc., a corporation organized and existing under the laws of Maryland (hereinafter called the “Company,”  which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to Hare & Co., the principal sum of Twenty Nine Million Four Hundred Thousand Dollars ($29,400,000) or such other principal amount represented hereby as may be set forth in the records of the Securities Registrar hereinafter referred to in accordance with the Indenture, on March 30, 2034. The Company further promises to pay interest on said principal sum from May 6, 2009, or from the most recent date on and to which interest has been paid or duly provided for, quarterly in arrears on June 30, September 30, December 30 and March 30, of each year, or if any such day is not a Business Day, on the next succeeding Business Day (and no interest shall accrue in respect of the amounts whose payment is so delayed for the period from and after such Interest Payment Date until such next succeeding Business Day), except that, if such Business Day falls in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case, with the same force and effect as if made on the Interest Payment Date, at the Fixed Rate during the Modification Period, and thereafter at a variable rate equal to LIBOR plus 3.75% per annum until the principal hereof is paid or duly provided for or made available for payment;  provided, further , that any overdue principal, premium, if any, and any overdue installment of interest shall bear Additional Interest at the Fixed Rate during the Modification Period, and thereafter at a variable rate equal to LIBOR plus 3.75% per annum (in each case, to the extent that the payment of such interest shall be legally enforceable), compounded quarterly, from the dates such amounts are due until they are paid or made available for payment, and such interest shall be payable on demand.
     Payments of interest on the Securities shall include interest accrued to but excluding the respective Interest Payment Dates. During the Modification Period, the amount of interest payable shall be computed on the basis of a 360-day year of twelve 30-day months and the amount payable for any partial period shall be computed on the basis of the number of days elapsed in a 360-day year of twelve 30-day months. Upon expiration of the Modification Period, the amount of interest payable for any Interest Period shall be computed on the basis of a 360-day year and the actual number of days elapsed in the relevant Interest Period. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date shall, as provided in the Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest installment. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than ten (10) days prior to such Special Record Date, or be paid at any time in any other lawful manner not
Indenture I — TPF I

 
inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture.
     Payment of principal of, premium, if any, and interest on this Security shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Payments of principal, premium, if any, and interest due at the Maturity of this Security shall be made at the Place of Payment upon surrender of such Securities to the Paying Agent, and payments of interest shall be made, subject to such surrender where applicable, by wire transfer at such place and to such account at a banking institution in the United States as may be designated in writing to the Paying Agent at least ten (10) Business Days prior to the date for payment by the Person entitled thereto unless proper written transfer instructions have not been received by the relevant record date, in which case such payments shall be made by check mailed to the address of such Person as such address shall appear in the Security Register.
     The indebtedness evidenced by this Security is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Debt, and this Security is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her behalf to take such actions as may be necessary or appropriate to effectuate the subordination so provided and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each Holder hereof, by his or her acceptance hereof, waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Debt, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions.
     Unless the certificate of authentication hereon has been executed by the Trustee by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.
[FORM OF REVERSE OF SECURITY]
     This Security is one of a duly authorized issue of securities of the Company (the “Securities”) issued under the Junior Subordinated Indenture, dated as of May 6, 2009 (the  “Indenture” ), between the Company and The Bank of New York Mellon Trust Company, National Association, as Trustee (in such capacity, the “Trustee,” which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee, the holders of Senior Debt and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered.
     All terms used in this Security that are defined in the Indenture shall have the meanings assigned to them in the Indenture. The Company may, on any Interest Payment Date, at its option, upon not less than thirty (30) days’ nor more than sixty (60) days’ written notice to the Holders of the Securities (unless a shorter notice period shall be satisfactory to the Trustee) on or
Indenture I — TPF I

 
after March 30, 2010 and subject to the terms and conditions of Article XI of the Indenture, redeem this Security in whole at any time or in part from time to time at a Redemption Price equal to one hundred percent (100%) of the principal amount hereof, together, in the case of any such redemption, with accrued interest, including any Additional Interest, through but excluding the date fixed as the Redemption Date.
     In addition, upon the occurrence and during the continuation of a Special Event, the Company may, at its option, upon not less than thirty (30) days’ nor more than sixty (60) days’ written notice to the Holders of the Securities (unless a shorter notice period shall be satisfactory to the Trustee), redeem this Security, in whole but not in part, subject to the terms and conditions of  Article XI  of the Indenture at a Redemption Price equal to one hundred seven and one half percent (107.5%) of the principal amount hereof, together, in the case of any such redemption, with accrued interest, including any Additional Interest, through but excluding the date fixed as the Redemption Date.
     In the event of redemption of this Security in part only, a new Security or Securities for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. If less than all the Securities are to be redeemed, the particular Securities to be redeemed shall be selected not more than sixty (60) days prior to the Redemption Date by the Trustee from the Outstanding Securities not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of a portion of the principal amount of any Security.
     The Indenture permits, with certain exceptions as therein provided, the Company and the Trustee at any time to enter into a supplemental indenture or indentures for the purpose of modifying in any manner the rights and obligations of the Company and of the Holders of the Securities, with the consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities. The Indenture also contains provisions permitting Holders of specified percentages in principal amount of the Securities, on behalf of the Holders of all Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.
     No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium, if any, and interest, including any Additional Interest (to the extent legally enforceable), on this Security at the times, place and rate, and in the coin or currency, herein prescribed.
     As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is restricted to transfers to “Qualified Purchasers” (as such term is defined in the Investment Company Act of 1940, as amended), and is registrable in the Securities Register, upon surrender of this Security for registration of transfer at the office or agency of the Company maintained for such purpose, duly endorsed by, or accompanied by a written
Indenture I — TPF I

 
instrument of transfer in form satisfactory to the Company and the Securities Registrar and duly executed by, the Holder hereof or such Holder’s attorney duly authorized in writing, and thereupon one or more new Securities, of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees.
     The Securities are issuable only in registered form without coupons in minimum denominations of $100,000 and any integral multiple of $1,000 in excess thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities are exchangeable for a like aggregate principal amount of Securities and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same.
     No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.
     The Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary.
     The Company and, by its acceptance of this Security or a beneficial interest herein, the Holder of, and any Person that acquires a beneficial interest in, this Security agree that, for United States federal, state and local tax purposes, it is intended that this Security constitute indebtedness.
     This Security shall be construed and enforced in accordance with and governed by the laws of the State of New York, without reference to its conflict of laws provisions (other than Section 5-1401 of the General Obligations Law).
Indenture I — TPF I

 
     IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed on this 6th day of May, 2009.
 	 	 	 	 	
 	ARBOR REALTY SR, INC.,
 	 	
 	By:  	/s/ Paul Elenio  	 	
 	 	Name:  	Paul Elenio 	 	
 	 	Title:  	Chief Financial Officer 	 	
 	
Signature Page – Note 1 (Taberna I)
Indenture I — TPF I

 
This is one of the within mentioned Securities referred to in the within mentioned Indenture.
     Dated: May 6, 2009
 	 	 	 	 	
 	THE BANK OF NEW YORK MELLON TRUST COMPANY, NATIONAL
ASSOCIATION,  not in its individual capacity, but
solely as Trustee  	 	

 	By:  	 	 	
 	 	Authorized signatory 	 	

A-1

 
EXHIBIT A-2
Copy of Note 2
Indenture II — TPF V

 
THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE  “ SECURITIES ACT ” ), AND SUCH SECURITIES, AND ANY INTEREST THEREIN, MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF ANY SECURITIES IS HEREBY NOTIFIED THAT THE SELLER OF THE SECURITIES MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A UNDER THE SECURITIES ACT.
THE HOLDER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITIES MAY BE OFFERED, RESOLD OR OTHERWISE TRANSFERRED ONLY (I) TO THE COMPANY OR (II) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A “QUALIFIED PURCHASER” (AS DEFINED IN SECTION 2(a)(51) OF THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED), AND (B) THE HOLDER WILL NOTIFY ANY PURCHASER OF ANY SECURITIES FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.
THE SECURITIES WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING AN AGGREGATE PRINCIPAL AMOUNT OF NOT LESS THAN $100,000. TO THE FULLEST EXTENT PERMITTED BY LAW, ANY ATTEMPTED TRANSFER OF SECURITIES, OR ANY INTEREST THEREIN, IN A BLOCK HAVING AN AGGREGATE PRINCIPAL AMOUNT OF LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. TO THE FULLEST EXTENT PERMITTED BY LAW, ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF SUCH SECURITIES FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF PRINCIPAL OF OR INTEREST ON SUCH SECURITIES, OR ANY INTEREST THEREIN, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN SUCH SECURITIES.
THE HOLDER OF THIS SECURITY, OR ANY INTEREST THEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ( “ ERISA ” ), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE  “ CODE ” ) (EACH A “ PLAN ” ), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE “PLAN ASSETS” BY REASON OF ANY PLAN’S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING “PLAN ASSETS” OF ANY PLAN MAY ACQUIRE OR HOLD THIS SECURITY OR ANY INTEREST THEREIN. ANY PURCHASER OR HOLDER OF
Indenture II — TPF V

 
THE SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE. ”
Indenture II — TPF V

 
ARBOR REALTY SR, INC.
Junior Subordinated Note due 2034
 	 	 	 	 	
No. 7	 	$	28,000,000	 	
Arbor Realty SR, Inc., a corporation organized and existing under the laws of Maryland (hereinafter called the “ Company, ”  which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to Embassy & Co., the principal sum of Twenty-Eight Million Dollars ($28,000,000) or such other principal amount represented hereby as may be set forth in the records of the Securities Registrar hereinafter referred to in accordance with the Indenture, on March 30, 2034. The Company further promises to pay interest on said principal sum from May 6, 2009, or from the most recent date on and to which interest has been paid or duly provided for, quarterly in arrears on July 30, October 30, January 30 and April 30 of each year, or if any such day is not a Business Day, on the next succeeding Business Day (and no interest shall accrue in respect of the amounts whose payment is so delayed for the period from and after such Interest Payment Date until such next succeeding Business Day), except that, if such Business Day falls in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case, with the same force and effect as if made on the Interest Payment Date, at the Fixed Rate during the Modification Period, and thereafter at a variable rate equal to LIBOR plus 2.87% per annum until the principal hereof is paid or duly provided for or made available for payment;  provided, further , that any overdue principal, premium, if any, and any overdue installment of interest shall bear Additional Interest at the Fixed Rate during the Modification Period, and thereafter at a variable rate equal to LIBOR plus 2.87% per annum (in each case, to the extent that the payment of such interest shall be legally enforceable), compounded quarterly, from the dates such amounts are due until they are paid or made available for payment, and such interest shall be payable on demand.
     Payments of interest on the Securities shall include interest accrued to but excluding the respective Interest Payment Dates. During the Modification Period, the amount of interest payable shall be computed on the basis of a 360-day year of twelve 30-day months and the amount payable for any partial period shall be computed on the basis of the number of days elapsed in a 360-day year of twelve 30-day months. Upon expiration of the Modification Period, the amount of interest payable for any Interest Period shall be computed on the basis of a 360-day year and the actual number of days elapsed in the relevant Interest Period. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date shall, as provided in the Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest installment. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than ten (10) days prior to such Special Record Date, or be paid at any time in any other lawful manner not
Indenture II — TPF V

 
inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture.
     Payment of principal of, premium, if any, and interest on this Security shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Payments of principal, premium, if any, and interest due at the Maturity of this Security shall be made at the Place of Payment upon surrender of such Securities to the Paying Agent, and payments of interest shall be made, subject to such surrender where applicable, by wire transfer at such place and to such account at a banking institution in the United States as may be designated in writing to the Paying Agent at least ten (10) Business Days prior to the date for payment by the Person entitled thereto unless proper written transfer instructions have not been received by the relevant record date, in which case such payments shall be made by check mailed to the address of such Person as such address shall appear in the Security Register.
     The indebtedness evidenced by this Security is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Debt, and this Security is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her behalf to take such actions as may be necessary or appropriate to effectuate the subordination so provided and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each Holder hereof, by his or her acceptance hereof, waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Debt, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions.
     Unless the certificate of authentication hereon has been executed by the Trustee by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.
[FORM OF REVERSE OF SECURITY]
     This Security is one of a duly authorized issue of securities of the Company (the “Securities”) issued under the Junior Subordinated Indenture, dated as of May 6, 2009 (the  “ Indenture ” ), between the Company and The Bank of New York Mellon Trust Company, National Association, as Trustee (in such capacity, the “Trustee,” which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee, the holders of Senior Debt and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered.
     All terms used in this Security that are defined in the Indenture shall have the meanings assigned to them in the Indenture. The Company may, on any Interest Payment Date, at its option, upon not less than thirty (30) days’ nor more than sixty (60) days’ written notice to the Holders of the Securities (unless a shorter notice period shall be satisfactory to the Trustee) on or
Indenture II — TPF V

 
after July 30, 2011 and subject to the terms and conditions of Article XI of the Indenture, redeem this Security in whole at any time or in part from time to time at a Redemption Price equal to one hundred percent (100%) of the principal amount hereof, together, in the case of any such redemption, with accrued interest, including any Additional Interest, through but excluding the date fixed as the Redemption Date.
     In addition, upon the occurrence and during the continuation of a Special Event, the Company may, at its option, upon not less than thirty (30) days’ nor more than sixty (60) days’ written notice to the Holders of the Securities (unless a shorter notice period shall be satisfactory to the Trustee), redeem this Security, in whole but not in part, subject to the terms and conditions of  Article XI  of the Indenture at a Redemption Price equal to one hundred seven and one half percent (107.5%) of the principal amount hereof, together, in the case of any such redemption, with accrued interest, including any Additional Interest, through but excluding the date fixed as the Redemption Date.
     In the event of redemption of this Security in part only, a new Security or Securities for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. If less than all the Securities are to be redeemed, the particular Securities to be redeemed shall be selected not more than sixty (60) days prior to the Redemption Date by the Trustee from the Outstanding Securities not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of a portion of the principal amount of any Security.
     The Indenture permits, with certain exceptions as therein provided, the Company and the Trustee at any time to enter into a supplemental indenture or indentures for the purpose of modifying in any manner the rights and obligations of the Company and of the Holders of the Securities, with the consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities. The Indenture also contains provisions permitting Holders of specified percentages in principal amount of the Securities, on behalf of the Holders of all Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.
     No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium, if any, and interest, including any Additional Interest (to the extent legally enforceable), on this Security at the times, place and rate, and in the coin or currency, herein prescribed.
     As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is restricted to transfers to “Qualified Purchasers” (as such term is defined in the Investment Company Act of 1940, as amended), and is registrable in the Securities Register, upon surrender of this Security for registration of transfer at the office or agency of the Company maintained for such purpose, duly endorsed by, or accompanied by a written
Indenture II — TPF V

 
instrument of transfer in form satisfactory to the Company and the Securities Registrar and duly executed by, the Holder hereof or such Holder’s attorney duly authorized in writing, and thereupon one or more new Securities, of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees.
     The Securities are issuable only in registered form without coupons in minimum denominations of $100,000 and any integral multiple of $1,000 in excess thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities are exchangeable for a like aggregate principal amount of Securities and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same.
     No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.
     The Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary.
     The Company and, by its acceptance of this Security or a beneficial interest herein, the Holder of, and any Person that acquires a beneficial interest in, this Security agree that, for United States federal, state and local tax purposes, it is intended that this Security constitute indebtedness.
     This Security shall be construed and enforced in accordance with and governed by the laws of the State of New York, without reference to its conflict of laws provisions (other than Section 5-1401 of the General Obligations Law).
Indenture II — TPF V

 
     IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed on this 6th day of May, 2009.
 	 	 	 	 	
 	ARBOR REALTY SR, INC.,
 	 	
 	By:  	/s/ Paul Elenio  	 	
 	 	Name:  	Paul Elenio 	 	
 	 	Title:  	Chief Financial Officer 	 	
 	
Signature Page — Note 7 (Taberna V)
Indenture II — TPF V

 
This is one of the within mentioned Securities referred to in the within mentioned Indenture.
     Dated: May                     , 2009
 	 	 	 	 	
 	THE BANK OF NEW YORK MELLON TRUST COMPANY, NATIONAL
ASSOCIATION,  not in its individual capacity, but
solely as Trustee
 	 	
 	By:  	 	 	
 	 	Authorized signatory 	 	
 	 	 	 	
A -10

 
 	 	 	 	 	
EXHIBIT A-3
Copy of Note 3
Indenture II — TPF VII

 
THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE  “ SECURITIES ACT ” ), AND SUCH SECURITIES, AND ANY INTEREST THEREIN, MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF ANY SECURITIES IS HEREBY NOTIFIED THAT THE SELLER OF THE SECURITIES MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A UNDER THE SECURITIES ACT.
THE HOLDER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITIES MAY BE OFFERED, RESOLD OR OTHERWISE TRANSFERRED ONLY (I) TO THE COMPANY OR (II) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A “QUALIFIED PURCHASER” (AS DEFINED IN SECTION 2(a)(51) OF THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED), AND (B) THE HOLDER WILL NOTIFY ANY PURCHASER OF ANY SECURITIES FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.
THE SECURITIES WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING AN AGGREGATE PRINCIPAL AMOUNT OF NOT LESS THAN $100,000. TO THE FULLEST EXTENT PERMITTED BY LAW, ANY ATTEMPTED TRANSFER OF SECURITIES, OR ANY INTEREST THEREIN, IN A BLOCK HAVING AN AGGREGATE PRINCIPAL AMOUNT OF LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. TO THE FULLEST EXTENT PERMITTED BY LAW, ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF SUCH SECURITIES FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF PRINCIPAL OF OR INTEREST ON SUCH SECURITIES, OR ANY INTEREST THEREIN, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN SUCH SECURITIES.
THE HOLDER OF THIS SECURITY, OR ANY INTEREST THEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ( “ ERISA ” ), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE  “ CODE ” ) (EACH A  “ PLAN ” ), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE “PLAN ASSETS” BY REASON OF ANY PLAN’S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING “PLAN ASSETS” OF ANY PLAN MAY ACQUIRE OR HOLD THIS SECURITY OR ANY INTEREST THEREIN. ANY PURCHASER OR HOLDER OF THE SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT IT IS NOT
Indenture II — TPF VII

 
AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE. ”
Indenture II — TPF VII

 
ARBOR REALTY SR, INC.
Junior Subordinated Note due 2034
 	 	 	 	 	
No. 5	 	$	28,000,000	 	
Arbor Realty SR, Inc., a corporation organized and existing under the laws of Maryland (hereinafter called the “ Company ,” which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to Hare & Co., the principal sum of Twenty-Eight Million Dollars ($28,000,000) or such other principal amount represented hereby as may be set forth in the records of the Securities Registrar hereinafter referred to in accordance with the Indenture, on March 30, 2034. The Company further promises to pay interest on said principal sum from May 6, 2009, or from the most recent date on and to which interest has been paid or duly provided for, quarterly in arrears on July 30, October 30, January 30 and April 30, of each year, or if any such day is not a Business Day, on the next succeeding Business Day (and no interest shall accrue in respect of the amounts whose payment is so delayed for the period from and after such Interest Payment Date until such next succeeding Business Day), except that, if such Business Day falls in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case, with the same force and effect as if made on the Interest Payment Date, at the Fixed Rate during the Modification Period, and thereafter at a variable rate equal to LIBOR plus 2.87% per annum until the principal hereof is paid or duly provided for or made available for payment;  provided, further , that any overdue principal, premium, if any, and any overdue installment of interest shall bear Additional Interest at the Fixed Rate during the Modification Period, and thereafter at a variable rate equal to LIBOR plus 2.87% per annum (in each case, to the extent that the payment of such interest shall be legally enforceable), compounded quarterly, from the dates such amounts are due until they are paid or made available for payment, and such interest shall be payable on demand.
     Payments of interest on the Securities shall include interest accrued to but excluding the respective Interest Payment Dates. During the Modification Period, the amount of interest payable shall be computed on the basis of a 360-day year of twelve 30-day months and the amount payable for any partial period shall be computed on the basis of the number of days elapsed in a 360-day year of twelve 30-day months. Upon expiration of the Modification Period, the amount of interest payable for any Interest Period shall be computed on the basis of a 360-day year and the actual number of days elapsed in the relevant Interest Period. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date shall, as provided in the Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest installment. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than ten (10) days prior to such Special Record Date, or be paid at any time in any other lawful manner not
Indenture II — TPF VII

 
inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture.
     Payment of principal of, premium, if any, and interest on this Security shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Payments of principal, premium, if any, and interest due at the Maturity of this Security shall be made at the Place of Payment upon surrender of such Securities to the Paying Agent, and payments of interest shall be made, subject to such surrender where applicable, by wire transfer at such place and to such account at a banking institution in the United States as may be designated in writing to the Paying Agent at least ten (10) Business Days prior to the date for payment by the Person entitled thereto unless proper written transfer instructions have not been received by the relevant record date, in which case such payments shall be made by check mailed to the address of such Person as such address shall appear in the Security Register.
     The indebtedness evidenced by this Security is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Debt, and this Security is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her behalf to take such actions as may be necessary or appropriate to effectuate the subordination so provided and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each Holder hereof, by his or her acceptance hereof, waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Debt, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions.
     Unless the certificate of authentication hereon has been executed by the Trustee by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.
[FORM OF REVERSE OF SECURITY]
     This Security is one of a duly authorized issue of securities of the Company (the “Securities”) issued under the Junior Subordinated Indenture, dated as of May 6, 2009 (the “ Indenture ”), between the Company and The Bank of New York Mellon Trust Company, National Association, as Trustee (in such capacity, the “Trustee,” which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee, the holders of Senior Debt and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered.
     All terms used in this Security that are defined in the Indenture shall have the meanings assigned to them in the Indenture. The Company may, on any Interest Payment Date, at its option, upon not less than thirty (30) days’ nor more than sixty (60) days’ written notice to the Holders of the Securities (unless a shorter notice period shall be satisfactory to the Trustee) on or
Indenture II — TPF VII

 
after July 30, 2011 and subject to the terms and conditions of Article XI of the Indenture, redeem this Security in whole at any time or in part from time to time at a Redemption Price equal to one hundred percent (100%) of the principal amount hereof, together, in the case of any such redemption, with accrued interest, including any Additional Interest, through but excluding the date fixed as the Redemption Date.
     In addition, upon the occurrence and during the continuation of a Special Event, the Company may, at its option, upon not less than thirty (30) days’ nor more than sixty (60) days’ written notice to the Holders of the Securities (unless a shorter notice period shall be satisfactory to the Trustee), redeem this Security, in whole but not in part, subject to the terms and conditions of  Article XI  of the Indenture at a Redemption Price equal to one hundred seven and one half percent (107.5%) of the principal amount hereof, together, in the case of any such redemption, with accrued interest, including any Additional Interest, through but excluding the date fixed as the Redemption Date.
     In the event of redemption of this Security in part only, a new Security or Securities for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. If less than all the Securities are to be redeemed, the particular Securities to be redeemed shall be selected not more than sixty (60) days prior to the Redemption Date by the Trustee from the Outstanding Securities not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of a portion of the principal amount of any Security.
     The Indenture permits, with certain exceptions as therein provided, the Company and the Trustee at any time to enter into a supplemental indenture or indentures for the purpose of modifying in any manner the rights and obligations of the Company and of the Holders of the Securities, with the consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities. The Indenture also contains provisions permitting Holders of specified percentages in principal amount of the Securities, on behalf of the Holders of all Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.
     No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium, if any, and interest, including any Additional Interest (to the extent legally enforceable), on this Security at the times, place and rate, and in the coin or currency, herein prescribed.
     As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is restricted to transfers to “Qualified Purchasers” (as such term is defined in the Investment Company Act of 1940, as amended), and is registrable in the Securities Register, upon surrender of this Security for registration of transfer at the office or agency of the Company maintained for such purpose, duly endorsed by, or accompanied by a written
Indenture II — TPF VII

 
instrument of transfer in form satisfactory to the Company and the Securities Registrar and duly executed by, the Holder hereof or such Holder’s attorney duly authorized in writing, and thereupon one or more new Securities, of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees.
     The Securities are issuable only in registered form without coupons in minimum denominations of $100,000 and any integral multiple of $1,000 in excess thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities are exchangeable for a like aggregate principal amount of Securities and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same.
     No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.
     The Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary.
     The Company and, by its acceptance of this Security or a beneficial interest herein, the Holder of, and any Person that acquires a beneficial interest in, this Security agree that, for United States federal, state and local tax purposes, it is intended that this Security constitute indebtedness.
     This Security shall be construed and enforced in accordance with and governed by the laws of the State of New York, without reference to its conflict of laws provisions (other than Section 5-1401 of the General Obligations Law).
Indenture II — TPF VII

 
     IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed on this 6th day of May, 2009.
 	 	 	 	 	
 	ARBOR REALTY SR, INC.,
 	 	
 	By:  	/s/ Paul Elenio  	 	
 	 	Name:  	Paul Elenio 	 	
 	 	Title:  	Chief Financial Officer 	 	
 	
Signature Page — Note 5 (Taberna VII)
Indenture II — TPF VII

 
This is one of the within mentioned Securities referred to in the within mentioned Indenture.
     Dated: May                     , 2009
 	 	 	 	 	
 	THE BANK OF NEW YORK MELLON TRUST COMPANY, NATIONAL
ASSOCIATION,  not in its individual capacity, but
solely as Trustee
 	 	
 	By:  	 	 	
 	 	Authorized signatory 	 	

A-3

 
EXHIBIT A-4
Copy of Note 4
Indenture II — TPF VIII

 
THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE  “ SECURITIES ACT ” ), AND SUCH SECURITIES, AND ANY INTEREST THEREIN, MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF ANY SECURITIES IS HEREBY NOTIFIED THAT THE SELLER OF THE SECURITIES MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A UNDER THE SECURITIES ACT.
THE HOLDER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITIES MAY BE OFFERED, RESOLD OR OTHERWISE TRANSFERRED ONLY (I) TO THE COMPANY OR (II) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A “QUALIFIED PURCHASER” (AS DEFINED IN SECTION 2(a)(51) OF THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED), AND (B) THE HOLDER WILL NOTIFY ANY PURCHASER OF ANY SECURITIES FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.
THE SECURITIES WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING AN AGGREGATE PRINCIPAL AMOUNT OF NOT LESS THAN $100,000. TO THE FULLEST EXTENT PERMITTED BY LAW, ANY ATTEMPTED TRANSFER OF SECURITIES, OR ANY INTEREST THEREIN, IN A BLOCK HAVING AN AGGREGATE PRINCIPAL AMOUNT OF LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. TO THE FULLEST EXTENT PERMITTED BY LAW, ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF SUCH SECURITIES FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF PRINCIPAL OF OR INTEREST ON SUCH SECURITIES, OR ANY INTEREST THEREIN, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN SUCH SECURITIES.
THE HOLDER OF THIS SECURITY, OR ANY INTEREST THEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ( “ ERISA ” ), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE  “ CODE ” ) (EACH A “ PLAN ” ), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE “PLAN ASSETS” BY REASON OF ANY PLAN’S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING “PLAN ASSETS” OF ANY PLAN MAY ACQUIRE OR HOLD THIS SECURITY OR ANY INTEREST THEREIN. ANY PURCHASER OR HOLDER OF THE SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT IT IS NOT
Indenture II — TPF VIII

 
AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE. ”
Indenture II — TPF VIII

 
ARBOR REALTY SR, INC.
Junior Subordinated Note due 2034
 	 	 	
No. 6	 	$28,700,000	
Arbor Realty SR, Inc., a corporation organized and existing under the laws of Maryland (hereinafter called the “ Company ,” which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to Hare & Co., the principal sum of Twenty-Eight Million Seven Hundred Thousand Dollars ($28,700,000) or such other principal amount represented hereby as may be set forth in the records of the Securities Registrar hereinafter referred to in accordance with the Indenture, on March 30, 2034. The Company further promises to pay interest on said principal sum from May 6, 2009, or from the most recent date on and to which interest has been paid or duly provided for, quarterly in arrears on July 30, October 30, January 30 and April 30, of each year, or if any such day is not a Business Day, on the next succeeding Business Day (and no interest shall accrue in respect of the amounts whose payment is so delayed for the period from and after such Interest Payment Date until such next succeeding Business Day), except that, if such Business Day falls in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case, with the same force and effect as if made on the Interest Payment Date, at the Fixed Rate during the Modification Period, and thereafter at a variable rate equal to LIBOR plus 2.87% per annum until the principal hereof is paid or duly provided for or made available for payment;  provided, further , that any overdue principal, premium, if any, and any overdue installment of interest shall bear Additional Interest at the Fixed Rate during the Modification Period, and thereafter at a variable rate equal to LIBOR plus 2.87% per annum (in each case, to the extent that the payment of such interest shall be legally enforceable), compounded quarterly, from the dates such amounts are due until they are paid or made available for payment, and such interest shall be payable on demand.
     Payments of interest on the Securities shall include interest accrued to but excluding the respective Interest Payment Dates. During the Modification Period, the amount of interest payable shall be computed on the basis of a 360-day year of twelve 30-day months and the amount payable for any partial period shall be computed on the basis of the number of days elapsed in a 360-day year of twelve 30-day months. Upon expiration of the Modification Period, the amount of interest payable for any Interest Period shall be computed on the basis of a 360-day year and the actual number of days elapsed in the relevant Interest Period. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date shall, as provided in the Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest installment. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than ten (10) days prior to such Special Record Date, or be paid at any time in any other lawful manner not
Indenture II — TPF VIII

 
inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture.
     Payment of principal of, premium, if any, and interest on this Security shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Payments of principal, premium, if any, and interest due at the Maturity of this Security shall be made at the Place of Payment upon surrender of such Securities to the Paying Agent, and payments of interest shall be made, subject to such surrender where applicable, by wire transfer at such place and to such account at a banking institution in the United States as may be designated in writing to the Paying Agent at least ten (10) Business Days prior to the date for payment by the Person entitled thereto unless proper written transfer instructions have not been received by the relevant record date, in which case such payments shall be made by check mailed to the address of such Person as such address shall appear in the Security Register.
     The indebtedness evidenced by this Security is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Debt, and this Security is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her behalf to take such actions as may be necessary or appropriate to effectuate the subordination so provided and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each Holder hereof, by his or her acceptance hereof, waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Debt, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions.
     Unless the certificate of authentication hereon has been executed by the Trustee by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.
[FORM OF REVERSE OF SECURITY]
     This Security is one of a duly authorized issue of securities of the Company (the “Securities”) issued under the Junior Subordinated Indenture, dated as of May 6, 2009 (the “ Indenture ”), between the Company and The Bank of New York Mellon Trust Company, National Association, as Trustee (in such capacity, the “Trustee,” which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee, the holders of Senior Debt and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered.
     All terms used in this Security that are defined in the Indenture shall have the meanings assigned to them in the Indenture. The Company may, on any Interest Payment Date, at its option, upon not less than thirty (30) days’ nor more than sixty (60) days’ written notice to the Holders of the Securities (unless a shorter notice period shall be satisfactory to the Trustee) on or
Indenture II — TPF VIII

 
after July 30, 2011 and subject to the terms and conditions of Article XI of the Indenture, redeem this Security in whole at any time or in part from time to time at a Redemption Price equal to one hundred percent (100%) of the principal amount hereof, together, in the case of any such redemption, with accrued interest, including any Additional Interest, through but excluding the date fixed as the Redemption Date.
     In addition, upon the occurrence and during the continuation of a Special Event, the Company may, at its option, upon not less than thirty (30) days’ nor more than sixty (60) days’ written notice to the Holders of the Securities (unless a shorter notice period shall be satisfactory to the Trustee), redeem this Security, in whole but not in part, subject to the terms and conditions of  Article XI  of the Indenture at a Redemption Price equal to one hundred seven and one half percent (107.5%) of the principal amount hereof, together, in the case of any such redemption, with accrued interest, including any Additional Interest, through but excluding the date fixed as the Redemption Date.
     In the event of redemption of this Security in part only, a new Security or Securities for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. If less than all the Securities are to be redeemed, the particular Securities to be redeemed shall be selected not more than sixty (60) days prior to the Redemption Date by the Trustee from the Outstanding Securities not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of a portion of the principal amount of any Security.
     The Indenture permits, with certain exceptions as therein provided, the Company and the Trustee at any time to enter into a supplemental indenture or indentures for the purpose of modifying in any manner the rights and obligations of the Company and of the Holders of the Securities, with the consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities. The Indenture also contains provisions permitting Holders of specified percentages in principal amount of the Securities, on behalf of the Holders of all Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.
     No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium, if any, and interest, including any Additional Interest (to the extent legally enforceable), on this Security at the times, place and rate, and in the coin or currency, herein prescribed.
     As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is restricted to transfers to “Qualified Purchasers” (as such term is defined in the Investment Company Act of 1940, as amended), and is registrable in the Securities Register, upon surrender of this Security for registration of transfer at the office or agency of the Company maintained for such purpose, duly endorsed by, or accompanied by a written
Indenture II — TPF VIII

 
instrument of transfer in form satisfactory to the Company and the Securities Registrar and duly executed by, the Holder hereof or such Holder’s attorney duly authorized in writing, and thereupon one or more new Securities, of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees.
     The Securities are issuable only in registered form without coupons in minimum denominations of $100,000 and any integral multiple of $1,000 in excess thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities are exchangeable for a like aggregate principal amount of Securities and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same.
     No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.
     The Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary.
     The Company and, by its acceptance of this Security or a beneficial interest herein, the Holder of, and any Person that acquires a beneficial interest in, this Security agree that, for United States federal, state and local tax purposes, it is intended that this Security constitute indebtedness.
     This Security shall be construed and enforced in accordance with and governed by the laws of the State of New York, without reference to its conflict of laws provisions (other than Section 5-1401 of the General Obligations Law).
Indenture II — TPF VIII

 
     IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed on this 6yh day of May, 2009.
 	 	 	 	 	
 	ARBOR REALTY SR, INC.,
 	 	
 	By:  	/s/ Paul Elenio  	 	
 	 	Name:  	Paul Elenio 	 	
 	 	Title:  	Chief Financial Officer 	 	
 	
Signature Page — Note 6 (Taberna VIII)
Indenture II — TPF VIII

 
This is one of the within mentioned Securities referred to in the within mentioned Indenture.
     Dated: May ___, 2009
 	 	 	 	 	
 	THE BANK OF NEW YORK MELLON TRUST COMPANY, NATIONAL
ASSOCIATION,  not in its individual capacity, but
solely as Trustee
 	 	
 	By:  	 	 	
 	 	Authorized signatory 	 	
 	 	 	 	
A-4

 
 	 	 	 	 	
EXHIBIT B
Schedule of Bonds
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cusip	 	Series	 	Class	 	Face	 	 	Taberna I	 	 	Taberna V	 	 	Taberna VII	 	 	Taberna VIII	 	
1248MLAG8	 	CBRE 2007-1A	 	B	 	$	20,000,000	 	 	 	5,153,374	 	 	 	4,907,975	 	 	 	4,907,975	 	 	 	5,030,675	 	
1248MLAS2	 	CBRE 2007-1A	 	G	 	$	5,000,000	 	 	 	1,288,344	 	 	 	1,226,994	 	 	 	1,226,994	 	 	 	1,257,669	 	
03877VAC9	 	ARMSS 2004-1	 	C	 	$	1,096,288	 	 	 	282,479	 	 	 	269,028	 	 	 	269,028	 	 	 	275,753	 	
03877VAC9	 	ARMSS 2004-1	 	C	 	$	2,192,575	 	 	 	564,958	 	 	 	538,055	 	 	 	538,055	 	 	 	551,507	 	
03877VAB1	 	ARMSS 2004-1	 	B	 	$	4,590,000	 	 	 	1,182,699	 	 	 	1,126,380	 	 	 	1,126,380	 	 	 	1,154,540	 	
03877VAC9	 	ARMSS 2004-1	 	C	 	$	8,222,158	 	 	 	2,118,593	 	 	 	2,017,707	 	 	 	2,017,707	 	 	 	2,068,150	 	
038927AH2	 	ARMSS 2005-1	 	H	 	$	1,612,221	 	 	 	415,419	 	 	 	395,637	 	 	 	395,637	 	 	 	405,528	 	
038927AF6	 	ARMSS 2005-1	 	F	 	$	3,224,442	 	 	 	830,838	 	 	 	791,274	 	 	 	791,274	 	 	 	811,056	 	
038927AH2	 	ARMSS 2005-1	 	H	 	$	4,030,552	 	 	 	1,038,547	 	 	 	989,093	 	 	 	989,093	 	 	 	1,013,820	 	
03878CAE6	 	ARMSS 2006-1	 	C	 	$	540,000	 	 	 	139,141	 	 	 	132,515	 	 	 	132,515	 	 	 	135,828	 	
03878CAE6	 	ARMSS 2006-1	 	C	 	$	770,000	 	 	 	198,405	 	 	 	188,957	 	 	 	188,957	 	 	 	193,681	 	
03878CAH9	 	ARMSS 2006-1	 	F	 	$	900,000	 	 	 	231,902	 	 	 	220,859	 	 	 	220,859	 	 	 	226,380	 	
03878CAH9	 	ARMSS 2006-1	 	F	 	$	1,280,000	 	 	 	329,816	 	 	 	314,110	 	 	 	314,110	 	 	 	321,963	 	
03878CAJ5	 	ARMSS 2006-1	 	G	 	$	1,846,155	 	 	 	475,696	 	 	 	453,044	 	 	 	453,044	 	 	 	464,370	 	
03878CAJ5	 	ARMSS 2006-1	 	G	 	$	5,000,000	 	 	 	1,288,344	 	 	 	1,226,994	 	 	 	1,226,994	 	 	 	1,257,669	 	
03878CAK2	 	ARMSS 2006-1	 	H	 	$	7,000,000	 	 	 	1,803,681	 	 	 	1,717,791	 	 	 	1,717,791	 	 	 	1,760,736	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Grand Total	 	 	 	$	67,304,391	 	 	 	17,342,236	 	 	 	16,516,415	 	 	 	16,516,415	 	 	 	16,929,325	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
B-1

 
Cash Allocation
 	 	 	 	 	
 	 	Cash Allocation	 	
Taberna I	 	$	2,388,040.40	 	
Taberna V	 	$	2,274,324.19	 	
Taberna VII	 	$	2,274,324.19	 	
Taberna VIII	 	$	2,331,182.30	 	
 	 	 	 	
B-2

 
EXHIBIT C
Notice Information
 	
Taberna:	
 	
c/o Taberna Capital Management, LLC	
450 Park Avenue, 11th Floor	
New York, NY 10022	
Attention: Mr. Raphael Licht	
Facsimile: (212) 243-9039	
e-mail: rlicht@raitft.com	
 	
Company:	
Arbor Realty SR, Inc.	
333 Earle Ovington Blvd Suite 900	
Uniondale, New York 11553	
Attention: Paul Elenio	
Facsimile: (516) 832-6422	
e-mail: pelenio@arbor.com	
 	
Attention: John Bishar	
Facsimile: (516) 542-2561	
e-mail: JBishar@arbor.com	
C-1

 
EXHIBIT D
Interest Payments
D-1

 
EXHIBIT E
Form of Direction Letter
E-1

 
JOINT CANCELLATION DIRECTION AND RELEASE
     THIS JOINT CANCELLATION DIRECTION AND RELEASE, dated as of February ___, 2010 (this “Cancellation Direction ”) is entered into by and between ARBOR REALTY SR, INC. (the “ Company ”) and THE BANK OF NEW YORK MELLON TRUST COMPANY, NATIONAL ASSOCIATION (“BNYM”), not in its individual capacity, but solely as Trustee (as defined in the Indenture II described below).
     WHEREAS, the Company and BNYM have entered into that certain Junior Subordinated Indenture dated as of May 6, 2009 (as amended and supplemented, the “ Indenture II ”) pursuant to which the Company issued certain junior subordinated notes in the original princiapl amount of $168,000,000 (the “ Securities ”);
     WHEREAS, pursuant to an Exchange Agreement dated as of February ___, 2010 (the “Exchange Agreement”) among the Company, Taberna Preferred Funding I, Ltd., Taberna Preferred Funding V, Ltd. (“ Taberna V ”), Taberna Preferred Funding VII, Ltd. (“ Taberna VII ”) and Taberna Preferred Funding VIII, Ltd. (“ Taberna VIII ”, and together with Taberna V and Taberna VII, the “ Taberna Entities ”), each of Taberna V, Taberna VII and Taberna VIII agreed to accept from the Company certain bonds and cash in exchange for the Company’s $28,000,000 principal amount of Securities held by Taberna V (the “ Taberna V Securities ”), $28,000,000 principal amount of Securities held by Taberna VII (the “ Taberna VII Securities ”) and $28,700,000 principal amount of Securities held by Taberna VIII (the “ Taberna VIII Securities ”, together with the Taberna V Securities and Taberna VII Securities, the “ Indenture II Exchanged Securities ”) as set forth in the Exchange Agreement (the “ Exchange ”);
     WHEREAS, pursuant to Section 3.8 of the Indenture II, under certain circumstances the Company is entitled to surrender Securities held by it to the Trustee for cancellation;
     WHEREAS, the Exchange occurred on February ___, 2010;
     WHEREAS, the Company, as beneficial owner of the Securities desires that all of the Indenture II Exchanged Securities (equal to $84,700,000 principal amount) be cancelled;
     WHEREAS, the Company hereby waives (and directs BNYM as Trustee under the Indenture II to waive) every applicable condition and prerequisite to the cancellation of the above-referenced Indenture II Exchanged Securities;
     WHEREAS, BNYM as Trustee under the Indenture II, as directed the Company, hereby waives every applicable condition and prerequisite for which the Trustee is the intended beneficiary, to the exchange and cancellation of the above-referenced Securities; and
     NOW THEREFORE, the Company and the BNYM hereby agree as follows:
     SECTION 1. INCORPORATION BY REFERENCE. Capitalized terms defined or referenced in this Cancellation Direction and not otherwise defined or referenced herein are used herein as defined or referenced in the Indenture II.
     SECTION 2. CANCELLATION DIRECTION. The Company has directed the trustees for each of the Taberna Entities to deliver the Indenture II Exchanged Securities held by each to the Trustee for cancellation. The Company hereby (a) consents to the cancellation of the Indenture II Exchanged Securities and (b) directs BNYM, as Trustee, to cancel the Indenture II Exchanged Securities. The Company agrees to cooperate with the Trustee by providing such additional certifications, instructions or other assurances as may be reasonably requested by the Trustee in order to facilitate cancellation of the Indenture II Exchanged Securities. Following cancellation of the Indenture II Exchanged Securities, there will be $83,300,000 principal amount of Securities outstanding under the Indenture II.
E-2

 
     SECTION 3. RELEASE. The Company hereby releases BNYM and agrees to indemnify, defend and hold BNYM (and its affiliates, directors, officers, stockholders, agents and employees) harmless from any liability, loss, expense, claim or responsibility of any kind (including the reasonable fees and expenses of counsel and other experts and out-of-pocket legal costs and expenses) in respect of or arising from actions taken (or not taken) in accordance with this Cancellation Direction, in whatever capacity BNYM may be acting hereunder, except to the extent arising from the negligence or willful misconduct of BNYM..
     SECTION 4. BNYM ACCEPTANCE/LIABILITY. BNYM shall not be responsible in any manner whatsoever for the validity or sufficiency of this Cancellation Direction or the due execution hereof by any of the parties hereto or for or in respect of the recitals and statements contained herein, all of which recitals and statements are made solely by the Company. Anything in this Agreement notwithstanding, in no event shall the Trustee be liable for special, indirect or consequential loss or damage of any kind whatsoever (including but not limited to lost profits), even if the Trustee has been advised of such loss or damage and regardless of the form of action.
     SECTION 5. COUNTERPARTS. This Cancellation Direction shall become effective only upon BNYM’s receipt of a counterpart of this Cancellation Direction duly executed by the all of the parties hereto. This Cancellation Direction may be executed in any number of counterparts, each of which shall be deemed to be an original for all purposes, but such counterparts shall together be deemed to constitute but one and the same instrument. The executed counterparts may be delivered by facsimile transmission, which facsimile copies shall be deemed original copies.
     SECTION 6. EXPENSES. The Company agrees to promptly pay the reasonable attorneys’ fees, expenses and disbursements of BNYM in connection with this Cancellation Direction, except to the extent such fees, expenses and disbursements are paid by Taberna Capital Management, LLC pursuant to the Exchange Agreement.
     SECTION 7. GOVERNING LAW. The laws of the State of New York shall govern this Cancellation Direction without regard to the conflict of law principles thereof.
     SECTION 8. EXECUTION, DELIVERY AND VALIDITY. The Company represents and warrants to BNYM that this Cancellation Direction has been duly and validly executed and delivered the Company and constitutes its respective legal, valid and binding obligation, enforceable against the Company in accordance with its terms. The Company further represents that the actions to be taken hereunder are authorized and permitted under the Indenture II and any condition precedent to taking such actions has been satisfied.
E-3

 
     IN WITNESS WHEREOF, the parties hereto have caused this Cancellation Direction to be duly executed as of the day and year first above written.
 	 	 	 	 	
 	ARBOR REALTY SR, INC.
as Company
 	 	
 	By:  	 	 	
 	 	Name:  	 	 	
 	 	Title:  	 	 	
 	
 	THE BANK OF NEW YORK MELLON TRUST COMPANY, NATIONAL ASSOCIATION,
as Trustee under the Indenture II  	 	

 	By:  	 	 	
 	 	Name:  	 	 	
 	 	Title:  	 	 	
E-4

 
 	 	 	 	 	
ACKNOWLEDGEMENT
Each of the Taberna Entities acknowledges and agrees that the Exchange has occurred and that each has surrendered and forfeited any right, claim, title and interest in and to the above-referenced Indenture II Exchanged Securities held by such Taberna Entity prior to the Exchange.
TABERNA PREFERRED FUNDING V, LTD.
TABERNA PREFERRED FUNDING VII, LTD.
TABERNA PREFERRED FUNDING VIII, LTD.

 	By:  	Taberna Capital Management LLC,  	 	
 	 	as Collateral Manager 	 	

 	 	 	
 	By:  	 	 	 	
 	Name:  	Michael A. Fralin 	 	 	
 	Title:  	Managing Director 	 	 	
E-5

 
 	 	 	 	 	
JOINT CANCELLATION DIRECTION AND RELEASE
     THIS JOINT CANCELLATION DIRECTION AND RELEASE, dated as of February ___, 2010 (this “Cancellation Direction ”) is entered into by and between ARBOR REALTY SR, INC. (the “ Company ”) AND THE BANK OF NEW YORK MELLON TRUST COMPANY, NATIONAL ASSOCIATION (“ BNYM ”), not in its individual capacity, but solely as Trustee (as defined in the Indenture I described below).
     WHEREAS, the Company and BNYM have entered into that certain Junior Subordinated Indenture dated as of May 6, 2009 (as amended and supplemented, the “ Indenture I ”) pursuant to which the Company issued certain junior subordinated notes in the original principal amount of $29,400,000 (the “ Securities ”);
     WHEREAS, pursuant to an Exchange Agreement dated as of February ___, 2010 (the “Exchange Agreement”) among the Company, Taberna Preferred Funding I, Ltd. (“ Taberna I ”), Taberna Preferred Funding V, Ltd., Taberna Preferred Funding VII, Ltd. and Taberna Preferred Funding VIII, Ltd., Taberna I agreed to accept from the Company certain bonds and cash in exchange for the Company’s Securities held by Taberna I as set forth in the Exchange Agreement (the “ Exchange ”);
     WHEREAS, pursuant to Section 3.8 of the Indenture I, under certain circumstances the Company is entitled to surrender Securities held by it to the Trustee for cancellation;
     WHEREAS, the Exchange occurred on February ___, 2010;
     WHEREAS, the Company, as beneficial and legal owner of the Securities desires that all of the Securities issued under the Indenture I (equal to $29,400,000 principal amount) be cancelled;
     WHEREAS, the Company hereby waives (and directs BNYM as Trustee under the Indenture I to waive) every applicable condition and prerequisite to the exchange and cancellation of the above referenced Securities;
     WHEREAS, BNYM as Trustee under the Indenture I, as directed the Company, as beneficial and legal owner of all of the Securities, hereby waives every applicable condition and prerequisite for which the Trustee is the intended beneficiary, to the exchange and cancellation of the above-referenced Securities; and
     NOW THEREFORE, the Company and the BNYM hereby agree as follows:
     SECTION 1. INCORPORATION BY REFERENCE. Capitalized terms defined or referenced in this Cancellation Direction and not otherwise defined or referenced herein are used herein as defined or referenced in the Indenture I.
     SECTION 2. CANCELLATION DIRECTION. The Company has directed the trustee for Taberna I to deliver the Securities to the Trustee for cancellation. The Company hereby (a) consents to the cancellation of the Securities and (b) directs BNYM, as Trustee, to cancel the Securities. The Company agrees to cooperate with the Trustee by providing such additional certifications, instructions or other assurances as may be reasonably requested by the Trustee in order to facilitate cancellation of the Securities. Following cancellation of the Securities, there will be no Securities outstanding under the Indenture I.
     SECTION 3. RELEASE. The Company hereby releases BNYM and agrees to indemnify, defend and hold BNYM (and its affiliates, directors, officers, stockholders, agents and employees) harmless from any liability, loss, expense, claim or responsibility of any kind (including the reasonable fees and expenses of counsel and other experts and out-of-pocket legal costs and expenses) in respect of or arising from actions taken (or not taken) in accordance with
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this Cancellation Direction, in whatever capacity BNYM may be acting hereunder, except to the extent arising from the negligence or willful misconduct of BNYM.
     SECTION 4. BNYM ACCEPTANCE/LIABILITY. BNYM shall not be responsible in any manner whatsoever for the validity or sufficiency of this Cancellation Direction or the due execution hereof by any of the parties hereto or for or in respect of the recitals and statements contained herein, all of which recitals and statements are made solely by the Company. Anything in this Agreement notwithstanding, in no event shall the Trustee be liable for special, indirect or consequential loss or damage of any kind whatsoever (including but not limited to lost profits), even if the Trustee has been advised of such loss or damage and regardless of the form of action.
     SECTION 5. COUNTERPARTS. This Cancellation Direction shall become effective only upon BNYM’s receipt of a counterpart of this Cancellation Direction duly executed by the all of the parties hereto. This Cancellation Direction may be executed in any number of counterparts, each of which shall be deemed to be an original for all purposes, but such counterparts shall together be deemed to constitute but one and the same instrument. The executed counterparts may be delivered by facsimile transmission, which facsimile copies shall be deemed original copies.
     SECTION 6. EXPENSES. The Company agrees to promptly pay the reasonable attorneys’ fees, expenses and disbursements of BNYM in connection with this Cancellation Direction, except to the extent such fees, expenses and disbursements are paid by Taberna Capital Management, LLC pursuant to the Exchange Agreement.
     SECTION 7. GOVERNING LAW. The laws of the State of New York shall govern this Cancellation Direction without regard to the conflict of law principles thereof.
     SECTION 8. EXECUTION, DELIVERY AND VALIDITY. The Company represents and warrants to BNYM that this Cancellation Direction has been duly and validly executed and delivered the Company and constitutes its respective legal, valid and binding obligation, enforceable against the Company in accordance with its terms. The Company further represents that the actions to be taken hereunder are authorized and permitted under the Indenture I and any condition precedent to taking such actions has been satisfied.
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     IN WITNESS WHEREOF, the parties hereto have caused this Cancellation Direction to be duly executed as of the day and year first above written.
 	 	 	 	 	
 	ARBOR REALTY SR, INC.
as Company
 	 	
 	By:  	 	 	
 	 	Name:  	 	 	
 	 	Title:  	 	 	
 	
 	THE BANK OF NEW YORK MELLON TRUST COMPANY, NATIONAL ASSOCIATION,
as Trustee under the Indenture I  	 	

 	By:  	 	 	
 	 	Name:  	 	 	
 	 	Title:  	 	 	
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ACKNOWLEDGEMENT
Taberna I acknowledges and agrees that the Exchange has occurred and that it has surrendered and forfeited any right, claim, title and interest in and to the above-referenced Securities held by Taberna I prior to the Exchange.
TABERNA PREFERRED FUNDING I, LTD.

By:  	Taberna Capital Management LLC,  	 	 	
 	as Collateral Manager 	 	 	

 	 	 	
By:  	 	 	 	
 	Name:  	Michael A. Fralin 	 	 	
 	Title:  	Managing Director 	 	 	
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ANNEX A-1
     Pursuant to Section 3(b) of the Agreement, Cooley, Godward Kronish LLP counsel for the Company, shall deliver opinions with respect to the related the Exchange Agreement to the effect that:
     1. The Exchange Agreement constitutes the valid and legally binding obligation of the Company, enforceable against the Company, in accordance with their terms.
Annex A-1-1

 
ANNEX A-2
     Pursuant to Section 3(b) of the Agreement, the General Counsel of Company shall deliver opinions with respect to the related the Exchange Agreement to the effect that:
1.	 	Each of the Company (A) is validly existing as a corporation in good standing under the laws of the State of Maryland; (B) has full power and authority to own or lease its properties and to conduct its business as such business is currently conducted in all material respects; and (C) has power and authority to (x) execute and deliver, and to perform its obligations under, the Exchange Agreement.	
 	 	 	
2.	 	Neither (a) the Exchange or (b) the execution and delivery of and compliance with the Exchange Agreement by the Company or the consummation of the transactions contemplated thereby, will constitute a breach or violation of the charter or by laws or similar organizational documents of the Company or any subsidiary of the Company.	
 	 	 	
3	 	. The Exchange Agreement has been duly authorized, executed and delivered by the Company and constitute the valid and legally binding obligation of the Company enforceable against the Company, in accordance with its terms, except that the enforcement thereof is subject to applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws now or hereafter in effect relating to creditors’ rights generally and to general principals of equity and the discretion of the court before which any proceeding to enforce the Exchange Agreement may be brought (regardless of whether such enforcement is considered in a proceeding in equity or at law).	
 	 	 	
4.	 	The Company is not in breach or violation of, or default under, with or without notice or lapse of time or both, its articles of incorporation or charter, by-laws or other governing documents; the execution, delivery and performance of the Exchange Agreement and the consummation of the transactions contemplated thereby do not and will not (A) to the best of my knowledge result in the creation or imposition of any material lien, claim, charge, encumbrance or restriction upon any property or assets of the Company, or (B) conflict with, constitute a breach or violation of, or constitute a default under, with or without notice or lapse of time or both, any of the terms, provisions or conditions of (x) the articles of incorporation or charter, by-laws or other governing documents of the Company, or (y) to the best of my knowledge, any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease, franchise, license or any of other agreement or instrument to which the Company is a party or by which any them or any of their respective properties may be bound or (z) any order, decree, judgment, franchise, license, permit, rule or regulation of any court, arbitrator, government, or governmental agency or instrumentality, domestic or foreign, known to me having jurisdiction over the Company or any of its properties which, in the case of each of (A) or (B)(y) or (z) above, is material to the Company and its subsidiaries on a consolidated basis.	
 	 	 	
5.	 	Except for filings, registrations or qualifications that may be required by applicable securities laws, no authorization, approval, consent or order of, or filing, registration or qualification with, any person (including, without limitation, any court, governmental	
Annex A-2-1

 
 	 	body or authority) is required in connection with the consummation of the transactions contemplated in the Exchange Agreement.	
Annex A-2-2

EXHIBIT 21.1
 
SUBSIDIARIES OF ARBOR REALTY TRUST, INC.
 
Arbor Realty GPOP, Inc., a Delaware corporation
Arbor Realty LPOP, Inc., a Delaware corporation
Arbor Realty Limited Partnership, a Delaware limited partnership
Arbor Realty SR, Inc., a Maryland corporation
Arbor Realty Funding, LLC, a Delaware limited liability company
Arbor Realty Member LLC, a Delaware limited liability company
ART 450 LLC, a Delaware limited liability company
ARMS 2004-1 Equity Holdings LLC, a Delaware limited liability company
Arbor Realty Mortgage Securities Series 2004-1 LLC, a Delaware limited liability company
Arbor Realty Mortgage Securities Series 2004-1, Ltd., a Cayman Islands exempted company with limited liability
Arbor Realty Collateral Management, LLC, a Delaware limited liability company
AC Flushing, LLC, a New York limited liability company
AR Prime Holdings LLC, a Delaware limited liability company
Arbor Realty Mortgage Securities Series 2005-1 Ltd., a Cayman Islands exempted company with limited liability
Arbor Realty Mortgage Securities Series 2005-1 LLC, a Delaware limited liability company
ARMS 2005-1 Equity Holdings LLC, a Delaware limited liability company
ARSR TRS Holdings LLC (formerly Arbor Toy LLC), a Delaware limited liability company (TRS)
ARMS 2006-1 Equity Holdings LLC, a Delaware limited liability company
Arbor Realty Mortgage Securities Series 2006-1 LLC, a Delaware limited liability company
Arbor Realty Mortgage Securities Series 2006-1, Ltd., a Cayman Islands exempted company with limited liability
Arbor Realty Participation LLC, a Delaware limited liability company
ART 823 LLC, a Delaware limited liability company (TRS)
ARSR Tahoe LLC, a Delaware limited liability company
ARSR Jacksonville LLC, a Delaware limited liability company
ARSR Alpine LLC, a Delaware limited liability company (TRS)
Arbor ESH Holdings LLC, a Delaware limited liability company
ARSR Grand Reserve LLC, Del.
Ashley Court — Fort Wayne LLC, an Indiana limited liability company
Richland Terrace Apts. LLC, a South Carolina limited liability company
Arbor Capital Trust III, a Delaware Statutory Trust
Arbor Capital Trust VI, a Delaware Statutory Trust
Arbor Capital Trust VII, a Delaware Statutory Trust
Arbor Capital Trust VIII, a Delaware Statutory Trust
Arbor Capital Trust IX, a Delaware Statutory Trust
JT Prime LLC, a Delaware limited liability company
WRGS LLC, a Delaware limited liability company
ABT ESI LLC, a Delaware limited liability company
Arbor CM LLC, a Delaware limited liability company
ARSR Solutions LLC, a Delaware limited liability company
Nottingham Village LLC, an Indiana limited liability company
Windrush Village Tall LLC, a Florida limited liability company
St. Louis LLC, a Delaware limited liability company
Beach Property Investment Opportunities LLC, a Delaware limited liability company
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EXHIBIT 23.1
 
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
We consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-141044) and in the related Prospectus, and on Forms S-8 (Nos. 333-150052 and 333-158671) pertaining to the Arbor Realty Trust, Inc. 2003 Omnibus Stock Incentive Plan, as amended and restated, of Arbor Realty Trust, Inc. and Subsidiaries of our reports dated March 8, 2010, with respect to the consolidated financial statements and schedule of Arbor Realty Trust, Inc. and Subsidiaries, and the effectiveness of internal control over financial reporting of Arbor Realty Trust, Inc. and Subsidiaries, included in this Annual Report (Form 10-K) for the year ended December 31, 2009.

 	/s/ ERNST & YOUNG LLP	
 
New York, New York
March 8, 2010
150

EXHIBIT 31.1
 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
 
I, Ivan Kaufman, certify that:
 
1. I have reviewed this annual report on Form 10-K of Arbor Realty Trust, Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
 
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 	By: 	/s/  Ivan Kaufman	
Name:     Ivan Kaufman
 	 	 	
 	Title: 	Chief Executive Officer	
 
Date: March 8, 2010
151

EXHIBIT 31.2
 
CERTIFICATION OF CHIEF FINANCIAL OFFICER
 
I, Paul Elenio, certify that:
 
1. I have reviewed this annual report on Form 10-K of Arbor Realty Trust, Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
 
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 	By: 	/s/  Paul Elenio	
Name:     Paul Elenio
 	 	 	
 	Title: 	Chief Financial Officer	
 
Date: March 8, 2010
152

EXHIBIT 32.1
 
CERTIFICATION OF CEO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Annual Report on Form 10-K of Arbor Realty Trust, Inc. (the “Company”) for the annual period ended December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Ivan Kaufman, as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
 
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 	By: 	/s/  Ivan Kaufman	
Name:     Ivan Kaufman
 	 	 	
 	Title: 	Chief Executive Officer	
 
Date: March 8, 2010
 
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
 
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
153

EXHIBIT 32.2
 
CERTIFICATION OF CFO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Annual Report on Form 10-K of Arbor Realty Trust, Inc. (the “Company”) for the annual period ended December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Paul Elenio, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
 
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 	By: 	/s/  Paul Elenio	
Name:     Paul Elenio
 	 	 	
 	Title: 	Chief Financial Officer	
 
Date: March 8, 2010
 
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
 
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
154