Company: NXDT
Filing Date: 2025-04-23
Form Type: S-4/A
Source: 0001437749-25-012810
Chunk: 163

Company: NEXPOINT DIVERSIFIED REAL ESTATE TRUST
Filing Date: 2025-04-23
Form: S-4/A
Chunk 163
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 of such loan will be equal to the portion of the loan amount that exceeds the value of the associated real property that is securing that loan. Mortgage loans that are qualifying real estate assets for purposes of the 75% asset test are also not considered securities for purposes of the 5% and 10% asset tests mentioned above.

Notwithstanding the general rule, as noted above, that for purposes of the REIT income and asset tests New NXDT is treated as owning its proportionate share of the underlying assets of a subsidiary partnership, if New NXDT holds indebtedness issued by a partnership, the indebtedness will be subject to, and may cause a violation of, the asset tests unless the indebtedness is a qualifying mortgage asset or other conditions are met. Similarly, although stock of another REIT is a qualifying asset for purposes of the REIT asset tests, any non-mortgage debt that is issued by another REIT may not so qualify unless such debt was issued by a “publicly offered” REIT.

There is limited case law and administrative guidance addressing whether instruments that are in the form of mezzanine loans or preferred equity will be treated as equity or debt for U.S. federal income tax purposes. If the IRS successfully recharacterizes a mezzanine loan or preferred equity investment that New NXDT has treated as debt for U.S. federal income tax purposes as equity for U.S. federal income tax purposes, New NXDT would be treated as owning the assets held by the partnership or limited liability company that issued the security. If that partnership or limited liability company owned nonqualifying assets, New NXDT may not be able to satisfy all of the asset tests. Alternatively, if the IRS successfully recharacterizes a mezzanine loan or preferred equity investment that New NXDT has treated as equity for U.S. federal income tax purposes as debt for U.S. federal income tax purposes, then that investment may be treated as a nonqualifying asset for purposes of the 75% asset test and would be subject to the 5% and 10% asset tests.

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If the IRS successfully challenges the partnership status of any of the partnerships in which New NXDT maintains a more than 10% vote or value interest, and the partnership is reclassified as a corporation or a publicly traded partnership taxable as a corporation, New NXDT could lose its REIT status. In addition, in the case of such a successful challenge, New NXDT could lose its REIT status if such re