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Arbor Realty's bid to acquire Arbor Commercial's agency platform began in '13

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Arbor Realty's bid to acquire Arbor Commercial's agency platform began in '13

Though discussions started as early as 2013, negotiations betweenArbor Realty Trust Inc.and Arbor Commercial Mortgage LLCabout their proposed deal were temporarily put on hold at one point during the three-yearprocess, with the proposed consideration fluctuating between $170 million and $275million, before the parties finally agreedon a purchase price of $250 million in February.

According to a preliminary proxy statement filed April 6, ArborRealty's independent directors in May 2013 met with Skadden Arps Slate Meagher &Flom LLP, Arbor Realty's counsel, and Wells Fargo Securities LLC, Arbor Commercial'sfinancial adviser, regarding Arbor Realty's potential acquisition of Arbor Commercial'sFannie Mae, DUS, FHA and CMBS platforms and internalization of the management functionArbor Commercial performs. Material terms consisted of an aggregate purchase priceof $250 million, less a $25 million holdback amount, and the issuance of Arbor Realtycommon shares to finance the acquisition.

Arbor Realty's independent directors in June 2013 formed a specialcommittee, which later engaged J.P. Morgan Securities LLC as financial adviser.Following negotiations, the parties executed a confidentiality agreement on June27, 2013.

In August 2013, Arbor Realty's special committee submitted anonbinding indication of interest to Arbor Commercial with respect to the proposedacquisition, including a preliminary aggregate purchase price range of $170 millionto $200 million, with a $50 million holdback applied to any future credit lossesand subject to certain performance earn out metrics. ArborCommercial responded to Arbor Realty's special committee, indicating an aggregatepurchase price range of $210 million to $230 million, and a $50 million holdbackcomprised of $30 million for certain credit losses and $20 million subject to performanceearn out metrics.

Arbor Realty's special committee then revised its nonbindingindication of interest, including a preliminary aggregate purchase price range of$185 million to $210 million and a $50 million holdback for certain credit lossesand subject to performance earn out metrics. At a later meeting, Arbor Commercialproposed an aggregate purchase price of $210 million with a $50 million holdbackfor certain credit losses only. Arbor Realty's special committee again revised itsnonbinding indication of interest, including a preliminary aggregate purchase priceof $210 million and a $50 million holdback for certain credit losses and subjectto performance earn out metrics. Also, Arbor Realty'sspecial committee determined to retain Willkie Farr & Gallagher LLP as specialoutside counsel.

Based on Arbor Commercial's updated financial information, J.P.Morgan in September 2013 submitted an update to the special committee's proposal,including an aggregate purchase price of $190 million and a $50 million holdbackfor certain credit losses and subject to performance earn out metrics.Arbor Commercial indicated to Arbor Realty's special committee that it was preparedto move forward with the transaction on certain terms, including an aggregate purchaseprice of $195 million, a holdback of $35 million for certain credit losses and amarket-based compensation plan for Arbor Realty CEO Ivan Kaufman, who is also CEOof Arbor Commercial. Arbor Realty further revised itsproposal that included a preliminary aggregate purchase price of $195 million anda $50 million holdback for certain credit losses. However, Arbor Commercial indicatedthat it would not be willing to proceed on the most recent terms proposed and expressedits desire to terminate negotiations at that time. During September 2013 and October2013, the parties and their respective advisers continued discussions, but ultimatelydecided to potentially re-visit the proposed transaction in 2014.

In August 2014, Arbor Realty's special committee and Arbor Commercialre-engaged in discussions, and the latter indicated its interest in moving forwardwith the proposed acquisition at an aggregate purchase price range of $225 millionto $250 million. Arbor Realty's special committee in September2014 submitted an indication of interest to Arbor Commercial that included a preliminaryaggregate purchase price of $225 million. In response, Arbor Commercial highlightedcertain items for discussion, including a purchase price of $235 million, pre-closingoriginated mortgage servicing rights, expenses of the purchased businesses, themanagement agreement and Kaufman's compensation. During the remainder of 2014, theparties negotiated the revised compensation arrangement for Kaufman, and on March10, 2015, Arbor Realty announced that it had entered into an annual incentive agreementwith the CEO.

In May 2015 and June 2015, Kaufman and Arbor Realty Treasurerand CFO Paul Elenio, who is also CFO of Arbor Commercial, both on behalf of ArborCommercial, proposed an aggregate purchase price of $275 million based on ArborCommercial's updated financial information, including an increase in Arbor Commercial'soriginated mortgage servicing rights portfolio. Arbor Commercial and Arbor Realty'sspecial committee then agreed to move forward to explore a proposed acquisitionat a preliminary aggregate purchase price of $275 million.

Arbor Realty's independent directors in July 2015, approved theexecution of a nonbinding indication of interest with Arbor Commercial that includedproposed terms consisting of an aggregate purchase price of $275 million, a purchaseprice adjustment based on Arbor Commercial's servicing portfolio, a working capitaladjustment based on a target working capital of $5 million and consideration splitequally between cash and equity securities of Arbor Realty. Arbor Realty's specialcommittee and Arbor Commercial later entered into a nonbinding indication of interestand entered into an updated "rules of the road" letter and a confidentialityagreement.

After discussions from Feb. 19 through Feb. 21, Arbor Realty'sspecial committee and Arbor Commercial agreed to finalize a proposed acquisitionat an aggregate purchase price of $250 million and to provide Arbor Realty the optionto internalize the management function during the two years following the proposedacquisition's completion for $25 million in the first year, and increasing to $27million in the following year. The proposed acquisition would also give Arbor Realty'sspecial committee the option to finance up to $50 million of the cash considerationin the form of seller financing.

Following further discussions on Feb. 25, Arbor Realty's boardapproved the proposed acquisition and the parties signed the purchase agreementas well as the voting and standstill agreement. Arbor Realty announced the purchaseagreement on the same day.