SAFE Safehold Inc

Item 11.   Executive Compensation

Compensation Discussion and Analysis

Our Compensation Discussion and Analysis describes our compensation program, objectives and policies for our Chairman and Chief Executive Officer, our President and Chief Investment Officer, our Chief Financial Officer and our Chief Accounting Officer, whom we have determined comprise our "named executive officers," as such term is defined in Item 402(a) of Regulation S-K of the Exchange Act, for our fiscal year ended December 31, 2022.

We are externally managed by a wholly owned subsidiary of STAR, which is our largest shareholder. All of our senior executives are employees of our manager or its affiliates. The location of the executive offices and telephone number of our manager are:

SFTY Manager LLC

1114 Avenue of the Americas 39th Floor

New York, NY 10036

(212) 930-9400

Our named executive officers, or NEOs, who served during 2022 are:

All of these individuals hold identical titles and roles at STAR.

All of our named executive officers serve at the pleasure of the Board of Directors and are customarily appointed as officers at the annual organizational meeting of the Board held following each Annual Meeting of Stockholders.

Overview of Compensation Program / Management Agreement

We have been externally managed and advised by a wholly-owned subsidiary of STAR pursuant to a management agreement, which is publicly available on the SEC's website as an exhibit to Original Filing (incorporated by reference from the Company's Current Report on Form 8-K filed on January 15, 2020) since our inception in 2017 (the Management Agreement). As a result, our named executive officers do not currently receive any compensation directly from us or any of our subsidiaries for serving as our executive officers, other than the Caret Unit awards previously awarded, as discussed below.

Our manager provides the day-to-day management of our business and operations. Our named executive officers (namely, our Chief Executive Officer, President and Chief Investment Officer, Chief Financial Officer and Chief Accounting Officer) and other senior officers are senior STAR officers. We do not have any employees. The Management Agreement does not require our named executive officers to dedicate a specific amount of time to fulfilling our manager's obligations to us under the Management Agreement and does not require a specified amount or percentage of the fees paid to the manager to be allocated to the named executive officers.

We pay our manager a management fee in accordance with the Management Agreement. Our manager is paid a quarterly management fee that increases incrementally as our total equity increases, from 1% to 1.5% of total equity. The quarterly management fee is payable either in cash or in shares of our common stock, at the election of our independent directors. The Management Agreement does not provide for an incentive fee. For the fiscal year ended December 31, 2022, we recorded $20.3 million in management fees to our manager.

We pay, or reimburse our manager for, certain of our operating expenses as well as the costs of personnel performing certain legal, accounting, finance, due diligence tasks and other services, in each case except those specifically required to be borne or elected not to be charged by our manager under the Management Agreement.

In 2022, we did not reimburse our manager or its affiliates for the salaries and other compensation of our named executive officers. In 2022, we reimbursed our manager or its affiliates for the allocable share of compensation, including, without limitation, annual base salary, bonus, any related withholding taxes and employee benefits, paid to certain finance, tax, accounting, internal audit, legal, risk management, operations, compliance and other non-investment personnel of our manager and its affiliates (other than the named executive officers) who spend all or a portion of their time managing our affairs, based upon the percentage of time devoted by such personnel to our affairs. In 2022, we also reimbursed our manager for our allocable share of rent, utilities and other overhead. For the fiscal year ended December 31, 2022, we were allocated a total of $12.5 million in expenses by our manager.

As we grow, our expenses have grown and our manager has elected to seek reimbursement of additional expenses, including, without limitation, rent, overhead and certain personnel costs. We intend to continue our efforts to grow materially, which we expect will result in increased reimbursements to our manager, which may be material in amount.

The initial term of the Management Agreement, as amended to the date of this Amendment, runs through June 30, 2023 and is terminable only for certain "cause" events. After the initial term, the agreement is automatically renewed each year for an additional one- year term, unless at least two-thirds (2/3) of our independent directors decline to renew the agreement based on unsatisfactory performance, in which event the manager will receive a termination fee equal to three times the annual management fee. After seven annual renewals, we may decline to renew the Management Agreement if at least two-thirds (2/3) of our independent directors determine that the management fee is unfair, and the parties are unable, after good faith negotiations, to agree on a new fee. A termination fee will be payable upon such termination. See "Certain Relationships and Related Transactions — Management Agreement," below.

Executive Compensation Paid by Our Manager and Its Affiliates

Our Chief Executive Officer and other named executive officers are employees of STAR, our manager's parent company, and are compensated under compensation arrangements made with STAR. STAR does not compensate its employees specifically for services rendered in performing obligations to us under the Management Agreement as these individuals also provide services relating to STAR's other business activities.

STAR has informed us that it does not segregate or identify the portion of the compensation awarded to our named executive officers that is attributable to their services to us. The total compensation of our named executive officers reflects the performance of services relating to all of STAR's activities in addition to services provided by these individuals to us.

STAR has informed us that no portion of the management fee paid by us to our manager is specifically allocated to aggregate compensation paid by STAR to our named executive officers.

For context with respect to our named executive officers' compensation, STAR reports that it paid our named executive officers aggregate base salary, annual incentive bonus and long-term incentive compensation in the aggregate amount of $5.3 million during 2022, which amount represented 26.2% of the management fee we paid to our manager in 2022.

STAR reports that its compensation program is designed to foster a strong pay-for-performance culture. In setting compensation for its professionals, including our Chief Executive Officer and our other named executive officers, According to STAR, it allocates pay among base salary, short-term incentives and long-term incentives to emphasize variable, performance-based compensation. This mix is designed to ensure the appropriate alignment of executive compensation with financial performance and shareholder value creation. For our CEO, 11.5% of his total 2022 compensation paid by STAR was variable performance-based pay, 86.6% was fixed base salary, and 1.8% was other compensation. For our other NEOs, 78.3% of their total aggregate 2022 compensation paid by STAR was variable performance-based pay, 20.5% was fixed base salary, and 1.1% was other compensation.

STAR has informed us that it takes into consideration many factors in determining its performance-based pay for its executives, including our named executive officers. In determining its performance-based compensation, STAR has established performance metrics that relate to our business performance and performance metrics that relate to STAR's activities that are unrelated to our business.

The performance metrics utilized by STAR in its executive compensation program are described in detail in its Form 10-K/A (Amendment No. 1) dated March 30, 2023, filed with the SEC and available at www.envisionreports.com/STAR.

For STAR's annual incentive program, STAR has established three performance metrics to determine funding of its annual incentive pool, which are:

STAR's long-term incentive compensation has consisted primarily of the iStar Performance Incentive Plan (iPIP), in which the ultimate value of awards granted to executives is tied directly to the performance of STAR's assets and investments. Payouts of iPIP awards are not guaranteed, are subject to long vesting requirements and are contingent upon meeting strict asset performance and total shareholder return hurdles, incentivizing executives to drive the performance of STAR's portfolio assets over the long term. A significant portion of the most recent iPIP investment pools consist of STAR's investment in our shares, thereby indirectly motivating STAR's executives to drive our share performance. Awards under STAR's iPIP are granted bi-annually and no iPIP awards were granted to our NEOs during 2022.

iPIP Distributions Paid in 2022

The following table presents information furnished by STAR on payouts to our NEOs during 2022 of amounts available for distribution under STAR’s iPIP program in respect of vested iPIP points. These distributions were paid 50% in cash and 50% in shares of STAR’s common stock. After deducting for applicable tax withholdings, the individual received net cash and a net amount of STAR shares. Payouts were made from the 2013-2014 iPIP pool and also from the 2015-2016 iPIP pool, which represented the final payout from the 2015-2016 iPIP pool. The amounts as shown in the table are gross payments, before deducting for applicable tax withholdings.

STAR has also granted long-term incentive awards in the form of restricted stock units, or RSUs, representing the right to receive an equivalent amount of shares of STAR common stock if and when the RSUs vest. RSUs have typically vested based on satisfaction of time-based service conditions.

In setting compensation for its individual employees, including our Chief Executive Officer and other named executive officers, STAR did not take into account the amount of the management fee we pay to our manager.

Merger Related Compensation Actions

STAR has informed us that, in connection with the Merger, Spin-Off and related transactions, STAR’s Compensation Committee approved the following compensation actions, which affect our NEOs and other employees:

STAR has informed us that, in making the compensation decisions related to the Merger, STAR’s Compensation Committee considered that one of the purposes of combining STAR and Safe is to create a pure-play, internally-managed ground lease company; therefore, it would be appropriate for the new combined company to terminate pre-merger incentive compensation arrangements such as iPIP and start with new incentive compensation arrangements that are appropriate for its business. In addition, the Committee focused on creating retention arrangements to retain personnel who are important to executing the Merger, Spin-Off and related transactions successfully, managing the transitions of iStar, Safehold and Star Holdings to their post-transaction businesses and corporate structures and executing the post-transaction business strategies of the combined company and Star Holdings, the separate public company formed to acquire and operate iStar’s remaining legacy non-ground lease assets that is being distributed to the iStar’s stockholders in the Spin-Off.

For a description of compensation payments made to our NEOs in 2023 related to the Merger and related transactions, described above, see STAR’s Form 10-K/A (Amendment No. 1) dated March 30, 2023, filed with the SEC.

Role of Compensation Committee

Since we do not have any employees and do not pay our named executive officers or other officers any compensation, our Compensation Committee does not currently make any recommendations regarding the base salaries, annual incentive bonuses or long-term compensation awards paid to our named executive officers by STAR. Our Compensation Committee reviews and approves any equity-based awards that we may grant under our 2017 Equity Incentive Plan or our Caret Performance Incentive Plan from time to time to our named executive officers or other officers based on recommendations from our Chief Executive Officer. We did not grant any equity based awards to our named executive officers in 2022. The Compensation Committee also oversees risk when it considers granting equity awards under the 2017 Equity Incentive Plan or our Caret Performance Incentive Plan.

Equity Compensation

The Compensation Committee may, from time to time, grant equity-based awards under the 2017 Equity Incentive Plan. These equity-based awards are designed to align the interests of our manager and its personnel in providing services to us under our management agreement with the interests of our shareholders. This allows our manager and its personnel to share in the creation of long-term value for our shareholders through stock appreciation and dividends. These equity-based awards are generally subject to time-based and possibly other vesting requirements designed to promote retention and to achieve strong corporate performance. These awards further provide flexibility to us in our ability to enable our manager and its affiliates who support our manager to attract, motivate and retain talented individuals.

2017 Equity Incentive Plan. The 2017 Equity Incentive Plan provides for the issuance of equity-based awards, including restricted shares of common stock, restricted stock units, stock options, phantom shares, dividend equivalents and other awards based on our common stock. Shares of common stock issued to our independent directors in respect of their annual director fees are also issued under this plan. Our Board of Directors has delegated its administrative responsibilities under the 2017 Equity Incentive Plan to the Compensation Committee. In its capacity as plan administrator, the Compensation Committee has the authority to make awards to members of our manager's management team and employees who perform services for us, our independent directors, advisers, consultants and other personnel, and to determine what form the awards will take and the terms and conditions of the awards. Each of our directors was awarded 6,500 fully-vested shares of our common stock in May 2022 as compensation for services as a director during 2022, other than Mr. Sugarman, our Chairman and Chief Executive Officer, and Mr. Hom, who has waived any compensation as a director. No other compensation was paid by us to our directors during 2022. Other than these awards to directors, no awards were granted by us during 2022 under the 2017 Equity Incentive Plan.

Caret Performance Incentive Plan. In 2018 the Compensation Committee adopted, and in 2019 our shareholders approved, the Caret Performance Incentive Plan to provide directly aligned incentives to management to capture capital appreciation embedded in our ground lease portfolio. Our ground leases typically contain residual rights providing that following the expiration or earlier termination of the lease (e.g., due to an uncured tenant default), we have the right to own the combined property associated with the lease because we regain possession of the land and receive title to the buildings and other improvements thereon for no additional consideration. After we recover our cost basis in the ground leases, any additional principal payments generated as a result of these residual rights are included in what we refer to as the "Owned Residual Portfolio".

Caret Units evidence a separate class of membership profit interests in our subsidiary, Caret Ventures LLC, designated as "Caret Units." Caret Units entitle their holder to receive distributions of cash proceeds in excess of the Company's remaining cost basis, after the repayment of transaction costs, asset-level debt and reasonable reserves, from (1) the sale of a ground lease or a combined property (land and improvements) or (2) a non-recourse mortgage debt refinancing of a ground lease. Our remaining cost basis for this purpose includes our acquisition costs, costs of improvements that we have acquired, carrying and financing costs on improvements that we have acquired that are not covered by revenues, and any unpaid past due rents under a ground lease. We have committed to sell a real property within 12 months after an involuntary termination of a ground lease due to a tenant default or a rejection in tenant bankruptcy, to the extent reasonably and commercially practicable. We have also committed to own all of our ground leases indirectly through our Caret subsidiary.

We created the Caret Units in 2018. A total of 10,000,000 Caret Units are authorized for issuance. Fifteen percent (15%) of that total authorized amount, or 1,500,000 Caret Units, are reserved for awards under the Caret Performance Incentive Plan, and approximately 95% of those Caret Units have been granted as of March 23, 2023. We initially retained the remaining 83.68% of the total authorized Caret Units. On February 15, 2022, we sold an aggregate of 1.37% of the authorized Caret Units to a group of investors (in the case of one investor, we received a commitment to purchase). We currently own the remaining 83.68% of the Caret Units, but may choose to sell additional amounts to third parties in the future, which would reduce our percentage interest in the distributions made to holders of Caret Units. As part of the sale, our subsidiary Caret Ventures is obligated to seek to provide a public market listing for the Caret Units, or securities for which they may be exchanged, by the second anniversary of such sales. In the event market liquidity of the Caret units is not achieved within such two year period at a valuation not less than the purchase price for the Caret units purchased in February 2022, reduced by an amount equal to the amount of subsequent cash distributions made to the investors on account of such Caret units, then the investors in the February 2022 transaction have the right to cause their Caret units purchased in February 2022 to be redeemed by Caret Ventures at such purchase price as so reduced. To the extent that an award of Caret units under the Caret Performance Incentive Plan expires or is cancelled, forfeited or otherwise terminated, the unused Caret Units will again be available for grant.

In August 2022, we entered into an agreement with MSD Partners, L.P. (MSD Partners) who has subscribed to purchase 100,000 Caret Units from us for an aggregate purchase price of $20.0 million conditioned on the closing of the Spin-Off and the Merger. MSD Partners’ obligations to purchase the Caret Units are also subject to certain other conditions. In November 2022, we entered into subscription agreements for an aggregate of 22,500 Caret Units for an aggregate $4.5 million, or $200 per unit, with certain third-party investors. The third-party investors obligations to purchase the Caret Units is contingent upon the MSD Partners’ Caret unit purchase.

In September 2022, we announced that we entered into an agreement, as approved by our board of directors, to sell a Ground Lease in the Washington, D.C. market for $136.0 million to a third-party purchaser. The sale closed on September 29, 2022. The transaction generated a net book gain for us of approximately $46.4 million. After paying closing costs, establishing reserves for Caret-related expenses and deducting the original $76.7 million cost basis to us, the remaining proceeds have been distributed approximately 84% to us and approximately 16% to the minority holders of Caret Units. In addition, MSD Partners will receive a credit against their purchase price for Caret Units equal to the amount they would have received had they held Caret Units at the time of the distribution.

Grants of Caret Units under the Caret Performance Incentive Plan are subject to graduated vesting based on continued service and hurdles of our common stock price. Once a particular stock price hurdle is met, a portion of the awards become eligible to vest, if additional time-based conditions are satisfied. Subject to the recipient's continued service, Caret Unit awards will satisfy the time-vesting condition with respect to 25% of the award on the date on which the stock price target is attained, 25% of the award on the first anniversary of the date on which the stock price target is attained and 50% of the award on the second anniversary of the date on which the stock price target is attained. As of December 31, 2022, all stock price hurdles have been achieved and all Caret Units granted under the Plan are vested, except 1,000 Caret Units that are scheduled to vest on December 31, 2023.

None of our named executive officers received any grants of Caret Units in 2022.

Hedging and Other Transactions

We prohibit directors and senior executives from engaging in transactions in our securities that are inconsistent with a long-term investment in our company. These transactions include any trading activity designed to profit from fluctuations in the price of these securities, such as short sales. We also prohibit the use of forward contracts, equity swaps, collars, exchange funds, puts, calls, options and other derivative securities or any instruments designed to increase in value as a result of, or hedge or offset any decrease in, the market value of our securities.

We prohibit directors and senior executives from significant pledging of our securities as collateral for a loan and holding our securities in a margin account. Any pledging of our securities or margin account arrangements must be pre-approved by our board. The board will not approve any pledges or margin account arrangements unless (a) an individual clearly demonstrates the financial capacity to repay the loan or meet a margin call using available cash or liquid securities without resort to the pledged shares, or (b) the amount of pledged shares or shares held in a margin account is not significant in comparison to the individual’s total ownership of our shares, or (c) the aggregate amount of pledged shares by all insiders is not significant compared to our total outstanding shares.