RISK FACTORS SUMMARY
This risk factor summary below should be read together with the more detailed discussion of risks and uncertainties set forth under Item 1A. “Risk Factors” of this Annual Report.
We may not be able to successfully raise capital in our offering of up to $575,000,000 in shares of common stock, consisting of up to $500 million in shares in our primary offering (“Primary Offering”) and up to $75 million in shares pursuant to our distribution reinvestment plan (the “DRP”, and together with the Primary Offering, the “Public Offering”, and together with the Private Offering (as defined below) and OP Unit Offering (as defined below), the “Offerings”).
We are dependent on the resources and personnel of StratCap Digital Infrastructure Advisors II, LLC (in its capacity as our advisor, the “Advisor”), StratCap Investment Management, LLC (our “Sponsor”) and their affiliates, including the Advisor’s ability to source and close on attractive investment opportunities on our behalf.
The performance of our Advisor and our Sponsor may affect our performance.
We may not be able to deploy capital quickly and successfully and achieve a diversified portfolio consistent with target asset classes.
We may not have access to financing for its investments.
We may not be able to make distributions to our stockholders and may make distributions from sources other than cash flow from operations. If we pay distributions from sources other than cash flows from operations, we will have less funds available for investment, the overall return to our stockholders may be reduced and subsequent investors will experience dilution.
There is a lack of a public trading market for our shares.
Our operating results will be affected by the impact of economic conditions on the tenants, borrowers and others who we depend on to make payments to it.
Our Advisor may not be able to attract and retain sufficient personnel to support growth and operations.
Table of Contents
We have a limited operating history.
Our operating results may be affected by the difficulties in economic conditions generally and the real estate, debt, and securities markets specifically.
We may make changes in our business or investment strategy without stockholder approval.
Our results of operations may be affected by environmental compliance costs and liabilities.
Our Advisor’s due diligence may fail to identify all relevant facts in our underwriting process or otherwise.
Our performance will be subject to the impact of market and other conditions influencing the availability of equity versus debt investments and performance of our investments relative to its expectations and the impact on the actual return on invested equity, as well as the cash provided by these investments.
Our results of operations may be affected by defaults on or non-renewal of leases by tenants, lease renewals at lower than expected rent, or failure to lease properties at all or on favorable rents and terms.
We are subject to competition in the investments it makes.
Our performance is subject to the risks associated with using debt to fund our business activities, including re-financing and interest rate risks.
The investments in our portfolio are illiquid, our share repurchase program is subject to limitations and we may suspend or terminate the share repurchase program at any time.
Our risk management systems may not be effective.
Our business is subject to information technology risks, including capacity constraints, failures, or disruptions in our systems or those of parties with which we interact, including cybersecurity risks and incidents, privacy risk and exposure to potential liability and regulatory focus.
We may not be able to realize current and expected returns over the life of its investments.
We may not be able to maintain effective internal controls.
Our business may be affected by regulatory requirements with respect to our business, as well as the related cost of compliance.
Our loans are subject to risks associated with guarantees and indemnities.
We may fail to qualify or maintain our qualification as a real estate investment trust (“REIT”) for U.S. federal income tax purposes and are subject to limitations imposed based on our status as a REIT.
We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the price of shares of our common stock.
Our business could be materially and adversely affected by the risks, or the public perception of the risks, related to a pandemic or other health crisis, such as the outbreak of coronavirus.
Our business may be affected by changes in laws or regulations governing various aspects of our business and non-traded REITs generally, including, but not limited to, changes implemented by the Department of Labor, the Securities &
Table of Contents
Exchange Commission (the “SEC”), or the Financial Industry Regulatory Authority, Inc. (“FINRA”) and changes to laws governing the taxation of REITs.
We may not be able to maintain its exemption from registration under the Investment Company Act of 1940, as amended (the “Investment Company Act”).
Our performance may be affected by general volatility in domestic and international capital markets and economies.
Our performance may be affected by regulatory actions, litigation and contractual claims against us and our affiliates, including the potential settlement and litigation of such claims.
There may be conflicts of interests arising among us and our Sponsor and its affiliates.
Our cash reserves and working capital may not be adequate.
Our performance may be affected by increases in interest rates, operating costs and expenses, or greater than expected capital expenditures.
Our operating performance may be affected by timing of cash flows, if any, from our investments.
Our performance is subject to other risks associated with investing in our targeted investments.
Table of Contents
PART I.
ITEM 1.BUSINESS
References herein to “StratCap Digital Infrastructure REIT,” “DIR,” “Company,” “we,” “us,” or “our” refer to StratCap Digital Infrastructure REIT, Inc., a Maryland corporation, and its subsidiaries including SWIF II Operating Partnership, LP, a Delaware limited partnership, which we refer to herein as the “Operating Partnership” unless the context specifically requires otherwise. As used herein, the term “you” refers to our current stockholders or potential investors in our common stock, as applicable.
General Description of Business and Operations
StratCap Digital Infrastructure REIT, Inc. is a Maryland corporation formed on April 7, 2021 for the principal purpose of acquiring and/or establishing, operating, managing and leasing digital infrastructure assets, with a primary focus on (1) data centers, (2) cell towers, (3) wireless easements and lease assignments, and (4) fiber networks. Data centers may include wholesale, enterprise, colocation, edge computing facilities, mobile and telecom switching exchanges, central offices, telecommunication hubs, telecommunication points of presences, or other data centers. To a lesser extent, DIR may invest in other real estate-related assets, including telecommunications infrastructure assets, such as small cells and distributed antenna systems (“DAS”), and other digital infrastructure real estate assets that our management believes provides an opportunity for income and/or growth. DIR conducts its operations as a REIT for U.S. federal income tax purposes and elected to be taxed as a REIT beginning with its taxable year ended December 31, 2021. We are the sole general partner of the Operating Partnership. We and the Operating Partnership are externally managed by our Advisor, StratCap Digital Infrastructure Advisors II, LLC, our Advisor, a Delaware limited liability company that owns a special limited partner interest in the Operating Partnership. Our Advisor is an affiliate of StratCap Investment Management, LLC, our Sponsor, which is an affiliate of HMC Capital Limited ABN 94 138 990 593 (“HMC Capital”).
We rely on our Advisor, a related party, to manage our day-to-day operating and acquisition activities and to implement our investment strategy pursuant to the terms of that certain Amended and Restated Advisory Agreement, dated August 18, 2023 (as amended, the “Advisory Agreement”), by and among us, the Operating Partnership, and the Advisor. The current term of the Advisory Agreement ends August 18, 2026, subject to renewal by mutual consent of the Company and our Advisor for an unlimited number of successive one-year periods. Our Advisor performs its duties and responsibilities under the Advisory Agreement as a fiduciary of us and our stockholders. Our Advisor’s services under the Advisory Agreement are not exclusive, and it is free to furnish similar services to other entities so long as its services to us are not impaired. We pay our Advisor fees and dividends and reimburse it for certain expenses incurred on our behalf. Our independent directors evaluate at least annually whether the compensation that we contract to pay to the Advisor is reasonable in relation to the nature and quality of services performed.
In July 2021, we commenced a private offering of our common stock (the “Private Offering”) consisting of shares of Class A common stock, $0.01 par value per share (“Class A shares”), shares of Class AX common stock, $0.01 par value per share (“Class AX shares”), shares of Class D common stock, $0.01 par value per share (“Class D shares”), shares of Class DX common stock, $0.01 par value per share (“Class DX shares”), shares of Class I common stock, $0.01 par value per share (“Class I shares”) and shares of Class IX common stock, $0.01 par value per share (“Class IX shares”) pursuant to the exemption from registration provided by Section 4(a)(2) of the U.S. Securities Act of 1933, as amended (the “Securities Act”), and Regulation D promulgated thereunder, and other exemptions of similar import in the laws of the states and other jurisdictions where the Private Offering was being made. In general, in lieu of receiving cash distributions that are expected to be authorized by our board of directors (the “Board”), distributions to holders of Class AX shares, Class DX shares and Class IX shares shall be deemed distributed and then invested in additional shares of the same class at the applicable transaction price per share, net of any selling commissions associated with the applicable share class. We terminated the Private Offering prior to the commencement of the Public Offering (as defined below).
Table of Contents
In addition, on January 18, 2022, we began offering Class P interests in our Operating Partnership (“Class P OP Units”), and Class PX interests in our Operating Partnership (“Class PX OP Units”), in a private offering to accredited investors only pursuant to a confidential private placement memorandum (the “OP Unit Offering”). We terminated the OP Unit Offering prior to commencement of the Public Offering. The Class P OP Units and Class PX OP Units are exchangeable at the applicable exchange ratio, in certain circumstances, into Class I shares and Class IX shares. In general, each such unit will share in distributions from the Operating Partnership when such distributions are declared by the Company, as made in the Company’s sole discretion as the sole general partner of the Operating Partnership.
On February 14, 2025, the SEC declared effective our Registration Statement on Form S-11 (File No. 333-284566) for our initial public offering of common stock. We registered a public offering of up to $575 million in shares of common stock, consisting of up to $500 million in shares in our Primary Offering and up to $75 million in shares under our DRP. We are selling any combination of four classes of shares of our common stock: Class T shares, Class S shares, Class D shares, and Class I shares in the Public Offering, with a dollar value up to the maximum offering amount. The publicly offered share classes have different upfront selling commissions and dealer manager fees and different ongoing stockholder servicing fees. The purchase price per share for each class of our common stock sold in the Public Offering varies and generally equals our prior month’s net asset value (“NAV”) per share for such class, as determined monthly, plus any applicable upfront selling commissions and dealer manager fees. Our dealer manager in the Offerings, StratCap Securities, LLC (the “Dealer Manager”), is an affiliate of our Advisor. As of December 31, 2025, the Company issued approximately 57,990 Class T shares and 2,979,260 Class I shares under the Public Offering, including the purchase of 2,869,410 Class I shares by the Sponsor, resulting in receipt of net proceeds of approximately $30,831,251.
Our NAV per share is calculated as of the last calendar day of each month for each of our outstanding classes of common stock and is available generally within 15 calendar days after the end of the applicable month. However, in certain circumstances, the transaction price is not made available until a later time. We may update a previously disclosed transaction price in cases where we believe there has been a material change (positive or negative) to our NAV per share relative to the most recently disclosed monthly NAV per share. See Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for further details.
On December 22, 2025, the Company, through the Operating Partnership and its subsidiaries, sold and transferred 100% of the fee simple interest (“Tower Sale”) in 48 towers with associated ground leases or easements, 68 tenant leases and other related assets (“Tower Assets”) to a third party. The sale of the Tower Assets represented a sale of substantially all of the Company’s wholly-owned Tower Assets, and, as such, the Tower Assets are reflected as discontinued operations. Refer to Note 6, “Discontinued Operations,” for related disclosures.
As of December 31, 2025, the Company, through wholly-owned subsidiaries of the Operating Partnership, owned 100% of the fee simple interest in two data centers leased to three tenants, as well as a 51% interest, through our unconsolidated joint venture with DataCom, LP (the “Datacom JV”), in 150 towers with associated ground leases or easements, two rooftop easements, 228 tenant leases and other related assets. Industrial market fundamentals remain favorable, and we continue to evaluate acquisition opportunities within the industrial market to effectively execute our business strategy. See Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Portfolio,” for further details on our real estate portfolio. See Notes 3 and 4 to the Consolidated Financial Statements in Item 8 – “Financial Statements and Supplementary Data” for detail regarding our investment and acquisition activity for the year ended December 31, 2025.
Investment Objectives
Our primary investment objectives are to:
assemble and operate a diversified portfolio of digital infrastructure assets;
preserve and protect investor capital;
provide attractive risk-adjusted returns to our investors;
deliver tax-efficient income to our investors via regular distributions; and
Table of Contents
realize growth in the value of our investments over time.
We cannot assure investors that we will achieve our investment objectives. In particular, we note that the NAV of non-traded REITs may be subject to volatility related to the values of their underlying assets. Furthermore, within our investment objectives and policies, our Advisor has substantial discretion with respect to the selection of specific investments and the purchase and sale of our assets, subject to the oversight of Board.
Investment Strategy
Our investment strategy is to capitalize on the overwhelming demand for digital infrastructure in order to provide investors with stable, tax-efficient cash distributions, as well as growth in the value of their shares. Our strategy entails acquiring and/or establishing, operating, managing and leasing digital infrastructure assets, with a primary focus on (1) data centers, (2) cell towers, (3) wireless easements and lease assignments and (4) fiber networks. Data centers may include wholesale, enterprise, colocation, edge computing facilities, mobile and telecom switching exchanges, central offices, telecommunication hubs, telecommunication points of presences, or other data centers. To a lesser extent, we may invest in other real estate-related assets and telecommunications infrastructure such as small cells and DAS wherein management believes there is an opportunity for considerable income and/or growth. There is no limitation on the number, size or type of assets we may acquire or the percentage of net proceeds of our Offerings that may be invested in a single investment. We will focus our investment activities on digital infrastructure, preferably with long-term leases or contracts, to creditworthy tenants or customers.
With regard to data center real estate investments, we have focused and expect to continue focus our investment activities on acquiring mission critical properties, preferably with long-term leases, to creditworthy tenants, focusing primarily on telecommunications switch and edge data centers. We may also seek to invest in wholesale, enterprise, co-location or other types of data center properties should management believe there is an opportunity for considerable income and/or growth. We generally will seek investments that produce current income. However, we may acquire single and/or multi-tenant data center properties that may or may not be fully occupied, or those that we believe can benefit from certain value enhancement strategies. We expect to generate additional value by implementing enhancement strategies that may include: lease-up and stabilization, maximizing utilization, facility expansion, cost control efforts, conversion from a single tenant data center to a multitenant data center, adjusting under market rents to current market rates, working with developers on build-to-suit projects, providing facility management services to tenants, and other real estate strategies that we believe may lead to overall appreciation in the value of assets.
As part of our core business, we provide and expect to continue to provide access, including space or capacity, to towers, data centers, wireless rooftop or ground easements, and fiber networks via long-term contracts or leases to creditworthy tenants or customers that often contain annual rent/lease increases. In general, cell towers and easement assets can accommodate multiple customers for antennas and/or other equipment necessary to support the transmission of signals for wireless communication devices. We seek to create additional value by increasing our site rental revenues by co-locating or adding more tenants via long-term leases on our digital infrastructure real estate, through tenant lease amendments, or through build-to-suit and development opportunities. We expect these initiatives to result in significant incremental cash flows due to the relatively fixed operating costs associated with these assets. In the case of our fiber networks, we will seek to further expand coverage and service areas to allow access to new prospective customers. In addition, we may offer certain network services relating to the expansion of our digital infrastructure, predominately consisting of site development services, including, but not limited to: site acquisition, architectural and engineering, design, zoning and permitting, new cell site, small cell, DAS and fiber network build-outs.
Our long-term strategy is based on our belief that additional demand for digital infrastructure will be created by the anticipated continued growth in the number of connected devices, the ongoing usage and reliance upon mobile devices, data, information and media applications, greater adoption of virtual platforms as a result of COVID-19, and the expectation of the major U.S. wireless carriers to continue the implementation of newer, more powerful 5G networks. We believe that ongoing demand for digital infrastructure will create significant future growth opportunities for us.
We have acquired and intend to continue to acquire assets located in the United States, but may consider acquisitions of assets located outside of the United States. We may also invest in real estate-related debt and securities that meet our investment strategy and return criteria; provided that we do not intend for such investments to constitute a significant portion of our assets, and we will evaluate our assets to ensure that any such investments do not cause us or any of our subsidiaries to be an investment company under the Investment Company Act or cause our Advisor to have assets under management that would require our Advisor to register as an
Table of Contents
investment Advisor under the Investment Advisers Act of 1940, as amended. The number and mix of assets and other real estate-related investments comprising our portfolio will depend upon market conditions and other circumstances existing at the time we acquire assets and other real estate-related investments, and the amount of proceeds raised in the Public Offering. As a result, we may acquire assets other than the types described in this Annual Report. In addition, we may acquire assets that vary from the parameters described in this Annual Report.
Our Board adopted a policy pursuant to which, subject to the terms and conditions of our Advisory Agreement, our Advisor will be authorized to make any and all investments in assets with a contract purchase price less than $1,000,000 without obtaining the prior approval of our Board, so long as any such investment would not, if consummated, violate our investment guidelines or any restrictions on indebtedness and the consideration to be paid for such assets does not exceed the fair market value of such assets.
We believe that our structure as a perpetual-life REIT will allow us to acquire and manage our investment portfolio in a more active and flexible manner.
We may enter into joint ventures and other co-ownership arrangements or participations with other affiliated programs; however, our charter permits such joint ventures only if a majority of our Board, including a majority of the independent directors, not otherwise interested in the transaction approve our investment as fair and reasonable and on substantially the same terms and conditions as those received by other joint venturers. We may enter into joint ventures and make similar arrangements for the purpose of acquiring, owning, and operating digital infrastructure real estate. In determining whether to invest in a particular joint venture, our Advisor will evaluate the asset that such joint venture owns, or is being formed to own, under the same criteria described above for the selection of our real estate investments.
Borrowing Policies
Under our charter, our borrowings may not exceed 300% of our total “net assets” (as defined in our charter) as of the date of any borrowing, which is generally expected to be approximately 75% of the cost of our investments. However, we can exceed this threshold if doing so is approved by a majority of our independent directors and is disclosed to our stockholders in our next quarterly report with an explanation of the justification for the excess borrowing.
Examples of justifications that could be found by a majority of our independent directors include: (i) if the value of our portfolio declined and new borrowings were necessary to repay existing obligations, (ii) to pay sufficient dividends to maintain our REIT status, or (iii) to buy a property where an exceptional acquisition opportunity presented itself and the terms of the debt and nature of the property were such that the debt did not increase the risk that we would become unable to meet our financial obligations as they became due. There is no limitation on the amount we may borrow for the purchase of any single property, but our portfolio leverage cannot exceed 75% of the cost of our investments without justification; however, we intend to target a leverage ratio of the greater of 65% loan-to-value or loan-to-cost. During the initial stages of the Public Offering, however, our leverage ratio could exceed our target leverage ratio. Should a majority of our independent directors find justification, there will be no limitation on our portfolio leverage.
We intend to maintain amounts outstanding under long-term debt arrangements or lines of credit so that we will have more funds available for investment in assets, which will allow us to acquire a more diversified portfolio. However, the percentage of debt financing we utilize at any given time will be dependent upon various factors to be considered in the sole discretion of our Board, including, but not limited to, our ability to raise equity proceeds from the sale of our securities in this and future offerings, our ability to pay dividends, the availability of properties meeting our investment criteria, the availability of debt financing, and changes in the cost of debt financing. To help finance our initial acquisitions, we may utilize short-term borrowings. However, after our initial property acquisitions, as a general principle, we anticipate that the term of any debt financing we utilize will correspond to the anticipated holding period for the respective asset.
Our use of leverage increases the risk of default on mortgage payments and a resulting foreclosure of a particular asset. To the extent that we do not obtain mortgage loans on our assets, our ability to acquire additional properties will be limited. When interest rates on mortgage loans are high or financing is otherwise unavailable on a timely basis, we may purchase certain properties for cash with the intention of obtaining a mortgage loan for a portion of the purchase price at a later time. Our Advisor will seek to obtain financing on our behalf on the most favorable terms available. Lenders may have recourse to assets not securing the repayment of indebtedness.
Table of Contents
Our Advisor may refinance assets during the term of a loan in various circumstances, such as when a decline in interest rates makes it beneficial to prepay an existing mortgage, when an existing mortgage matures, or if an attractive investment becomes available and the proceeds from the refinancing can be used to purchase such investment. The benefits of the refinancing may include an increased cash flow resulting from reduced debt service requirements, an increase in dividend dividends from proceeds of the refinancing, if any, and/or an increase in property ownership if some refinancing proceeds are reinvested in real estate.
We may repay borrowings under any future credit facility or under any future long-term mortgage debt with proceeds from the sale of properties, operating cash flow, long-term mortgage debt, proceeds from the Public Offering, proceeds from any future private or public offering, or proceeds from any other future securities offerings.
Our Taxation as a REIT
We conduct our operations as a REIT for U.S. federal income tax purposes and elected to be taxed as a REIT beginning with our taxable year ended December 31, 2021. Furthermore, we intend to operate in such a manner as to continue to qualify for taxation as a REIT under the applicable provisions of the Internal Revenue Code of 1986, as amended (the “Code”), so long as our Board determines that REIT qualification remains in our best interest. Our qualification and taxation as a REIT depend upon our ability to meet on a continuing basis, through actual annual operating results, certain qualification tests set forth in the U.S. federal tax laws. Those qualification tests involve the percentage of income that we earn from specified sources, the percentage of our assets that falls within specified categories, the diversity of the ownership of our shares, and the percentage of our taxable income that we distribute. Accordingly, no assurance can be given by us that our actual results of operations for any particular taxable year will satisfy such requirements.
Employees
The Company is externally managed and currently has no employees. Employees of our Advisor and its affiliates perform substantially all of the services related to our asset management, accounting, investor relations, and other administrative activities. See Item 13, “Certain Relationships and Related Transactions, and Director Independence”.
Governmental Regulations
As an owner of real estate, our operations are subject, in certain instances, to supervision and regulation by U.S. and other governmental authorities, and may be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, which include, among other things: (i) federal and state securities laws and regulations; (ii) federal, state and local tax laws and regulations, (iii) state and local laws relating to real property; and (iv) federal, state and local environmental laws, ordinances, and regulations.
Compliance with the federal, state and local laws described above has not had a material adverse effect on our business, assets, results of operations, financial condition and ability to pay distributions, and we do not believe that our existing portfolio will require us to incur material expenditures to comply with these laws and regulations.
Environmental
As an owner of real estate, we are subject to various environmental laws of federal, state, and local governments. Compliance with existing laws has not had a material adverse effect on our financial condition or results of operations, and management does not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties we currently own, or on properties that may be acquired in the future.
Table of Contents
Competition
As we purchase properties to build our portfolio, we are in competition with other potential buyers for the same properties, which may result in an increase in the amount we must pay to acquire a property or may require us to locate another property that meets our investment criteria. Such other potential buyers may include other listed and non-listed REITs, real estate operating companies, pension funds, insurance companies, investment funds and companies, partnerships and developers. These potential buyers may have substantially greater financial resources and experience than we do. At the time we elect to dispose of our properties, we may be in competition with sellers of similar properties to locate suitable purchasers.
Conflicts of Interest
We are subject to conflicts of interest arising out of our relationship with our Sponsor, our Advisor and their affiliates. See Item 1A- “Risk Factors - Risks Related to Conflicts of Interest.”
Available Information
We are subject to the reporting and information requirements of the Exchange Act of 1934, as amended (the “Exchange Act”), and, accordingly, we file Annual Reports, Quarterly Reports, and other information with the SEC. Access to copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings with the SEC, including amendments to such filing, may be obtained free of charge from our website, https://www.digitalinfrastructurereit.com. These filings are available promptly after we file them with, or furnish them to, the SEC. We are not incorporating our website or any information from the website into this Annual Report. The SEC also maintains a website, http://www.sec.gov, that will contain our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Report on Form 8-K and other filings with the SEC. Access to these filings is free of charge.
Table of Contents
ITEM 1A. RISK FACTORS
You should specifically consider the following material risks in addition to the other information contained in this Annual Report. The occurrence of any of the following risks might have a material adverse effect on our business and financial condition. The risks and uncertainties discussed below are not the only ones we face, but do represent those risks and uncertainties that we believe are most significant to our business, operating results, financial condition, prospects and forward-looking statements. As used herein, the term “you” refers to our current stockholders or potential investors in our common stock, as applicable.
Risks Related to an Investment in the Company
We have a limited operating history and limited established financing sources, and the prior performance of real estate programs sponsored by affiliates of our Advisor may not be an indication of our future results.
We were formed on April 7, 2021, and therefore, have a limited operating history and you should not rely upon the past performance of other real estate investment programs sponsored by affiliates of our Advisor to predict our future results. Although the members of our Advisor’s management have significant experience in the acquisition, finance, management and development of commercial real estate, the prior performance of real estate investment programs sponsored by the members of our Advisor’s management team and other affiliates of our Advisor may not be indicative of our future results.
Moreover, we have limited established financing sources.
We may not succeed in achieving our goals, and our failure to do so could cause you to lose all or a portion of your investment.
Because the Public Offering is a “blind pool” offering, you will not have the opportunity to evaluate our investments before we make them, which makes an investment in us more speculative.
We have not identified all of the properties we will acquire with the net proceeds from the Public Offering. Additionally, we will not provide you with information to evaluate our investments prior to our acquisition of properties. We intend to invest the net proceeds from the Public Offering in digital infrastructure real estate assets. We also may, in the discretion of our Board, invest in other types of real estate or in entities that invest in real estate.
Our Expense Support Agreement may be terminated by us or our Advisor at any time upon 30 days’ notice.
We entered into an Amended and Restated Expense Support Agreement with our Advisor and the Operating Partnership on August 12, 2025 (as amended, the “Expense Support Agreement”). Pursuant to the terms of the Expense Support Agreement, as amended, we or our Advisor may terminate the Expense Support Agreement at any time, without penalty, upon 30 days’ notice. If our Advisor terminates the Expense Support Agreement, we must then reimburse our Advisor for all current unreimbursed expense payments on a quarterly basis as provided in the Expense Support Agreement.
Your ability to have your shares repurchased through our share repurchase program is limited. We may choose to repurchase fewer shares than have been requested to be repurchased, in our discretion at any time, and the amount of shares we may repurchase is subject to caps. Further, our Board may make exceptions to, modify, suspend or terminate our share repurchase program if it deems such action to be in our best interest and the best interest of our stockholders.
We may choose to repurchase fewer shares than have been requested in any particular month to be repurchased under our share repurchase program, or none at all, in our discretion at any time. We may repurchase fewer shares than have been requested to be repurchased due to lack of readily available funds because of adverse market conditions beyond our control, the need to maintain liquidity for our operations or because we have determined that investing in real property or other illiquid investments is a better use of our capital than repurchasing our stock. In addition, the aggregate NAV of total repurchases of Class A shares, Class AX shares, Class D shares, Class DX shares, Class I shares, Class IX shares, Class S shares and Class T shares will be limited to no more than 1.67% of our aggregate NAV per month (with the first month of each calendar quarter limitation being 1.66% instead of 1.67%), which will be measured using the aggregate NAV attributable to stockholders as of the end of the immediately preceding month, and no more than 5% of our aggregate NAV per calendar quarter, which will be measured using the average aggregate NAV attributable to stockholders as of the end of the immediately preceding three months. For the avoidance of doubt, the aggregate NAV per month that is used to
Table of Contents
calculate the aforementioned limitations of our share repurchase program will be the Company’s aggregate NAV per month excluding our Operating Partnership’s aggregate NAV per month. Further, our Board may make exceptions to, modify, suspend or terminate our share repurchase program if it deems such action to be in our best interest and the best interest of our stockholders. If the full amount of all shares of our common stock requested to be repurchased in any given month are not repurchased, funds will be allocated pro rata based on the total number of shares of common stock being repurchased without regard to class and subject to the volume limitation. All unsatisfied repurchase requests must be resubmitted after the start of the next month or quarter, or upon the recommencement of the share repurchase program, as applicable.
The vast majority of our assets consist of properties that cannot generally be readily liquidated without impacting our ability to realize full value upon their disposition. Therefore, we may not always have a sufficient amount of cash to immediately satisfy repurchase requests.
Since March 2025, we have routinely received share repurchase requests that exceeded our limitations, and we may in the future continue to receive share repurchase requests in excess of the limitations under our share repurchase program. Should repurchase requests, in our judgment, place an undue burden on our liquidity, adversely affect our operations or risk having an adverse impact on the Company as a whole, or should we otherwise determine that investing our liquid assets in real properties or other illiquid investments rather than repurchasing our shares is in the best interests of the Company as a whole, then we may choose to repurchase fewer shares than have been requested to be repurchased, or none at all. Because we are not required to authorize the recommencement of the share repurchase program within any specified period of time, we may effectively terminate the plan by suspending it indefinitely. As a result, your ability to have your shares repurchased by us may be limited and at times you may not be to your investment.
Adverse economic conditions, including an economic slowdown or downturn, could have a material adverse effect on us.
Our business could be significantly affected by global and national economic and market conditions generally and by the local economic conditions where our assets are located. A return to a recessionary period, elevated inflation, adverse trends in employment levels, geopolitical instability or conflicts, trade or supply chain disruptions, economic or other sanctions or a sustained capital market correction could have an adverse effect on our business, including on the value of our investments. Any deterioration of the real estate market as a result of these conditions may cause us to experience losses related to our assets and to sell assets at a loss.
The length and severity of any economic slowdown or downturn cannot be predicted. The occurrence of any of the foregoing could have a material adverse effect on us.
Global economic, political and market conditions may materially and adversely affect us.
The current worldwide financial markets situation, as well as various social and political tensions in the U.S. and around the world (including wars, such as the recent military actions involving Iran, and other forms of conflict, terrorist acts, security operations and catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes and global health epidemics) may contribute to increased market volatility, may have long-term effects on the U.S. and worldwide financial markets and may cause economic uncertainties or deterioration in the U.S. and worldwide. For example, conflicts, and resulting market volatility, could materially and adversely affect us and have in the past led, and could lead in the future, to the U.S. and other countries imposing sanctions or taking other restrictive actions. In addition, other government actions, including sanctions, export controls, tariffs (including recent tariffs imposed and threatened by the U.S.) and trade wars could have a material adverse effect on us and could cause the NAV of our common shares to . Further, we face an increase in cybersecurity risks generally as Russia and Iran and Russia- or Iran-aligned cyber groups and cyber- groups react to the U.S.’s response to and involvement in . We will continue to monitor developments and seek to manage our investments in a manner consistent with our investment objectives, but there can be no assurance that we will be in doing so.
Table of Contents
In addition, the current regulatory environment in the U.S. and in other countries may be impacted by future legislative developments. The outcome of elections creates uncertainty with respect to legal, tax and regulatory regimes in which we and our investments, as well as the Advisor and its affiliates, will operate. Any significant changes in, among other things, economic policy (including with respect to interest rates and foreign trade (including tariffs)), the regulation of the investment management industry, tax law, immigration policy or government entitlement programs could have a material and adverse impact on us.
Uncertainty with respect to the financial stability of the U.S. could have a significant material adverse effect on us.
Our investment strategy depends on the real estate industry generally, which in turn depends on broad economic conditions in the U.S. and, to the extent our investments are secured by real estate located outside of the U.S., elsewhere. Recently, concerns over global economic conditions, energy and commodity prices, geopolitical issues and military conflicts, inflation, Federal Reserve short term rate decisions, actual or perceived instability in the U.S. banking system, foreign exchange rates, the availability and cost of credit, the sovereign debt crisis, the U.S. mortgage market and a potentially weakening real estate market in the United States have contributed to increased economic uncertainty and diminished expectations for the global economy. These factors, combined with volatile prices of oil and the potential for declining business and consumer confidence, may precipitate an economic slowdown, as well as cause extreme volatility in security prices. Global economic and political headwinds, along with global market and the risk of maturing debt that may have being refinanced, may continue to cause periodic in the real estate market for some time. conditions in the real estate industry can cause a in the value of real estate assets, and credit and liquidity , among other potential risks.
High interest rates and elevated inflation may adversely affect our financial condition and results of operations.
Periods of elevated inflation and high interest rates, such as those experienced in recent years, can contribute to significant volatility in the equity and debt markets and economic deceleration or contraction in the rate of growth in certain industries, sectors or geographies. Although decelerating, inflation remains above the U.S. Federal Reserve’s target levels. Despite multiple federal fund rate decreases over the course of 2024 and 2025, interest rates have remained elevated, with the U.S. Federal Reserve indicating in early 2025 an expectation of slower rate decreases moving forward. A slower-than-expected decrease, or a further increase, in interest rates would present a challenge for our real estate valuations. High interest rates and elevated inflation could have an adverse impact on our operating costs, including any floating rate mortgages, credit facilities, property operating expenses and general and administrative expenses, as these costs could increase at a rate higher than our rental and other revenue.
We expect that we will continue to incur indebtedness in the future. To the extent that we incur variable rate debt, increases in interest rates would increase our interest costs, which could reduce our cash flows and our ability to pay distributions to you. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in assets at times that may not permit realization of the maximum return on such investments.
Economic events that may cause our stockholders to request that we repurchase their shares may materially adversely affect our cash flow and our results of operations and financial condition.
Economic events affecting economic conditions in the United States and/or elsewhere or globally, such as the general negative performance of the real estate sector (including as a result of inflation or higher interest rates), actual or perceived instability in the U.S. banking system, disruptions in the labor market (including labor shortages and unemployment), stock market volatility (including volatility as a result of geopolitical events, tariffs and trade conflicts, and military conflicts, such as the continuing war in Ukraine, the recent operations by the United States in Venezuela, recent military action in Iran and the broader conflict and escalating tensions in the Middle East), trade barriers, availability of credit, national and international circumstances and inflation could cause our stockholders to seek to sell their shares to us pursuant to our share repurchase program, particularly at a time when such events are affecting the performance of our assets. Even if we decide to all resulting repurchase requests, our cash flow could be materially affected. In addition, if we determine to sell assets to repurchase requests, we may not be to realize the return on such assets that we may have been to had we sold at a more time, and our results of operations and financial condition, including, without , breadth of our portfolio by property type and location, could be materially affected.
Table of Contents
We do not currently intend to seek to list the shares sold in the Public Offering on an exchange, and we are not required to provide for a liquidity event. Therefore, if you purchase shares in the Public Offering, it will be difficult for you to sell your shares and, if you are able to sell your shares, you will likely sell them at a substantial discount.
The shares offered by us in the Public Offering are illiquid assets for which there is not expected to be any secondary market nor is it expected that any will develop in the future. In addition, stockholders may not be able to have their shares repurchased under our share repurchase program. Therefore, it will be difficult for you to sell your shares promptly or at all. If you are able to sell your shares, you may only be able to sell them at a substantial discount from the price you paid. The shares should be purchased as a long-term investment only.
While we may consider a liquidity event at any time in the future, we currently do not intend to undertake such consideration until at least 2028, seven years after we launched our investment program, and we are not obligated by our charter or otherwise to effect a liquidity event at any time. If we do not pursue a liquidity event, or delay such an event due to market conditions, your shares may continue to be illiquid and you may, for an indefinite period of time, be unable to convert your investment to cash easily and could suffer losses on your investment.
We may suffer from delays in locating suitable investments, which could adversely affect our ability to make distributions and the value of your investment.
Our stockholders will have no opportunity to evaluate the terms of transactions or other economic or financial data concerning our investments. We could suffer from delays in locating suitable investments. The more money we raise in the Public Offering, the more difficult it will be to invest the net offering proceeds promptly. Therefore, the size of the Public Offering increases the risk of delays in investing our net offering proceeds. Our reliance on our Advisor to locate suitable investments for us at times when the management of our Advisor is simultaneously seeking to locate suitable investments for other investment programs sponsored by our Advisor’s affiliates could also delay the investment of the proceeds of the Public Offering. Delays we encounter in the selection and acquisition of income-producing properties would likely limit our ability to pay dividends to you and reduce your overall returns.
We may be unable to make or maintain cash distributions or increase distributions over time.
There are many factors that can affect the availability and timing of cash distributions to stockholders, including the amount of cash flow from operations. Initially, we expect distributions to be based on a combination of offering proceeds and cash available from our operations, and we cannot assure you that we will generate cash from operations to sustain our distributions. The amount of cash available for distributions is affected by many factors, such as our ability to buy assets as offering proceeds become available, income from such properties and our operating expense levels, as well as many other variables. Actual cash available for distributions may vary substantially from estimates. We cannot assure you that we will be able to pay distributions or maintain our current level of distributions, or that distributions will increase over time. We also cannot give any assurance that rents from the properties we acquire will increase, that the properties or securities we buy will increase in value or provide constant or increased distributions over time, or that future acquisitions of real estate or any investments in securities will increase our cash available for distributions to stockholders. We may not have sufficient cash from operations to make a distribution required to maintain our REIT status. We may make distributions from the proceeds of the Public Offering or from borrowings in anticipation of future cash flow. Any such distributions may constitute a return of capital and may reduce the amount of capital we ultimately invest in properties and impact the value of your investment.
We may pay distributions from sources other than our cash flow from operations, including, without limitation, the sale of or repayment under our assets, borrowings or offering proceeds, and we have no limits on the amounts we may pay from such sources.
We may not generate sufficient cash flow from operations to fully fund distributions to stockholders, particularly during the early stages of our operations. Therefore, particularly in the earlier part of the Public Offering, we may fund distributions to our stockholders from sources other than cash flow from operations, including, without limitation, the sale of or repayment under our assets, borrowings, return of capital or offering proceeds. We have paid, and may continue to pay, distributions from sources other than from our cash flow from operations. For the year ended December 31, 2025, our cash flows used in operations of approximately ($2,666,071) was a shortfall of approximately $7,170,507 or (159%), of our distributions paid (total distributions were approximately $4,504,436 during such period and such shortfall was paid from proceeds from the Public Offering, including the proceeds from investments made by our Sponsor in the Public Offering). For the year ended December 31, 2024, our cash flows used in operations of approximately ($4,197,497) was a shortfall of approximately $8,904,472, or (189%), of our distributions paid (total distributions were approximately
Table of Contents
$4,706,975 during such period and such shortfall was paid from proceeds from our private offering.) The extent to which we pay distributions from sources other than cash flow from operations will depend on various factors, including the level of participation in our DRP, the extent to which the Advisor elects to receive its management fee in shares of our common stock or Class P OP Units, and Class PX interests in our Operating Partnership (together, “OP Units”) and elects to receive distributions on its performance participation interest in OP Units, how quickly we invest the proceeds from this and any future offering and the performance of our investments. Funding distributions from the sale of or repayment under our assets, borrowings or proceeds of the Public Offering will result in us having less funds available to make new investments. As a result, the return you realize on your investment may be reduced. Doing so may also negatively impact our ability to generate cash flows. Likewise, funding distributions from the sale of additional securities will dilute your interest in us on a percentage basis and may impact the value of your investment especially if we sell these securities at prices less than the price you paid for your shares. We may be required to continue to fund our regular distributions from a combination of some of these sources if our investments fail to perform, if expenses are greater than our revenues, or due to numerous other factors. We have not established a limit on the amount of our distributions that may be paid from any of these sources.
To the extent we borrow funds to pay distributions, we would incur borrowing costs and these borrowings would require a future repayment. The use of these sources for distributions and the ultimate repayment of any liabilities incurred could adversely impact our ability to pay distributions in future periods, decrease our NAV, decrease the amount of cash we have available for operations and new investments and adversely impact the value of your investment.
We may also defer expenses or pay expenses (including management fees or distributions to the Advisor, as the special limited partner of our Operating Partnership) with shares of our common stock or OP Units in order to preserve cash flow for the payment of distributions. The ultimate repayment of these deferred expenses could adversely affect our operations and reduce the future return on your investment. We may repurchase shares or redeem OP Units from the Advisor shortly after issuing such shares or units as compensation. The payment of expenses in shares of our common stock or with OP Units will dilute your percentage ownership interest in us. There is no guarantee that any of our operating expenses will be deferred and the Advisor is under no obligation to receive fees or distributions in shares of our common stock or OP Units and may elect to receive such amounts in cash.
Our Board may change our investment policies without stockholder approval, which could alter the nature of your investments.
Our investment policies may change over time. The methods of implementing our investment policies also may vary, as new real estate development trends emerge and new investment techniques are developed. Our investment objectives and strategies, the methods for their implementation, and our other objectives, policies and procedures may be altered by our Board without the approval of our stockholders. As a result, the nature of your investment could change without your consent.
If we are unable to raise substantial funds in the Public Offering, we will be limited in the number and type of investments we may make, and the value of your investment in us will fluctuate with the performance of the specific properties we acquire.
The Public Offering is being made on a “best efforts” basis, whereby our Dealer Manager and broker-dealers participating in the Public Offering are only required to use their best efforts to sell shares of our stock and have no firm commitment or obligation to purchase any of the shares. As a result, the amount of proceeds we raise in the Public Offering may be substantially less than the amount we would need to achieve a broadly diversified property portfolio. If we are unable to raise substantial proceeds from the Public Offering, we will make fewer investments resulting in less diversification in terms of the number of investments owned, the geographic regions in which our investments are located and the types of investments that we make. In such event, the likelihood of our profitability being affected by the performance of any one of our investments will increase. Additionally, we are not limited in the number or size of our investments or the percentage of net proceeds we may dedicate to a single investment. Your investment in our stock will be subject to greater risk to the extent that we lack a diversified portfolio of investments.
In addition, our inability to raise substantial funds would increase our fixed operating expenses as a percentage of gross income, and our financial condition and ability to pay distributions could be adversely affected.
A high concentration of our properties in a particular geographic area, or of tenants in a similar industry, would magnify the effects of downturns in that geographic area or industry.
If there is a concentration of our properties in any particular geographic area, any adverse situation that disproportionately affects that geographic area would have a magnified adverse effect on our portfolio. Similarly, since we expect the tenants of our
Table of Contents
properties to be concentrated in the digital infrastructure industry, any adverse effect to that industry generally would have a disproportionately adverse effect on our portfolio.
The Company owned data centers located in Missouri and California that account for approximately 62.97% and 37.03%, respectively, of total data center rental revenue for the year ended December 31, 2025.
Data center leases with tenants under common control of TierPoint, Wesco and AT&T Inc. and its subsidiaries accounted for approximately 40.38%, 22.59% and 37.03%, respectively, of total data center rental revenue for the year ended December 31, 2025.
If the Advisor is unable to find suitable investments or successfully implement our investment strategy, then we may not be able to achieve our investment objectives or pay distributions.
Our Advisor is responsible for, among other things, identifying, structuring and negotiating investments and providing asset management and disposition services in connection with our investments. Accordingly, our ability to achieve our investment objectives and to pay distributions depends on our Advisor’s performance, including its ability to locate suitable investments and successfully structure and negotiate our investment and financing arrangements. We cannot be sure that our Advisor will be successful in locating suitable investments on financially attractive terms or that our investment objectives will be achieved. If our Advisor is unable to find suitable investments or otherwise fails to successfully implement our investment strategy, our performance will suffer, and, if our Board determines, we may liquidate. In these events, our ability to pay distributions to our stockholders and the value of your investment would be adversely affected.
If our Advisor and its affiliates are unable to retain key personnel, our ability to implement our investment strategies could be delayed or hindered, which could adversely affect our ability to make distributions and the value of your investment.
Our success depends to a significant degree upon the contributions of certain of the executive officers and other key personnel of our Advisor who would be difficult to replace. Our Advisor does not have an employment agreement with any of these key personnel and we cannot guarantee that all, or any particular one, will remain affiliated with our Advisor. If any of such key personnel were to cease their affiliation with our Advisor, our operating results could suffer. Further, we do not intend to separately maintain key person life insurance on or for any person. We believe that our future success depends, in large part, upon our Advisor’s ability to hire and retain highly skilled managerial, operational and marketing personnel. Competition for such personnel is intense, and we cannot assure you that our Advisor will be successful in attracting and retaining such skilled personnel, particularly in light of our perpetual-life nature. If our Advisor loses or is unable to obtain the services of key personnel, our ability to implement our investment strategies could be or , and the value of your investment may .
Our Advisor can resign on 60 days’ notice from its role as Advisor, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business, and results of operations and cash flows.
Our Advisor has the right, under the Advisory Agreement, to resign at any time upon not less than 60 days’ written notice, whether we have found a replacement or not. If our Advisor resigns, we may not be able to find a new Advisor or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, and our financial condition, business and results of operations, as well as our ability to pay dividends, are likely to be adversely affected. In addition, the coordination of our management and investment activities is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by our Advisor and its affiliates. Even if we are able to retain comparable management, the integration of such management and its lack of familiarity with our investment objectives may result in additional costs and time that may affect our business, financial condition, results of operations and cash flows.
Maryland law and our organizational documents limit our rights and the rights of our stockholders to recover claims against our directors and officers, which could reduce your and our recovery against them if they cause us to incur losses.
Maryland law provides that a director will not have any liability as a director so long as he or she performs his or her duties in accordance with the applicable standard of conduct. In addition, our charter generally limits the personal liability of our directors and officers for monetary damages subject to the limitations of the North American Securities Administrators Association’s Statement of
Table of Contents
Policy Regarding Real Estate Investment Trusts, as revised and adopted on May 7, 2007 (the “NASAA REIT Guidelines”) and Maryland law. Maryland law and our charter provide that no director or officer shall be liable to us or our stockholders for monetary damages unless the director or officer (1) actually received an improper benefit or profit in money, property or services or (2) was actively and deliberately dishonest as established by a final judgment as material to the cause of action. Moreover, our charter generally requires us to indemnify and advance expenses to our directors and officers for losses they may incur by reason of their service in those capacities unless their act or omission was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty, they actually received an improper personal benefit in money, property or services or, in the case of any proceeding, they had reasonable cause to believe the act or was . Further, we have entered into separate indemnification agreements with each of our officers and directors. As a result, you and we may have more limited rights our directors or officers than might otherwise exist under common law, which could reduce your and our recovery from these persons if they act in a manner that causes us to incur .
In addition, we are obligated to fund the defense costs incurred by these persons in some cases. However, our charter provides that we may not indemnify any of our directors, our Advisor or any of its or our affiliates, for any liability or loss suffered by them or hold any of our directors, our Advisor or any of its or our affiliates harmless for any liability or loss suffered by us, unless they have determined, in good faith, that the course of conduct that caused the loss or liability was in our best interests, they were acting on our behalf or performing services for us, the liability or loss was not the result of negligence or misconduct by any of our non-independent directors, our Advisor or any of its or our affiliates, or gross negligence or willful misconduct by any of our independent directors, and the indemnification or agreement to hold harmless is recoverable only out of our net assets and not from the stockholders.
The failure of any bank in which we deposit our funds could reduce the amount of cash we have available to pay distributions, make additional investments and service our debt.
The Federal Deposit Insurance Corporation only insures interest-bearing accounts in amounts up to $250,000 per depositor per insured bank. While we will monitor our cash balance in our operating accounts, if any of the banking institutions in which we deposit funds ultimately fails, we may lose our deposits over $250,000. The loss of our deposits may have a material adverse effect on our financial condition.
Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.
We rely on information technology systems, including the internet and networks and systems maintained and controlled by third-party vendors and other third parties, to process, transmit and store information and to manage or support our business processes. Third-party vendors collect and hold personally identifiable information and other confidential information of our tenants, operators, patients, stockholders and employees. We also maintain confidential financial and business information regarding us and persons and entities with which we do business on our information technology systems. While we take steps to protect the security of the information maintained in our information technology systems, including the use of commercially available systems, software, tools and monitoring to provide security for processing, transmitting and storing of the information, it is possible that such security measures will not be able to prevent human error or the systems’ improper functioning, or the loss, misappropriation, disclosure or corruption of personally identifiable information or other confidential or sensitive information. Cybersecurity breaches, including physical or electronic break-ins, computer viruses, phishing scams, attacks by hackers, due to employee or and similar , the risk of which may be heightened by the increased prevalence and use of artificial intelligence and machine-learning technology, can create, and in some instances in the past have resulted in, system , or access to information maintained on our information technology systems or the information technology systems of our third-party vendors or other third parties or otherwise cause or impacts to occur to our business and materially and affect us. While we maintain cyber risk insurance to provide some coverage for certain risks arising out of cybersecurity , there is no assurance that such insurance would cover all or a significant portion of the costs or consequences associated with a cybersecurity . As our reliance on technology increases, so will the risks posed to our information systems, both internal and those we outsource. In addition, as the techniques used to obtain access to information technology systems become more varied and sophisticated and the occurrence of such becomes more frequent, we and our third-party vendors and other third parties may be to anticipate these techniques or and implement appropriate preventative measures. There is no guarantee that any processes, procedures and internal controls we have implemented or will implement will prevent cyber intrusions. Any to prevent cybersecurity and maintain the proper function, security and availability of our or our third-party vendors’ and other third
Table of Contents
parties’ information technology systems could interrupt our operations, damage our reputation and brand, damage our competitive position, make it difficult for us to acquire properties, and subject us to liability claims or regulatory penalties, which could materially and adversely affect us. Additionally, as increased regulatory compliance for cybersecurity protocols and disclosures are required by state or federal authorities, the increased amount of resources, both time and expense, could also materially and adversely affect us.
We have incurred net losses under GAAP in the past and may incur net losses in the future, and we have an accumulated deficit and may continue to have an accumulated deficit in the future.
For the years ended December 31, 2025 and 2024, we had net loss attributable to our stockholders of approximately $218,081 and $9,771,882, respectively. As of December 31, 2025 and 2024, we had an accumulated deficit of approximately $34,627,996 and $28,660,011, respectively. The net loss attributable to stockholders for both periods was primarily due to the general and administrative costs and real estate depreciation and amortization amounting to $8,815,590 and $7,389,744 during the years ended December 31, 2025 and 2024, respectively. We may incur net losses and continue to have an accumulated deficit in the future.
We may be subject to additional risks from any non-U.S. investments.
We may in the future invest in real estate located outside of the United States and real estate debt issued in, and/or backed by real estate in, countries outside the United States. Non-U.S. real estate and real estate-related investments involve certain factors not typically associated with investing in real estate and real estate-related investments in the U.S., including risks relating to (i) currency exchange matters, including fluctuations in the rate of exchange between the U.S. dollar and the various non-U.S. currencies in which such investments are denominated, and costs associated with conversion of investment principal and income from one currency into another; (ii) differences in conventions relating to documentation, settlement, corporate actions, stakeholder rights and other matters; (iii) differences between U.S. and non-U.S. real estate markets, including potential price volatility in and relative illiquidity of some non-U.S. markets; (iv) the absence of uniform accounting, auditing and financial reporting standards, practices and disclosure requirements and differences in government supervision and regulation; (v) certain economic, social and political risks, including potential exchange-control regulations, potential restrictions on non-U.S. investment and repatriation of capital, the risks associated with political, economic or social instability, including the risk of sovereign defaults, regulatory change, and the possibility of or confiscatory taxation or the imposition of withholding or other taxes on dividends, interest, capital , other income or gross sale or disposition proceeds, and economic and political developments; (vi) the possible imposition of non-U.S. taxes on income and and gross sales or other proceeds recognized with respect to such investments; (vii) differing and potentially less well-developed or well-tested corporate laws regarding stakeholder rights, creditors’ rights (including the rights of secured parties), fiduciary duties and the protection of investors; (viii) different laws and regulations including differences in the legal and regulatory environment or legal and regulatory compliance; (ix) political to investments by foreign investors; and (x) less publicly available information. Furthermore, while we may have the capacity, but not the obligation, to mitigate such additional risks, including through the utilization of certain foreign exchange hedging instruments, there is no guarantee that we will be in mitigating such risks and in turn may introduce additional risks and expenses linked to such efforts.
Risks Related to Conflicts of Interest
We are subject to conflicts of interest arising out of our relationships with our Advisor and its affiliates, including the material conflicts discussed below.
Various potential and actual conflicts of interest will arise, and these conflicts may not be identified or resolved in a manner favorable to us.
Our Sponsor has conflicts of interest, or conflicting loyalties, as a result of the numerous activities and relationships of our Sponsor, our Dealer Manager, our Advisor and the affiliates, partners, members, stockholders, officers, directors and employees of the foregoing, some of which are described herein.
However, not all potential, apparent and actual conflicts of interest may be included herein, and additional conflicts of interest could arise as a result of new activities, transactions or relationships commenced in the future. If any matter arises that we and our affiliates (including the Advisor) determine in our good faith judgment constitutes an actual and material conflict of interest, we and our affiliates (including the Advisor) will take such actions as we determine appropriate to mitigate the conflict. Transactions between us and our Sponsor or its affiliates will require approval by a majority of our directors, including a majority of our independent directors,
Table of Contents
not otherwise interested in such transaction. There can be no assurance that our Board or our Sponsor will identify or resolve all conflicts of interest in a manner that is favorable to us.
The fees we pay in connection with the Public Offering and the agreements entered into with our Advisor and its affiliates were not determined on an arm’s-length basis and therefore may not be on the same terms we could achieve from a third party.
The compensation paid to our Advisor, our Dealer Manager and other affiliates of our Advisor for services they provide us was not determined on an arm’s-length basis. All service agreements, contracts or arrangements between or among our Advisor and its affiliates, including the Advisor and us, were not negotiated at arm’s-length. Such agreements include our Advisory Agreement, the Operating Partnership’s partnership agreement, our Dealer Manager agreement, and any property related corporate services and other agreements we may enter into with affiliates of the Advisor from time to time.
The Advisor faces a conflict of interest because the fees it receives for services performed are based in part on our NAV, which the Advisor is ultimately responsible for determining.
The Advisor is paid a management fee for its services based on our estimated monthly NAV, less a management fee equal to 0.75% of the NAV of the OP Units and Class PX OP Units sold in the OP Unit Offering and that are not held by us, per annum, payable monthly. In addition, the distributions to be received by the Advisor, in its capacity as the special limited partner of the Operating Partnership, with respect to its performance participation interest in the Operating Partnership are based in part upon the Operating Partnership’s net assets (which is a component of our NAV). The calculation of our NAV includes certain subjective judgments with respect to estimating, for example, the value of our portfolio and our accrued expenses, net portfolio income and liabilities, and therefore, our NAV may not correspond to realizable value upon a sale of those assets. The Advisor may benefit by us retaining ownership of our assets at times when our stockholders may be better served by the sale or disposition of our assets in order to avoid a reduction in our NAV. If our NAV is calculated in a way that is not reflective of our actual NAV, then the purchase price of shares of our common stock or the price paid for the repurchase of your shares of common stock on a given date may not accurately reflect the value of our portfolio, and your shares may be worth less than the purchase price or more than the repurchase price. The valuation of our investments will affect the amount and timing of the management fee paid to the Advisor and its performance participation interest. As a result, there may be circumstances where the Advisor is incentivized to determine valuations that are higher than the actual fair value of our investments.
The Advisor’s management fee and performance participation interest may not create proper incentives or may induce the Advisor and its affiliates to make certain investments, including speculative investments, that increase the risk of our real estate portfolio.
We pay the Advisor a management fee regardless of the performance of our portfolio. The Advisor’s entitlement to a management fee, which is not based upon performance metrics or goals, might reduce its incentive to devote its time and effort to seeking investments that provide attractive risk-adjusted returns for our portfolio. We would be required to pay the Advisor a management fee in a particular period even if we experienced a net loss or a decline in the value of our portfolio during that period.
The existence of the Advisor’s 12.5% performance participation interest in our Operating Partnership, which is based on our total distributions plus the change in NAV per share, may create an incentive for the Advisor to make riskier or more speculative investments on our behalf or cause us to use more leverage than we would otherwise in the absence of such performance-based compensation. In addition, the change in NAV per share will be based on the value of our investments on the applicable measurement dates and not on realized gains or losses. As a result, the performance participation interest may receive distributions based on unrealized gains in certain assets at the time of such distributions and such gains may not be realized when those assets are eventually disposed of.
Because the management fee and performance participation are based on our NAV, the Advisor may also be motivated to accelerate acquisitions in order to increase NAV or, similarly, delay or curtail repurchases to maintain a higher NAV, and the Dealer Manager may also be incentivized to sell more shares of our common stock to increase aggregate NAV, which would, in each case, increase amounts payable to the Advisor, but may make it more difficult for us to efficiently deploy new capital.
Table of Contents
Our Advisor faces potential conflicts of interest relating to the purchase and leasing of properties, and such conflicts may not be resolved in our favor, which could adversely affect our investment opportunities.
Affiliates of our Advisor sponsor several private real estate programs, and may sponsor one or more other real estate investment programs in the future. One private real estate program sponsored by affiliates of our Advisor is currently targeting digital infrastructure assets. We may buy properties at the same time as one or more of the other programs sponsored by affiliates of our Advisor and managed by officers and key personnel of our Advisor. There is a risk that our Advisor will choose a property that provides lower returns to us than a property purchased by another program sponsored by affiliates of our Advisor. We cannot be sure that officers and key personnel acting on behalf of our Advisor and on behalf of managers of other programs that may be sponsored by affiliates of our Advisor will act in our best interests when deciding whether to allocate any particular property to us. In addition, we may acquire properties in geographic areas where other programs sponsored by affiliates of our Advisor own properties. Also, we may acquire properties from, or sell properties to, other programs sponsored by affiliates of our Advisor if such sale or purchase is on market terms and is approved by a majority of our directors, including a majority of our independent directors, not otherwise interested in the transaction. If one of the other programs sponsored by affiliates of our Advisor attracts a tenant that we are competing for, we could suffer a loss of revenue due to in locating another suitable tenant. You will not have the to evaluate the manner in which these of interests are resolved before or after making your investment.
Conflicts of interest caused by more than one investment vehicle sponsored by the Sponsor, our Advisor, or their affiliates having funds available simultaneously for acquiring investments of the type we are targeting will be resolved in good faith by the Sponsor, our Advisor, or such affiliates.
HMC Capital is the sponsor of DigiCo Infrastructure REIT (ASX:DGT) (“DigiCo REIT”), comprised of shares in HMC Digital Infrastructure Ltd (ACN 682 024 924) and units in HMC Digital Infrastructure Trust (ARSN 682 160 578) (such shares and units, the “stapled securities”). DigiCo REIT’s initial public offering of the stapled securities closed in December 2024, with DigiCo REIT raising approximately AUD $2.7 billion. DigiCo REIT has a portfolio of data centers, which includes data centers located in the United States, and focuses on stabilized, value-add and development opportunities. Our Sponsor will allocate data center investment opportunities located in the United States between us and DigiCo REIT in accordance with the acquisition allocation policy described below.
In addition, fiber and tower real estate assets will be offered to the Datacom JV in accordance with our Sponsor’s acquisition allocation policy.
Our Advisor will undertake to report to our Board, on a quarterly basis, all such investment opportunities and how the allocation of such investment opportunities were resolved. In resolving any such conflicts, the Sponsor, through its subsidiary Advisors and managers, will take into account a number of factors in allocating the investment opportunities for the vehicles they advise, including but not limited to: (a) which vehicle has available cash (including availability under lines of credit) to acquire an investment; (b) how the investment size, potential leverage, transaction structure and anticipated cash flows affect each vehicle in light of the vehicles targeted returns and cash flow needs; (c) whether the estimated transaction timing will be more advantageous (or possible) for a particular vehicle; (d) how closely aligned the proposed investment is with a vehicle’s investment objectives; (e) whether the proposed investment conforms to the operation parameters of a particular vehicle’s property acquisitions objectives; (f) whether a particular investment vehicle has an existing strategic relationship with the tenant(s), operator, facility, franchisor, or system associated with the investment; (g) whether an investment vehicle has or lacks a geographic presence that would make the investment strategically more important for that vehicle; and (h) whether there would be or income tax effects on an investment vehicle and its investors relating to the investment .
We may co-invest or joint venture an investment with a sponsor affiliated entity or related party.
We may enter into joint ventures, co-investment or other arrangements with affiliates of our Sponsor or entities sponsored or advised by affiliates of our Sponsor to acquire, develop and/or manage property, debt and other investments. Such investments may raise potential conflicts of interest between us and such other investment vehicles managed by our Advisor or its affiliates, including determining which of such entities should enter into any particular joint venture, co-investment or other arrangement agreement. Joint venture, co-investment or other arrangement partners affiliated with our Advisor or sponsored or advised by affiliates of our Sponsor may have economic or business interests or goals which are or that may become inconsistent with our business interests or goals. In addition, should any such joint venture, co-investment or other arrangement be consummated, our Advisor and its affiliates may face a conflict in structuring the terms of the relationship between our interests and the interests of other parties, in managing the joint venture,
Table of Contents
co-investment or other arrangement, and in resolving any conflicts or exercising any rights in connection with the joint venture, co-investment or other arrangement. Since our Advisor will make various decisions on our behalf, agreements and transactions between us and our Advisor’s affiliates or entities sponsored or advised by affiliates of our Sponsor will not have the benefit of arm’s-length negotiations of the type normally conducted between unrelated parties, which may result in the co-venturer receiving benefits greater than the benefits that we receive. Furthermore, when such other investment vehicles managed by our Advisor or its affiliates have interests or requirements that do not align with our interests, including differing liquidity needs or desired investment horizons, conflicts may arise in the manner in which any voting or control rights are exercised with respect to the relevant investment, potentially resulting in an adverse impact on us. In addition, we may assume liabilities related to the joint venture that exceed the percentage of our investment in the joint venture. We may enter into joint ventures with affiliates of our Sponsor or entities sponsored or advised by affiliates of our Sponsor for the acquisition of investments, but only if (i) a majority of our directors, including a majority of the independent directors, not otherwise interested in the transaction approve the transaction as being fair and reasonable to us and (ii) the investment by us and such affiliate are on terms and conditions that are no less than those that would be available to other joint venturers.
With respect to any joint venture, we may enter into an advisory or sub-advisory agreement with an affiliate of our Advisor. We may also enter into arrangements with our Advisor in which our Advisor receives fees (directly or indirectly, including through a subsidiary of ours) from the joint venture entity or from the joint venture partners. Fees received from joint venture entities or partners and paid, directly or indirectly (including without limitation, through us or our subsidiaries), to our Advisor may be more or less than similar fees that we pay to our Advisor pursuant to the Advisory Agreement.
In addition, our Advisor may, with respect to any investment in which we are a participant, also render advice and service to others in that investment, and earn fees for rendering such advice and service. Specifically, it is contemplated that we may enter into joint venture or other similar co-investment arrangements with certain individuals, corporations, partnerships, trusts, joint ventures, limited liability companies or other entities, with respect to which our Advisor or one of its affiliates may be engaged to provide advice and service to such individuals, corporations, partnerships, trusts, joint ventures, limited liability companies or other entities. Our Advisor or its affiliate will earn fees for rendering such advice and service pursuant to the agreements governing such joint ventures or arrangements. Joint ownership arrangements with our Sponsor’s affiliates may also entail conflicts of interest.
Our Advisor and its affiliates and their officers and other key personnel face competing demands relating to their time, and this may cause our operating results to suffer.
Our Advisor, its affiliates and their officers are key personnel of general partners, sponsors, directors, managers, owners and advisors of other real estate investment programs, including, with respect to our Advisor, certain of our Advisor’s key personnel and their respective affiliates, some of which have, or may in the future have, investment objectives and legal and financial obligations similar to ours, and may own real properties or provide services with respect to other real properties, some of which may compete with us, as well as owning other business interests. Furthermore, these persons derive financial benefit from these other activities, including fees and performance-based compensation. Because these persons have competing demands on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities. If this occurs, the returns on our investments may suffer.
Under certain circumstances, our Advisor may determine not to pursue some or all of an investment opportunity within our investment objectives and guidelines, including without limitation, as a result of our prior investments, business or other reasons applicable to us, our Sponsor or its affiliates.
Under certain circumstances, our Advisor may determine not to pursue some or all of an investment opportunity within our investment objectives and guidelines, including without limitation, as a result of business, reputational or other reasons applicable to us, our Sponsor or its affiliates. In addition, our Advisor and its affiliates may determine that we should not pursue some or all of an investment opportunity, including, by way of example and without limitation, because we have already invested sufficient capital in the investment, geographic region or markets in question, as determined by our Advisor and its affiliates in their good faith discretion, or the investment is not appropriate for us for other reasons as determined by our Advisor and its affiliates in their good faith reasonable sole discretion. In any such case, our Sponsor could, thereafter, offer such opportunity to other parties, including portfolio entities, joint venture partners, related parties or third parties. Any such affiliated party may be advised by a different sponsor affiliate with a different investment committee, which could determine an investment to be more than our Advisor believes to be the case. In any event, there can be no assurance that our Advisor’s assessment will prove correct or that the performance of any investments actually pursued by us will be comparable to any investment that are not pursued by us. Our Sponsor, including its
Table of Contents
personnel, will, in certain circumstances, receive compensation from any such party that makes the investment, including an allocation of carried interest or referral fees, and any such compensation could be greater than amounts paid by us to our Advisor. As a result, our Advisor (including real estate personnel who receive such compensation) could be incentivized to allocate investment opportunities away from us to or source investment opportunities for affiliates of our Sponsor.
Our Advisor and its affiliates make good faith determinations for allocation decisions based on expectations that will, in certain circumstances, prove inaccurate. Information unavailable to our Advisor, or circumstances not foreseen by our Advisor at the time of allocation, may cause an investment opportunity to yield a different return than expected. For example, an investment opportunity that our Advisor and its affiliates determine to be consistent with the return objective of affiliates of our Sponsor rather than us may not match the expectations and underwriting of our Advisor and its affiliates and generate an actual return that would have been appropriate for us. Conversely, an investment that our Advisor and its affiliates expect to be consistent with our return objectives will, in certain circumstances, fail to achieve them. There is no assurance that any conflicts arising out of the foregoing will be resolved in our favor. Our Sponsor is entitled to amend its policies and procedures at any time without prior notice or our consent.
Our Sponsor may raise and/or manage additional real estate investment entities, which could result in the reallocation of our Sponsor’s personnel and the direction of potential investments to such other programs.
Our Sponsor reserves the right to raise and/or manage other programs, including entities that may have the same investment objectives and policies as we do and which may be involved in the same geographic area. The closing of an additional real estate investment entity raised or managed by our Sponsor could result in the reallocation of our Sponsor’s personnel, including reallocation of existing real estate professionals, to such real estate investment entity. In addition, potential investments that may be suitable for us may be directed toward such real estate investment entity.
Certain principals and employees will, in certain circumstances, be involved in and have a greater financial interest in the performance of our Sponsor’s other real estate investment entities, and such activities may create conflicts of interest in making investment decisions on our behalf.
Certain of our Sponsor’s personnel will, in certain circumstances, be subject to a variety of conflicts of interest relating to their responsibilities to us, our Sponsor’s other real estate investment entities, and their outside personal or business activities, including as members of investment or advisory committees or boards of directors of or advisors to investment funds, corporations, foundations or other organizations. Such positions create a conflict if such other entities have interests that are adverse to those of us, including if such other entities compete with us for investment opportunities or other resources. The Sponsor’s personnel in question may have a greater financial interest in the performance of the other entities than our performance. This involvement may create conflicts of interest in making investments on our behalf and on behalf of such other entities. Although our Advisor will generally seek to minimize the impact of any such conflicts, there can be no assurance they will be resolved favorably for us. Also, our Sponsor’s personnel are generally permitted to invest in alternative investment funds, private equity funds, real estate funds, hedge funds and other investment vehicles, as well as engage in other personal trading activities relating to companies, assets, securities or instruments (subject to our Sponsor’s code of ethics requirements), some of which will involve of interests. Such personal securities transactions will, in certain circumstances, relate to securities or instruments, which can be expected to also be held or acquired by us or our Sponsor’s other real estate investment entities, or otherwise relate to companies or issuers in which we have or acquire a different principal investment (including, for example, with respect to seniority). There can be no assurance that of interest arising out of such activities will be resolved in our favor. Investors will not receive any from any such investments, and the financial incentives of our Sponsor’s personnel in such other investments could be than their financial incentives in relation to us.
The personnel of the Dealer Manager and our Advisor may trade in securities for their own accounts, subject to restrictions applicable to our Sponsor’s personnel.
The officers, directors, members, managers and employees of the Dealer Manager and our Advisor can be expected to trade in securities and make personal investments for their own accounts, subject to restrictions and reporting requirements as may be required by law and our Sponsor’s policies, or otherwise determined from time to time by the Dealer Manager or our Advisor. Such personal securities transactions and investments will, in certain circumstances, result in conflicts of interest, including to the extent they relate to (i) a company in which we hold or acquire an interest (either directly through a privately negotiated investment or indirectly through the purchase of securities or other traded instruments related thereto) and (ii) entities that have interests which are adverse to ours or pursue similar investment opportunities as us.
Table of Contents
Disputes between our Sponsor and our joint venture partners who have pre-existing investments with our Sponsor or its affiliates may affect our investments with such joint venture partners.
Some of the third-party operators and joint-venture partners with which our Advisor may elect to co-invest our capital may have pre-existing investments with our Sponsor or its affiliates. The terms of these preexisting investments may differ from the terms upon which we invest with such operators and partners. To the extent a dispute arises between our Sponsor and such operators and partners, our investments with such operators and partners may be affected.
Our UPREIT structure may result in potential conflicts of interest with limited partners in our Operating Partnership whose interests may not be aligned with those of our stockholders.
Our directors and officers have duties to our corporation and our stockholders under Maryland law and our charter in connection with their management of the corporation. At the same time, we, as general partner, have fiduciary duties under Delaware law to our Operating Partnership and to the limited partners in connection with the management of our Operating Partnership. Our duties as general partner of our Operating Partnership and its partners may come into conflict with the duties of our directors and officers to the corporation and our stockholders. Under Delaware law, a general partner of a Delaware limited partnership owes its limited partners the duties of good faith and fair dealing. Other duties, including fiduciary duties, may be modified or eliminated in the partnership’s partnership agreement. The partnership agreement of our Operating Partnership provides that, for so long as we own a controlling interest in our Operating Partnership, any conflict that cannot be resolved in a manner not adverse to either our stockholders or the limited partners may be resolved in favor of our stockholders.
Additionally, the partnership agreement expressly limits our liability by providing that we and our officers, directors, agents and employees will not be liable or accountable to our Operating Partnership for losses sustained, liabilities incurred or benefits not derived if we or our officers, directors, agents or employees acted in good faith. In addition, our Operating Partnership is required to indemnify us and our officers, directors, employees, agents and designees to the extent permitted by applicable law from and against any and all claims arising from operations of our Operating Partnership, unless it is established that: (1) the act or omission was material to the matter giving rise to the proceeding and either was committed in bad faith or was the result of active and deliberate dishonesty; (2) the indemnified party received an improper personal benefit in money, property or services; or (3) in the case of a criminal proceeding, the indemnified person had reasonable cause to believe that the act or was .
The provisions of Delaware law that allow the fiduciary duties of a general partner to be modified by a partnership agreement have not been tested in a court of law, and we have not obtained an opinion of counsel covering the provisions set forth in the partnership agreement that purport to waive or restrict our fiduciary duties.
There is no separate counsel for us, our Advisor, our Dealer Manager and some affiliates of us and our Dealer Manager, which could result in conflicts of interest.
Troutman Pepper Locke LLP acts as legal counsel to us and also represents our Advisor, our Dealer Manager and some affiliates of us, our Advisor and our Dealer Manager. There is a possibility in the future that the interests of the various parties may become adverse and, under the Code of Professional Responsibility of the legal profession, Troutman Pepper Locke LLP may be precluded from representing any one or all such parties. If any situation arises in which our interests appear to be in conflict with those of our Advisor, our Dealer Manager or their affiliates, additional counsel may be retained by one or more of the parties to assure that their interests are adequately protected. If we are required to retain independent counsel, we will incur additional fees and expenses. Moreover, should a conflict of interest not be readily apparent, Troutman Pepper Locke LLP may inadvertently act in derogation of the interest of the parties, which could affect our ability to meet our investment objectives.
We expect to have a diverse stockholder group and the interests of our stockholders may conflict with one another and may conflict with the interests of investors in other vehicles that we co-invest with.
Our stockholders may have conflicting investment, tax and other interests with respect to their investments in us and with respect to the interests of investors in other investment vehicles managed or advised by our Advisor or its affiliates that participate in the same investments as us. The conflicting interests of individual stockholders with respect to other stockholders and relative to investors in other investment vehicles and investors relate to, among other things, the nature, structuring, financing, tax profile and timing of disposition of investments. Our Advisor may as a result have conflicts in making these decisions, which may be more beneficial
Table of Contents
for one or some stockholders than for other stockholders. In addition, we may make investments that may have a negative impact on related investments made by the stockholders in separate transactions. In selecting and structuring investments appropriate for us, our Advisor considers the investment and tax objectives of us (including our qualification as a REIT) and our stockholders (and those of investors in other investment vehicles managed or advised by our Advisor or its affiliates) that participate in the same investments as us, not the investment, tax or other objectives of any stockholder individually. In addition, certain investors may also be investors in our Sponsor’s other real estate investment entities, which could create conflicts for our Advisor in the treatment of different investors.
Risks Related to Our Organization and Our Structure
No investor may own more than 9.9% of our stock unless exempted by our Board, which may discourage a takeover that could otherwise result in a premium price to our stockholders.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. There is a limitation on ownership that prohibits any person or group from actually, constructively or beneficially acquiring or owning more than 9.9% in value or in number of shares, whichever is more restrictive, of the aggregate of the outstanding shares of our capital stock, or more than 9.9% in value or in number of shares, whichever is more restrictive, of the aggregate of the outstanding shares of our common stock, unless exempted, prospectively or retroactively, by our Board. Our Board may waive this ownership limit with respect to a particular person if the board receives certain representations and undertakings as required by our charter. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our capital stock.
Our charter permits our Board to authorize us to issue preferred stock on terms that may be senior to the rights of the holders of our current common stock or discourage a third party from acquiring us.
Our Board is permitted, subject to certain restrictions set forth in our charter, to authorize the issuance of shares of preferred stock without stockholder approval. Further, our Board may classify or reclassify any unissued shares of common or preferred stock into other classes or series of stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, and terms or conditions of redemption of the stock and may amend our charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of any class or series of stock that we have authority to issue without stockholder approval. Thus, our Board could authorize us to issue shares of preferred stock with terms and conditions that could be senior to the rights of the holders of our common stock or have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction such as a merger, tender offer or sale of all or substantially all of our assets, that might provide a premium price for holders of our common stock.
We depend on our Advisor to select our investments and otherwise conduct our business, and any material adverse change in its financial condition or our relationship with our Advisor could have a material adverse effect on our business and ability to achieve our investment objectives.
Our success is dependent upon our relationship with, and the performance of, our Advisor in the acquisition and management of our real estate portfolio, and our corporate operations. Our Advisor may suffer or become distracted by adverse financial or operational problems in connection with the Sponsor’s business and activities unrelated to us and over which we have no control. Should our Advisor fail to allocate sufficient resources to perform its responsibilities to us for any reason, we may be unable to achieve our investment objectives or to pay distributions to our stockholders.
The termination or replacement of our Advisor could trigger a repayment event under any future mortgage loans for our properties, a credit agreement governing future lines of credit and any repurchase agreements.
Lenders for certain of our properties may request provisions in the mortgage loan documentation that would make the termination or replacement of our Advisor an event requiring the immediate repayment of the full outstanding balance of the loan. The termination or replacement of our Advisor could trigger repayment of outstanding amounts under the credit agreements governing any future lines of credit that we may obtain or under the repurchase agreements that we may enter into. If a repayment event occurs with respect to any of our properties, our results of operations and financial condition may be adversely affected.
Table of Contents
Our Advisor manages our portfolio pursuant to very broad investment guidelines and generally is not required to seek the approval of our Board for each investment, financing or asset allocation decision made by it, which may result in our making riskier investments and which could adversely affect our results of operations and financial condition.
Our Board approved very broad investment guidelines that delegate to the Advisor the authority to execute acquisitions and dispositions of real estate and real estate debt on our behalf, in each case so long as such investments are consistent with the investment guidelines and our charter. Our Advisor will implement on our behalf the strategies and discretionary approaches it believes from time to time may be best suited to prevailing market conditions in furtherance of that purpose, subject to the limitations under our investment guidelines and our charter. There can be no assurance that our Advisor will be successful in implementing any particular strategy or discretionary approach to our investment activities. Our Board reviews our investment guidelines on an annual basis (or more often as it deems appropriate) and reviews our investment portfolio periodically. The prior approval of disinterested directors or disinterested independent directors will be required only as set forth in our charter (including for transactions with affiliates of our Advisor) or for the acquisition or disposition of assets that are not in accordance with our investment guidelines. In addition, in conducting periodic reviews, our directors rely primarily on information provided to them by our Advisor. Furthermore, transactions entered into on our behalf by our Advisor may be , or to unwind when they are subsequently reviewed by our Board.
You will have limited control over changes in our policies and operations, which increases the uncertainty and risks you face as a stockholder.
Our Board determines our major policies, including our policies regarding financing, growth, debt capitalization, REIT qualification and distributions. Our Board may amend or revise these and other policies without your vote except to the extent that such policies are set forth in our charter. The broad discretion of our Board in setting policies and your inability to exert control over those policies increases the uncertainty and risks you face as a stockholder.
Under Maryland General Corporation Law (the “MGCL”) and our charter, our stockholders are generally entitled to vote only on the following matters: a) election and removal of directors; b) amendment of the charter, except that our Board may amend our charter without stockholder approval to i) increase or decrease the aggregate number of shares of stock or the number of shares of any class or series of stock that we have the authority to issue, and ii) change our name or the name or other designation or the par value of any class or series of our stock and the aggregate par value of our stock; c) our liquidation or dissolution; and d) to the extent required under Maryland law, a merger, conversion or consolidation of us, a statutory share exchange, or the sale or other disposition of all or substantially all of our assets. With respect to all matters, other than the election or removal of directors, our Board must first adopt a resolution declaring that a proposed action is advisable and direct that such matter be submitted to our stockholders for approval or ratification.
These limitations on voting rights may limit your ability to influence decisions regarding our business. Holders of shares of our common stock will have identical voting rights except that, with respect to a) any amendment of our charter that would materially and adversely affect the rights, preferences and privileges of only a particular class of common stock, b) any matter submitted to stockholders that relates solely to a particular class of common stock or c) any matter submitted to stockholders in which the interests of a particular class of common stock differ from the interests of all other classes of common stock, only the affirmative vote of the holders of a majority of such affected class of common stock, with no other class of common stock voting except such affected class of common stock voting as a separate class, will be required.
Our ability to conduct the Public Offering successfully depends, in part, on the ability of our Dealer Manager to successfully establish, operate and maintain a network of broker-dealers.
The success of the Public Offering, and correspondingly our ability to implement our business strategy, depends on the ability of our Dealer Manager to establish and maintain a network of licensed securities broker-dealers and other agents to sell our securities. The past success of our Dealer Manager cannot be relied upon as predictive of our Dealer Manager’s performance in the Public Offering. In addition, the Dealer Manager currently serves and may serve as Dealer Manager for other issuers. As a result, the Dealer Manager may experience conflicts of interest in allocating its time between the Public Offering and such other issuers, which could adversely affect our ability to raise proceeds through the Public Offering and implement our investment strategy. There is therefore no assurance that our Dealer Manager will be able to sell a sufficient number of shares to allow us to have adequate funds to make our investments. If our Dealer Manager fails to perform, we may not be able to raise adequate proceeds through the Public Offering to implement our investment strategy. Further, the participating broker-dealers retained by the Dealer Manager may have numerous competing investment
Table of Contents
products, some with similar or identical investment strategies and areas of focus as us, which they may elect to emphasize to their retail clients. In addition, because this is a “reasonable best efforts” offering, we may not raise proceeds in the Public Offering sufficient to meet our investment objectives. If we are unsuccessful in implementing our investment strategy, you could lose all or a part of your investment.
We may change our targeted investments without stockholder consent.
We expect our portfolio of investments in commercial real estate to consist primarily of digital infrastructure real estate. Though this is our current target portfolio, we may make adjustments to our target portfolio based on real estate market conditions and investment opportunities, and we may change our targeted investments and investment guidelines at any time without the consent of our stockholders. Any such change could result in our making investments that are different from, and possibly riskier than, our existing investments. Our charter requires that our independent directors review our investment policies at least annually to determine that the policies we are following are in the best interests of our stockholders. These policies may change over time. A change in our targeted investments or investment guidelines, which may occur without your consent, may increase our exposure to interest rate risk, default risk and real estate market fluctuations, all of which could adversely affect our ability to make distributions to you and the value of the securities we are offering through the Public Offering. Although our investment strategy focuses primarily on digital infrastructure real estate assets, our charter, bylaws and investment guidelines will not preclude us from investing in other types of real estate. However, we do not intend to invest more than 25% of our gross real estate portfolio in other types of real estate.
Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act.
We intend to continue to conduct our operations so that neither we, nor our Operating Partnership nor the subsidiaries of our Operating Partnership are investment companies under the Investment Company Act. However, there can be no assurance that we and our subsidiaries will be able to successfully avoid operating as an investment company.
A change in the value of any of our assets could negatively affect our ability to maintain our exemption from regulation under the Investment Company Act. To maintain compliance with the applicable exemption under the Investment Company Act, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional assets that we might not otherwise have acquired or may have to forego opportunities to acquire assets that we would otherwise want to acquire and would be important to our investment strategy.
If we were required to register as an investment company but failed to do so, we would become subject to substantial regulation with respect to our capital structure (including our ability to use borrowings), management, operations, transactions with affiliated persons (as defined in the Investment Company Act), and portfolio composition, including disclosure requirements and restrictions with respect to diversification and industry concentration, and other matters. Compliance with the Investment Company Act would, accordingly, limit our ability to make certain investments and require us to significantly restructure our business plan, which could materially adversely affect our NAV and our ability to pay distributions to our stockholders.
Our Dealer Manager is one of our affiliates, therefore you will not have the benefit of the type of independent review of us customarily performed in underwritten offerings.
Our Dealer Manager, StratCap Securities, LLC, is one of our affiliates and will not make an independent review of us or the Public Offering normally performed by an unaffiliated, independent underwriter and its counsel in connection with a securities offering. Accordingly, you will have to rely on your own broker-dealer to make an independent review of the terms of the Public Offering. If your broker-dealer does not conduct such a review, you will not have the benefit of an independent review of the terms of the Public Offering. Further, the due diligence investigation of us by our Dealer Manager cannot be considered to be an independent review and, therefore, may not be as meaningful as a review conducted by an unaffiliated broker-dealer or investment banker. In addition, we do not, and do not expect to, have research analysts reviewing our performance or our securities on an ongoing basis. Therefore, you will not have an independent review of us, our performance, the value of shares of our common stock or the terms of the Public Offering.
Investing in shares of our common stock may involve an above average degree of risk and is intended for long-term investors.
The investments we make in accordance with our investment objectives and strategies may result in a higher amount of risk of loss of principal than alternative investment options. Our investments in real estate assets may be highly speculative and aggressive and,
Table of Contents
therefore, an investment in shares of our common stock may not be suitable for someone with lower risk tolerance. In addition, shares of our common stock are intended for long-term investors.
Any estimated NAV per share may not be an accurate reflection of the fair value of our assets and liabilities and likely will not represent the amount of net proceeds that would result if we were liquidated or dissolved.
For the purposes of calculating our monthly NAV, the Advisor also conducts a monthly valuation of our properties that will be reviewed for reasonableness by our independent valuation advisor. Investments in real estate debt and other securities with readily available market quotations will be valued monthly at fair market value. Certain investments, such as mortgages and mezzanine loans, are unlikely to have market quotations. In the case of loans acquired by us, such initial value will generally be the acquisition price of such loan. Each such investment will then be valued by the Advisor within the first three full months after we invest in such investment and no less than monthly thereafter. Additionally, the Advisor may in its discretion consider material market data and other information that becomes available after the end of the applicable month in valuing our assets and liabilities and calculating our NAV for a particular month.
Although monthly valuations of each of our real properties will be reviewed for reasonableness by our independent valuation Advisor, such valuations are based on asset- and portfolio-level information provided by the Advisor, including historical operating revenues and expenses of the properties, lease agreements on the properties, revenues and expenses of the properties, information regarding recent or planned capital expenditures and any other information relevant to valuing the real property, which information will not be independently verified by our independent valuation advisor. Similarly, although our monthly valuations of our real estate debt for which market quotations are not readily available will be reviewed for reasonableness by our independent valuation advisor, such valuations are based on information provided by the Advisor, which information will not be verified by our independent valuation advisor.
Within the parameters of our valuation guidelines, the valuation methodologies used to value our properties and certain of our investments will involve subjective judgments and projections and may not be accurate. Valuation methodologies will also involve assumptions and opinions about future events, which may or may not turn out to be correct. Valuations and appraisals of our properties and other investments will be only estimates of fair value. Ultimate realization of the value of an asset depends to a great extent on economic, market and other conditions beyond our control and the control of the Advisor and our independent valuation advisor. Further, valuations do not necessarily represent the price at which an asset would sell, since market prices of assets can only be determined by negotiation between a willing buyer and seller. As such, the carrying value of an asset may not reflect the price at which the asset could be sold in the market, and the difference between carrying value and the ultimate sales price could be material. In addition, accurate valuations are more difficult to obtain in times of low transaction volume because there are fewer market transactions that can be considered in the context of the appraisal. There will be no retroactive adjustment in the valuation of such assets, the offering price of shares of our common stock, the price we paid to repurchase shares of our common stock or NAV-based fees we paid to the Advisor and the Dealer Manager, to the extent such valuations prove to not accurately reflect the realizable value of our assets. Because the price you will pay for shares of our common stock in the Public Offering, and the price at which your shares may be repurchased by us pursuant to our share repurchase program will generally be based on the prior month’s NAV per share, you may pay more than realizable value or receive less than realizable value for your investment.
Our NAV per share amounts may change materially if the appraised values of our real estate assets materially change from prior appraisals or the actual operating results for a particular month differ from what we originally budgeted for that month.
We anticipate that the annual appraisals of our real estate assets will be conducted on a rolling basis, such that properties may be appraised at different times but each property would be appraised at least once per year. When these appraisals are considered by the Advisor for purposes of valuing the relevant real estate asset, there may be a material change in our NAV per share amounts for each class of our common stock from those previously reported. In addition, actual operating results for a given month may differ from what we originally budgeted for that month, which may cause a material increase or decrease in the NAV per share amounts. We will not retroactively adjust the NAV per share of each class reported for the previous month. Therefore, because a new annual appraisal may differ materially from the prior appraisal or the actual results from operations may be better or worse than what we previously budgeted for a particular month, the adjustment to take into consideration the new appraisal or actual operating results may cause the NAV per share for each class of our common stock to increase or decrease, and such increase or decrease will occur in the month the adjustment is made.
Table of Contents
It may be difficult to reflect, fully and accurately, material events that may impact our monthly NAV.
The Advisor’s determination of our monthly NAV per share will be based in part on appraisals of each of our real estate assets provided annually by independent third-party appraisal firms and monthly valuations of our real estate debt and other securities for which market prices are not readily available provided by the Advisor, each in accordance with valuation guidelines approved by our Board. As a result, our published NAV per share in any given month may not fully reflect any or all changes in value that may have occurred since the most recent appraisal or valuation. The Advisor will review appraisal reports and monitor our real estate and real estate debt, and is responsible for notifying our independent valuation advisor of the occurrence of any property-specific or market-driven event it believes may cause a material valuation change in the real estate valuation, but it may be difficult to reflect fully and accurately rapidly changing market conditions or material events that may impact the value of our real estate and real estate debt or liabilities between valuations, or to obtain complete information regarding any such events in a timely manner. For example, an unexpected termination or renewal of a material contract, a material increase or decrease in vacancies or an unanticipated structural or environmental event at a property may cause the value of a property to change materially, yet obtaining sufficient relevant information after the occurrence has come to light and/or analyzing fully the financial impact of such an event may be to do and may require some time. As a result, the NAV per share may not reflect a material event until such time as sufficient information is available and analyzed, and the financial impact is fully evaluated, such that our NAV may be appropriately adjusted in accordance with our valuation guidelines. Depending on the circumstance, the resulting potential in our NAV may be in favor or to the of either stockholders who repurchase their shares, or stockholders who buy new shares, or existing stockholders.
NAV calculations are not governed by governmental or independent securities, financial or accounting rules or standards.
The methods used by our Advisor to calculate our NAV, including the components used in calculating our NAV, are not prescribed by rules of the SEC or any other regulatory agency. Further, there are no accounting rules or standards that prescribe which components should be used in calculating NAV, and our NAV is not audited by our independent registered public accounting firm. We calculate and publish NAV solely for purposes of establishing the price at which we sell and repurchase shares of our common stock, and you should not view our NAV as a measure of our historical or future financial condition or performance. The components and methodology used in calculating our NAV may differ from those used by other companies now or in the future.
In addition, calculations of our NAV, to the extent that they incorporate valuations of our assets and liabilities, are not prepared in accordance with generally accepted accounting principles. These valuations may differ from liquidation values that could be realized in the event that we were forced to sell assets.
Additionally, errors may occur in calculating our NAV, which could impact the price at which we sell and repurchase shares of our common stock and the amount of our Advisor’s management fee and performance participation interest. Our Advisor has implemented certain policies and procedures to address such errors in NAV calculations. If such errors were to occur, the Advisor, depending on the circumstances surrounding each error and the extent of any impact the error has on the price at which shares of our common stock were sold or repurchased or on the amount of our Advisor’s management fee or performance participation interest, may determine in its sole discretion to take certain corrective actions in response to such errors, including, subject to our Sponsor’s policies and procedures, making adjustments to prior NAV calculations.
Your interest in us will be diluted if we issue additional shares, which could reduce the overall value of your investment.
Existing stockholders and potential investors in the Public Offering do not have preemptive rights to any shares we issue in the future. Upon commencement of the Public Offering, our charter authorized us to issue 600,000,000 shares of common stock, of which 6,000,000 shares will be classified as Class A shares, 3,000,000 shares will be classified as Class AX shares, 100,000,000 shares will be classified as Class D shares, 100,000,000 shares will be classified as Class DX shares, 100,000,000 shares will be classified as Class I shares, 100,000,000 shares will be classified as Class IX shares, 94,000,000 shares will be classified as Class S shares and 97,000,000 shares will be classified as Class T shares. Our Board may amend the charter from time to time to increase or decrease the aggregate number of authorized shares of stock or the number of authorized Class A shares, Class AX shares, Class D shares, Class DX shares, Class I shares, Class IX shares, Class S shares, Class T shares or shares of any other class or series of stock without stockholder approval. After your purchase of shares in the Public Offering, our board may elect to (1) sell additional shares in the Public Offering or future private placements or public offerings; (2) issue shares of capital stock under a long-term incentive plan to our independent directors or to employees of our Advisor or its affiliates; (3) issue shares to our Advisor, or its successors or assigns, in payment of an outstanding fee obligation or as consideration in a related-party transaction; or (4) issue shares to sellers of properties we acquire in connection with
Table of Contents
an exchange of property for limited partnership interests of our Operating Partnership. To the extent we issue additional equity interests after your purchase in the Public Offering, your percentage ownership interest in us will be diluted. Investors will also experience dilution if we issue equity compensation pursuant to our equity incentive plan. Further, depending upon the terms of such transactions (most notably the offering price per share, which may be less than the price paid per share in the Public Offering) and the value of our real estate assets, existing stockholders may also experience a dilution in the book value of their investment in us.
If we internalize our management functions, the percentage of our outstanding capital stock owned by our other stockholders could be reduced, and we could incur other significant costs associated with being self- managed.
Our Board may decide in the future to internalize our management functions. If we do so, we may elect to negotiate to acquire assets of our Advisor and/or to directly employ the personnel of our Sponsor or its affiliates that our Advisor utilizes to perform services on its behalf for us.
Additionally, while we would no longer bear the cost of the various fees and expenses we expect to pay to our Advisor under our Advisory Agreement, our additional direct expenses would include general and administrative costs, including certain legal, accounting and other expenses related to corporate governance, SEC reporting and compliance matters that otherwise would be borne by our Advisor. We would also be required to employ personnel and would be subject to potential liabilities commonly faced by employers, such as workers disability and compensation claims, potential labor disputes and other employee-related liabilities and grievances as well as incur the compensation and benefits costs of our officers and other employees and consultants that will be paid by our Advisor or its affiliates. We may issue equity awards to officers, employees and consultants of our Advisor or its affiliates in connection with an internalization transaction, which awards would decrease net income and funds from operations (“FFO”) and may further dilute your investment. We cannot reasonably estimate the amount of fees to our Advisor we would save or the costs we would incur if we became self-managed. If the expenses we assume as a result of an internalization are higher than the expenses we avoid paying to our Advisor, our net income and FFO would be lower as a result of the internalization than it otherwise would have been, potentially decreasing the amount of cash available to distribute to you and the value of your shares.
Internalization transactions involving the acquisition of advisors affiliated with entity sponsors have also, in some cases, been the subject of litigation. Even if these claims are without merit, we could be forced to spend significant amounts of money defending claims which would reduce the amount of funds available for us to invest and cash available to pay distributions.
If we internalize our management functions, we could have difficulty integrating these functions as a stand-alone entity. Currently, our Advisor and/or its affiliates perform portfolio management and general and administrative functions, including accounting and financial reporting, for multiple entities. These personnel have substantial know-how and experience which provides us with economies of scale. We may fail to properly identify the appropriate mix of personnel and capital needs to operate as a stand-alone entity. Certain key employees may not become our employees but may instead remain employees of our Sponsor or its affiliates. An inability to manage an internalization transaction effectively could result in our incurring excess costs and suffering deficiencies in our disclosure controls and procedures or our internal control over financial reporting. Such deficiencies could cause us to incur additional costs and our management’s attention could be diverted from most effectively managing our investments.
Payments to the Advisor in the form of common stock or OP Units it elects to receive in lieu of fees or distributions will dilute future cash available for distribution to our stockholders.
The Advisor may choose to receive our common stock or OP Units in lieu of certain fees or distributions. The holders of all OP Units are entitled to receive cash from operations pro rata with the distributions being paid to us and such distributions to the holder of the OP Units will reduce the cash available for distribution to us and to our stockholders. Furthermore, under certain circumstances the OP Units held by the Advisor are required to be repurchased, in cash at the holder’s election, and there may not be sufficient cash to make such a repurchase payment; therefore, we may need to use cash from operations, borrowings, offering proceeds or other sources to make the payment, which will reduce cash available for distribution to you or for investment in our operations.
Shares or OP Units held by our Advisor acquired as payment of our Advisor’s management fee will not be subject to our share repurchase plan, including with respect to any repurchase limits or the Early Repurchase Deduction, and will not be included in the calculation of our aggregate NAV for purposes of the 1.67% monthly or 5% quarterly limitations on share repurchases. Notwithstanding the foregoing, we have adopted a policy that requires the affiliated-transactions committee of our Board, which is composed of all of our independent directors, to approve any repurchase request of the Advisor for shares or Operating Partnership units received as
Table of Contents
payment for the management fee that, when combined with any stockholder repurchase requests submitted through our share repurchase plan, would cause us to exceed the 1.67% monthly or 5% quarterly repurchase limitations of our share repurchase plan. Such approval must find that the repurchase will not impair our capital or operations and is consistent with the fiduciary duties of our independent directors. In addition, any repurchases of shares in respect of distributions on the performance participation interest will not be subject to the Early Repurchase Deduction but will be subject to the 1.67% monthly and 5% quarterly limitations on repurchases.
Our Board has opted out of provisions of the Maryland General Corporation Law relating to deterring or defending hostile takeovers. Although we will not currently be afforded this protection, our Board could opt into one or more of these provisions of Maryland law in the future, which may discourage others from trying to acquire control of us and may prevent you from receiving a premium price for your shares in connection with a business combination.
Under Maryland law, “business combinations” between a Maryland corporation and certain interested stockholders, or affiliates of interested stockholders, are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation’s outstanding voting stock; or
an affiliate or associate of the corporation who, at any time during the two-year period prior to the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding voting stock of the corporation.
After the five-year prohibition, any business combination between a Maryland corporation and an interested stockholder generally must be recommended by the Board of the corporation and approved by the affirmative vote of at least:
80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and
two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.
Also, under Maryland law, control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of stockholders entitled to cast two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquirer, an officer of the corporation or an employee of the corporation who is also a director of the corporation, are excluded from the vote on whether to accord voting rights to the control shares. We have opted out of these provisions of Maryland law, by board resolution in the case of the business combination provisions provided that the applicable business combination is first approved by our Board and in our bylaws in the case of the control share acquisition provisions. However, should our board opt into these provisions of Maryland law or, in the case of the business combination provisions, our board does not first approve the applicable business combination, it may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer. Similarly, provisions of Title 3, Subtitle 8 of the MGCL could provide similar anti-takeover protection.
We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements.
In April 2012, President Obama signed into law the Jumpstart Our Business Startups Act, or the JOBS Act. We are an “emerging growth company,” as defined in the JOBS Act, and are eligible to take advantage of certain exemptions from, or reduced disclosure obligations relating to, various reporting requirements that are normally applicable to public companies.
We could remain an “emerging growth company” for up to five years, or until the earliest of (a) the last day of the first fiscal year in which we have total annual gross revenue of $1,235,000,000 (adjusted for inflation) or more, (b) December 31 of the fiscal year that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act (which would occur if the market value of our capital stock registered under the Exchange Act held by non-affiliates exceeds $700 million, measured as of the last business day of our most recently completed second fiscal quarter, and we have been publicly reporting for at least 12 months) or (c) the date on
Table of Contents
which we have issued more than $1,000,000,000 in non-convertible debt during the preceding three-year period. Under the JOBS Act, emerging growth companies are not required to (1) provide an auditor’s attestation report on management’s assessment of the effectiveness of internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act, (2) comply with certain more stringent audit rules adopted by the Public Company Accounting Oversight Board (unless the SEC determines otherwise), (3) provide certain disclosures relating to executive compensation generally required for larger public companies or (4) hold stockholder advisory votes on executive compensation.
Additionally, the JOBS Act provides that an “emerging growth company” may take advantage of an extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies. This means an “emerging growth company” can delay adopting certain accounting standards until such standards are otherwise applicable to private companies. However, we are electing to “opt out” of such extended transition period and will therefore comply with new or revised accounting standards on the applicable dates on which the adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that any decision to opt out of such extended transition period for compliance with new or revised accounting standards is irrevocable.
If we sell real estate assets by providing financing to purchasers, defaults by the purchasers would adversely affect our cash flows and our ability to make distributions to our stockholders.
If we decide to sell any of our real estate assets, we intend to sell them for cash, if possible. However, nothing prohibits us from selling our real estate assets and providing financing to purchasers. If we provide financing to purchasers, we will bear the risk that the purchaser may default, which could negatively impact our cash distributions to stockholders. Even in the absence of a purchaser default, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property we may accept upon the sale are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price, and subsequent payments will be spread over a number of years.
If any purchaser defaults under a financing arrangement with us, it could negatively impact our ability to pay cash distributions to our stockholders.
Fees and expenses may adversely impact our ability to pay dividends.
Identifying attractive investment opportunities and performing due diligence with respect to prospective investments will require significant expenditures, which we will bear whether or not we acquire the investment. In addition, acquiring investments may require us to participate in auctions or other forms of competitive bids, which may also require significant expenditures, including expenses relating to legal fees, the fees of third party advisors, and other costs. Moreover, even after investments are made, the returns may not be realized by the stockholders for a period of several years.
Payment or accrual of fees will result in immediate dilution to the value of your investment, and any such current payments will reduce the amount of cash available to acquire investments. Payment of such fees and expenses increases the risk that the amount available for distribution to our stockholders would be less than the purchase price of the securities sold in the Public Offering.
General Risks Related to Digital Infrastructure Real Estate Assets
If a tenant, customer or subscriber declares bankruptcy, we may be unable to collect balances due under relevant contracts or subscription agreements, which would reduce our cash flows from operations and the amount available for distributions to you.
Any of our tenants, customers or subscribers or any guarantor of a tenant’s contract or customer’s or subscriber’s subscription agreement obligations, could be subject to a bankruptcy proceeding pursuant to Title 11 of the bankruptcy laws of the United States. Such a bankruptcy filing would bar all efforts by us to collect pre-bankruptcy debts from these entities or their properties, unless we receive an enabling order from the bankruptcy court. Post-bankruptcy debts would be paid currently. If a contract or subscription agreement is assumed, all pre-bankruptcy balances owing under it must be paid in full. If a contract or subscription agreement is rejected by a tenant, customer or subscriber in bankruptcy, we would have a general unsecured claim for damages. If a contract or subscription agreement is rejected, it is unlikely we would receive any payments from the tenant, customer or subscriber. This claim could be paid only if funds were available, and then only in the same percentage as that realized on other unsecured .
Table of Contents
A tenant, customer or subscriber or contract or subscription agreement guarantor bankruptcy could delay efforts to collect past due balances under the relevant contracts and subscription agreements, and could ultimately preclude full collection of these sums. Such an event could cause a decrease or cessation of rental or subscription payments that would mean a reduction in our cash flow and the amount available for distributions to you. In the event of a bankruptcy there can be no assurance that the tenant, customer or subscriber or their respective trustee will assume our contract or subscription agreement. If a given contract or subscription agreement, or guaranty of a contract or subscription agreement, is not assumed, our cash flow and the amounts available for distributions to you may be adversely affected.
We may not be able to fully recognize the anticipated benefits of the digital infrastructure real estate that we acquire.
A key element of our investment strategy is to establish and increase a digital infrastructure real estate portfolio through acquisitions. We rely on our due diligence of the assets and the representations and financial records of the sellers and other third parties to establish the anticipated site rental, subscription or other such tenant, customer or subscriber revenues and expenses and whether the assets to be acquired will meet our investment guidelines. In addition, we may not always have the ability to analyze and verify all information regarding title, access and other issues regarding the land underlying assets to be acquired. To the extent that these assets are acquired in individually material transactions, we may be required to place enhanced reliance on the financial and operational representations and warranties of the sellers. If (i) these records are not complete or accurate, (ii) we do not have complete access to, or use of, the land underlying the assets to be acquired or (iii) the assets do not achieve the financial results anticipated, it could adversely affect our revenues and results of operations.
In addition, acquisitions which would be material in the aggregate may exacerbate the risks inherent with our investment strategy, such as (i) an adverse impact on our overall profitability if the acquired assets do not achieve the projected financial results, (ii) unanticipated costs associated with the acquisitions that may impact our results of operations for a period, (iii) increased demands on our cash resources that may, among other things, impact our ability to explore other opportunities, (iv) undisclosed and assumed liabilities that we may be unable to recover, (v) increased vulnerability to general economic conditions, (vi) an adverse impact on our existing tenant, customer or subscriber relationships, (vii) additional expenses and exposure to new regulatory, political and economic risks if such acquisitions were in new jurisdictions and (viii) diversion of managerial attention.
The process of integrating any acquired assets into our operations may result in unforeseen operating difficulties and large expenditures and may absorb significant management attention that would otherwise be available for the ongoing development of our business. It may also result in the loss of key tenants and/or personnel and expose us to unanticipated liabilities.
We may obtain only limited warranties when we purchase an asset and would have only limited recourse if our due diligence did not identify any issues that lower the value of such asset, which could adversely affect our financial condition and ability to make distributions to our stockholders.
The seller of an asset often sells such asset in its “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. The purchase of assets with limited warranties increases the risk that we may lose some or all our invested capital in such assets as well as the loss of rental, subscriber or other such income from such assets.
We may be unable to secure funds for future capital improvements or capital needs, which could adversely impact our ability to make distributions to our stockholders.
In order to maintain or attract tenants, we will be required to expend substantial funds for capital improvements to our digital infrastructure real estate. In addition, although we expect that our contracts and subscription agreements with tenants, customers and subscribers may require them to pay routine maintenance costs, we will likely be responsible for any major structural repairs, even if our contracts and subscription agreements with tenants, customers and subscribers require them to pay routine maintenance costs. We expect to use substantially all of the net proceeds from the Public Offering to buy digital infrastructure real estate and pay various fees and expenses. Accordingly, if we need additional capital in the future to improve or maintain our assets or for any other reason, we will have to obtain financing from other sources, such as cash flows from operations, borrowings, asset sales or future equity offerings. These sources of funding may not be available on attractive terms or at all. If we cannot procure additional funding for capital improvements, our investments may generate lower cash flows or decline in value, or both.
Table of Contents
Our inability to sell an asset when we desire to do so could adversely impact our ability to make distributions to you.
The digital infrastructure market is affected by many factors, such as general economic conditions, carrier consolidations, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any asset for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of an asset.
We may be required to expend funds to correct defects or to make improvements before an asset can be sold. We cannot assure you that we will have funds available to correct such defects or to make such improvements. Moreover, in acquiring an asset, we may agree to restrictions that prohibit the sale of that asset for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that asset. These provisions would restrict our ability to sell an asset.
We may be required to indemnify the purchasers of our assets, which could hurt our ability to make distributions or result in a decline in the value of your investment.
In connection with the disposition of an asset from our portfolio, we may be required to make representations about our assets typical of those made in connection with the sale of any asset. We may also be required to indemnify the purchasers of such asset to the extent that any such representations turn out to be inaccurate, incorrect, or misleading. These arrangements may result in contingent liabilities, which might ultimately have to be funded by us out of assets other than the net proceeds made available from such disposition, which would hurt our ability to make distributions to you and result in a decline in the value of our assets and hence your investment in us.
We may not be able to sell an asset at a price equal to, or greater than, the price for which we purchased such asset, which may lead to a decrease in the value of our assets and a reduction in the value of your shares.
Some of our contracts and subscription agreements may not contain rental or revenue increases over time, or the rental or revenue increases may be less than the fair market rate at a future point in time. Therefore, the value of the asset to a potential purchaser may not increase over time, which may restrict our ability to sell an asset, or if we are able to sell such asset, may lead to a sale price less than the price that we paid to purchase the asset.
We may acquire or finance assets with lock-out provisions, which may prohibit us from selling an asset, or may require us to maintain specified debt levels for a period of years on some assets, which could have an adverse effect on your investment.
Our financing agreements may contain lock-out provisions, which are provisions in loan agreements that prohibit the prepayment of a loan during a specified period of time. Lock-out provisions could materially restrict us from selling or otherwise disposing of or refinancing assets. These provisions would affect our ability to turn our investments into cash, and thus affect cash available for distributions to you. Lock-out provisions may prohibit us from reducing the outstanding indebtedness with respect to any assets, refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such assets. Lock-out provisions could impair our ability to take other actions during the lock-out period that could be in the best interests of our stockholders and, therefore, may have an adverse impact on the value of our shares of common stock, relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in the best interests of our stockholders.
Rising expenses could reduce cash flow and funds available for future acquisitions or distributions to you.
Any assets that we buy will be subject to operating risks common to digital infrastructure real estate in general, any or all of which may negatively affect us. If any asset is not leased or rents or subscription fees are being paid in an amount that is insufficient to cover operating expenses, we could be required to expend funds with respect to that asset for operating expenses. The assets will be subject to increases in tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses. While we expect that many of our assets will be leased at a cost to cover such expenses, renewals of leases or future leases may not be negotiated on a basis to cover those costs. If we are unable to lease assets on a basis whereby the tenants are off-setting all or some of
Table of Contents
such expenses, or if tenants fail to pay required tax, utility and other impositions, we could be required to pay those costs, which could adversely affect funds available for future acquisitions or cash available for distributions.
If we suffer losses that are not covered by insurance or that are in excess of insurance coverage, we could lose invested capital and anticipated profits.
We carry comprehensive general liability coverage and umbrella liability coverage on all our assets with limits of liability that we deem adequate to insure against liability claims and provide for the costs of defense. Similarly, we will be insured against the risk of direct physical damage in amounts we estimate to be adequate to reimburse us on a replacement cost basis for costs incurred to repair or rebuild each asset, including loss of income during the rehabilitation period. Material losses may occur in excess of insurance proceeds with respect to any asset, as insurance may not be available or sufficient to fund the losses. However, there are types of losses, generally of a catastrophic nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, which are either uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with potential terrorist acts could increase the premiums we may be required to pay for coverage property and casualty . Additionally, lenders in some cases have begun to insist that owners of certain assets purchase specific coverage terrorism as a condition for providing loans. It is uncertain whether such insurance policies will be available, or available at reasonable cost, which could inhibit our ability to finance or refinance our potential assets. In these instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential . We may not have adequate, or any, coverage for such . The Terrorism Risk Insurance Program Reauthorization Act of 2015 (“TRIPRA”) is designed for a sharing of terrorism between insurance companies and the federal government. Under TRIPRA, the amount of terrorism-related insurance triggering the federal insurance threshold was raised from $180 million in 2019 to $200 million in 2020. Additionally, the bill increased insurers’ co-payments for exceeding their deductibles, in annual steps, from 19% in 2019 to 20% in 2020. Each of these changes may have the effect of increasing the cost to insure acts of terrorism for property owners, such as the Company, notwithstanding the other provisions of TRIPRA. In December 2019, Congress further extended TRIPRA through December 31, 2027. If TRIPRA is not continued beyond 2027 or is significantly modified, we may incur higher insurance costs and experience in obtaining insurance that covers terrorist-related . Our tenants may also have similar .
Real estate-related taxes may increase and if these increases are not passed on to tenants, our income will be reduced, which could adversely affect our ability to make distributions to our stockholders.
Some local real property tax assessors may seek to reassess some of our assets as a result of our acquisition of such assets. From time to time, our property taxes may increase as values or assessment rates change or for other reasons deemed relevant by the assessors. An increase in the assessed valuation of our digital infrastructure real estate assets for real estate tax purposes could result in an increase in the related real estate taxes on that asset. Although some tenant contracts may permit us to pass through such tax increases to the tenants for payment, there is no assurance that renewal contracts or future contracts will be negotiated on the same basis. Increases not passed through to tenants will adversely affect our income, cash available for distributions and the amount of distributions to you.
Failure to timely and efficiently execute on construction projects for digital infrastructure real estate could adversely affect our business.
Construction projects for digital infrastructure real estate, some of which may be long-term and complex in nature, can be challenging to execute. The quality of our performance on such construction projects depends in large part upon our ability to manage (1) the associated tenant relationship and (2) the project itself by timely deploying and properly managing appropriate internal and external project resources. In connection with such construction projects, we generally will bear the risk of cost over-runs, labor availability and productivity, and contractor pricing and performance. Additionally, contracts with our customers for these projects typically specify delivery dates, performance criteria and penalties for our failure to perform. Our failure to manage such tenant relationships, project resources, and project milestones in a timely and efficient manner could have a material adverse effect on our business.
Table of Contents
Competition with third parties for assets and other investments may impede our ability to make future acquisitions or may increase the cost of these acquisitions and reduce our profitability and the return on your investment.
We may experience significant and increased competition for the acquisition of assets, contracts to build new communication sites for tenants or the expansion of other networks, which could make the acquisition of high-quality assets significantly more costly or prohibitive, prohibit us from securing contracts to build new sites or expand other networks. Some of our competitors may be larger and may have greater financial resources than we do, while other competitors may apply less stringent investment criteria than we do. In addition, we may not anticipate increased competition entering a particular market or competing for the same assets. Higher prices for assets, the failure to add new assets to our portfolio or expand existing network assets could reduce our profitability, which could materially and adversely affect our business, results of operations or financial condition, and therefore the return on your investment.
Increasing competition within the tower industry may adversely affect our contract rates and the amount of rent paid to us may affect the cash available for distributions and the amount of distributions paid to our stockholders.
Our industry is highly competitive and tenants have numerous alternatives in leasing antenna space on towers. Pricing competition from peers could have a material effect on our contract rates. We may not be able to renew existing tenant contracts or enter into new tenant contracts, or if we are able to renew or enter into new contracts, they may be at rates lower than the current rates, resulting in decreased cash flows from tenants, thus affecting cash available for distributions and the amount available for distributions to you. In addition, should inflation rates exceed the fixed escalator percentages in markets where our contracts may include fixed escalators, our income could be adversely affected.
Delays in acquisitions of assets may have an adverse effect on the value of your investment.
There may be a substantial period of time before all of the proceeds of the Public Offering are invested. Delays we encounter in the selection, acquisition and/or development of assets could adversely affect your returns. When assets are acquired prior to the start of construction or during the early stages of construction, it will typically take several months to complete construction and rent available antenna space. Therefore, you could suffer delays in the payment of cash distributions attributable to those particular assets.
Our business depends on the demand for our digital infrastructure real estate, driven primarily by demand for data, and we may be adversely affected by any slowdown in such demand. Additionally, a reduction in the amount or change in the mix of network investment by our tenants may materially and adversely affect our business (including reducing demand for tenant, customer or subscriber additions or network services).
Tenant demand for our digital infrastructure real estate and customer and subscriber demand for network services depends on the demand for data. The willingness of our tenants to utilize our digital infrastructure real estate and customers and subscribers to utilize our network services, or renew or extend existing contracts on our digital infrastructure real estate or network service subscription agreements, is affected by numerous factors, including:
consumers’ and organizations’ demand for data;
availability or capacity of our communications and network infrastructure or associated land interests;
location of our networks and digital infrastructure real estate;
financial condition of our tenants, customers and subscribers including their profitability and availability or cost of capital;
willingness of our tenants to maintain or increase their network investment or changes in their capital allocation strategy;
need for integrated networks and organizations;
availability and cost of spectrum for commercial use;
Table of Contents
increased use of network sharing, roaming, joint development, or resale agreements by our tenants;
mergers or consolidations by and among our tenants;
changes in, or success of, our tenants’, customers’ and subscribers’ business models;
governmental regulations and initiatives, including local or state restrictions on the proliferation of digital infrastructure real estate;
cost of constructing digital infrastructure real estate;
our market competition;
technological changes, such as artificial intelligence, including those (1) affecting the number or type of digital infrastructure real estate needed to provide data to a given geographic area or which may otherwise serve as substitute or alternative to our digital infrastructure real estate or (2) resulting in the obsolescence or decommissioning of certain existing networks or data centers; and
our ability to efficiently satisfy our tenants’, customers’ and subscribers’ service requirements.
A slowdown in demand for data or our digital infrastructure real estate may negatively impact our growth or otherwise have a material adverse effect on us. If our tenants, customers or subscribers are unable to raise adequate capital to fund their business plans, as a result of disruptions in the financial and credit markets, technological changes, such as artificial intelligence, or otherwise, they may reduce their spending, which could adversely affect our anticipated growth or the demand for our digital infrastructure real estate.
The amount, timing, and mix of our tower tenants’ network investment are variable and can be significantly impacted by the various matters described in these risk factors. Changes in tower tenant network investment typically impact the demand for our digital infrastructure real estate. As a result, changes in tenant plans such as delays in the implementation of new systems, new and emerging technologies (including small cells and fiber), or plans to expand coverage or capacity may reduce demand for our digital infrastructure real estate. Furthermore, the industries in which our tenants may operate (particularly those in the wireless industry) could experience a slowdown or slowing growth rates as a result of numerous factors, including a reduction in consumer demand (including demand for wireless connectivity) or general economic conditions. There can be no assurances that weakness or uncertainty in the economic environment will not adversely impact our tower tenants or their industries, which may materially and adversely affect our business, including by reducing demand for our digital infrastructure real estate or network services. In addition, a slowdown may increase competition for tower tenants or network services. Such an industry or a reduction in tower tenant network investment may materially and affect our business.
Our investments in digital infrastructure real estate will be subject to the risks typically associated with real estate.
We invest directly in real estate. We will not know whether the values of properties that we own directly will remain at the levels existing on the dates of acquisition. If the values of properties we own decrease, our risk will increase because of the lower value of the real estate. In this manner, real estate values will impact the value of our real estate investments. Therefore, our investments will be subject to the risks typically associated with real estate.
The value of real estate may be adversely affected by a number of risks, including:
changes in global, national, regional or local economic, demographic or capital market conditions (including volatility as a result of the war in Ukraine, the Iran war and other international conflicts and the rapidly evolving measures in response and economic impacts resulting from actual or perceived instability in the U.S. banking system);
epidemics, pandemics or other outbreaks of an illness, disease or virus;
natural disasters such as hurricanes, snow, earthquakes, floods, wildfires or severe weather storms;
Table of Contents
acts of war or terrorism, including the consequences of terrorist attacks;
cybersecurity attacks and telecommunication failures;
adverse changes in national, regional and local economic and real estate conditions;
an oversupply of (or a reduction in demand for) space in the areas where particular properties are located and the attractiveness of particular properties to prospective tenants;
changes in governmental laws and regulations, fiscal policies, including changes in tax laws and increases in property taxes, changes in zoning laws, climate-change initiatives, limitations on rental rates and increasing costs to comply with environmental laws;
costs associated with the need to periodically repair or re-lease our properties;
costs associated with real property taxes and changes in tax rates;
costs of remediation and liabilities associated with environmental conditions affecting properties;
over-concentrations in certain geographic areas;
the worsening of economic or real estate conditions in the geographic area in which our investments may be concentrated;
inflation;
increases in interest rates and the lack of availability of financing; and
the potential for uninsured or underinsured property losses.
All of these factors are beyond our control. Any negative changes in these factors could affect our performance and our ability to meet our obligations and make distributions to stockholders.
New technologies or changes in a tenant’s business model could make our digital infrastructure real estate business less desirable and result in decreasing revenues and operating results.
The development and implementation of new technologies designed to enhance the efficiency of communications networks or changes in a tenant’s business model could decrease demand for tower space or reduce previously obtainable contract rates. In addition, tenants may allocate less of their budgets to leasing space on towers, as the industry is trending towards deploying increased capital to the development and implementation of new technologies. Examples of these technologies include spectrally efficient technologies, which could relieve a portion of our tenants’ network capacity needs and, as a result, could reduce the demand for tower-based antenna space. Moreover, the emergence of alternative technologies could reduce the need for tower-based broadcast services transmission and reception. Further, a tenant may decide to cease outsourcing tower infrastructure or otherwise change its business model, which would result in a decrease in our revenue and operating results. Our failure to innovate in response to the development and implementation of these or other new technologies or changes in a tenant’s business model could have a material adverse effect on our business, results of operations or financial condition. Conversely, we may invest significant capital in technologies and projects that may not provide expected returns or , which could management attention and have a material effect on our operating results.
Table of Contents
Our data center properties may not be suitable for lease to certain data center, technology or office tenants without significant expenditures or renovations.
Because many of our data center properties will contain extensive tenant improvements installed at our tenants’ expense, they may be better suited for a specific corporate enterprise data center user or technology industry tenant and could require modification in order for us to re-lease vacant space to another corporate enterprise data center user or technology industry tenant. For the same reason, our properties also may not be suitable for lease to traditional office tenants without significant expenditures or renovations.
Our tenants may choose to develop new data centers or expand their existing data centers, which could result in the loss of one or more key tenants or reduce demand for our newly developed data centers.
Our larger tenants may choose to develop new data centers or expand any existing data centers of their own. In the event that any of our key tenants were to do so, it could result in a loss of business to us or put pressure on our pricing. If we lose a tenant, there is no guarantee that we would be able to replace that tenant at a competitive rate or at all.
Our data center infrastructure may become obsolete or less marketable and we may not be able to upgrade our power and cooling, security or connectivity systems cost-effectively or at all.
The markets for data centers, as well as the industries in which data center tenants operate, are characterized by rapidly changing technology, evolving industry standards, frequent new service introductions, shifting distribution channels and changing tenant demands. The data center infrastructure in some of the data centers that we acquired and expect to acquire in the future may become obsolete or less marketable due to demand for new processes or technologies, including, without limitation: (i) new processes to deliver power to, or eliminate heat from, computer systems; (ii) demand for additional redundancy capacity; (iii) new technology that permits lower levels of critical load and heat removal than the data centers in which we invest may be designed to provide; or (iv) new technology, including artificial intelligence, that reduces tenant need or demand for data center capacity, changes the requirements for such capacity or otherwise renders our data centers less attractive to tenants or obsolete. In addition, the systems that will connect the data centers in which we invest to the Internet and other external networks may become outdated, including with respect to latency, reliability and diversity of connectivity. When tenants demand new processes or technologies, we may not be to upgrade our data centers on a cost- basis, or at all, due to, among other things, increased expenses to us that cannot be passed on to the tenant or revenue to fund the necessary capital expenditures.
The obsolescence of current data centers, including of the power and cooling systems in such data centers or our inability to upgrade our data centers, including associated connectivity, could have a material negative impact on our business. Furthermore, potential future regulations that apply to industries we serve may require users in those industries to seek specific requirements from their data centers that we are unable to provide. These may include physical security regulations applicable to the defense industry and government contractors and privacy and security requirements applicable to the financial services and health care industries. Such regulations could have a material adverse effect on us. If our competitors offer data center space that our existing or potential tenants perceive to be superior to ours based on numerous factors, including power, security considerations, location or network connectivity, or if they offer rental rates below our or current market rates, we may lose existing or potential tenants, incur costs to improve our data centers or be forced to reduce our rental rates.
We will depend on third parties to provide Internet, telecommunication and fiber optic network connectivity to the tenants in our data centers, and any delays or disruptions in service could have a material adverse effect on us.
Our data centers’ products and infrastructures will rely on third-party service providers. In particular, we depend on third parties to provide Internet, telecommunication and fiber optic network connectivity to the tenants in our data centers, and we have no control over the reliability of the services provided by these suppliers. Our tenants may in the future experience difficulties due to service failures unrelated to our systems and services. Any Internet, telecommunication or fiber optic network failures may result in significant loss of connectivity to our data centers, which could reduce the confidence of our tenants and could consequently impair our ability to retain existing tenants or attract new tenants and could have a material adverse effect on us.
Similarly, we depend upon the presence of Internet, telecommunications and fiber optic networks serving the locations of our data centers in order to attract and retain tenants. The construction required to connect multiple carrier facilities to our data centers is complex, requiring a sophisticated redundant fiber network, and involves matters outside of our control, including regulatory
Table of Contents
requirements and the availability of construction resources. Each new data center that we develop requires significant amounts of capital for the construction and operation of a sophisticated redundant fiber network. We believe that the availability of carrier capacity affects our business and future growth. We cannot assure you that any carrier will elect to offer its services within our data centers or that once a carrier has decided to provide connectivity to our data centers that it will continue to do so for any period of time. Furthermore, some carriers are experiencing business difficulties or have announced consolidations or mergers. As a result, some carriers may be forced to downsize or terminate connectivity within our data centers, which could adversely affect our tenants and could have a material adverse effect on us.
Power outages, limited availability of electrical resources and increased energy costs could have a material adverse effect on us.
Our data centers will be subject to electrical power outages, regional competition for available power and increased energy costs. We attempt to limit exposure to system downtime by using backup generators and power supplies generally at a significantly higher operating cost than we would pay for an equivalent amount of power from a local utility. However, we may not be able to limit our exposure entirely even with these protections in place. Power outages, which may last beyond our backup and alternative power arrangements, would harm our tenants. During power outages, changes in humidity and temperature can cause permanent damage to servers and other electrical equipment. We could incur financial obligations or be subject to lawsuits by our tenants in connection with a loss of power. Any loss of services or equipment damage could reduce the confidence of our tenants in our services and could consequently impair our ability to attract and retain customers, which could have a material effect on us.
In addition, power and cooling requirements at our data centers are increasing as a result of the increasing power and cooling demands of modern servers. Since third parties will provide our data centers with sufficient power to meet our tenants’ needs, our data centers could have a limited or inadequate amount of electrical resources.
We also may be subject to risks and unanticipated costs associated with obtaining power from various utility companies. Utilities that serve our data centers may be dependent on, and sensitive to price increases for, a particular type of fuel, such as coal, oil or natural gas. The price of these fuels and the electricity generated from them could increase as a result of proposed legislative measures related to climate change or efforts to regulate carbon emissions. Although we may have a diverse tenant base, the concentration and mix of our tenants may change and increases in the cost of power at any of our data centers would put those locations at a competitive disadvantage relative to data centers served by utilities that can provide less expensive power. This could adversely affect our relationships with our tenants, which could have a material adverse effect on us.
Climate change may adversely affect our business, financial condition, cash flows and results of operations.
Climate change creates physical and financial risks. Physical risks from climate change include an increase in sea levels and changes in weather conditions, such as an increase in storm intensity and severity of weather (e.g., floods, tornadoes or hurricanes) and extreme temperatures. The occurrence of sea level rise or one or more natural disasters, such as floods, tornadoes, hurricanes, tropical storms, wildfires, and earthquakes (whether or not caused by climate change), could cause considerable damage to our properties, disrupt our operations and negatively affect our financial performance. To the extent any of these events result in significant damage to or closure of one or more of our properties, our operations and financial performance could be adversely affected through an inability to lease or re-lease the property. In addition, these events could result in significant expenses to restore or remediate a property, increases in fuel or other energy costs or a fuel shortage, and increases in the costs of (or making ) insurance on terms if they result in significant of property or other insurable . In addition, transition risks associated with new or more laws or regulations or stricter interpretations of existing laws or regulations may require material expenditures by us. For example, various federal, state, and regional laws and regulations have been implemented or are under consideration to mitigate the effects of climate change caused by greenhouse gas emissions. Among other things, “green” building codes may seek to reduce emissions through the imposition of standards for design, construction materials, water and energy usage and , and waste management. Such codes could require us to make to our properties, increase the costs of maintaining or our properties or developing new properties, or increase taxes and fees assessed on us or our properties.
We rely on the proper and efficient functioning of computer and data-processing systems, and a large-scale malfunction could have a material adverse effect on us.
Since computer and data-processing systems are susceptible to malfunctions and interruptions, including those due to equipment damage, power outages, computer viruses and a range of other hardware, software and network problems, we cannot
Table of Contents
guarantee that our data centers will not experience such malfunctions or interruptions in the future. Additionally, expansions and developments in the products and services that our data centers offer could increasingly add a measure of complexity that may overburden our data center and network resources and human capital, making service interruptions and failures more likely. A significant or large-scale malfunction or interruption of one or more of any of our data centers’ computer or data-processing systems could adversely affect our ability to keep such data centers running efficiently. If a malfunction results in a wider or sustained disruption to business at a property, it could have a material adverse effect on us.
Our network services business may experience significant volatility in demand, which could reduce the predictability of our results.
The operating results of our network services business for any particular period may vary significantly and should not necessarily be considered indicative of longer-term results for such services. Our network services business generally will be driven by demand for our digital infrastructure real estate and may be adversely impacted by various factors, including:
competition;
the timing, mix and amount of customer network investments;
the rate and volume of customer deployment plans;
unforeseen delays or challenges relating to work performed;
economic weakness or uncertainty;
our market share; and
changes in the size, scope, or volume of work performed.
New wireless technologies may not deploy or be adopted by tenants as rapidly or in the manner projected.
There can be no assurances that new wireless services or technologies will be introduced or deployed as rapidly or in the manner projected by the wireless carriers. In addition, demand or tenant adoption rates for such new technologies may be lower or slower than anticipated for numerous reasons. As a result, growth opportunities or demand for our digital infrastructure real estate arising from such technologies may not be realized at the times or to the extent anticipated.
A substantial portion of our revenue may be derived from a small number of tenants, which could make us sensitive to changes in the creditworthiness and financial strength of our tenants.
A substantial portion of our total operating revenues may be derived from a small number of tenants. Consequently, a reduction in demand for site leasing, reduced future capital expenditures on the networks, or the loss, as a result of bankruptcy, consolidation and mergers with other tenants of ours or otherwise, of any of our largest tenants could materially decrease our revenue and have an adverse effect on our growth. Additionally, if tenants are unwilling or unable to perform their obligations under their contracts with us, our revenues, results of operations, financial condition and liquidity could be materially and adversely affected. In the ordinary course of our business, we may occasionally experience disputes with our tenants, generally regarding the interpretation of terms in our contracts, which we hope to resolve in a manner that would not have a material adverse effect on us or our tenant relationships. However, it is possible that such disputes could lead to a of our contracts with tenants, a material modification of the terms of those contracts, a in our relationships with those tenants that leads to a to obtain new business from them, any of which could have a material effect on our business, results of operations or financial condition. If we are to any of these through , our relationship with the applicable tenant could be or , which could lead to decreased revenue or increased costs, resulting in a corresponding effect on our business, results of operations or financial condition.
Due to the long-term nature of our tenant contracts, we depend on the continued financial strength of our tenants. Many wireless service providers operate with substantial levels of debt. Sometimes our tenants, or their parent companies, face financial difficulty, file for bankruptcy or terminate operations.
Table of Contents
In addition, many of our tenants will rely on capital raising activities to fund their operations and capital expenditures, which may be more difficult or expensive in the event of downturns in the economy or disruptions in the financial and credit markets. If our tenants are unable to raise adequate capital to fund their business plans or face capital constraints, they may reduce their spending, which could materially and adversely affect demand for our digital infrastructure real estate. If, as a result of a prolonged economic downturn or otherwise, one or more of our tenants experience financial difficulties or files for bankruptcy, it could result in uncollectible accounts receivable and an impairment of our deferred asset. The loss of significant tenants, or the loss of all or a portion of our anticipated site rental revenues from certain tenants, could have a material effect on our business, results of operations or financial condition.
If our tenants consolidate their operations, exit the telecommunications business or share digital infrastructure real estate to a significant degree, our growth, revenue and ability to generate positive cash flows could be materially and adversely affected.
Significant consolidation among our tenants could reduce demand for our digital infrastructure real estate and network services and may materially and adversely affect our growth and revenues. Certain combined companies have rationalized duplicative parts of their networks or modernized their networks, and these and other tenants could determine not to renew, or attempt to cancel, avoid or limit contracts with us or related payments. Our ongoing contractual revenues and our future results may be negatively impacted if a significant number of these contracts are terminated or not renewed. In addition, extensive sharing of digital infrastructure real estate, roaming or resale arrangements among wireless service providers as an alternative to leasing our digital infrastructure real estate, without compensation to us, may cause new lease activity to slow if carriers utilize shared equipment rather than deploy new equipment, or may result in the decommissioning of equipment on certain existing digital infrastructure real estate because portions of the tenants’ networks may become redundant, which could have a material adverse effect on our business, results of operations or financial condition.
Fiber contains certain differences from towers, resulting in different operational risks. If we do not successfully operate fiber networks or identify or manage the related operational risks, such operations may produce results that are less than anticipated.
We anticipate that our portfolio will include investments in fiber. Fiber contains certain differences from towers, including certain differences relating to tenant base, competition, contract terms (including requirements for service level agreements regarding network performance and maintenance), upfront capital requirements, landlord demographics, ownership of certain network assets, operational oversight requirements, government regulations (including by counties and municipalities, and are subject to local easement and rights-of-way licenses from municipalities), growth rates and applicable laws. While fiber has certain risks that are similar to towers, they also have certain operational risks that are different from an investment in towers, including:
the use of public rights-of-way and franchise agreements;
use of poles and conduits owned solely by, or jointly with, third parties;
risks relating to overbuilding;
risk of decrease in demand for data;
risks relating to the specific markets that we choose to operate in or plan to operate in;
construction management risks;
risks relating to wireless carriers building their own fiber, or subscribers utilizing their own or alternative fiber;
risk of failing to optimize the use of our finite supply of fiber strands;
damage to our assets and the need to maintain, repair, upgrade and periodically replace our assets;
the risk of failing to properly maintain or operate highly specialized hardware and software;
network data security risks;
Table of Contents
the risk of new technologies that could enable subscribers to realize the same benefits with less utilization of our fiber;
potential damage to our overall reputation as a digital infrastructure real estate provider; and
the use of competitive local exchange carrier status.
In addition, our fiber networks will in some instances support and provide the transport of data for small cells. The rate at which tenants adopt or prioritize small cells and fiber may be lower or slower than we anticipate or may cease to exist altogether. Fiber will also expose us to different safety or liability risks or hazards than towers as a result of numerous factors, including the location or nature of the assets involved. There may be risks and challenges associated with small cells being comparatively new and emerging technologies and continuing to evolve, and there may be other risks related to small cells of which we are not yet aware.
Our business is subject to government regulations and changes in current or future regulations could harm our business.
We are subject to federal, state and local regulation of our business. In the United States, both the Federal Aviation Administration (“FAA”) and the Federal Communications Commission (“FCC”) regulate the construction, modification, and maintenance of towers and structures that support antennas used for wireless communications and radio and television broadcasts. In addition, the FCC separately licenses and regulates wireless communications equipment and television and radio stations operating from such towers. FAA and FCC regulations govern construction, lighting, painting, and marking of towers and may, depending on the characteristics of the tower, require registration of the tower. Certain proposals to construct new towers or to modify existing towers are reviewed by the FAA to ensure that the tower will not present a hazard to air navigation.
Tower owners may have an obligation to mark or paint such towers or install lighting to conform to FAA and FCC regulations and to maintain such marking, painting and lighting. Tower owners may also bear the responsibility of notifying the FAA of any lighting outages. Certain proposals to operate wireless communications and radio or television stations from towers are also reviewed by the FCC to ensure compliance with environmental impact requirements established in federal statutes, including the National Environmental Policy Act of 1969, as amended. Failure to comply with existing or future applicable requirements may lead to civil penalties or other liabilities and may subject us to significant indemnification liability to our tenants against any such failure to comply. In addition, new regulations may impose additional costly burdens on us, which may affect our revenues and cause delays in our growth. Local regulations, including municipal or local ordinances, zoning restrictions and restrictive covenants imposed by community developers, vary greatly, but typically require tower owners to obtain approval from local officials or community standards organizations prior to tower construction or modification. Local regulations can , prevent, or increase the cost of new construction, co-locations, or site upgrades, thereby limiting our ability to respond to tenant demand. In addition, new regulations may be adopted that increase or result in additional costs to us.
We may be vulnerable to security breaches that could adversely affect our operations, business, and reputation.
Despite any security measures, certain of our digital infrastructure real estate assets may be vulnerable to damage, disruptions, or shutdowns due to unauthorized access, computer viruses, cyber-attacks, and other security breaches. An attack attempt or security breach, such as a distributed denial of service attack, could potentially result in (1) interruption or cessation of certain of our services to our customers, (2) our inability to meet expected levels of service to our customers, or (3) data transmitted over our customers’ networks being compromised. We cannot guarantee that our security measures will not be circumvented, resulting in customer network failures or interruptions that could impact our customers’ network availability and have a material effect on our business, financial condition, or operational results. We may be required to expend significant resources to protect or recover from such . We may elect to secure and maintain insurance policies, as available, that include coverage over cyber-attacks and other security ; however, there can be no assurances that such coverage will be available or, if available, even adequate to cover exposure for such . If an actual or perceived of our security occurs, the market perception of the effectiveness of our security measures could be , and we could customers. Further, the perpetrators of cyber-attacks are not restricted to particular groups or persons. These attacks may be committed by our employees or external actors operating in any geography. Any such events could result in legal or , in operations, of sensitive data, to our reputation, market perception, or response measures, which could affect our business.
Table of Contents
If radio frequency emissions from wireless handsets or equipment on our digital infrastructure real estate are demonstrated to cause negative health effects, potential future claims could adversely affect our operations, costs or revenues.
The potential connection between radio frequency emissions and certain negative health effects, including some forms of cancer, has been the subject of substantial study by the scientific community in recent years. We cannot guarantee that claims relating to radio frequency emissions will not arise in the future or that the results of such studies will not be adverse to us.
Public perception of possible health risks associated with cellular or other wireless connectivity services may slow or diminish the growth of wireless companies, which may in turn slow or diminish our growth. In particular, negative public perception of, and regulations regarding, these perceived health risks may slow or diminish the market acceptance of wireless services. If a connection between radio frequency emissions and possible negative health effects were established, our operations, costs, or revenues may be materially and adversely affected. We currently do not maintain any significant insurance with respect to these matters.
If we are unable to protect our rights to the land under our towers or other digital infrastructure real estate, it could adversely affect our business and operating results.
Our real property interests relating to our towers consist primarily of leasehold and sub-leasehold interests, fee interests, easements, licenses and rights-of-way. A loss of these interests at a particular tower or other communications network infrastructure, like fiber, may interfere with our ability to operate that tower site or fiber network and generate revenues. For various reasons, we may not always have the ability to access, analyze and verify all information regarding titles and other issues prior to completing an acquisition of digital infrastructure real estate, which can affect our rights to access and operate such asset. From time to time, we also may experience disputes with landowners regarding the terms of easements or ground agreements for land under towers or fiber networks, which can affect our ability to access and operate such infrastructure. Further, for various reasons, landowners may not want to renew their ground agreements with us, they may lose their rights to the land, or they may transfer their land interests to third parties, including ground lease aggregators, which could affect our ability to renew ground agreements on commercially viable terms. A significant number of the digital infrastructure real estate in our portfolio may be located on land that we will lease pursuant to long-term operating leases. Our inability to protect our rights to the land under our towers and other telecommunications network infrastructure may have a material effect on our business, results of operations or financial condition.
If we are unable or choose not to exercise our rights to purchase towers that may be subject to lease and sublease agreements at the end of the applicable period, our cash flows derived from those towers will be eliminated.
Our portfolio may include towers that we operate pursuant to lease or sublease agreements that include a purchase option at the end of the lease period. We may not have the required available capital to exercise our right to purchase the towers at the end of the applicable period, or we may choose, for business or other reasons, not to do so. If we do not exercise these purchase rights, and are unable to extend the lease or sublease or otherwise acquire an interest that would allow us to continue to operate these towers after the applicable period, we will lose the cash flows derived from the towers. If we decide to exercise these purchase rights, the benefits of acquiring a significant number of towers may not exceed the associated acquisition, compliance and integration costs, which could have a material adverse effect on our business, results of operations or financial condition.
If we acquire digital infrastructure real estate outside of the United States, our international operations would be subject to economic, political and other risks that could materially and adversely affect our business, results of operations or financial condition.
If we acquire digital infrastructure real estate outside of the United States, our international operations could result in adverse financial consequences and operational problems not typically experienced in the United States, including but not limited to:
changes to existing or new tax laws or methodologies impacting our international operations, or fees directed specifically at the ownership and operation of infrastructure sites or our international acquisitions, any of which may be applied or enforced retroactively;
laws or regulations that tax or otherwise restrict repatriation of earnings or other funds or otherwise limit distributions of capital;
Table of Contents
changes in a specific country’s or region’s political or economic conditions, including inflation or currency devaluation;
changes to zoning regulations or construction laws, which could be applied retroactively to any existing infrastructure sites;
expropriation or governmental regulation restricting foreign ownership or requiring reversion or divestiture;
actions restricting or revoking spectrum licenses or suspending or terminating business under prior licenses;
failure to comply with anti-bribery laws such as the Foreign Corrupt Practices Act or similar local anti- bribery laws, or Office of Foreign Assets Control requirements;
material site security issues;
significant license surcharges;
increases in the cost of labor (as a result of unionization or otherwise), power and other goods and services required for our operations;
price setting or other similar laws for the sharing of passive infrastructure; and
uncertain or inconsistent laws, regulations, rulings or results from legal or judicial systems, which may be enforced retroactively, and delays in the judicial process.
We would also face risks associated with changes in foreign currency exchange rates, including those arising from operations, investments and financing transactions. Volatility in foreign currency exchange rates could also affect our ability to plan, forecast and budget for our international operations and expansion efforts.
Risks Associated with Debt Financing and Investments
We expect to incur indebtedness and other borrowings, which could increase our business risks, hinder our ability to make distributions and adversely impact the value of your investment if the value of the property securing the debt falls or if we are forced to refinance the debt during adverse economic conditions.
We expect that in most instances, we will acquire digital infrastructure real estate by using either existing financing or borrowing new funds. In addition, we may incur mortgage debt and pledge all or some of our real properties as security for that debt to obtain funds to acquire additional real properties. We may borrow if we need funds to satisfy the REIT tax qualification requirement that we distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. We also may borrow if we otherwise deem it necessary or advisable to assure that we qualify as a REIT.
There is no limitation on the amount we may borrow against any single improved property. Our charter provides that the maximum amount of our total indebtedness shall not exceed 300% of our total “net assets” (total assets (other than intangibles) at cost, before deducting depreciation, reserves for bad debts or other non-cash reserves, less total liabilities) as of the date of any borrowing (which is the maximum level of indebtedness permitted under the NASAA REIT Guidelines, absent a satisfactory showing that a higher level is appropriate), which is generally expected to be approximately 75% of the cost of our investments.
Notwithstanding this 75% leverage limitation, we intend to target the greater of 65% loan-to-value or loan-to-cost. However, during the initial stages of the Public Offering, our leverage ratio could exceed our target leverage ratio. However, we may exceed that limit if such excess is approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing, along with justification for exceeding such limit. This charter limitation, however, does not apply to individual real estate assets or investments. In addition, it is our intention to limit our borrowings to 75% of the aggregate fair market
Table of Contents
value of our assets (calculated after the close of the Public Offering and once we have invested substantially all the proceeds of the Public Offering), unless excess borrowing is approved by a majority of the independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for such excess borrowing. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits. We expect that during the period of the Public Offering we will seek such independent director approval of borrowings in excess of these limitations since we will then be in the process of raising our equity capital to acquire our portfolio. As a result, we expect that our debt levels will be higher until we have raised equity capital and repaid a portion of our initial leverage. High debt levels would cause us to incur higher interest charges, would result in higher debt service payments and could be accompanied by restrictive covenants. The use of leverage involves a high degree of financial risk and will increase the exposure of the investments to adverse economic factors such as rising interest rates, downturns in the economy or deteriorations in the condition of the investments. Our investments will be by a smaller in the value of the properties than is the case where properties are owned with a proportionately smaller amount of debt. These factors could limit the amount of cash we have available to distribute and could result in a in the value of your investment.
Principal and interest payments on indebtedness (including mortgages having “balloon” payments) will have to be made regardless of the sufficiency of cash flow from the properties. If there is a shortfall between the cash flow from an asset and the cash flow needed to service mortgage debt on a property, then the amount available for distributions to stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, thus reducing the value of your investment. For U.S. federal income tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. In such event, we may be to pay the amount of distributions required in order to maintain our REIT status. We may give full or partial guarantees to lenders of mortgage debt to the entities that own our properties. When we provide a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for of the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or cross- provisions, a on a single property could affect multiple properties. If any of our properties are upon due to a , our ability to pay cash distributions to our stockholders will be affected which could result in our our REIT status and would result in a decrease in the value of your investment.
Many of these same issues also apply to credit facilities which are expected to be in place at various times as well. For example, the loan documents for such facilities may include various coverage ratios, the continued compliance with which may not be completely within our control. If such coverage ratios are not met, the lenders under such credit facilities may declare any unfunded commitments to be terminated and declare any amounts outstanding to be due and payable. We may also rely on short-term financing that would be especially exposed to changes in availability.
Although borrowings by us have the potential to enhance overall returns that exceed our cost of funds, they will further diminish returns (or increase losses on capital) to the extent overall returns are less than our cost of funds. As a result, the possibilities of profit and loss are increased. Borrowing money to purchase properties provides us with the advantages of leverage, but exposes us to greater market risks and higher current expenses.
In certain cases, financings for our properties may be recourse to us.
Generally, commercial real estate financings are structured as non-recourse to the borrower, which limits a lender’s recourse to the property pledged as collateral for the loan, and not the other assets of the borrower or to any parent of borrower, in the event of a loan default. However, lenders customarily will require that a creditworthy parent entity enter into so-called “recourse carveout” guarantees to protect the lender against certain bad-faith or other intentional acts of the borrower in violation of the loan documents. A “bad boy” guarantee typically provides that the lender can recover losses from the guarantors for certain bad acts, such as fraud or intentional misrepresentation, intentional waste, willful misconduct, criminal acts, of funds, voluntary incurrence of prohibited debt and environmental sustained by lender. In addition, “ boy” guarantees typically provide that the loan will be a full personal recourse obligation of the guarantor, for certain actions, such as prohibited transfers of the collateral or changes of control and voluntary of the borrower. These financing arrangements with respect to our investments generally require “ boy” guarantees from us and/or the Operating Partnership and in the event that such a guarantee is called, our assets could be affected. Moreover, our “ boy” guarantees could apply to actions of the joint venture partners associated with our investments. While the Advisor expects to negotiate indemnities from such joint venture partners to protect such risks, there remains the possibility that the acts of such joint venture partner could result in liability to us under such guarantees. We may provide “ boy” guarantees on
Table of Contents
behalf of affiliates of our Sponsor investing alongside us and as such guarantees are not for borrowed money, they will typically not be included under our leverage limitations.
Changes in the debt markets could have a material adverse impact on our earnings and financial condition.
The domestic debt markets are subject to changing levels of volatility, resulting in, from time to time, the tightening of underwriting standards by lenders and credit rating agencies, which results in lenders increasing the cost of debt financing. Should the overall cost of borrowings increase, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of future acquisitions. This may result in future acquisitions generating lower overall economic returns and potentially reducing future cash flow available for distribution. If these disruptions in the debt markets persist, our ability to borrow monies to finance the purchase of, or other activities related to, digital infrastructure real estate assets will be negatively impacted. If we are unable to borrow monies on terms and conditions that we find acceptable, we likely will have to reduce the number of assets we can purchase, and the return on the assets we purchase may be lower. In addition, we may find it difficult, costly or impossible to refinance indebtedness that is maturing. In addition, the state of the debt markets could have an impact on the overall amount of capital invested in real estate, which may result in price or value decreases of real estate assets. Although this may us for future acquisition, it could impact the value of our assets after the time we acquire them.
High lending rates may make it difficult for us to finance or refinance assets, which could reduce the number of assets we can acquire and the amount of cash distributions we can make.
If we place debt on assets, we run the risk of being unable to refinance the assets when the loans come due, or of being unable to refinance on favorable terms. If interest rates are higher when the assets are refinanced, we may not be able to finance the assets and our income could be reduced. If any of these events occur, our cash flow would be reduced. This, in turn, would reduce our cash flow and cash available for distribution to stockholders, as well as hinder our ability to raise more capital by issuing more shares or by borrowing more money. Additionally, we would have to reduce the number of properties we can purchase, and the return on the properties we do purchase may be lower.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
In connection with providing us financing, certain of our lenders may impose restrictions on us that affect our distribution, investment and operating policies and our ability to incur additional debt. Loan documents we enter into may also contain covenants that limit our ability to further borrow against the asset, sell the asset or discontinue insurance coverage. In addition, loan documents may limit our ability to enter into or terminate certain operating or lease agreements related to the property. Loan documents may also require lender approval of certain actions and as a result of the lender’s failure to grant such approval, we may not be able to take a course of action we deem most profitable. These or other limitations may adversely affect our flexibility and our ability to achieve our distribution, investment and operating objectives.
If we enter into financing arrangements involving balloon payment obligations, it may adversely affect our ability to make distributions to our stockholders.
Some of our financing arrangements may require us to make a lump-sum or “balloon” payment at maturity. Our ability to make a balloon payment is uncertain and may depend upon our ability to obtain replacement financing or our ability to sell particular properties. At the time the balloon payment is due, we may or may not be able to refinance the balloon payment on terms as favorable as the original loan or sell the particular property at a price sufficient to make the balloon payment. Such a refinancing would be dependent upon interest rates and lenders’ policies at the time of refinancing, economic conditions in general and the value of the underlying properties in particular. The effect of a refinancing or sale could affect the rate of return to stockholders and the projected time of disposition of our assets.
Failure to hedge effectively against interest rate changes may materially adversely affect our results of operations and financial condition.
Subject to any limitations required to maintain qualification as a REIT, we may seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements, such as interest rate cap or collar agreements and interest rate swap agreements.
Table of Contents
These agreements involve risks, such as the risk that counterparties may fail to honor their obligations under these arrangements and that these arrangements may not be effective in reducing our exposure to interest rate changes. These interest rate hedging arrangements may create additional assets or liabilities from time to time that may be held or liquidated separately from the underlying property or loan for which they were originally established. Hedging may reduce the overall returns on our investments. Failure to hedge effectively against interest rate changes may materially adversely affect our results of operations and financial condition.
Any digital infrastructure real estate debt securities that we originate or purchase is subject to the risks of delinquency and foreclosure.
We may originate and purchase digital infrastructure real estate debt securities, which are subject to risks of delinquency and foreclosure and risks of loss. Typically, we will have limited recourse, if any, to the personal assets of our borrowers. The ability of a borrower to repay a debt security secured by an income-producing asset depends primarily upon the successful operation of the asset, rather than upon the existence of independent income or assets of the borrower. If the net operating income of the asset is reduced, the borrower’s ability to repay the debt security may be impaired. An asset’s net operating income can be affected by, among other things:
increased costs, including added costs imposed by franchisors for improvements or operating changes required, from time to time, under the franchise agreements;
asset management decisions;
asset location and condition;
competition from comparable types of assets;
changes in specific industry segments;
declines in regional or local real estate values, or occupancy rates; and
increases in interest rates, real estate tax rates and other operating expenses.
We bear the risks of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the digital infrastructure real estate debt security, which could have a material adverse effect on our cash flows from operations and limit amounts available for distribution to you. In the event of the bankruptcy of a digital infrastructure real estate debt security borrower, the digital infrastructure real estate debt security to that borrower will be deemed to be collateralized only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the digital infrastructure real estate debt security will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a digital infrastructure real estate debt security can be an expensive and lengthy process that could have a substantial negative effect on our anticipated return on the digital infrastructure real estate debt security. We also may be to on certain assets, be to sell these assets and be to incur substantial expenses to operations at the asset.
Risks Related to Investments in Debt
We do not have substantial experience investing in mortgage, mezzanine, bridge or construction loans, B-Notes, securitized debt or other debt related to properties in which we may invest, which could adversely affect our return on our loan investments.
We may make investments in mortgage, mezzanine, bridge or construction loans, B-Notes, securitized debt or other debt related to properties if our Advisor determines that it is advantageous to us due to the state of the real estate market or in order to diversify our investment portfolio. However, neither our Advisor nor any of its affiliates has any substantial experience investing in these types of loans and we may not have the expertise necessary to maximize the return on our investment in these types of loans.
Table of Contents
If we make or invest in loans, our loans may be impacted by unfavorable real estate market conditions, which could decrease the value of our loan investments.
If we make or invest in loans, we will be at risk of default by the borrowers on those loans. These defaults may be caused by many conditions beyond our control, including interest rate levels and local and other economic conditions affecting real estate values. We may invest in unsecured loans. Even with respect to loans secured by real property, we will not know whether the values of the properties securing the loans will remain at the levels existing on the dates of origination of the loans. If the values of such underlying properties drop, our risk will increase with respect to secured loans because of the lower value of the security associated with such loans.
If we make or invest in loans, our loans will be subject to interest rate fluctuations, which could reduce our returns as compared to market interest rates as well as the value of the loans in the event we sell the loans.
If we invest in fixed-rate, long-term loans and interest rates rise, the loans could yield a return that is lower than then-current market rates. If interest rates decrease, we will be adversely affected to the extent that loans are prepaid, because we may not be able to make new loans at the previously higher interest rate. If we invest in variable interest rate loans, if interest rates decrease, our revenues will likewise decrease. Finally, if interest rates increase, the value of fixed-rate loans we own at such time would decrease which would lower the proceeds we would receive in the event we sell such assets.
Debt investments face prepayment risk that may adversely affect our results of operations and financial condition.
During periods of declining interest rates, the issuer of a security or borrower under a loan may exercise its option to prepay principal earlier than scheduled, forcing us to reinvest the proceeds from such prepayment in lower yielding securities or loans, which may result in a decline in our return. Debt investments frequently have call features that allow the issuer to redeem the security at dates prior to its stated maturity at a specified price (typically greater than par) only if certain prescribed conditions are met. An issuer may choose to redeem a debt security if, for example, the issuer can refinance the debt at a lower cost due to declining interest rates or an improvement in the credit standing of the issuer.
Delays in liquidating defaulted loans could reduce our investment returns.
If there are defaults under our loans secured by real property, we may not be able to repossess and sell the underlying properties quickly. The resulting time delay could reduce the value of our investment in the defaulted loans. An action to foreclose on a property securing a loan is regulated by state statutes and rules and is subject to many of the delays and expenses of other lawsuits if the defendant raises defenses or counterclaims. In the event of default by a borrower, these restrictions, among other things, may impede our ability to foreclose on or sell the secured property or to obtain proceeds sufficient to repay all amounts due to us on the loan.
We may make or invest in mezzanine loans, which involve greater risks of loss than senior loans secured by real properties.
We may make or invest in mezzanine loans that generally take the form of subordinated loans secured by second mortgages on the underlying real property or loans secured by a pledge of the ownership interests of an entity that directly or indirectly owns real property; provided, however, that we will comply with our charter, which prohibits us from investing in indebtedness secured by a mortgage on real property that is subordinate to any mortgage or equity interest of the Advisor, our directors or any of our affiliates. These types of investments involve a higher degree of risk than long-term senior mortgage loans secured by 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 mezzanine 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 all of our investment. In addition, mezzanine loans may have higher loan-to-value ratios than traditional mortgage loans, resulting in less equity in the real property and increasing our risk of of principal.
Bridge loans may involve a greater risk of loss than conventional mortgage loans.
We may provide bridge loans secured by first lien mortgages on properties to borrowers who are typically seeking short-term capital in connection with acquisitions, developments or refinancings of real estate. In connection with such investments, there is a risk that the borrower may not achieve its investment objectives and that we may therefore not recover some or all of our investment in such
Table of Contents
bridge loans. For example, if we provide a bridge loan to a borrower who has identified an undervalued asset, either due to mismanagement of the underlying assets or as a result of what the borrowers deem to be a recovering market, and the market in which such asset is located fails to recover according to the borrower’s projections, or if the borrower fails to improve the quality of the asset’s management or the value of the asset, the borrower may not receive a sufficient return on the asset to satisfy the bridge loan.
In addition, owners usually borrow funds under a conventional mortgage loan to repay a bridge loan. If the borrower is unable to obtain permanent financing to repay our bridge loan, we may lose some or all of our investment. Bridge loans are also subject to risks of borrower defaults, bankruptcies, fraud, losses and special hazard losses that are not covered by standard hazard insurance. In the event we make a bridge loan to a borrower who defaults, we bear the risk of loss of principal and nonpayment of interest and fees to the extent of any between the value of the mortgage collateral and the principal amount of the loan. To the extent we such with respect to our investments in loans, it could impact our business, results of operations, cash flows and financial ability and our ability to make distributions to you and the value of your investment.
Non-conforming and non-investment grade loans are subject to an increased risk of loss.
Loans we may acquire or originate may not conform to conventional loan criteria applied by traditional lenders and may not be rated or may be rated as “non-investment grade.” Non-investment grade ratings for these loans typically result from the overall leverage of the loans, the lack of a strong operating history for the properties underlying the loans, the borrowers’ credit history, the properties’ underlying cash flow or other factors. Therefore, non-conforming and investment loans we acquire or originate may have a higher risk of default and loss than conventional loans. Any loss we incur may adversely impact our business, results of operations, cash flows and financial ability and our ability to make distributions to you and the value of your investment.
Our debt investments may be considered illiquid and we may not be able to adjust our portfolio in response to changes in economic and other conditions.
The debt investments we may make in connection with privately negotiated transactions may not be registered under the relevant securities laws, resulting in a prohibition against their transfer, sale, pledge or other disposition except in a transaction that is exempt from the registration requirements of, or is otherwise in accordance with, those laws. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited. The mezzanine loans we may purchase in the future will be particularly illiquid investments due to their short life, their unsuitability for securitization and the greater difficulty of recoupment in the event of a borrower’s default.
We have entered into multiple secured credit facilities.
On March 15, 2023, we entered into a Secured Revolving Loan Credit Agreement pursuant to which we may request advances on a revolving facility up to an initial aggregate principal of $35,000,000 (the “Sunflower Secured Credit Facility”). The maturity date of the Sunflower Secured Credit Facility is March 15, 2028. The Sunflower Secured Credit Facility’s base rate loans shall bear interest at the lesser of (i) 1.75% plus the highest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 0.50% and (c) Secured Overnight Financing Rate (“ SOFR”) for a one- month term in effect on such date plus 0.25% and (ii) the Maximum Rate. The Sunflower Secured Credit Facility’s SOFR rate loans shall bear interest at the lesser of (i) 2.75% plus Term SOFR for the Interest Period therefor (as detailed below) and (ii) the Maximum Rate. On March 15, 2026, in accordance with the Sunflower Secured Credit Facility agreement, the outstanding balance on the Sunflower Secured Credit Facility principal balance became fixed at the then outstanding amount of $18,340,795 with no remaining available borrowing capacity. On this same date, the outstanding balance also converted to an amortizing loan with principal and interest payments required to be paid monthly over an amortization period of 25 years with the remaining unamortized balance of principal and interest due and payable in full on March 15, 2028.
On September 10, 2024, the Datacom JV entered into a credit agreement (the “Datacom Revolving Facility”) pursuant to which the Datacom JV may request advances on a revolving facility up to an initial aggregate principal of $30,000,000. On October 29, 2024, the Datacom JV amended the Datacom Revolving Facility to increase the aggregate principal commitment to $45,000,000. The Datacom Revolving Facility bears interest at a spread over Term SOFR ranging between 1.25% and 1.75% based on the loan to value at the date of borrowing and matures on September 10, 2029. As of December 31, 2025 and 2024, the carrying value of the Datacom Revolving
Table of Contents
Facility was $44,317,320 and $32,375,896, respectively, net of deferred financing costs. The unused capacity on Datacom Revolving Facility was $160,547 as of December 31, 2025.
The Sunflower Secured Credit Facility requires maintenance of certain financial covenants such as loan-to-value ratio, debt service coverage ratio and minimum lease terms requirements while Datacom Revolving Facility requires loan-to-value ratio, debt service coverage ratio and minimum rental income requirements that support the borrowing base, among others. The Company and Datacom JV were in compliance with these financial covenants as of December 31, 2025 and 2024.
U.S. Federal Income Tax Risks
Our failure to qualify as a REIT would subject us to U.S. federal income tax and potentially state, local and Puerto Rico tax, and would adversely affect our operations and the price of our shares of common stock.
We elected to be taxed as a REIT commencing with our taxable year ended December 31, 2021. We have operated and intend to continue to operate in a manner that would allow us to qualify as a REIT. Our qualification as a REIT depends upon our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. We have structured and intend to continue structuring our activities in a manner designed to satisfy all requirements for qualification as a REIT. However, the REIT qualification requirements are extremely complex and interpretation of the U.S. federal income tax laws governing qualification as a REIT is limited, and it is possible our REIT status may terminate inadvertently.
Our ability to satisfy the asset tests depends on our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income or quarterly asset requirements also depends on our ability to successfully manage the composition of our income and assets on an ongoing basis.
If we fail to qualify as a REIT for any taxable year, and we do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax on our taxable income at corporate rates. Our taxation as a domestic corporation, under current laws, would mean that we would be unable to deduct dividends paid to stockholders for purposes of computing our taxable income. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT qualification. Losing our REIT qualification would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the dividends paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
In certain circumstances, we may incur tax liabilities that would reduce our cash available for distribution to you.
Even if we qualify as a REIT, we may be subject to U.S. federal, state and local income taxes. For example, net income from the sale of properties that are “dealer” properties sold by a REIT (a “prohibited transaction” under the Internal Revenue Code of 1986 (as amended, “the Code”) will be subject to a 100% tax). If we fail to make (or be deemed to make) sufficient, timely distributions of our income and gain, we could be subject to a 4% excise tax to the extent of such failure. Similarly, if we were to fail an income test (and did not lose our REIT status because such failure was due to reasonable cause and not willful neglect and certain other requirements were satisfied) we would be subject to tax on the portion of our income that caused us to fail to meet the income test requirements. We also may decide to retain net capital gain we recognize from the sale or other disposition of our property and pay U.S. federal income tax directly on such . In that event, our stockholders would be treated as if they recognized that and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no from their deemed payment of such tax liability unless they file U.S. federal income tax returns and thereon seek a refund of such tax. We also will be subject to corporate tax on any undistributed REIT taxable income. We also may be subject to state and local taxes on our income or property, including franchise, payroll and transfer taxes. Additionally, companies through which we indirectly own our assets, such as taxable REIT subsidiaries, may be subject to U.S. federal, state, local, Puerto Rico and non-U.S. income taxes. Any taxes we pay directly or indirectly will reduce our cash available for distribution to you.
Table of Contents
If we fail to invest a sufficient amount of the net proceeds from selling shares of our common stock in real estate assets within one year from the receipt of the proceeds, we could fail to qualify as a REIT.
Temporary investment of the net proceeds from sales of shares of our common stock in short-term securities and income from such investment generally will allow us to satisfy various REIT income and asset requirements, but only during the one-year period beginning on the date we receive the net proceeds. If we are unable to invest a sufficient amount of the net proceeds from the sales of shares of our common stock in qualifying real estate assets within such one-year period, we could fail to satisfy one or more of the gross income or asset tests and/or we could be limited to investing all or a portion of any remaining funds in cash or cash equivalents. If we fail to satisfy any such income or asset test, unless we are entitled to relief under certain provisions of the Code, we could fail to qualify as a REIT.
To qualify as a REIT, we must meet annual distribution requirements, which may force us to forgo otherwise attractive opportunities or borrow funds during unfavorable market conditions. This could delay or hinder our ability to meet our investment objectives and reduce your overall return.
In order to qualify as a REIT, we must distribute annually to our stockholders at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain. To the extent that we do not distribute our net capital gains or distribute at least 90% but less than 100% of our REIT taxable income, as adjusted, we will have to pay tax on those amounts at regular U.S. federal corporate tax rates. We will be subject to U.S. federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay (or are deemed to have paid) with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. Payments we make to our stockholders under our share repurchase program will not be taken into account for purposes of these distribution requirements. These requirements could cause us to distribute amounts that otherwise would be spent on investments in real estate assets and it is possible that we might be required to borrow funds, possibly at unfavorable rates, or sell assets to fund these distributions. Although we intend to make distributions sufficient to meet the annual distribution requirements and to avoid U.S. federal income and excise taxes on our earnings while we qualify as a REIT, it is possible that we might not always be to do so.
If we were considered to have actually or constructively paid a “preferential dividend” to certain of our stockholders, our status as a REIT could be adversely affected.
As stated above, in order to qualify as a REIT, we must distribute as dividends to our stockholders at least 90% of our annual REIT taxable income, determined without regard to the dividends-paid deduction and excluding net capital gains. Until we were required to file annual and periodic reports with the SEC under the Exchange Act, we were subject to the “preferential dividend” rule and therefore distributions could not be considered “preferential dividends” in order for them to be counted as satisfying the annual distribution requirements for REITs and to provide us with a REIT-level tax deduction. A dividend is not a preferential dividend if the distribution is pro rata among all outstanding shares of stock within a particular class, and in accordance with any preferences among different classes of stock as set forth in our organizational documents. Currently, there is uncertainty as to the IRS’s position regarding whether certain arrangements involving REITs could give rise to the inadvertent payment of a preferential dividend (e.g., the pricing methodology for stock purchased under a distribution reinvestment plan, the terms of stock redemptions, or the allocation of certain fees among different classes of stock).
Furthermore, we did not seek a ruling from the IRS but believe that differences in dividends distributed to holders of Class D shares, Class I shares, Class S shares and Class T shares before we became a reporting company as a result of class- specific stockholder servicing fees that are deducted from the gross distributions for each share class should not have resulted in preferential dividends. However, no assurance can be given that the IRS will agree with this determination. If the IRS were to successfully assert that we paid a preferential dividend, we might be deemed to fail the 90% distribution test, and our status as a REIT could be terminated.
On December 18, 2015, Congress passed the Protecting Americans from Tax Hikes Act of 2015, which is commonly referred to as the PATH Act. The PATH Act repealed the set of rules prohibiting preferential dividends, but only with respect to REITs that file annual and periodic reports with the SEC under the Exchange Act. With the filing of our Registration Statement on Form S-11 for the Public Offering, we became a reporting company under the Exchange Act, and the preferential dividend rule therefore became inapplicable to us as of that time. However, if the IRS determined that we made a preferential dividend payment before we became a reporting company, we may be deemed either to (a) have distributed less than 100% of our REIT taxable income and be subject to tax
Table of Contents
on the undistributed portion, or (b) have distributed less than 90% of our REIT taxable income and our status as a REIT could be terminated for the year in which such determination is made if we were unable to cure such failure. We can provide no assurance that we will not be treated having as inadvertently paid preferential dividends before we became a reporting company.
If our leases are not respected as true leases for U.S. federal income tax purposes, we would fail to qualify as a REIT.
To qualify as a REIT, we must satisfy two gross income tests, under which specified percentages of our gross income must be derived from certain sources, including “rents from real property.” In order for rent paid to us to qualify as “rents from real property” for purposes of the REIT gross income tests, the leases must be respected as true leases for U.S. federal income tax purposes and not be treated as service contracts, joint ventures, or some other type of arrangement. If our leases are not respected as true leases for U.S. federal income tax purposes, we would fail to qualify as a REIT, which would materially adversely impact the value of an investment in our securities and in our ability to pay distributions to you.
The use of taxable REIT subsidiaries, which may be required for REIT qualification purposes, would increase our overall tax liability and thereby reduce our cash available for distribution to you.
Some of our assets may need to be owned by, or operations may need to be conducted through, one or more taxable REIT subsidiaries. Any of our taxable REIT subsidiaries would be subject to U.S. federal, state and local income tax on their taxable income. The after-tax net income of our taxable REIT subsidiaries would be available for distribution to us. Further, we would incur a 100% excise tax on transactions with our taxable REIT subsidiaries that are not conducted on an arm’s-length basis. While we intend that all transactions between us and our taxable REIT subsidiaries would be conducted on an arm’s-length basis, and therefore, any amounts paid by our taxable REIT subsidiaries to us would not be subject to the excise tax, no assurance can be given that no excise tax would arise from such transactions.
Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on your investment.
For so long as we qualify as a REIT, our ability to dispose of property may be restricted to a substantial extent as a result of our REIT qualification. Under applicable provisions of the Code regarding prohibited transactions by REITs, while we qualify as a REIT, we will be subject to a 100% penalty tax on any gain recognized on the sale or other disposition of any property (other than foreclosure property) that we own, directly or indirectly through any subsidiary entity other than a taxable REIT subsidiary, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of a trade or business, unless certain safe harbor provisions apply. Although we do not intend to hold any properties that would be characterized as held for sale to customers in the ordinary course of our business, unless a sale or disposition qualifies under certain statutory safe harbors, such characterization is a factual determination and no guarantee can be given that the IRS would agree with our characterization of our properties or that we will always be able to make use of the available safe harbors. Any losses we incur on such prohibited transactions may not be used to offset from prohibited transactions. Any taxes we pay would reduce our cash available for distribution to you. To avoid incurring prohibited transactions tax, we may forgo disposition that would otherwise be available if we were not a REIT.
Recharacterization of sale-leaseback transactions may cause us to fail to qualify as a REIT, or when qualified, lose our REIT status, which would subject us to U.S. federal income tax at corporate rates, which would reduce the amounts available for distribution to you.
We may purchase properties and lease them back to the sellers of such properties. While we will use our best efforts to structure any such sale-leaseback transaction such that the lease will be characterized as a “true lease,” thereby allowing us to be treated as the owner of the property for U.S. federal income tax purposes, the IRS could challenge such characterization. In the event that any such sale-leaseback is challenged and recharacterized as a financing transaction or loan for U.S. federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed. If a sale- leaseback transaction were so recharacterized, we might fail to satisfy the REIT qualification asset tests or income tests and, consequently, lose our REIT status effective with the year of recharacterization. Alternatively, the amount of our REIT taxable income could be recalculated, which also might cause us to fail to meet the annual distribution requirement for a taxable year in the event we cannot make a sufficient dividend.
Table of Contents
Investments outside the United States, including in Puerto Rico, may subject us to additional taxes and could present additional complications to our ability to satisfy the REIT qualification requirements.
In the event we make investments outside of the United States, including in the unincorporated U.S. territory of Puerto Rico, we may become subject us to various non-U.S. tax liabilities, including withholding taxes. In addition, operating in functional currencies other than the U.S. dollar and in environments in which real estate transactions are typically structured differently than they are in the United States or are subject to different legal rules may present complications to our ability to structure non-U.S. investments in a manner that enables us to satisfy the REIT qualification requirements.
Failure of the Operating Partnership to be taxable as a partnership could cause us to fail to qualify as a REIT and we could suffer other adverse tax consequences.
Based on our operating procedures, we believe that the Operating Partnership will continue to be treated for U.S. federal income tax purposes as a partnership and not as an association taxable as a corporation. If the IRS were successfully to determine that the Operating Partnership was properly treated as a corporation, the Operating Partnership would be required to pay U.S. federal income tax at corporate rates on its net income, its partners would be treated as stockholders of the Operating Partnership and distributions to partners would constitute distributions that would not be deductible in computing the Operating Partnership’s taxable income. In addition, if the Operating Partnership were treated as a corporation, we could fail to qualify as a REIT, with the resulting consequences as described in this Annual Report.
You may have a current tax liability on distributions you elect to reinvest in our common stock.
If you participate in our DRP, you will be deemed to have received, and for U.S. federal income tax purposes will be taxed on, the amount reinvested in shares of our common stock to the extent the amount reinvested was not a tax-free return of capital. Therefore, unless you are a tax-exempt entity, you may be forced to use funds from other sources to pay your tax liability on the reinvested dividends.
Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends.
Currently, the maximum tax rate applicable to qualified dividend income payable to U.S. stockholders that are individuals, trusts and estates is 20%. Ordinary dividends payable by REITs, however, generally are not eligible for the reduced rates for qualified dividends and are taxed at ordinary income rates. However, U.S. stockholders that are individuals, trusts and estates generally may deduct 20% of ordinary dividends from a REIT. The OBBBA made this deduction permanent. You are urged to consult with your tax advisor regarding the effect of this on your effective tax rate with respect to REIT dividends.
Our taxable income may substantially exceed our net cash flow, which may make it difficult for us to meet the REIT distribution requirements.
If we have differences in timing between the recognition of taxable income and the actual receipt of cash, we may generate less cash flow than taxable income. As a result of the foregoing, we may be required to (1) sell assets in adverse market conditions, (2) borrow on unfavorable terms, (3) distribute amounts that would otherwise be used for future acquisitions or used to repay debt or (4) make a taxable distribution of shares of our common stock as part of a distribution in which stockholders may elect to receive shares of common stock or (subject to a limit measured as a percentage of the total distribution) cash, in order to comply with the REIT distribution requirements.
Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code may limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets, if properly identified under applicable Treasury Regulations, does not constitute “gross income” for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions will likely be treated as non-qualifying income for purposes of both of these gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a taxable REIT subsidiary. This could increase the cost of our hedging activities because our taxable REIT subsidiaries would be subject to tax on gains or expose
Table of Contents
us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in a taxable REIT subsidiary generally will not provide any tax benefit, except for being carried forward against future taxable income of such taxable REIT subsidiary.
Complying with REIT requirements may force us to forgo or liquidate otherwise attractive investment opportunities, which may hinder or delay our ability to meet our investment objectives and reduce your overall return.
To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually and 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 (other than government securities and interests in taxable REIT subsidiaries) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer (other than certain excluded securities, including securities that qualify for the “straight debt” safe harbor). Debt will generally meet the “straight debt” safe harbor if the debt is a written unconditional promise to pay on demand or on a specified date a certain sum of money, the debt is not convertible, directly or indirectly, into stock, and the interest rate and the interest payment dates of the debt are not contingent on the profits, the borrower’s discretion, or similar factors. In addition, in general, no more than 5% of the value of our assets can consist of the securities of any one issuer (other than interests in taxable REIT subsidiaries and qualified real estate assets), and no more than 20% (25% for taxable years beginning after December 31, 2025 as a result of the OBBBA) of the value of our assets can be represented by securities of one or more taxable REIT subsidiaries (other than qualified real estate assets). If we fail to comply with these requirements at the end of any calendar quarter, we must correct the within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid our REIT qualification and tax consequences. As a result, we may be required to assets from our portfolio or not make otherwise investments in order to qualify and maintain our qualification as a REIT. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
You may be restricted from acquiring or transferring certain amounts of shares of our common stock.
In order to qualify as a REIT, among other requirements, no more than 50% in value of the outstanding shares of our stock may be owned, directly or indirectly, by five or fewer individuals, as defined in the Code to include certain kinds of entities, during the last half of any taxable year, other than the first year for which our REIT election is effective. To assist us in qualifying as a REIT, among other purposes, our charter contains share ownership limits. Generally, any shares of our stock owned by affiliated owners will be added together for purposes of the share ownership limits.
If anyone attempts to transfer or own shares of stock in a way that would violate the share ownership limits (or would prevent us from continuing to qualify as a REIT), unless such ownership limits have been waived prospectively or retroactively by our Board, those shares instead will be deemed transferred to a trust for the benefit of a charitable beneficiary and will be either repurchased by us or sold to a person whose ownership of the shares will not violate the aggregate share ownership limit or the common share ownership limit and will not prevent us from qualifying as a REIT. If this transfer to a trust fails to prevent such a violation or a disqualification as a REIT, then the initial transfer or ownership will be null and void from the outset. Anyone who acquires or owns shares in violation of the aggregate share ownership limit or the common share ownership limit, unless such ownership limit or limits have been waived prospectively or retroactively by our Board, or the other restrictions on transfer or ownership in our charter, bears the risk of a financial when the shares are repurchased or sold.
The ability of our Board to revoke our REIT qualification without stockholder approval may cause adverse consequences to our stockholders.
Our Board may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to be a REIT, we will not be allowed a deduction for distributions paid to stockholders in computing our taxable income and will be subject to U.S. federal income tax at regular corporate rates, as well as state and local taxes, and we would no longer be required to distribute most of our net income to our stockholders, which may have adverse consequences on our total return to stockholders.
Table of Contents
We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the price of shares of our common stock.
In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of the U.S. federal income tax laws applicable to investments similar to an investment in shares of our common stock. Additional changes to the tax laws are likely to continue to occur, and we cannot assure you that any such changes will not adversely affect your taxation, the investment in the shares of common stock or the market value or the resale potential of our properties. You are urged to consult with your own tax advisor with respect to the impact of recent or proposed legislation on your investment in the shares of common stock and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in shares of our common stock.
Distributions May Constitute UBTI for Tax-Exempt Investors.
Neither ordinary nor capital gain distributions with respect to our shares or gain from the sale of our shares should generally constitute unrelated business taxable income (“UBTI”) to a tax-exempt investor. However, there are certain exceptions to this rule. In particular:
Part of the income and gain recognized by certain qualified employee pension trusts with respect to our shares may be treated as UBTI if shares are predominately held by qualified employee pension trusts, and we are required to rely on a special look-through rule for purposes of meeting one of the REIT share ownership tests, and we are not operated in a manner to avoid treatment of such income or gain as UBTI;
Part of the income and gain recognized by a tax-exempt investor with respect to our shares would constitute UBTI if the investor incurs debt in order to acquire the shares;
Part or all of the income or gain recognized with respect to shares by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans which are exempt from U.S. federal income taxation under Sections 501(c)(7), (9), (17), or (20) of the Code may be treated as UBTI; and
Part or all of the income and gain recognized by a tax-exempt investor would constitute UBTI if we directly or indirectly acquire a residual interest in certain mortgage loan securitization structures (i.e., a “taxable mortgage pool” or a residual interest in a real estate mortgage investment conduit (a “REMIC”).
Non-U.S. stockholders will be subject to U.S. federal withholding tax and may be subject to U.S. federal income tax on distributions received from us and upon the disposition of our stock.
Subject to certain exceptions, distributions received from us will be treated as dividends of ordinary income to the extent of our current or accumulated earnings and profits. Such dividends ordinarily will be subject to U.S. withholding tax at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty, unless the distributions are treated as “effectively connected” with the conduct by the non-U.S. stockholder of a U.S. trade or business. Pursuant to the Foreign Investment in Real Property Tax Act of 1980, or “FIRPTA,” capital gain distributions attributable to sales or exchanges of U.S. real property interests, or “USRPIs,” generally will be taxed to a non-U.S. stockholder as if such gain were effectively connected with a U.S. trade or business. However, a capital gain distribution will not be treated as effectively connected income if (1) the distribution is received with respect to a class of shares that is regularly traded on an established securities market located in the United States and (2) the non-U.S. stockholder does not own more than 10% of the class of our stock at any time during the one-year period ending on the date the distribution is received. Our stock is not and has never been “regularly traded” on an established securities market. Therefore, this exception does not currently apply.
Gain recognized by a non-U.S. stockholder upon the sale or exchange of shares of our common stock generally will not be subject to U.S. federal income taxation unless such shares constitute a USRPI within the meaning of FIRPTA. Our shares of common stock will not constitute a USRPI so long as we are a “domestically-controlled qualified investment entity.” A domestically-controlled qualified investment entity includes a REIT if at all times during a specified testing period, less than 50% in value of such REIT’s stock is held directly or indirectly by non-U.S. stockholders. There can be no assurance that we will qualify as a domestically-controlled qualified investment entity.
Table of Contents
Even if we do not qualify as a domestically-controlled qualified investment entity at the time a non-U.S. stockholder sells or exchanges shares of our common stock, gain arising from such a sale or exchange would not be subject to U.S. taxation under FIRPTA as a sale of a USRPI if: (1) shares of our common stock are “regularly traded,” as defined by applicable Treasury regulations, on an established securities market, and (2) such non-U.S. stockholder owned, actually and constructively, 10% or less of the shares of our common stock at any time during the five-year period ending on the date of the sale. However, as noted above, our stock is not and has never been “regularly traded” on an established securities market. We encourage our non-U.S. stockholders to consult an independent tax advisor to determine the tax consequences applicable to them.
Retirement Plans and Other ERISA Risks
If our underlying assets are treated as the assets of investing Benefit Plans (as defined below), our Advisor and we and our affiliates may be exposed to liabilities under Title I of the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Code.
In some circumstances where an ERISA plan holds an interest in an entity, a pro rata portion of the assets of the entire entity are deemed to be plan assets unless an exception applies. This is known as the “look-through rule.” Under those circumstances, the obligations and other responsibilities of plan sponsors, plan fiduciaries and plan administrators, and of parties in interest and disqualified persons, under Title I of ERISA and Section 4975 of the Code, as applicable, may be applicable, and there may be liability under these and other provisions of ERISA and the Code. We believe that our assets should not be treated as plan assets because the shares should qualify as “publicly-offered securities” that are exempt from the look-through rules under applicable treasury regulations. We note, however, that because certain limitations are imposed upon the transferability of shares so that we may qualify as a REIT, and perhaps for other reasons, it is possible that this exemption may not apply. If that is the case, and if our Advisor or we or our affiliates are exposed to liability under ERISA or the Code, our performance and results of operations could be adversely affected. Additionally, regardless of whether our shares qualify for the “publicly offered securities” exception of the treasury regulations, a prohibited transaction could occur if we, the Advisor, any selected dealer or any of their affiliates is a fiduciary with respect to any tax-qualified employee pension plan described in Section 3(3) and subject to Title I of ERISA, a “plan” described in Section 4975(e)(1) of the Code, that is subject to Section 4975 of the Code (including for e.g., an IRA and a “Keogh” plan), a plan, account or other arrangement that is subject to any other federal, state, local, non-U.S. or other laws or regulations that are similar to such provisions of ERISA or the Code (collectively, “Similar Laws”) or by an entity whose underlying assets are considered to include the assets of any of the foregoing (collectively “ Plans”), purchasing shares of our common stock. Prior to making an investment in us, you should consider whether the investment is appropriate for a Plan, taking into account your obligations under ERISA, the Code and applicable Similar Laws, including, without , the prudence, diversification, delegation of control and prohibited transaction provisions of ERISA, the Code and any other applicable Similar Laws and the facts and circumstances of the investing Plan.
Compliance with the SEC’s Regulation Best Interest by participating broker-dealers may negatively impact our ability to raise capital in the Public Offering, which would harm our ability to achieve our investment objectives.
Broker-dealers must comply with Regulation Best Interest, which, among other requirements, contains a standard of conduct for broker-dealers and their associated persons when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer. The impact of Regulation Best Interest on participating dealers cannot be determined at this time, and it may negatively impact whether participating dealers and their associated persons recommend the Public Offering to certain retail customers. If Regulation Best Interest reduces our ability to raise capital in the Public Offering, it would harm our ability to create a diversified portfolio of investments and our ability to achieve our investment objectives.
