Terra Property Trust (TPTS) risk factors, FY2025 10-K

Risks Related to Owning Our Common Stock

1. 01There is no public market for our common stock and a market may never develop, which could cause our common stock to trade at a discount and make it difficult for holders of our common stock to sell their shares
2. 02If we complete an alternative liquidity transaction by pursuing an initial public offering or listing of our shares of common stock in the future, you will be subject to additional risks
3. 03Trading Value of our Shares: Our shares will be publicly traded and investors will be able to assess the value of their shares by reference to the public trading price of our shares
4. 04Common stock and preferred stock eligible for future sale may have adverse effects on our share price20% rewritten
5. 05Our principal stockholders, which are currently controlled by affiliates of our Manager, own a significant amount of our outstanding shares of common stock
6. 06Our Manager’s voting power may discourage transactions involving a change of control of our company, including transactions in which a holder of our common stock might otherwise receive a premium for his or her shares over the then-current market price
7. 07For the years ended December 31, 2025 and 2024, our Board declared total cash distributions of $0.48 and $0.76 per share, respectively, which were paid monthly
8. 08Investing in our common stock may involve a high degree of risk and may result in loss of capital invested in us

Risks Related to Our Business

1. 09Changes in national, regional or local economic, demographic or real estate market conditions may adversely affect our results of operations, our financial position, the value of our assets and our cash flows
2. 10Periods of higher inflation in the U.S. may have an adverse impact on the valuation of our investments
3. 11The lack of liquidity of our assets may adversely affect our business, including our ability to value and sell our assets
4. 12Our investments are selected by our Manager and our investors will not have input into investment decisions
5. 13there can be no assurance that the due diligence processes of our Manager will uncover all relevant facts or that any particular investment will be successful
6. 14Our Manager’s due diligence of potential real estate-related loans and other commercial real estate assets may not reveal all of the liabilities associated with such assets and may not reveal other weaknesses in our assets, which could lead to investment losses
7. 15If our Manager underestimates the borrower’s credit analysis or originates loans by using an exception to its loan underwriting guidelines, we may experience losses28% rewritten
8. 16Deficiencies in appraisal quality in the mortgage loan origination process may result in increased principal loss severity
9. 17Our Manager utilizes analytical models and data in connection with the valuation of our real estate-related loans and other commercial real estate assets, and any incorrect, misleading or incomplete information used in connection therewith would subject us to potential risks
10. 18The use of artificial intelligence by us, our Manager, our borrowers or third-party service providers could expose us to operational, legal, regulatory and competitive risksNew
11. 19Changes in interest rates could adversely affect the demand for our target loans, the value of our loans, CMBS and other real-estate debt or equity assets and the availability and yield on our targeted assets
12. 20New entrants in the market for commercial loan originations and acquisitions could adversely impact our ability to originate and acquire real estate-related loans at attractive risk-adjusted returns
13. 21Our loans are dependent on the ability of the commercial property owner to generate net income from operating the property, which may result in the inability of such property owner to repay a loan, as well as the risk of foreclosure
14. 22We are not required to observe specific diversification criteria. Therefore, our portfolio of assets may, at times, be concentrated in certain property types that are subject to higher risk of foreclosure, or secured by properties concentrated in a limited number of geographic locations27% rewritten
15. 23We expect that a significant portion of the mortgage loans invested in by us may be development mortgage loans on infill land, which are speculative in nature
16. 24Loans to small businesses involve a high degree of business and financial risk, which can result in substantial losses that would adversely affect our business, results of operation and financial condition
17. 25Our investments may include subordinated tranches of CMBS, which are subordinate in right of payment to more senior securities
18. 26Any credit ratings assigned to our loans and CMBS assets will be subject to ongoing evaluations and revisions and we cannot assure you that those ratings will not be downgraded
19. 27The mezzanine loans, preferred equity and other subordinated loans in which we invest involve greater risks of loss than senior loans secured by income-producing commercial properties
20. 28Investments we may make in B-notes are generally subject to losses. The B-notes in which we may invest from time to time may be subject to additional risks relating to the privately negotiated structure and terms of the transaction, which may result in losses to us
21. 29Any disruption in the availability and/or functionality of our Manager’s technology infrastructure and systems and any failure or our security measures related to these systems could adversely impact our business
22. 30Our acquisitions and the integration of acquired businesses subject us to various risks and may not result in all of the cost savings and benefits anticipated, which could adversely affect our financial condition or results of operations
23. 31We make strategic non-real estate-related investments that align with our investment objectives and criteria, which may expose us to risks from a number of diverse issuers, industries, and investment forms

Risks Related to Regulation

1. 32The increasing number of proposed U.S. federal, state and local laws may affect certain mortgage-related assets in which we invest and could materially increase our cost of doing business
2. 33Failure to obtain or maintain required approvals and/or state licenses necessary to operate our mortgage-related activities may adversely impact our investment strategy
3. 34The impact of financial reform legislation and legislation promulgated thereunder on us is uncertain
4. 35Accounting rules for certain of our transactions are highly complex and involve significant judgment and assumptions, and changes in such rules, accounting interpretations or our assumptions could adversely impact our ability to timely and accurately prepare our consolidated financial statements
5. 36The CECL accounting standard requires us to make certain estimates and judgements, which may be difficult to determine and may have a material adverse effect on our financial condition and results of operations24% rewritten
6. 37(2)had annual revenues of less than $100 million during the most recently completed fiscal year for which audited financial statements are available and either had no public float or a public float of less than $700 million
7. 38We may be exposed to environmental liabilities with respect to properties to which we take title, which may in turn decrease the value of the underlying properties
8. 39Insurance on the properties underlying our loans may not adequately cover all losses and uninsured losses could materially and adversely affect us
9. 40Maintenance of our 1940 Act exclusion imposes limits on our operations
10. 41Changes in U.S. tax laws could adversely impact us

Risks Related to Our Management and Our Relationship With Our Manager

1. 42We rely entirely on the management team and employees of our Manager for our day-to-day operations
2. 43We face certain conflicts of interest with respect to our operations and our relationship with our Manager and its affiliates
3. 44Our officers and the officers of our Manager are also officers of other affiliates of our Manager; therefore, our officers and the officers of our Manager will face competing demands based on the allocation of investment opportunities between us and our affiliates
4. 45Our Manager, our officers and the investment professionals assembled by our Manager will face competing demands relating to their time and this may cause our operations and our investors’ investments to suffer
5. 46The recurring asset management and asset servicing fees we pay our Manager may reduce its incentive to devote its time and effort to seeking attractive assets for our portfolio because the fees are payable regardless of our performance63% rewritten
6. 47We cannot predict the amounts of compensation to be paid to the Manager
7. 48If our Manager causes us to enter into a transaction with an affiliate, our Manager may face conflicts of interest that would not exist if such transaction had been negotiated at arm’s-length with an independent party

Risks Related to Financing and Hedging

1. 49Our Board may change our leverage policy and or investment strategy and guidelines, asset allocation and financing strategy without stockholder consent
2. 50We may pursue and not be able to successfully complete securitization transactions, which could limit potential future sources of financing and could inhibit the growth of our business
3. 51We may be required to repurchase loans or indemnify investors if we breach representations and warranties, which could harm our earnings
4. 52Covenants in our debt agreements may restrict our operating activities and adversely affect our financial condition, operating results and cash flows22% rewritten
5. 53Our inability to access funding could have a material adverse effect on our results of operations, financial condition and cash flows. We may rely on short-term financing and thus are especially exposed to changes in the availability of financing
6. 54Limited participation in the exchange offers described in the Registration Statement could result in Terra LLC defaulting on the 7.00% Senior Notes Due 2026 that remain outstanding after such exchange offers are completedNew
7. 55Limited participation in the exchange offers described in the Registration Statement could result in us defaulting on the 6.00% Senior Notes Due 2026 that remain outstanding after such exchange offers are completedNew
8. 56An increase in our borrowing costs relative to the interest we receive on our leveraged assets may have a material adverse effect on our results of operations, financial condition and cash flows
9. 57We may enter into hedging transactions that could expose us to contingent liabilities in the future and adversely impact our financial condition
10. 58If we attempt to qualify for fair value hedge accounting treatment for any derivative instruments, but we fail to so qualify, we may suffer because losses on the derivatives that we enter into may not be offset by a change in the fair value of the related hedged transaction

Risks Related to Our Organization and Structure

1. 59Our rights to take action against our directors and officers are limited
2. 60Rapid changes in the values of our assets may make it more difficult for us to maintain our qualification as a REIT or our exclusion from the 1940 Act
3. 61Our ownership limitations may restrict our change of control or business combination opportunities

Risks Related to Our Qualification as a REIT

1. 62Our failure to qualify or remain qualified as a REIT would subject us to U.S. federal income tax and applicable state and local taxes, which could have a material adverse effect on our results of operations, financial condition and cash flows
2. 63REIT distribution requirements could adversely affect our ability to execute our business plan and may require us to incur debt or sell assets to make such distributions
3. 64Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flow23% rewritten
4. 65Complying with the REIT requirements may force us to liquidate or forego otherwise attractive investments
5. 66Our preferred equity and mezzanine loan investments may fail to qualify as real estate assets for purposes of the REIT gross income and asset tests, which could jeopardize our ability to qualify as a REIT
6. 67The IRS may successfully challenge the treatment of our preferred equity and mezzanine loan investments as debt for U.S. federal income tax purposes
7. 68The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to qualify as a REIT
8. 69We may be required to report taxable income from certain investments in excess of the economic income we ultimately realize from them
9. 70Complying with REIT requirements may limit our ability to hedge effectively
10. 71The tax on prohibited transactions will limit our ability to engage in transactions, including sales of participation interests in loans and securitizations, that would be treated as sales of dealer property for U.S. federal income tax purposes
11. 72A failure to comply with the limits on our ownership of and relationship with our TRSs, if any, would jeopardize our REIT qualification and may result in the application of a 100% excise tax32% rewritten
12. 73scrutinize all of our transactions with such TRS to ensure that they are entered into on arm’s length terms to avoid incurring the 100% excise taxNew
13. 74Legislative, regulatory or administrative changes could adversely affect us
14. 75Your investment has various U.S. federal income tax risks
15. 76The future outbreak of highly infectious or contagious diseases could materially and adversely impact or disrupt our investments, business, financial condition and results of operations
16. 77Future recessions, downturns, disruptions or instability could have a materially adverse effect on our results of operations, financial condition and cash flows
17. 78Disruptions in the financial and banking sectors may adversely impact our access to capital and our cost of borrowing, which could adversely affect us, our business or our results of operations81% rewritten
18. 79Continued uncertainty over U.S. fiscal and political policy could adversely affect financial markets and our businessNew
19. 80Returns on our real estate-related loans may be limited by regulations