Sila Realty Trust, Inc. (SILA) Risk Analysis

The net income of our TRS is not required to be distributed to us, and such undistributed TRS income is generally not subject to our REIT distribution requirements. However, if the accumulation of cash or reinvestment of significant earnings in our TRS causes the fair market value of our securities in those entities, taken together with other non-qualifying assets to exceed 20% of the value of our assets, in each case as determined for REIT asset testing purposes, we would, absent timely responsive action, fail to maintain our qualification as a REIT.

To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of shares of our common stock. We may be required to forego otherwise attractive investments or make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

Tenants of our healthcare properties may be required to hold appropriate licenses and secure regulatory approvals for initial or continued operation. Operators failing to comply with state licensing laws and regulations may face disciplinary actions from state and regulatory agencies, including restrictions or termination of their privilege to operate within the state. Many states regulate the establishment and construction of healthcare facilities and services, and the expansion of existing healthcare facilities and services through a certificate of need, or CON, laws, which may include regulation of certain licenses, medical equipment, and capital expenditures. Additionally, the transfer of healthcare facilities to successor operators may necessitate regulatory approval, and the replacement of a tenant operator could be delayed due to this process. Failure to secure CON approval for a desired project, failure of tenant operators to maintain proper licensing, and delays in transferring properties to successor operators could negatively impact our tenants' financial conditions, and thus result in an adverse impact on our revenue, operations, and ability to make stockholder distributions. Our tenants' operations may become subject to legal claims that their services have resulted in patient injury or other adverse effects in violation of applicable laws. Such claims may cause our tenants to incur punitive damages arising from professional liability and general liability claims and/or become subject to governmental investigations, enforcement actions or litigation. Legal claims against our tenants, including any governmental audits or investigations resulting therefrom, could have a negative impact on their financial condition and ability to pay rent. Consequently, such legal claims against our tenants could have an adverse impact on our revenue, operations, and ability to make stockholder distributions. Our tenants' businesses are generally influenced by government and private payor rates. Reimbursement from Medicare, Medicaid, and other governmental payors may be subject to statutory changes, recovery of overpayments, rate adjustments, administrative decision-making, funding restrictions, and payment delays due to investigations or audits. The effect and timing of any future legislative reforms related to reimbursement to our tenants for their services cannot be ascertained, and we cannot guarantee continued adequate reimbursement levels from either governmental or private payors. Insufficient reimbursement from government and private payors could negatively impact tenants' finances and rent payments, which could have an adverse effect on our revenue, operations, and ability to make stockholder distributions. Federal, state, and local laws, statutes, regulatory policies, and any future legislative changes or rulings may impact healthcare providers leasing our properties. These include regulations concerning the quality and medical necessity of care, insurance and patient billing, the security and privacy of patient information, healthcare provider financial interests and conflicts of interest, self-referrals, price transparency, corporate practice of medicine and surprise billing. Relevant laws and regulations include, but are not limited to: the Medicare and Medicaid statutes; the Stark Law; the civil False Claims Act; the federal False Claims Law; the federal Anti-Kickback Statute; state law prohibitions against kickbacks, fraud and abuse, patient brokering, advertising and marketing of healthcare items and services and fee splitting; state laws regulating the corporate practice of medicine; the federal Eliminating Kickbacks in Recovery Act; the Program Fraud Civil Remedies Act; the Civil Monetary Penalties Law; the Exclusion Laws; the Emergency Medical Treatment & Labor Act; the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act; applicable state laws regarding patient privacy and security of patient health information; the Clinical Laboratory Improvement Amendments of 1988; the Travel Act; OIG compliance program elements; and all amendments thereto, including any related regulations or decisions. Non-compliance with these laws and regulations could have legal and financial consequences that adversely affect our tenants' ability to make rent payments which could have an adverse effect on our business, financial condition, results of operations, and ability to make distributions to our stockholders.

All real property investments and the operations conducted in connection with such investments are subject to federal, state and local laws and regulations relating to environmental protection, human health and safety and disability accommodation. Some of these laws and regulations may impose joint and several liability on customers, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. They also may impose restrictions on the manner in which real property may be used or businesses may be operated. We can provide no assurance that we are aware of all potential environmental or other liabilities or the ultimate cost to address them or that our properties will not be affected by tenants or nearby properties or other unrelated third parties and their future uses or conditions. In addition, new environmental laws and regulations, or changes to such laws and regulations, may result in additional liabilities. Compliance with environmental, social and governance-related, or ESG-related, laws, regulations, expectations or reporting requirements may result in increased costs, as well as additional scrutiny that could heighten all of the risks associated with environmental, social and sustainability matters. For example, in March 2024, the SEC adopted climate-related disclosure rules that would require increased climate change-related disclosure in our periodic reports and other filings with the SEC (which rules have been stayed pending completion of judicial review). Additionally, our California properties may subject us to reporting requirements of Senate Bill 253 and Senate Bill 261. The costs of complying with these laws and regulations may have a material adverse effect on our business, financial condition and results of operations and ability to make distributions to our stockholders. In addition, if we fail to comply with these new laws, regulations, expectations or reporting requirements, or if we are perceived as failing, our reputation and business could be adversely impacted, which could have a material adverse effect on our financial condition and results of operations.

In order for us to maintain our qualification as a REIT, we must satisfy certain requirements set forth in the Code and Treasury Regulations and various factual matters and circumstances that are not entirely within our control. We intend to structure our activities in a manner designed to satisfy all of these requirements. However, if certain of our operations were to be recharacterized by the Internal Revenue Service, or IRS, such recharacterization could jeopardize our ability to satisfy all of the requirements for qualification as a REIT. If we fail to maintain our qualification 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. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the taxable year in which we lost our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional corporate-level 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. Our failure to qualify as a REIT would adversely affect the return of stockholders' investments.

The maximum U.S. federal income tax rate for "qualified dividends" payable to U.S. stockholders that are individuals, trusts and estates generally is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates for qualified dividends and are taxed at ordinary income rates. However, for taxable years beginning after December 31, 2017, and before January 1, 2026, U.S. stockholders that are individuals, trusts and estates generally may deduct 20% of ordinary dividends from a REIT resulting in an effective maximum U.S. federal income tax rate of 29.6% on such income. These rules do not adversely affect the taxation of REITs or dividends payable by REITs, to the extent that the reduced rates continue to apply to regular corporate qualified dividends; however, investors that are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could materially and adversely affect the value of the shares of REITs, including our common stock.

We intend to maintain the status of our Operating Partnership as a partnership for U.S. federal income tax purposes. However, if the IRS were to successfully challenge the status of our Operating Partnership as a partnership or disregarded entity for such purposes, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that our Operating Partnership could make to us. This would also result in us losing our REIT status, and becoming subject to a corporate level tax on our own income. This would substantially reduce our cash available to pay distributions and the yield on our stockholders' investment. In addition, if any of the partnerships or limited liability companies through which our Operating Partnership owns its properties, in whole or in part, loses its characterization as a partnership and is otherwise not disregarded for U.S. federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to our Operating Partnership. Such a recharacterization of an underlying property owner could also threaten our ability to maintain our REIT status and would have a material adverse impact on us.

Our ability to dispose of a property during the first few years following its acquisition may be restricted to a substantial extent as a result of our REIT status. Under applicable provisions of the Code regarding "prohibited transactions" by REITs, we would be subject to a 100% tax on any gain recognized on the sale or other disposition of any property (other than foreclosure property) that we own, directly or through any subsidiary entity, including our Operating Partnership, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of a trade or business. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. Properties we own, directly or through any subsidiary entity, including our Operating Partnership, may, depending on how we conduct our operations, be treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or business. Any such taxes we pay would reduce our cash available for distribution to our stockholders. Our desire to avoid the prohibited transactions tax may cause us to forego disposition opportunities that would otherwise be advantageous if we were not a REIT.

Even if we maintain our qualification as a REIT, we may be subject to U.S. federal, state and local income taxes. For example, we may be subject to the prohibited transactions tax and/or the excise tax for failing to make (or be deemed to have made) sufficient distributions, as described above. We also may decide to retain net capital gain we earn from the sale or other disposition of our property and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit 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 may be subject to state and local taxes on our income or property, either directly or indirectly through our Operating Partnership or other companies through which we indirectly own assets. Any taxes we pay would reduce our cash available for distribution to our stockholders.

Some of our assets may need to be owned by, or operations may need to be conducted through, one or more taxable REIT subsidiaries, or TRS. Any of our TRS would be subject to U.S. federal, state and local income tax on its taxable income at applicable corporate rates. The after-tax net income of our TRS would be available for distribution to us. Further, we would incur a 100% excise tax on transactions with our TRS that are not conducted on an arm's-length basis. For example, to the extent that the rent paid by one of our TRS exceeds an arm's-length rental amount, such amount would be potentially subject to a 100% excise tax. While we intend that all transactions between us and our TRS would be conducted on an arm's-length basis, and therefore, any amounts paid by our TRS to us would not be subject to the excise tax, no assurance can be given that excise tax would not arise from such transactions.

We have acquired an interest in certain of our properties by acquiring a leasehold interest in the property on which the building is located, and we may acquire additional properties in the future through the purchase of interests in ground leases. Many of these ground leases impose significant limitations on our uses of the subject properties, restrict our ability to sell or otherwise transfer our interests in the properties or restrict the leasing of the properties. These restrictions may limit our ability to timely sell or exchange the properties, impair the properties' value or negatively impact our ability to find suitable tenants for the properties. As the lessee under a ground lease, we are exposed to the possibility of losing the property upon termination of the ground lease or an earlier breach of the ground lease by us. In addition, we could be forced to renegotiate such ground leases upon their expiration on terms that are unfavorable to us.

Our financial condition depends, in part, on the financial stability of our tenants and our ability to lease our space. Among the factors that could impact our financial condition are our inability to renew leases, lease vacant space or re-let space as leases expire, restrictions related to re-leasing space, co-tenancy constraints if co-tenancy clauses are exercised which limit our ability to lease to certain operators and competition for tenancy of our leases. As of December 31, 2024, 96.0% of our property portfolio was leased and leases representing 20.3% of our annualized base rent are set to expire within 5 years. We cannot assure that leases will be renewed or that our properties will be re-leased on terms equal to or better than the current terms, or at all. We also may not be able to lease space which is currently not occupied on acceptable terms and conditions, if at all. Portions of our assets may remain vacant for extended periods of time. If the rental rates for our assets decrease, or existing tenants do not renew their leases or we do not re-lease a significant portion of our available space and space for which leases will expire, our financial condition, cash flows and results of operations could be adversely affected.

Our leases generally provide that tenants are responsible for some or all of the maintenance and other day-to-day management of the relevant properties or their premises. If a property is not adequately maintained in accordance with the terms of the applicable lease, we may incur expenses for deferred maintenance or other liabilities, including upon expiration or earlier termination of a lease. We generally visit our properties on a periodic basis, but deferred maintenance items may go unnoticed. In addition, a tenant may refuse or be unable to pay for any required maintenance for a property or its premises, which may result in us needing to cover such costs. While our leases generally provide for protection in these instances, a tenant may defer maintenance and it may be difficult to enforce remedies against such a tenant.

Operating expenses associated with owning a property typically include real estate taxes, insurance, maintenance, repair and renovation costs, the cost of compliance with governmental regulation (including zoning) and the potential for liability under applicable laws. We generally lease our properties to tenants pursuant to triple-net leases that require the tenant to pay their proportionate share of substantially all such property operating expenses. However, if there are operating expenses that we are unable to pass along to our tenants, then our business, financial condition and results of operations could be negatively impacted.

Some of our leases will not contain rental increases over time, the rental increases may be less than the fair market rate at a future point in time, or we may not be able to renew or re-lease space at current rents. Therefore, the value of the property to a potential purchaser may not increase over time, which may restrict our ability to sell a property, or if we are able to sell such property, may lead to a sale price less than the price that we paid to purchase the property.

Our operating results are subject to risks generally incident to the ownership of real estate, which may prevent us from being profitable, realizing growth or maintaining the value of our real estate properties, including: changes in general economic or local conditions including inflationary and/or recessionary conditions; tenant turnover, technological changes and changes in supply of or demand for similar or competing properties in an area; changes in the cost or availability of insurance; changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive; and changes in tax, real estate, environmental and zoning laws. In addition, our business may be adversely affected by market and economic volatility due to, among other things, inflation, increased interest rates, volatility in the equity and debt markets, and economic and other conditions, including pandemics, geopolitical instability, geopolitical conflicts, terrorist attacks, sanctions, tariffs and other conditions beyond our control.