PILLARSTONE CAPITAL REIT

Item 1A. Risk Factors

Risks Related to Our Business and Real Estate Assets

We may not prevail in our litigation proceedings with Whhitestone.

On July 12, 2022, we were named as a defendant in a lawsuit filed in the Court of Chancery of the State of Delaware by Whitestone OP. The suit challenges Pillarstones rights agreement, dated as of December 27, 2021 (as the same may be amended from time to time, the Rights Agreement), between us and American Stock Transfer Trust Company Uptown Tower, LLC, as rights agent, and claims that our adoption of the Rights Agreement breached the Amended and Restated Agreement of Limited Partnership with Whitestone OP, and that we breached our fiduciary duties as general partner of Pillarstone OP to Whitestone OP and breached the implied covenant of good faith and fair dealing under the Amended and Restated Agreement of Limited Partnership. On July 21, 2022, Whitestone OP filed a Motion to Preserve the Status Quo (the Status Quo Order) requesting broad restrictions on our ability to conduct our business, including buying  may not prevail in its litigation properties, enforcing the Rights Agreement, incurrceeding expenses, or engaging in transactions. We believe that these allegations are s without merit, intend to vigorously defend against them, and are considering our rights and potential claims for affirmative relief with respect to the lawsuit. However, an unfavorable outcome of this lawsuit is unpredictable and could result in substantial costs to us Whitestone.

Whitestone TRS was contracted to perform and maintain the records and processes for much of our accounting and financial reporting functions. As part of the termination of the management agreements, Whitestone removed our access to its accounting and financial software platform. To date, Whitestone has not provided us with a complete electronic copy of our financial and accounting records, as kept and maintained on the software platform. As a result of the abrupt termination of the management agreements, inadequate assistance in the transition of the management of the Real Estate Assets, and Whitestones failure to provide a complete copy of our accounting and financial reporting information that was maintained on Whitestones accounting and software platform, we are havinghad to rebuild our internal accounting and financial reporting processes.

 To assist with and expedite this process, we have retained accounting consultants to (i) recreate the accounting records, processes, and systems that Whitestone hasdid not released in usable electronic format to us, and (ii) incorporate those records that we have received, and are continuing to sporadically receive,  from Whitestone related to the Real Estate Assets and their management. In the meantime, the registrant is we began directly overseeing the maintenance and operations of the Real Estate Assets. In the course of doing so, we have confirmed that certain Real Estate Assets have deteriorated following significant deferred maintenance and neglect while under Whitestones management. We arebegan working to address these deferred maintenance and other operating issues, and new issues dating back to Whitestones management emerged regularly.

Based upon issues, including those discussed in this report, we filed a lawsuit on September 16, 2022 in Harris County, Texas against 4

Whitestone and certain officers of Whitestone REIT alleging, among other things, breach of the Pillarstone OP limited partnership agreement and fiduciary duty and breach of the management agreements and seeking an accounting and reconciliation of amounts that may be owed to the registrant or Pillarstone OP.

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In the discovered significant defe meantime, we are continuing to rebuild our accounting and financial reporting system and rred maintend as soon as possible to resume timely filing of our current, quarterlyance and annual reports under the Exchange Act and to file any delinquent reports. We cannot provide assurance at this time as to ineglect of or when we will be able to complete such filings.

Under the Pillarstone OP limited partnership agreement, Whitestone OP has the right to require Pillarstone OP to redeems its partnership interests for cash. We have the right to assume directly and satisfy the redemption in the form of cash or common shares. The Status Quo Order prevents Whitestone from exercising its redemption right. In addition, our ameur assets had occurred unded petition in the Texas lawsuit argues that r Whitestones material breaches of contract and fiduciary duty operate to discharge and/or excuse any obligation to perform under the redemption provisions of the Pillarstone OP limited partnership agreement.

Whitestone has indicated to us that it intends to exercise its redemption right. Whitestone has stated publicly that it intends to monetize its investment in Pillarstone OP. If Whitestone is permitted to exercise its redemption right nagement. Our effor cash amounts, we may not have the cash available to pay such amounts and may be required to sell one or more of the Real Estates Assets to satisfy this obligation, which may cause us to sell some or all of our Real Estate Assets at below fair market value and otherwise have a material adverse effect on our liquidity and financial condition and our ability to operate and improve our Real Estate Assets. If Whitestone is permitted to exercise its redemption for common shares, it could constitute a change of control of us and give Whitestone the ability to monetize its interest in Pillarstone OP for the benefit of Whitestone shareholders and not necessarily in the best interests of the other holders of common shares.

Based on ts to address these matters were in some cases stymied by Whitestones performance under the management agreements and their public statements regarding its intentions to monetize its investment in Pillarstone OP, we do not believe that Whitestones actions in connection with the exercise of the redemption rights will respect the rights of the holders of our common shares. The Pillarstone OP limited partnership agreement expressly provides that in the event of a conflict between the interests of the limited partners (Whitestone OP as the sole limited partner) and our shareholders, we shall act litigation against us in the interests of our shareholders, and we shall not be liable for monetary or other losses sustained, liabilities incurred or benefits not derived by the limited partners in connection therewith. Accordingly, we intend to vigorously defendDelaware where the Delaware action and to vigorously pursue the Texas action to seek damages from Whitestone due to its violations of the management agreements and fiduciary duties and to protect ocourt limited our shareholders from the further harms that Whitestone has indicated it intends to inflict on us and our shareholders.

We discovered significant deferred maintenance and neglect of our assets had occurred under Whitestones management. Our efforts to address these matters have in some cases been stymied by Whitestones abilitigation against us in Delaware where the court has limited our ability to incur expenses above low threshold amounts for the types of expenses a company in our industry could expect to incur in the ordinary course of business. Our legal and professional fees have increased substantially as we addressed the internalization of management and the litigation matters discussed in this report. As a result, on September 16, 2022, we filed a lawsuit against Whitestone TRS, Inc., Whitestone REIT and Whitestone OP in the District Court, Harris County, Texas, 189th Judicial District alleging, among other things, breach of the Pillarstone OP limited partnership agreement and the management agreements for the Real Estate Assets by the Whitestone defendants and breach of fiduciary duties relating to Pillarstone OP by Whitestone OP going outside the role of limited partner and harming us and Pillarstone OP.

On July 17, 2023 and July 18, 2023, trial was held in the Delaware lawsuit. Post-trial argument in the lawsuit was held on October 18, 2023. Whitestone has asked the D We moved portions of this case relaware court to award damages of approximately $51,200,600 and post-judgementting to Uptown Tower interest of $6,820,000 in o the filing of its post-trial opening brief on August 28, 2023. On January 25,Whitestone Uptown Tower, LLC bankruptcy in 2024, the5. Delaware court issued its opinion and determinedspite that we breached the implied covenant of good faith and fair dealing without resolving the breach of contract or breach of fiduciary duty ce settlement of claims. Although Whitestone asked for monetary damages of $51,200,600 plus interest, the Delaware court declined to award damages. We disagree with the Delaware courts ruling and are considering our options for appeal, subject to a final order being entered in the case, the outcome of various proceedings in by the plan agent and Whitestone with respect to the jointly administered bankruptcy cases described below and the decision of the plan agent in the bankruptcy cases to pursue an appeal.

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The Delaware cour, t declared the Rights Agreement unenforceable against Whitestone, permitted Whitestone OP to tender a notice of redemption for its OP Units and determined that the Pillarstone OP limited partnership agreement should be followed whereby we would decide whether to assume Pillarstone OPs redemption obligation and determine what value to attribute to Pillarstone OPs assets. The Delaware court declared that any further relief must await future proceedings.

In addihis case, along with other litigation, Whitestone has challenged our ability to be reimbursed by Pillarstone OP for our expenses, includ matters involving our litigation expenses in the Delaware case and in our bankruptcy case. We are actively fighting this challenge in the course of our bankruptcy case. If we do not prevail on this issue, we may not have the resources to challenge any further proceedings in the Delaware case or seek some or all of the recoveries we seek iUptown Tower, continues in the Houston case. We believe WWhitestones assertion of damages in the Delaware case to be erroneous and unsupported by the facts, but if we do not have the resources to oppose their claim, we could be subject to damages that would leave us with no assets and the value  Uptown Tower, LLC bankruptcy case as of the date of our common shares would be wthis reporthless.

This litigation has been and is expected to continue to be expensive, lengthy, and disruptive to normal business operations. Moreover, the results of these proceedings are difficult to predict. As a result, future adverse rulings, settlements, or unfavorable developments could result in charges that could have a material adverse effect on our business,any distribution to us as results of operations or financial conditionthe Whitestone Uptown Tower, LLC bankruptcy.

Since the termination of our management agreements by Whitestone, we have incurred significant losses, which raises substantial doubt about our ability to continue as a going concern.

The accompanying financial statements have been prepared assuming that we will continue as a going concern. As discussed in Note 1 to the consolidated financial statements included in this report, we have incurred significant losses since the year ended December 31, 2020 and have an accumulated deficit of approximately $235.4 million as of December 31, 20223 and need to raise substantial amounts of additional funds to meet our obligations and afford us time to implement our business plan and resume profitable operations.

We worked diligently to restore normal operations and leasing activities following Whitestones unanticipated termination of its managerial services. Many of Pillarstones actions were affected by a lack of usable information being made available to us by Whitestone on a timely basis. Prior to receiving the termination notice, we had anticipated an orderly transition of the management of the Real Estate Assets over an appropriate timeframe, particularly as Whitestone OP ownsed 81.4% of Pillarstone OP as a non-controlling limited partner. We believe the management functions as operated by Whitestone were deeply integrated with Whitestones management functions for its own business and have been difficult, expensive, and time-consuming to separate, causing material adverse effects on our business, income, cash flow, results of operations, financial condition, liquidity and prospects. As a result, Whitestone did significant damage to us by its intentional actions. In addition, our litigation with Whitestone has been, and is expected tofollowing the period covered by this report continued to be, expensive, lengthy, and disruptive to normal business operations. Moreover, the results of these proceedings are dihad been, and following the period covered by this report are expected to continue to be, difficult to predict. As a result, future adverse rulings, settlements, or unfavorable developments could result in charges that could have a material adverse effect on our business, results of operations or financial condition.

We are deUntil the sales of our Real Estate Assets in 2024 and 2025, we were dependent on cash generated by our ownership of the eight Real Estate Assets to meet our liquidity needs. Historically, weOur debts have financed our long-term capital nbeen repaid from the proceeds, including acquisitions, as follows:

We from have been developing strategithese sales for the of our Real Estate Assets in accorder to create value forance with our plan of liquidation and the enterprise and our shareholders and sellWhitestone Uptown Tower, LLC plan of reorganization following assets to pay off some of our debt. To implement the strategy to create value with ththe period covered by this report.

Historically, we have financed our long-term capital needs, including acquisitions, as follows:

To imple Real Estment our business strate Assetsgy, additional capital will need to be raised. Our ability to access the capital markets will be dependent on a number of factors, including general market conditions and market perceptions about our Company. There can be no assurance that we will be able to raise capital, obtain debt financing, or improve operating results sufficiently to continue as a going concern, if at all. The consolidated financial statements included in this report do not include any adjustments that might result from the outcome of this uncertainty.

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We have identified a material weakness in our internal controls over financial reporting. If we fail to maintain an effective system of internal controls, such failure could cause investors to lose confidence in our reported financial information, which could harm our business and have a material adverse effect on the price of our common shares.

In 2022, mManagement identified material weaknesses in our internal controls over financial reporting including:

Management concluded that as of December 31, 20223 and continuing to the date of the filing of this report, our internal control over financial reporting was not effective to provide reasonable assurance of the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

These material weaknesses arose in large part because of Whitestones abrupt termination in August 2022 of managerial services it provided, on-going litigation with Whitestone and the subsequent bankruptcy filings. At the date its managerial services ceased, we did not have our own personnel, processes or systems needed for proper accounting and financial reporting. While we immediately began to address these needs after Whitestones termination, we were unable to complete the design and implementation of appropriate internal control over financial reporting before year-end. Our efforts were stymied first by Whitestones litigation against us in Delaware where the Delaware court limited our ability to incur expenses above low threshold amounts and then by the subsequent bankruptcy filings in 2023 and 2024. These material weaknesses did not result in a material misstatement of our consolidated financial statements for the periods presented.

We have been working diligently on the process of designing and implementing effective internal control measures to remediate the reported material weaknesses. The Companys efforts include implementing a newn enterprise-wide system that will help us in reducing reliance on manual processes and spreadsheets supporting the financial statements of our own. This implementation was completed in 2023. We are using contract personnel for specialized accounting and financial reporting roles.

While we believe that these efforts have improved our internal control over financial reporting, our remediation efforts are ongoing and will require validation and testing of the design and operating effectiveness of internal controls. The actions that we are taking are subject to ongoing senior management review, as well as audit committee oversight. We will not be able to conclude whether the steps we are taking will fully remediate the remaining material weakness in our internal control over financial reporting until we have completed our remediation efforts and subsequent evaluation of their effectiveness. We may also conclude that additional measures may be required to remediate the material weakness in our internal control over financial reporting.

We face risks due to lack of geographic diversity.

During the period covered by this report, all of our properties were located in Dallas and Houston. A downturn in general economic conditions and local real estate conditions in these geographic regions, as a result of oversupply of or reduced demand for industrial, office, and warehouse properties, local business climate, business layoffs, and changing demographics, would have a particularly strong adverse effect on us.

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We may be affected negatively by tenant bankruptcies and leasing delays.

At any time, a tenant may experience a downturn in its business that may weaken its financial condition. Similarly, a general decline in the economy may result in a decline in the demand for space at our industrial properties. As a result, our tenants may delay lease commencement, fail to make rental payments when due, or declare bankruptcy. Any such event could result in the termination of that tenants lease and losses to us. We receive a substantial portion of our income as rents under leases. If tenants are unable to comply with the terms of their leases for any reason, including because of rising costs or falling sales, we may deem it advisable to modify lease terms to allow tenants to pay a lower rent or a smaller share of taxes, insurance, and other operating costs. If a tenant becomes insolvent or bankrupt, we cannot be sure that we would recover the premises from the tenant promptly or from a trustee or debtor-in-possession in any bankruptcy proceeding relating to the tenant. We also cannot be sure that we would receive rent in the proceeding sufficient to cover our expenses with respect to the premises. If a tenant becomes bankrupt, the federal bankruptcy code will apply and, in some instances, may restrict the amount and recoverability of our claims against the tenant. A tenants default on its obligations to us could adversely affect our cash flow, financial condition and results of operations.

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We face potential difficulties or delays renewing leases or re-leasing space.

We deriveDuring the period covered by this report, we derived most of our income from rent received from our tenants. If a tenant experiences a downturn in its business or other types of financial distress, it may be unable to make timely rental payments. Also, when our tenants decide not to renew their leases, renew for less space or terminate early, we may not be able to re-lease the space or there could be a substantial delay in re-leasing the space. Even if tenants decide to renew or lease new space, the terms of renewals or new leases, including the cost of required renovations or concessions to tenants, may be less favorable to us than current lease terms. As a result, our cash flows, results of operations and financial condition could be adversely affected.

Uncertain economic conditions may adversely impact current tenants in our various markets and, accordingly, could affect their ability to pay rent owed to us pursuant to their leases. In periods of economic uncertainty, tenants are more likely to downsize and/or to declare bankruptcy; and, pursuant to various bankruptcy laws, leases may be rejected and thereby terminated. Furthermore, our ability to sell or lease our properties at favorable rates, or at all, may be negatively impacted by general or local economic conditions.

Our ability to collect rent from tenants may affect our ability to pay for adequate maintenance, insurance, and other operating costs, including real estate taxes. Also, the expense of owning and operating a property is not necessarily proportionally reduced when circumstances such as reduced occupancy or other market factors cause a reduction in income from the property. If a property is mortgaged and we are unable to meet the mortgage payments, the lender could foreclose on the mortgage and take title to the property. In addition, interest rates, financing availability, law changes, and governmental regulations (including those governing usage, zoning, and taxes) may adversely affect our financial condition and results of operations.

We face risks associated with our property development.

We intend to continue to develop properties where we believe market conditions warrant such investment. Once made, our investments may not produce results in accordance with our expectations. Risks associated with our current and future development and construction activities include:

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We face risks associated with property acquisitions.

We have acquired portfolios of properties and intend to continue to do so. Our acquisition activities and their success are subject to the following risks:

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We may face competition for acquisition opportunities with other investors, and this competition may adversely affect us by subjecting us to the following risks:

We face risks due to the illiquidity of real estate which may limit our ability to vary our portfolio.

Real estate investments are relatively illiquid and can be difficult to sell and convert to cash quickly. Our ability to sell one or more of our properties, whether in response to any changes in economic or other conditions or in response to a change in strategy, may be limited. In the event we want to sell a property, we may not be able to do so in the desired time period, the sales price of the property may not meet our expectations or requirements, and/or we may be required to record an impairment on the property as a result.

Coverage under our existing insurance policies may be inadequate to cover losses.

We generally maintain insurance policies related to our business, including casualty, general liability, and other policies, covering our business operations, employees and assets as appropriate for the markets where our properties and business operations are located. However, we would be required to bear all losses that are not adequately covered by insurance. In addition, there may be certain losses that are not generally insured against or that are not generally fully insured against because it is not deemed economically feasible or prudent to do so, including losses due to floods, wind, earthquakes, acts of war, acts of terrorism, or riots. For example, our elevators at our Uptown Tower property have undergone significant renovation and repairs, some of which were covered by insurance. If an uninsured loss or a loss in excess of insured limits occurs with respect to one or more of our properties, then we could be liable for the excess expenses involved in the loss, and we could lose the capital we invested in the properties, as well as the anticipated future revenue from the properties. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged. Property ownership also involves potential liability to third parties for such matters as personal injuries occurring on the property. Such losses may not be fully insured. In addition to uninsured losses, various government authorities may condemn all or parts of operating properties. Such condemnations could adversely affect the viability of such projects.

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We face risks in attracting and retaining key personnel.

Our senior executives have strong industry reputations, which aid us in identifying acquisition and development opportunities and negotiating with tenants and sellers of properties. As of the date of this report, we do not have employment agreements with our senior executives. The loss of the services of these key personnel could affect our operations because of diminished relationships with existing and prospective tenants, property sellers and industry personnel. In addition, attracting new or replacement personnel may be difficult in a competitive market.

We face risks associated with security breaches through cyber attacks or cyber intrusions, as well as other significant disruptions of our information technology (IT) networks and related systems.

We face risks associated with security breaches or disruptions, whether through cyber attacks or cyber intrusions over the internet, malware, computer viruses, attachments to emails, persons inside our organization, persons with access to systems inside our organization, and other significant disruptions of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber attacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity, and sophistication of attempted attacks and intrusions from around the world have increased. Our IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations (including managing our building systems) and, in some cases, may be critical to the operations of certain of our tenants. While, to date, we have not had a significant cyber breach or attack that had a material impact on our business or results of operations, there can be no assurance that our efforts to maintain the security and integrity of these types of IT networks and related systems will be effective or that attempted security breaches or disruptions will not be successful or damaging. For example, during the term of the management agreements with Whitestone, Whitestone managed our IT systems and was subject to a ransomware attack that affected our documents, and we cannot be sure of the extent of the damage done to our files despite Whitestones recovery of its data files after its payment of the ransom. Following the termination of the management agreements, we have worked on separating our information technology systems from those implemented and maintained by Whitestone. A security breach or other significant disruption involving our IT networks and related systems could adversely impact our financial condition, results of operations, cash flows, liquidity, and the market price of our common shares and would require significant management attention and resources to remedy any resulting damages. A security breach or other significant disruption involving our IT networks and systems could result in our inability to maintain the building systems relied upon by our tenants for their efficient use of their leased space, and the continuation of that circumstance could entitle the affected tenants to abate a portion of their rent. Further, one or more of our tenants could experience a cyber incident which could impact their operations and ability to perform under the terms of their lease with us. As cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and to investigate and remediate any information security vulnerabilities.

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Risks Relating to Financing

An increase in interest rates would increase our interest costs and could adversely impact our ability to refinanWe face existing debt or sell assets on favorable terms or at all.

As of December 31, 2022, we had $14.6 million outstanding indebtedness, and we may incur more indebtedness in the future. Interest rates increased throughout 2022, and if interest rates continue to increase, it could have an adverse effect on our cash flow and our ability to pay principal and interest on our debt. Further, rising interest rates could limit our ability to refinance existing debt when it matures or significantly increase our future interest expense. In addition, an increase in interest rates could decrease the amounts third-parties are willing to pay for our assets, thereby limiting our ability to change our portfolio promptly in response to changes in economic or other conditions.

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We face risks associated with the use of debt to fund acquisitions and developmentsrisks associated with the use of debt financing, including refinancing risk.

We are subject to the risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest. 

As we incur indebtedness, we are likely to need to refinance at least a portion of our outstanding debt as it matures. There is a risk that we may not be able to refinance existing debt or that the terms of any refinancing will not be as favorable as the terms of our existing debt. For example, Whitestone Uptown Tower, LLC, Pillarstone OPs subsidiary that ownsed the Uptown Tower office building, iwas the borrower under a mortgage loan agreement during the period covered by this report. We were not able to refinance the mortgage loan for our Uptown Tower property, resulting in the filing of a bankruptcy petition for the borrower. We deconsolidated Whitestone Uptown Tower, LLC from our consolidated financial statements effective December 1, 2023, the date of its bankruptcy filing. As such, Whitestone Uptown Tower, LLCs financial condition and results of operations are no longer presented in our consolidated financial statements after this date.

If principal payments due at maturity cannot be refinanced, extended, or repaid with proceeds from other sources, such as new equity capital, our cash flow may not be sufficient to repay all maturing debt in years when significant balloon payments come due. In addition, we may rely on debt to fund a portion of our new investments such as our acquisition and development activity. There is a risk that we may be unable to finance these activities on favorable terms or at all.  In addition, an increase in interest rates could decrease the amounts third-parties are willing to pay for our assets, thereby limiting our ability to change our portfolio promptly in response to changes in economic or other conditions. These conditions, which increase the cost and reduce the availability of debt, may continue or worsen in the future.

Adverse changes in our credit ratings could impair our ability to obtain additional debt and equity financing on favorable terms, if at all.

Our credit ratings are based on our operating performance, liquidity and leverage ratios, overall financial position, and other factors employed by the credit rating agencies in their rating analysis of us. Our credit ratings can affect the amount and type of capital we can access, as well as the terms of any financings we may obtain. There can be no assurance that we will be able to maintain our current credit ratings. In the event our current credit ratings deteriorate, it may be more difficult or expensive to obtain additional financing or refinance existing obligations and commitments. Also, a downgrade in our credit ratings would trigger additional costs or other potentially negative consequences under our current and future credit facilities and debt instruments.

The lack of certain limitations on our ability to incur debt could result in our becoming more highly leveraged. Any additional indebtedness incurred may have a material adverse effect on our financial condition and results of operations.

Our governing documents do not limit the amount of indebtedness we may incur. Accordingly, we may incur additional debt and would do so, for example, to improve or develop our existing properties or to acquire new properties. We might become more highly leveraged as a result, and our financial condition might be negatively affected and the risk of default on our indebtedness could increase.

The incurrence of additional indebtedness could have adverse consequences on our business, such as:

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The impact of any of these potential adverse consequences could have a material adverse effect on our results of operations, financial condition, and liquidity.

Risks Related to the Real Estate Industry

We face risks associated with local real estate conditions in areas where we own properties.

We may be adversely affected by general economic conditions and local real estate conditions. For example, an oversupply of commercial properties in a local area or a decline in the attractiveness of our Real Estate Assets to tenants would have a negative effect on us. Factors that may adversely affect the economic performance and value of our Real Estate Assets include, among other things:

We may be unable to compete for properties and tenants.

The real estate business is highly competitive. We compete for interests in properties with other real estate investors and purchasers, some of whom have greater financial resources, revenues and geographical diversity than we have. Furthermore, we compete for tenants with other property owners. All of our Real Estate Assets are subject to significant local competition. We also compete with a wide variety of institutions and other investors for capital funds necessary to support our investment activities and asset growth.

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Inflation and related volatility in the economy could negatively impact our tenants, our results of operations, and the value of our publicly-traded equity securities.

Inflation in the United States accelerated rapidly in 2022 and 2023 and is expected to continue at an elevated level in the near-term. Inflation and its related impacts, including increased prices for services and goods and higher interest rates and wages, and any fiscal or other policy interventions by the U.S. government in reaction to such events, could negatively impact our tenants businesses or our results of operations. We believe we have lost tenants due to inflationary pressures on their businesses in 2022 and 2023. Many of our leases require the tenants to pay their pro rata share of operating expenses, including real estate taxes, insurance and common area maintenance, although a limited number of tenants have capped the amount of these operating expenses they are responsible for under their lease. As a result, we believe that most of our leases mitigate our exposure to increases in costs and operating expenses resulting from inflation. However, there can be no assurance that our tenants would be able to absorb these expense increases and be able to continue to pay us their portion of operating expenses, capital expenditures and rent. In addition, while most of our leases provide for scheduled rent increases, high levels of inflation could outpace these increases. As a result, our business, financial condition, results of operations, cash flows, and liquidity could be adversely affected over time. There is no guarantee that we will be able to mitigate the effects of inflation and related impacts, and the duration and extent of any prolonged periods of inflation, and any related adverse effects on our results of operations and financial condition, remain unknown at this time.

Additionally, inflationary pricing  had and may continue to have a negative effect on the construction costs for repairs and improvements and any development projects we may undertake, including, but not limited to, costs of construction materials, labor, and services from third-party contractors and suppliers. For example, we experienced higher tenant improvement costs during 2023.

Inflation may also cause increased volatility in financial markets, which could affect our ability to access the capital markets or impact the cost or timing at which we are able to do so. To the extent our exposure to increases in interest rates on any of our debt is not eliminated through interest rate swaps and interest rate protection agreements, such increases will result in higher debt service costs, which will adversely affect our cash flows. Our exposure to increases in interest rates in the short term includes the anticipated refinancing of our existing loan agreement. Increases in interest rates could increase our debt financing costs over time.

The state of the economy or other adverse changes in general or local economic conditions may adversely affect our operating results and financial condition.

Turmoil in the global financial markets may have an adverse impact on the availability of credit to businesses generally and could lead to a further weakening of the U.S. and global economies. Our ability to access the capital markets may be restricted at a time when we would like, or need, to raise financing, which could have an impact on our flexibility to react to changing economic and business conditions. Furthermore, deteriorating economic conditions including business layoffs, downsizing, industry slowdowns, and other similar factors that affect our tenants could negatively impact commercial real estate fundamentals and result in lower occupancy, lower rental rates, and declining values in our real estate portfolio and in the collateral securing any loan investments we may make. Additionally, an adverse economic situation could have an impact on our lenders or tenants, causing them to fail to meet their obligations to us. No assurances can be given that the effects of an adverse economic situation will not have a material adverse effect on our business, financial condition and results of operations.

Pandemics, such as COVID-19, and mitigation efforts to control their spread may impact our business, financial condition, results of operations and cash flows.

The COVID-19 pandemic, including the ongoing emergence of viral variants, has caused and could continue to cause widespread disruptions to the U.S. and global economy and has contributed to significant volatility and negative pressure in financial markets. Our financial condition, results of operations and cash flows are affected by our ability to lease our properties and collect rental revenues, renew our leases or lease vacant space on favorable terms, and the health and well-being of our tenants, employees, and other stakeholders, all of which could be adversely affected by COVID-19 or other pandemics. In addition, to the extent the COVID-19 pandemic, its macroeconomic effects or the government responses thereto adversely affect our business, financial condition, results of operations and cash flows, they may also have the effect of heightening many of the other risks described in Item 1A. Risk Factors in this report.

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Compliance or failure to comply with the Americans with Disabilities Act or other safety regulations and requirements could result in substantial costs.

The Americans with Disabilities Act generally requires that certain buildings, including office buildings, residential buildings and hotels, be made accessible to disabled persons. Noncompliance could result in the imposition of fines by the federal government or the award of damages to private litigants. If, under the Americans with Disabilities Act, we are required to make substantial alterations and capital expenditures in one or more of our properties, including the removal of access barriers, it could adversely affect our financial condition and results of operations.

At December 31, 2023, we owned eight Real Estate Assets, including the Uptown Tower property. Our properties are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If we fail to comply with these requirements, we could incur fines or private damage awards or our properties could be shut down by enforcement officials. We do not know whether existing requirements will change or whether compliance with future requirements will require significant unanticipated expenditures that will affect our cash flow and results of operations.

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Legislative or regulatory action with respect to tax laws and regulations could adversely affect us and our shareholders.

We are subject to state and local tax laws and regulations. Changes in state and local tax laws or regulations may result in an increase in our tax liability. A shortfall in tax revenues for states and municipalities in which we operate may lead to an increase in the frequency and size of such changes. If such changes occur, we may be required to pay additional taxes on our assets or income. These increased tax costs could adversely affect our financial condition and results of operations. Additional changes to tax laws are likely to continue to occur in the future, and we cannot assure our shareholders that any such changes will not adversely affect the taxation of a shareholder. We cannot assure you that future changes to tax laws and regulations will not have an adverse effect on an investment in our stock.

We are subject to environmental laws and regulations.

Current and previous real estate owners and operators may be required under various federal, state, and local laws, ordinances, and regulations to investigate and clean up hazardous substances released at the properties they own or operate. They may also be liable to the government or to third parties for substantial property or natural resource damage, investigation costs, and cleanup costs. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release or presence of such hazardous substances. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs the government incurs in connection with the contamination. Contamination may adversely affect the owners ability to use, sell, or lease real estate or to borrow using the real estate as collateral. We have no way of determining at this time the magnitude of any potential liability to which we may be subject arising out of environmental conditions or violations with respect to the properties we currently or formerly owned. Environmental laws today can impose liability on a previous owner or operator of a property that owned or operated the property at a time when hazardous or toxic substances were disposed of, released from, or present at the property. A conveyance of the property, therefore, may not relieve the owner or operator from liability. Moreover, material environmental liabilities or compliance concerns may exist, of which we are currently unaware, that in the future may have a material adverse effect on our business, assets or results of operations.

Climate change and its effects, including compliance with new laws or regulations such as green building codes, may require us to make improvements to our existing properties or result in unanticipated losses that could affect our business and financial condition.

To the extent that climate change causes an increase in catastrophic weather events, such as severe storms, fires or floods, our properties may be susceptible to an increase in weather-related damage. Even in the absence of direct physical damage to our properties, the occurrence of any natural disasters or a changing climate in the area of any of our properties could have a material adverse effect on business, supply chains and the economy generally. Climate change could cause an increase in property and casualty insurance premiums. The potential impacts of future climate change on our properties could adversely affect our ability to lease, develop, or sell our properties or to borrow using our properties as collateral. In addition, any proposed legislation or regulatory actions enacted to address climate change could increase the costs of energy, utilities, and overall development. The resulting costs of any proposed legislation or regulatory action may adversely affect our financial position, results of operations, and cash flows.

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Risks Related to the Ownership of Our Common Shares

The market price of our common shares may fluctuate.

The market price of our common shares has been, and may continue to be, subject to fluctuation due to many events and factors such as those described in this report, including:

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Furthermore, the stock markets recently have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes, international currency fluctuations or political unrest, may negatively impact the market price of our common shares. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our managements attention from other business concerns, which could harm our business.

Many of the factors listed above are beyond our control. Those factors may cause the market price of our common shares to decline, regardless of our financial performance, condition, and prospects. The market price of our common shares may fall significantly in the future, and it may be difficult for our shareholders to resell our common shares at prices they find attractive.

We do not qualify as a REIT.

Since we do not qualify as a REIT, we are not be allowed to deduct dividends to shareholders in computing our taxable income and are subject to federal income tax at regular corporate rates. The additional tax incurred at regular corporate rates could significantly reduce the cash flows. Furthermore, we are not required by the Internal Revenue Code to make any dividends to our shareholders as a condition to maintain REIT qualification. The REIT qualification requirements are extremely complex, and interpretation of the U.S. federal income tax laws governing REIT qualification is limited. There can be no assurance that we will meet REIT qualifications in the future. In addition, facts and circumstances that may be beyond our control may affect our ability to qualify as a REIT. We cannot assure you that new legislation, regulations, administrative interpretations, or court decisions will not change the tax laws significantly with respect to any future attempts to qualify as a REIT or with respect to the federal income tax consequences of qualification.

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Certain provisions of our declaration of trust and bylaws may inhibit a change of our control.

Certain provisions contained in our declaration of trust and bylaws and the Maryland General Corporation Law may discourage a third party from making a tender offer or acquisition proposal to us. If this were to happen, it could delay, deter, or prevent a change in control or the removal of existing management. These provisions also may delay or prevent our shareholders from receiving a premium for their common shares over then-prevailing market prices. These provisions include:

In addition, Maryland law provides protection for Maryland corporations against unsolicited takeovers by limiting, among other things, the duties of the trustees in unsolicited takeover situations and certain business combinations and control share acquisitions. Our bylaws contain provisions exempting us from the Maryland Control Share Acquisition Act and the Maryland Business Combination Act. Our bylaws prohibit the repeal, amendment or alteration of our Maryland Control Share Acquisition opt out without the approval by the Companys shareholders; however, there can be no assurance that this provision will not be amended or eliminated at some time in the future.

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A small number of existing shareholders control our company, which could limit your ability to influence the outcome of shareholder votes.

Our trustees beneficially own approximately 6254.5% of our common shares and approximately 44.6% of our total common shares as ond preferred shares, on an as-converted basis, as of June 301, 20256. As a result, these persons may be able to exercise significant influence over the outcome of shareholder votes, including votes concerning the election of trustees, the adoption or amendment of provisions in our declaration of trust or bylaws and the approval of mergers and other significant corporate transactions.

We are subject to the reporting requirements of the federal securities laws, which can be expensive.

We are a public reporting company in the United States and therefore, we are subject to the information and reporting requirements of the Securities Exchange Act of 1934 and other federal securities laws, and the compliance obligations of the Sarbanes-Oxley Act. The costs of preparing and filing annual and quarterly reports and other information with the SEC will cause our expenses to be higher than they would be if we were a privately-held company.

The issuance or sale of equity, convertible or exchangeable securities in the market, or the perception of such future sales or issuances, could lead to a decline in the price, if any, of our common shares.

Our board of trustees has the authority to issue up to 450,000,000 common shares and 50,000,000 preferred shares of beneficial interest. Any issuance of equity or securities convertible into or exchangeable for our equity securities, including for the purposes of expansion of our business, may have a dilutive effect on our existing shareholders.

The perceived risk associated with the possible issuance of a large number of common shares or securities convertible into or exchange for a large number of common shares could cause some of our shareholders to sell their shares, thus causing the price of our shares to decline. Subsequent sales of common shares in the open market or the private placement of common shares or securities convertible into or exchangeable for common shares could also have an adverse effect on the market price, if any, of our common shares. If our common shares price declines, it may be more difficult for us to or we may be unable to raise additional capital.

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We may conduct further equity offerings in the future. If common shares are issued in return for additional funds, property or services, the price per share could be lower than that paid by our current shareholders. Also, any capital stock we sell in the future may be valued on an arbitrary basis by us and the issuance of capital stock for future services, acquisitions, or other corporate actions may have the effect of diluting the value of the shares held by our existing shareholders.

Future sales of substantial amounts of our currently outstanding common shares in the public market, or the perception that such sales could occur, could adversely affect prevailing trading prices of our common shares and could impair our ability to raise capital through future offerings of equity or equity-related securities. We cannot predict what effect, if any, future sales of our common shares, or the availability of shares for future sales, will have on the market price of our common shares.

Because our shares are deemed penny stock, you may have difficulty selling them in the secondary trading market.

The SEC has adopted regulations which generally define a penny stock to be any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share. Additionally, if the equity security is not registered or authorized on a national securities exchange, the equity security also would constitute a penny stock. As our common shares fall within the definition of penny stock, these regulations require the delivery, prior to any transaction involving our common shares, of a risk disclosure schedule explaining the penny stock market and the risks associated with it. Disclosure is also required to be made regarding compensation payable to both the broker-dealer and the registered representative and current quotations for the securities. In addition, monthly statements are required to be sent disclosing recent price information for the penny stocks. The ability of broker-dealers to sell our common shares and the ability of shareholders to sell our common shares in the secondary market may be limited. As a result, the market liquidity for our common shares may be severely and adversely affected. We can provide no assurance that trading in our common shares will not be subject to these or other regulations in the future, which would negatively affect the market for our common shares.

Risks Related to Our Bankruptcy

As a result of our bankruptcy cases, we are subject to the risks and uncertainties associated with bankruptcy cases and operating under Chapter 11 may restrict our ability to pursue strategic and operational initiatives.

For the duration of our bankruptcy cases, our operations and our ability to execute our business strategy will be subject to the risks and uncertainties associated with bankruptcy. These risks include:

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These risks and uncertainties could affect our business and operations in various ways. For example, transactions outside the ordinary course of business are subject to the prior approval of the bankruptcy court, which may limit our ability to respond timely to certain events or take advantage of opportunities. 

In December 2025, the bankruptcy court in the jointly administered bankruptcy cases approved a settlement agreement between the plan agent and Whitestone REIT, Whitestone REIT Operating Partnership, L.P. and Whitestone TRS, Inc. settling the claims between us and the Whitestone parties and creating reserves for the payment of claims and the administration of the jointly administered bankruptcy estates. The bankruptcy court retains jurisdiction to enforce the settlement agreement or decide any claims or disputes that may arise or result from or be connected with the settlement agreement. Claims in the Whitestone Uptown Tower, LLC bankruptcy case were not settled as part of this agreement and remain outstanding as of the date of this report.

Because of the risks and uncertainties associated with the bankruptcy cases, we cannot predict or quantify the ultimate impact that events occurring during the bankruptcy process may have on our business, financial condition and results of operations, and there is no certainty as to our ability to continue as a going concern.

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Prosecution of the bankruptcy cases has consumed and will continue to consume a substantial portion of the time and attention of our management, which may have an adverse effect on our business and results of operations.

While the bankruptcy cases continue, our management will be required to spend a significant amount of time and effort focusing on the cases. This diversion of attention may materially adversely affect the conduct of our business, and, as a result, our financial condition and results of operations, particularly if the bankruptcy cases continue to be protracted. During the bankruptcy cases, our employees have faced considerable distraction and uncertainty. A loss of key personnel or material erosion of employee morale could have a materially adverse effect on our ability to meet tenant expectations, thereby adversely affecting our business and results of operations. The failure to retain members of our management team and other key personnel could impair our ability to execute our strategy and implement operational initiatives, thereby having a material adverse effect on our financial condition and results of operations.

We are in the process of Chapter 11 reorganization cases under the Bankruptcy Code, which may cause our common shares to decrease in value or may render our common shares worthless.

Following the commencement of the bankruptcy cases, the price of our common shares, Class A Cumulative Convertible Preferred Shares and Our Class C Convertible Preferred Shares may decrease in value or become worthless. Accordingly, any trading in our shares during the pendency of our bankruptcy cases is highly speculative and poses substantial risks to holders and purchasers of our shares. Recoveries in the bankruptcy cases for holders of shares, if any, will depend upon our ability to implement our plans of liquidation and reorganization, the treatment of claims under the plans and the value of our assets. We expect that shareholders would not receive a recovery through any plan unless the holders of more senior claims and interests, such as secured and unsecured indebtedness, are paid in full. We also expect our shareholders equity to decrease as we use cash on hand to support our operations in bankruptcy. We may not be able to implement a post-bankruptcy business plan. Consequently, there is a significant risk that the holders of our shares will receive no recovery under the bankruptcy cases and that our shares will be worthless.

Operating in bankruptcy for a long period of time may harm our business.

Prolonged operations under bankruptcy court protection could have a material adverse effect on our business, financial condition, results of operations, and liquidity. So long as we remain subject to bankruptcy court protection or jurisdiction, senior management will be required to spend a significant amount of time and effort dealing with the reorganization instead of focusing exclusively on business operations. A prolonged period of operating under bankruptcy court protection also may continue to make it more difficult to retain management and other key personnel necessary to the success of our business. In addition, the longer we remain under bankruptcy court protection, the more likely it is that tenants and vendors will lose confidence in our ability to reorganize our business successfully and will seek to establish alternative commercial relationships.

So long as we remain under In December 2025, the bankruptcy court in the jointly administered bankruptcy cases approved a settlement agreement between the plan agent and Whitestone REIT, Whitestone REIT Operating Partnership, L.P. and Whitestone TRS, Inc. settling the claims between us and the Whitestone parties and creating reserves for the payment of claims and the administration of the jointly administered bankruptcy estates. The bankruptcy court retains jurisdiction to enforce the settlement agreement or decide any claims or disputes that may arise or result from or be connected with the settlement agreement. Claims in the Whitestone Uptown Tower, LLC bankruptcy case were not settled as part of this agreement and remain outstanding as of the date of this report.

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So long as we remain under bankruptcy court protection or jurisdiction, we will be required to incur substantial costs for professional fees and other expenses associated with the administration of the bankruptcy cases, including potentially the cost of litigation. In general, litigation can be expensive and time consuming to bring or defend against. Such litigation could result in settlements or damages that could significantly affect our financial results. It is also possible that certain parties will commence litigation with respect to the treatment of their claims under a Chapter 11 plan. It is not possible to predict the potential litigation that we may become party to, nor the final resolution of such litigation. The impact of any such litigation on our business and financial stability, however, could be material.

Should the time that we remain under bankruptcy court protection be protracted, we may also need to seek new financing to fund operations. If we are unable to obtain such financing on favorable terms or at all, the chances of confirming a Chapter 11 plan may be seriously jeopardized and the likelihood that we will instead be required to liquidate our assets may increase.

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