ACRES Commercial Realty Corp.

Except as set forth below, there have been no material changes to the risk factors previously disclosed in Part I, Item 1A. "Risk Factors" of the Company’s Annual Report on Form 10-K for the year ended December 31, 2025 and Part II, Item 1A. "Risk Factors" of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2026.

Risks Relating to the Completed Merger and Internalization

On August 6, 2026, we completed the merger of ACRES Capital Corp. ("ACC") with and into ACRES Holdings Sub LLC ("Merger Sub"), our subsidiary, with Merger Sub continuing as the surviving company and our wholly-owned subsidiary (the "Merger"), pursuant to the Agreement and Plan of Merger, dated April 29, 2026 (the "Merger Agreement"). As a result of the Merger, among other things, (i) we acquired ACRES Capital LLC, our former external manager (the "Manager"), (ii) the Manager ceased to perform any outside management services for us, (iii) we and the Manager terminated the Fourth Amended and Restated Management Agreement, dated as of July 31, 2020, as amended, by and among us, the Manager and ACC (the "Management Agreement"), for no additional consideration, and (iv) we became internally managed (the "Internalization").

The issuance of shares of our common stock in the Merger and Internalization substantially increased the number of shares outstanding and may dilute existing stockholders or adversely affect the market price of our common stock.

Pursuant to the Merger Agreement, as of August 6, 2026, each outstanding share of common stock of ACC was converted into the right to receive 2.61882 shares of our common stock, and we issued 7,478,462 shares of our common stock as Merger consideration, resulting in 13,452,489 shares of our common stock outstanding as of August 6, 2026. The issuance of these shares significantly increased our outstanding common stock and diluted the ownership and voting interests of our pre-Merger stockholders.

The additional shares may adversely affect the market price of our common stock, particularly if former ACC stockholders sell a significant number of shares, if investors expect such sales to occur, or if the market perceives that the Merger and Internalization will not produce the expected benefits. If the market price of our common stock declines, our ability to raise capital on favorable terms, maintain investor confidence or pursue strategic transactions may be adversely affected. The increased number of shares outstanding also may reduce earnings per share, book value per share or other per-share metrics, depending on our post-Closing results, transaction costs, integration costs and the value of the acquired business. In addition, the issuance of shares to former owners of ACC may affect voting dynamics and governance matters.

We may not realize the anticipated benefits of the Merger and Internalization and may not improve our operating results, cost structure or stockholder value to the extent anticipated.

We completed the Merger and Internalization with the expectation that becoming internally managed would provide operational and strategic benefits, including the alignment of management with stockholders, greater control over personnel, investment processes and operating infrastructure, and potential cost savings over time. We may not realize these anticipated benefits in the expected amounts or within the expected time periods, or at all. The extent of any benefits will depend on a number of factors, including our ability to integrate ACRES Capital LLC’s operations, personnel, systems, investment processes, accounting functions, compliance programs and internal controls into our business, as well as our ability to manage our expenses as an internally managed REIT.

Our actual costs of operating as an internally managed REIT may exceed the fees and expenses previously paid or reimbursed under the former Management Agreement. We may incur higher-than-expected compensation and benefits costs, insurance costs, technology costs, professional fees, corporate overhead, compliance costs and other recurring expenses. In addition, we have incurred, and expect to continue to incur, transaction, integration and transition expenses in connection with the Merger and Internalization, including legal, accounting, advisory, tax, valuation, consulting, compensation, information technology, insurance and governance-related costs. These expenses may be material, may be higher than currently anticipated and may reduce or delay any expected cost savings.

If we do not realize the anticipated benefits of the Merger and Internalization, if those benefits are offset by increased costs, or if integration activities detract from management’s ability to focus on investment and asset management activities, our business, financial condition, results of operations, cash flows, ability to make distributions to stockholders and market price of our common stock could be materially adversely affected.

Assumption of Facility pursuant to Merger and Internalization

In connection with the Merger and Internalization, on August 6, 2026 we entered into a First Amendment and Joinder to Loan and Servicing Agreement (the "First Amendment") with the Administrative Agent, as administrative agent and facility servicer (the "Administrative Agent") and Massachusetts Mutual Life Insurance Company ("MassMutual") and the other lenders party thereto (the "Lenders"). The First Amendment amends and restates the existing loan and servicing agreement (as amended by the First Amendment, the "Loan Agreement") entered into on July 23, 2025 and provides for term loan advances in an aggregate principal amount of $185,000,000.

There is no assurance we will generate sufficient cash flow to pay principal and interest when due on our indebtedness. Our indebtedness could have important consequences, including:

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vulnerability to general adverse economic and industry conditions;

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limits on our ability to obtain additional financing for uses such as to fund future working capital, capital expenditures, acquisitions, and other general corporate requirements;

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requiring the use of a substantial portion of our cash flow to pay principal and interest;

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reducing cash flow available to pay distributions, fund working capital, acquisitions, capital expenditures, and general corporate requirements;

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requiring us to maintain certain financial covenants at specified levels, thereby reducing our financial flexibility; and

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putting us at a disadvantage compared to our competitors with less indebtedness.

The transition from an externally managed REIT to an internally managed REIT exposes us to enhanced operational, personnel, compliance and execution risks, and we may experience difficulties integrating ACRES Capital LLC, including its personnel, systems, controls, books and records, investment processes and compliance framework.

Our ability to operate successfully as an internally managed REIT will depend in part on the continuity and effectiveness of the personnel, systems and processes acquired or assumed in the Merger and Internalization. Prior to the Merger and Internalization, we relied on our external manager to provide personnel, infrastructure, investment sourcing, underwriting, asset management, administrative services and other management functions. Following the completion of the Merger and Internalization, we are responsible for these functions and costs. As an internally managed company, we must maintain appropriate staffing, compensation arrangements, policies, procedures, systems, controls, insurance coverage, internal control over financial reporting, vendor relationships and governance processes to support our business.

This transition may place significant demands on management, employees and our operational infrastructure. We may experience disruptions or inefficiencies and incur additional expenses as we integrate employees, systems and processes previously used by ACRES Capital LLC. We also may need to develop, modify or expand policies and procedures relating to investment approvals, asset management, accounting, treasury, tax, financial reporting, cybersecurity, human resources, compensation, compliance and internal audit. If these functions are not effectively implemented or maintained, we may experience errors, control deficiencies, reporting delays, increased expenses, regulatory or compliance issues, employee retention challenges or other adverse consequences.

There can be no assurance that our internalized management platform will perform as expected or that the transition will not adversely affect our business, financial condition, results of operations or ability to execute investment strategy.

The termination of the prior Management Agreement may result in the loss of rights, services, indemnities, relationships or operational arrangements on which we previously relied.

In connection with the Merger and Internalization, we terminated the prior Management Agreement for no additional consideration, which could result in disputes or uncertainties regarding surviving obligations, indemnification rights, expense reimbursement matters, confidentiality obligations, books and records, intellectual property, insurance coverage, allocation of liabilities, or other contractual matters.

We also may lose, or may be required to renegotiate or replace, arrangements that were entered into by or through the former manager or its affiliates, including vendor relationships, advisory relationships, licensing arrangements, software subscriptions, data services, office leases, insurance policies, employee benefit arrangements or other operational support services. We may not be able to replace those services or arrangements on terms as favorable as those previously available, or at all. Any disruption, dispute or increased cost arising from the termination of the prior Management Agreement could adversely affect our operations and results.

We may be unable to retain key employees or preserve investment, advisory, borrower, lender and other business relationships following the Merger and Internalization.

Our success following the Merger and Internalization depends in significant part on our ability to retain and motivate key employees and investment professionals, including personnel of ACRES Capital LLC who have historically supported our investment sourcing, underwriting, asset management, financing, accounting, tax, legal, compliance and administrative functions. The transition to internal management may create uncertainty for employees regarding roles, compensation, benefits, reporting lines, incentives, culture and future business plans. We may incur increased compensation, retention, severance or recruiting costs, and we may not be able to retain or replace key personnel on acceptable terms.

We also depend on the continuity of relationships with borrowers, loan sellers, financing counterparties, co-investors, consultants, service providers, rating agencies, trustees, custodians, administrators, legal and accounting advisors and other business partners. Some relationships may have been maintained historically by the former external manager or its affiliates, and counterparties may seek to modify, re-underwrite, terminate or decline to renew arrangements following the Merger and Internalization. If we lose key employees or important business relationships, or if employee departures or relationship disruptions impair investment sourcing, asset management, financing or reporting activities, our business, financial condition, results of operations and ability to execute our investment strategy could be adversely affected.

The Merger and Internalization may create or fail to eliminate conflicts of interest, and our governance structure may be subject to new or different risks following the Merger and Internalization.

Former owners, officers, employees or affiliates of ACRES Capital Corp. or ACRES Capital LLC may receive benefits from the Merger and Internalization or post-closing arrangements that differ from, or are in addition to, the interests of our other stockholders. These benefits may include equity ownership, employment arrangements, compensation plans, incentive awards, indemnification rights, registration rights, governance rights, transition arrangements, tax arrangements or other contractual rights.

Our board of directors and management may also need to oversee new or expanded functions, including compensation practices, employee benefit plans, human capital management, internal audit, regulatory compliance, conflicts policies, affiliate transaction controls and risk management activities. If our governance policies, committee oversight, related-party transaction procedures or conflicts management practices are not effective, we may be exposed to regulatory scrutiny, litigation, reputational harm or decisions that do not align with the interests of all stockholders. Any actual or perceived conflicts of interest could adversely affect investor confidence and the market price of our common stock.

The Merger and Internalization may affect our ability to maintain our qualification as a REIT and our exclusion or exemption from regulation under the Investment Company Act of 1940.

We intend to continue to qualify as a REIT for U.S. federal income tax purposes and to operate in a manner that permits us to maintain our exclusion or exemption from regulation under the Investment Company Act of 1940. The Merger and Internalization may introduce new assets, liabilities, income streams, employee compensation arrangements, intercompany arrangements, service activities, taxable REIT subsidiary considerations, related-party transactions and other structural or operational matters that must be monitored for REIT compliance and Investment Company Act purposes. Failure to properly structure, operate or monitor these matters could adversely affect our ability to satisfy applicable income, asset, distribution, ownership and other REIT requirements or to maintain our Investment Company Act exemption.

See "Risks Related to Our REIT Status and Certain Other Tax Items" and "Risks Related to Our Organization and Structure—Loss of our exclusion from regulation under the Investment Company Act would require significant changes in our operations and could reduce the market price of our common stock and our ability to make distributions" in our Annual Report on Form 10-K for the year ended December 31, 2025 for the general consequences of a failure to maintain REIT qualification or Investment Company Act exemption.

We may incur liabilities, claims, litigation or contractual obligations arising from the Merger Agreement and the completed Merger and Internalization.

Although the Merger and Internalization have been completed, we may be subject to liabilities, claims, litigation, demands, indemnification obligations, purchase price or share issuance disputes, appraisal or dissenters’ rights claims, tax claims, employee claims, intellectual property claims, third-party consent issues, breaches of representations, warranties or covenants, or other obligations arising from or relating to the Merger Agreement, the completed Merger and Internalization, the termination of the Management Agreement or related transactions. Any such matters may be costly to defend or resolve, may divert management’s attention and may result in monetary damages, equitable remedies, settlement costs, indemnification payments, additional disclosures, governance changes or other adverse consequences.

We may also be required to satisfy surviving covenants, indemnities, confidentiality obligations, registration rights, tax matters, employee benefit obligations, insurance obligations, expense reimbursement obligations or other post-closing commitments under the Merger Agreement or related agreements. The amounts and timing of any such obligations may be uncertain and may exceed our expectations.

If any liabilities, claims, litigation or contractual obligations arising from the Merger and Internalization and related transactions are material, they could adversely affect our business, financial condition, results of operations, liquidity, cash flows and market price of our common stock.

The unaudited pro forma financial information related to the Merger and Internalization may not be indicative of our actual financial condition or results after the Merger and Internalization.

The unaudited pro forma condensed combined consolidated financial information filed after the closing of the Merger and Internalization was prepared for illustrative purposes and was based on assumptions and adjustments that may not reflect our actual financial condition or results of operations following the Merger and Internalization. The pro forma information does not necessarily reflect all costs, synergies, dis-synergies, integration expenses, financing effects, compensation arrangements, tax consequences, accounting adjustments, control remediation costs, changes in business strategy or other effects of the completed Merger and Internalization. Our actual results may differ materially from the pro forma information due to changes in interest rates, market conditions, asset performance, credit losses, financing costs, operating expenses, integration costs, accounting estimates, valuation assumptions or other factors.

Investors should not place undue reliance on pro forma financial information as an indication of what our financial condition or results of operations would have been had the Merger and Internalization occurred on the dates assumed in the pro forma presentation, or as an indication of our future results.

Risks Relating to Our Advisory and Investment Activities Following the Merger and Internalization

We conduct advisory activities through an SEC-registered investment adviser subsidiary, and we are subject to extensive regulation under the Investment Advisers Act of 1940, including fiduciary duties and compliance obligations; failure to comply could result in SEC examinations, enforcement actions, penalties, client claims, reputational harm and increased compliance costs and may adversely affect our ability to raise capital, retain clients and third-party investors, retain key personnel and originate or manage investments.

To the extent we operate as, or through, an SEC-registered investment adviser, we will be subject to regulation under the Investment Advisers Act of 1940 and related SEC rules and guidance, including requirements relating to fiduciary duties, conflicts of interest, disclosure, marketing and advertising, custody of client assets, fee and expense allocation, valuation practices, best execution, books and records, privacy, business continuity, cybersecurity, personal trading, material nonpublic information, and oversight of service providers.

The SEC has broad authority to conduct examinations of registered investment advisers and to bring administrative or civil enforcement actions. Any failure, or alleged failure, to comply with applicable requirements could result in censures, fines, penalties, limitations on our advisory activities, suspensions, disgorgement, reputational harm, client claims, investor withdrawals and increased compliance and insurance costs. Compliance obligations may require substantial management attention, systems, personnel and professional fees and may reduce our operating flexibility.

Increased regulatory scrutiny of investment advisers, negative publicity, compliance failures, investor dissatisfaction regarding performance or liquidity, or disputes over fees, expenses, valuations or disclosures could reduce investor confidence in us or our investment strategies and impair our ability to raise capital, retain or attract clients and investors, and compete for investment opportunities. If we are unable to recruit, retain and motivate personnel with the expertise required to operate an internalized platform and to meet applicable regulatory requirements, our investment performance, operations and growth prospects could be adversely affected.

Our ownership of, investments in, or consolidation of investment funds or other investment vehicles may increase the complexity and volatility of our financial statements, may reduce comparability across periods, and may cause our reported results to differ from the economics of our business.

If we hold interests in, sponsor, advise or otherwise become the primary beneficiary of investment funds or other investment vehicles, we may be required to consolidate such entities in our financial statements under applicable accounting guidance. This may increase the size and volatility of our balance sheet and income statement, increase period-to-period volatility in our reported results, and make our financial statements more complex and less comparable to prior periods or to other companies that do not consolidate similar investment vehicles.

Consolidation may also require us to make significant judgments regarding whether we are the primary beneficiary of an entity, whether an entity is a variable interest entity, and how to present and disclose the results of consolidated investment vehicles and the interests of third-party investors. If our consolidation conclusions change over time, we may be required to consolidate or deconsolidate investment vehicles, which could result in material changes to our consolidated financial statements and key metrics.

Investors in consolidated investment funds or other investment vehicles may have redemption or withdrawal rights, and we may be required to present third-party interests as redeemable non-controlling interests, which could adversely affect our reported equity, liquidity profile and financial metrics.

To the extent we consolidate investment funds or other investment vehicles in which third parties hold interests, those third-party interests may be presented as non-controlling interests and, in certain circumstances, as redeemable non-controlling interests (or "temporary equity") if investors have redemption, repurchase or withdrawal rights. The presentation and measurement of redeemable non-controlling interests may reduce our reported stockholders’ equity, affect book value per share and leverage metrics and increase the complexity of our financial statements.

If a consolidated investment vehicle is required to satisfy investor redemptions or withdrawals at a time when its assets cannot be liquidated on favorable terms, the investment vehicle could experience liquidity constraints, may be required to sell assets at depressed prices or borrow under unfavorable terms, may impose gating, suspension or other limitations (where permitted), may take other actions to generate liquidity and may experience losses that could adversely affect our consolidated results and the value of our interests in such vehicle. In addition, if a consolidated vehicle is unable to satisfy redemption requests as expected, investors may suffer losses or delays in receiving proceeds, which could result in litigation, regulatory scrutiny, reputational harm and reduced ability to raise capital for our investment strategies.

The valuation of investments held by consolidated funds or other investment vehicles may involve significant judgment, may be volatile and may not be realized, and errors in valuation could adversely affect our reported results, fees, investor allocations and internal controls.

Investment funds and other investment vehicles may hold investments that do not have readily observable market prices, including loans, structured products, real estate-related assets and other instruments that require significant estimates and assumptions to determine fair value. Valuation processes may require the use of models, third-party pricing services, appraisals and other methodologies that involve significant judgment, including assumptions about interest rates, credit spreads, default rates, recoveries, collateral values, discount rates, market liquidity and other factors.

Because of the inherent uncertainty of valuation for hard-to-value assets, the values we record may differ materially from the amounts ultimately realized upon sale, repayment or other disposition. Any material valuation error, restatement, change in valuation methodology, or failure of controls over valuation could adversely affect our financial statements, results of operations, ability to raise capital, and relationships with investors, lenders and counterparties.

We may face conflicts of interest among our interests, the interests of our stockholders, the interests of proprietary capital, the interests of consolidated funds and other investment vehicles, the interests of advised accounts and the interests of third-party investors, which could adversely affect our business and subject us to regulatory scrutiny or litigation.

We may manage, advise or otherwise be involved with multiple investment strategies, vehicles and accounts, including those in which we have proprietary investments, those in which our employees or affiliates may invest, and those in which third-party investors participate. We may also allocate time, personnel and investment opportunities among our own balance sheet investments, consolidated investment vehicles and other advised accounts. These circumstances may give rise to conflicts of interest regarding, among other things, allocation of investment opportunities, valuations, investment decisions, expense allocations, use of affiliated service providers, cross-transactions, principal transactions, liquidity decisions, redemptions, and the timing of asset sales or financings.

If we fail to identify, manage, mitigate or disclose such conflicts appropriately, we could be subject to regulatory enforcement, litigation, reputational harm, investor withdrawals and loss of business.

Liabilities of consolidated funds or other investment vehicles may be non-recourse to us, but we may nonetheless experience reputational harm or be expected to provide financial or other support, which could adversely affect our liquidity and results of operations.

Even where the liabilities and obligations of consolidated funds or other investment vehicles are contractually and legally non-recourse to us, we may experience reputational harm if such vehicles perform poorly, experience losses, are unable to satisfy redemption requests, or default on their obligations. In certain circumstances, we may determine (or investors, lenders or other market participants may expect) that we provide financial support, liquidity, guarantees, waivers, fee concessions or other assistance to such vehicles, even if we are not contractually required to do so. Providing any such support could reduce our liquidity, increase our leverage and adversely affect our results of operations and financial condition.