UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended SeptemberJune 30, 2017
2020
¨☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File NumberNumber: 000-55780
Terra Secured Income Fund 5, LLC
(Exact name of registrant as specified in its charter)
Delaware90-0967526
(State or other jurisdiction of

incorporation or organization)
(I.R.S. Employer

Identification No.)
805 Third550 Fifth Avenue, 86th Floor
New York, New York 1002210036
(Address of principal executive offices)

(Zip Code)
(212) 753-5100
(Registrant’s telephone number, including area code)

Securities registered pursuant to section 12(b) of the Securities Exchange Act of 1934:
None
Securities registered pursuant to section 12(g) of the Securities Exchange Act of 1934:
Units of Limited Liability Company Interests

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ þNo þo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer☐Accelerated filer☐
Non-accelerated filer☑Smaller reporting company☑
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company þ
Emerging growth companyþ
☑
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. þ☑

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No þ

As of November 13, 2017,August 10, 2020, the registrant had 6,697.56,637.7 units of limited liability company interests outstanding.

No market value has been computed based upon the fact that no active trading market had been established as of the date of this document.



TABLE OF CONTENTS
Page
PART I
Page
PART IItem 1.
Item 1.
Financial Statements
32
43
54
65
86
14
Item 2.
2524
Item 3.
38
Item 4.
3839
PART II
39
Item 1.
3940
Item 1A.
3940
Item 2.
3942
Item 3.
3942
Item 4.
3942
Item 5.
3942
Item 6.
3943
4144






1
2



PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Terra Secured Income Fund 5, LLC
Consolidated Statements of Financial Condition

June 30, 2020December 31, 2019
(unaudited)
Assets
Equity investment in Terra JV, LLC at fair value (cost of $238,509,445 and
$0, respectively)		$238,509,869  $—  
Equity investment in Terra Property Trust, Inc. at fair value (cost of $0 and
$243,924,852, respectively)		—  247,263,245  
Cash and cash equivalents400,213  97,937  
Other assets11,573  15,064  
Total assets$238,921,655  $247,376,246  
Liabilities and Members’ Capital
Liabilities
Accounts payable and accrued expenses$216,691  $271,333  
Due to related party—  38,000  
Total liabilities216,691  309,333  
Commitments and contingencies (Note 5)
Members’ capital:
Managing member—  —  
Non-managing members238,704,964  247,066,913  
Total members’ capital238,704,964  247,066,913  
Total liabilities and members’ capital$238,921,655  $247,376,246  
Net asset value per unit$35,962  $37,222  

  September 30, 2017 December 31, 2016
  (unaudited)  
Assets    
Equity investment in Terra Property Trust, Inc. at fair value — controlled (cost
   of $277,456,081 and $291,468,567, respectively)
 $277,326,857
 $290,419,317
Cash and cash equivalents 167,784
 41,520
Due from Terra Property Trust, Inc. 25,000
 —
Other assets 4,542
 7,447
Total assets $277,524,183
 $290,468,284
     
Liabilities and Members’ Capital    
Liabilities    
Accounts payable and accrued expenses $189,685
 $441,388
Due to Terra Property Trust, Inc. —
 438,249
Other liabilities 21,697
 —
Distributions payable —
 2,243
Total liabilities 211,382
 881,880
Commitments and contingencies (Note 6)
 
 
Members’ capital:    
Managing member —
 —
Non-managing members 277,312,801
 289,586,404
Total members’ capital 277,312,801
 289,586,404
Total liabilities and members’ capital $277,524,183
 $290,468,284

See notes to consolidatedunaudited financial statements.
 

2

3




Terra Secured Income Fund 5, LLC
Consolidated Statements of Operations
(Unaudited)

Three Months Ended June 30,Six Months Ended June 30,
Three Months Ended September 30, Nine Months Ended September 30, 2020201920202019
2017 2016 2017 2016
Investment income — controlled       
Investment incomeInvestment income
Dividend income$4,448,792
 $9,824,336
 $15,703,171
 $25,042,346
Dividend income$681,685  $—  $1,946,123  $3,922,875  
Investment income       
Other operating income111
 614
 1,064
 8,571
Other operating income34  90  178  392  
Total investment income4,448,903
 9,824,950
 15,704,235
 25,050,917
Total investment income681,719  90  1,946,301  3,923,267  
Operating expenses       Operating expenses
Professional fees104,100
 269,635
 431,465
 549,211
Professional fees161,100  98,119  335,199  271,333  
Merger transaction fees—
 —
 —
 388,692
Other3,448
 (38,342) 35,761
 52,954
Other1,295  6,076  2,744  8,959  
Total operating expenses107,548
 231,293
 467,226
 990,857
Total operating expenses162,395  104,195  337,943  280,292  
Net investment income4,341,355
 9,593,657
 15,237,009
 24,060,060
Net change in unrealized depreciation on
investment — controlled		428,032
 (730,673) 920,026
 (1,400,694)
Net investment income (loss)Net investment income (loss)519,324  (104,105) 1,608,358  3,642,975  
Net change in unrealized appreciation on investmentNet change in unrealized appreciation on investment2,813,973  1,609,008  527,675  3,198,259  
Net increase in members’ capital resulting
from operations		$4,769,387
 $8,862,984
 $16,157,035
 $22,659,366
Net increase in members’ capital resulting from
operations		$3,333,297  $1,504,903  $2,136,033  $6,841,234  
Per unit data:Per unit data:
Net investment income (loss) per unitNet investment income (loss) per unit$78  $(16) $242  $549  
Net increase in members’ capital resulting from
operations per unit		Net increase in members’ capital resulting from
operations per unit		$502  $227  $322  $1,030  
Weighted average units outstandingWeighted average units outstanding6,638  6,639  6,638  6,639  




See notes to consolidatedunaudited financial statements.


statements.

3
4



Terra Secured Income Fund 5, LLC
Consolidated Statements of Changes in Members’ Capital (Unaudited)
NineThree and Six Months Ended SeptemberJune 30, 20172020 and 20162019

(Unaudited)
Managing
Member		Non-Managing MembersTotal
Balance, April 1, 2020$—  $238,402,378  $238,402,378  
Capital distributions—  (3,030,711) (3,030,711) 
Increase in members’ capital resulting from operations:
Net investment income—  519,324  519,324  
Net change in unrealized appreciation on investment—  2,813,973  2,813,973  
Net increase in members’ capital resulting from operations—  3,333,297  3,333,297  
Balance, June 30, 2020$—  $238,704,964  $238,704,964  
 Managing
Member		 Non-Managing Members Total
Balance, January 1, 2017$—
 $289,586,404
 $289,586,404
Capital distributions—
 (23,127,464) (23,127,464)
Capital redemptions—
 (5,303,174) (5,303,174)
Increase in members’ capital resulting from operations:     
Net investment income—
 15,237,009
 15,237,009
Net change in unrealized depreciation on investment—
 920,026
 920,026
Net increase in members’ capital resulting from operations—
 16,157,035
 16,157,035
Balance, September 30, 2017$—
 $277,312,801
 $277,312,801


Managing
Member		Non-Managing MembersTotal
Balance, April 1, 2019$—  $260,948,679  $260,948,679  
Capital distributions—  (7,468,095)(7,468,095) 
Increase in members’ capital resulting from operations:
Net investment loss—  (104,105)(104,105) 
Net change in unrealized appreciation on investment—  1,609,0081,609,008  
Net increase in members’ capital resulting from operations—  1,504,903  1,504,903  
Balance, June 30, 2019$—  $254,985,487  $254,985,487  

 Managing
Member		 Non-Managing Members Total
Balance, January 1, 2016$—
 $122,208,698
 $122,208,698
Capital contributions from Merger—
 155,751,516
 155,751,516
Capital contributions, net of selling commissions and dealer
   manager fees of $1,277,916
—
 25,598,261
 25,598,261
Capital distributions—
 (22,949,286) (22,949,286)
Capital redemptions—
 (6,771,430) (6,771,430)
Increase in members’ capital resulting from operations:    
Net investment income—
 24,060,060
 24,060,060
Net change in unrealized depreciation on investment—
 (1,400,694) (1,400,694)
Net increase in members’ capital resulting from operations—
 22,659,366
 22,659,366
Balance, September 30, 2016$—
 $296,497,125
 $296,497,125
Managing
Member		Non-Managing MembersTotal
Balance, January 1, 2020$—  $247,066,913  $247,066,913  
Capital distributions—  (10,497,982) (10,497,982) 
Increase in members’ capital resulting from operations:
Net investment income—  1,608,358  1,608,358  
Net change in unrealized appreciation on investment—  527,675  527,675  
Net increase in members’ capital resulting from operations—  2,136,033  2,136,033  
Balance, June 30, 2020$—  $238,704,964  $238,704,964  



Managing
Member		Non-Managing MembersTotal
Balance, January 1, 2019$—  $263,080,442  $263,080,442  
Capital distributions—  (14,936,189) (14,936,189) 
Increase in members’ capital resulting from operations:
Net investment income—  3,642,975  3,642,975  
Net change in unrealized appreciation on investment—  3,198,259  3,198,259  
Net increase in members’ capital resulting from operations—  6,841,234  6,841,234  
Balance, June 30, 2019$—  $254,985,487  $254,985,487  


See notes to consolidatedunaudited financial statements.




4
5



Terra Secured Income Fund 5, LLC
Consolidated Statements of Cash Flows
(Unaudited)

Six Months Ended June 30,
20202019
Cash flows from operating activities:
Net increase in members’ capital resulting from operations$2,136,033  $6,841,234  
Adjustments to reconcile net increase in members’ capital resulting from
operations to net cash provided by operating activities:
Return of capital on investment9,281,051  11,260,039  
Net change in unrealized appreciation on investment(527,675) (3,198,259) 
Changes in operating assets and liabilities:
Decrease (increase) in other assets3,491  (14,260) 
(Decrease) increase in accounts payable and accrued expenses(54,642) 8,804  
Decrease in due to related party(38,000) —  
Net cash provided by operating activities10,800,258  14,897,558  
Cash flows from financing activities:
Distributions paid(10,497,982) (14,936,189) 
Net cash used in financing activities(10,497,982) (14,936,189) 
Net increase (decrease) in cash and cash equivalents302,276  (38,631) 
Cash and cash equivalents at beginning of period97,937  131,784  
Cash and cash equivalents at end of period$400,213  $93,153  
Supplemental Non-Cash Disclosure:
Transfer of ownership interest in Terra Property Trust, Inc. to
   Terra JV, LLC (Note 3)
$244,006,890  $—  



See notes to unaudited financial statements.
5
 Nine Months Ended September 30,
 2017 2016
Cash flows from operating activities:   
Net increase in members’ capital resulting from operations$16,157,035
 $22,659,366
Adjustments to reconcile net increase in members’ capital resulting from
   operations to net cash provided by operating activities:
   
Purchase of common stock of Terra Property Trust, Inc.—
 (10,000,000)
Cash transferred to Terra Property Trust, Inc.—
 (5,034,571)
Return of capital on investment14,012,486
 315,730
Net change in unrealized depreciation on investment(920,026) 1,400,694
    
Changes in operating assets and liabilities:   
Interest receivable—
 351,883
Other assets898
 (129,397)
Due to Manager—
 (705,389)
Accounts payable and accrued expenses(251,702) (5,339,803)
Due to Terra Property Trust, Inc.(463,249) —
Taxes payable—
 (621,177)
Interest payable—
 (172,051)
Net cash provided by operating activities28,535,442
 2,725,285
    
Cash flows from financing activities:   
Proceeds from capital contributions, net of selling commissions and dealer
   manager fees
—
 25,598,261
Distributions paid(23,129,410) (22,949,286)
Payments for capital redemptions(5,279,768) (10,198,413)
Cash acquired in the Merger—
 3,480,981
Net cash used in financing activities(28,409,178) (4,068,457)
    
Net increase (decrease) in cash and cash equivalents126,264
 (1,343,172)
Cash and cash equivalents at beginning of period41,520
 1,862,798
Cash and cash equivalents at end of period$167,784
 $519,626
    
Supplemental Disclosure of Cash Flows Information:   
Cash paid for income taxes$—
 $681,033
Cash paid for interest$—
 $—



6



Terra Secured Income Fund 5, LLC
Consolidated StatementsSchedule of Cash FlowsInvestment
June 30, 2020 (unaudited) (Continued)and December 31, 2019


Supplemental Non-Cash Investing and Financing Activities:
In December 2015, the members approved the merger of Terra Secured Income Fund, LLC (“Terra Fund 1”), Terra Secured Income Fund 2, LLC (“Terra Fund 2”), Terra Secured Income Fund 3, LLC (“Terra Fund 3”) and Terra Secured Income Fund 4, LLC (“Terra Fund 4”) with and into subsidiaries of the Company (individually, each a “Terra Fund” and collectively, the “Terra Funds”) through a series of separate mergers effectiveOn January 1, 2016, (collectively, the “Merger”). The following table summarizes the fair values of the assets acquired and liabilities assumed in the Merger:
Total Consideration:  
Fair value of units issued $155,751,516
  155,751,516
Assets Acquired at Fair Value  
Investments, at fair value 142,768,001
Investments through participation interests, at fair value 7,771,619
Equity investment in Terra Park Green Member, LLC, at fair value 16,900,000
Restricted cash 7,119,078
Interest receivable 1,412,840
Other assets 35,695
Liabilities Assumed at Fair Value  
Obligations under participation agreements (8,154,822)
Interest reserve and other deposits held on loans (7,119,078)
Accounts payable and accrued expenses (3,113,022)
Redemption liability (3,426,983)
Due to Manager (1,343,020)
Taxes payable (232,040)
Interest payable (80,807)
Other liabilities (266,926)
Net assets acquired excluding cash 152,270,535
Cash acquired in the Merger $3,480,981
Following the Merger, the Company, contributed the consolidated portfoliothen parent of net assets of the five Terra Funds to Terra Property Trust, Inc. (“Terra Property Trust”), contributed its consolidated portfolio of net assets to Terra Property Trust pursuant to a newly-formed and wholly-owned subsidiarycontribution agreement in exchange for shares of Terra Property Trust’s common stock, par value $0.01 per share. Upon receipt of the contribution of the consolidated portfolio of net assets from the Company, Terra Property Trust commenced its operations on January 1, 2016. As discussed in Note 4, on March 2, 2020, Terra Property Trust engaged in a series of transactions pursuant to which Terra Property Trust issued an aggregate of 4,574,470.35 shares of its common stock in exchange for the commonsettlement of an aggregate of $49.8 million of participation interests in loans that Terra Property Trust owned, cash of $25.5 million and other working capital. As of June 30, 2020, Terra JV, LLC (“Terra JV”) held 87.4% of the issued and outstanding shares of Terra Property Trust. The following table summarizesTrust’s common stock with the fair values ofremainder held by Terra International Fund 3 REIT, LLC (“TIF3 REIT”), and the net assets contributed to Terra Property Trust:
Total Consideration:  
Fair value of common stock of Terra Property Trust received $288,259,804
  288,259,804
Assets Contributed at Fair Value  
Investments, at fair value 276,746,475
Investments through participation interests, at fair value 13,789,884
Equity investment in Terra Park Green Member, LLC, at fair value 16,900,000
Restricted cash 21,421,501
Interest receivable 2,382,546
Due from related parties 438,249
Other assets 35,695
Liabilities Transferred at Fair Value  
Obligations under participation agreements (24,147,097)
Interest reserve and other deposits held on loans (21,421,501)
Due to Manager (2,011,003)
Other liabilities (909,516)
Net assets transferred excluding cash 283,225,233
Cash transferred to Terra Property Trust $5,034,571

See notes to consolidated financial statements.


7


Company and Terra Secured Income Fund 5,7, LLC (“Terra Fund 7”) owned an 87.6% and 12.4% percentage interest, respectively, in Terra JV. Accordingly, as of June 30, 2020, the Company indirectly beneficially owned 76.5% of the outstanding shares of common stock of Terra Property Trust through Terra JV.
Consolidated Schedule
        The following table presents a summary of Investments
Septemberthe Company’s investment as of June 30, 2017 (unaudited)2020 and December 31, 20162019:

Percentage InterestJune 30, 2020
InvestmentDate AcquiredCostFair Value% of Members’ Capital
Terra JV, LLC3/2/202087.6 %$238,509,445  $238,509,869  99.9 %
Number of Shares of Common StockDecember 31, 2019
InvestmentDate AcquiredCostFair Value% of Members’ Capital
Terra Property Trust, Inc.1/1/2016 and 3/7/201614,912,990  $243,924,852  $247,263,245  100.1 %


As of SeptemberJune 30, 20172020 and December 31, 2016,2019, the Company’s only investment is its equity interest in a wholly-owned subsidiaryCompany indirectly beneficially owned 76.5% and directly owned 98.6%, respectively, of the outstanding shares of common stock of Terra Property Trust. Additionally, as presented below:of June 30, 2020, Terra JV was jointly-controlled by the Company and Terra Fund 7, and as of December 31, 2019, Terra Property Trust was controlled by the Company.

    Number of Shares of Common Stock September 30, 2017 December 31, 2016
Investment — Controlled Date Acquired  Cost Fair Value % of Net Assets Cost Fair Value % of Net Assets
Terra Property Trust, Inc. — 100% Owned 1/1/2016 and 3/7/2016 14,912,990
 $277,456,081
 $277,326,857
 100.1% $291,468,567
 $290,419,317
 100.3%

The following table presents a schedule of loans held for investment by Terra Property Trust at 100% and the Company’s wholly-owned subsidiary, aspro-rata share of Septemberthe fair value at June 30, 2017:2020:
Portfolio CompanyCollateral LocationProperty
Type		Coupon
Rate		Current Interest RateExit FeeAcquisition DateMaturity
Date		Principal AmountAmortized
Cost
Fair
Value (1)
Pro Rata
Fair Value (2)
% (3)
Loans held for investment:
Mezzanine loans:
150 Blackstone River Road, LLCUS - MAIndustrial8.5 %8.5 %— %9/21/20179/6/2027$7,000,000  $7,000,000  $6,866,583  $5,252,936  2.2 %
Austin H. I. Owner LLCUS - TXHotel12.5 %12.5 %1.0 %9/30/201510/6/20203,613,000  3,647,936  3,645,676  2,788,942  1.2 %
High Pointe Mezzanine Investments, LLC (4)
US - SCStudent housing15.0 %15.0 %1.0 %12/27/20131/6/20243,000,000  3,233,789  2,984,870  2,283,426  1.0 %
LD Milipitas Mezz, LLC (7)
US - CAHotelLIBOR +10.25% (2.75% Floor)13.0 %1.0 %6/27/20186/27/20214,250,000  4,297,989  4,297,730  3,287,763  1.4 %
SparQ Mezz Borrower, LLC (8)
US - CAMultifamily12.0 %12.0 %1.0 %9/29/201710/1/20208,700,000  8,785,415  8,756,821  6,698,968  2.9 %
Stonewall Station Mezz LLC (5)(6)
US - NCHotel12.0% current
2.0% PIK		14.0 %1.0 %5/31/20185/20/202110,010,007  10,097,447  10,121,270  7,742,772  3.2 %
36,573,007  37,062,576  36,672,950  28,054,807  11.9 %


See notes to unaudited financial statements.
7
Collateral LocationPortfolio CompanyStructureProperty
Type		Coupon
Rate		Acquisition Date
Maturity
Date
Principal Amount
Amortized
Cost
Fair
Value (1)
% of Net
 Assets (2)
 Loans held for investment — non-controlled:        
US - ALASA Mgt. Holdings, LLCPreferred equity investmentMultifamily16.0%4/7/20128/1/2022$2,100,000
$2,141,204
$2,124,927
0.8%
 SVA Mgt. Holdings, LLCPreferred equity investmentMultifamily16.0%4/7/20128/1/20221,600,000
1,633,817
1,619,625
0.6%
 Total US - AL     3,700,000
3,775,021
3,744,552
1.4%
US - CAPalmer City-Core Stockton Street, LLCPreferred equity investmentHotel12.0%1/17/201412/17/20174,325,000
4,368,250
4,367,145
1.6%
 Maguire Partners-1733 Ocean, LLCFirst mortgageOfficeLIBOR+8.5%
3/7/20163/9/201852,986,912
53,494,280
53,637,569
19.3%
 
L.A. Warner Hotel Partners, LLC (3)(4)(5)
Preferred equity investmentHotel12.0%7/25/20148/4/201832,100,000
32,669,975
32,417,458
11.7%
 
TSG-Parcel 1, LLC (3)(5)(6)(7)
First mortgageLand12.0%7/10/201510/10/201718,000,000
18,180,000
18,174,048
6.6%
 
SparQ Mezz Borrower, LLC (8)
Mezzanine loanMultifamily12.0%9/29/201710/1/2020—
—
—
—%
 Total US - CA     107,411,912
108,712,505
108,596,220
39.2%
US - DE
BPG Office Partners III/IV LLC (3)(4)(5)
Mezzanine loanOffice13.5%6/5/20156/5/201810,000,000
10,091,154
10,096,628
3.6%
US - FL
1100 Biscayne Management
   Holdco, LLC (3)(5)(7)
Mezzanine loanHotel12.0% current
3.0% PIK
4/24/201510/9/201715,809,601
15,954,054
15,952,786
5.8%
 
37 Gables Member LLC (4)(5) 
Mezzanine loanMultifamily13.0%6/16/20166/16/20195,750,000
5,795,947
5,800,317
2.1%
 
Greystone Gables Holdings Member
   LLC (4)(5)
Preferred equity investmentMultifamily13.0%6/16/20166/16/2019500,000
503,995
504,375
0.2%
 
RS JZ 2700 NW2, LLC (3)(5)
First mortgageLand12.0%9/1/201612/1/201721,360,000
21,569,263
21,575,419
7.8%
 Total US - FL     43,419,601
43,823,259
43,832,897
15.9%
US - GAYMP Georgia Portfolio Mezzanine, LLCMezzanine loanMultifamily14.0%12/19/20131/6/20194,250,000
4,487,398
4,286,112
1.5%
 
OHM Atlanta Owner, LLC (5)(6)(9)
First mortgageLand12.0%6/20/20176/20/201824,500,000
24,724,490
24,724,490
8.9%
 Total US - GA     28,750,000
29,211,888
29,010,602
10.4%
US - INMuncie Mezz, LLCMezzanine loanStudent
housing		13.0%8/29/20139/6/20232,700,000
2,688,171
3,059,033
1.1%
US - MA150 Blackstone River Road, LLCMezzanine loanIndustrial8.5%9/21/20179/6/20277,000,000
7,000,000
7,000,000
2.5%
US - NC
Milestone Greensboro Holdings,
   LLC (4)(5)
Mezzanine loanHotel14.0%3/1/20133/1/20183,500,000
3,540,614
3,534,591
1.3%



8



Terra Secured Income Fund 5, LLC
Consolidated Schedule of InvestmentsInvestment (Continued)
SeptemberJune 30, 20172020 (unaudited) and December 31, 20162019


Terra Property TrustTrust’s Schedule of Loans Held for Investment as of SeptemberJune 30, 20172020 (Continued):
Portfolio CompanyCollateral LocationProperty
Type		Coupon
Rate		Current Interest RateExit FeeAcquisition DateMaturity
Date		Principal AmountAmortized
Cost
Fair
Value (1)
Pro Rata 
Fair Value (2)
% (3)
Loans held for investment:
Preferred equity investments:
370 Lex Part Deux, LLC (5)(6)
US - NYOfficeLIBOR + 8.25% (2.44% Floor)10.7 %— %12/17/20181/9/2022$51,037,529 $51,094,313 $49,728,042 $38,041,952 15.9 %
City Gardens 333 LLC (5)(6)
US - CAMultifamilyLIBOR + 9.95% (2.0% Floor)12.0 %— %4/11/20184/1/202127,449,731 27,461,070 27,446,297 20,996,417 8.8 %
NB Private Capital, LLC (5)(6)(8)
VariousStudent housing16.0 %16.0 %1.0 %7/27/20184/16/202119,670,115 19,837,285 19,864,687 15,196,486 6.3 %
Orange Grove Property Investors, LLC (5)(6)
US - CACondominiumLIBOR + 8.0% (4.0% Floor)12.0 %1.0 %5/24/20186/1/202110,600,000 10,699,082 10,680,949 8,170,926 3.4 %
REEC Harlem Holdings Company, LLCUS - NYInfill landLIBOR + 12.5% (no Floor)12.7 %— %3/9/20183/9/202314,759,047 14,759,047 13,573,859 10,384,002 4.4 %
RS JZ Driggs, LLC (5)(6)(9)
US - NYMultifamily12.3 %12.3 %1.0 %5/1/20188/1/20208,200,000 8,276,271 8,282,546 6,336,148 2.7 %
The Bristol at Southport, LLC (8)
US - WAMultifamily12.0 %12.0 %1.0 %9/22/20179/22/202223,500,000 23,671,815 23,951,192 18,322,662 7.7 %
155,216,422 155,798,883 153,527,572 117,448,593 49.2 %
First mortgages:
14th & Alice Street Owner, LLC (5)(10)
US - CAMultifamilyLIBOR + 5.75% (3.25% Floor)9.0 %0.5 %3/5/20193/5/202224,510,905 24,689,333 24,407,964 18,672,092 7.8 %
1389 Peachtree St, LP; 1401 Peachtree St, LP;
   1409 Peachtree St, LP (11)
US - GAOfficeLIBOR + 4.5% (no Floor)4.7 %0.5 %2/22/20192/10/202245,671,947 45,853,379 45,821,197 35,053,216 14.7 %
330 Tryon DE LLC (11))
US - NCOfficeLIBOR + 3.85% (2.51% Floor)6.4 %0.5 %2/7/20193/1/202222,800,000 22,896,169 22,898,866 17,517,632 7.4 %
AGRE DCP Palm Springs, LLC (11)
US - CAHotelLIBOR +4.75% (1.80% Floor)6.6 %0.5 %12/12/20191/1/202332,975,680 33,030,797 33,084,469 25,309,619 10.6 %
MSC Fields Peachtree Retreat, LLC (11)
US - GAMultifamilyLIBOR + 3.85% (2.0% Floor)5.9 %0.5 %3/15/20194/1/202223,308,335 23,442,092 23,108,448 17,677,963 7.4 %
Patrick Henry Recovery Acquisition, LLC (11)
US - CAOfficeLIBOR + 2.95% (1.5% Floor)4.5 %0.3 %11/25/201912/1/202318,000,000 18,038,578 17,845,715 13,651,972 5.7 %
TSG-Parcel 1, LLC (5)(6)
US - CAInfill land15.0 %15.0 %1.0 %7/10/201512/31/202018,000,000 18,180,000 18,177,747 13,905,976 5.8 %
University Park Berkeley, LLCUS - CAStudent housingLIBOR + 2.95% (1.50% Floor)4.5 %0.3 %2/27/20203/1/202323,250,000 23,272,652 23,304,937 17,828,277 7.5 %
Windy Hill PV Five CM, LLC (12)
US - CAOfficeLIBOR + 6.0% (2.05% Floor)8.1 %0.5 %9/20/20199/20/202213,797,643 13,498,117 13,825,988 10,576,881 4.4 %
222,314,510 222,901,117 222,475,331 170,193,628 71.3 %
Total gross loans held for investment414,103,939 415,762,576 412,675,853 315,697,028 132.3 %
Obligations under participation agreements (5)(6)(10)
(78,116,748)(78,246,519)(77,898,387)(59,592,266)(25.1)%
Allowance for loan losses— (1,314,294)— — — %
Net loans held for investment$335,987,191 $336,201,763 $334,777,466 $256,104,762 107.2 %
Collateral LocationPortfolio CompanyStructureProperty
Type		Coupon
Rate		Acquisition Date
Maturity
Date
Principal Amount
Amortized
Cost
Fair
Value (1)
% of Net
 Assets (2)
 Loans held for investment — non-controlled:        
US - NY
Cape Church Mezz, LLC (3)(4)(5)
Mezzanine loanMultifamily12.0%3/15/20167/15/2019$16,663,302
$16,797,445
$16,730,367
6.0 %
 
140 Schermerhorn Street Mezz LLC (5)(6)
Mezzanine loanHotel12.0%11/16/201612/1/201915,000,000
15,115,355
15,130,717
5.5 %
 575 CAD I LLCMezzanine loanLand12.0% current
2.5% PIK
1/31/20178/1/20199,280,360
9,350,309
9,352,034
3.4 %
 WWML96MEZZ, LLCMezzanine loanMultifamily13.0%12/18/201512/31/20187,687,862
7,753,121
7,767,565
2.8 %
 WWML96, LLCPreferred equity investmentMultifamily13.0%12/18/201512/31/20181,438,384
1,450,594
1,447,064
0.5 %
 Total US - NY     50,069,908
50,466,824
50,427,747
18.2 %
US - OR
Pollin Hotels PDX Mezzanine, LLC (4)(5)
Mezzanine loanHotel13.0%9/23/201310/6/20185,000,000
5,225,052
5,240,101
1.9 %
US - PA
Millennium Waterfront Associates,
   L.P.
First mortgageLand12.0%7/2/201512/29/201714,150,000
14,291,500
14,290,080
5.2 %
US - SC
High Pointe Mezzanine Investments,
   LLC (4)(5)
Mezzanine loanStudent
housing		13.0%12/27/20131/6/20243,000,000
3,396,889
3,428,790
1.2 %
US - TN
Kingsport 925-Mezz LLC (4)(5)
Mezzanine loanMultifamily13.0%1/6/201412/5/20183,000,000
3,138,451
3,120,351
1.1 %
US - TX
Northland Museo Member, LLC (4)(5)
Mezzanine loanMultifamily12.0%11/22/201312/6/20184,000,000
3,967,600
4,072,570
1.5 %
 
Austin H. I. Owner LLC (3)(5)
Mezzanine loanHotel12.5%9/30/201510/6/20203,500,000
3,523,928
3,539,140
1.3 %
 AHF-Heritage #1, LLCMezzanine loanMultifamily14.0%7/30/20128/11/20222,689,038
2,919,386
2,729,307
1.0 %
 Total US - TX     10,189,038
10,410,914
10,341,017
3.8 %
US - UT
NB Factory JV, LLC (5)(6)
Preferred equity
   investment
Student
   housing
15.0%6/29/20176/26/20203,595,670
3,595,670
3,595,670
1.2 %
US - WA
The Bristol at Southport, LLC (5)(9)
Preferred equity
   investment
Multifamily10.0% current
2.0% PIK
9/22/201710/1/202222,500,000
22,623,164
22,685,693
8.2 %
US - Various
Nelson Brothers Professional Real
   Estate, LLC (7)
FacilityVarious15.0%8/31/20161/27/20188,000,000
8,080,000
8,078,999
2.9 %
 Total loans held for investment — non-controlled:    325,986,129
330,071,076
330,082,971
119.1 %
           
 
Loan held for investment through participation interest — non-controlled (10):
       
US - PA
KOP Hotel XXXI Mezz LP (3)(5)
Participation in
mezzanine loan		Hotel13.0%11/24/201512/6/20221,800,000
1,804,562
1,820,502
0.7 %
 Total loan held for investment through participation interest — non-controlled   1,800,000
1,804,562
1,820,502
0.7 %
           
 Total gross loans held for investment     327,786,129
331,875,638
331,903,473
119.7 %
 
Obligations under participation agreements (3)(4)(6)(9)(10)
    (70,020,950)(70,992,661)(70,910,091)(25.6)%
 Net loans held for investment     $257,765,179
$260,882,977
$260,993,382
94.1 %



See notes to unaudited financial statements.

8
9



Terra Secured Income Fund 5, LLC
Consolidated Schedule of InvestmentsInvestment (Continued)
SeptemberJune 30, 20172020 (unaudited) and December 31, 20162019


Terra Property Trust’s Schedule of Loans Held for Investment as of June 30, 2020 (Continued):
___________________________
(1)Because there is no readily available market for these loans, the fair values of these loans are approved in good faith by Terra Income Advisors, LLC (the “Manager”) pursuant to Terra Property Trust’s valuation policy.
(2)Percentages are based on the fair value of the Company’s investment in Terra Property Trust of $277.3 million as of September 30, 2017.
(3)Terra Property Trust sold a portion of its interests in these loans via participation agreements to Terra Secured Income Fund 5 International, an affiliated fund advised by the Manager.
(4)Terra Property Trust sold a portion of its interests in these loans via participation agreements to Terra Income Fund International, an affiliated fund advised by the Manager.
(5)
The loan participations from Terra Property Trust do not qualify for sale accounting under Accounting Standards Codification (“ASC”) Topic 860, Transfers and Servicing, and therefore, the gross amount of these loans remain in the Consolidated Schedule of Loans Held for Investments.
(6)Terra Property Trust sold a portion of its interest in this loan through a participation agreement to Terra Income Fund 6, Inc., an affiliated fund advised by the Manager.
(7)The maturity date of this loan was extended subsequent to September 30, 2017.
(8)On September 29, 2017, Terra Property Trust entered into agreement with the borrower to provide funding commitment of up to $8.7 million. As of September 30, 2017, none of the commitment has been funded.
(9)Terra Property Trust sold a portion of its interest in this loan through a participation agreement to Terra Property Trust 2, Inc., an affiliated fund managed by a subsidiary of the Manager.
(10)Terra Property Trust purchased its interest in this loan from Terra Income Fund 6, Inc. through a participation agreement.

Operating real estate:
DescriptionAcquisition DateReal estate owned, netEncumbranceNet Investment
Pro Rata Net Investment (2)
% (3)(15)

Multi-tenant office building in Santa Monica, CA (13)
7/30/2018$50,570,596  $44,481,855  $6,088,741  $4,657,887  2.0 %
Land in Conshohocken, PA (14)
1/9/201913,395,430  —  13,395,430  10,247,504  4.2 %
$63,966,026  $44,481,855  $19,484,171  $14,905,391  6.2 %
Portfolio CompanyInterest RateAcquisition DateMaturity DateSharesCostFair Value
Pro Rata
Fair Value (2)
% (3)
Marketable securities (16):
Preferred shares:
City Office REIT, Inc. - Series A Preferred Shares6.63 %3/19/202010/4/20215,768  $104,653  $136,529  $104,445  0.04 %
City Office REIT, Inc. - Series A Preferred Shares6.63 %3/26/202010/4/20214,206  63,910  99,556  76,160  0.04 %
Total marketable securities$168,563  $236,085  180,605  0.08 %
__________________________

(1)Because there is no readily available market for these loans, these loans were valued using significant unobservable inputs under Level 3 of the fair value hierarchy and were approved in good faith by Terra REIT Advisors, LLC (“Terra REIT Advisors”), Terra Property Trust’s manager, pursuant to Terra Property Trust’s valuation policy.
(2)Amount represents the Company’s portion, or 76.5%, of the fair value or net investment value.
(3)Percentage is based on the Company’s pro rata share of the fair value or net investment value over the Company’s total members’ capital of $238.7 million at June 30, 2020.
(4)Terra Property Trust entered into a forbearance agreement with the borrower to allow for more time to make the interest payment.
(5)The loan participations from Terra Property Trust do not qualify for sale accounting and therefore, the gross amount of these loans remain in the consolidated balance sheets.
(6)Terra Property Trust sold a portion of its interest in this loan through a participation agreement to Terra Income Fund 6, Inc., an affiliated fund advised by Terra Income Advisors, LLC (“Terra Income Advisors”), an affiliate of our sponsor and Terra Property Trust’s manager.
(7)On June 27, 2018, Terra Property Trust entered into a participation agreement with Terra Income Fund 6, Inc. to purchase a 25% interest, or $4.3 million, in a mezzanine loan. As of June 30, 2020, the commitment was fully funded.
(8)In June 2020, Terra Property Trust amended the credit facility agreement to provide for interest at a fixed rate of 16.00% and to capitalize any unpaid interest to principal.
(9)In August 2020, Terra Property Trust extended the maturity of this loan to February 1, 2021.
(10)Terra Property Trust sold a portion of its interest in this loan via a participation agreement to a third-party.
(11)These loans were used as collateral for $95.4 million of borrowings under a repurchase agreement.
(12)In March 2020, Terra Property Trust restructured the loan into A-note and B-note. In connection with the restructuring, Terra Property Trust sold the A-note to a third-party. However, the sale did not qualify for sale accounting and therefore, the gross amount of the loan remains in the consolidated balance sheets.

9
10



(13)Terra Property Trust acquired this property through foreclosure of a $54.0 million first mortgage. Real estate owned, net amount includes building and building improvements, tenant improvements and lease intangible assets and liabilities, net of accumulated depreciation and amortization.
(14)Terra Property Trust acquired the collateral for this loan via deed in lieu of foreclosure. On June 30, 2019, Terra Property Trust recorded an impairment charge of $1.6 million on the land in order to reduce the carrying value of the land to its estimated fair value, which is the estimated selling price less the cost of sale.
(15)Percentage is based on Terra Property Trust’s net exposure on the property (real estate owned less encumbrance).
(16)From time to time, Terra Property Trust might invest in short-term debt and equity securities. These securities are comprised of shares of preferred stock and bonds.




See notes to unaudited financial statements.
10

Terra Secured Income Fund 5, LLC
Consolidated Schedule of InvestmentsInvestment (Continued)
SeptemberJune 30, 20172020 (unaudited) and December 31, 20162019
        
The following table presents a schedule of loans held for investment held by Terra Property Trust as of December 31, 2016:
2019:
Collateral LocationPortfolio CompanyStructureProperty
Type		Coupon
Rate		Acquisition Date
Maturity
Date
Principal Amount
Amortized
Cost
Fair
Value (1)
% of Net
 Assets (2)
 Loans held for investment — non-controlled:        
US - ALASA Mgt. Holdings, LLCPreferred equity investmentMultifamily15.0%4/7/20128/1/2022$2,100,000
$2,145,498
$2,120,737
0.7%
 SVA Mgt. Holdings, LLCPreferred equity investmentMultifamily15.0%4/7/20128/1/20221,600,000
1,637,463
1,615,800
0.6%
 Total US - AL     3,700,000
3,782,961
3,736,537
1.3%
US - CAPalmer City-Core Stockton Street, LLCPreferred equity investmentHotel12.0%1/17/201412/17/20174,325,000
4,368,250
4,369,096
1.5%
 
Encino Courtyard Mezzanine, LLC (3)
Mezzanine loanRetail13.5%12/19/20121/6/20232,500,000
2,609,852
2,529,828
0.9%
 Maguire Partners-1733 Ocean, LLCFirst mortgageOfficeLIBOR+8.5%
3/7/20163/9/201850,450,061
50,902,766
50,924,056
17.4%
 
L.A. Warner Hotel Partners, LLC (4)(5)
Preferred equity investmentHotel13.3%7/25/20148/4/201720,000,000
20,579,513
20,201,344
7.0%
 
SD Carmel Hotel Partners, LLC (3)(4)(5)
Preferred equity investmentHotel12.0%3/13/20151/31/20176,000,000
6,059,398
6,059,398
2.1%
 
TSG-Parcel 1, LLC (4)(5)(6)
First mortgageLand12.0%7/10/20154/10/201718,000,000
18,180,000
18,178,193
6.3%
 Total US - CA     101,275,061
102,699,779
102,261,915
35.2%
US - DE
BPG Office Partners III/IV LLC (4)(5)
Mezzanine loanOffice13.0%6/5/20156/5/201810,000,000
10,082,308
10,123,340
3.5%
US - FLBeach Resort Management, LLCMezzanine loanHotel13.0%7/16/20128/1/20174,500,000
4,518,850
4,517,228
1.6%
 
CGI Mezz 55MM, LLC (3)(4)(5)
Mezzanine loanMixed use12.0% current
2.0% PIK
8/21/20149/6/20193,593,947
3,619,217
3,610,816
1.2%
 
1100 Biscayne Management
   Holdco, LLC (4)(5)
Mezzanine loanHotel12.0% current
3.0% PIK
4/24/201510/9/201715,359,671
15,488,644
15,257,412
5.2%
 
Caton Mezz, LLC (3)(4)(5)
Mezzanine loanOffice12.0% current
2.0% PIK
7/27/20151/27/20175,160,404
5,210,404
5,189,222
1.8%
 37 Gables Member LLCMezzanine loanMultifamily13.0%6/16/20166/16/20195,750,000
5,791,644
5,797,477
2.0%
 Greystone Gables Holdings Member LLCPreferred equity investmentMultifamily13.0%6/16/20166/16/2019500,000
503,621
504,128
0.2%
 RS JZ 2700 NW2, LLCFirst mortgageLand12.0%9/1/201612/1/201719,620,000
19,795,534
19,800,927
6.8%
 Total US - FL     54,484,022
54,927,914
54,677,210
18.8%
US - GAYMP Georgia Portfolio Mezzanine, LLCMezzanine loanMultifamily14.0%12/19/20131/6/20194,250,000
4,604,941
4,387,683
1.5%
US - INMuncie Mezz, LLCMezzanine loanStudent
housing		13.0%8/29/20139/6/20232,700,000
2,683,938
3,039,674
1.0%
US - MA
Phoenix CR 2012A, LLC, Phoenix CR
   2012B, LLC, & Phoenix CR 2012C,
   LLC
Mezzanine loanMultifamily12.0%7/27/20128/11/20224,000,000
4,112,275
4,071,618
1.4%


Portfolio CompanyCollateral LocationProperty
Type		Coupon
Rate		Current Interest RateExit FeeAcquisition DateMaturity
Date		Principal AmountAmortized
Cost
Fair
Value (1)
Pro Rata
Fair Value (2)
% (3)
Loans held for investment — non-controlled:
Mezzanine loans:
150 Blackstone River Road, LLCUS - MAIndustrial8.5 %8.5 %— %9/21/20179/6/2027$7,000,000  $7,000,000  $7,081,127  $6,981,991  2.8 %
2539 Morse, LLC (4)(5)(6)
US - CAStudent housing11.0 %11.0 %1.0 %10/20/201711/1/20207,000,000  7,067,422  7,069,355  6,970,384  2.8 %
Austin H. I. Owner LLC (4)(6)
US - TXHotel12.5 %12.5 %1.0 %9/30/201510/6/20203,500,000  3,531,776  3,534,499  3,485,016  1.4 %
High Pointe Mezzanine Investments, LLC (5)(6)
US - SCStudent housing13.0 %13.0 %1.0 %12/27/20131/6/20243,000,000  3,263,285  3,115,139  3,071,527  1.2 %
LD Milipitas Mezz, LLC (9)
US - CAHotelLIBOR +10.25% (2.75% Floor)13.0 %1.0 %6/27/20186/27/20213,120,887  3,150,546  3,204,261  3,159,401  1.3 %
SparQ Mezz Borrower, LLC (4)(5)(6)
US - CAMultifamily12.0 %12.0 %1.0 %9/29/201710/1/20208,700,000  8,783,139  8,786,127  8,663,121  3.5 %
Stonewall Station Mezz LLC (6)(7)
US - NCHotel12.0% current
2.0% PIK		14.0 %1.0 %5/31/20185/20/20219,792,767  9,875,162  9,883,488  9,745,119  3.9 %
42,113,654  42,671,330  42,673,996  42,076,559  16.9 %






See notes to unaudited financial statements.



11
11



Terra Secured Income Fund 5, LLC
Consolidated Schedule of InvestmentsInvestment (Continued)
SeptemberJune 30, 20172020 (unaudited) and December 31, 20162019




Terra Property TrustTrust’s Schedule of Loans Held for Investment as of December 31, 20162019 (Continued):
Portfolio CompanyCollateral LocationProperty
Type		Coupon
Rate		Current Interest RateExit FeeAcquisition DateMaturity
Date		Principal AmountAmortized
Cost
Fair
Value (1)
Pro Rata
Fair Value (2)
% (3)
Loans held for investment — non-controlled:
Preferred equity investments:
370 Lex Part Deux, LLC (6)(7)(8)
US - NYOfficeLIBOR + 8.25% (2.44% Floor)10.7 %— %12/17/20181/9/2022$48,349,948  $48,425,659  $48,236,458  $47,561,148  19.3 %
City Gardens 333 LLC (4)(5)(6)(7)(8)
US - CAStudent housingLIBOR + 9.95% (2.0% Floor)12.0 %— %4/11/20184/1/202128,049,717  28,056,179  28,057,779  27,664,970  11.2 %
NB Private Capital, LLC (4)(5)(6)(7)(8)
VariousStudent housingLIBOR +10.5% (3.5% Floor)14.0 %1.0 %7/27/20184/16/202120,000,000  20,166,610  20,180,782  19,898,251  8.1 %
Orange Grove Property Investors, LLC (6)(7)
US - CACondominiumLIBOR + 8.0% (4.0% Floor)12.0 %1.0 %5/24/20186/1/202110,600,000  10,696,587  10,695,415  10,545,679  4.3 %
REEC Harlem Holdings Company, LLCUS - NYInfill landLIBOR + 12.5% (no Floor)14.3 %— %3/9/20183/9/202318,444,375  18,444,375  18,280,168  18,024,246  7.3 %
RS JZ Driggs, LLC (6)(7)
US - NYMultifamily12.3 %12.3 %1.0 %5/1/20185/1/20208,200,000  8,286,629  8,277,336  8,161,453  3.3 %
The Bristol at Southport, LLC (4)(5)(6)(8)
US - WAMultifamily12.0 %12.0 %1.0 %9/22/20179/22/202223,500,000  23,661,724  23,769,361  23,436,590  9.5 %
157,144,040  157,737,763  157,497,299  155,292,337  63.0 %
First mortgages:
14th & Alice Street Owner, LLC (10)
US - CAMultifamilyLIBOR + 5.75% (3.25% Floor)9.0 %0.5 %3/5/20193/5/202212,932,034  12,957,731  12,983,863  12,802,089  5.2 %
1389 Peachtree St, LP; 1401 Peachtree St, LP;
   1409 Peachtree St, LP (11)
US - GAOfficeLIBOR + 4.5% (no Floor)6.3 %0.5 %2/22/20192/10/202238,464,429  38,510,650  38,655,000  38,113,830  15.4 %
330 Tryon DE LLC (11)
US - NCOfficeLIBOR + 3.85% (2.51% Floor)6.4 %0.5 %2/7/20193/1/202222,800,000  22,891,149  22,906,207  22,585,520  9.0 %
AGRE DCP Palm Springs, LLC (11)
US - CAHotelLIBOR +4.75% (1.80% Floor)6.6 %0.5 %12/12/20191/1/202330,184,357  30,174,455  30,326,076  29,901,511  12.1 %
MSC Fields Peachtree Retreat, LLC (11)
US - GAMultifamilyLIBOR + 3.85% (2.0% Floor)5.9 %0.5 %3/15/20194/1/202223,308,335  23,446,793  23,418,996  23,091,130  9.3 %
Patrick Henry Recovery Acquisition, LLCUS - CAOfficeLIBOR + 2.95% (1.5% Floor)4.7 %0.3 %11/25/201912/1/202318,000,000  18,037,329  18,042,390  17,789,797  7.2 %
REEC 286 Lenox LLCUS - NYOfficeLIBOR + 2.95% (no Floor)4.7 %— %8/2/20199/22/20194,740,000  4,740,000  4,740,000  4,673,640  1.9 %
TSG-Parcel 1, LLC (4)(6)(7)
US - CAInfill landLIBOR + 10.0% (2.0% Floor)12.0 %1.0 %7/10/20153/31/202018,000,000  18,180,000  18,174,634  17,920,189  7.3 %
Windy Hill PV Five CM, LLCUS - CAOfficeLIBOR + 6.0% (2.05% Floor)8.1 %0.5 %9/20/20199/20/20229,701,468  9,265,568  9,741,954  9,605,567  3.9 %
178,130,623  178,203,675  178,989,120  176,483,273  71.3 %
Total gross loans held for investment377,388,317  378,612,768  379,160,415  373,852,169  151.3 %
Obligations under participation agreements (4)(5)(6)(7)(8)
(102,564,795) (103,186,327) (103,188,783) (101,744,140) (41.2)%
Net loans held for investment$274,823,522  $275,426,441  $275,971,632  $272,108,029  110.1 %
Collateral LocationPortfolio CompanyStructureProperty
Type		Coupon
Rate		Acquisition Date
Maturity
Date
Principal Amount
Amortized
Cost
Fair
Value (1)
% of Net
 Assets (2)
 Loans held for investment — non-controlled:        
US - NCMilestone Greensboro Holdings, LLCMezzanine loanHotel14.0%3/1/20133/1/2018$3,500,000
$3,551,028
$3,550,732
1.2%
US - NJEssence 144 Urban Renewal, LLCFirst mortgageMultifamily12.0%1/14/20153/14/201722,639,955
22,865,291
22,864,082
7.9%
US - NYCape Church Mezz, LLCMezzanine loanMultifamily12.0%3/15/20167/15/201915,207,664
15,323,482
15,341,724
5.3%
 140 Schermerhorn Street Mezz LLCMezzanine loanHotel12.0%11/16/201612/1/201915,000,000
15,105,343
15,118,900
5.2%
 WWML96MEZZ, LLCMezzanine loanMultifamily13.0%12/18/201512/31/20184,075,585
4,106,941
4,104,596
1.4%
 WWML96, LLCPreferred equity investmentMultifamily13.0%12/18/201512/31/20181,303,583
1,313,612
1,281,507
0.4%
 Total US - NY     35,586,832
35,849,378
35,846,727
12.3%
US - ORPollin Hotels PDX Mezzanine, LLCMezzanine loanHotel13.0%9/23/201310/6/20185,000,000
5,356,923
5,324,812
1.8%
US - PAPHL Hotel Partners, LLCPreferred equity investmentHotel13.0%10/8/201311/1/20173,742,000
3,779,420
3,772,758
1.3%
 Millennium Waterfront Associates, L.P.First mortgageLand12.0%7/2/20151/2/201713,980,000
14,119,800
14,118,397
4.9%
 Total US - PA     17,722,000
17,899,220
17,891,155
6.2%
US - SC
High Pointe Mezzanine
   Investments, LLC
Mezzanine loanStudent
housing		13.0%12/27/20131/6/20243,000,000
3,441,697
3,176,165
1.1%
US - TNKingsport 925-Mezz LLCMezzanine loanMultifamily13.0%1/6/201412/5/20183,000,000
3,208,266
3,111,362
1.1%
 
315 JV, LLC (6)
Mezzanine loanOffice12.0% current
3.0% PIK
11/15/20135/28/20176,877,843
6,971,219
6,935,693
2.4%
 Total US - TN     9,877,843
10,179,485
10,047,055
3.5%
US - TXNorthland Museo Member, LLCMezzanine loanMultifamily12.0%11/22/201312/6/20184,000,000
3,946,771
4,051,342
1.4%
 
Austin H. I. Owner LLC (4)(5)
Mezzanine loanHotel12.5%9/30/201510/6/20203,500,000
3,521,769
3,549,105
1.2%
 AHF-Heritage #1, LLCMezzanine loanMultifamily14.0%7/30/20128/11/20222,689,038
2,951,669
2,794,286
1.0%
 Total US - TX     10,189,038
10,420,209
10,394,733
3.6%
US - VariousCapital Square Realty Advisors, LLCFacilityVarious13%-14%
12/17/20137/29/201715,500,000
15,643,328
15,643,328
5.4%
 
Nelson Brothers Professional Real
   Estate, LLC
FacilityVarious15.0%8/31/20167/27/20178,000,000
8,073,342
8,073,342
2.8%
 Total US - Various     23,500,000
23,716,670
23,716,670
8.2%
 Total loans held for investment — non-controlled:    311,424,751
316,174,017
315,110,108
108.5%







See notes to unaudited financial statements.

12
12



Terra Secured Income Fund 5, LLC
Consolidated Schedule of InvestmentsInvestment (Continued)
SeptemberJune 30, 20172020 (unaudited) and December 31, 20162019


Terra Property TrustTrust’s Schedule of Loans Held for Investment as of December 31, 2016 2019(Continued):

Operating real estate:
DescriptionAcquisition DateReal estate owned, netEncumbranceNet Investment
Pro Rata Net Investment (2)
% (3)(14)
Multi-tenant office building in Santa Monica, CA (12)
7/30/2018$52,776,236  $44,614,480  $8,161,756  $8,047,491  3.3 %
Land in Conshohocken, PA (13)
1/9/201913,395,430  —  13,395,430  13,207,894  5.3 %
$66,171,666  $44,614,480  $21,557,186  $21,255,385  8.6 %

Collateral LocationPortfolio CompanyStructureProperty
Type		Coupon
Rate		Acquisition Date
Maturity
Date
Principal Amount
Amortized
Cost
Fair
Value (1)
% of Net
 Assets (2)
 
Loans held for investment through participation interests — non-controlled (7):
       
US - NY
QPT 24th Street Mezz LLC (4)(5)
Participation in
   mezzanine loan
Land12.0% current
2.0% PIK
12/15/20156/15/201712,780,220
12,897,391
12,897,392
4.5 %
US - PA
KOP Hotel XXXI Mezz LP (4)(5)
Participation in
   mezzanine loan
Hotel13.0%11/24/201512/6/20221,800,000
1,804,135
1,847,839
0.6 %
 Total loans held for investment through participation interest — non-controlled   14,580,220
14,701,526
14,745,231
5.1 %
           
 Total gross loans held for investment     326,004,971
330,875,543
329,855,339
113.6 %
 
Obligations under participation agreements (4)(6)
    (32,635,785)(32,986,194)(32,904,955)(11.3)%
 Net loans held for investment     $293,369,186
$297,889,349
$296,950,384
102.3 %

___________________________
(1)Because there is no readily available market for these loans, the fair values of these loans are approved in good faith by the Manager pursuant to Terra Property Trust’s valuation policy.
(2)Percentages are based on the fair value of the Company’s investment in Terra Property Trust of $290.4 million as of December 31, 2016.
(3)This loan was repaid in full.
(4)Terra Property Trust sold a portion of its interests in these loans via participation agreements to Terra Secured Income Fund 5 International, an affiliated fund advised by the Manager.
(5)
The loan participations from Terra Property Trust do not qualify for sale accounting under ASC Topic 860, Transfers and Servicing, and therefore, the gross amount of these loans remain in the Consolidated Schedule of Loans Held for Investments.
(6)Terra Property Trust sold a portion of its interest in this loan through a participation agreement to Terra Income Fund 6, Inc., an affiliated fund advised by the Manager.
(7)Terra Property Trust purchased its interests in these loans from Terra Income Fund 6, Inc. through participation agreements.


(1)Because there is no readily available market for these loans, these loans were valued using significant unobservable inputs under Level 3 of the fair value hierarchy and were approved in good faith by Terra REIT Advisors, Terra Property Trust’s manager, pursuant to Terra Property Trust’s valuation policy.
(2)Amount represents the Company’s portion, or 98.6%, of the fair value or net investment value.
(3)Percentage is based on the Company’s pro rata share of the fair value or net investment value over the Company’s total members’ capital of $247.1 million at December 31, 2019.
(4)Terra Property Trust sold a portion of its interests in these loans via participation agreements to Terra Secured Income Fund 5 International, an affiliated fund advised by Terra REIT Advisors.
(5)Terra Property Trust sold a portion of its interests in these loans via participation agreements to Terra Income Fund International, an affiliated fund advised by Terra REIT Advisors.
(6)The loan participations from Terra Property Trust do not qualify for sale accounting and therefore, the gross amount of these loans remain in the consolidated statements of financial condition.
(7)Terra Property Trust sold a portion of its interest in this loan through a participation agreement to Terra Income Fund 6, Inc., an affiliated fund advised by Terra Income Advisors, an affiliate of our sponsor and Terra Property Trust’s manager.
(8)Terra Property Trust sold a portion of its interest in this loan through a participation agreement to TPT2, an affiliated fund managed by Terra REIT Advisors.
(9)On June 27, 2018, Terra Property Trust entered into a participation agreement with Terra Income Fund 6, Inc. to purchase a 25% interest, or $4.3 million, in a mezzanine loan. As of December 31, 2019, the unfunded commitment was $1.1 million.
(10)Terra Property Trust sold a portion of its interest in this loan via a participation agreement to a third-party.
(11)These loans were used as collateral for $81.1 million of borrowings under a repurchase agreement.
(12)Terra Property Trust acquired this property through foreclosure of a $54.0 million first mortgage. Real estate owned, net amount includes building and building improvements, tenant improvements and lease intangible assets and liabilities, net of accumulated depreciation and amortization.
(13)Terra Property Trust acquired the collateral for this loan via deed in lieu of foreclosure. On June 30, 2019, Terra Property Trust recorded an impairment charge of $1.6 million on the land in order to reduce the carrying value of the land to its estimated fair value, which is the estimated selling price less the cost of sale.
(14)Percentage is based on Terra Property Trust’s net exposure on the property (real estate owned less encumbrance).



See notes to consolidatedunaudited financial statements.



13
13

Notes to Consolidated Financial Statements (Unaudited)

Terra Secured Income Fund 5, LLC
Notes to Consolidated Financial Statements (Unaudited)
SeptemberJune 30, 20172020


Note 1. Business
Terra Secured Income Fund 5, LLC (and, together(the “Company”), is a real estate credit focused company that originates, structures, funds and manages high yielding commercial real estate investments, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments throughout the United States. The Company’s loans finance the acquisition, construction, development or redevelopment of quality commercial real estate in the United States. The Company focuses on the origination of middle market loans in the approximately $10 million to $50 million range, to finance properties in primary and secondary markets. The Company believes loans of this size are subject to less competition, offer higher risk adjusted returns than larger loans with its consolidated subsidiaries, the “Company”),similar risk metrics and facilitate portfolio diversification. The Company was formed as a Delaware limited liability company on April 24, 2013 and commenced operations on August 8, 2013. The Company was formed to originate, acquire and structure real estate-related loans, including mezzanine loans, first and second mortgage loans, subordinated mortgage loans, bridge loans, preferred equity investments and other loans related to high quality commercial real estate. The Company completed its original offering on January 31, 2015 and raised approximately $142 million in gross proceeds. The Company’s investment strategy is to investmakes substantially all of its investments and conducts substantially all of its real estate lending business through Terra Property Trust, which has elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2016. The Company’s objectives are to (i) preserve its members’ capital contributions, (ii) realize income from its investments and (iii) make monthly distributions to its members from cash generated from investments. There can be no assurances that the net proceeds of membership interestsCompany will be successful in and manage a diverse portfolio of, real estate-related loans. The Company seeks to create and maintain a portfolio of investments that generates a low volatility income stream for attractive and consistent cash distributions. The real-estate loans are typically investments between $3 million and $25 million, with unlevered yields on subordinated positions and levered yields on senior positions ranging from 12% to 16% and maturities between one to ten years.meeting its objectives.


In December 2015, the members approved the merger of Terra Secured Income Fund, 1, LLC (“Terra Fund 1”), Terra Secured Income Fund 2, LLC (“Terra Fund 2”), Terra Secured Income Fund 3, LLC (“Terra Fund 3”) and Terra Secured Income Fund 4, LLC (“Terra Fund 4”) with and into subsidiaries of the Company (individually, each a “Terra Fund” and collectively, the “Terra Funds”) through a series of separate mergers effective January 1, 2016.2016 (collectively, the “Merger”). Following the Merger, the Company contributed the consolidated portfolio of net assets of the five5 Terra Funds to Terra Property Trust, a newly-formed and wholly-owned subsidiary of the Company that elected to be taxed as a real estate investment trust (“REIT”),REIT, in exchange for the shares of common sharesstock of Terra Property Trust. Upon completion of the Merger, the Company became the parent company of Terra Funds 1 through 4 and the direct and indirect sole common stockholder of, and began conducting substantially all of its real estate lending business through, Terra Property Trust.

        On March 2, 2020, Terra Fund 1, Terra Fund 2 and Terra Fund 3 merged with and into Terra Fund 4, with Terra Fund 4 continuing as the surviving company (the “Terra Fund Merger”), and the Company consolidated its holdings of shares of common stock of Terra Property Trust in Terra Fund 4. Subsequent to the Terra Fund Merger, the legal name of Terra Fund 4 was changed to Terra JV. On March 2, 2020, Terra Property Trust engaged in a series of transactions pursuant to which Terra Property Trust issued an aggregate of 4,574,470.35 shares of its common stock in exchange for the settlement of an aggregate of $49.8 million of participation interests in loans that Terra Property Trust owned, cash of $25.5 million and other working capital. As of June 30, 2020, Terra JV held 87.4% of the issued and outstanding shares of Terra Property Trust’s common stock with the remainder held by TIF3 REIT, and the Company and Terra Fund 7 owned an 87.6% and 12.4% percentage interest, respectively, in Terra JV (Note 4). The Company does not consolidate Terra Property Trust asJV because the Company and Terra Fund 7 share joint approval rights with respect to certain major decisions that are taken by Terra JV and Terra Property Trust is not an investment company.(Note 4).


The Company’s investment activities are externally managed by Terra IncomeFund Advisors, LLC a private investment firm affiliated with the Company.(“Terra Fund Advisors”). The Company does not currently have any employees and does not expect to have any employees. Services necessary for the Company’s business are provided by individuals who are employees of the Manager or its affiliates or by individuals who were contracted by the Company or by the Manager or its affiliates to work on behalf of the Company pursuant to the terms of the operating agreement, as amended.


The CompanyCompany’s amended and restated operating agreement provides that the Company’s existence will continue in existence until December 31, 2023; however,2023, unless sooner terminated. However, the Company expects that prior to be terminatedsuch date it will consummate a liquidity transaction, which may include an orderly liquidation of its assets or to consummate an alternative liquidity transaction on or prior to the five-year anniversaryevent such as a sale of the completionCompany or an initial public offering and listing of Terra Property Trust’s shares of common stock on a national securities exchange. The Manager would pursue an alternative liquidity event only if it believes such a transaction would be in the best interests of the Company’s original offering, which was January 31, 2015, unless extended for upmembers.

14

Notes to a maximum of two one-year extensions at the discretion of the Manager, in order to facilitate an orderly liquidation or to consummate such alternative liquidity transaction.Unaudited Financial Statements


Note 2. Summary of Significant Accounting Policies


Basis of Presentation and Principles of Consolidation


The consolidatedinterim financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S.(U.S. GAAP”). The financial statements as of December 31, 2019 and includefor the three and six months ended June 30, 2019 and the period from January 1, 2020 to March 1, 2020 included all of the Company’s accounts and those of its consolidated subsidiaries. The consolidated financial statements reflect all adjustments and reclassifications that, in the opinion of management, are necessary for the fair presentation of the Company’s results of operations and financial condition as of and for the periods presented. All intercompany balances and transactions havehad been eliminated. As discussed in Note 1, on March 2, 2020, the Company’s subsidiaries completed the Terra Fund Merger. As a result of the Terra Fund Merger, the Company no longer consolidates the subsidiaries. The financial statements as of June 30, 2020 and for the period from March 2, 2020 to June 30, 2020 and the three months ended June 30, 2020 includes all of the Company’s accounts only.

        The accompanying interim financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Articles 6 or 10 of Regulation S-X. The Company is an investment company, as defined under U.S. GAAP, and applies accounting and reporting guidance in accordance with Financial Accounting Standards Board (“FASB”) ASCAccounting Standards Codification (“ASC”) Topic 946, Financial Services - Investment Companies.


Use of Estimates


The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosuresdisclosure of contingent assets and liabilities atas of the date of the consolidated financial statements and the reported amounts of gains (losses), incomerevenues and expenses during the reporting period. During the first half of 2020, there was a global outbreak of a novel coronavirus (“COVID-19”), which has spread to over 200 countries and territories, including the United States, and has spread to every state in the United States. The World Health Organization has designated COVID-19 as a pandemic, and numerous countries, including the United States, have declared national emergencies with respect to COVID-19. The global impact of the outbreak has been rapidly evolving, and as cases of COVID-19 have continued to be identified in additional countries, many countries have reacted by instituting quarantines and restrictions on travel, closing financial markets and/or restricting trading and operations of non-essential offices and retail centers. Such actions are creating disruption in global supply chains, and adversely impacting many industries. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions. The Company believes the estimates and assumptions underlying its financial statements are reasonable and supportable based on the information available as of June 30, 2020, however uncertainty over the ultimate impact COVID-19 will have on the global economy generally, and the Company’s business in particular, makes any estimates and assumptions as of June 30, 2020 inherently less certain than they would be absent the current and potential impacts of COVID-19. Actual results could significantlymay ultimately differ from those estimates. The most significant estimates inherent in the preparation of the Company’s consolidated financial statements is the valuation of investments.



14
Notes to Consolidated Financial Statements (Unaudited)


Equity Investment in Terra JV or Terra Property Trust


Equity investment in Terra JV or Terra Property Trust represents the Company’s equity interest in Terra JV or Terra Property Trust as applicable, which was initially recorded at cost. Subsequent to the asset contribution, the equity investment is reported, at each reporting date, at fair value on the consolidated statements of financial condition. Change in fair value is reported in net change in unrealized appreciation or depreciation on investment on the consolidated statements of operations.


Revenue Recognition


Revenue is accounted for under ASC 605, Revenue Recognition, which provides among other things that revenue be recognized when there is persuasive evidence an arrangement exists, delivery and services have been rendered, price is fixed and determinable and collectability is reasonably assured.

Dividend Income: Dividend income associated with the Company’s ownership of Terra JV or Terra Property Trust is recognized on the record date as declared by Terra JV or Terra Property Trust. Any excess of dividendsdistributions over Terra JV or Terra Property Trust’s cumulative net income are recorded as return of capital.


Other Operating Income: All other income is recognized when earned.


Cash and Cash Equivalents


The Company considers all highly liquid investments, with original maturities of ninety days or less when purchased, as cash equivalents.Cash and cash equivalents are exposed to concentrations of credit risk. The Company maintains all of its cash at financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation.
15

Notes to Unaudited Financial Statements

Income Taxes


No provision for U.S. federal and state income taxes has been made in the accompanying consolidated financial statements, as individual members are responsible for their proportionate share of the Company’s taxable income. The Company, however, may be liable for New York City Unincorporated Business Tax (the “NYC UBT”) and similar taxes of various other municipalities. New York City imposes the NYC UBT at a statutory rate of 4% on net income generated from ordinary business activities carried on in New York City. For the three and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, none of the Company’s income was subject to the NYC UBT.


Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the consolidated financial statements and tax basis assets and liabilities using enacted tax rates in effect for the year in which differences are expected to reverse. Such deferred tax assets and liabilities were not material.


The Company did not have any uncertain tax positions that met the recognition or measurement criteria of ASC 740-10-25, Income Taxes, nor did the Company have any unrecognized tax benefits as of the periods presented herein. The Company recognizes interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in its consolidated statements of operations. For the three and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, the Company did not incur any interest or penalties. Although the Company files federal and state tax returns, its primary tax jurisdiction is federal. The Company’s inception-to-date2015-2019 federal tax years remain subject to examination by the Internal Revenue Service.


Recent Accounting PronouncementsPronouncement
        
In May 2014,February 2016, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers2018-13, Fair Value Measurement (Topic 606)820): Disclosure framework — Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2014-09”2018-13”). The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services. The Company will adopt this standard on January 1, 2018 using the cumulative effect transition method. The Company is evaluating the impactobjective of ASU 2014-09 but does not currently believe that2018-13 is to improve the applicationeffectiveness of ASU 2014-09 will have a material impact on its consolidateddisclosures in the notes to financial statements by facilitating clear communication of information required by U.S. GAAP. The amendments in ASU 2018-13 added, removed and disclosures.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 retains many current requirements for the classification and measurement of financial instruments; however, it significantly revises an entity’s accounting related to (i) the classification and measurement of investments in equity securities and (ii) the presentation ofmodified certain fair value changes for


15
Notes to Consolidated Financial Statements (Unaudited)

financial liabilities measured at fair value.measurement disclosure requirements. ASU 2016-01 also amends certain disclosure requirements associated with the fair value of financial instruments. This guidance2018-13 is effective for the Company beginning on January 1, 2018. Management is currently
evaluating the impact these changes will have on the Company’s consolidated financial statementsall entities for fiscal years, and disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 outlines a new model for accounting by lessees, whereby their rights and obligations under substantially all leases, existing and new, would be capitalized and recorded on the balance sheet. For lessors, however, the accounting remains largely unchanged from the current model, with the distinction between operating and financing leases retained, but updated to align with certain changes to the lessee model and the new revenue recognition standard. The new standard also replaces existing sale-leaseback guidance with a new model applicable to both lessees and lessors. Additionally, the new standard requires extensive quantitative and qualitative disclosures. ASU 2016-02 is effective for U.S. GAAP public companies forinterim periods within those fiscal years, beginning after December 15, 2018, including2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim periods within those fiscal years. Early application will be permitted for all entities. The new standard must be adopted using a modified retrospective transition of the new guidance and provides for certain practical expedients. Transition will require application of the new model at the beginning of the earliest comparativeor annual period presented. This ASU is not expected to have any impact on the Company’s consolidated financial statements and disclosures as the Company does not have any lease arrangements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, a Consensus of the FASB’s Emerging Issues Task Force (“ASU 2016-15”).  ASU 2016-15 provides guidance on how certain transactions are classifiedpresented in the statementinitial fiscal year of cash flows. ASU 2016-15 isadoption. All other amendments should be applied retrospectively to all periods presented upon their effective for annual and interim periods beginning after December 15, 2017. The guidance requires application using a retrospective transition method.date. The Company does not expect theadopted ASU 2018-13 on January 1, 2020. The adoption of ASU 2016-15 to have a material impact on its consolidated financial statements and disclosures.

In October 2016, the U.S. Securities and Exchange Commission adopted new rules and amended rules (together, “final rules”) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The Company adopted the amendments to Regulation S-X on August 1, 2017. The adoption2018-13 did not have a material impact on its consolidated financial statements and disclosures.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 intends to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business: inputs, processes, and outputs. While an integrated set of assets and activities, collectively referred to as a “set,” that is a business usually has outputs, outputs are not required to be present. ASU 2017-01 provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. ASU 2017-01 will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. Management is currently evaluating the impact of this change will have on the Company’s consolidated financial statements and
disclosures.

Note 3. Investment and Fair Value


Equity Investment in Terra JV or Terra Property Trust


The Company investsinvested substantially all of its equity capital in the purchase of shares of common stock of Terra Property Trust. On March 2, 2020, Terra Property Trust engaged in a series of transactions pursuant to which Terra Property Trust issued an aggregate of 4,574,470.35 shares of its common stock in exchange for the settlement of an aggregate of $49.8 million of participation interests in loans that Terra Property Trust owned, cash of $25.5 million and other working capital. As of June 30, 2020, Terra JV held 87.4% of the issued and outstanding shares of Terra Property TrustTrust’s common stock with the remainder held by TIF3 REIT, and its primarythe Company and Terra Fund 7 owned an 87.6% and 12.4% percentage interest, respectively, in Terra JV, and Terra JV became the Company’s only investment position is the common shares of Terra Property Trust.(Note 4).


16

Notes to Unaudited Financial Statements

The following table presentstables present a summary of the Company’s investment at SeptemberJune 30, 20172020 and December 31, 2016:2019:
June 30, 2020
InvestmentCostFair Value% of Members’ Capital
87.6% interest in Terra JV, LLC$238,509,445  $238,509,869  99.9 %
 September 30, 2017 December 31, 2016December 31, 2019
Investment Cost Fair Value % of Net Assets Cost Fair Value % of Net AssetsInvestmentCostFair Value% of Members’ Capital
14,912,990 common shares
of Terra Property Trust, Inc.
 $277,456,081
 $277,326,857
 100.1% $291,468,567
 $290,419,317
 100.3%14,912,990 common shares of Terra Property Trust, Inc.$243,924,852  $247,263,245  100.1 %


For the three months ended SeptemberJune 30, 20172020 and 2016,2019, the Company received approximately $13.1$3.4 million and $9.6$7.6 million of dividendsdistributions from Terra JV and/or Terra Property Trust as applicable, respectively, of which $8.7$2.7 million and none$7.6 million were returns of capital, respectively. For the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, the Company received approximately $29.7$11.2 million and $25.4$15.2 million of dividendsdistributions from Terra JV and/or Terra Property Trust as applicable, respectively, of which $14.0$9.3 million and $0.3$11.3 million were returns of capital, respectively.



16
Notes to Consolidated Financial Statements (Unaudited)


        As of June 30, 2020 and December 31, 2019, the Company indirectly beneficially owned 76.5% (Note 4) and directly owned 98.6% of the outstanding shares of common stock of Terra Property Trust, respectively. The following tables present the summarized financial information of Terra Property Trust:
June 30, 2020December 31, 2019
Carrying value of loans held for investment$414,448,282  $378,612,768  
Real estate owned, net75,694,708  77,596,475  
Cash, cash equivalent and restricted cash102,945,300  50,549,700  
Other assets21,143,973  20,584,135  
Total assets614,232,263  527,343,078  
Mortgage loan payable, repurchase agreement payable, revolving credit facility
payable and obligations under participation agreements		(252,571,125) (227,548,397) 
Accounts payable, accrued expenses and other liabilities(41,304,905) (40,826,139) 
Lease intangible liabilities(11,127,360) (11,424,809) 
Total liabilities(305,003,390) (279,799,345) 
Stockholder’s equity$309,228,873  $247,543,733  
  September 30, 2017 December 31, 2016
Carrying value of investments $331,875,638
 $330,683,840
Other assets 79,469,290
 53,966,401
Total assets 411,344,928
 384,650,241
Mortgage loan payable and obligations under participation agreements (105,051,385) (66,855,038)
Accounts payable, accrued expenses and other liabilities (28,725,822) (26,203,277)
Total liabilities (133,777,207) (93,058,315)
Stockholder’s equity $277,567,721
 $291,591,926
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Revenues$12,064,629  $13,332,694  $24,142,200  $26,070,628  
Expenses(10,562,322) (13,486,179) (21,750,371) (22,301,238) 
Net loss on extinguishment of obligations under participation agreements—  —  (319,453) —  
Realized gains on marketable securities1,076,213  —  1,085,107  —  
Unrealized gains on marketable securities67,522  —  67,522  —  
Net income (loss)$2,646,042  $(153,485) $3,225,005  $3,769,390  
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Revenues $9,651,677
 $14,408,350
 $28,197,274
 $37,395,488
Expenses (4,598,716) (4,584,017) (12,379,894) (12,493,517)
Realized gain on investments (604,169) —
 (114,209) 140,375
Net income $4,448,792
 $9,824,333
 $15,703,171
 $25,042,346


Fair Value Measurements


The Company adopted the provisions of ASC 820, Fair Value Measurement (“ASC 820”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 established a fair value hierarchy that prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment, the characteristics specific to the investment, and the state of the marketplace (including the existence and transparency of transactions between market participants). Investments with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree
17

Notes to Unaudited Financial Statements

of judgment used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Investments measured and reported at fair value are classified and disclosed into one of the following categories based on the inputs as follows:


Level 1 — Quoted prices (unadjusted) in active markets for identical assets and liabilities that the Company has the ability to access.


Level 2 — Pricing inputs are other than quoted prices in active markets, including, but not limited to, quoted prices for similar assets and liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market corroborated inputs.


Level 3 — Significant unobservable inputs are based on the best information available in the circumstances, to the extent observable inputs are not available, including the Company’s own assumptions used in determining the fair value of investments. Fair value for these investments are determined using valuation methodologies that consider a range of factors, including but not limited to the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance, and financing transactions subsequent to the acquisition of the investment. The inputs into the determination of fair value require significant management judgment.
       
  In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.
        


17
Notes to Consolidated Financial Statements (Unaudited)

Assets and Liabilities Reported at Fair Value


The following table summarizes the Company’s equity investment in Terra Property Trust at fair value on a recurring basis as of SeptemberJune 30, 20172020 and December 31, 2016:2019:
June 30, 2020
Fair Value Measurements
Level 1Level 2Level 3Total
Investment:
Equity investment in Terra JV$—  $—  $238,509,869  $238,509,869  
December 31, 2019
Fair Value Measurements
Level 1Level 2Level 3Total
Investment:
Equity investment in Terra Property Trust$—  $—  $247,263,245  $247,263,245  

18

Notes to Unaudited Financial Statements

 September 30, 2017
 Fair Value Measurements
 Level 1 Level 2 Level 3 Total
Investment:       
Equity investment in Terra Property Trust$—
 $—
 $277,326,857
 $277,326,857

 December 31, 2016
 Fair Value Measurements
 Level 1 Level 2 Level 3 Total
Investment:       
Equity investment in Terra Property Trust$—
 $—
 $290,419,317
 $290,419,317

Changes in Level 3 investment for the ninesix months ended SeptemberJune 30, 20172020 and 20162019 were as follows:
Equity Investment in Terra JVEquity Investment in Terra Property Trust
Period from March 2, 2020 to June 30, 2020Period from January 1, 2020 to March 1, 2020Six Months Ended June 30, 2019
Beginning balance$—  $247,263,245  $263,092,586  
Transfer of ownership interest in Terra Property Trust to
Terra JV		244,006,890  (244,006,890) —  
Return of capital(5,497,444) (3,783,607) (11,260,039) 
Net change in unrealized appreciation on investment423  527,252  3,198,259  
Ending balance$238,509,869  $—  $255,030,806  
Net change in unrealized appreciation on investment for the
period relating to those Level 3 assets that were still held by
the Company		$423  $527,252  $3,198,259  
  Equity Investment in Terra Property Trust
  Nine Months Ended September 30,
  2017 2016
Beginning balance $290,419,317
 $—
Shares of Terra Property Trust common stock received in exchange for the Company’s
   consolidated portfolio of net assets
 —
 288,259,804
Shares of Terra Property Trust common stock purchased —
 10,000,000
Return of capital (14,012,486) (315,730)
Net change in unrealized depreciation on investment 920,026
 (1,400,694)
Ending balance $277,326,857
 $296,543,380
Net change in unrealized depreciation on investment for the period relating to those
   Level 3 assets that were still held by the Company
 $920,026
 $(1,400,694)


Transfers between levels, if any, are recognized at the beginning of the period in which transfers occur. For the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, there were no transfers.


The Company estimated that its other financial assets and liabilities had fair values that approximated their carrying values at SeptemberJune 30, 20172020 and December 31, 20162019 due to their short-term nature.


Valuation Process for Fair Value Measurement


Market quotations are not readily available for the Company’s real estate-related investments throughinvestment in Terra Property Trust all ofor Terra JV, which areis included in Level 3 of the fair value hierarchy,hierarchy. The fair value of the Company’s sole investment takes into consideration the fair value of Terra Property Trust’s assets and therefore these investmentsliabilities which are valued utilizing a yield approach, i.e. a discounted cash flow methodology to arrive at an estimate of the fair value of each respective investment in the portfolio using an estimated market yield.methodology. In following this methodology, investmentsloans are evaluated individually, and management takes into account, in determining the risk-adjusted discount rate for each of the Company’s investments,Terra Property Trust’s loans, relevant factors, including available current market data on applicable yields of comparable debt/preferred equity instruments; market credit spreads and yield curves; the investment’s yield; covenants of the investment, including prepayment provisions,provisions; the portfolio company’s ability to make payments, its net operating income, debt-service coverage ratio (“DSCR”),ratio; construction progress reports and construction budget analysis; the nature, quality, and realizable value of any collateral (and loan-to-value ratio); and the forces that influence the local markets in which the asset (the collateral) is purchased and sold, such as capitalization rates, occupancy rates, rental rates, replacement costs and the anticipated duration of each real estate-related loan investment.loan.



18
Notes to Consolidated Financial Statements (Unaudited)


The Manager designates a valuation committee to oversee the entire valuation process of the Company’sTerra Property Trust’s Level 3 investments. The valuation committee is comprised of members of the Manager’s senior management, deal and portfolio management teams, who meet on a quarterly basis, or more frequently as needed, to review the CompanyTerra Property Trust investments being valued as well as the inputs used in the proprietary valuation model. Valuations determined by the valuation committee are supported by pertinent data and, in addition to a proprietary valuation model, are based on market data, industry accepted third-party valuation modelsdata and discount rates or other methods the valuation committee deems to be appropriate.

The following tables summarize the valuation techniques and significant unobservable inputs used by the Company to value the Level 3 investments as of SeptemberJune 30, 20172020 and December 31, 2016.2019. The tables are not intended to be all-inclusive, but instead identify the significant unobservable inputs relevant to the determination of fair values.
Fair ValuePrimary Valuation TechniqueUnobservable InputsJune 30, 2020
Asset CategoryMinimumMaximumWeighted Average
Assets:
Equity investment in Terra JV$238,509,869  
Discounted cash flow (1)
Discount rate (1)
2.51 %19.05 %16.82 %
Fair ValuePrimary Valuation TechniqueUnobservable InputsDecember 31, 2019
Asset CategoryMinimumMaximumWeighted Average
Assets:
Equity investment in Terra Property Trust$247,263,245  
Discounted cash flow (1)
Discount rate (1)
4.11 %14.95 %12.36 %
_______________
19

Notes to Unaudited Financial Statements

  Fair ValuePrimary Valuation Technique Unobservable Inputs September 30, 2017
Asset Category   MinimumMaximumWeighted Average
Assets:          
Equity investment in Terra Property Trust $277,326,857
 Discounted cash flow Discount rate 2.56%15.00%12.71%
(1)Discounted cash flows and discount rates applied to Terra Property Trust’s assets and liabilities.

Risks and Uncertainties

        The Company’s investment in Terra Property Trust or Terra JV is highly illiquid and there is no assurance that the Company will achieve its investment objectives, including targeted returns. Terra Property Trust’s loans are highly illiquid. Due to the illiquidity of the loans, valuation of the loans may be difficult, as there generally will be no established markets for these loans. As the Company’s investment is carried at fair value with fair value changes recognized in the statements of operations, any changes in fair value would directly affect the Company’s members’ capital.

  Fair ValuePrimary Valuation Technique Unobservable Inputs December 31, 2016
Asset Category   MinimumMaximumWeighted Average
Assets:          
Equity investment in Terra Property Trust $290,419,317
 Discounted cash flow Discount rate 9.09%15.96%12.19%

Note 4. Related Party Transactions

Merger

In December 2015, the members approved the merger of Terra Fund 1, Terra Fund 2, Terra Fund 3 and Terra Fund 4 with and into subsidiaries of the Company through a series of separate mergers effective January 1, 2016. Following the Merger, the Company contributed the consolidated portfolio of net assets of the five Terra Funds to Terra Property Trust in exchange for the common shares of Terra Property Trust. Upon completion of the Merger, the Company became the parent company of Terra Funds 1 through 4 and the direct and indirect sole common stockholder of, and began conducting substantially all of its real estate lending business through, Terra Property Trust.

Consent Solicitation

Terra Capital Markets, LLC (“Terra Capital Markets”), an affiliate of the manager, served as the dealer manager for the consent solicitation on the Merger, and was paid a voting advisory fee of $750 per initial unit sold to members in the Terra Funds and a dealer manager fee of 0.5% of the aggregate offering price of the units originally issued by the Terra Funds. Most of these fees were re-allowed to participating dealers. The Terra Funds also incurred costs for legal, accounting, and other professional services in connection with the consent solicitation. For the nine months ended September 30, 2016, the Company incurred $0.4 million of merger transaction costs.

Rights Offering

In connection with the Merger, the Company offered existing members of the Terra Funds the opportunity to invest in the Company through purchase of additional membership units (the “Rights Offering”). Terra Capital Markets served as the dealer manager for the sale of the Company’s membership units and received compensation of 3% in selling commission, 1% in dealer manager fees and a 1% broker dealer fee. Most of these fees are re-allowed to independent broker dealers and financial advisors. These fees amounted to approximately $1.3 million for the nine months ended September 30, 2016 and have been deducted from capital contributions received as selling commissions and dealer manager fees.


Operating Agreement


The Company entered intohas an operating agreement, as amended, with the Manager whereby the Manager is responsible for the Company’s day-to-day operations.Terra Fund Advisors. The operating agreement, as amended, is scheduled to terminate on December 31, 2023 unless the Company is dissolved earlier. Starting January 1, 2016, the Company conducts all of its real estate lending business through Terra Property Trust. As such, Terra Property Trust is responsible for management compensation paid and operating expenses reimbursed to the Managerits manager pursuant to a management agreement with the Manager.


19
Notes to Consolidated Financial Statements (Unaudited)


Due from Terra Property Trust

As of September 30, 2017, amount due from Terra Property Trust was $0.03 million, related to a professional fee invoice the Company paid on its behalf. As of December 31, 2016, there was no amount due from Terra Property Trust.

Due to Terra Property Trust

As of September 30, 2017, there was no amount due to Terra Property Trust. As of December 31, 2016, approximately $0.4 million was due to Terra Property Trust, as reflected on the consolidated statements of financial condition, primarily related to an adjustment to the contribution of the consolidated portfolio of net assets of the five Terra Funds to Terra Property Trust on January 1, 2016.manager.
        
Dividend Income
        
As discussed in Note 3, for the three months ended SeptemberJune 30, 20172020 and 2016,2019, the Company received approximately $13.1$3.4 million and $9.6$7.6 million of distributions from Terra JV and/or Terra Property Trust as applicable, respectively, of which $8.7$2.7 million and none was a return$7.6 million were returns of capital, respectively. For the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, the Company received approximately $29.7$11.2 million and $25.4$15.2 million of distributions from Terra JV and/or Terra Property Trust as applicable, respectively, of which $14.0$9.3 million and $0.3$11.3 million was a returnwere returns of capital, respectively.


TPT2 Merger
Note 5. Significant Risk Factors

In the normal course of business, the Company enters into transactions in various financial instruments. The Company’s financial instruments are subject to, but are not limited to, the following risks:

Market Risk

The Company’s loans through        On February 28, 2020, Terra Property Trust are highly illiquidentered into certain Agreement and there is no assurance that the Company will achieve its investment objectives, including targeted returns. Due to the illiquidityPlan of the loans, valuation of the loans may be difficult, as there generally will be no established markets for these loans. As the Company’s loans were carried at fair value with fair value changes recognized in the consolidated statements of operations, all changes in market conditions would directly affect the Company’s members’ capital.

Credit Risk

Credit risk represents the potential loss thatMerger (the “Merger Agreement”), by and among Terra Property Trust, would incur if the borrowers failed to perform pursuant to the terms of their obligations to Terra Property Trust. Thus, the value of the underlying collateral, the creditworthiness of the borrower or other counterparty, and the priority of Terra Property Trust’s lien on the borrower’s assets are of importance. Terra Property Trust minimizes its exposure2, Inc. (“TPT2”) and Terra Fund 7, the sole stockholder of TPT2, pursuant to credit risk by limiting exposure to any one individual borrowerwhich TPT2 merged with and any one asset class. Additionally,into Terra Property Trust, employs an asset management approach and monitors the portfolio of loans, through, at a minimum, quarterly financial review of property performance including net operating income, loan-to-value ratio, DSCR and the debt yield.with Terra Property Trust also requires certain borrowerscontinuing as the surviving corporation (the “TPT2 Merger”), effective March 1, 2020. In connection with the TPT2 Merger, each share of common stock, par value $0.01 per share, of TPT2 issued and outstanding immediately prior to establish a cash reserve, as a formthe effective time of additional collateral, for the purpose of providing for future interest or property-related operating payments.

Mezzanine loans and preferred equity investments are subordinateTPT2 Merger was converted into the right to senior mortgage loans and, therefore, involve a higher degree of risk. In the event of a default, mezzanine loans and preferred equity investments will be satisfied only after the senior lender’s investment is fully recovered. As a result, in the event of a default,receive from Terra Property Trust may not recover alla number of its investment.

The Company maintains allshares of its cash at financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation.

Concentration Risk

Terra Property Trust holds real estate related loans. Thus, the loan portfoliocommon stock, par value $0.01 per share, of Terra Property Trust may be subjectequal to a more rapid change in value than would bean exchange ratio, which was 1.2031. The exchange ratio was based on the case if Terra Property Trust maintained a wide diversification among industries, companies and types of loans. The result of such concentration in real estate assets is that a loss in such loans could materially reduce Terra Property Trust’s capital.



20
Notes to Consolidated Financial Statements (Unaudited)

Liquidity Risk

Liquidity risk represents the possibility that the Company may not be able to sell its positions at a reasonable price in times of low trading volume, high volatility and financial stress.

Interest Rate Risk

Interest rate risk represents the effect from a change in interest rates, which could result in an adverse change in therelative fair value of Terra Property Trust’s interest-bearing financial instruments.

Prepayment Risk

Prepayments can either positively or adversely affect the yields on loans. Prepayments on debt instruments, where permitted under the debt documents, are influenced byTrust and TPT2 as of December 31, 2019 as adjusted to reflect changes in current interest rates and a varietynet working capital of economic, geographic and other factors beyond Terra Property Trust’s control, and consequently, such prepayment rates cannot be predicted with certainty. Ifeach of Terra Property Trust does not collectand TPT2 during the period from January 1, 2020 through March 1, 2020, the effective time for the TPT2 Merger. For purposes of determining the respective fair values of Terra Property Trust and TPT2, the value of the loans (or participation interests therein) held by each of Terra Property Trust and TPT2 was the value of such loans (or participation interests) as set forth in the audited financial statements of Terra Property Trust as of and for the year ended December 31, 2019. As a prepayment feeresult, Terra Fund 7 received 2,116,785.76 shares of common stock of Terra Property Trust as consideration in the TPT2 Merger and subsequently contributed these shares to Terra JV. The shares of Terra Property Trust common stock issued in connection with the TPT2 Merger were issued in a prepayment or is unableprivate placement in reliance on Section 4(a)(2) under the U.S. Securities Act of 1933, as amended (the “Securities Act”), and the rules and regulations promulgated thereunder
Issuance of Common Stock to invest the proceeds of such prepayments received, the yield on the portfolio will decline.TIF3 REIT
        In addition, on March 2, 2020, Terra Property Trust may acquire assets at a discount or premiumentered into two separate contribution agreements, one by and if the asset does not repay when expected, the anticipated yield may be impacted. Under certain interest rate and prepayment scenarios,among Terra Property Trust, may failTIF3 REIT and Terra Income Fund International, and another by and among Terra Property Trust, TIF3 REIT and Terra Secured Income Fund 5 International, pursuant to recoup fully its costwhich Terra Property Trust issued 2,457,684.59 shares of acquisitioncommon stock of certain loans.Terra Property Trust to TIF3 REIT in exchange for the settlement of $32.1 million of participation interests in loans also held by Terra Property Trust, $8.6 million in cash and other working capital (“Issuance of Common Stock to TIF3 REIT”).The shares of common stock were issued in a private placement in reliance on Section 4(a)(2) under the Securities Act and the rules and regulations promulgated thereunder. On April 29, 2020, Terra Property Trust repurchased, at a purchase price $17.02 per share, 212,691 shares of common stock that Terra Property Trust had previously sold to TIF3 REIT on September 30, 2019.

20

UseNotes to Unaudited Financial Statements

Terra JV, LLC

        Prior to the completion of Leverage

As partthe TPT2 Merger and the Issuance of Common Stock to TIF3 REIT transactions described above, the Company owned approximately 98.6% of the issued and outstanding shares of Terra Property Trust’s investment strategy,common stock indirectly through its wholly owned subsidiary, Terra JV, of which the Company was the sole managing member, and the remaining issued and outstanding shares of Terra Property Trust’s common stock were owned by TIF3 REIT.

        As described above, Terra Property Trust may borrowacquired TPT2 in the TPT2 Merger and, utilize leverage. While borrowingin connection with such transaction, Terra Fund 7 contributed the shares of Terra Property Trust’s common stock received as consideration in the TPT2 Merger to Terra JV and leverage present opportunities for increasing total return, they may havebecame a co-managing member of Terra JV pursuant to the effectamended and restated operating agreement of potentially creating or increasing losses.

Property Acquisitions

Terra JV, dated March 2, 2020 (the “JV Agreement”). The JV Agreement and related stockholders agreement between Terra JV and Terra Property Trust, may find it necessary to take possession of collateral including, without limitation, an asset or a business, through a purchase or foreclosure action. Borrowers may resist mortgage foreclosure or sales actions by asserting numerous claims and defenses, which delay both repayments of existing loan investments and acquisitiondated March 2, 2020, provide for the joint approval of the collateralCompany and add costTerra Fund 7 with respect to such actions.certain major decisions that are taken by Terra JV and Terra Property Trust.


There can be no assurance that        On March 2, 2020, Terra Property Trust, the Company, Terra JV and Terra REIT Advisors also entered into the Amended and Restated Voting Agreement (the “Voting Agreement”), pursuant to which the Company assigned its rights and obligations under the Voting Agreement to Terra JV. Consistent with the original voting agreement dated February 8, 2018, for the period that Terra REIT Advisors remains the external manager of Terra Property Trust, Terra REIT Advisors will be ablehave the right to successfully operate, hold or maintain the collateral in accordance with its expectations.

Further, there can benominate two individuals to serve as directors of Terra Property Trust, until Terra JV no assurance that there will be a ready market for resale of foreclosed or acquired properties because investments in real estate generally are not liquid and holding periods are difficult to predict. In addition, there may be significant expenditures associated with holding real property, including real estate taxes and maintenance costs. The liquidation proceeds upon salelonger holds at least 10% of the real estate may be less thanoutstanding shares of Terra Property Trust’s common stock, Terra JV will have the amount investedright to nominate one individual to serve as a director of Terra Property Trust.

        As of June 30, 2020, Terra JV owns approximately 87.4% of the issued and outstanding shares of Terra Property Trust common stock with the remainder held by TIF3 REIT, and the Company and Terra Fund 7 own an 87.6% and 12.4% interest, respectively, in Terra JV. As a result, as of June 30, 2020, the loan, and its fair value and such differences could be material.Company indirectly beneficially owned 76.5% of Terra Property Trust's outstanding common stock through Terra JV.


Note 6.5. Commitments and Contingencies


The Company enters into contracts that contain a variety of indemnification provisions. The Company’s maximum exposure under these arrangements is unknown; however, the Company has not had prior claims or losses pursuant to these contracts. The Manager has reviewed the Company’s existing contracts and expects the risk of loss to the Company to be remote.


The Company is not currently subject to any material legal proceedings and, to the Company’s knowledge, no material legal proceedings are threatened against the Company. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company’s rights under contracts with its portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, the Company does not expect that any such proceedings will have a material adverse effect upon its financial condition or results of operations.




21


Note 7.6. Members’ Capital


As of Septemberboth June 30, 20172020 and December 31, 2016,2019, the Company had 6,697.56,637.7 units and 6,826.5 units outstanding, respectively.outstanding. The net asset value per unit was $41,405$35,962 and $42,423$37,222 as of SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively.


Capital Contributions


As of January 31, 2015, the offering period ended, and the Company stopped accepting capital contributions.

In connection with the Merger, between the Terra Funds, original membership units of Terra Funds 1 through 4 were exchanged for 3,206.7 Continuing Income Units (regular units in the Company) and 463.6 Termination Units (membership interest in the Company offered to members of Terra Funds 1 through 4 who wish to enter the liquidation phase of their investments). The Company also offered existing members of the Terra Funds the opportunity to invest in the Company through thepurchase of additional units (the “Rights Offering”). The Rights Offering. For the nine months ended September 30, 2016, the Company sold 573.3 units and received capital contributions of approximately $25.6 million, net of selling commissions and dealer manager fees.Offering was completed on May 17, 2016.


Capital Distributions


At the discretion of the Manager, the Company may make distributions from net cash flow from operations, net disposition proceeds, or other cash available for distribution. Distributions are made to holders of Continuing Income Units (regular units of limited liability company interest in the Company) in proportion to their unit holdings until they receive a return of their initial Deemed Capital Contribution, as defined in the operating agreement, plus a preferred return ranging from 8.5% to 9.0% depending on the historical preferred return applicable to their Terra Fund units, after which time distributions are made 15% to
21

Notes to Unaudited Financial Statements

the Manager which the Company referredrefers to as the carried interest distribution, and 85% to the holders of Continuing Income Units. The preferred return applicable to the Continuing Income Units sold in the Rights Offeringoffering concurrent with the Merger is 8.5%.


In addition, holders of Termination Units receive monthly distributions at a fixed rate of 6.0% per annum of the Unreturned Invested Capital, as defined in the operating agreement.

For the ninethree months ended SeptemberJune 30, 20172020 and 2016,2019, the Company made total capital distributiondistributions to non-manager members of $23.1$3.0 million and $22.9$7.5 million, respectively. For the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, the Company made total distributions to non-manager members of $10.5 million and $14.9 million, respectively. For the three and six months ended June 30, 2020 and 2019, the Company did not make any carried interest distributions to the Manager.
Capital Redemptions

In the Merger, members of Terra Funds 1 through 4 who wished to enter the liquidation phase of their investments chose to receive Termination Units as merger consideration. These Termination Units will be redeemed on the original expected liquidation dates of the funds. For the nine months ended September 30, 2017, 121.1 Termination Units of Terra Fund 3 were redeemed for $5.0 million. For the nine months ended September 30, 2016, 161.3 Termination Units of Terra Fund 1 were redeemed for $6.8 million. These Termination Units were redeemed at book value as defined in the amended and restated operating agreement. Additionally, for the nine months ended September 30, 2017, 7.9 units of Continuing Income Units were redeemed for $0.3 million. For the nine months ended September 30, 2016, the Company also paid $3.4 million to members the Manager was unable to establish their continuation to qualify as “accredited investors” under the Securities Act of 1933, as amended, and to members holding their interests through a qualified ERISA plan to redeem their units.

The following table presents a summary of the Termination Units outstanding as of September 30, 2017:
Fund
Number of
Units
Scheduled
Redemption Date
Terra Fund 450.4
July 2018

        
At the discretion of the Manager, a reserve of 5% of cash from operations may be established in order to repurchase units from non-managing members. The Manager is under no obligation to redeem non-managing members’ units. As of SeptemberJune 30, 20172020 and December 31, 2016,2019, no such reserve was established. For the three and six months ended June 30, 2020 and 2019, the Company did not redeem any membership units.


Allocation of Income (Loss)


Profits and losses are allocated to the members in proportion to the units held in a given calendar year.



22



Member Units


Each membership interest through the original offering was offered for a price of $50,000 per unit. The membership interests in Terra Funds 1 through 4 were exchanged for units of the Company at a price of $43,410 per unit, which was the exchange value per unit of the Company on December 31, 2015, and the units in the Rights Offering waswere offered at a price of $47,000 per unit. The following table provides a roll forward ofFor the units outstanding ofsix months ended June 30, 2020 and 2019, the Company for the nine months ended September 30, 2017 and 2016:did not issue or redeem any membership units.

  Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
  
Managing
Member
 Non-Managing Members Total Managing
Member		 Non-Managing Members Total
Units outstanding, beginning of period —
 6,826.5
 6,826.5
 —
 2,878.9
 2,878.9
Units issued in the Merger —
 —
 —
 —
 3,670.4
 3,670.4
Units admitted through the Rights
   Offering
 —
 —
 —
 —
 573.3
 573.3
Early redemption of Continuing
   Income Units
 —
 (7.9) (7.9) —
 —
 —
Termination Units redeemed —
 (121.1) (121.1) —
 (161.3) (161.3)
Units outstanding, end of period —
 6,697.5
 6,697.5
 —
 6,961.3
 6,961.3

Note 8.7. Financial Highlights


The financial highlights represent the per unit operating performance, return and ratios for the non-managing members’ class, taken as a whole, for the ninesix months ended SeptemberJune 30, 20172020 and 2016.2019. These financial highlights consist of the operating performance, the internal rate of return (“IRR”) since inception of the Company, and the expense and net investment income ratios which are annualized except for the non-recurringon-recurring expenses.


The IRR, net of all fees and carried interest (if any), is computed based on actual dates of the cash inflows (capital contributions), outflows (capital distributions), and the ending capital at the end of the respective period (residual value) of the non-managing members’ capital account.


22

Notes to Unaudited Financial Statements

The following summarizes the Company’s financial highlights for the ninesix months ended SeptemberJune 30, 20172020 and 2016:2019:
 Nine Months Ended September 30,
 2017 2016
Per unit operating performance:   
Net asset value per unit, beginning of period$42,423
 $42,451
Increase in members’ capital from operations (1):
   
Net investment income2,240
 3,469
Net change in unrealized depreciation on investment135
 (202)
Total increase in members’ capital from operations2,375
 3,267
Distributions to member (2):
   
Capital distributions(3,401) (3,309)
Net decrease in members’ capital resulting from distributions(3,401) (3,309)
Capital share transactions:   
Other (3)
8
 181
Net increase in members’ capital resulting from capital share transactions8
 181
Net asset value per unit, end of period$41,405
 $42,590




23


Six Months Ended June 30,
Nine Months Ended September 30,20202019
Per unit operating performance:Per unit operating performance:
Net asset value per unit, beginning of periodNet asset value per unit, beginning of period$37,222  $39,630  
Increase in members’ capital from operations (1):
Increase in members’ capital from operations (1):
Net investment incomeNet investment income242  549  
Net change in unrealized appreciation on investmentNet change in unrealized appreciation on investment80  481  
Total increase in members’ capital from operationsTotal increase in members’ capital from operations322  1,030  
Distributions to member (2):
Distributions to member (2):
Capital distributionsCapital distributions(1,582) (2,249) 
Net decrease in members’ capital resulting from distributionsNet decrease in members’ capital resulting from distributions(1,582) (2,249) 
Net asset value per unit, end of periodNet asset value per unit, end of period$35,962  $38,411  
2017 2016
Ratios to average net assets:   Ratios to average net assets:
Expenses (4)
0.22% 0.40%
ExpensesExpenses0.28 %0.21 %
Net investment income7.13% 10.99%Net investment income1.33 %2.76 %
   
IRR, beginning of period5.43% 0.34%IRR, beginning of period6.40 %6.56 %
IRR, end of period6.07% 4.91%IRR, end of period6.07 %6.46 %
_______________
(1)The per unit data was derived by using the weighted average units outstanding during the applicable periods, which were 6,801 units and 6,935 units for the nine months ended September 30, 2017 and 2016, respectively.
(2)The per unit data for distributions reflects the actual amount of distributions paid per share during the periods.
(3)Represents the impact of the different unit amounts used in calculating per unit data as a result of calculating certain per unit data based upon the weighted average units outstanding during the period and certain per unit data based on the units outstanding as of a period end or transaction date.
(4)
Total expenses used for calculating the ratio included $0.4 million of merger transaction fees for the nine months ended September 30, 2016, which are non-recurring expenses.

(1)The per unit data was derived by using the weighted average units outstanding during the applicable periods, which were 6,638 units and 6,639 units for the six months ended June 30, 2020 and 2019, respectively.
(2)The per unit data for distributions reflects the actual amount of distributions paid per unit during the periods.

Note 9.8. Subsequent Events


Management has evaluated subsequent events through the date the consolidated financial statements were available to be issued. Management has determined that there are no material events that would require adjustment to, or disclosure in, the Company’s consolidated financial statements.



24
        

23



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and related notes thereto and other financial information included elsewhere in this quarterly report on Form 10-Q. In this report, the “Company,” “we,” “us” and “our” refer to Terra Secured Income Fund 5, LLC and its consolidated subsidiaries.LLC.

FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this quarterly report on Form 10-Q within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For these statements, we claim the protections of the safe harbor for forward-looking statements contained in such Sections. The forward-looking statements contained in this quarterly report on Form 10-Q may include, but are not limited to, statements as to:

•our expected financial performance, operating results and our ability to make distributions to our members in the future;

•the potential negative impacts of COVID-19 on the global economy and the impacts of COVID-19 on our financial condition, results of operations, liquidity and capital resources and business operations;

•actions that may be taken by governmental authorities to contain the COVID-19 outbreak or to treat its impact;

•the availability of attractive risk-adjusted investment opportunities in our target asset class and other real estate-related investments that satisfy our investment objectives and strategies;

•the origination or acquisition of our targeted assets, including the timing of originations or acquisitions;

•volatility in our industry, interest rates and spreads, the debt or equity markets, the general economy or the real estate market specifically, whether the results of market events or otherwise;

•changes in our investment objectives and business strategy;

•the availability of financing on acceptable terms or at all;

•the performance and financial condition of our borrowers;

•changes in interest rates and the market value of our assets;

•borrower defaults or decreased recovery rates from our borrowers;

•changes in prepayment rates on our investments;loans;

•our use of financial leverage;

•actual and potential conflicts of interest with any of the following affiliated entities: Terra IncomeFund Advisors, LLC (“Terra IncomeFund Advisors”, or the “Manager”);, Terra REIT Advisors, LLC (“Terra REIT Advisors”), Terra Income Advisors, LLC; Terra Capital Partners, LLC (“Terra Capital Partners”), our sponsor; Terra SecuredJV, LLC (“Terra JV”); Terra Income Fund LLC6, Inc. (“Terra Fund 1”6”); Terra Secured Income Fund 2, LLC (“Terra Fund 2”); Terra Secured Income Fund 3, LLC (“Terra Fund 3”); Terra Secured Income Fund 4, LLC (“Terra Fund 4”); Terra Secured Income Fund 5 International; Terra Income Fund International; Terra Secured Income Fund 7, LLC;LLC (“Terra Fund 7”); Terra Property Trust, Inc. (“Terra Property Trust”), our wholly-owned subsidiary;; Terra Property Trust 2, Inc.International Fund 3, L.P. (“Terra International 3”); Terra International Fund 3 REIT, LLC (“TIF3 REIT”), a subsidiary of Terra Secured Income Fund 7, LLC;International 3; Terra Capital Advisors, LLC; Terra Capital Advisors 2, LLC; Terra Income Advisors 2, LLC; or any of their affiliates;

•our dependence on our Manager or its affiliates and the availability of its senior management team and other personnel;

•liquidity transactions that may be available to us in the future, including a liquidation of our assets, a sale of our company or an initial public offering and listing of the shares of common stock of Terra Property Trust on a national securities exchange, and the timing of any such transactions;
24


•actions and initiatives of the U.S. federal, state and local government and changes to the U.S. federal, state and local government policies and the execution and impact of these actions, initiatives and policies;

•limitations imposed on our business and our ability to satisfy complex rules in order for us to maintain our exclusion from registration under the Investment Company Act of 1940, as amended (the “1940 Act”), and Terra Property Trust to maintain its qualification as a real estate investment trust (“REIT”) for U.S. federal income tax purposes; and

•the degree and nature of our competition.

In addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-


25


lookingforward-looking statements for any reason, including the factors set forth as “Riskin “Part I — Item 1A. Risk Factors” in our registration statementannual report on Form 10.10-K for the year ended December 31, 2019 and in “Part II - Item 1A. Risk Factors” in this quarterly report on Form 10-Q. Other factors that could cause actual results to differ materially include:

•changes in the economy;

•risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters; and

•future changes in laws or regulations and conditions in our operating areas.

We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. Members are advised to consult any additional disclosures that we may make directly to members or through reports that we may file in the future with the Securities and Exchange Commission (the “SEC”“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Overview
        
We are a specialized real estate financecredit focused company that originates, structures, funds and manages high yielding commercial real estate loans. We focus primarily on the origination ofinvestments, including mezzanine loans, which are subordinate commercial real estate loans secured by ownership interests in the entity that owns commercial real estate. We also originate first mortgage loans, bridgesubordinated mortgage loans and preferred equity investments in each case tothroughout the United States. Our loans finance the acquisition, construction, development or redevelopment of high quality commercial real estate in the U.S.United States. We focus on the origination of middle market loans in the approximately $10 million to $50 million range, to finance properties primarily in primary and secondary markets. We believe loans of this size are subject to less competition, offer higher risk adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification. We were formed as a Delaware limited liability company on April 24, 2013 and commenced operations on August 8, 2013. We make substantially all of our investments and conduct substantially all of our real estate lending business through our wholly-owned subsidiary, Terra Property Trust.Trust, which has elected to be taxed as a REIT for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2016. Our objective isobjectives are to continue(i) preserve our members’ capital contributions, (ii) realize income from our investments and (iii) make monthly distributions to provide attractive risk-adjusted returns toour members primarily through distributions.from cash generated from investments. There can be no assurances that we will be successful in meeting our objective.objectives.


On January 1, 2016, Terra Secured Income Fund, 1, LLC (“Terra Fund 2,1”), Terra Fund Secured Income Fund 2, LLC (“Terra Fund 2”), Terra Secured Income Fund 3, LLC (“Terra Fund 3”) and Terra Secured Income Fund 4, LLC (“Terra Fund 4”) merged with and into our subsidiaries (individually, each a “Terra Fund” and collectively,(collectively, the “Terra Funds”) through a series of separate mergers (collectively, the “Merger”). Following the Merger, we contributed the consolidated portfolio of our net assets and the net assets of the Terra Funds to Terra Property Trust in exchange for all of the shares of common sharesstock of Terra Property Trust. We elected to engage in these transactions, which we refer to continueas the “REIT formation transactions,” to make our business as a REIT for U.S. federal income tax purposes,investments through Terra Property Trust and to provide our members with a more broadly diversified portfolio of assets, while at the same time providing us with enhanced access to capital and borrowings, lower operating costs and enhanced opportunities for growth.


Our investment activities are externally managed by        On March 2, 2020, Terra Fund 1, Terra Fund 2 and Terra Fund 3 merged with and into Terra Fund 4, with Terra Fund 4 continuing as the surviving company (the “Terra Fund Merger”), and we consolidated our Manager, a subsidiaryholdings of shares of common stock of Terra Capital Partners,Property Trust in Terra Fund 4. Subsequent to the Terra Fund Merger, the legal name of Terra Fund 4 was changed to
25

Terra JV, LLC. On March 2, 2020, Terra Property Trust engaged in a series of transactions pursuant to which Terra Property Trust issued an aggregate of 4,574,470.35 shares of its common stock in exchange for the settlement of an aggregate of $49.8 million of participation interests in loans that Terra Property Trust owned, cash of $25.5 million and other working capital. On April 29, 2020, Terra Property Trust repurchased, at a purchase price of $17.02 per share, 212,691 shares of common stock that Terra Property Trust had previously sold to TIF3 REIT on September 30, 2019. As of June 30, 2020, Terra JV held 87.4% of the issued and outstanding shares of Terra Property Trust’s common stock with the remainder held by TIF3 REIT, and we and Terra Fund 7 owned an 87.6% and 12.4% percentage interest, respectively, in Terra JV. Accordingly, as of June 30, 2020, we indirectly beneficially owned 76.5% of the outstanding shares of common stock of Terra Property Trust through Terra JV.

Recent Developments

        During the first half of 2020, there was a global outbreak of a novel coronavirus, or COVID-19, which has spread to over 200 countries and territories, including the United States, and has spread to every state in the United States. The World Health Organization has designated COVID-19 as a pandemic, and numerous countries, including the United States, have declared national emergencies with respect to COVID-19. The global impact of the outbreak has been rapidly evolving, and as cases of COVID-19 have continued to be identified in additional countries, many countries have reacted by instituting quarantines and restrictions on travel, closing financial markets and/or restricting trading, and limiting operations of non-essential offices and retail centers. Such actions are creating disruption in global supply chains, increasing rates of unemployment and adversely impacting many industries. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown.
        While we believe that compelling opportunities for us will emerge as a result of the economic downtown caused by the COVID-19 pandemic, we are in the early stages of assessing its full impact on the commercial real estate financemarket. While it has had a demonstrable effect on employment, the economy and investment firm based in New York Citythe national psyche, the impact of the pandemic on property values has yet to be fully realized. The reason is that focus primarilyproperty values are the result of slow moving forces, including consumer behavior, supply and demand for space, availability and pricing of mortgage financing and investor demand for property. As these factors become clear and commercial real estate is repriced accordingly, we believe there will be abundant opportunities available to experienced alternative lenders such as us to provide financing for property acquisition, refinancing, development and redevelopment on attractive terms that reflect the origination and managementnew realities of mezzanine loans, as well as first mortgage loans, bridge loans, and preferred equity investments in all major property types.the economy. 

Portfolio Summary


The following tables provide a summary of Terra Property Trust’s net loan portfolio as of SeptemberJune 30, 20172020 and December 31, 2016:2019:
 September 30, 2017
 Fixed Rate 
Floating
Rate (1)
 Total Gross Loans Obligations under Participation Agreements Total Net Loans
Number of loans32
1
1
 33
 19
 33
Principal balance$274,799,217
 $52,986,912
 $327,786,129
 70,020,950
 $257,765,179
Amortized cost278,381,358
 53,494,280
 331,875,638
 70,992,661
 260,882,977
Fair value278,265,904
 53,637,569
 331,903,473
 70,910,091
 260,993,382
Weighted average coupon rate12.60% 9.73% 12.13% 12.49% 11.99%
Weighted-average remaining
   terms (year)
1.68
 0.44
 1.48
 1.26
 1.54



26


 December 31, 2016
 Fixed Rate 
Floating
Rate (1)
 Total Gross Loans Obligations under Participation Agreements Total Net Loans
Number of loans37
 1
 38
 11
 38
Principal balance$275,554,910
 $50,450,061
 $326,004,971
 32,635,785
 $293,369,186
Amortized cost279,781,074
 50,902,766
 330,683,840
 32,986,194
 297,697,646
Fair value278,931,283
 50,924,056
 329,855,339
 32,904,955
 296,950,384
Weighted average coupon rate12.98% 9.19% 12.38% 12.96% 12.33%
Weighted-average remaining
   terms (year)
1.42
 1.19
 1.39
 1.35
 1.37
_______________
(1)June 30, 2020
Fixed Rate
This loan pays an annualFloating 
Rate (1)(2)(3)
Total Gross LoansObligations under Participation AgreementsTotal Net Loans
Number of loans9 13 22 9 22 
Principal balance$101,693,122 $312,410,817 $414,103,939 $78,116,748 $335,987,191 
Amortized cost102,402,613 312,045,669 414,448,282 78,246,519 336,201,763 
Fair value102,651,392 310,024,461 412,675,853 77,898,387 334,777,466 
Weighted average coupon rate of London Interbank Offered Rate (“LIBOR”) plus 8.5% with a LIBOR floor of 0.5%. Coupon rate shown was determined using the applicable annual coupon rate as of September 30, 2017 and 10.29 %8.91 %9.25 %10.83 %8.88 %
Weighted-average remaining
term (years)		1.33 1.92 1.77 1.42 1.85 
26

December 31, 2016.2019
Fixed Rate
Floating 
Rate (1)(2)(3)
Total Gross LoansObligations under Participation AgreementsTotal Net Loans
Number of loans8 15 23 13 23 
Principal balance$70,692,767 $306,695,550 $377,388,317 102,564,795 $274,823,522 
Amortized cost71,469,137 307,143,631 378,612,768 103,186,327 275,426,441 
Fair value71,516,432 307,643,983 379,160,415 103,188,783 275,971,632 
Weighted average coupon rate11.93 %9.13 %9.65 %11.77 %8.87 %
Weighted-average remaining
term (years)		2.28 2.09 2.13 1.58 2.33 

_______________
(1)These loans pay a coupon rate of London Interbank Offered Rate (“LIBOR”) plus a fixed spread. Coupon rate shown was determined using LIBOR of 0.16% and 1.76% as of June 30, 2020 and December 31, 2019.
(2)As of June 30, 2020 and December 31, 2019, amounts included $142.8 million and $114.8 million, respectively, of senior mortgages used as collateral for $95.4 million and $81.1 million, respectively, of borrowings under a repurchase agreement. These borrowings bear interest at an annual rate of LIBOR plus a spread ranging from 2.00% to 2.50% as of June 30, 2020 and LIBOR plus a spread ranging from 2.25% to 2.50% as of December 31, 2019.
(3)As of June 30, 2020 and December 31, 2019, eleven and twelve of these loans, respectively, are subject to a LIBOR floor.

        In addition to its net loan portfolio, as of June 30, 2020 and December 31, 2019, Terra Property Trust owns 4.9 acres of adjacent land acquired via deed in lieu of foreclosure and a multi-tenant office building acquired via foreclosure. The land and building and related lease intangible assets and liabilities had a net carrying value of $64.6 million and $66.2 million as of June 30, 2020 and December 31, 2019, respectively. The mortgage loan payable encumbering the office building had an outstanding principal amount of $44.5 million and $44.6 million as of June 30, 2020 and December 31, 2019, respectively.

Portfolio Investment Activity
        For the three months ended June 30, 2020 and 2019, Terra Property Trust invested $2.6 million and $8.6 million in new and add-on loans, respectively, and had $5.2 million and $9.8 million of repayments, respectively, resulting in net repayments of $2.5 million and $1.2 million respectively. For the six months ended June 30, 2020 and 2019, Terra Property Trust invested $11.9 million and $28.3 million in new and add-on loans, respectively, and had $15.1 million and $45.2 million of repayments, respectively, resulting in net repayments of $3.2 million and $16.9 million, respectively. Amounts are net of obligations under participation agreements and borrowings under the master repurchase agreement.

        In addition, in March 2020, Terra Property Trust issued 4,574,470.35 shares of common stock in exchange for the settlement of an aggregate of $49.8 million of participation interests in loans that it owned, cash of $25.5 million and other working capital. In connection with the transactions, the related participation obligations were settled.

For each of the three and six months ended June 30, 2020, Terra Property Trust sold $5.8 million of marketable securities and recognized net gains on sale of marketable securities of $1.1 million. 

In January 2019, Terra Property Trust acquired 4.9 acres of adjacent land encumbering a $14.3 million first mortgage via deed in lieu of foreclosure in exchange for the release of the first mortgage and related fees and expenses.

27

Portfolio Information


The tables below detailset forth the types of loansassets in Terra Property Trust’s loan portfolio, as well as the property type and geographic location of the properties securing thesethe loans in the portfolio, on a net loan basis, which represents Terra Property Trust’s proportionate share of the loans, based on its economic ownership of these loans.
June 30, 2020December 31, 2019
Loan StructurePrincipal BalanceAmortized CostFair
Value		% of TotalPrincipal BalanceAmortized CostFair
Value		% of Total
First mortgages$191,170,829  $191,848,919  $191,374,666  57.1 %$160,984,996  $160,948,585  $161,736,057  58.6 %
Preferred equity
investments		112,647,758  113,046,936  111,183,208  33.2 %84,202,144  84,485,061  84,191,396  30.5 %
Mezzanine loans32,168,604  32,620,202  32,219,592  9.6 %29,636,382  29,992,795  30,044,179  10.9 %
Allowance for loan
losses		—  (1,314,294) —  — %—  —  —  — %
Total loan
investments		$335,987,191  336,201,763  334,777,466  99.9 %$274,823,522  275,426,441  275,971,632  100.0 %
Marketable
securities		168,563  236,085  0.1 %—  —  — %
Total$336,370,326  $335,013,551  100.0 %$275,426,441  $275,971,632  100.0 %
  September 30, 2017 December 31, 2016
Loan Structure Principal Balance Amortized Cost Fair
Value		 % of Total Principal Balance Amortized Cost Fair
Value		 % of Total
First mortgages $106,946,912
 $107,981,096
 $108,124,338
 41.4% $117,890,016
 $118,995,391
 $119,018,338
 40.1%
Mezzanine loans 89,335,269
 90,756,354
 90,821,211
 34.8% 118,524,437
 121,037,421
 120,466,609
 40.6%
Preferred equity
   investments
 53,482,998
 54,065,527
 53,968,834
 20.7% 47,415,691
 48,229,921
 47,838,821
 16.1%
Other (1)
 8,000,000
 8,080,000
 8,078,999
 3.1% 9,539,042
 9,626,616
 9,626,616
 3.2%
Allowance for
   loan losses
 —
 —
 —
 —% —
 (191,703) —
 —%
Total $257,765,179
 $260,882,977
 $260,993,382
 100.0% $293,369,186
 $297,697,646
 $296,950,384
 100.0%
_______________
(1)Other includes $8.0 million of unused cash from a credit facility at September 30, 2017 and $9.5 million of unused cash from two credit facilities at December 31, 2016.
  September 30, 2017 December 31, 2016
Property Type Principal Balance Amortized Cost Fair
Value		 % of Total Principal Balance Amortized Cost Fair
Value		 % of Total
Multifamily $71,765,501
 $72,775,385
 $72,426,060
 27.8% $83,510,933
 $85,021,199
 $84,556,067
 28.5%
Office 57,382,912
 57,930,352
 58,076,047
 22.3% 69,506,033
 70,159,209
 70,158,868
 23.6%
Land 53,960,000
 54,486,816
 54,486,769
 20.8% 53,746,133
 54,255,486
 54,258,353
 18.2%
Hotel 53,922,152
 54,641,489
 54,562,580
 20.9% 66,351,287
 67,557,902
 67,077,247
 22.6%
Industrial 7,000,000
 7,000,000
 7,000,000
 2.7% —
 —
 —
 —%
Student housing 5,734,614
 5,968,935
 6,362,927
 2.4% 5,700,000
 6,125,635
 6,215,839
 2.1%
Mixed use —
 —
 —
 —% 2,515,758
 2,533,450
 2,527,566
 0.9%
Other (1)
 8,000,000
 8,080,000
 8,078,999
 3.1% 12,039,042
 12,236,468
 12,156,444
 4.1%
Allowance for
   loan losses
 —
 —
 —
 —% —
 (191,703) —
 —%
Total $257,765,179
 $260,882,977
 $260,993,382
 100.0% $293,369,186
 $297,697,646
 $296,950,384
 100.0%
_______________
(1)Other includes $8.0 million of unused cash from a credit facility at September 30, 2017 and $9.5 million of unused cash from two credit facilities at December 31, 2016. Other also includes $2.5 million of retail properties as of December 31, 2016.

June 30, 2020December 31, 2019
Property TypePrincipal BalanceAmortized CostFair
Value		% of TotalPrincipal BalanceAmortized CostFair
Value		% of Total
Office$123,909,027  $124,175,135  $123,160,449  36.8 %$119,331,369  $119,145,879  $119,597,533  43.2 %
Student housing42,637,550  43,033,299  42,839,458  12.8 %26,470,740  26,725,148  26,638,826  9.7 %
Multifamily83,117,283  83,616,924  83,347,144  24.9 %49,017,844  49,331,885  49,386,995  17.9 %
Hotel46,444,284  46,631,795  46,695,787  13.9 %41,239,194  41,327,772  41,539,239  15.1 %
Infill land30,759,047  30,919,047  29,731,856  8.9 %29,644,375  29,756,375  29,588,829  10.7 %
Industrial7,000,000  7,000,000  6,866,583  2.0 %7,000,000  7,000,000  7,081,127  2.6 %
Condominium2,120,000  2,139,857  2,136,189  0.6 %2,120,000  2,139,382  2,139,083  0.8 %
Allowance for loan
losses		—  (1,314,294) —  — %—  —  —  — %
Total loan
investments		$335,987,191  $336,201,763  $334,777,466  99.9 %$274,823,522  275,426,441  275,971,632  100.0 %
Marketable
securities		168,563  $236,085  0.1 %—  —  — %
Total$336,370,326  $335,013,551  100.0 %$275,426,441  $275,971,632  100.0 %

28
27



 September 30, 2017 December 31, 2016June 30, 2020December 31, 2019
Geographic Location Principal Balance Amortized Cost Fair
Value		 % of Total Principal Balance Amortized Cost Fair
Value		 % of TotalGeographic LocationPrincipal BalanceAmortized CostFair
Value		% of TotalPrincipal BalanceAmortized CostFair
Value		% of Total
United States                United States
California $90,816,912
 $91,818,221
 $91,838,599
 35.2% $89,925,061
 $91,165,200
 $90,798,926
 30.5%California$141,982,974  $142,446,080  $142,295,102  42.5 %$102,774,905  $102,622,718  $103,333,019  37.4 %
GeorgiaGeorgia68,980,282  69,295,471  68,929,645  20.6 %61,772,764  61,957,443  62,073,996  22.5 %
New York 37,805,463
 38,107,156
 38,068,216
 14.5% 37,032,965
 37,324,858
 37,315,430
 12.6%New York52,033,441  52,128,360  50,038,360  14.9 %52,909,847  53,029,923  52,670,818  19.1 %
Florida 34,529,152
 34,851,771
 34,858,786
 13.3% 49,122,324
 49,520,673
 49,320,018
 16.6%
North CarolinaNorth Carolina28,405,604  28,551,242  28,566,778  8.5 %28,283,950  28,421,676  28,440,960  10.3 %
Washington 20,250,000
 20,360,848
 20,417,124
 7.8% —
 —
 —
 —%Washington18,500,000  18,635,259  18,855,194  5.6 %13,525,556  13,618,636  13,680,588  5.0 %
Pennsylvania 15,410,000
 15,554,693
 15,564,431
 6.0% 18,982,000
 19,162,115
 19,184,642
 6.5%
Georgia 15,250,000
 15,588,190
 15,386,904
 5.9% 4,250,000
 4,604,941
 4,387,683
 1.5%
MassachusettsMassachusetts7,000,000  7,000,000  6,866,583  2.0 %7,000,000  7,000,000  7,081,127  2.6 %
Texas 7,651,038
 7,879,004
 7,764,279
 3.0% 9,139,038
 9,363,678
 9,330,002
 3.1%Texas3,613,000  3,647,936  3,645,676  1.1 %2,450,000  2,472,244  2,474,149  0.9 %
Massachusetts 7,000,000
 7,000,000
 7,000,000
 2.7% 4,000,000
 4,112,275
 4,071,618
 1.4%
Delaware 4,396,000
 4,436,072
 4,438,478
 1.7% 7,000,000
 7,057,616
 7,086,338
 2.4%
Alabama 3,700,000
 3,775,021
 3,744,552
 1.4% 3,844,445
 3,928,742
 3,882,318
 1.3%
Oregon 3,140,000
 3,273,511
 3,290,784
 1.3% 5,000,000
 5,356,923
 5,324,812
 1.8%
North Carolina 2,198,000
 2,222,837
 2,219,723
 0.9% 4,921,404
 4,985,576
 4,985,280
 1.7%
Tennessee 1,884,000
 1,966,718
 1,959,580
 0.8% 9,877,843
 10,179,485
 10,047,055
 3.4%
New Jersey —
 —
 —
 —% 22,639,955
 22,865,291
 22,864,082
 7.7%
Virginia —
 —
 —
 —% 6,675,510
 6,737,238
 6,737,238
 2.3%
Arizona —
 —
 —
 —% 5,719,598
 5,772,487
 5,772,487
 1.9%
IllinoisIllinois2,836,668  2,860,776  2,864,728  0.9 %2,209,189  2,227,593  8,018,753  2.9 %
Other (1)
 13,734,614
 14,048,935
 14,441,926
 5.5% 15,239,043
 15,752,251
 15,842,455
 5.3%
Other (1)
12,635,222  12,950,933  12,715,400  3.8 %3,897,311  4,076,208  (1,801,778) (0.7)%
Allowance for
loan losses
 —
 —
 —
 —% —
 (191,703) —
 —%Allowance for loan
losses		—  (1,314,294) —  — %—  —  —  — %
Total loan
investments		Total loan
investments		$335,987,191  336,201,763  334,777,466  99.9 %$274,823,522  275,426,441  275,971,632  100.0 %
Marketable
securities		Marketable
securities		168,563  236,085  0.1 %—  —  — %
Total $257,765,179
 $260,882,977
 $260,993,382
 100.0% $293,369,186
 $297,697,646
 $296,950,384
 100.0%Total$336,370,326  $335,013,551  100.0 %$275,426,441  $275,971,632  100.0 %
_______________
(1)Other includes $8.0 million of unused cash from a credit facility, $2.7 million of properties in Indiana, $1.9 million of properties in South Carolina and $1.1 million of properties in Utah at September 30, 2017. Other includes $9.5 million of unused cash from two credit facilities, $2.7 million of properties in Indiana and $3.0 million of properties in South Carolina at December 31, 2016.

(1)Other includes $7.1 million and $0.3 million of unused portion of a credit facility, $2.6 million and a $1.7 million of loans with collateral located in Kansas, and $3.0 million and $1.9 million of loans with collateral located in South Carolina at June 30, 2020 and December 31, 2019, respectively.

Factors Impacting Operating Results


Our operating results of operations are affected by a number of factors and primarily depend on, among other things, the level of the interest income generated by Terra Property Trust from targeted assets, the market value of our assets and the supply of, and demand for, real estate-related loans, including mezzanine loans, first and second mortgage loans, subordinated mortgage loans, bridge loans, preferred equity investments and other loans related to high quality commercial real estate in the United States, and the financing and other costs associated with our business. Interest income and borrowing costs of Terra Property Trust may vary as a result of changes in interest rates, which could impact the net interest we receive on our assets. Our operating results may also be impacted by conditions in the financial markets and unanticipated credit events experienced by borrowers under our loan assets.


Market Risk


Terra Property Trust’s loans are highly illiquid and there is no assurance that it will achieve its investment objectives, including targeted returns. Due to the illiquidity of the loans, valuation of Terra Property Trust’s loans may be difficult, as there generally will be no established markets for these loans.


        The COVID-19 pandemic has resulted in extreme volatility in a variety of global markets, including the real estate-related debt markets. U.S. financial markets, in particular, are experiencing limited liquidity and forced selling by certain market participants with insufficient liquidity available to meet current obligations, which puts further downward pressure on asset prices. In reaction to these tumultuous and unpredictable market conditions, banks and other lenders have generally restricted lending activity and requested margin posting or repayments where applicable for secured loans collateralized by assets with depressed valuations. Terra Property Trust’s repurchase agreement contains margin call provisions that provide the lender with certain rights in the event of a decline in the market value of the assets purchased under the repurchase agreement. Upon the occurrence of a margin deficit event, the lender may require Terra Property Trust to make a payment to reduce the outstanding obligation to eliminate any margin deficit.

Credit Risk


Credit risk represents the potential loss that Terra Property Trust would incur if the borrowers failed to perform pursuant to the terms of their obligations to Terra Property Trust. Terra Property Trust minimizes itsmanages exposure to credit risk by limiting exposure to any one individual borrower and any one asset class. Additionally, Terra Property Trust employs an asset management
29

approach and monitormonitors the portfolio of loans, through, at a minimum, quarterly financial review of property performance including net operating income, loan-to-value ratio, debt service coverage ratio, and the debt yield. Terra Property Trust also requires certain borrowers to establish a cash reserve, as a form of additional collateral, for the purpose of providing for future interest or property-related operating payments.


28
        



The performance and value of Terra Property Trust’s loans depend upon the sponsors’ ability to operate or manage the development of the respective properties that serve as collateral so that each property’s value ultimately supports the repayment of the loan balance. Mezzanine loans and preferred equity investments are subordinate to senior mortgage loans and, therefore, involve a higher degree of risk. In the event of a default, mezzanine loans and preferred equity investments will be satisfied only after the senior lender’s investment is fully recovered. As a result, in the event of a default, Terra Property Trust may not recover all of its investments.


        In addition, Terra Property Trust is exposed to the risks generally associated with the commercial real estate market, including variances in occupancy rates, capitalization rates, absorption rates, and other macroeconomic factors beyond its control. Terra Property Trust seeks to manage these risks through its underwriting and asset management processes.

        The COVID-19 pandemic has significantly impacted the commercial real estate markets, causing reduced occupancy, requests from tenants for rent deferral or abatement, and delays in construction and development projects currently planned or underway. These negative conditions may persist into the future and impair Terra Property Trust’s borrowers’ ability to pay principal and interest due to Terra Property Trust under its loan agreements.
We and Terra Property Trust maintain all of our cash at financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation.


Concentration Risk


Terra Property Trust holds real estate-related loans. Thus, its loan portfolio may be subject to a more rapid change in value than would be the case if it were required to maintain a wide diversification among industries, companies and types of loans. The result of such concentration in real estate assets is that a loss in such loans could materially reduce Terra Property Trust’s capital.


Liquidity Risk


Liquidity risk represents the possibility that we may not be able to sell, directly or indirectly, our positionsequity interest in Terra Property Trust or Terra JV at a reasonable price in times of low trading volume, high volatility and financial stress.


Interest Rate Risk


Interest rate risk represents the effect from a change in interest rates, which could result in an adverse change in the fair value of our interest-bearing financial instruments. With respect to Terra Property Trust’s business operations, increases in interest rates, in general, may over time cause: (i) the interest expense associated with variable rate borrowings to increase; (ii) the value of real estate-related loans to decline; (iii) coupons on variable rate loans to reset, although on a delayed basis, to higher interest rates; (iv) to the extent applicable under the terms of Terra Property Trust’s investments, prepayments on real estate-related loans to slow, and (v) to the extent we enter into interest rate swap agreements as part of Terra Property Trust’s hedging strategy, the value of these agreements to increase.

        Conversely, decreases in interest rates, in general, may over time cause: (i) the interest expense associated with variable rate borrowings to decrease; (ii) the value of real estate-related loans to increase; (iii) coupons on variable rate real estate-related loans to reset, although on a delayed basis, to lower interest rates (iv) to the extent applicable under the terms of Terra Property Trust’s investments, prepayments on real estate-related loans to increase, and (v) to the extent Terra Property Trust enters into interest rate swap agreements as part of its hedging strategy, the value of these agreements to decrease.


Prepayment Risk


Prepayments can either positively or adversely affect the yields on Terra Property Trust’s loans. Prepayments on debt instruments, where permitted under the debt documents, are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control, and consequently, such prepayment rates cannot be predicted with certainty. If Terra Property Trust does not collect a prepayment fee in connection with a prepayment or are unable to invest the proceeds of such prepayments received, the yield on the portfolio will decline. In addition, Terra Property Trust may acquire
30

assets at a discount or premium and if the asset does not repay when expected, the anticipated yield may be impacted. Under certain interest rate and prepayment scenarios Terra Property Trust may fail to recoup fully its cost of acquisition of certain loans.


Extension Risk

        Extension risk is the risk that Terra Property Trust’s assets will be repaid at a slower rate than anticipated and generally increases when interest rates rise. In which case, to the extent Terra Property Trust has financed the acquisition of an asset, Terra Property Trust may have to finance its asset at potentially higher costs without the ability to reinvest principal into higher yielding securities because borrowers prepay their mortgages at a slower pace than originally expected, adversely impacting its net interest spread, and thus its net interest income.

Real Estate Risk

        The market values of commercial and residential mortgage assets are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; retroactive changes to building or similar codes; pandemics; natural disasters and other acts of god. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loans, which could also cause Terra Property Trust to suffer losses. Market volatility has been particularly heightened due to the COVID-19 global pandemic. COVID-19 has disrupted economic activities and could have a continued significant adverse effect on economic and market conditions including limited lending from financial institutions, depressed asset values, and limited market liquidity.

Use of Leverage


Terra Property Trust may deploydeploys moderate amounts of leverage as part of ourits operating strategy, which may consist of borrowings under first mortgage financings, warehouse facilities, repurchase agreements and other credit facilities. While borrowing and leverage present opportunities for increasing total return, they may have the effect of potentially creating or increasing losses.




29


Results of Operations
The following table presents the comparative results of our operations for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016:2019:
Three Months Ended June 30,Six Months Ended June 30,
20202019Change20202019Change
Investment income
Dividend income$681,685  $—  $681,685  $1,946,123  $3,922,875  $(1,976,752) 
Other operating income34  90  (56) 178  392  (214) 
Total investment income681,719  90  681,629  1,946,301  3,923,267  (1,976,966) 
Operating expenses
Professional fees161,100  98,119  62,981  335,199  271,333  63,866  
Other1,295  6,076  (4,781) 2,744  8,959  (6,215) 
Total operating expenses162,395  104,195  58,200  337,943  280,292  57,651  
Net investment income (loss)519,324  (104,105) 623,429  1,608,358  3,642,975  (2,034,617) 
Net change in unrealized
appreciation on investment		2,813,973  1,609,008  1,204,965  527,675  3,198,259  (2,670,584) 
Net increase in members’
capital resulting from
operations		$3,333,297  $1,504,903  $1,828,394  $2,136,033  $6,841,234  $(4,705,201) 
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 Change 2017 2016 Change
Investment income           
Dividend income$4,448,792
 $9,824,336
 $(5,375,544) $15,703,171
 $25,042,346
 $(9,339,175)
Other operating income111
 614
 (503) 1,064
 8,571
 (7,507)
Total investment income4,448,903
 9,824,950
 (5,376,047) 15,704,235
 25,050,917
 (9,346,682)
Operating expenses           
Professional fees104,100
 269,635
 (165,535) 431,465
 549,211
 (117,746)
Merger transaction fees—
 —
 —
 —
 388,692
 (388,692)
Other3,448
 (38,342) 41,790
 35,761
 52,954
 (17,193)
Total operating expenses107,548
 231,293
 (123,745) 467,226
 990,857
 (523,631)
Net investment income4,341,355
 9,593,657
 (5,252,302) 15,237,009
 24,060,060
 (8,823,051)
Net change in unrealized
   depreciation on investment
428,032
 (730,673) 1,158,705
 920,026
 (1,400,694) 2,320,720
Net increase in members’
   capital resulting from
   operations
$4,769,387
 $8,862,984
 $(4,093,597) $16,157,035
 $22,659,366
 $(6,502,331)


Dividend Income


Dividend income associated with our indirect ownership of Terra Property Trust primarily represents our proportionate share of Terra Property Trust’s net income for the period. Any excess of distributions received from Terra Property Trust over
31

its net income is recorded as return of capital. As of June 30, 2020 and December 31, 2019, we indirectly beneficially owned 76.5% through Terra JV and directly owned 98.6%, respectively, of the outstanding shares of common stock of Terra Property Trust.


For the three months ended SeptemberJune 30, 20172020 and 2016,2019, we received distributions of $13.1$3.4 million and $9.6$7.6 million, respectively, or $0.88$0.23 and $0.65$0.51 per share, respectively, from Terra Property Trust and/or Terra JV, as applicable, of which $4.4$0.7 million and $9.6 millionzero was recorded as dividend income respectively, representing Terra Property Trust’s net income for the periods presented, and $8.7$2.7 million and none was recorded as return of capital, respectively. The $5.4 million decrease in Terra Property Trust’s net income was primarily due to (i) $3.6 million of prepayment fee income received from one loan during the three months ended September 30, 2016 as the borrower repaid the loan two years before the scheduled maturity date; (ii) a decrease in net interest income of 0.8 million as a result of lower weighted average principal balance and lower weighted average coupon rate; and (iii) operating income of $0.5 million for three months ended September 30, 2016 from Terra Park Green Members, LLC (“Terra Park Green”), a wholly-owned subsidiary of Terra Property Trust that owned two commercial office building parks and the related operations, which was subsequently sold in November 2016. The $8.7 million increase in return of capital was primarily due to the decrease in Terra Property Trust’s net income as well as additional cash needed to redeem Terra Fund 3’s Termination Units.

For the nine months ended September 30, 2017 and 2016, we received distributions of $29.7 million and $25.4 million, respectively, or $1.99 and $1.71 per share, respectively, from Terra Property Trust, of which $15.7 million and $25.0 million was recorded as dividend income, respectively, representing Terra Property Trust’s net income for the periods presented, and $14.0 million and $0.3$7.6 million was recorded as return of capital, respectively. TheFor the six months ended June 30, 2020 and 2019, we received distributions of $11.2 million and $15.2 million, or $0.76 and $1.02 per share, from Terra Property Trust and/or Terra JV, as applicable, of which $1.9 million and $3.9 million was recorded as dividend income and $9.3 million decreaseand $11.3 million was recorded as return of capital, respectively.

For the three months ended June 30, 2020 as compared to the same period in 2019, Terra Property Trust’s net income wasincreased by $2.8 million, primarily due to (i) $3.6a decrease in professional fees of $2.2 million as a result of $2.4 million of prepayment fee income received from one loan duringprofessional fees directly incurred for the three months ended SeptemberJune 30, 20162019, and which were previously deferred, in contemplation of Terra Property Trust becoming a public entity; (ii) a decrease in net real estate operating loss of $1.2 million, primarily as a result of a $1.6 million of impairment charge recorded for the borrower repaidthree months ended June 30, 2019 on a piece of land in order to reduce the loan two years beforecarrying value of the scheduled maturity date; (ii)land to its estimated fair value; and (iii) a gain on sale of marketable securities of $1.1 million for the three months ended June 30, 2020; partially offset by (i) a decrease in net interest income of 3.7$0.9 million as a result of lowera decrease in the weighted average outstanding principal balance lowerof net investments resulting from a higher volume of loan repayments than new loan originations and a decrease in the weighted average interest rate on net investments driven by new loan originations having lower coupon raterates than those of the loans that were repaid and (ii) an increase in fees paid and operating expenses reimbursed to Terra Property Trust’s Manager of $0.7 million as a result of an increase in assets under management and an increase in allocation ratio in relation to affiliated funds managed by Terra Property Trust’s Manager and its affiliates.

        For the suspension of $1.2 million of net interest income accrual on two loans as discussed in “Annualized Net Effective Yield” below; and (iii) operating income of $1.5 million for ninesix months ended SeptemberJune 30, 2016 from Terra Park Green which was subsequently sold in November 2016. The $13.7 million increase in return of capital was primarily due2020 as compared to the decreasesame period in 2019, Terra Property Trust’s net income decreased by $0.5 million, primarily due to (i) a decrease in net interest income of $2.0 million as wella result of a decrease in the weighted average outstanding principal balance of net investments resulting from a higher volume of loan repayments than new loan originations and a decrease in the weighted average interest rate on net investments driven by new loan originations having lower coupon rates than those of the loans that were repaid; (ii) a provision for loan losses of $1.3 million on five loans with a loan risk rating of “4”; (iii) an increase in fees paid and operating expenses reimbursed to Terra Property Trust’s Manager of $1.1 million as additional cash neededa result of an increase in assets under management and an increase in allocation ratio in relation to redeemaffiliated funds managed by Terra Fund 3’s Termination Units.Property Trust’s Manager and its affiliates; and (iv) a net loss of $0.3 million on extinguishment of obligations under participation agreement; partially offset by (i) a decrease in professional fees of $2.1 million as a result of $2.4 million of professional fees directly incurred for the three months ended June 30, 2019 as described above; (ii) a decrease in net real estate operating loss of $1.0 million primarily as a result of a $1.6 million of impairment charge described above partially offset by increase in real estate taxes; and (iii) a gain on sale of marketable securities of $1.1 million for the three months ended June 30, 2020.



30


Net Loan Portfolio
        
In assessing the performance of Terra Property Trust’s loans, we believe it is appropriate to evaluate the loans on an economic basis, that is, gross loans net of obligations under participation agreements, and mortgage loan payable and repurchase agreement payable.

32

         The following tables present a reconciliation of Terra Property Trust’s loan portfolio from a gross basis to a net basis for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016:2019:
Three Months Ended June 30, 2020Three Months Ended June 30, 2019
Weighted Average Principal Amount (1)
Weighted Average Coupon Rate (2)
Weighted Average Principal Amount (1)
Weighted Average Coupon Rate (2)
Total portfolio
Gross loans$403,107,647  9.3%$383,193,015  10.8%
Obligations under participation agreements(73,120,692) 10.9%(95,337,563) 12.2%
Repurchase agreement payable(94,768,307) 3.8%(78,140,846) 4.8%
Net loans (3)
$235,218,648  11.0%$209,714,606  12.4%
Senior loans
Gross loans$212,859,783  6.7%$143,125,696  7.9%
Obligations under participation agreements(27,807,684) 9.1%(6,800,000) 12.4%
Repurchase agreement payable(94,768,307) 3.8%(78,140,846) 4.8%
Net loans (3)
$90,283,792  9.1%$58,184,850  11.6%
Subordinated loans (4)
Gross loans$190,247,864  12.2%$240,067,319  12.5%
Obligations under participation agreements(45,313,008) 12.0%(88,537,563) 12.2%
Net loans (3)
$144,934,856  12.2%$151,529,756  12.7%
  Three Months Ended September 30, 2017 Three Months Ended September 30, 2016
  Weighted Average Principal Amount Weighted Average Coupon Rate Weighted Average Principal Amount Weighted Average Coupon Rate
Gross loans $314,920,884
 12.1% $318,263,084
 12.5%
Obligations under participation
   agreements
 (68,234,833) 12.5% (24,792,000) 13.2%
Mortgage loan payable (34,000,000) 5.7% (34,000,000) 5.8%
Net loans $212,686,051
 
      13.0% (1)
 $259,471,084
 
   13.3% (1)


Six Months Ended June 30, 2020Six Months Ended June 30, 2019
 Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
Weighted Average Principal Amount (1)
Weighted Average Coupon Rate (2)
Weighted Average Principal Amount (1)
Weighted Average Coupon Rate (2)
 Weighted Average Principal Amount Weighted Average Coupon Rate Weighted Average Principal Amount Weighted Average Coupon Rate
Total portfolioTotal portfolio
Gross loans $338,889,294
 12.0% $309,970,724
 12.8%Gross loans$395,636,304  9.4%$368,486,550  11.0%
Obligations under participation
agreements
 (52,385,371) 12.4% (22,848,289) 13.4%Obligations under participation agreements(81,213,576) 11.5%(96,415,887) 12.2%
Mortgage loan payable (36,928,955) 5.7% (30,435,055) 5.8%
Repurchase agreement payableRepurchase agreement payable(94,617,024) 3.9%(61,443,378) 4.8%
Net loans(3) $249,574,968
 
   12.8% (1)
 $256,687,380
 
    13.6% (1)
$219,805,704  11.0%$210,627,285  12.3%
Senior loansSenior loans
Gross loansGross loans$201,392,405  6.7%$127,213,974  8.3%
Obligations under participation agreementsObligations under participation agreements(23,368,896) 9.7%(9,200,440) 12.3%
Repurchase agreement payableRepurchase agreement payable(94,617,024) 3.8%(61,443,378) 4.8%
Net loans (3)
Net loans (3)
$83,406,485  9.2%$56,570,156  11.4%
Subordinated loans (4)
Subordinated loans (4)
Gross loansGross loans$194,243,899  12.2%$241,272,576  12.5%
Obligations under participation agreementsObligations under participation agreements(57,844,680) 12.2%(87,215,447) 12.2%
Net loans (3)
Net loans (3)
$136,399,219  12.2%$154,057,129  12.7%
_______________
(1)Represents net interest income over the period calculated using the weighted average coupon rate and weighted average principal amount shown on the table (interest income on the loans less interest expense) divided by the weighted average principal amount of the net loans during the period.

(1)Amount is calculated based on the number of days each loan is outstanding.
(2)Amount is calculated based on the underlying principal amount of each loan.
(3)The weighted average coupon rate represents net interest income over the period calculated using the weighted average coupon rate and weighted average principal amount shown on the table (interest income on the loans less interest expense) divided by the weighted average principal amount of the net loans during the period.
(4)Subordinated loans include mezzanine loans, preferred equity investments and credit facilities.

For the three and ninesix months ended SeptemberJune 30, 20172020 as compared to the same periods in 2016,2019, the decrease in weighted average coupon rate was due to an increase in investments in senior loans, which are typically larger principal-balance loans paying lower levels of interest reflecting the lower perceived risk due to their senior position in the borrower's capital structure as compared to investments in subordinated loans, as well as the new subordinated loans we originated and purchased during the current periods have coupon rates that are lower than those of the maturing subordinated loans.

Annualized Net Effective Yield
The following table presents a calculation of Terra Property Trust’s annualized net effective yield on its net loan portfolio for the periods presented:
  Three Months Ended September 30,
  2017 2016 Change
Interest income $9,598,478
 $9,245,815
 $352,663
Interest expense — obligations under participation agreements (2,001,349) (839,996) (1,161,353)
Interest expense — mortgage loan payable (625,477) (503,466) (122,011)
Net interest income $6,971,652
 $7,902,353
 $(930,701)
       
Weighted average carrying value of gross loans $320,242,875
 $325,305,778
 $(5,062,903)
Weighted average carrying value of obligations under
  participation agreements
 (69,032,326) (25,292,536) (43,739,790)
Weighted average carrying value of mortgage loan payable (33,921,185) (33,736,918) (184,267)
Weighted average carrying value of net loans $217,289,364
 $266,276,324
 $(48,986,960)
       
Annualized net effective yield (1)
 12.7% 12.7% —%


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  Three Months Ended September 30,
  2017 2016 Change
Senior loans      
Weighted average carrying value of net loans $84,784,385
 $71,433,279
 $13,351,106
Annualized net effective yield (1)
 11.4% 12.7% (1.3)%
Subordinated loans      
Weighted average carrying value of net loans $132,504,979
 $194,843,045
 $(62,338,066)
Annualized net effective yield (1)
 13.4% 12.6% 0.8 %

  Nine Months Ended September 30,
  2017 2016 Change
Interest income $27,721,062
 $29,008,206
 $(1,287,144)
Interest expense — obligations under participation agreements (4,712,165) (2,321,418) (2,390,747)
Interest expense — mortgage loan payable (2,021,006) (1,174,968) (846,038)
Net interest income $20,987,891
 $25,511,820
 $(4,523,929)
       
Weighted average carrying value of gross loans $345,427,543
 $318,048,375
 $27,379,168
Weighted average carrying value of obligations under
  participation agreements
 (56,230,271) (23,284,885) (32,945,386)
Weighted average carrying value of mortgage loan payable (36,737,795) (26,701,336) (10,036,459)
Weighted average carrying value of net loans $252,459,477
 $268,062,154
 $(15,602,677)
       
Annualized net effective yield (1)
 11.4% 12.8% (1.4)%
       
Senior loans      
Weighted average carrying value of net loans $104,279,060
 $61,575,436
 $42,703,624
Annualized net effective yield (1)
 9.2% 13.0% (3.8)%
Subordinated loans      
Weighted average carrying value of net loans $148,180,417
 $206,486,718
 $(58,306,301)
Annualized net effective yield (1)
 12.8% 12.6% 0.2 %
_______________
(1)Represents the annualized net interest income divided by the weighted average carrying value of net loans during the period. We do not annualize one-time transaction fee income and expenses such as net origination fee income or expenses and net exit fee income or expenses.

The following table presents the components of the annualized net effective yield on Terra Property Trust’s net loan portfolio:
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 Change 2017 2016 Change
Net contractual interest income (1)
 12.7 % 13.3 % (0.6)% 12.5 % 13.5 % (1.0)%
Non-collection of interest income, net (2)
 — % — % — % (0.5)% — % (0.5)%
Amortization of net purchase premium (3)
 (0.1)% (0.6)% 0.5 % (0.5)% (0.7)% 0.2 %
Net transaction fee income (expense) 0.1 % — % 0.1 % (0.1)% — % (0.1)%
Total 12.7 % 12.7 % — % 11.4 % 12.8 % (1.4)%
_______________


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(1)The decrease was primarily due to a decrease in weighted average coupon rate (see “Net Loan Portfolio” above).
(2)The increase was primarily due to a decrease in amortization of net purchase premium as a result of the majority of the net purchase premium recognized in connection with the Merger in 2016 became substantially amortized.
(3)During the nine months ended September 30, 2017, Terra Property Trust did not receive interest income payment of $1.2 million, net of interest expense on obligations under participation agreements, on a senior loan and a subordinated loan. In July 2017, the principal balances of these two loans were repaid in full.

Professional Fees

For the three and nine months ended September 30, 2017 as compared to the same periods in 2016, professional fees decreased by $0.2 million and $0.1 million, respectively, primarily due to professional fees incurred in 2016 related to the additional SEC financial statement audit and reporting requirements in relation to the initial filinga higher volume of our registration statement on Form 10.loan originations with lower coupon rates.


Merger Transaction Fees
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Merger transaction fees represent fees incurred in connection with the Merger. Terra Capital Markets, LLC, an affiliate of our Manager, served as the dealer manager for the consent solicitation and was paid a voting advisory fee of $750 per initial unit sold to members of the Terra Funds and a dealer manager fee of 0.5% of the aggregate offering price of the units originally issued by the Terra Funds. Most of these fees were re-allowed to participating dealers. The Terra Funds also incurred costs for legal, accounting, and other professional services in connection with the consent solicitation.

For the three and nine months ended September 30, 2017 and the three months ended September 30, 2016, there were no merger transaction fees recorded. For the nine months ended September 30, 2016, we recorded additional merger transaction fees of $0.4 million.
Net Change in Unrealized DepreciationAppreciation on Investment


Net change in unrealized appreciation or depreciation on investment reflects the change in Terra Property Trust’s net loan portfoliofair value during the reporting period, including any reversal of previously recorded unrealized gains or losses, when gains or losses are realized.period. There may be fluctuations in unrealized gains and losses of the underlying portfolio as loans within the portfolio approach their respective maturity dates and fair value premiums are amortized or discounts are accreted to each loan’s respective collectible value.dates. In addition, the unrealized gains or losses in the portfolio may fluctuate over time due to changes in the market yields or carrying value adjustments such as the amortization or accretion of premiums, discounts, origination fees, and exit fees.yields.


2017 — For the three and nine months ended SeptemberJune 30, 2017, we recorded a decrease2020 as compared to the same period in 2019, net change in unrealized depreciationappreciation on investment increased by $1.2 million, reflecting an increase in dividends classified as return of $0.4 million and $0.9 million, respectively, primarily due to the amortization of a substantial portion of the net purchase premiums recognized in connection with the Merger in 2016,capital, which reduced the carrying valuecost basis of the loans.   

2016 — For the three and nine months ended Septemberour investment in Terra Property Trust and/or Terra JV, as applicable. As of June 30, 2016, we recorded an increase in unrealized depreciation on investment of $0.7 million and $1.4 million, respectively, primarily due to amortization of fair value premiums on loans within the portfolio as they neared their respective maturity dates, which reduced2020, the fair value of Terra Property Trust’s loans and debt was substantially at par.

For the loans.six months ended June 30, 2020 as compared to the same period in 2019, net change in unrealized appreciation on investment decreased by $2.7 million as a result of a net decline in fair value of Terra Property Trust’s loans and debt due to widening credit spreads partially offset by decreases in underlying index rates as a result of the macro-economic conditions impacted by the COVID-19 outbreak.


Net Increase in Members’ Capital Resulting from Operations


For the three and ninesix months ended SeptemberJune 30, 20172020 as compared to the same periods in 2016,2019, the resulting net increase in members’ capital resultsresulting from operations of increased by $1.8 million and decreased by $4.1 million and $6.5$4.7 million, respectively.


Financial Condition, Liquidity and Capital Resources


Liquidity is a measure of our ability to meet potential cash requirements, including funding and maintaining our assets and operations, making distributions to our members and other general business needs. Our primary cash requirements for the next twelve months are making the discretionary recurring distributions to our members and, to a lesser extent, redeeming Terra Fund 4 Termination Units for approximately $2.1 million. “Termination Units” refer to the membership interest in our fund that were issued to members of Terra Funds 1 through 4 who chose to enter the liquidation phase of their investments.members. We expect to use cash distributions received from Terra Property Trust to meet such cash requirements. During the three months ended June 30, 2020, Terra Property Trust paid distributions of $0.0805, $0.0738 and $0.0738 per share of common stock for each of the months of April, May and June, respectively, which translated to a distribution rate of approximately 5.5% of the fair value per share. Going forward, Terra Property Trust intends to target a distribution rate of approximately 5.0% of the fair value per share, which Terra Property Trust believes is more closely aligned with its earnings per share. Distributions are made at the discretion of Terra Property Trust’s expected loanboard and liability maturities duringwill depend upon, among other things, its actual results of operations and liquidity.

A total of $26.1 million of Terra Property Trust’s obligations under participation agreements will mature in the next twelve months include the sole mortgage loan payable with a principal amount of $34.0 million which matures in March 2018, assuming no extensions, and obligations under participation agreements totaling $43.6 million. The first mortgage loan held by Terra Property Trust has a coupon rate of LIBOR plus 8.5%, the borrowings under the mortgage loan incurred to finance the asset bear interest at an annual rate of LIBOR plus 5.25%, and the weighted average net interest spread


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between the yield on the first mortgage loan and the cost of funds under the mortgage loan payable was 2.26% for the nine months ended September 30, 2017. Terra Property Trust expects to use the proceeds from the repayment of the corresponding investments to repay the mortgage loan payable and participation obligations. Additionally, Terra Property Trust expects to fund approximately $27.4$81.6 million of the unfunded commitments to borrowers during the next twelve months. Terra Property Trust expects to maintain sufficient cash on hand to fund such commitmentcommitments through matching these commitments with principal repayments on outstanding loans. Additionally, Terra Property Trust had $44.5 million of borrowings outstanding under a mortgage loan payable that bear interest at an annual rate of LIBOR plus 3.85% with a LIBOR floor of 2.23%, that is collateralized by an office building. The mortgage loan payable matures on September 27, 2020. Terra Property Trust expects to extend the maturity of the loan payable for another year. Terra Property Trust may also issue additional equity, equity-related and debt securities to fund its investment strategies. Terra Property Trust may issue these securities to unaffiliated third parties or to vehicles advised by affiliates of Terra Capital Partners or third parties. As part of its capital raising transactions, Terra Property Trust may grant to one or more of these vehicles certain control rights over its activities including rights to approve major decisions it takes as part of its business.

        On December 12, 2018, Terra Property Trust entered into a master repurchase agreement that provides for advances of up to $150 million in the aggregate, which Terra Property Trust expects to use to finance certain secured performing commercial real estate loans, including senior mortgage loans. Advances under the master repurchase agreement accrue interest at an annual rate equal to the sum of (i) the 30-day LIBOR and (ii) the applicable spread, and have a maturity date of December 12, 2020. Terra Property Trust expects to extend the maturity of the master repurchase agreement for another year or refinance it with a different facility. As of June 30, 2020, the weighted average interest rate on borrowings outstanding under the master repurchase agreement was approximately 3.79%, calculated using the 30-day LIBOR of 0.16% as of June 30, 2020. As of June 30, 2020, the amount remaining available under the repurchase agreement was $54.6 million.
        Under the master repurchase agreement, on the second anniversary of the closing date and on each anniversary thereafter, Terra Property Trust is required to pay the buyer the difference, if positive, between $4.2 million and the interest paid during the immediately preceding 12-month period. Terra Property Trust currently expects the actual interest paid in calendar year 2020 on borrowings under the master repurchase agreement to be less than $4.2 million. As a result, Terra Property Trust
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accrued approximately $0.3 million for six months ended June 30, 2020 to make up for the difference between the actual interest paid and the $4.2 million.
        The master repurchase agreement contains margin call provisions that provide the buyer with certain rights in the event of a decline in the market value of the assets purchased under the master repurchase agreement. Upon the occurrence of a margin deficit event, the buyer may require the seller to make a payment to reduce the outstanding obligation to eliminate any margin deficit. During the six months ended June 30, 2020, Terra Property Trust received a margin call on one of the borrowings and as a result, made a repayment of $3.4 million to reduce the outstanding obligation under the master repurchase agreement.
        On June 20, 2019, Terra Property Trust entered into a credit agreement that provides for revolving credit loans of up to $35.0 million in the aggregate, which Terra Property Trust expects to use for short term financing needed to bridge the timing of anticipated loans repayments and funding obligations. Borrowings under the revolving credit facility can be either prime rate loans or LIBOR rate loans and accrue interest at an annual rate of prime rate plus 1% or LIBOR plus 4% with a floor of 6%. The credit facility matures on September 3, 2020. As of June 30, 2020, the revolving credit facility was fully utilized. Terra Property Trust has sufficient cash on hand to repay the amount outstanding under the revolving credit facility.

Cash Flows Provided by Operating Activities


20172020 — For the ninesix months ended SeptemberJune 30, 2017,2020, cash flows provided by operating activities were $28.5$10.8 million, primarily due to $29.7$11.2 million of dividends received from Terra Property Trust and/or Terra JV, as applicable, of which $9.3 million was recorded as a return of capital.

2019— For the six months ended June 30, 2019, cash flows provided by operating activities were $14.9 million, primarily due to $15.2 million of dividends received from Terra Property Trust, of which $14.0$11.3 million was recorded as a return of capital.

2016— For the nine months ended September 30, 2016, cash flows provided by operating activities were $2.7 million, primarily due to $25.4 million of dividends received from Terra Property Trust, of which $0.3 million was recorded as a return of capital, partially offset by (i) $10.0 million used to purchase shares of common stock of Terra Property Trust; (ii) the payment of $5.3 million related to merger transaction fees that were accrued; (iii) $5.0 million of cash transferred to Terra Property Trust in connection with the Merger; (iv) $0.7 million reimbursed to the Manager for merger transaction fees paid; and (v) a $0.6 million of state and local tax paid in connection with the filing of the 2015 tax returns.


Cash Flows used in Financing Activities


20172020 — For the ninesix months ended SeptemberJune 30, 2017,2020, cash flows used in financing activities were $10.5 million primarily related to distributions paid to members.

2019— For the six months ended June 30, 2019, cash flows used in financing activities was $28.4 million, consisting of distributions paid to members of $23.1 million and cash of $5.3 million used to primarily redeem Terra Fund 3 Termination Units.

2016— For the nine months ended September 30, 2016, cash flows used in financing activities was $4.1$14.9 million, primarily duerelated to distributions paid to members of $22.9 million and cash used for capital redemptions of $10.2 million, of which $6.8 million was used to redeem Terra Fund 1 Termination Units and $3.4 million was paid to other redeeming members. These cash outflows were partially offset by $25.6 million of proceeds from capital contributions from the offering concurrent with the Merger, net of selling commissions and dealer manager fees, and cash of $3.5 million acquired in the Merger.


Critical Accounting Policies and Use of Estimates


Our consolidated financial statements are prepared in conformity with United States generally accepted accounting principles (“U.S. GAAP”), which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. In preparing the consolidated financial statements, management has utilized available information, including industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As we execute our expected operating plans, we will describe additional critical accounting policies in the notes to our future consolidated financial statements in addition to those discussed below.

Allowance for Loan Losses

Terra Property Trust’s investments are typically collateralized by either the sponsors’ equity interest in real estate properties or real estate properties. As a result, Terra Property Trust regularly evaluates the extent and impact of any credit migration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower/sponsor on a loan by loan basis. The Manager employs an asset management approach and monitors the portfolio of investments, through, at a minimum, quarterly financial review of property performance including net operating income, loan-to-value, debt-service coverage ratio and the debt yield, supplemented by occasional site visits to evaluate the assets. The Manager also requires certain borrowers to establish a cash reserve, as a form of additional collateral, for the purpose of providing for future interest or property-related operating payments. The information gathered by way of the asset management process is sufficient in assessing collectability.



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Using the information gathered by way of the asset management process, the Manager performs a quarterly, or more frequently as needed, review of Terra Property Trust’s portfolio of investments. In conjunction with this review, the Manager assesses the risk factors of each investment and assigns each investment a risk rating. Based on a 5-point scale, Terra Property Trust’s investments are rated “1” through “5”, from less risk to greater risk. For investments with a risk rating of “4” and “5”, the Manager assesses each investment for collectability. This includes the ability to realize the full amount of principal and interest in the event that Terra Property Trust needs to exercise its rights under the terms of the agreement and/or any other contemplated workout or modification. To the extent the net realizable amount analysis indicates the principal amount of the recorded investment as of the reporting date is in jeopardy, an appropriate allowance for loan losses will be recorded. Additionally, Terra Property Trust records a general allowance for loan losses equal to 1.5% of the aggregate principal amount of loans rated as a “4” and 5% of the aggregate principal amount of loans rated as a “5”. Loans on which a specific allowance is recorded are removed from the pool of loans on which a general allowance is calculated.


Fair Value Measurements


The fair value of financial instrumentsour investment is categorized based on the priority of the inputs to the valuation technique and categorized into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.


Our financial assets and liabilities wereinvestment was recorded at fair value on our consolidated statements of assets and liabilities and were categorized based on the inputs valuation techniques as follows:

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•Level 1. Quoted prices for identical assets or liabilities in an active market.


•Level 2. Financial assets and liabilities whose values are based on the following:


◦Quoted prices for similar assets or liabilities in active markets.


◦Quoted prices for identical or similar assets or liabilities in non-active markets.


◦Pricing models whose inputs are observable for substantially the full term of the asset or liability.


◦Pricing models whose inputs are derived principally from or corroborated by observable market data for
substantially full term of the asset or liability.


•Level 3. Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value measurement.


Unobservable inputs reflect our assumptions about the factors that market participants would use in pricing an asset or liability, and would be based on the best information available.


Any changes to the valuation methodology will be reviewed by management to ensure the changes are appropriate. As markets and products develop and the pricing for certain products becomes more transparent, we will continue to refine our valuation methodologies. The methods used may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we anticipate that our valuation methods will be appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. We will use inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced.


Income Taxes


No provision for U.S. federal and state income taxes has been made in the accompanying consolidated financial statements, as individual members are responsible for their proportionate share of our taxable income. We, however, may be liable for New York City Unincorporated Business Tax (the “NYC UBT”) and similar taxes of various other municipalities. New York City imposes the NYC UBT at a statutory rate of 4% on net income generated from ordinary business activities carried on in New York City. For the three and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, none of our income was subject to the NYC UBT.




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We did not have any uncertain tax positions that met the recognition or measurement criteria of Accounting Standards Codification 740-10-25, Income Taxes, nor did we have any unrecognized tax benefits as of the periods presented herein. We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in our consolidated statements of operations. For the three and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, we did not incur any interest or penalties. Although we file federal and state tax returns, our major tax jurisdiction is federal. Our inception-to-date2015-2019 federal tax years remain subject to examination by the Internal Revenue Service.


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Contractual Obligations of Terra Property Trust
Our wholly-owned subsidiary,
        The following table provides a summary of Terra Property Trust’s contractual obligations at June 30, 2020:
TotalLess than
1 year		1-3 years3-5 yearsMore than 5 years
Obligations under participation
   agreements — principal (1)
$78,116,748  26,109,93252,006,816$—  $—  
Mortgage loan payable — principal (2)
44,481,855  44,481,855  —  —  —  
Repurchase agreement payable —
   principal (3)
95,356,360  95,356,360—  —  —  
Revolving credit facility payable —
   principal (4)
35,000,000  35,000,000—  —  —  
Interest on borrowings (5)
14,760,282  9,401,8895,358,393—  —  
Unfunded lending commitments (6)
92,711,431  81,641,92411,069,507—  —  
Ground lease commitment (7)
83,825,813  1,264,5002,529,0002,529,00077,503,313
$444,252,489  $293,256,460  $70,963,716  $2,529,000  $77,503,313  
___________________________
(1)In the normal course of business, Terra Property Trust enters into participation agreements with related parties, and to a lesser extent, non-related parties, whereby it transfers a portion of the loans to them. These loan participations do not qualify for sale treatment. As such, the loans remain on its consolidated balance sheets and the proceeds are recorded as obligations under participation agreements. Similarly, interest earned on the entire loan balance is recorded within “Interest income” and the interest related to the participation interest is recorded within “Interest expense from obligations under participation agreements” in the consolidated statements of operations. Terra Property Trust has no direct liability to a participant under our participation agreements with respect to the underlying loan, and the participants’ share of the loan is repayable only from the proceeds received from the related borrower/issuer of the loans.
(2)Terra Property Trust has an option to extend the maturity of the loan by two years subject to certain conditions provided in the loan agreement. Amount excludes unamortized origination and exit fees of $0.3 million.
(3)Terra Property Trust may extend the maturity date of the master repurchase agreement for a period of one year. Amount excludes unamortized deferred financing costs of $0.8 million.
(4)Terra Property Trust’s revolving credit facility was scheduled to mature on June 20, 2020. In June and July 2020, Terra Property Trust amended the credit agreement twice to extend the maturity to September 3, 2020. Terra Property Trust has sufficient cash on hand to repay the amount outstanding under the revolving credit facility.
(5)Interest was calculated using the applicable annual variable interest rate and balance outstanding at June 30, 2020. Amount represents interest expense through maturity plus exit fee as application.
(6)Certain of Terra Property Trust’s loans provide for a commitment to fund the borrower at a future date. As of June 30, 2020, Terra Property Trust had eight of such loans with total funding commitments of $305.6 million, of which $212.9 million had been funded.
(7)Represents rental obligation under the ground lease, inclusive of imputed interest, for Terra Property Trust’s office building that it acquired through foreclosure.

Management Agreement with Terra REIT Advisors

        Terra Property Trust currently pays the following fees to the ManagerTerra REIT Advisors pursuant to a management agreement:


Origination and Extension Fee. An origination fee in the amount of 1.0% of the amount used to originate, acquire, fund, acquire or structure real estate-related loans, including any third-party expenses related to such loan. In the event that the term of any real estate-related loan is extended, the ManagerTerra REIT Advisors also receives an originationextension fee equal to the lesser of (i) 1.0% of the principal amount of the loan being extended or (ii) the amount of fee paid by the borrower in connection with such extension. The origination fee is offset by the amount of any origination fee received by Terra Property Trust from borrowers.


Asset Management Fee. A monthly asset management fee at an annual rate equal to 1.0% of the aggregate funds under management, which includes the loan origination amount or aggregate gross acquisition cost, as applicable, for each real estate-related loan and cash held by Terra Property Trust.


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Asset Servicing Fee. A monthly asset servicing fee at an annual rate equal to 0.25% of the aggregate gross origination price or aggregate gross acquisition price for each real estate related loan then held by Terra Property Trust (inclusive of closing costs and expenses).


Disposition Fee. A disposition fee in the amount of 1.0% of the gross sale price received by usTerra Property Trust from the disposition of each loan, but not upon the maturity, prepayment, workout, modification or extension of a loan unless there is a corresponding fee paid by the borrower, in which case the disposition fee will be the lesser of (i) 1.0% of the principal amount of the loan and (ii) the amount of the fee paid by the borrower in connection with such transaction. If Terra Property Trust takes ownership of a property as a result of a workout or foreclosure of a loan, Terra Property Trust will pay a disposition fee upon the sale of such property equal to 1.0% of the sales price.


Transaction Breakup Fee. In the event that Terra Property Trust receives any “breakup fees,” “busted-deal fees,” termination fees, or similar fees or liquidated damages from a third-party in connection with the termination or non-consummation of any loan or disposition transaction, the ManagerTerra REIT Advisors will be entitled to receive one-half of such amounts, in addition to the reimbursement of all out-of-pocket fees and expenses incurred by the ManagerTerra REIT Advisors with respect to its evaluation and pursuit of such transactions.


In addition to the fees described above, Terra Property Trust reimburses the ManagerTerra REIT Advisors for operating expenses incurred in connection with services provided to the operations of Terra Property Trust, including Terra Property Trust’s allocable share of the Manager’sTerra REIT Advisors’ overhead, such as rent, employee costs, utilities, and technology costs.


The following table presents a summary of fees paid and costs reimbursed to the Managerpredecessor to Terra REIT Advisors and Terra REIT Advisors in the aggregate in connection with providing services to Terra Property Trust:
Three Months Ended June 30,Six Months Ended June 30,
 Three Months Ended September 30, Nine Months Ended September 30,2020201920202019
 2017 2016 2017 2016
Origination fee expense (1)
 $624,255
 $734,706
 $2,381,562
 $2,396,149
Origination and extension fee expense (1)
Origination and extension fee expense (1)
$250,601  $117,380  $688,218  $800,552  
Asset management fee 785,748
 948,372
 2,397,595
 2,482,315
Asset management fee1,140,426  956,985  2,169,959  1,837,340  
Asset servicing fee 152,047
 227,101
 529,535
 602,662
Asset servicing fee253,316  226,764  487,524  431,241  
Operating expenses reimbursed to Manager 725,197
 838,287
 2,425,699
 2,516,849
Operating expenses reimbursed to Manager1,694,875  1,213,314  3,062,064  2,328,518  
Disposition fee (2)
 197,614
 44,879
 798,333
 451,980
Disposition fee (2)
220,424  167,091  295,944  637,024  
Total $2,484,861
 $2,793,345
 $8,532,724
 $8,449,955
Total$3,559,642  $2,681,534  $6,703,709  $6,034,675  
_______________
(1)
(1)Origination and extension fee expense is generally offset with origination and extension fee income. Any excess is deferred and amortized to interest income over the term of the investment.
(2)Disposition fee is generally offset with exit fee income on the consolidated statements of operations. Any excess is deferred


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and amortized to interest income over the term of the investment.loan.

(2)Disposition fee is generally offset with exit fee income and included in interest income on the consolidated statements of operations.

Off-Balance Sheet Arrangements


Other than contractual commitments and other legal contingencies incurred in the normal course of our business, we do not have any off-balance sheet financings or liabilities.
Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services. We will adopt this standard on January 1, 2018 using the cumulative effect transition method. We are evaluating the impact of ASU 2014-09 but do not currently believe that the adoption of ASU 2014-09 will have a material impact on our consolidated financial statements and disclosures.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 retains many current requirements for the classification and measurement of financial instruments; however, it significantly revises an entity’s accounting related to (i) the classification and measurement of investments in equity securities and (ii) the presentation of certain fair value changes for financial liabilities measured at fair value. ASU 2016-01 also amends certain disclosure requirements associated with the fair value of financial instruments. This guidance is effective for us beginning on January 1, 2018. We are currently evaluating the impact these changes will have on our consolidated financial statements and disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 outlines a new model for accounting by lessees, whereby their rights and obligations under substantially all leases, existing and new, would be capitalized and recorded on the balance sheet. For lessors, however, the accounting remains largely unchanged from the current model, with the distinction between operating and financing leases retained, but updated to align with certain changes to the lessee model and the new revenue recognition standard. The new standard also replaces existing sale-leaseback guidance with a new model applicable to both lessees and lessors. Additionally, the new standard requires extensive quantitative and qualitative disclosures. ASU 2016-02 is effective for U.S. GAAP public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application will be permitted for all entities. The new standard must be adopted using a modified retrospective transition of the new guidance and provides for certain practical expedients. Transition will require application of the new model at the beginning of the earliest comparative period presented. This ASU is not expected to have any impact on our consolidated financial statements and disclosures as we do not have any lease arrangements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, a Consensus of the FASB’s Emerging Issues Task Force (“ASU 2016-15”). ASU 2016-15 provides guidance on how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017. The guidance requires application using a retrospective transition method. We do not expect the adoption of ASU 2016-15 to have a material impact on our consolidated financial statements and disclosure.

In October 2016, the U.S. Securities and Exchange Commission adopted new rules and amended rules (together, “final rules”) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X was August 1, 2017. We adopted the amendments to Regulation S-X on August 1, 2017. The adoption did not have a material impact on our consolidated financial statements and disclosures.    
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 intends to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business: inputs, processes, and outputs. While an integrated set of assets and activities, collectively referred to as a “set,” that is a business usually has outputs, outputs are not required to be present. ASU 2017-01 provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. ASU 2017-01 will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact these changes will have on our consolidated financial statements and disclosures.


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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We may be subject to financial market risks, including changes in interest rates. To the extent that we borrow money to make investments, our net investment income will be dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. In periods of rising interest rates, our cost of funds would increase, which may reduce our net investment income. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.
As of SeptemberJune 30, 2017,2020, Terra Property Trust had one investment13 investments with aan aggregate principal balance of approximately $53.0$253.1 million, net of obligations under participation agreements, that providesprovide for interest income indexedat an annual rate of LIBOR plus a spread, 11 of which are subject to LIBOR, with a LIBOR floorfloor. A decrease of 0.5%.100 basis points in LIBOR would decrease our annual interest income, net of interest expense on participation agreements, by approximately $0.1 million, and an increase of 100 basis points in LIBOR would increase Terra Property Trust’s annual interest income, net of interest expense on participation agreements, by approximately $0.6 million.
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        Additionally, Terra Property Trust had approximately $34.0$44.5 million of borrowings outstanding under a mortgage loan payable that bear interest at an annual rate of LIBOR plus 5.25%.3.85% with a LIBOR floor of 2.23%, that is collateralized by an office building; and $95.4 million of borrowings outstanding under a repurchase agreement that bear interest at an annual rate of LIBOR plus a spread ranging from 2.00% to 2.50% with a LIBOR floor ranging from no floor to 2.52% and collateralized by $142.8 million of first mortgages. A decrease of 1%100 basis points in LIBOR would decrease ourTerra Property Trust’s total annual net interest expense by approximately $0.03$0.04 million and an increase of 1%100 basis points in LIBOR would increase ourTerra Property Trust’s annual net interest incomeexpense by approximately $0.2$0.3 million.


         In July 2017, the U.K. Financial Conduct Authority announced that it would cease to compel banks to participate in setting LIBOR as a benchmark by the end of 2021, or the LIBOR transition date. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021. The Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions convened by the U.S. Federal Reserve, has recommended Secured Overnight Financing Rate (“SOFR”) as a more robust reference rate alternative to U.S. dollar LIBOR. SOFR is calculated based on overnight transactions under repurchase agreements, backed by Treasury securities. SOFR is observed and backward looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members. Given that SOFR is a secured rate backed by government securities, it will be a rate that does not take into account bank credit risk (as is the case with LIBOR). SOFR is therefore likely to be lower than LIBOR and is less likely to correlate with the funding costs of financial institutions. Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question. As such, the future of LIBOR at this time is uncertain.

        Potential changes, or uncertainty related to such potential changes, may adversely affect the market for LIBOR-based loans, including Terra Property Trust’s portfolio of LIBOR-indexed, floating-rate loans, or the cost of its borrowings. In addition, changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based loans, including the value of the LIBOR-indexed, floating-rate loans in Terra Property Trust’s portfolio, or the cost of its borrowings. The potential effect of the phase-out or replacement of LIBOR on Terra Property Trust’s cost of capital and net investment income cannot yet be determined.

We may hedge against interest rate and currency exchange rate fluctuations by using standard hedging instruments, such as futures, options and forward contracts, subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in benefits of lower interest rates with respect to our portfolio of investments with fixed interest rates. For the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, we did not engage in interest rate hedging activities.


In addition, we may have risks regarding portfolio valuation. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Fair Value Measurements.”Measurements” in this quarterly report on Form 10-Q.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including ourthe chief executive officer and chief financial officer of our Manager (performing functions equivalent to those a principal executive officer and principal financial officer of our company would perform if we had any officers), of the effectiveness of the design and operation of our disclosure controls and procedures as of SeptemberJune 30, 2017.2020. Based on that evaluation, ourthe chief executive officer and chief financial officer of our Manager concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we would meet our disclosure obligations. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute assurance that it will detect or uncover failures within our company to disclose material information otherwise required to be set forth in our periodic reports.
Changes in Internal Control Over Financial Reporting

During the most recent fiscal quarter, there was no change in our internal controls over financial reporting, as defined under
Rule 13a-15(f) under the Exchange Act, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.



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PART II – OTHER INFORMATION

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Item 1. Legal Proceedings.
Neither we, Terra Property Trust, Terra JV nor Terra Income Advisorsour Manager is currently subject to any material legal proceedings, nor, to our knowledge, are material legal proceedings threatened against us, Terra Property Trust, Terra JV or Terra Income Advisors.our Manager. From time to time, we, Terra Property Trust and individuals employed by Terra Income Advisorsour Manager or its affiliates may be a party to certain legal proceedings in the ordinary course of business. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.

Item 1A. Risk Factors.
There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the amendment no. 2year ended December 31, 2019 other than as set forth below.

Major public health issues, including the current outbreak of COVID-19, and related disruptions in the U.S. and global economy and financial markets have adversely impacted and could continue to adversely impact or disrupt our financial condition and results of operations.
        The recent outbreak of COVID-19 in many countries continues to adversely impact global economic activity and has contributed to significant volatility in financial markets. On March 11, 2020, the World Health Organization publicly characterized COVID-19 as a pandemic. On March 13, 2020, the President of the United States declared the COVID-19 outbreak a national emergency. The global impact of the outbreak has been rapidly evolving, and as cases of the virus increased around the world, governments and organizations have implemented a variety of actions to mobilize efforts to mitigate the ongoing and expected impact. Many governments, including where real estate is located that secures or underlies a significant portion of Terra Property Trust's commercial real estate loans, have reacted by instituting quarantines, restrictions on travel, school closures, bans on public events and on public gatherings, “shelter in place” or “stay at home” rules, restrictions on types of business that may continue to operate, with exceptions, in certain cases, available for certain essential operations and businesses, and/or restrictions on types of construction projects that may continue. Further, such actions have created, and we expect will continue to create, disruption in real estate financing transactions and the commercial real estate market and adversely impacted a number of industries. The outbreak could have a continued adverse impact on economic and market conditions and continue to cause regional, national and global economic slowdowns and potentially trigger recessions in any or all of these areas.
        In the United States, there have been a number of federal, state and local government initiatives applicable to a significant number of mortgage loans, to manage the spread of the virus and its impact on the economy, financial markets and continuity of businesses of all sizes and industries. On March 27, 2020, the U.S. Congress approved, and President Trump signed into law, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act provides approximately $2 trillion in financial assistance to individuals and businesses resulting from the outbreak of COVID-19. The CARES Act, among other things, provides certain measures to support individuals and businesses in maintaining solvency through monetary relief, including in the form of financing and loan forgiveness and/or forbearance. Although this action by the federal government, together with other actions taken at the federal, regional and local levels, are intended to support these economies, there is no guarantee that such measures will provide sufficient relief to avoid continued adverse effects on the economy and potentially a recession. Similar actions have been taken by governments around the globe but as is the case in the United States there is no assurance that such measures will prevent further economic disruptions, which may be significant, around the world.
        We believe that our and Terra Property Trust's ability, as well as that of Terra REIT Advisors, LLC ("Terra REIT Advisors"), the external manager of Terra Property Trust, and our Manager, to operate, our and Terra Property Trust's level of business activity and the profitability of our and Terra Property Trust's business, as well as the values of, and the cash flows from, the loan assets Terra Property Trust owns have been, and will continue to be, impacted by the effects of COVID-19 and could in the future be impacted by another pandemic or other major public health issues. While we, Terra Property Trust, Terra REIT Advisors and our Manager have implemented risk management and contingency plans and taken preventive measures and other precautions, no predictions of specific scenarios can be made with respect to the COVID-19 pandemic and such measures may not adequately predict the impact on our or Terra Property Trust's business from such events.
 The effects of COVID-19 have adversely impacted the value of Terra Property Trust's loan assets, and our and Terra Property Trust's business, financial condition and results of operations and cash flows. Some of the factors that impacted us and Terra Property Trust to date and may continue to affect us and Terra Property Trust include the following:
•the decline in the value of commercial real estate, which negatively impacts the value of Terra Property Trust's loans, potentially materially;

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•to the extent the value of commercial real estate declines, which would also likely negatively impact the value of the loans Terra Property Trust owns, Terra Property Trust could become subject to additional margin calls under the master repurchase agreement with Goldman Sachs Bank USA, and if Terra Property Trust fails to resolve such margin calls when due by payment of cash or delivery of additional collateral, the lenders may exercise remedies including demanding payment by Terra Property Trust of its aggregate outstanding financing obligations and/or taking ownership of the loans or other assets securing the applicable obligations. Terra Property Trust may not have the funds available to repay such financing obligations, and it may be unable to raise the funds from alternative sources on favorable terms or at all. Forced sales of the loans or other assets that secure Terra Property Trust's financing obligations in order to pay outstanding financing obligations may be on terms less favorable to it than might otherwise be available in a regularly functioning market and could result in deficiency judgments and other claims against Terra Property Trust;

•difficulty accessing debt and equity capital on attractive terms, or at all;

•a severe disruption and instability in the financial markets or deteriorations in credit and financing conditions may affect Terra Property Trust or its borrowers’ ability to make regular payments of principal and interest (whether due to an inability to make such payments, an unwillingness to make such payments, or a waiver of the requirement to make such payments on a timely basis or at all);

•government-mandated moratoriums on the construction, development or redevelopment of properties underlying our construction loans may prevent the completion, on a timely basis or at all, of such projects;

•unavailability of information, resulting in restricted access to key inputs used to derive certain estimates and assumptions made in connection with evaluating loans for impairments and establishing allowances for loan losses;

•Terra Property Trust's ability to remain in compliance with the financial covenants under its borrowings, including in the event of impairments in the value of the loans it owns;

•a general decline in business activity and demand for mortgage financing, servicing and other real estate and real estate-related transactions, which could adversely affect Terra Property Trust's ability to make new investments or to redeploy the proceeds from repayments of its existing investments;

•disruptions to the efficient function of our or Terra Property Trust's operations because of, among other factors, any inability to access short-term or long-term financing for the loans it makes;

•Terra Property Trust's need to sell assets, including at a loss;

•Terra Property Trust’s loan origination activities;

•inability of other third-party vendors Terra Property Trust or we rely on to conduct Terra Property Trust's or our business to operate effectively and continue to support Terra Property Trust's or our business and operations, including vendors that provide IT services, legal and accounting services, or other operational support services;

•effects of legal and regulatory responses to concerns about the COVID-19 pandemic and related public health issues, which could result in additional regulation or restrictions affecting the conduct of Terra Property Trust's or our business; and

•Terra Property Trust's or our ability to ensure operational continuity in the event our business continuity plan is not effective or ineffectually implemented or deployed during a disruption.

        The rapid development and fluidity of the circumstances resulting from this pandemic precludes any prediction as to the ultimate adverse impact of COVID-19. There are no comparable recent events which provide guidance as to the effect of the spread of COVID-19 and a pandemic on our business. Nevertheless, COVID-19 and the current financial, economic and capital markets environment, and future developments in these and other areas present material uncertainty and risk with respect to our performance, financial condition, volume of business, results of operations and cash flows. Moreover, many risk factors set forth in our Annual Report on Form 10 filed10-K for the year ended December 31, 2019 should be interpreted as heightened risks as a result of the impact of the COVID-19 pandemic.
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We may receive distributions from Terra Property Trust on July 24, 2017.a delayed basis or distributions may decrease over time. Changes in the amount and timing of distributions Terra Property Trust pays or in the tax characterization of distributions Terra Property Trust pays may adversely affect the fair value of our units or may result in our members being taxed on their allocable share of distributions from Terra Property Trust at a higher rate than initially expected.

        Our distributions are driven by a variety of factors, including Terra Property Trust's minimum distribution requirements under the REIT tax laws and Terra Property Trust's REIT taxable income (including certain items of non-cash income) as calculated pursuant to the Internal Revenue Code. Terra Property Trust is generally required to distribute to its stockholders at least 90% of its REIT taxable income, although its reported financial results for GAAP purposes may differ materially from its REIT taxable income.
        In the year ended December 31, 2019, Terra Property Trust paid $30.4 million of cash distributions on its common stock, representing total distributions of $2.03 per share. For the six months ended June 30, 2020, Terra Property Trust's board of directors declared total cash distribution of $0.76 per share that were paid monthly in the same period in which each was declared.
        Terra Property Trust continues to prudently evaluate its liquidity and review the rate of future distributions in light of its financial condition and its applicable minimum distribution requirements under applicable REIT tax laws and regulations. Terra Property Trust may determine to pay distributions on a delayed basis or decrease distributions for a number of factors, including the risk factors described in this quarterly report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2019.
        To the extent Terra Property Trust determines that future distributions would represent a return of capital to investors or would not be required under applicable REIT tax laws and regulations, rather than the distribution of income, Terra Property Trust may determine to discontinue distribution payments until such time that distributions would again represent a distribution of income or be required under applicable REIT tax laws and regulations. Any reduction or elimination of Terra Property Trust’s payment of distributions would not only reduce the amount of distributions you would receive as a holder of our units, but could also have the effect of reducing the fair value of our units and the ability of Terra Property Trust to raise capital in future securities offerings.
        In addition, the rate at which holders of our units are taxed on their allocable share of Terra Property Trust’s distributions and the characterization of such distributions - be it ordinary income, capital gains, or a return of capital - could have an impact on the fair value of our units. After Terra Property Trust announces the expected characterization of distributions Terra Property Trust has paid, the actual characterization (and, therefore, the rate at which holders of our units are taxed on their allocable share of Terra Property Trust’s distributions) could vary from Terra Property Trust’s expectations, including due to errors, changes made in the course of preparing Terra Property Trust’s corporate tax returns, or changes made in response to an audit by the Internal Revenue Service, or the IRS, with the result that holders of our units could incur greater income tax liabilities than expected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.

Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.None.

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Item 6.  Exhibits.
The following exhibits are filed with this report. Documents other than those designated as being filed herewith are incorporated herein by reference.
Exhibit No.Description and Method of Filing
2.1
2.2
2.3
2.4
2.5


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Exhibit No.2.6Description and Method of Filing
2.6
3.12.7
3.1
31.1*
31.2*
32**
101.INS**XBRL Instance Document
101.SCH**XBRL Taxonomy Extension Schema Document
101.CAL**XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**XBRL Taxonomy Extension Label Linkbase Document
101.PRE**XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF**XBRL Taxonomy Extension Definition Linkbase Document
_______________
* Filed herewith.
** Furnished herewith.

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Quarterly Report on Form10-Qreport to be signed on its behalf by the undersigned in the capacities indicated* thereunto duly authorized.


Date: November 13, 2017
August 10, 2020
TERRA SECURED INCOME FUND 5, LLC
By:/s/ Bruce D. BatkinVikram S. Uppal
Bruce D. BatkinVikram S. Uppal
Chief Executive Officer
(Principal Executive Officer)
By:/s/ Gregory M. Pinkus
Gregory M. Pinkus
Chief Financial Officer and Chief Operating Officer,
Treasurer and Secretary
(Principal Financial and Accounting Officer)

___________

*  The registrant is a limited liability company managed by Terra Fund Advisors, LLC, its sole and managing member and the persons are signing in their respective capacities as officers of Terra Fund Advisors, LLC.



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