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 March 31, 2020
June 30, 2023
o☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition periodTransition Period from to
Commission File Number: 000-56117001-40496
Terra Property Trust, Inc.
(Exact name of registrant as specified in its charter)
Maryland81-0963486
(State or other jurisdiction of

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

Identification No.)
550 Fifth Avenue, 6205 West 28th Street, 12th Floor
New York, New York 1003610001
(Address of principal executive offices)
(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
Title of each classTrading Symbol(s)Name of exchange on
which registered
6.00% Notes due 2026TPTANew York Stock Exchange
Securities registered pursuant to section 12(g) of the Securities Exchange Act of 1934:
Class B Common Stock, $0.01 par value per share

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 þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer¨Accelerated filer¨
Non-accelerated filerþSmaller reporting company☑
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer þ
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 May 15, 2020,August 11, 2023, the registrant had 19,700,15124,335,575 shares of common stock,Class B Common Stock, $0.01 par value, 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.
Consolidated Financial Statements:
2
3
4
Consolidated Statements of Changes in Equity for the three and six months ended March 31, 2020June 30, 2023 and 20192022 (unaudited)
54
76
109
Item 2.
3747
Item 3.
5264
Item 4.
5465
PART II
Item 1.
5466
Item 1.1A.
5466
Item 1A.2.
54
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
5666
Item 3.
5666
Item 4.
5766
Item 5.
5767
Item 6.
5767
5869



1




PART I –- FINANCIAL INFORMATION
Item 1. Financial Statements.Statements
Terra Property Trust, Inc.
Consolidated Balance Sheets
June 30, 2023December 31, 2022
(unaudited)
Assets
Cash and cash equivalents$51,808,573 $28,567,825 
Restricted cash3,201,935 4,633,204 
Cash held in escrow by lender3,086,398 3,268,563 
Loans held for investment, net of allowance for credit losses of $32,992,709
   and $25,471,890
475,173,171 584,417,939 
Loans held for investment acquired through participation, net of allowance for
    credit losses of $136,087 and none
38,645,336 42,072,828 
Equity investment in unconsolidated investments32,608,994 62,498,340 
Real estate owned, net (Note 6)
Land, building and building improvements, net162,063,697 46,660,226 
Lease intangible assets, net14,069,928 2,568,461 
Operating lease right-of-use asset27,370,242 27,378,786 
Deal deposit— 4,241,892 
Interest receivable3,889,641 4,100,501 
Other assets7,784,490 2,928,327 
Total assets$819,702,405 $813,336,892 
Liabilities and Equity
Liabilities:
Term loan payable$14,850,000 $25,000,000 
Unsecured notes payable, net of debt issuance cost117,433,372 116,530,673 
Repurchase agreements payable, net of deferred financing fees122,070,840 169,304,710 
Obligations under participation agreements (Note 8 )
13,789,070 12,680,594 
Mortgage loans payable, net of deferred financing fees and other98,687,185 29,488,326 
Revolving line of credit payable, net of deferred financing fees105,260,351 89,807,448 
Interest reserve and other deposits held on investments3,201,935 4,633,204 
Operating lease liability27,370,242 27,378,786 
Lease intangible liabilities, net (Note 6)
16,827,043 8,646,840 
Due to Manager (Note 8)
3,431,790 3,935,997 
Interest payable1,746,183 1,058,001 
Accounts payable and accrued expenses3,816,487 1,452,236 
Unearned income757,580 378,018 
Other liabilities1,315,374 1,159,885 
Total liabilities530,557,452 491,454,718 
Commitments and contingencies (Note 10)
Equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized and none issued— — 
12.5% Series A Cumulative Non-Voting Preferred Stock at liquidation preference,
   125 shares authorized and no shares and 125 shares issued and outstanding at
   June 30, 2023 and December 31, 2022, respectively
— 125,000 
Class A Common Stock, $0.01 par value, 450,000,000 shares authorized and no
   shares issued, at both June 30, 2023 and December 31, 2022
— — 
Class B Common Stock, $0.01 par value, 450,000,000 shares authorized and
   24,335,513 and 24,335,370 shares issued and outstanding at June 30, 2023 and
    December 31, 2022, respectively
243,354 243,354 
Additional paid-in capital444,451,801 444,449,813 
Accumulated deficit(155,550,202)(122,935,993)
Total equity289,144,953 321,882,174 
Total liabilities and equity$819,702,405 $813,336,892 
 March 31, 2020 December 31, 2019
 (unaudited)  
Assets   
Cash and cash equivalents$82,163,055
 $29,609,484
Restricted cash16,255,423
 18,542,163
Cash held in escrow by lender2,062,941
 2,398,053
Marketable securities3,490,394
 —
Loans held for investment, net398,931,946
 375,462,222
Loans held for investment acquired through participation, net4,037,567
 3,150,546
Real estate owned, net (Note 5)
   
Land, building and building improvements, net64,358,637
 64,751,247
Lease intangible assets, net12,286,955
 12,845,228
Operating lease right-of-use assets16,111,217
 16,112,925
Interest receivable2,253,718
 1,876,799
Other assets2,535,476
 2,594,411
Total assets$604,487,329
 $527,343,078
Liabilities and Equity   
Liabilities:   
Obligations under participation agreements (Note 7)
$67,670,405
 $103,186,327
Repurchase agreement payable, net of deferred financing fees91,352,312
 79,608,437
Mortgage loan payable, net of deferred financing fees and other44,687,123
 44,753,633
Revolving credit facility payable, net of deferred financing fees34,930,844
 —
Interest reserve and other deposits held on investments16,255,423
 18,542,163
Operating lease liabilities16,111,217
 16,112,925
Lease intangible liabilities, net (Note 5)
11,276,085
 11,424,809
Due to Manager (Note 7)
1,359,132
 1,037,168
Interest payable933,011
 1,076,231
Accounts payable and accrued expenses2,563,299
 1,749,525
Unearned income587,535
 624,021
Distributions payable3,906
 —
Other liabilities1,906,300
 1,684,106
Total liabilities289,636,592
 279,799,345
Commitments and contingencies (Note 9)

 
Equity:   
Preferred stock, $0.01 par value, 50,000,000 shares authorized and
   none issued
—
 —
12.5% Series A Cumulative Non-Voting Preferred Stock at liquidation
preference, 125 shares authorized and 125 shares issued and outstanding at
both March 31, 2020 and December 31, 2019		125,000
 125,000
Common stock, $0.01 par value, 450,000,000 shares authorized and
19,700,151 and 15,125,681 shares issued and outstanding at
March 31, 2020 and December 31, 2019, respectively		197,002
 151,257
Additional paid-in capital377,061,545
 301,727,297
Accumulated deficit(62,716,835) (54,459,821)
Accumulated other comprehensive income184,025
 —
Total equity314,850,737
 247,543,733
Total liabilities and equity$604,487,329
 $527,343,078
See notes to unaudited consolidated financial statements.

2




Terra Property Trust, Inc.
Consolidated Statements of Operations
(Unaudited)

 Three Months Ended March 31,Three Months Ended June 30,Six Months Ended June 30,
 2020 20192023202220232022
Revenues    Revenues
Interest income $9,651,865
 $10,208,964
Interest income$15,878,453 $10,274,051 $31,494,260 $19,156,202 
Real estate operating revenue 2,313,051
 2,321,238
Real estate operating revenue2,803,9342,991,3214,136,903 5,970,775 
Prepayment fee income —
 98,775
Prepayment fee income—1,174,760— 1,174,760 
Other operating income 112,655
 108,957
Other operating income100,068247,981153,463 498,646 
 12,077,571
 12,737,934
18,782,455 14,688,113 35,784,626 26,800,383 
Operating expenses    Operating expenses
Operating expenses reimbursed to Manager 1,367,189
 1,115,204
Operating expenses reimbursed to Manager2,120,029 2,140,635 4,297,033 4,069,198 
Asset management fee 1,029,533
 880,355
Asset management fee2,105,049 1,640,628 4,102,476 3,128,723 
Asset servicing fee 234,208
 204,477
Asset servicing fee496,374 395,718 966,899 745,047 
Provision for loan losses 1,144,994
 —
Provision for credit lossesProvision for credit losses4,652,644 25,633 3,802,593 75,929 
Real estate operating expenses 944,518
 755,855
Real estate operating expenses1,864,212 1,247,328 3,074,124 2,465,291 
Depreciation and amortization 946,494
 946,494
Depreciation and amortization1,756,664 1,718,373 2,438,477 3,436,745 
Impairment chargeImpairment charge11,765,540 — 11,765,540 1,604,989 
Professional fees 294,761
 172,786
Professional fees787,427 1,011,354 1,767,322 1,753,872 
Directors fees 83,750
 83,750
Directors’ feesDirectors’ fees83,750 36,247 180,214 72,499 
Other 64,949
 17,584
Other188,631 374,203 403,875 457,624 
 6,110,396
 4,176,505
25,820,320 8,590,119 32,798,553 17,809,917 
Operating income 5,967,175
 8,561,429
Operating (loss) incomeOperating (loss) income(7,037,865)6,097,994 2,986,073 8,990,466 
Other income and expenses    Other income and expenses
Interest expense from obligations under participation agreements (2,600,758) (2,924,310)Interest expense from obligations under
participation agreements		(576,915)(1,238,655)(1,109,061)(2,313,764)
Interest expense on repurchase agreement payable (1,551,270) (933,973)
Interest expense on mortgage loan payable (750,636) (780,271)
Interest expense on revolving credit facility (174,989) —
Net loss on extinguishment of obligations under participation agreements (319,453) —
Realized gains on marketable securities 8,894
 —
Interest expense on repurchase agreements
payable		Interest expense on repurchase agreements
payable		(2,946,797)(1,665,283)(6,003,303)(2,421,109)
Interest expense on mortgage loans payableInterest expense on mortgage loans payable(1,640,972)(520,829)(2,387,100)(1,039,446)
Interest expense on revolving line of creditInterest expense on revolving line of credit(2,540,047)(700,737)(4,505,581)(1,225,031)
Interest expense on term loan payableInterest expense on term loan payable(355,468)— (707,031)(164,969)
Interest expense on unsecured notes payableInterest expense on unsecured notes payable(2,405,267)(1,432,877)(4,799,573)(2,863,060)
Interest expense on secured borrowingInterest expense on secured borrowing— (556,855)— (1,109,640)
Unrealized gains (losses) on investments, netUnrealized gains (losses) on investments, net51,224 (34,950)57,808 (133,994)
Loss on sale of real estateLoss on sale of real estate— (51,984)— (51,984)
(Loss) income from equity investment in
unconsolidated investments		(Loss) income from equity investment in
unconsolidated investments		(1,759,934)1,364,332(2,196,794)2,783,667
Realized (losses) gains on investments, netRealized (losses) gains on investments, net(25,024)32,278(25,024)83,411
 (5,388,212) (4,638,554)(12,199,200)(4,805,560)(21,675,659)(8,455,919)
Net income $578,963
 $3,922,875
Preferred stock dividend declared (3,906) (3,906)
Net income allocable to common stock $575,057
 $3,918,969
Net (loss) incomeNet (loss) income$(19,237,065)$1,292,434 $(18,689,586)$534,547 
Series A preferred stock dividend declaredSeries A preferred stock dividend declared— $(3,906)$(3,907)$(7,812)
Net (loss) income allocable to common stockNet (loss) income allocable to common stock$(19,237,065)$1,288,528 $(18,693,493)$526,735 
    
Earnings per share — basic and diluted
 $0.03
 $0.26
(Loss) income per share — basic and diluted
(Loss) income per share — basic and diluted
$(0.79)$0.07 $(0.77)$0.03 
    
Weighted-average shares — basic and diluted
 16,707,279
 14,912,990
Weighted-average shares — basic and diluted
24,335,430 19,487,460 24,335,402 19,487,460 
    
Distributions declared per common share $0.53
 $0.51
Distributions declared per common share$0.19 $0.19 $0.38 $0.39 
See notes to unaudited consolidated financial statements.

3

3




Terra Property Trust, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)

   Three Months Ended March 31,
   2020 2019
Comprehensive income, net of tax     
Net income  $578,963
 $3,922,875
Other comprehensive income     
Net unrealized gains on marketable securities  192,919
 —
Reclassification of net realized gains on marketable securities into earnings  (8,894) —
   184,025
 —
Total comprehensive income  $762,988
 $3,922,875
Preferred stock dividend declared  (3,906) (3,906)
Comprehensive income attributable to common shares  $759,082
 $3,918,969

See notes to unaudited consolidated financial statements.


4



Terra Property Trust, Inc.
Consolidated Statements of Changes in Equity
Three Months Ended March 31, 2020 and 2019
(Unaudited)


Preferred Stock12.5% Series A Cumulative Non-Voting Preferred StockClass A Common StockClass B Common StockAdditional
Paid-in
Capital		Accumulated Deficit
$0.01 Par Value$0.01 Par Value
SharesAmountSharesAmountSharesAmountTotal equity
Balance at January 1, 2023$— 125$125,000 —$— 24,335,370$243,354 $444,449,813 $(122,935,993)$321,882,174 
Cumulative effect of credit loss
    accounting standard effective
    January 1, 2023 (Note 2)
— —— ————— (4,619,723)(4,619,723)
Shares issued from reinvestment of
     shareholder distributions		— —— ——34—478 — 478 
Redemption of Series A Preferred
   Stock		— (125)(125,000)——��� — — — (125,000)
Distributions declared on common
   shares ($0.19 per share)
— —— ———— — (4,650,492)(4,650,492)
Distributions declared on preferred
   shares		— —— ———— — (3,907)(3,907)
Net income— —— ———— — 547,479 547,479 
Balance at March 31, 2023— — — — — 24,335,404 243,354 444,450,291 (131,662,636)313,031,009 
Shares issued from reinvestment of
     shareholder distributions		— — — — — 109 — 1,510 — 1,510 
Distributions declared on common
   shares ($0.19 per share)
— — — — — — — — (4,650,501)(4,650,501)
Net loss— — — — — — — — (19,237,065)(19,237,065)
Balance at June 30, 2023$— — $— — $— 24,335,513 $243,354 $444,451,801 $(155,550,202)$289,144,953 
  Preferred Stock 12.5% Series A Cumulative Non-Voting Preferred Stock Common Stock Additional
Paid-in
Capital		 Accumulated Deficit Accumulated Other Comprehensive Income  
    $0.01 Par Value     
   Shares Amount Shares Amount    Total equity
Balance at January 1, 2020 $—
 125
 $125,000
 15,125,681
 $151,257
 $301,727,297
 $(54,459,821) $—
 $247,543,733
Issuance of common stock (Note 3)
 —
 —
 —
 4,574,470
 45,745
 75,334,248
 —
 —
 75,379,993
Distributions declared on common
   share ($0.53 per share)
 —
 —
 —
 —
 —
 —
 (8,832,071) —
 (8,832,071)
Distributions declared on preferred
   shares
 —
 —
 —
 —
 —
 —
 (3,906) —
 (3,906)
Comprehensive income:                  
Net income —
 —
 —
 —
 —
 —
 578,963
 —
 578,963
Net unrealized gains on marketable
   securities
 —
 —
 —
 —
 —
 —
 —
 192,919
 192,919
Reclassification of net realized
   gains on marketable securities
   into earnings
 —
 —
 —
 —
 —
 —
 —
 (8,894) (8,894)
Balance at March 31, 2020 $—
 125
 $125,000
 19,700,151
 $197,002
 $377,061,545
 $(62,716,835) $184,025
 $314,850,737









See notes to unaudited consolidated financial statements.statements.












5
4





Terra Property Trust, Inc.
Consolidated Statements of Changes in Equity
Three Months Ended March 31, 2020 and 2019 (Continued)
(Unaudited)


Preferred Stock12.5% Series A Cumulative Non-Voting Preferred StockCommon StockAdditional
Paid-in
Capital		Accumulated Deficit
$0.01 Par Value
SharesAmountSharesAmountTotal equity
Balance at January 1, 2022$— 125$125,000 19,487,460$194,875 $373,443,672 $(99,919,969)$273,843,578 
Distributions declared on common shares ($0.20 per share)— —— —— — (3,893,595)(3,893,595)
Distributions declared on preferred shares— —— —— — (3,906)(3,906)
Net loss— —— —— — (757,887)(757,887)
Balance at March 31, 2022— 125125,000 19,487,460 194,875 373,443,672 (104,575,357)269,188,190 
Distributions declared on common shares ($0.19 per share)— — — — — — (3,780,568)(3,780,568)
Distributions declared on preferred shares— — — — — — (3,906)(3,906)
Net income— — — — — — 1,292,434 1,292,434 
Balance at June 30, 2022$— 125$125,000 19,487,460 $194,875 $373,443,672 $(107,067,397)$266,696,150 
  Preferred Stock 12.5% Series A Cumulative Non-Voting Preferred Stock Common Stock Additional
Paid-in
Capital		 Accumulated Deficit Accumulated Other Comprehensive Income  
    $0.01 Par Value     
   Shares Amount Shares Amount    Total equity
Balance at January 1, 2019 $—
 125
 $125,000
 14,912,990
 $149,130
 $298,109,424
 $(33,091,195) $—
 $265,292,359
Distributions declared on common
   share ($0.51 per share)
 —
 —
 —
 —
 —
 —
 (7,556,413) —
 (7,556,413)
Distributions declared on preferred
   shares
 —
 —
 —
 —
 —
 —
 (3,906) —
 (3,906)
Comprehensive income:                  
Net income —
 —
 —
 —
 —
 —
 3,922,875
 —
 3,922,875
Net unrealized gains on marketable
securities		 —
 —
 —
 —
 —
 —
 —
 —
 —
Reclassification of net realized
gains on marketable securities
into earnings		 —
 —
 —
 —
 —
 —
 —
 —
 —
Balance at March 31, 2019 $—
 125
 $125,000
 14,912,990
 $149,130
 $298,109,424
 $(36,728,639) $—
 $261,654,915



See notes to unaudited consolidated financial statements.








6
5




Terra Property Trust, Inc.
Consolidated Statements of Cash Flows
(Unaudited)

Six Months Ended June 30,
20232022
Cash flows from operating activities:
Net (loss) income$(18,689,586)$534,547 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization2,438,477 3,436,745 
Provision for credit losses3,802,593 75,929 
Impairment charge11,765,540 1,604,989 
Amortization of net purchase premiums on loans823,785 122,783 
Straight-line rent adjustments22,197 719,036 
Amortization of deferred financing costs1,143,668 1,135,225 
Amortization of discount on unsecured notes payable815,300 228,281 
Amortization of above- and below-market rent intangibles(609,983)(492,749)
Amortization and accretion of investment-related fees, net(475,043)(467,910)
Amortization of above-market rent ground lease(65,174)(65,175)
Realized loss (gain) on investments, net25,024 (83,411)
Unrealized (gains) losses on investments, net(57,808)133,994 
Loss on sale of real estate— 51,984
Distributions received from equity investment in unconsolidated investments5,087,025 225,280 
 Loss (income) from equity investment in unconsolidated investments4,001,731 (1,991,014)
Changes in operating assets and liabilities:
Deal deposits4,241,892 — 
Interest receivable(245,790)(710,459)
Due from related party(255,142)2,605,639 
Other assets(3,232,943)(1,383,519)
Due to Manager(439,232)281,058 
Unearned income379,562 160,042
Interest payable688,182(509,427)
Accounts payable and accrued expenses1,451,483(16,274)
Other liabilities(609,921)(2,223,662)
Net cash provided by operating activities12,005,837 3,371,932 
Cash flows from investing activities:
Origination and purchase of loans(63,775,372)(120,420,961)
Proceeds from repayments of loans98,977,506 56,610,198 
Purchase of real estate properties(52,313,739)— 
Purchase of held-for-maturity securities(20,025,024)— 
Proceeds from redemption of held-for-maturity securities20,000,000 — 
Purchase of marketable securities(1,051,754)— 
Proceeds from sale of marketable securities— 1,259,417 
Return of capital on equity interests in unconsolidated investments10,650,947 — 
Cash acquired in purchase of real estate712,608 — 
Purchase of equity interests in unconsolidated investments— (20,915,067)
Proceeds from sale of real estate— 8,585,500 
Distributions in excess equity income— 497,920 
Net cash used in investing activities(6,824,828)(74,382,993)



6
 Three Months Ended March 31,
 2020 2019
Cash flows from operating activities:   
Net income$578,963
 $3,922,875
Adjustments to reconcile net income to net cash provided by operating activities:   
Paid-in-kind interest income, net(80,116) (657,700)
Depreciation and amortization946,494
 946,494
Provision for loan losses1,144,994
 —
Amortization of net purchase premiums on loans11,112
 12,654
Straight-line rent adjustments(334,452) (121,395)
Amortization of deferred financing costs551,226
 419,173
Net loss on extinguishment of obligations under participation agreements319,453
 —
Amortization of above- and below-market rent intangibles(111,748) (111,750)
Amortization and accretion of investment-related fees, net(4,140) (105,567)
Amortization of above-market rent ground lease(32,587) (32,587)
Changes in operating assets and liabilities:   
Interest receivable(376,919) (109,029)
Other assets(9,093) 155,815
Due to Manager22,520
 (57,782)
Unearned income(167,104) 563,412
Interest payable(143,220) (93,939)
Accounts payable and accrued expenses839,938
 (489,766)
Other liabilities222,194
 (89,376)
Net cash provided by operating activities3,377,515
 4,151,532
Cash flows from investing activities:   
Origination and purchase of loans(38,376,448) (70,813,882)
Proceeds from repayments of loans13,371,565
 60,319,802
Purchase of marketable securities(3,354,442) —
Proceeds from sale of marketable securities48,073
 —
Capital expenditures on real estate—
 (242,071)
Net cash used in investing activities(28,311,252) (10,736,151)
Cash flows from financing activities:   
Proceeds from borrowings under revolving credit facility35,000,000
 —
Proceeds from borrowings under repurchase agreement14,807,834
 45,347,521
Proceeds from issuance of common stock in the Merger16,897,074
 —
Proceeds from issuance of common stock to TIF3 REIT8,600,000
 —
Distributions paid(8,832,071) (7,556,413)
Proceeds from obligations under participation agreements14,291,899
 5,716,927
Repayment of borrowings under repurchase agreement(3,395,740) —
Change in interest reserve and other deposits held on investments(2,286,740) (2,250,093)
Repayment of mortgage principal(132,625) —
Payment of financing costs(84,175) (226,738)
Repayments of obligations under participation agreements—
 (24,903,061)
Net cash provided by financing activities74,865,456
 16,128,143
Net increase in cash, cash equivalents and restricted cash49,931,719
 9,543,524
Cash, cash equivalents and restricted cash at beginning of period50,549,700
 28,538,853
Cash, cash equivalents and restricted cash at end of period (Note 2)
$100,481,419
 $38,082,377

7




Terra Property Trust, Inc.
Consolidated Statements of Cash Flows (Continued)
(Unaudited)

Six Months Ended June 30,
20232022
Cash flows from financing activities:
Proceeds from borrowings under repurchase agreements1,300,858 148,089,549 
Proceeds from borrowings under revolving line of credit57,032,155 41,169,295 
Proceeds from mortgage loan payable72,618,367 — 
Proceeds from obligations under participation agreements1,093,862 16,522,472 
Repayments of borrowings under repurchase agreements(49,344,783)— 
Repayments of obligations under participation agreements— (15,000,000)
Repayments of borrowings under revolving line of credit(41,720,000)(30,920,124)
Distributions paid(9,302,911)(7,681,975)
Repayment of borrowings under the term loan(10,000,000)(93,763,471)
Proceeds from secured borrowing— 3,629,034 
Repayment of mortgage principal(1,649,191)(413,065)
Change in interest reserve and other deposits held on investments(1,431,269)10,041 
Payment of financing costs(2,025,783)(975,947)
Redemption of Series A Preferred Stock(125,000)— 
Net cash provided by financing activities16,446,305 60,665,809 
Net increase (decrease) in cash, cash equivalents and restricted cash21,627,314 (10,345,252)
Cash, cash equivalents and restricted cash at beginning of period36,469,592 51,098,647 
Cash, cash equivalents and restricted cash at end of period (Note 2)
$58,096,906 $40,753,395 
Six Months Ended June 30,
20232022
Supplemental Disclosure of Cash Flows Information:
Cash paid for interest$16,864,499 $10,482,040 
Supplemental non-cash information:
Reinvestment of stockholder distributions$1,988 $— 
7
 Three Months Ended March 31,
 2020 2019
Supplemental Disclosure of Cash Flows Information: 
   
Cash paid for interest$4,459,761
 $1,701,039


Supplemental Non-Cash Financing Activities:non-cash investing information:

Merger

On February 28, 2020, Terra Property Trust, Inc. (the “Company”) entered into certain Agreement and Plan of Merger (the “Merger Agreement”), by and amongIn May 2023, the Company Terra Property Trust 2, Inc. (“TPT2”)acquired five industrial buildings for a $3.5 million cash payment and Terra Secured Income Fund 7, LLC (“Terra Fund 7”), the sole stockholdersettlement of TPT2, pursuant to which, effective March 1, 2020, TPT2a mezzanine loan that was merged withaccounted for as an equity investment and into the Company, with the Company continuing as the surviving corporation (the “Merger”). In connection with the Merger, the Company issued 2,116,785.76 shares of common stock, par value $0.01 per share,five senior loans that were issued to Terra Fund 7 (Note 3).held for investment. The following table presents a summary of the consideration exchangedtotal capitalized costs and settlementthe values of the Company’s obligations under participation agreements as a result of the Merger:net assets acquired:

Total Consideration  
Equity issued in the Merger $34,630,615
Proceeds from equity issued in the Merger 16,897,074
  $17,733,541
Net assets exchanged  
Settlement of obligations under participation agreements $17,688,741
Interest receivable 134,543
Other assets 18,384
Accounts payable and accrued expenses (57,433)
Due to Manager (50,694)
  $17,733,541
Total Capitalized Costs:
Cash and cash equivalents$3,515,466 
Loans held for investment68,737,877 
Equity investment in unconsolidated investment10,149,642 
Interest receivable456,650 
Other assets429,326 
$83,288,961 
Net Assets Acquired
Cash and cash equivalents$712,608 
Other assets33,802 
Land14,457,149 
Buildings and Improvements65,365,376 
Intangible asset and liability:
In-please lease8,403,667 
Below-market rent(4,770,870)
Accounts payable and accrued expenses(912,771)
$83,288,961 
Non-cash Proceeds from Issuance of Common Stock to TIF3 REIT


In addition, on March 2, 2020, the Company entered into two separate contribution agreements, one by and among the Company, Terra International Fund 3 REIT, LLC (“TIF3 REIT”) and Terra Income Fund International, and another by and among the Company, TIF3 REIT and Terra Secured Income Fund 5 International, pursuant to which the Company issued an aggregate of 2,457,684.59 shares of common stock in exchange for the settlement of $32.1 million of participation interests in loans held by the Company, $8.6 million in cash, and other net working capital (“Issuance of Common Stock to TIF3 REIT”) (Note 3). The following table presents a summary of the consideration exchanged and settlement of the Company’s obligations under participation agreements as a result of the Issuance of Common Stock to TIF3 REIT:

Total Consideration  
Equity issued to TIF3 REIT $40,749,378
Proceeds from equity issued to TIF3 REIT 8,600,000
  $32,149,378
Net Assets exchanged  
Settlement of obligations under participation agreements $32,112,257
Interest receivable 270,947
Due to Manager (233,826)
Net assets acquired excluding cash and cash equivalents $32,149,378



For the three months ended March 31, 2020, the Company declared distributions of $3,906 on its 12.5% Series A Cumulative Non-Voting Preferred Stock to be paid in June 2020.




8






Terra Property Trust, Inc.
Consolidated Statements of Cash Flows (Continued)
(Unaudited)


Supplemental Non-Cash Investing Activities    `:

Deed in Lieu of Foreclosure

On January 9, 2019, the Company acquired 4.9 acres of adjacent land encumbering a $14.3 million first mortgage via deed in lieu of foreclosure in exchange for the payment of the first mortgage and related fees and expenses (Note 5). The following table summarizes the carrying value of the first mortgage and the fair value of asset acquired in the transaction:
Carrying Value of First Mortgage  
Loan held for investment $14,325,000
Interest receivable 439,300
Restricted cash applied against loan principal amount (60,941)
  $14,703,359
   
Assets Acquired at Fair Value  
Land $14,703,359


See notes to unaudited consolidated financial statements.



9
8



Terra Property Trust, Inc.
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2020June 30, 2023


Note 1. Business


Terra Property Trust, Inc. (and, together with its consolidated subsidiaries, the “Company” or “Terra Property Trust”) was incorporated under the general corporation laws of the State of Maryland General Corporation Law on December 31, 2015. Terra Property Trust is a real estate credit focused company that originates, structures, funds and manages commercial real estate investments, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments. 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 these loans are subject to less competition and offer higher risk adjusted returns than larger loans with similar risk/return metrics.
    
On January 1, 2016, Terra Secured Income Fund 5, LLC (“Terra Fund 5”), the Company’s then parent, contributed its consolidated portfolio of net assets to the Company pursuant to a contribution agreement in exchange for shares of the Company’s common stock. Upon receipt of the contribution of the consolidated portfolio of net assets from Terra Fund 5, the Company commenced its operations on January 1, 2016. On March 2, 2020, the Company engaged in a series of transactions pursuant to which the Company issued an aggregate of 4,574,470.35 shares of ourits common stock in exchange for the settlement of an aggregate of $49.8 million of participation interests in loans held by the Company, cash of $25.5 million and other working capital. Following the completion of the transactions, as of March 31, 2020, Terra JV, LLC (“Terra JV”) held 86.4% of the issued and outstanding shares of the Company's common stock with the remainder held by TIF3 REIT (Note 3).


The Company has elected to be taxed, and to qualify annually thereafter, as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), commencing with the taxable year ended December 31, 2016. As a REIT, the Company is not subject to federal income taxes on income and gains distributed to the stockholders as long as certain requirements are satisfied, principally relating to the nature of income and the level of distributions, as well as other factors. The Company also operates its business in a manner that permits it to maintain its exclusionexemption from registration as an “investment company” under the Investment Company Act of 1940, as amended.amended (the “1940 Act”).


The Company’s investment activities are externally managed by Terra REIT Advisors, LLC (“Terra REIT Advisors” or the “Manager”), a subsidiary of the Company’s sponsor, Terra Capital Partners, LLC (“Terra Capital Partners”), pursuant to a management agreement (the “Management Agreement”), under the oversight of the Company’s board of directors (the “Board”) (Note 78). 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 by individuals who were contracted by the Company or by the Manager to work on behalf of the Company pursuant to the terms of the Management Agreement.


On October 1, 2022, pursuant to that certain Agreement and Plan of Merger, dated as of May 2, 2022 (the “Merger Agreement”), Terra Income Fund 6, Inc. (“Terra BDC”), merged with and into Terra Income Fund 6, LLC (“Terra LLC”), a wholly owned subsidiary of the Company, with Terra LLC continuing as the surviving entity of the merger (the “BDC Merger”) and as a wholly owned subsidiary of the Company (Note 3).

As of June 30, 2023, Terra JV, LLC (“Terra JV”), former shareholders of Terra BDC and Terra Offshore Funds REIT, LLC (“Terra Offshore REIT”) held 70.0%, 19.9% and 10.1% of the issued and outstanding shares of the Company’s common stock, respectively.
Note 2. Summary of Significant Accounting Policies


Basis of Presentation and Principles of Consolidation


The interim consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and include all of the Company’s accounts and those of its consolidated subsidiaries. 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. All significant intercompany balances and transactions have been eliminated.eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation.


The Company consolidates entities in which it has a controlling financial interest based on either the variable interest entity (“VIE”) or voting interest model. The Company is required to first apply the VIE model to determine whether it holds a variable interest in an entity, and if so, whether the entity is a VIE. If the Company determines it does not hold a variable
9

Notes to Unaudited Consolidated Financial Statements

interest in a VIE, it then applies the voting interest model. Under the voting interest model, the Company consolidates an entity when it holds a majority voting interest in an entity.

The Company accounts for investments in which it has significant influence but not a controlling financial interest using the equity method of accounting (see Note 5).

VIE Model

An entity is considered to be a VIE if any of the following conditions exist: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) the holders of the equity investment at risk, as a group, lack either the direct or indirect ability through voting rights or similar rights to make decisions that have a significant effect on the success of the entity or the obligation to absorb the entity’s expected losses or right to receive the entity’s expected residual returns, or (c) the voting rights of some equity investors are disproportionate to their obligation to absorb losses of the entity, their rights to receive returns from an entity, or both and substantially all of the entity’s activities either involve or are conducted on behalf of an investor with disproportionately few voting rights.

Under the VIE model, limited partnerships are considered VIEs unless a limited partner holds substantive kick-out or participating rights over a general partner. The Company consolidates entities that are VIEs when the Company determines it is the primary beneficiary. Generally, the primary beneficiary of a VIE is a reporting entity that has (a) the power to direct the activities that most significantly affect the VIE’s economic performance, and (b) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE.

Loans Held for Investment


The Company originates, acquires, and structures, or acquires through participations, real estate-related loans generally to be held to maturity.maturity (collectively the “loans”). Loans held for investment are carried at the principal amount outstanding, adjusted for the accretion of discounts on investments and exit fees, and the amortization of premiums on investments and origination fees. The Company’s preferred equity investments, which are economically similar to mezzanine loans and subordinate to any loans but senior to common equity, are accounted for as loans held for investment. Loans are carried at amortized cost less allowance for loancredit losses.



Current Expected Credit Losses Reserve

Accounting Standards Codification (“ASC”) 326, Financial Instruments – Credit Losses, became effective for the Company on January 1, 2023. ASC 326 mandates the use of a current expected credit loss (“CECL”) model for estimating future credit losses of certain financial instruments measured at amortized cost, instead of the “incurred loss” credit model previously required under United States generally accepted accounting principles (“U.S. GAAP”). The CECL model requires the consideration of possible credit losses over the life of an instrument as opposed to only estimating credit losses upon the occurrence of a discrete loss event under the previous “incurred loss” methodology. The CECL model applies to the Company’s loan portfolio and the held-to-maturity debt securities which are carried at amortized cost, including future funding commitments for which the Company does not have the unconditional right to cancel. Amortized cost is defined as the principal amount outstanding, adjusted for the accretion of purchase discounts and disposition fees, and amortization of purchase premiums and origination fees, and includes accrued interest receivable related to these loans and securities. As permitted by ASC 326, the Company elected not to measure an allowance for credit losses on accrued interest receivable (which is presented separately on the consolidated balance sheet), but rather write off in a timely manner by reversing interest income that would likely be uncollectible. The Company’s adoption of the CECL model resulted in a $4.6 million increase to total reserve, including reserve on future funding commitments, which was recognized as a cumulative-effect adjustment to accumulated deficit as of January 1, 2023. Subsequent to the adoption of the CECL model, any increase or decrease to the CECL reserve is recorded in earnings on the consolidated statements of operations.

The Company utilizes information obtained from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts about the future to determine the expected credit losses for its loan portfolio. The Company does not have a meaningful history of realized credit losses on its loan portfolio so it has subscribed to a third-party database service to provide the Company with industry losses for its loans. The Company utilizes a loan loss model that is widely used among banks and commercial mortgage REITs and is marketed by a leading commercial mortgage-based security data analytics provider. It employs logistic regression to forecast expected losses at the loan level based on a commercial real estate loan securitization database that contains activity dating back to 1998. The Company provides specific loan-level inputs which include loan-to-value and debt service coverage ratio metrics, as well as principal balances, property type, location, coupon rate, coupon rate type, original or remaining term, expected repayment dates and contractual future funding
10



Notes to Unaudited Consolidated Financial Statements



commitments. The Company selects from a group of independent five-year macroeconomic forecasts included in the model that are updated regularly based on current economic trends. Because the Company’s loan portfolio is comprised of a small number of loans, the Company measures the CECL reserve based on an evaluation of each loan as its own segregated asset. Based on the inputs, the loan loss model determines a loan loss rate through the generation of probability of defaults (PD) and loss given defaults (LGD) for each loan. The CECL reserve is then calculated by applying the loan loss rate to the total outstanding loan balance of each loan. These results require a significant amount of judgment applied in selecting inputs and analyzing the results produced by the models to determine the allowance for credit losses. Changes in such estimates can significantly affect the expected credit losses.
Allowance for Loan Losses

The calculation of the estimate of expected credit loss considers historical experience and current conditions for each loan and reasonable and supportable forecasts about the future. The reasonable and supportable forecast period is determined based on the Company’s loans are typically collateralized by eitherassessment of the sponsors’ equity interestmost likely scenario of assumptions and plausible outcomes for the U.S. economy, current portfolio composition, level of historical loss forecast estimates, material changes in the real estate properties or the underlying real estate properties. As a result, thegrowth and credit strategy and other factors that may affect its loss experience. The Company regularly evaluates the extentreasonable and impactsupportable forecast period to determine if a change is needed.

Beyond the Company’s reasonable and supportable forecast period, the Company generally reverts to historical loss information, pooled by asset type and investment structure, over the remaining loan period, taken from a period that most accurately reflects the expectation of any credit migration associated withconditions expected to exist during the performance and/or valueperiod of reversion. The Company may adjust historical loss information for differences in risk that may not reflect the characteristics of its current portfolio, including but not limited to, loan-to-value and debt service coverage ratios, among other relevant factors. The method of reversion selected represents the best estimate of the underlying collateral property as well as the financial and operating capabilitycollectability of the borrower/sponsor on a loan-by-loan basis. Specifically, a property’s operating resultsinvestments and any cash reserves are analyzed and usedis reevaluated each reporting period. The Company generally expects to assess (i) whether cash from operations and/use an average historical loss for reversion, utilizing an immediate or reserve balances are sufficient to coverstraight-line method for the debt service requirements currently and into the future; (ii) the abilityremaining life of the borrowerloans.

The Company also performs a qualitative assessment beyond model estimates and applies qualitative adjustments as necessary. The Company’s qualitative analysis includes a review of data that may directly impact its estimates including internal and external information about the loan or property including current market conditions, asset specific conditions, property operations or borrower/sponsor details (i.e., refinance, sale, bankruptcy) which allows the Company to refinancedetermine the loan; and/or (iii)amount of the property’s liquidation value.expected loss more accurately and reasonably for these investments. The Company also evaluates the financial wherewithalcontractual life of its loans to determine if changes are needed for contractual extension options, renewals, modifications, and prepayments.

During the sponsor as well as its competency in managing and operating the real estate property. In addition,loan review process, if the Company considers the overall economic environment, real estate sector, and geographic sub-market in which the borrower operates. Such analyses are completed and reviewed by asset management and finance personnel, who utilize various data sources, including (i) periodic financial data such as debt service coverage ratio, property occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, the capitalization and discount rates; (ii) site inspections; and (iii) current credit spreads and discussions with market participants.

The Manager performs a quarterly evaluation for possible impairment of the Company’s portfolio of loans. A loan is impaired ifdetermines that it is deemed probable that the Company will not be able to collect all amounts due for both principal and interest according to the contractual terms of a loan, the loan. ImpairmentCompany considers that loan non-performing. For all non-performing loans, such as those in default, collateral-dependent or modified loans, including historical troubled debt restructurings, the Company removes these loans from the industry loss rate approach described above and analyzes them separately. The credit loss reserve for these loans is measured based oncalculated as any excess of the amortized cost of the loan over (i) the present value of expected future cash flows discounted at the appropriate discount rate or (ii) the fair value of the collateral, if repayment is expected solely from the collateral.

Some of the Company’s loans include commitments to fund incremental proceeds to the borrowers over the life of the loan is collateral dependent. Upon measurement of impairment,and these unfunded commitments are also subject to the CECL model because the Company recordsdoes not have an allowanceunconditional right to reducecancel such commitments. The CECL reserve related to unfunded commitments is recorded as a component of other liabilities on the Company’s consolidated balance sheets. This CECL reserve is estimated using the same method outlined above for the Company’s outstanding loan balances, and increases or decreases in the CECL reserve relating to unfunded commitments are also recorded in earnings on the consolidated statements of operations.

    As discussed below in Recent Accounting Pronouncements, the Company adopted the provisions of Accounting Standards Update (“ASU”) 2022-02 Financial Instruments—Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) concurrently with the adoption of CECL on January 1, 2023, prospectively.

Equity Investment in Unconsolidated Investments

The Company accounts for its equity interests in unconsolidated investments under the equity method of accounting, i.e., at cost, increased or decreased by its share of earnings or losses, less distributions, plus contributions and other adjustments required by equity method accounting.

11

Notes to Unaudited Consolidated Financial Statements

The Company evaluates its equity investment unconsolidated investments on a periodic basis to determine if there are any indicators that the value of its equity investments may be impaired and whether or not that impairment is other-than-temporary. To the extent an impairment has occurred and is determined to be other-than-temporary, the Company measures the charge as the excess of the carrying value of the loan with a corresponding charge to net income.

In conjunction with the quarterly evaluation of loans not considered impaired, the Manager assesses the risk factors of each loan and assigns each loan a risk rating between 1 and 5,its investment over its estimated fair value, which is an averagedetermined by calculating its share of the numerical ratings in the following categories: (i) sponsor capability and financial condition; (ii) loan and collateral performance relative to underwriting; (iii) quality and stability of collateral cash flows and/or reserve balances; and (iv) loan to value. Based on a 5-point scale, the Company’s loans are rated “1” through “5”, from less risk to greater risk, as follows:
Risk RatingDescription
1Very low risk
2Low risk
3Moderate/average risk
4Higher risk
5Highest risk

The Company records an allowance for loan losses equal to (i) 1.5%estimated fair market value of the aggregate carrying amount of loans rated as a “4”, plus (ii) 5%underlying net assets based on the terms of the aggregate carrying amount of loans rated as a “5”, plus (iii) impaired loan reserves, if any.applicable partnership or joint venture agreements.

There may be circumstances where the Company modifies a loan by granting the borrower a concession that it might not otherwise consider when a borrower is experiencing financial difficulty or is expected to experience financial difficulty in the foreseeable future. Such concessionary modifications are classified as troubled debt restructurings (“TDR”s) unless the modification solely results in a delay in a payment that is insignificant. Loans classified as TDRs are considered impaired loans for reporting and measurement purposes.


Marketable Securities


The Company from time to time invests in short term debt and equity securities. These securities are classified as available-for-sale and are carried at fair value. Unrealized gains or losses on available-for-saleChanges in the fair value of equity securities are recognized in earnings. Changes in the fair value of debt securities are reported in other comprehensive income until a gain or loss on the securities is realized.

Held-to-Maturity Debt Securities

The Company classifies debt securities for which it has both the positive intent and ability to hold until theymaturity of the security as held-to-maturity debt securities. These securities are recorded at amortized cost with changes in amortized cost recognized in earnings until realized. Held-to-maturity debt securities are subject to the CECL reserve described above.
    
Real Estate Owned, Net


Real estate acquired is recorded at its estimated fair value at acquisition and is shown net of accumulated depreciation and impairment charges.


Acquisition of properties generally are accounted for as asset acquisitions. Under asset acquisition accounting, the costs to acquire real estate, including transaction costs, are accumulated and then allocated to individual assets and liabilities acquired based upon their relative fair value. The Company allocates the purchase price of its real estate acquisitions to land, building,

11


Notes to Unaudited Consolidated Financial Statements


tenant improvements, acquired in-place leases, intangibles for the value of any above or below market leases at fair value and to any other identified intangible assets or liabilities. The Company amortizes the value allocated to in-place leases over the remaining lease term, which is reported in depreciation and amortization expense on its consolidated statements of operations. The value allocated to above or below market leases are amortized over the remaining lease term as an adjustment to rental income.


Real estate assets are depreciated using the straight-line method over their estimated useful lives: buildings and improvements - not to exceed 40 years, and tenant improvements - shorter of the lease term or life of the asset. Ordinary repairs and maintenance which are not reimbursed by the tenants are expensed as incurred. Major replacements and betterments which improve or extend the life of the asset are capitalized and depreciated over their estimated useful life.


Management reviews the Company’s real estate for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of recoverability is based on estimated future cash flows and the estimated liquidation value of such real estate assets, and provide for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the real estate assets. If impaired, the real estate asset will be written down to its estimated fair value.


Leases


The Company determines if an arrangement is a lease at inception. Operating leases in which the Company is the lessee are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in the consolidated balance sheets. 


ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s lease typically does not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made in advance and excludes lease incentives if there were any. The Company’s lease term may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

12

Notes to Unaudited Consolidated Financial Statements


Revenue Recognition


Revenue is recognized 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 those goods or services.


Interest Income: Interest income is accrued based upon the outstanding principal amount and contractual terms of the loans and preferred equity investments that the Company expects to collect, and it is accrued and recorded on a daily basis. Discounts and premiums on investments purchased are accreted or amortized over the expected life of the respective loan using the effective yield method, and are included in interest income in the consolidated statements of operations. Loan origination fees and exit fees, net of portions attributable to obligations under participation agreements, are capitalized and amortized or accreted to interest income over the life of the investment using the effective yield method. Outstanding interest method. Income accrualreceivable is assessed for recoverability. The Company generally suspendedreverses the accrued and unpaid interest against interest income and no longer accrues for loans at the earlier of the date at which payments become 90 days past due orinterest when, in the opinion of the Manager, recovery of income and principal becomes doubtful. Outstanding interest receivable is assessed for recoverability. Interest is then recorded on the basis of cash received until accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed.demonstrated. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability.


The Company holds loans in its portfolio that contain paid-in-kind (“PIK”) interest provisions. The PIK interest, which represents contractually deferred interest that is added to the principal balance that is due at maturity, is recorded on the accrual basis.


Real Estate Operating Revenues: Real estate operating revenue is derived from leasing of space to various types of tenants. The leases are for fixed terms of varying length and generally provide for annual rent increases and expense reimbursements to be paid in monthly installments. Lease revenue, or rental income from leases, is recognized on a straight-line basis over the term of the respective leases. Additionally, the Company recorded above- and below-market lease intangibles, which are included in real estate owned, net, in connection with the acquisition of the real estate properties. These intangible assets and liabilities are amortized to lease revenue over the remaining contractual lease term.
    
Other Revenues: Prepayment fee income is recognized as prepayments occur. All other income is recognized when earned.


12


Notes to Unaudited Consolidated Financial Statements



Cash, Cash Equivalents and Restricted Cash


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.
Restricted cash represents cash held as additional collateral by the Company on behalf of the borrowers related to the investments in loans or preferred equity instruments for the purpose of such borrowers making interest and property-related operating payments. Restricted cash is not available for general corporate purposes. The related liability is recorded in “Interest reserve and other deposits held on investments” on the consolidated balance sheets.


Cash held in escrow by lender represents amounts funded to an escrow account for debt services and tenant improvements. Cash held in escrow is restricted and is not available for general corporate purposes.


The following table provides a reconciliation of cash, cash equivalents and restricted cash in the Company’s consolidated balance sheets to the total amount shown in its consolidated statements of cash flows:flows as of:
June 30,
20232022
Cash and cash equivalents$51,808,573 $28,978,788 
Restricted cash3,201,935 7,421,852 
Cash held in escrow by lender3,086,398 4,352,755 
Total cash, cash equivalents and restricted cash shown in the consolidated
   statements of cash flows		$58,096,906 $40,753,395 
13

Notes to Unaudited Consolidated Financial Statements

  March 31, 2020
 March 31, 2019
Cash and cash equivalents $82,163,055
 $20,738,351
Restricted cash 16,255,423
 15,120,570
Cash held in escrow by lender 2,062,941
 2,223,456
Total cash, cash equivalents and restricted cash shown in the consolidated
   statements of cash flows
 $100,481,419
 $38,082,377


Participation Interests


Loan participations from the Company which do not qualify for sale treatment remain on the Company’s consolidated balance sheets and the proceeds are recorded as obligations under participation agreements. For the investments for which participation has been granted, the 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. Interest expense from obligations under participation agreement is reversed when recovery of interest income on the related loan becomes doubtful. See “Obligations under Participation Agreements” in Note 89 for additional information.


Term Loan

    The Company previously financed certain of its senior loans through borrowings under an indenture and credit agreement. The Company accounted for the borrowings as a term loan, which was carried at the contractual amount (cost), net of unamortized deferred financing fees. On February 18, 2022, the Company refinanced the Term Loan (as defined below) with a new repurchase agreement. See “Goldman Master Purchase Agreement” in Note 9 for additional information. In connection with the BDC Merger, the Company assumed a $25.0 million term loan. In June 2023, the Company made a repayment of $10.0 million on the Term Loan. The Company classified this Term Loan as term loan payable on the consolidated balance sheets.

Repurchase AgreementAgreements


The Company finances certain of its senior loans held for investment through repurchase transactions under a master repurchase agreement.agreements. The Company accounts for the repurchase transactions as secured borrowing transactions, which are carried at their contractual amounts (cost), net of unamortized deferred financing fees.See “Repurchase Agreements” in Note 9 for additional information.


Fair Value Measurements


U.S. GAAP establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The Company has not elected the fair value option for its financial instruments, including loans held for investment, loans held for investment acquired through participation, obligations under participation agreements, secured borrowing, unsecured notes, mortgage loan payable, term loan payable, repurchase agreement payablepayment and revolving credit facility payable.line of credit. Such financial instruments are carried at cost, less impairment.impairment, where applicable. Marketable securities are financial instruments that are reported at fair value.


Deferred Financing Costs


Deferred financing costs represent fees and expenses incurred in connection with obtaining financing for investments. These costs are presented in the consolidated balance sheets as a direct deduction of the debt liability to which the costs pertain. These costs are amortized using the effective interest method and are included in interest expense on mortgage loan payablethe applicable borrowings in the consolidated statements of operations over the life of the borrowings.



Income Taxes
13


    

Notes to Unaudited Consolidated Financial Statements


Income Taxes

The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with the taxable year ended December 31, 2016. In order to qualify as a REIT, the Company is required, among other things, to distribute dividends equal to at least 90% of its REIT net taxable income to the stockholders and meet certain tests regarding the nature of its income and assets. As a REIT, the Company is not subject to federal income taxes on income and gains distributed to the stockholders as long as certain requirements are satisfied, principally relating to the nature of income and the level of distributions, as well as other factors. If the Company fails to continue to qualify as a REIT in any taxable year and does not qualify for certain statutory relief provisions, the Company will be subject to U.S. federal and state income taxes at regular corporate rates (including any applicable alternative minimum tax for taxable years before 2018)tax) beginning with the year in which it fails to qualify and may be precluded from being able to elect to be treated as a REIT for the Company’s four subsequent taxable years. Any gains from the sale of foreclosed properties within two years are subject to U.S. federal and state income taxes at regular corporate rates.

As of March 31, 2020,June 30, 2023, the Company has satisfied all the requirements for a REIT and accordingly, no provision for federal income taxes has been included in the consolidated financial statements for the three months ended March 31, 2020 and 2019.REIT.


14

Notes to Unaudited Consolidated Financial Statements

The Company did not have any uncertain tax positions that met the recognition or measurement criteria of Accounting Standards Codification (“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 six months ended March 31, 2020June 30, 2023 and 2019,2022, the Company did not incur any interest or penalties. Although the Company files federal and state tax returns, its major tax jurisdiction is federal. The Company’s inception-to-date2019-2022 federal tax returns remain subject to examination by the Internal Revenue Service.


Earnings Per Share


The Company has a simple equity capital structure with only common stock outstanding as of June 30, 2023 and common stock and preferred stock outstanding.outstanding as of December 31, 2022. As a result, earnings per share, as presented, represent both basic and dilutive per-share amounts for the periods presented in the consolidated financial statements. Income per basic share of common stock is calculated by dividing net income allocable to common stock by the weighted-average number of shares of common stock issued and outstanding during such period.


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 disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. During the first quarter 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 consolidated financial statements are reasonable and supportable based on the information available as of March 31, 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 March 31, 2020 inherently less certain than they would be absent the current and potential impacts of COVID-19. Actual results may ultimately differ from those estimates.estimates, and those differences could be material.


Segment Information


The Company’s primary business is originating, acquiring and structuring real estate-related loans related to high quality commercial real estate. From time to time, the Company may acquire real estate encumbering the senior loans through foreclosure. However, management treats the operations of theforeclosure, may invest in real estate acquired through foreclosure as the continuation of the original senior loans.related joint ventures and may directly acquire real estate properties. The Company operates in a single segment focused on mezzanine loans, other loans and preferred equity investments, and to a lesser extent, owning and managing real estate.
    

14


Notes to Unaudited Consolidated Financial Statements


Recent Accounting Pronouncements


In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. In April 2019, the FASB issued additional amendments to clarify the scope of ASU 2016-13 and address issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, among other things. In May 2019, the FASB issued ASU 2019-05 — Targeted Transition Relief, which provides an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. In October 2019, the FASB decided that for smaller reporting companies, ASU 2016-13 and related amendments will beare effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company meets the definition of a smaller reporting company under the regulation of the Securities and Exchange Commission. As such, theThe Company will adoptadopted this ASU and related amendments on January 1, 2023. Management is currently evaluating the impact this change will have on the Company’s consolidated financial statements and disclosures.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure framework — Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The objective of ASU 2018-13 is to improve the effectiveness of disclosures 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 modified certain fair value measurement disclosure requirements. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. 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 or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted ASU 2018-13 on January 1, 2020. The adoption of ASU 2018-13 did not have2016-13 resulted in an incremental reserve of approximately $4.6 million, which included a material impactreserve on its consolidated financial statements and disclosures.future loan funding commitments. The Company recorded the cumulative effect of initially applying this guidance as an adjustment to Accumulated deficit using the modified retrospective method of adoption.


London Interbank Offered Rate (“LIBOR”) is a benchmark interest rate referenced in a variety of agreements that are used by all types of entities. AtIn July 2017, the U.K. Financial Conduct Authority, which regulates the LIBOR administrator, ICE Benchmark Administration Limited (“IBA”), announced that it would cease to compel banks to participate in setting LIBOR as a benchmark by the end of 2021, banks will no longer be requiredwhich has subsequently been delayed to report information that is used to determine LIBOR. As a result, LIBOR could be discontinued. Other interest rates used globally could also be discontinued for similar reasons.June 30, 2023. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) — Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The amendments in ASU 2020-04 provide companies with optional guidanceexpedients and exceptions for applying U.S. GAAP to ease the potential accounting burden associated with transitioning away fromcontracts, hedging relationships, and other transactions affected by reference ratesrate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that arereference LIBOR or another reference rate expected to be discontinued. The provisionsdiscontinued because of optional relief include: (i) contract modifications - account forreference rate reform. In January 2021, the modification as a continuationFASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848), which expanded the scope of Topic 848 to include derivative instruments impacted by discounting transition (“ASU 2021-01”). In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848) — Deferral of the existing contract without additional analysis; (ii) hedging accounting - continue hedge accounting when certain critical termsSunset Date of a hedging relationship change; and (iii) held-to-maturity (HTM) debt securities - one-time sale and/or transfer to available for sale or trading may be made for HTM debt securities that both reference an eligible reference rate and were classified as HTM before January 1, 2020. Companies can applyTopic 848 (“ASU 2022-06”). ASU 2022-06 deferred the amendments insunset date of ASU 2020-04 immediately. However, ASU 2020-04 will only be availableto
15

Notes to Unaudited Consolidated Financial Statements

December 31, 2024. In the event LIBOR is unavailable, the Company’s investment documents provide for a limited time (generally through December 31, 2022). Thesubstitute index, on a basis generally consistent with market practice, intended to put the Company is currently evaluatingin substantially the impact ofsame economic position as LIBOR. As a result, the Company does not expect the reference rate reform and the adoption of ASU 2020-04 and ASU 2021-01 to have a material impact on its consolidated financial statements and disclosures.


In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”). ASU 2022-02 eliminates troubled debt restructuring guidance for organizations that adopted the amendments in ASU 2016-13 while providing for additional disclosures for loan modifications. ASU 2022-02 also amends the vintage disclosure guidance for public business entities. The Company adopted the provisions of ASU 2022-02 concurrently with the adoption of ASU 2016-03. The adoption of ASU 2022-02 did not have any material impact on the Company’s financial condition and results of operations.

Note 3. Merger and Issuance of Common Stock to TIF3 REIT

BDC Merger


BDC Merger

On February 28, 2020, the Company entered intoOctober 1, 2022 (the “Closing Date”), pursuant to the Merger Agreement, pursuant to which TPT2 wasTerra BDC merged with and into Terra LLC, with Terra LLC surviving as a wholly owned subsidiary of the Company,Company. The Certificate of Merger and Articles of Merger with respect to the BDC Merger were filed with the Company continuing asSecretary of State of the surviving corporation,State of Delaware and State Department of Assessments and Taxation of Maryland (the “SDAT”), respectively, with an effective March 1, 2020. In connection withtime and date of 12:02 a.m., Eastern Time, on the Merger, each shareClosing Date (the “Effective Time”).

At the Effective Time, except for any shares of common stock, par value $0.01$0.001 per share, of TPT2Terra BDC (“Terra BDC Common Stock”) held by the Company or any wholly owned subsidiary of the Company or Terra BDC, which shares were automatically retired and ceased to exist with no consideration paid therefor, each issued and outstanding immediately prior to the effective timeshare of the MergerTerra BDC Common Stock was automatically cancelled and retired and converted into the right to receive from the Company a number of(i) 0.595 shares of common stock,the newly designated Class B Common Stock, par value $0.01 per share (“Class B Common Stock”) and (ii) cash, without interest, in lieu of any fractional shares of Class B Common Stock otherwise issuable in an amount, rounded to the nearest whole cent, determined by multiplying (x) the fraction of a share of Class B Common Stock to which such holder would otherwise be entitled by (y) $14.38.

Pursuant to the terms of the Company equaltransactions described in the Merger Agreement, approximately 4,847,910 shares of Class B Common Stock were issued to an exchange ratio, which was 1.2031. The exchange ratio wasformer Terra BDC stockholders in connection with the BDC Merger, based on the relative net asset valuesnumber of outstanding shares of Terra BDC Common Stock as of the Closing Date. Following the consummation of the BDC Merger, former Terra BDC stockholders owned approximately 19.9% of the common equity of the Company.

The Company and Terra BDC prepared their respective financial statements in accordance with generally accepted accounting principles in the United States. The BDC Merger is accounted for using the acquisition method of accounting, with the Company being treated as the accounting acquirer. In identifying the Company as the acquiring entity for accounting purposes, the Company and TPT2 asTerra BDC took into account a number of December 31, 2019 as adjusted to reflect changes infactors, including the net working capital of eachrelative size of the merging companies, which entity issues additional shares in conjunction with the BDC Merger, the relative voting interests of the respective stockholders after consummation of the BDC Merger, and the composition of the Board and senior management of the combined company after consummation of the BDC Merger.

The Company, and TPT2 duringas the period from January 1, 2020 through March 1, 2020, the effective timeacquirer, accounted for the Merger. For purposes of determiningBDC Merger as an asset acquisition and all direct acquisition-related costs are capitalized to the respective fair valuestotal cost of the Companyassets acquired and TPT2,liabilities assumed. Pursuant to Accounting Standard Codification Topic 805, Business Combination, total cost is allocated to the assets acquired and liabilities assumed on a relative fair value of the loans (or participation interests therein) held by each of the Company and TPT2 was the value of such loans (or participation interests) as set forth in the audited financial statements of the Company as of and for the year ended December 31, 2019. As a result, Terra Fund 7, the sole stockholder of TPT2, received 2,116,785.76 shares of common stock of the Company as consideration in the Merger. The shares of common stock were issued in a private placement in reliance on Section 4(a)(2) under the Securities Act of 1933, as amended (the “Securities Act”), and the rules and regulations promulgated thereunder.

basis.
15
16



Notes to Unaudited Consolidated Financial Statements




The following table presents a summarysummarizes the total consideration and the fair values of assets acquired and liabilities assumed in the consideration exchanged and settlement of the Company’s obligations under participation agreements as a result of theBDC Merger:

Total Consideration  
Equity issued in the Merger $34,630,615
  $34,630,615
   
Net Assets of TPT2 Received in the Merger  
Loans held for investment acquired through participation $17,688,741
Cash and cash equivalents 16,897,074
Interest receivable 134,543
Other assets 18,384
Accounts payable and accrued expenses (57,433)
Due to Manager (50,694)
Total identifiable net assets $34,630,615
Total Consideration
Fair value of Terra Property Trust shares of common stock issued
$71,054,620 
Cash paid for fractional shares12,920 
Transaction costs2,283,785 
$73,351,325 
Assets Acquired and Liabilities Assumed at Fair Value
Cash and cash equivalents$24,321,951 
Restricted cash260,614 
Loans held for investment77,562,528 
Loans held for investment acquired through participation36,793,313 
Interest receivable1,367,044 
Other assets55,465 
Term loan payable(25,000,000)
Unsecured notes payable(33,770,000)
Obligations under participation agreements(6,114,979)
Interest reserve and other deposits held on investments(260,614)
Due to manager(682,541)
Interest payable(53,186)
Accounts payable and accrued expenses(740,824)
Other liabilities(387,446)
Net assets acquired$73,351,325 

The fair value of the 2,116,785.764,847,910 shares of the Class B Common Stock was determined based on the Company’s stock issued in the Merger as consideration paid for TPT2 was derived from the fairnet asset value per share of the Company$14.66 as of December 31, 2019 as adjusted to reflect the change in the net working capital of the Company during the period from JanuaryOctober 1, 2020 through March 1, 2020, the effective time of the Merger.2022.
In connection with the Merger, the size of the board of directors of the Company was reduced from eight directors to four directors, with Andrew M. Axelrod, Vikram S. Uppal, Roger H. Beless and Michael L. Evans continuing as directors of the Company.
Issuance of Common Stock to TIF3 REIT
In addition, on March 2, 2020, the Company entered into two separate contribution agreements, one by and among the Company, TIF3 REIT and Terra Income Fund International, and another by and among the Company, TIF3 REIT and Terra Secured Income Fund 5 International, pursuant to which the Company issued 2,457,684.59 shares of common stock of the Company to TIF3 REIT in exchange for the settlement of $32.1 million of participation interests in loans also held by the Company, $8.6 million in cash and other net working capital. 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.
The fair value of the 2,457,684.59 shares of the Company’s stock issued in the transaction as consideration paid for TIF3 REIT was derived from the fair value per share of the Company as of December 31, 2019, which was the most recently determined fair value per share of the Company.
The following table presents a summary of the consideration exchanged and settlement of the Company’s obligations under participation agreements as a result of the Issuance of Common Stock to TIF3 REIT:
Total Consideration  
Equity issued to TIF3 REIT $40,749,378
  $40,749,378
Net Assets of TIF3 REIT Received  
Investments through participation interest, at fair value $32,112,257
Cash and cash equivalents 8,600,000
Interest receivable 270,947
Due to Manager (233,826)
Total identifiable net assets $40,749,378

16


Notes to Unaudited Consolidated Financial Statements


Terra JV, LLC

Prior to the completion of the Merger and the Issuance of Common Stock to TIF3 REIT transactions described above, Terra Fund 5 owned approximately 98.6% of the issued and outstanding shares of the Company’s common stock indirectly through its wholly owned subsidiary, Terra JV, of which Terra Fund 5 was the sole managing member, and the remaining issued and outstanding shares of the Company’s common stock were owned by TIF3 REIT.

As described above, the Company acquired TPT2 in the Merger and, in connection with such transaction, Terra Fund 7 contributed the shares of the Company’s common stock received as consideration in the Merger to Terra JV and became a co-managing member of Terra JV pursuant to the amended and restated operating agreement of Terra JV, dated March 2, 2020 (the “JV Agreement”). The JV Agreement and related stockholders agreement between Terra JV and the Company, dated March 2, 2020, provide for the joint approval of Terra Fund 5 and Terra Fund 7 with respect to certain major decisions that are taken by Terra JV and the Company.

On March 2, 2020, the Company, Terra Fund 5, Terra JV and Terra REIT Advisors also entered into the Amended and Restated Voting Agreement (the “Voting Agreement”), pursuant to which Terra Fund 5 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 the Company, Terra REIT Advisors will have the right to nominate two individuals to serve as directors of the Company and, until Terra JV no longer holds at least 10% of the outstanding shares of the Company’s common stock, Terra JV will have the right to nominate one individual to serve as a director of the Company.

Following the completion of the transactions described above, as of March 31, 2020, Terra JV owns 86.4% of the issued and outstanding shares of the Company’s common stock with the remainder held by TIF3 REIT, and Terra Fund 5 and Terra Fund 7 own an 87.6% and 12.4% interest, respectively, in Terra JV.


Net LossGain on Extinguishment of Obligations Under Participation Agreements


As discussed in Note 78, in the normal course of business, the Company may enter into participation agreements with related parties, primarily other affiliated funds managed by the Manager, and to a lesser extent, unrelated parties. TheAs a result of the BDC Merger, the obligations under participation agreements with Terra BDC totaling $37.0 million were released as a result of the Mergereffectively extinguished and the Issuance of Common Stock to TIF3 REIT. In connection with these transactions, the Company recognized a net lossgain of $0.3$3.4 million, whichrepresenting the difference between the carrying value of the Company’s obligations under participation agreements and the fair value of Terra BDC’s investments acquired through participation agreements.

Appointment of Directors

As of the Effective Time and in accordance with the Merger Agreement, the size of the Board was primarily transaction costsincreased by three members and each of Spencer Goldenberg, Adrienne Everett and Gaurav Misra (each a “Terra BDC Designee”, and collectively, the “Terra BDC Designees”) were elected to the Board to fill the vacancies created by such increase, with each Terra BDC Designee to serve until the Company’s next annual meeting of stockholders and until his or her successor is duly elected and qualifies. Each of the other members of the Board immediately prior to the Effective Time continued as members following the Effective Time.

Voting Support Agreement

On the Closing Date, the Company, Terra JV and Terra Offshore REIT entered into a Voting Support Agreement (the “2022 Voting Agreement”). Pursuant to the 2022 Voting Agreement, effective as of the Closing Date, Terra JV and Terra
17

Notes to Unaudited Consolidated Financial Statements

Offshore REIT have agreed to, at any meeting of the Company’s stockholders called for the purpose of electing directors (or by any consent in writing or by electronic transmission in lieu of any such meeting), cast all votes entitled to be cast by each of them in favor of the election of the Terra BDC Designees until the earlier of (i) the first anniversary of the Closing Date, (ii) the TPT Class B Common Stock Distributions (as defined in the 2022 Voting Agreement) or (iii) an amendment and restatement of the amended and restated management agreement between the Company and Terra REIT Advisors approved by the Company’s Board, including the Terra BDC Designees.

Indemnification Agreements

The Company has entered into customary indemnification agreements with each member of the Board (including each Terra BDC Designee). These agreements, among other things, require the Company to indemnify each director to the maximum extent permitted by Maryland law, including indemnification of expenses such as attorney’s fees, judgments, fines and settlement amounts incurred in connection with both transactions.any action or proceeding, including any action or proceeding by or in right of the Company, arising out of his or her service as a director.

Note 4. Loans Held for Investment


The Company elected the practical expedient under ASC 326 to exclude accrued interest from amortized cost. As of June 30, 2023 and December 31, 2022, accrued interest receivable of $3.9 million and $4.1 million, respectively, is included in interest receivable on the consolidated balance sheets, and is excluded from the amortized cost of loans held for investment.

Portfolio Summary


The following table provides a summary of the Company’s loan portfolio as of:
June 30, 2023December 31, 2022
Fixed Rate
Floating
Rate (1)(2)(3)
TotalFixed Rate
Floating
Rate (1)(2)(3)
Total
Number of loans5 18 23 8 23 31 
Principal balance$52,940,319 $488,915,124 $541,855,443 $90,990,183 $554,805,276 $645,795,459 
Carrying value$53,069,799 $460,748,708 $513,818,507 $92,274,998 $534,215,769 $626,490,767 
Fair value$52,504,064 $464,990,667 $517,494,731 $90,729,098 $532,416,656 $623,145,754 
Weighted-average coupon rate13.22 %12.77 %12.82 %13.82 %11.23 %11.59 %
Weighted-average remaining
 term (years)		1.470.590.691.351.101.14
_______________
(1)These loans pay a coupon rate of MarchLIBOR, Secured Overnight Financing Rate (“SOFR”), or forward-looking term rate based on SOFR (“Term SOFR”), as applicable, plus a fixed spread. Coupon rates shown were determined using LIBOR of 5.22%, average SOFR of 5.07% and Term SOFR of 5.14% as of June 30, 2023 and LIBOR of 4.39%, average SOFR of 4.06% and Term SOFR of 4.36% as of December 31, 20202022.
(2)As of June 30, 2023 and December 31, 2019:2022, amount included $336.8 million and $413.1 million of senior mortgages used as collateral for $228.3 million and $261.0 million of borrowings under credit facilities, respectively (Note 9).
(3)As of June 30, 2023 and December 31, 2022, sixteen and twenty-one loans, respectively, were subject to a LIBOR, SOFR or Term SOFR floor, as applicable.

18
 March 31, 2020 December 31, 2019
 Fixed Rate 
Floating
Rate (1)(2)(3)
 Total Fixed Rate 
Floating
Rate (1)(2)(3)
 Total
Number of loans8
 14
 22
 8
 15
 23
Principal balance$81,751,847
 $320,935,591
 $402,687,438
 $70,692,767
 $306,695,550
 $377,388,317
Carrying value$82,483,887
 $320,485,626
 $402,969,513
 $71,469,137
 $307,143,631
 $378,612,768
Fair value$82,249,333
 $317,360,045
 $399,609,378
 $71,516,432
 $307,643,983
 $379,160,415
Weighted-average coupon rate12.76% 8.50% 9.36% 11.93% 9.13% 9.65%
Weighted-average remaining
 term (years)
1.76
 2.05
 1.99
 2.28
 2.09
 2.13
_______________
(1)These loans pay a coupon rate of LIBOR plus a fixed spread. Coupon rate shown was determined using LIBOR of 0.99% and 1.76% as of March 31, 2020 and December 31, 2019, respectively.
(2)
As of March 31, 2020 and December 31, 2019, amounts included $136.1 million and $114.8 million, respectively, of senior mortgages used as collateral for $92.5 million and $81.1 million, respectively, of borrowings under a repurchase agreement (Note 8). These borrowings bear interest at an annual rate of LIBOR plus a spread ranging from 2.00% to 2.50% as of March 31, 2020 and LIBOR plus a spread ranging from 2.25% to 2.50% as of December 31, 2019.
(3)As of both March 31, 2020 and December 31, 2019, twelve of these loans are subject to a LIBOR floor.

17



Notes to Unaudited Consolidated Financial Statements




Lending Activities


The following table presentstables present the activities of the Company’s loan portfolio for the three months ended March 31, 2020 and 2019:portfolio:
Loans Held for InvestmentLoans Held for Investment through Participation InterestsTotal
Balance, January 1, 2023$584,417,939 $42,072,828 $626,490,767 
Cumulative effect of credit loss accounting standard effective
   January 1, 2023 (Note 2)
(4,123,143)(126,909)(4,250,052)
New loans made63,775,372 — 63,775,372 
Principal repayments received(95,695,298)(3,282,208)(98,977,506)
Net amortization of premiums on loans(823,785)— (823,785)
Settlement of loans in exchange for real estate properties (Note 6)
(68,737,877)— (68,737,877)
Accrual, payment and accretion of investment-related fees and other,
   net		(242,361)(9,197)(251,558)
Provision for credit losses(3,397,676)(9,178)(3,406,854)
Balance, June 30, 2023$475,173,171 $38,645,336 $513,818,507 
Loans Held for InvestmentLoans Held for Investment through Participation InterestsTotal
Loans Held for Investment Loans Held for Investment through Participation Interests Total
Balance, January 1, 2020$375,462,222
 $3,150,546
 $378,612,768
Balance, January 1, 2022Balance, January 1, 2022$457,329,582 $12,343,732 $469,673,314 
New loans made37,504,601
 871,847
 38,376,448
New loans made119,461,668 959,293 120,420,961 
Principal repayments received(13,371,565) —
 (13,371,565)Principal repayments received(56,610,198)— (56,610,198)
PIK interest (1)
294,237
 —
 294,237
Net amortization of premiums on loans(15,348) —
 (15,348)Net amortization of premiums on loans(122,783)— (122,783)
Accrual, payment and accretion of investment-related fees and other,
net
202,793
 15,174
 217,967
Accrual, payment and accretion of investment-related fees and other,
net		537,682 19,355 557,037 
Provision for loan losses(1,144,994) —
 (1,144,994)
Balance, March 31, 2020$398,931,946
 $4,037,567
 $402,969,513
Provision for credit lossesProvision for credit losses(75,929)— (75,929)
Balance, June 30, 2022Balance, June 30, 2022$520,520,022 $13,322,380 $533,842,402 
 Loans Held for Investment Loans Held for Investment through Participation Interests Total
Balance, January 1, 2019$388,243,974
 $—
 $388,243,974
New loans made70,813,882
 —
 70,813,882
Principal repayments received(60,319,802) —
 (60,319,802)
Foreclosure of collateral (2)
(14,325,000) —
 (14,325,000)
PIK interest (1)
852,968
 —
 852,968
Net amortization of premiums on loans(18,350) —
 (18,350)
Accrual, payment and accretion of investment-related fees, net(651,089) —
 (651,089)
Balance, March 31, 2019$384,596,583
 $—
 $384,596,583
_______________
(1)Certain loans in the Company’s portfolio contain PIK interest provisions. The PIK interest represents contractually deferred interest that is added to the principal balance. PIK interest related to obligations under participation agreements amounted to $0.2 million for both the three months ended March 31, 2020 and 2019.
(2)
On January 9, 2019, the Company acquired 4.9 acres of adjacent land encumbering a $14.3 million first mortgage via deed in lieu of foreclosure in exchange for the relief of the first mortgage and related fees and expenses (Note 5).


18


Notes to Unaudited Consolidated Financial Statements



Portfolio Information


The tables below detail the types of loans in the Company’s loan portfolio, as well as the property type and geographic location of the properties securing these loans as of March 31, 2020 and December 31, 2019:of:


June 30, 2023December 31, 2022
Loan StructurePrincipal BalanceCarrying Value% of TotalPrincipal BalanceCarrying Value% of Total
First mortgages$380,923,792 $385,177,670 75.0 %$456,408,889 $461,299,182 73.7 %
Preferred equity investments123,242,640 123,957,220 24.1 %121,231,434 122,132,177 19.5 %
Mezzanine loans37,689,011 37,812,413 7.3 %39,352,303 39,451,115 6.3 %
Credit facility— — — %28,802,833 29,080,183 4.6 %
Allowance for credit losses— (33,128,796)(6.4)%— (25,471,890)(4.1)%
Total$541,855,443 $513,818,507 100.0 %$645,795,459 $626,490,767 100.0 %

19
  March 31, 2020 December 31, 2019
Loan Structure Principal Balance Carrying Value % of Total Principal Balance Carrying Value % of Total
First mortgages $208,956,222
 $209,289,995
 51.9 % $178,130,623
 $178,203,675
 47.1%
Preferred equity investments 157,686,635
 158,285,097
 39.3 % 157,144,040
 157,737,763
 41.6%
Mezzanine loans 36,044,581
 36,539,415
 9.1 % 42,113,654
 42,671,330
 11.3%
Allowance for loan losses —
 (1,144,994) (0.3)% —
 —
 —%
Total $402,687,438
 $402,969,513
 100.0 % $377,388,317
 $378,612,768
 100.0%
  March 31, 2020 December 31, 2019
Property Type Principal Balance Carrying Value % of Total Principal Balance Carrying Value % of Total
Office $143,941,260
 $143,879,383
 35.7 % $142,055,845
 $141,870,355
 37.5%
Multifamily 83,318,419
 83,907,425
 20.8 % 76,640,369
 77,136,016
 20.4%
Student housing 75,155,569
 75,608,070
 18.8 % 58,049,717
 58,553,496
 15.5%
Hotel 47,859,380
 48,029,027
 11.9 % 46,598,011
 46,731,939
 12.3%
Infill land 34,812,810
 34,992,810
 8.7 % 36,444,375
 36,624,375
 9.7%
Condominium 10,600,000
 10,697,792
 2.7 % 10,600,000
 10,696,587
 2.8%
Industrial 7,000,000
 7,000,000
 1.7 % 7,000,000
 7,000,000
 1.8%
Allowance for loan losses —
 (1,144,994) (0.3)% —
 —
 —%
Total $402,687,438
 $402,969,513
 100.0 % $377,388,317
 $378,612,768
 100.0%
  March 31, 2020 December 31, 2019
Geographic Location Principal Balance Carrying Value % of Total Principal Balance Carrying Value % of Total
United States            
California $178,222,394
 $178,498,419
 44.3 % $150,988,463
 $151,108,109
 39.9%
New York 74,681,066
 74,830,437
 18.6 % 79,734,323
 79,896,663
 21.1%
Georgia 64,832,131
 65,075,669
 16.1 % 61,772,764
 61,957,443
 16.4%
North Carolina 32,651,847
 32,829,933
 8.1 % 32,592,767
 32,766,311
 8.7%
Washington 23,500,000
 23,666,693
 5.9 % 23,500,000
 23,661,724
 6.2%
Illinois 4,004,877
 4,039,438
 1.0 % 8,004,877
 8,071,562
 2.1%
Massachusetts 7,000,000
 7,000,000
 1.7 % 7,000,000
 7,000,000
 1.8%
Kansas 6,200,000
 6,253,504
 1.6 % 6,200,000
 6,251,649
 1.7%
Texas 3,500,000
 3,532,794
 0.9 % 3,500,000
 3,531,776
 0.9%
Other (1)
 8,095,123
 8,387,620
 2.1 % 4,095,123
 4,367,531
 1.2%
Allowance for loan losses —
 (1,144,994) (0.3)% —
 —
 —%
Total $402,687,438
 $402,969,513
 100.0 % $377,388,317
 $378,612,768
 100.0%
_______________
(1)Other includes $5.1 million and $1.1 million of unused portion of a credit facility at March 31, 2020 and December 31, 2019, respectively. Other also includes a $3.0 million loan with collateral located in South Carolina at both March 31, 2020 and December 31, 2019.


19



Notes to Unaudited Consolidated Financial Statements



June 30, 2023December 31, 2022
Property TypePrincipal BalanceCarrying Value% of TotalPrincipal BalanceCarrying Value% of Total
Office$164,837,437 $165,327,122 32.2 %$184,196,708 $184,722,657 29.4 %
Multifamily103,427,397 104,222,850 20.3 %104,589,464 105,570,432 16.9 %
Industrial64,340,667 64,865,942 12.6 %147,796,164 148,891,742 23.8 %
Mixed-use62,746,351 63,257,099 12.3 %64,880,450 65,838,965 10.5 %
Infill land51,031,209 52,122,303 10.1 %48,860,291 49,565,437 7.9 %
Hotel - full/select service43,222,382 43,826,614 8.5 %43,222,382 43,758,804 7.0 %
Student housing31,000,000 31,768,579 6.2 %31,000,000 31,774,261 5.1 %
Infrastructure21,250,000 21,556,794 4.2 %21,250,000 21,840,359 3.5 %
Allowance for credit losses— (33,128,796)(6.4)%— (25,471,890)(4.1)%
Total$541,855,443 $513,818,507 100.0 %$645,795,459 $626,490,767 100.0 %

June 30, 2023December 31, 2022
Geographic LocationPrincipal BalanceCarrying Value% of TotalPrincipal BalanceCarrying Value% of Total
United States
California$139,246,557 $140,733,468 27.3 %$164,253,345 $165,839,561 26.5 %
New York88,336,078 88,336,079 17.2 %91,845,479 91,877,084 14.7 %
New Jersey77,371,876 78,691,851 15.3 %62,228,622 62,958,482 10.0 %
Georgia75,205,257 75,840,968 14.8 %72,401,718 73,101,964 11.7 %
Washington52,969,210 53,070,927 10.3 %56,671,267 57,027,639 9.1 %
Utah49,250,000 50,399,536 9.8 %49,250,000 50,698,251 8.1 %
Arizona31,000,000 31,296,394 6.1 %31,000,000 31,276,468 5.0 %
North Carolina21,476,465 21,578,080 4.2 %43,520,028 44,041,162 7.0 %
Massachusetts7,000,000 7,000,000 1.4 %7,000,000 7,000,000 1.1 %
Texas— — — %67,625,000 68,142,046 10.9 %
Allowance for credit losses— (33,128,796)(6.4)%— (25,471,890)(4.1)%
Total$541,855,443 $513,818,507 100.0 %$645,795,459 $626,490,767 100.0 %
Current Expected Credit Losses Reserve
As described in Note 2, on January 1, 2023, the Company adopted the provisions of ASU 2016-13, which requires entities to recognize credit losses on financial instruments based on an estimate of current expected credit losses. The adoption of ASU 2016-13 resulted in a $4.6 million increase to total reserve, including reserve on future funding commitments, which was recognized as a cumulative-effect adjustment to accumulated deficits as of January 1, 2023.
The following table presents the activity in allowance for credit loss for funded loans:
Six Months Ended June 30,
20232022
Allowance for credit losses, beginning of period$25,471,890 $13,658,481 
Cumulative effect of credit loss accounting standard effective
   January 1, 2023 (Note 2)
4,250,052 — 
Provision for credit losses (1)
3,406,854 75,929 
Charge-offs— — 
Recoveries— — 
Allowance for credit losses, end of period$33,128,796 $13,734,410 
20

Notes to Unaudited Consolidated Financial Statements

_______________
(1)Prior to the adoption of the CECL model on January 1, 2023, the Company recorded an allowance for credit losses equal to (i) 1.5% of the aggregate carrying amount of loans rated as a “4”, plus (ii) 5% of the aggregate carrying amount of loans rated as a “5”, plus (iii) non-performing loan reserves, if any.

Certain of the Company’s loans contain provisions for future fundings, which are subject to the borrower meeting certain performance-related metrics that are monitored by the Company. These unfunded commitments amounted to approximately $53.2 million and $47.3 million as of June 30, 2023 and December 31, 2022, respectively. The following table presents the activity in the liability for credit losses on unfunded commitments:
Six Months Ended June 30, 2023
Liability for credit losses on unfunded commitments, beginning of period$— 
Cumulative effect of credit loss accounting standard effective January 1, 2023 (Note 2)
369,671 
Provision for credit losses395,739 
Liability for credit losses on unfunded commitments, end of period$765,410 
The liability for credit losses on unfunded commitments is included in other liabilities on the consolidated balance sheets.
Accrued Interest Receivable

The Company elected not to measure a CECL reserve on accrued interest receivable due to the Company’s policy of writing off uncollectible accrued interest receivable balances in a timely matter. If the Company determines it has uncollectible accrued interest receivable, it generally would reverse the accrued and unpaid interest against interest income and no longer accrues for interest. For the three and six months ended June 30, 2023 and 2022, the Company did not reverse any interest income accrual because all accrued interest income were deemed collectible. As of June 30, 2023 and 2022, the Company had three and two loans that were in default, and suspended interest income accrual of $3.7 million and $1.2 million for the three months ended June 30, 2023 and 2022, respectively, because recovery of such income was doubtful. For the six months ended June 30, 2023 and 2022, the Company suspended interest income accrual of $7.2 million and $2.3 million on three and two loans, respectively, because recovery of such income was doubtful. As of June 30, 2023 and December 31, 2022, there was no outstanding interest receivable on these loans.
Non-Performing Loans

As discussed in Note 2, for loans that are considered non-performing, the Company removes them from the industry loss rate approach and analyzes them separately. As of June 30, 2023 and December 31, 2022, the Company had four non-performing loans with total carrying value of $89.7 million and $89.9 million, respectively. The allowance for credit losses for these non-performing loans were $25.5 million as of both June 30, 2023 and December 31, 2022.
Loan Risk Rating

As described in Note 2, the Manager evaluates the Company’s loan portfolio on a quarterly basis or more frequently as needed. In conjunction with the quarterly review of the Company’s loan portfolio, the ManagerThe Company assesses the risk factors of each loan and assigns each loan a risk rating basedbetween 1 and 5, which is an average of the numerical ratings in the following categories: (i) sponsor capability and financial condition; (ii) loan and collateral performance relative to underwriting; (iii) quality and stability of collateral cash flows and/or reserve balances; and (iv) loan to value. Based on a five-point5-point scale, withthe Company’s loans are rated “1” beingthrough “5”, from less risk to greater risk, as follows:
Risk RatingDescription
1Very low risk
2Low risk
3Moderate/average risk
4Higher risk
5Highest risk

21

Notes to Unaudited Consolidated Financial Statements

    The following table presents the lowestamortized cost of the Company’s loan portfolio by year of origination and loan risk and “5” being the greatest risk.rating as of June 30, 2023:
June 30, 2023
Loan Risk RatingNumber of LoansAmortized Cost% of TotalAmortized Cost by Year Originated
20232022202120202019Prior
1— $— — %$— $— $— $— $— $— 
22 25,043,198 4.6 %— — — — 18,043,198 7,000,000 
315 392,865,778 71.8 %6,120,513 133,191,835 119,894,853 27,750,542 102,982,198 2,925,837 
42 39,337,304 7.2 %— 39,337,304 — — — — 
5— — — %— — — — — — 
Non-performing4 89,701,023 16.4 %— — — — 1,364,944 88,336,079 
23 546,947,303 100.0 %$6,120,513 $172,529,139 $119,894,853 $27,750,542 $122,390,340 $98,261,916 
Allowance for credit losses(33,128,796)
Total, net of allowance for credit losses$513,818,507 

The following table allocatespresents the principal balance and the carrying valueamortized cost of the Company’s loans based on the loan risk rating as of MarchDecember 31, 20202022:
December 31, 2022
Loan Risk RatingNumber of LoansPrincipal BalanceAmortized Cost% of Total
1— $— $— — %
22 25,000,000 25,041,782 3.8 %
325 530,867,244 536,992,660 82.4 %
4— — — — %
5— — — — %
Non-performing (1)
4 89,928,215 89,928,215 13.8 %
31 $645,795,459 651,962,657 100.0 %
Allowance for credit losses(25,471,890)
Total, net of allowance for credit losses$626,490,767 
_______________
(1)Because these loans have an event of default, they were removed from the pool of loans on which a general allowance was calculated and were evaluated for collectability individually. As of December 31, 2022, the specific allowance for credit losses on these loans were $25.5 million, as a result of a decline in the fair value of the respective collateral.

Troubled Debt Restructuring

As ofDecember 31, 2022, there was one investment that qualified as troubled debt restructuring.

In December 2022, the borrower of a $40.1 million senior loan experienced financial difficulty and offered to repay the loan for $38.7 million. The remaining $1.4 million was converted to subordinated equity that accrues dividends at 8.0% and the Company is entitled to receive waterfall profit upon a sale. The Company does not anticipate a full recovery of the equity position and does not expect to receive any additional income. As a result, the remaining $1.4 million is reflected as a loan receivable and it is fully reserved for as of June 30, 2023 and December 31, 2019:2022. The Company classified this loan modification as a TDR as it met all the conditions to be considered a TDR pursuant to ASC 310-40.

22
  March 31, 2020 December 31, 2019
Loan Risk Rating Number of Loans Principal Balance Carrying Value % of Total Number of Loans Principal Balance Carrying Value % of Total
1 0
 $—
 $—
 —% 0 $—
 $—
 —%
2 2
 25,000,000
 25,180,000
 6.2% 5 50,000,000
 50,284,751
 13.3%
3 15
 294,854,525
 295,669,585
 73.2% 17 322,648,317
 323,588,017
 85.4%
4 (1)
 3
 76,332,913
 76,483,600
 18.9% 0 —
 —
 —%
5 0
 —
 —
 —% 0 —
 —
 —%
Other (2)
 2
 6,500,000
 6,781,322
 1.7% 1 4,740,000
 4,740,000
 1.3%
  22
 $402,687,438
 404,114,507
 100.0% 23 $377,388,317
 378,612,768
 100.0%
Allowance for loan losses (1,144,994)       —
  
Total, net of allowance for loan losses $402,969,513
       $378,612,768
  
_______________
(1)The increase in number of loans with a loan risk rating of “4” was due to the higher risk in loans collateralized by hospitality and select other asset classes that are particularly negatively impacted by the COVID-19 pandemic.
(2)These loans were deemed impaired and removed from the pool of loans on which a general allowance is calculated. As of March 31, 2020 and December 31, 2019, no specific reserve for loan losses was recorded on these loans because the fair value of the collateral was greater than carrying value for each loan. The Company entered into forbearance agreement with the borrower for the two loans categorized as “other” above as of March 31, 2020. The Company expects to recover in full the principal balance of these two loans. In March 2020, the loan categorized as “other” above as of December 31, 2019 was repaid in full.

As of March 31, 2020, the Company had three loans with a loan risk rating of “4” and recorded a general allowance for loan losses of $1.1 million

The following table presents the activity in the Company’s allowance for loan losses for the three months ended March 31, 2020 and 2019:
  Three Months Ended March 31,
  2020 2019
Allowance for loan losses, beginning of period $—
 $—
Provision for loan losses 1,144,994
 —
Charge-offs —
 —
Recoveries —
 —
Allowance for loan losses, end of period $1,144,994
 $—

The allowance for loan losses reserve reflects the macroeconomic impact of the COVID-19 pandemic on commercial real estate markets generally and is not specific to any loan losses or impairments in our portfolio. See Note 2 and Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion of COVID-19.


20



Notes to Unaudited Consolidated Financial Statements



The following table summarizes the recorded investment of TDR as of the date of restructuring:

Number of loans modified1
Pre-modified recorded carrying value$40,072,138 
Post-modified recorded carrying value (1)
$1,364,944 
_______________
(1) As of June 30, 2023 and December 31, 2022, the principal balance of this loan was the same as the carrying value. The Company recorded an allowance for credit losses of $1.4 million to fully reserve for the unpaid principal balance. There was no income from this investment from the date of modification on December 28, 2022 through June 30, 2023.

Note 5. Equity Investment in Unconsolidated Investments

The Company owns interests in a limited partnership and three joint ventures. The Company accounts for its interests in these investments under the equity method of accounting (Note 2). The Company classifies distributions received from equity method investments using the cumulative earnings approach. Distributions received are considered returns on the investment and classified as cash inflows from operating activities. If, however, the investor’s cumulative distributions received, less distributions received in prior periods determined to be returns of investment, exceeds cumulative equity in earnings recognized, the excess is considered a return of investment and is classified as cash inflows from investing activities.

Equity Investment in a Limited Partnership

On August 3, 2020, the Company entered into a subscription agreement with Mavik Real Estate Special Opportunities Fund, LP (“RESOF”) whereby the Company committed to fund up to $50.0 million to purchase a limited partnership interest in RESOF. RESOF’s primary investment objective is to generate attractive risk-adjusted returns by purchasing performing and non-performing mortgages, loans, mezzanines and other credit instruments supported by underlying commercial real estate assets. RESOF may also opportunistically originate high-yield mortgages or loans in real estate special situations including rescue financings, bridge loans, restructurings and bankruptcies (including debtor-in-possession loans). The general partner of RESOF is Mavik Real Estate Special Opportunities Fund GP, LLC, which is a subsidiary of the Company’s sponsor, Terra Capital Partners. As of June 30, 2023 and December 31, 2022, the unfunded commitment was $37.4 million and $22.4 million, respectively.

The Company evaluated its equity interest in RESOF and determined it does not have a controlling financial interest and is not the primary beneficiary. Accordingly, the equity interest in RESOF is accounted for as an equity method investment. As of June 30, 2023 and December 31, 2022, the Company owned 14.9% and 27.9% of the equity interest in RESOF, respectively. As of June 30, 2023 and December 31, 2022, the carrying value of the Company’s investment in RESOF was $18.1 million and $36.8 million, respectively. For the three and six months ended June 30, 2023, the Company recorded equity loss from RESOF of $1.2 million and $0.9 million, respectively, as a result of adjustments made to equity income due to the dilution in the Company’s ownership interest in RESOF as new investors were admitted in 2022 and 2023. For the three and six months ended June 30, 2023, the Company received distributions from RESOF of $0.9 million and $4.7 million, respectively. For the three and six months ended June 30, 2022, the Company recorded equity income from RESOF of $1.6 million and $2.9 million, respectively, and received no distributions from RESOF.

In connection with the equity investment in RESOF, the Company paid origination fees to the Manager totaling $0.5 million, to be amortized to equity income on a straight-line basis over the life of RESOF.
23

Notes to Unaudited Consolidated Financial Statements


The following tables present summarized financial information of the Company’s equity investment in RESOF. Amounts provided are the total amounts attributable to the investment and do not represent the Company’s proportionate share:

As of
June 30, 2023December 31, 2022
Investments at fair value (cost of $166,181,966 and $176,035,290, respectively)$167,673,063 $178,283,703 
Other assets33,566,430 23,918,841 
Total assets201,239,493 202,202,544 
Revolving line of credit, net of financing costs27,648,565 14,795,985 
Obligations under participation agreement (proceeds of $38,444,357 and
    $41,726,565, respectively)
38,764,750 41,962,861 
Other liabilities16,193,681 17,120,804 
Total liabilities82,606,996 73,879,650 
Partners’ capital$118,632,497 $128,322,894 

Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Total investment income$8,264,132 $5,891,371 $16,375,911 $10,736,035 
Total expenses3,827,584 1,761,814 6,994,379 3,055,130 
Net investment income4,436,548 4,129,557 9,381,532 7,680,905 
Unrealized (depreciation) appreciation on investments(288,031)1,493,140 (883,942)1,562,191 
Provision for income tax(138,944)— (138,944)— 
Net increase in partners’ capital resulting from operations$4,009,573 $5,622,697 $8,358,646 $9,243,096 

Equity Investment in Joint Ventures

As of June 30, 2023 and December 31, 2022, the Company beneficially owned equity interests in three joint ventures that invest in real estate properties. The Company evaluated its equity interests in the joint ventures and determined it does not have a controlling financial interest and is not the primary beneficiary. Accordingly, the equity interests in the joint ventures are accounted for as equity method investments. In September 2022, the Company sold a 53% effective interest in two joint ventures and 59% effective interest in another joint venture for a total of $33.7 million and recognized a gain on sale of $0.8 million.

In December 2022, the Company originated a $10.0 million mezzanine loan to a borrower to finance the acquisition of a real estate portfolio. In connection with this mezzanine loan, the Company entered into a residual profit sharing agreement with the borrower where the borrower would pay the Company an additional amount of 35.0% of remaining net cash flow from the sale of the real estate portfolio. The Company accounted for this arrangement using the equity method of accounting. In May 2023, the Company purchased the underlying asset (Note 8) and the $10.0 million mezzanine loan was settled in connection with the purchase.

24

Notes to Unaudited Consolidated Financial Statements

The following table presents a summary of the Company’s equity investment in unconsolidated investments as of:

June 30, 2023December 31, 2022
Entity
Co-owner (1)
Beneficial Ownership InterestCarrying ValueBeneficial Ownership InterestCarrying Value
LEL Arlington JV LLC (1)
Affiliate/Third party27.2%$6,689,133 27.2%$7,271,603 
LEL NW 49th JV LLC (1)
Affiliate/Third party27.2%1,546,725 27.2%1,521,556 
TCG Corinthian FL Portfolio
    JV LLV (1)(2)
Affiliate/Third Party30.6%6,236,696 30.6%6,896,816 
SF-Dallas Industrial, LLC (3)
N/AN/A— N/A10,013,691 
$14,472,554 $25,703,666 
_______________
(1)The Company sold a portion of the interest in this investment to an affiliate in September 2022.
(2)This investment was purchased from a third party in March 2022.
(3)This investment that meets the definition of an equity investment was entered into in December 2022. As discussed above, this investment was settled in May 2023.

The following tables present estimated combined summarized financial information of the Company’s equity investment in the joint ventures. Amounts provided are the total amounts attributable to the joint ventures and do not represent the Company’s proportionate share:
As of
June 30, 2023December 31, 2022
Net investments in real estate$191,629,757 $192,616,298 
Other assets12,413,292 12,817,388 
Total assets204,043,049 205,433,686 
Mortgage loan payable148,454,820 147,740,645 
Other liabilities5,010,555 3,104,624 
Total liabilities153,465,375 150,845,269 
Members’ capital$50,577,674 $54,588,417 

Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Revenues$4,243,689 $3,681,032 $8,168,268 $6,131,470 
Operating expenses(2,181,707)(2,206,984)(4,324,974)(3,023,665)
Depreciation and amortization expense(1,728,214)(1,065,066)(3,693,251)(1,755,897)
Interest expense(2,595,844)(1,744,226)(5,155,798)(2,829,787)
Unrealized (losses) gains(423,481)1,170,866 (1,249,982)1,406,377 
Net (loss) income$(2,685,557)$(164,378)$(6,255,737)$(71,502)

For the three and six months ended June 30, 2023, the Company recorded net equity loss from the joint ventures and the mezzanine loan of $0.6 million and $1.3 million, respectively, and did not receive any distributions from the joint ventures. For the three and six months ended June 30, 2022, the Company recorded equity income from the joint ventures of $0.2 million and $0.1 million, respectively, and received distributions from the joint venture of $0.4 million and $0.7 million, respectively. In connection with these investments, the Company paid origination fee to the Manager totaling $0.5 million, to be amortized to equity income over the life of the respective joint venture.

25

Notes to Unaudited Consolidated Financial Statements

Note 5.6. Real Estate Owned, Net


Acquisition of Real Estate Activities

20192023 —    On January 9, 2019, During the three and six months ended June 30, 2023, the Company acquired 4.9 acresrecorded an impairment charge of adjacent land encumbering a first mortgage via deed$11.8 million on the multi-tenant office building located in lieu of foreclosureCalifornia in exchange for the payment of the first mortgage and related fees and expenses.

The following table summarizesorder to reduce the carrying value of the first mortgage priorbuilding to its estimated fair value.

Additionally, during the six months ended June 30, 2023, the Company entered into the following investments:

Property
Location		Number of
Properties		Date of
Acquisition		Property TypeTotal Capitalized
Costs
Texas, United States33/24/2023Industrial$48,798,273 
Texas, United States55/25/2023Industrial83,288,961 
$132,087,234 

These acquisitions were deemed to be real estate asset acquisitions, and therefore total transaction costs were capitalized to the deed in lieucost basis of foreclosure on January 9, 2019:
Carrying Value of First Mortgage  
Loan held for investment $14,325,000
Interest receivable 439,300
Restricted cash applied against loan principal amount (60,941)
  $14,703,359

the assets. The following table below summarizes thepresents an allocation of the estimated fair valuetotal capitalized costs:
Total Capitalized Costs:
Cash and cash equivalents$52,313,739 
Loans held for investment68,737,877 
Equity investment in unconsolidated investment10,149,642 
Interest receivable456,650 
Other assets429,326 
$132,087,234 
Net Assets Acquired
Cash and cash equivalents$712,608 
Other assets33,802 
Land23,785,004 
Buildings and Improvements104,613,728 
Intangible assets and liabilities:
In-place lease (weighted-average expected life of 3.95 years)12,719,000 
Below-market rent (weighted-average expected life of 3.98 years)(8,864,137)
Accounts payable and accrued expenses(912,771)
$132,087,234 

2022 — In June 2022, the Company sold the 4.9acres of the real estate acquiredland it owned in Pennsylvania for net proceeds of $8.6 million, and recognized a net loss on January 9, 2019 based on the policy describedsale of $0.1 million excluding impairment charges of $1.6 million and $3.4 million recognized in Note 2:March 2022 and December 2021, respectively.

26
Assets Acquired  
Real estate owned:  
Land $14,703,359


Notes to Unaudited Consolidated Financial Statements
The Company capitalized transaction costs of approximately $0.2 million to land.
Real Estate Owned, Net


Real estate owned is comprised of 4.9 acres of adjacent landeight industrial buildings located in PennsylvaniaTexas and a multi-tenant office building located in California, with lease intangible assets and liabilities, located in California.liabilities. The following table presents the components of real estate owned, net:net as of:
 June 30, 2023December 31, 2022
CostAccumulated Depreciation/AmortizationNetCostAccumulated Depreciation/AmortizationNet
Real estate:
Land$23,785,004 $— $23,785,004 $— $— $— 
Building and building
   improvements		144,574,158 (6,786,818)137,787,340 51,725,969 (5,711,468)46,014,501 
Tenant improvements1,854,640 (1,363,287)491,353 1,854,640 (1,224,648)629,992 
Furniture and fixtures236,000 (236,000)— 236,000 (220,267)15,733 
Total real estate170,449,802 (8,386,105)162,063,697 53,816,609 (7,156,383)46,660,226 
Lease intangible assets:
In-place lease27,701,537 (13,701,834)13,999,703 14,982,538 (12,493,079)2,489,459 
Above-market rent156,542 (86,317)70,225 156,542 (77,540)79,002 
Total intangible assets27,858,079 (13,788,151)14,069,928 15,139,080 (12,570,619)2,568,461 
Lease intangible liabilities:
Below-market rent(11,619,059)3,047,407 (8,571,652)(2,754,922)2,428,647 (326,275)
Above-market ground lease(8,896,270)640,879 (8,255,391)(8,896,270)575,705 (8,320,565)
Total intangible liabilities(20,515,329)3,688,286 (16,827,043)(11,651,192)3,004,352 (8,646,840)
Total real estate$177,792,552 $(18,485,970)$159,306,582 $57,304,497 $(16,722,650)$40,581,847 
 March 31, 2020 December 31, 2019
 Cost Accumulated Depreciation/Amortization Net Cost Accumulated Depreciation/Amortization Net
Real estate:           
Land$13,395,430
 $—
 $13,395,430
 $13,395,430
 $—
 $13,395,430
Building and building
   improvements
51,725,969
 (2,155,271) 49,570,698
 51,725,969
 (1,831,980) 49,893,989
Tenant improvements1,854,640
 (462,131) 1,392,509
 1,854,640
 (392,812) 1,461,828
Total real estate66,976,039
 (2,617,402) 64,358,637
 66,976,039
 (2,224,792) 64,751,247
Lease intangible assets:           
In-place lease15,852,232
 (3,692,559) 12,159,673
 15,852,232
 (3,138,675) 12,713,557
Above-market rent156,542
 (29,260) 127,282
 156,542
 (24,871) 131,671
Total intangible assets16,008,774
 (3,721,819) 12,286,955
 16,008,774
 (3,163,546) 12,845,228
Lease intangible liabilities:          
Below-market rent(3,371,314) 774,252
 (2,597,062) (3,371,314) 658,115
 (2,713,199)
Above-market ground lease(8,896,270) 217,247
 (8,679,023) (8,896,270) 184,660
 (8,711,610)
Total intangible liabilities(12,267,584) 991,499
 (11,276,085) (12,267,584) 842,775
 (11,424,809)
Total real estate$70,717,229
 $(5,347,722) $65,369,507
 $70,717,229
 $(4,545,563) $66,171,666


21


Notes to Unaudited Consolidated Financial Statements



Real Estate Operating Revenues and Expenses


The following table presents the components of real estate operating revenues and expenses that are included in the consolidated statements of operations:
Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Real estate operating revenues:
Lease revenue$2,283,272 $1,744,262 $3,368,731 $3,498,823 
Other operating income520,662 1,247,059 768,172 2,471,952 
Total$2,803,934 $2,991,321 $4,136,903 $5,970,775 
Real estate operating expenses:
Utilities$69,919 $56,171 $106,333 $101,505 
Real estate taxes537,681 344,727 892,361 691,159 
Repairs and maintenances256,187 169,817 463,552 327,233 
Management fees86,880 70,219 126,298 138,087 
Lease expense, including amortization of above-market ground lease487,163 487,163 974,326 974,326 
Other operating expenses426,382 119,231 511,254 232,981 
Total$1,864,212 $1,247,328 $3,074,124 $2,465,291 
  Three Months Ended March 31, 2020 Three Months Ended March 31, 2019
Real estate operating revenues:    
Lease revenue $1,922,128
 $1,922,538
Other operating income 390,923
 398,700
Total $2,313,051
 $2,321,238
Real estate operating expenses:    
Utilities $39,022
 $33,762
Real estate taxes 232,875
 80,360
Repairs and maintenances 237,132
 209,843
Management fees 56,701
 61,349
Lease expense, including amortization of above-market ground lease 283,538
 283,538
Other operating expenses 95,250
 87,003
Total $944,518
 $755,855


Leases


On July    As of June 30, 2018,2023, the Company foreclosed onowned eight industrial buildings that were leased to ten tenants and a multi-tenant office building in full satisfactionthat was leased to three tenants. As of a first mortgage and related fees and expenses. In connection with the foreclosure,December 31, 2022, the Company assumed four leases whereby the Company is the lessorowned a multi-tenant office building that was leased to the leases. These four tenant leases had remaining lease terms ranging from 6.3 years to 8.8 years as of July 30, 2018 and provide for annual fixed rent increase. Three of the tenant leases each provides two options to renew the lease for five years each and the remaining tenant lease provides one option to renew the lease for five years.

three tenants. In addition, the Company assumedoffice building is subject to a ground lease whereby the Company is the lessee (or a
27

Notes to Unaudited Consolidated Financial Statements

tenant) to the ground lease. The ground lease had a remaining lease term of 68.363.3 years as of June 30, 2023, and provides for a new base rent every five5 years based on the greater of the annual base rent for the prior lease year or 9% of the fair market value of the land. The next rent reset on the ground lease is scheduled for November 1, 2020.2025. The Company is currently litigating with the landlord with respect to the appropriate method for determining the fair value of the land for purposes of setting the ground rent – Terra Ocean Ave., LLC v. Ocean Avenue Santa Monica Realty LLC, Superior Court of California, Los Angeles County, Case No. 20STCV34217. The Company believes this determination should be based on comparable sales, while the landlord insists that the rent under the ground lease itself is also relevant. The Company’s position has prevailed in all three of the prior arbitrations to reset the ground rent. Since future rent increase onreset determinations under the ground lease is unknown,cannot be known at this time, the Company did not include theany potential future rent increaseincreases in calculating the present value of future rent payments. The ground lease does not provide for renewal options.

OnCompany intends vigorously to pursue the date of foreclosure,litigation. While the Company performed lease classification test onbelieves its arguments will likely prevail, the tenant leases as well asoutcome of the legal proceeding cannot be predicted with certainty. If the landlord prevails, the future rent reset determinations could result in significantly higher ground rent, which would likely result in a significant diminution in the value of the Company’s interest in the ground lease in accordance with ASC 840. The result of the lease classification test indicated that the tenant leases and the ground lease shall be classified as operating leases on the date of foreclosure.office building.


On January 1, 2019, the Company adopted ASU 2016-02 using a modified retrospective transition approach and chose not to adjust comparable periods (Note 2). The Company elected to use the package of practical expedients for its existing leases whereby the Company did not need to reassess whether a contract is or contains a lease, lease classification and initial direct costs. As a result, the leases continue to be classified as operating leases under ASC 842, Leases. The adoption of ASU 2016-02 did not have any impact on the tenant leases; however, for the ground lease, the Company recognized $16.1 million of both operating lease right-of-use assets and operating lease liabilities on its consolidated balance sheets. No cumulative effect adjustment was recorded because there was no change to operating lease cost. In addition, as of January 1, 2019, the Company had $0.5 million of unamortized leasing commission (initial direct costs) on the tenant leases. The Company elected to continue to amortize the remaining leasing commission through the end of the lease terms.


22


Notes to Unaudited Consolidated Financial Statements


Scheduled Future Minimum Rent Income


Scheduled future minimum rents, exclusive of renewals and expenses paid by tenants, under non-cancelable operating leases at March 31, 2020June 30, 2023 are as follows: 
Years Ending December 31,Total
2023 (July 1 through December 31)$4,650,111 
20249,456,610 
20254,940,447 
20264,600,139 
20273,162,610 
Thereafter5,821,613 
Total$32,631,530 
Years Ending December 31, Total
2020 (April 1 through December 31) $5,060,780
2021 7,025,413
2022 7,547,261
2023 7,787,842
2024 8,026,942
Thereafter 5,836,010
Total $41,284,248


Scheduled Annual Net Amortization of Intangibles


Based on the intangible assets and liabilities recorded at March 31, 2020,June 30, 2023, scheduled annual net amortization of intangibles for each of the next five calendar years and thereafter is as follows:
Years Ending December 31, 
Net Decrease in Real Estate Operating Revenue (1)
 
Increase in Depreciation and Amortization (1)
 
Decrease in Rent Expense (1)
 TotalYears Ending December 31,
Net Decrease in Real Estate Operating Revenue (1)
Increase in Depreciation and Amortization (1)
Decrease in Rent Expense (1)
Total
2020 (April 1 through December 31) $(335,247) $1,661,652
 $(97,761) $1,228,644
2021 (446,995) 2,215,536
 (130,348) 1,638,193
2022 (446,995) 2,215,536
 (130,348) 1,638,193
2023 (446,995) 2,215,536
 (130,348) 1,638,193
2023 (July 1 through December 31)2023 (July 1 through December 31)$(1,567,274)$2,757,572 $(65,174)$1,125,124 
2024 (446,995) 2,215,536
 (130,348) 1,638,193
2024(3,104,584)5,467,389 (130,348)2,232,457 
20252025(1,549,275)2,192,061 (130,348)512,438 
20262026(1,158,163)1,780,528 (130,348)492,017 
20272027(444,207)835,888 (130,348)261,333 
Thereafter (346,553) 1,635,877
 (8,059,870) (6,770,546)Thereafter(677,924)966,265 (7,668,825)(7,380,484)
Total $(2,469,780) $12,159,673
 $(8,679,023) $1,010,870
Total$(8,501,427)$13,999,703 $(8,255,391)$(2,757,115)
_______________
(1)Amortization of below-market rent and above-market rent intangibles is recorded as an adjustment to lease revenues; amortization of in-place lease intangibles is included in depreciation and amortization; and amortization of above-market ground lease is recorded as a reduction to rent expense.

(1)Amortization of below-market rent and above-market rent intangibles is recorded as an adjustment to lease revenues; amortization of in-place lease intangibles is included in depreciation and amortization; and amortization of above-market ground lease is recorded as a reduction to rent expense.
28

Notes to Unaudited Consolidated Financial Statements


Supplemental Ground Lease Disclosures
    
Supplemental balance sheet information related to the ground lease was as follows:    
follows as of:    
 March 31, 2020June 30, 2023December 31, 2022
Operating lease  Operating lease
Operating lease right-of-use assets $16,111,217
Operating lease liabilities $16,111,217
Operating lease right-of-use assetOperating lease right-of-use asset$27,370,242 $27,378,786 
Operating lease liabilityOperating lease liability$27,370,242 $27,378,786 
  
Weighted average remaining lease term — operating lease (years) 66.6
Weighted average remaining lease term — operating lease (years)63.363.8
  
Weighted average discount rate — operating lease 7.9%Weighted average discount rate — operating lease7.6 %7.6 %


The component of lease expense for the ground lease was as follows:
   Three Months Ended March 31, 2020
Operating lease cost  $316,125


23

Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Operating lease cost$519,750 $519,750 $1,039,500 $1,039,500 
    

Notes to Unaudited Consolidated Financial Statements


Supplemental non-cash information related to the ground lease was as follows:
Six Months Ended June 30,
20232022
Amounts included in the measurement of lease liability:
Operating cash flows from an operating lease$1,039,500 $1,039,500 
Right-of-use asset obtained in exchange for lease obligations:
Operating lease$1,039,500 $1,039,500 
  Three Months Ended March 31, 2020
Cash paid for amounts included in the measurement of lease liabilities:  
Operating cash flows from operating leases $316,125
   
Right-of-use assets obtained in exchange for lease obligations  
Operating leases $316,125


Maturities of operating lease liabilities areliability as of June 30, 2023 was as follows:
Years Ending December 31,Operating Lease
2023 (July 1 through December 31)$1,039,500 
20242,079,000 
20252,079,000 
20262,079,000 
20272,079,000 
Thereafter122,227,875 
Total lease payments131,583,375 
Less: Imputed interest(104,213,133)
Total$27,370,242 

Years Ending December 31, Operating Lease
2020 (April 1 through December 31) (Year of rent reset) $948,375
2021 1,264,500
2022 1,264,500
2023 1,264,500
2024 1,264,500
Thereafter 78,135,563
Total lease payments 84,141,938
Less: Imputed interest (68,030,721)
Total $16,111,217

Note 6.7. Fair Value Measurements


The Company adoptedfollows 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 of judgment used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets
29

Notes to Unaudited Consolidated Financial Statements

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.


24


Notes to Unaudited Consolidated Financial Statements



As of March 31, 2020June 30, 2023 and December 31, 2019,2022, the Company hashad not elected the fair value option for its financial instruments, including loans held for investment, loans held for investment acquired through participation, held-to-maturity debt securities, obligations under participation agreements, mortgageterm loan payable, repurchase agreement payable, mortgage loan payable and revolving credit facility payable.line of credit. Such financial instruments are carried at cost, less impairment.impairment or less net deferred costs, where applicable. Marketable securities and derivatives are financial instruments that are reported at fair value.


Financial Instruments Carried at Fair Value on a Recurring Basis


In March 2020,From time to time, the Company invested $3.4 millionmay invest in short-term debt and equity securities. These securities which are comprised of preferred stock and bonds. The Company classified these short-term marketable securities as available-for-sale securities, which are presented at fair value onand included in Other assets in the consolidated balance sheet withsheet. Changes in the changefair value of equity securities are recognized in earnings. Changes in the fair value of debt securities are reported in other comprehensive income until the securities are realized.


As discussed in Note 9, in March 2023, the Company entered into a loan agreement with a lender to provide financing for the acquisition of real estate properties (Note 6). In connection with the financing, the Company purchased an interest rate cap for $258,500 to effectively cap the related index rate at 5.0%. The interest rate cap met all the criteria of a derivative under ASC 815, but it did not meet the criteria under ASC 815-20-25 to qualify for hedging accounting. As such, the interest rate cap is reported at fair value and is included in other assets in the consolidated balance sheet, and the change in the fair value of the interest rate cap is reported in income.

The following tables present fair value measurements of marketable securities and derivatives, by major class as of March 31, 2020, according to the fair value hierarchy:hierarchy as of:
June 30, 2023
 Fair Value Measurements
 Level 1Level 2Level 3Total
Money market fund (1)
$5,041,526 $— $— $5,041,526 
Marketable securities - debt securities (2)
1,203,973 — — 1,203,973 
Derivative - interest rate cap (2)
— — 281,028 281,028 
Total$6,245,499 $— $281,028 $6,526,527 
_______________
30

Notes to Unaudited Consolidated Financial Statements

  March 31, 2020
  Fair Value Measurements
  Level 1 Level 2 Level 3 Total
Marketable Securities:  
  
  
  
Preferred stock $1,028,189
 $—
 $—
 $1,028,189
Bonds —
 2,462,205
 —
 2,462,205
Total $1,028,189
 $2,462,205
 $—
 $3,490,394
(1) Amount is included in cash and cash equivalents on the consolidated balance sheets.

(2) Amount is included in other assets on the consolidated balance sheets.

December 31, 2022
 Fair Value Measurements
 Level 1Level 2Level 3Total
Marketable Securities:    
Debt securities$147,960 $— $— $147,960 
Total$147,960 $— $— $147,960 

The following table presents the activities of the marketable securities for the periods presented.and derivatives:
Six Months Ended June 30,
20232022
Marketable SecuritiesDerivativesMarketable Securities
Beginning balance$147,960 $— $1,310,000 
Purchases1,051,754 258,500 — 
Proceeds from sale— — (1,259,417)
Amortization of interest rate cap— (31,021)— 
Reclassification of net realized gains on marketable securities
   into earnings		— — 83,411 
Unrealized (losses) gains on marketable securities and derivatives4,259 53,549 (133,994)
Ending balance$1,203,973 $281,028 $— 
  Three Months Ended March 31,
  2020 2019
Beginning balance $—
 $—
Purchases 3,354,442
 —
Proceeds from sale (48,073) —
Net unrealized gains on marketable securities 192,919
 —
Reclassification of realized gains (2)
 (8,894) —
Ending balance $3,490,394
 $—
_______________
(1)Amount is presented as Net unrealized gains on marketable securities on the consolidated statements of comprehensive income.
(2)Amount is presented as realized gains on marketable securities on the consolidated statements of operations.


25


Notes to Unaudited Consolidated Financial Statements



Financial Instruments Not Carried at Fair Value


In the first quarter of 2023, the Company purchased $20.0 million of corporate bonds with a coupon rate of 6.125% with a maturity date of May 15, 2023. The Company classified these bonds as held-to-maturity debt securities, as it had the intent and ability to hold these securities until maturity. These securities were recorded at amortized cost and were fully redeemed at par on May 15, 2023.

The following table presents the carrying value which represents the principal amount outstanding, adjusted for the accretion of purchase discounts on loans and exit fees, and the amortization of purchase premiums on loans and origination fees, and estimated fair value of the Company’s financial instruments that are not carried at fair value on the consolidated balance sheets:sheets as of:
June 30, 2023December 31, 2022
LevelPrincipal AmountCarrying ValueFair ValuePrincipal AmountCarrying ValueFair Value
Loans:
Loans held for investment3$503,411,086 $508,301,967 $478,729,965 $604,068,894 $609,889,829 $581,182,892 
Loans held for investment
   acquired through
   participation		338,444,357 38,645,336 38,764,766 41,726,565 42,072,828 41,962,862 
Allowance for loan losses— (33,128,796)— — (25,471,890)— 
Total loans$541,855,443 $513,818,507 $517,494,731 $645,795,459 $626,490,767 $623,145,754 
Liabilities:
Term loan payable3$15,000,000 $14,850,000 $15,000,000 $25,000,000 $25,000,000 $25,000,000 
Unsecured notes payable1123,500,000 117,433,372 101,228,000 123,500,000 116,530,673 103,481,748 
Repurchase agreement
   payable		3122,832,682 122,070,840 122,832,682 170,876,606 169,304,710 170,876,606 
Obligations under participation
   agreements		313,678,820 13,789,070 13,789,071 12,584,958 12,680,594 12,680,595 
Mortgage loan payable3100,221,485 98,687,185 100,487,973 29,252,308 29,488,326 29,394,870 
Revolving line of credit
   payable		3105,448,019 105,260,351 105,448,019 90,135,865 89,807,448 90,135,865 
Total liabilities$480,681,006 $472,090,818 $458,785,745 $451,349,737 $442,811,751 $431,569,684 
31

Notes to Unaudited Consolidated Financial Statements

   March 31, 2020 December 31, 2019
 Level Principal Amount Carrying Value Fair Value Principal Amount Carrying Value Fair Value
Loans:             
Loans held for investment, net3 $398,694,704
 $400,076,940
 $395,581,145
 $374,267,430
 $375,462,222
 $375,956,154
Loans held for investment
   acquired through
   participation, net
3 3,992,734
 4,037,567
 4,028,233
 3,120,887
 3,150,546
 3,204,261
Allowance for loan losses  —
 (1,144,994) —
 —
 —
 —
Total loans  $402,687,438
 $402,969,513
 $399,609,378
 $377,388,317
 $378,612,768
 $379,160,415
Liabilities:             
Obligations under participation
   agreements
3 $67,624,467
 $67,670,405
 $59,524,887
 $102,564,795
 $103,186,327
 $103,188,783
Mortgage loan payable3 44,481,855
 44,687,123
 44,813,764
 44,614,480
 44,753,633
 44,947,378
Repurchase agreement payable3 92,546,529
 91,352,312
 92,546,529
 81,134,436
 79,608,437
 81,134,436
Revolving credit facility
   payable
3 35,000,000
 34,930,844
 35,000,000
 —
 —
 —
Total liabilities  $239,652,851
 $238,640,684
 $231,885,180
 $228,313,711
 $227,548,397
 $229,270,597


The Company estimated that its other financial assets and liabilities, not included in the tables above, had fair values that approximated their carrying values at both March 31, 2020June 30, 2023 and December 31, 20192022 due to their short-term nature.


Items Measured at Fair Value on a Non-Recurring Basis (Including Impairment Charges)

The Company periodically assesses whether there are any indicators that the value of its real estate investments may be impaired or that their carrying value may not be recoverable (Note 2).

The following tables present information about assets for which the Company recorded an impairment charge and that were measured at fair value on a non-recurring basis:

Three Months Ended June 30,
20232022
Fair ValueImpairment ChargesFair ValueImpairment Charges
Impairment Charges
Real estate and intangibles$27,603,118 $11,765,540 $— $— 
$11,765,540 $— 
Six Months Ended June 30,
20232022
Fair ValueImpairment ChargesFair ValueImpairment Charges
Impairment Charges
Real estate and intangibles$27,603,118 $11,765,540 $8,395,011 $1,604,989 
$11,765,540 $1,604,989 

Impairment charges, and their related triggering events and fair value measurements, recognized during the three and six months ended June 30, 2023 and 2022 were as follows:

Real Estate and Intangibles

The impairment charges described below are reflected within Impairment charges in the consolidated statements of operations.

During the three and six months ended June 30, 2023, the Company recorded an impairment charge of $11.8 million on the multi-tenant office building located in California in order to reduce the carrying value of the building to its estimated fair value. The fair value measurement was determined by estimating discounted cash flows using two significant unobservable inputs, which were the cash flow discount rate (8.50%) and terminal capitalization rate (7.50%).

For the six months June 30, 2022, the Company recorded an impairment charge of $1.6 million on the 4.9acres of land located in Pennsylvania to reduce the carrying value of the land to its estimated fair value, which was based on the selling price in the purchase and sale agreement. The land was sold in June 2022. There was no impairment charge recorded for the three months ended June 30, 2022.

Valuation Process for Fair Value Measurement


The fair value of the Company’s investment in preferred stockequity securities, held-to-maturity debt securities and its unsecured notes payable is determined based on quoted prices in an active market and is classified as Level 1 of the fair value hierarchy. The fair value of the Company’s investment in bonds is determined based on a matrix which takes the following factors into consideration: structured product markets, interest rate movements, trends, spreads, new issue information and other pertinent data to produce price evaluations that are designed to represent closing market bids or means for the current day. Valuation of bonds falls within Level 2 of the fair value hierarchy.
    
Market quotations are not readily available for the Company’s real estate-related loan investments, all of which are included in Level 3 of the fair value hierarchy, and therefore these investments 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. In following this methodology, investments are evaluated individually, and management takes into account, in determining the risk-adjusted discount rate for each of the Company’s investments, relevant factors, includingwhich may include available current market data on applicable yields of comparable debt/preferred equity instruments; market credit
32

Notes to Unaudited Consolidated Financial Statements

spreads and yield curves; the investment’s yield; covenants of the investment, including prepayment provisions; the portfolio company’s ability to make payments, net operating income and debt-service coverage ratio; construction progress reports and construction budget analysis; the nature, quality and realizable value of any collateral (and loan-to-value ratio); 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 and replacement costs; and the anticipated duration of each real estate-related loan investment.


The Manager designates a valuation committee to oversee the entire valuation process of the Company’s Level 3 loans. 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 Company 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 models and discount rates or other methods the valuation committee deems to be appropriate. Because there is no readily available market for these investments, the fair values of these investments are approved in good faith by the Manager pursuant to the Company’s valuation policy.board of directors (which is made up exclusively of independent directors).


26


    

Notes to Unaudited Consolidated Financial Statements


The fair values of the Company’s mortgage loan payable, repurchase agreementsecured borrowing, term loan payable and revolving line of credit facility payable are determined by discounting the contractual cash flows at the interest rate the Company estimates such arrangements would bear if executed in the current market.


The following table summarizestables summarize the valuation techniques and significant unobservable inputs used by the Company to value the Level 3 loans as of March 31, 2020June 30, 2023 and December 31, 2019.2022. The tables are not intended to be all-inclusive, but instead identify the significant unobservable inputs relevant to the determination of fair values.
Fair Value at June 30, 2023Primary Valuation TechniqueUnobservable InputsJune 30, 2023
Asset CategoryMinimumMaximumWeighted Average
Assets:
Loans held for investment, net$478,729,965 Discounted cash flowDiscount rate8.79 %17.14 %12.21 %
Loans held for investment acquired through
   participation, net		38,764,766 Discounted cash flowDiscount rate15.30 %17.84 %17.35 %
Total Level 3 Assets$517,494,731 
Liabilities:
Repurchase agreement payable122,832,682 Discounted cash flowDiscount rate6.01 %7.61 %6.97 %
Obligations under participation agreements13,789,071 Discounted cash flowDiscount rate17.14 %17.14 %17.14 %
Mortgage loan payable100,487,973 Discounted cash flowDiscount rate6.25 %8.99 %7.78 %
Term loan payable15,000,000 Discounted cash flowDiscount rate12.48 %12.48 %12.48 %
Revolving line of credit105,448,019 Discounted cash flowDiscount rate8.49 %8.49 %8.49 %
Total Level 3 Liabilities$357,557,745 

Fair Value at December 31, 2022Primary Valuation TechniqueUnobservable InputsDecember 31, 2022
Asset CategoryMinimumMaximumWeighted Average
Assets:
Loans held for investment, net$581,182,892 Discounted cash flowDiscount rate8.71 %19.36 %11.46 %
Loans held for investment acquired through
   participation, net		41,962,862 Discounted cash flowDiscount rate15.25 %17.06 %16.67 %
Total Level 3 Assets$623,145,754 
Liabilities:
Repurchase agreement payable170,876,606 Discounted cash flowDiscount rate5.22 %6.17 %6.82 %
Obligations under participation agreements12,680,595 Discounted cash flowDiscount rate16.36 %16.36 %16.36 %
Mortgage loan payable29,394,870 Discounted cash flowDiscount rate8.24 %8.24 %8.24 %
Term loan payable25,000,000 Discounted cash flowDiscount rate5.63 %5.63 %5.63 %
Revolving line of credit90,135,865 Discounted cash flowDiscount rate7.64 %7.64 %7.64 %
Total Level 3 Liabilities$328,087,936 

33
  Fair Value at March 31, 2020Primary Valuation Technique Unobservable Inputs March 31, 2020
Asset Category   MinimumMaximumWeighted Average
Assets:          
Loans held for investment, net $395,581,145
 Discounted cash flow Discount rate 4.45%19.25%11.03%
Loans held for investment acquired through
participation, net		 4,028,233
 Discounted cash flow Discount rate 13.15%13.15%13.15%
Total Level 3 Assets $399,609,378
        
Liabilities:          
Obligations under Participation Agreements $59,524,887
 Discounted cash flow Discount rate 9.86%19.25%13.23%
Mortgage loan payable 44,813,764
 Discounted cash flow Discount rate 6.08%6.08%6.08%
Repurchase agreement payable 92,546,529
 Discounted cash flow Discount rate 3.34%4.77%4.00%
Revolving credit facility payable 35,000,000
 Discounted cash flow Discount rate 6.00%6.00%6.00%
Total Level 3 Liabilities $231,885,180
        

Notes to Unaudited Consolidated Financial Statements

  Fair Value at December 31, 2019Primary Valuation Technique Unobservable Inputs December 31, 2019
Asset Category   MinimumMaximumWeighted Average
Assets:          
Loans held for investment, net $375,956,154
 Discounted cash flow Discount rate 4.71%14.95%9.77%
Loans held for investment acquired
   through participation, net
 3,204,261
 Discounted cash flow Discount rate 11.90%11.90%11.90%
Total Level 3 Assets $379,160,415
        
Liabilities:          
Obligations under Participation Agreements $103,188,783
 Discounted cash flow Discount rate 9.00%14.95%11.99%
Mortgage loan 44,947,378
 Discounted cash flow Discount rate 6.08%6.08%6.08%
Repurchase agreement payable 81,134,436
 Discounted cash flow Discount rate 4.11%4.75%4.33%
Total Level 3 Liabilities $229,270,597
        

Note 7.8. Related Party Transactions


Management Agreement


The Company entered into athe Management Agreement with the Manager whereby the Manager is responsible for its day-to-day operations. The Management Agreement runs co-terminus with the amended and restated operating agreement for Terra Fund 5, which is scheduled to terminate on December 31, 2023 unless Terra Fund 5 is dissolved earlier. The following table presents a summary of fees paid and costs reimbursed to the Manager in connection with providing services to the Company that are included on the consolidated statements of operations:
Three Months Ended June 30,Six Months Ended June 30,
 Three Months Ended March 31,2023202220232022
 2020 2019
Origination and extension fee expense (1)
 $437,617
 $683,172
Origination and extension fee expense (1)(2)
Origination and extension fee expense (1)(2)
$343,159 $381,947 $814,607 $1,068,312 
Asset management fee 1,029,533
 880,355
Asset management fee2,105,049 1,640,6284,102,476 3,128,723 
Asset servicing fee 234,208
 204,477
Asset servicing fee496,374 395,718 966,899 745,047 
Operating expenses reimbursed to Manager 1,367,189
 1,115,204
Operating expenses reimbursed to Manager2,120,029 2,140,6354,297,033 4,069,198 
Disposition fee (2)
 75,520
 469,933
Disposition fee (3)
Disposition fee (3)
917,750 479,5001,208,563 479,500 
Total $3,144,067
 $3,353,141
Total$5,982,361 $5,038,428 $11,389,578 $9,490,780 
_______________

(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 loan.
27(2)Amount for the six months ended June 30, 2023 excluded $0.5 million of origination fee paid to the Manager in connection with the acquisition of the three industrial buildings in 2023. Amount for the six months ended June 30, 2022 excluded $0.2 million of origination fee paid to the Manager in connection with the Company’s equity investment in an unconsolidated investment. This origination fee was capitalized to the carrying value of the unconsolidated investment as a transaction cost.

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

Notes to Unaudited Consolidated Financial Statements


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


Origination and Extension Fee Expense


Pursuant to the Management Agreement, the Manager or its affiliates receives an origination fee in the amount of 1% of the amount used to originate, fund, acquire or structure real estate-related loans,investments, including any third-party expenses related to such loans. In the event that the term of any real estate-related loan held by the Company is extended, the Manager also receives an extension fee equal to the lesser of (i) 1% of the principal amount of the loan being extended or (ii) the amount of fee paid to the Company by the borrower in connection with such extension.


Asset Management Fee


Under the terms of the Management Agreement, the Manager or its affiliates provides the Company with certain investment management services in return for a management fee. The Company pays a monthly asset management fee at an annual rate of 1% of the aggregate funds under management, which includes the loan origination price or aggregate gross acquisition price, as defined in the Management Agreement, for each real estate related loan and cash held by the Company.


Asset Servicing Fee


The Manager or its affiliates receives from the Company a monthly servicing fee at an annual rate of 0.25% of the aggregate gross origination price or acquisition price, as defined in the Management Agreement, for each real estate-related loan held by the Company.


Transaction Breakup Fee


In the event that the Company 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 Manager 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 Manager with respect to its evaluation and pursuit of such transactions. As of MarchJune 30, 2023 and December 31, 2020,2022, the Company hashad not received any breakup fees.

34

Notes to Unaudited Consolidated Financial Statements


Operating Expenses


The Company reimburses the Manager for operating expenses incurred in connection with services provided to the operations of the Company, including the Company’s allocable share of the Manager’s overhead, such as rent, employee costs, utilities, and technology costs.


Disposition and Extension Fee


Pursuant to the Management Agreement, the Manager or its affiliates receives a disposition fee in the amount of 1% of the gross sale price received by the Company from the disposition of any real estate-related loan, or any portion of, or interest in, any real estate-related loan. The disposition fee is paid concurrently with the closing of any such disposition of all or any portion of any real estate-related loan or any interest therein, which is the lesser of (i) 1% of the principal amount of the loan or debt-related loan prior to such transaction or (ii) the amount of the fee paid by the borrower in connection with such transaction. If the Company takes ownership of a property as a result of a workout or foreclosure of a loan, the Company will pay a disposition fee upon the sale of such property equal to 1% of the sales price.


Cost Sharing and Reimbursement Agreement

The Company and Terra LLC have entered into a cost sharing and reimbursement agreement effective October 1, 2022, pursuant to which Terra LLC is responsible for its allocable share of the Company’s expenses, including fees paid by the Company to the Manager based on relative assets under management. These fees are eliminated in consolidation and therefore have no impact on the Company’s consolidated financial statements.

Distributions Paid


For the three months ended March 31, 2020,June 30, 2023 and 2022, the Company made distributions to Terra Fund 5, Terra JVinvestors totaling $4.7 million and TIF3 REIT in the aggregate of $8.8$3.8 million, respectively, of which $8.3$4.7 million and $2.8 million were returns of capital, (Note 10).respectively. For the threesix months ended March 31, 2019,June 30, 2023 and 2022, the Company made distributions to Terra Fund 5investors totaling $7.6$9.3 million and $7.7 million, respectively, of which $3.6$8.8 million and $5.7 million were returns of capital, respectively (Note 1011).


28


Notes to Unaudited Consolidated Financial Statements



Due to Manager


As of March 31, 2020June 30, 2023 and December 31, 2019,2022, approximately $1.4$3.4 million and $1.0$3.9 million, respectively, was due to the Manager, respectively, as reflected on the consolidated balance sheets, primarily related to the present value of the disposition fees on individual loans due to the Manager.


Merger and Issuance of Common Stock to TIF3 REITMavik Real Estate Special Opportunities Fund, LP


As discussed in NoteOn August 3,, on March 1, 2020, TPT2 merged with and into the Company with the Company continuing as the surviving company. In connection with the Merger, the Company issued 2,116,785.76 shares of common stock of the Company to Terra Fund 7, the sole stockholder of TPT2, as consideration in the Merger. In addition, on March 2, 2020, TIF3 REIT contributed cash and released obligations under the participation agreements to the Company (Note 3) in exchange for the issuance of 2,457,684.59 shares of common stock of the Company. As described in Note 3, Terra Fund 7 contributed the shares of the Company’s common stock received as consideration in the Merger to Terra JV and became a co-managing member of Terra JV pursuant to the JV Agreement. The JV Agreement and related stockholders agreement between Terra JV and the Company, dated March 2, 2020, provide for the joint approval of Terra Fund 5 and Terra Fund 7 with respect to certain major decisions that are taken by Terra JV and the Company. Following the completion of the transactions described above, as of March 31, 2020, Terra JV owns 86.4% of the issued and outstanding shares of the Company’s common stock with the remainder held by TIF3 REIT, and Terra Fund 5 and Terra Fund 7 own an 87.6% and 12.4% interest, respectively, in Terra JV.

Terra International 3

On September 30, 2019, the Company entered into a Contribution and Repurchase Agreementsubscription agreement with Terra International Fund 3, L.P. (“Terra International 3”) and TIF3 REIT, a wholly-owned subsidiary of Terra International 3.

PursuantRESOF whereby the Company committed to this agreement, Terra International 3, through TIF3 REIT, contributed cash in the amount of $3.6fund up to $50.0 million to the Company in exchange for 212,691 shares of common stock, at a price of $17.02 per share. In addition, Terra International 3 agreed to contribute to the Company future cash proceeds, if any, raised from time to time by it, and the Company agreed to issue shares of common stock to International Fund 3 in exchange for any such future cash proceeds, in each case pursuant to and in accordance with the terms and conditions specified in the agreement. The shares were issued in a private placement in reliance on Section 4(a)(2) of the Securities Act and the rules and regulations promulgated thereunder.

Under Cayman securities law, when there is a change in the terms of the offering, previously admitted partners have rights to rescind their subscription. On September 24, 2019, Terra International 3 amended its private placement memorandum to change its term from finite life to perpetual life with limited opportunity for liquidity, as well as to change the selling commission structure and to provide for a dividend reinvestment plan. As a result of the change in the terms of the offering, as of today, Terra International 3 received requests to rescind all of the units of itspurchase limited partnership interest at a price of $50,000 per unit. Terra International 3 expects to honor all the requests. As a result of the rescission requests, TIF3 REIT redeemed the previously purchased of 212,691 shares of the Company’s common stockinterests in RESOF. For more information on April 29, 2020.this investment, please see Note 5.


Participation Agreements


In the normal course of business, the Company may enter into participation agreements (“PAs”) with related parties, primarily other affiliated funds managed by the Manager, and to a lesser extent, unrelated parties (the “Participants”). The purpose of the PAsparticipation agreements is to allow the Company and an affiliate to originate a specified loan when, individually, the Company does not have the liquidity to do so or to achieve a certain level of portfolio diversification. The Company may transfer portions of its investments to other Participants or it may be a Participant to a loan held by another entity.


ASC 860, Transfers and Servicing (“ASC 860”), establishes accounting and reporting standards for transfers of financial assets. ASC 860-10 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The Company has determined that the participation agreements it enters into are accounted for as secured borrowings under ASC 860 (See “Participation interests” in Note 2 and “Obligations under Participation Agreementsand Secured Borrowing” in (Note 79).



29
35



Notes to Unaudited Consolidated Financial Statements



Participation Interests Purchased by the Company


The below table lists the loan interests participated in byFrom time to time, the Company via PAs as of March 31, 2020 and December 31, 2019.may purchase investments from affiliates pursuant to participation agreements. In accordance with the terms of each PA,participation agreement, each Participant’s rights and obligations, as well as the proceeds received from the related borrower/issuer of the loan, are based upon their respective pro rata participation interest in the loan.

 March 31, 2020 December 31, 2019
 Participating Interests Principal Balance Carrying Value Participating Interests Principal Balance Carrying Value
      
LD Milpitas Mezz, LP (1)
25.00% 3,992,734
 4,037,567
 25.00% 3,120,887
 3,150,546
The table below lists the participation interests purchased by the Company pursuant to participation agreements as of:
June 30, 2023
Participating InterestsPrincipal BalanceCarrying Value
Mesa AZ Industrial Owner, LLC (1)
38.27%$31,000,000 $31,296,394 
UNJ Sole Member, LLC (1)
40.80%7,444,357 7,485,029 
Allowance for credit losses— (136,087)
$38,444,357 $38,645,336 
December 31, 2022
Participating InterestsPrincipal BalanceCarrying Value
Havemeyer TSM LLC (1)(2)
23.00%$3,282,208 $3,313,813 
Mesa AZ Industrial Owner, LLC (1)
38.27%31,000,000 31,276,468 
UNJ Sole Member, LLC (1)
40.80%7,444,357 7,482,547 
$41,726,565 $42,072,828 
________________
(1)On June 27, 2018, the Company entered into a participation agreement with Terra Income Fund 6, Inc. (“Terra Fund 6”) to purchase a 25% participation interest, or $4.3 million, in a $17.0 million mezzanine loan. As of March 31, 2020, the unfunded commitment was $0.3 million.

(1)The loan is held in the name of Mavik Real Estate Special Opportunities Fund REIT, LLC, a related-party REIT managed by the Manager.
(2)This loan was repaid in February 2023.

Transfers of Participation Interest by the Company


The following tables summarize the loans that were subject to PAsparticipation agreements with affiliated entities and third-parties as of March 31, 2020 and December 31, 2019:of:

     
Transfers Treated as Obligations Under Participation Agreements as of
March 31, 2020
 Principal Balance Carrying Value % Transferred 
Principal Balance (6)
 
Carrying Value (6)
14th & Alice Street Owner, LLC (5)
$19,610,084
 $19,728,938
 80.00% $15,688,067
 $15,752,112
370 Lex Part Deux, LLC (2)
49,668,256
 49,734,503
 35.00% 17,383,890
 17,383,890
City Gardens 333 LLC (2)
28,905,569
 28,917,582
 14.00% 4,046,781
 4,048,428
NB Private Capital, LLC (2)
20,000,000
 20,172,593
 16.67% 3,333,333
 3,362,098
Orange Grove Property Investors, LLC (2)
10,600,000
 10,697,792
 80.00% 8,480,000
 8,558,182
RS JZ Driggs, LLC (2)
8,200,000
 8,283,124
 50.00% 4,100,000
 4,140,330
Stonewall Station Mezz LLC (2)
9,851,847
 9,936,287
 44.00% 4,334,813
 4,371,496
TSG-Parcel 1, LLC (2)
18,000,000
 18,180,000
 11.11% 2,000,000
 2,020,000
Windy Hill PV Five CM, LLC (5)
11,949,208
 11,581,850
 69.11% 8,257,583
 8,033,869
 $176,784,964
 $177,232,669
   $67,624,467
 $67,670,405
Transfers Treated as Obligations Under Participation Agreements as of
June 30, 2023
Principal BalanceCarrying Value% TransferredPrincipal BalanceCarrying Value
610 Walnut Investors LLC (1)
$20,244,654 $20,401,547 67.57 %$13,678,820 $13,789,070 
$20,244,654 $20,401,547 $13,678,820 $13,789,070 


30


Notes to Unaudited Consolidated Financial Statements


     
Transfers Treated as Obligations Under Participation Agreements as of
December 31, 2019
 Principal Balance Carrying Value % Transferred 
Principal Balance (6)
 
Carrying Value (6)
14th & Alice Street Owner, LLC (5)
$12,932,034
 $12,957,731
 80.00% $10,345,627
 $10,387,090
2539 Morse, LLC (1)(3)(7)
7,000,000
 7,067,422
 40.00% 2,800,001
 2,825,519
370 Lex Part Deux, LLC (2)(4)(7)
48,349,948
 48,425,659
 47.00% 22,724,476
 22,724,476
Austin H. I. Owner LLC (1)(7)
3,500,000
 3,531,776
 30.00% 1,050,000
 1,059,532
City Gardens 333 LLC (1)(2)(3)(4)(7)
28,049,717
 28,056,179
 47.00% 13,182,584
 13,184,648
High Pointe Mezzanine Investments,
   LLC (3)(7)
3,000,000
 3,263,285
 37.20% 1,116,000
 1,217,160
NB Private Capital, LLC (1)(2)(3)(4)(7)
20,000,000
 20,166,610
 72.40% 14,480,392
 14,601,021
Orange Grove Property Investors, LLC (2)
10,600,000
 10,696,587
 80.00% 8,480,000
 8,557,205
RS JZ Driggs, LLC (2)
8,200,000
 8,286,629
 50.00% 4,100,000
 4,142,264
SparQ Mezz Borrower, LLC (1)(3)(7)
8,700,000
 8,783,139
 36.81% 3,202,454
 3,231,689
Stonewall Station Mezz LLC (2)
9,792,767
 9,875,162
 44.00% 4,308,817
 4,344,635
The Bristol at Southport, LLC (1)(3)(4)(7)
23,500,000
 23,661,724
 42.44% 9,974,444
 10,043,088
TSG-Parcel 1, LLC (1)(2)(7)
18,000,000
 18,180,000
 37.78% 6,800,000
 6,868,000
 $201,624,466
 $202,951,903
   $102,564,795
 $103,186,327
Transfers Treated as Obligations Under Participation Agreements as of
December 31, 2022
Principal BalanceCarrying Value% TransferredPrincipal BalanceCarrying Value
610 Walnut Investors LLC (1)
$18,625,738 $18,738,386 67.57 %$12,584,958 $12,680,594 
$18,625,738 $18,738,386 $12,584,958 $12,680,594 
________________
(1)Participant is Terra Secured Income Fund 5 International, an affiliated fund advised by the Manager.
(2)Participant is Terra Fund 6, an affiliated fund advised by Terra Income Advisors.
(3)Participant is Terra Income Fund International, an affiliated fund advised by the Manager.
(4)Participant is TPT2, an affiliated fund managed by the Manager.
(5)Participant is a third-party.
(6)Amounts transferred may not agree to the proportionate share of the principal balance and fair value due to the rounding of percentage transferred.
(7)
As discussed in Note 3, in March 2020, the Company settled an aggregate of $49.8 million of participation interests in loans held by the Company with TPT2 and TIF3 REIT, which TIF3 REIT received from Terra Secured Income Fund 5 International and Terra Income Fund International. In connection with the Merger and the Issuance of Common Stock to TIF3 REIT, the related participation obligations were settled.

(1)Participant was a third party.

These investments are held in the name of the Company, but each of the Participant’s rights and obligations, including interest income and other income (e.g., exit fee, prepayment income) and related fees/expenses (e.g., disposition fees, asset management and asset servicing fees), are based upon their respective pro rata participation interest in such participated investments, as specified in the respective PA.participation agreement. The Participants’ share of the investments is repayable only
36

Notes to Unaudited Consolidated Financial Statements

from the proceeds received from the related borrower/issuer of the investments and, therefore, the Participants also are subject to credit risk (i.e., risk of default by the underlying borrower/issuer). Pursuant to the PAsparticipation agreements with these entities, the Company receives and allocates the interest income and other related investment income to the Participants based on their respective pro rata participation interest. The Participants pay relatedany expenses, also basedincluding any fees to the Manager, only on their respective pro rata participation interest, (i.e., asset management and asset servicing fees, disposition fees) directlysubject to the Manager.terms of the respective governing fee arrangements.


Co-investment
In January 2018,Note 9. Debt

Unsecured Notes Payable

The 6.00% Senior Notes Due 2026

On June 10, 2021, the Company issued $78.5 million in aggregate principal amount of its 6.00% notes due 2026 (the “initial note”), for net proceeds of $76.0 million after deducting underwriting commissions of $2.5 million, but before offering expenses payable by the Company. On June 25, 2021, the underwriters partially exercised their option to purchase an additional $6.6 million of the notes for net proceeds of $6.4 million (the “additional notes” and, together with the initial notes, the “6.00% Senior Notes Due 2026”), after deducting underwriting commissions of $0.2 million, but before offering expenses payable by us, which closed on June 29, 2021. Interest on the 6.00% Senior Notes Due 2026 is paid quarterly in arrears every March 30, June 30, September 30 and December 30, at a fixed rate of 6.00% per year, beginning September 30, 2021. The 6.00% Senior Notes Due 2026 mature on June 30, 2026, unless redeemed earlier by the Company, and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after June 10, 2023.
In connection with the issuance of the 6.00% Senior Notes Due 2026, the Company entered into (i) an Indenture, dated June 10, 2021 (the “Base Indenture”), by and between the Company and U.S. Bank National Association, as trustee (the “Trustee”), and (ii) the First Supplemental Indenture thereto, dated June 10, 2021 (the “Supplemental Indenture” and, collectively with the Base Indenture, the “Indenture”), by and between the Company and the Trustee. The Indenture contains certain covenants that, among other things, limit the ability of the Company, subject to exceptions, to make distributions in excess of 90% of the Company’s taxable income, incur indebtedness (as defined in the Indenture) or purchase shares of the Company’s capital stock unless the Company has an asset coverage ratio (as defined in the Indenture) of at least 150% after giving effect to such transaction. The Indenture also provides for customary events of default which, if any of them occurs, would permit or require the principal of and accrued interest on the notes to become or to be declared due and payable. As of June 30, 2023 and December 31, 2022, the Company was in compliance with the covenants included in the Indenture.

The 7.00% Senior Notes Due 2026

As previously reported by Terra Fund 6 co-investedBDC, on February 10, 2021, Terra BDC issued $34.8 million in aggregate principal amount of 7.00% fixed-rate notes due 2026, for net proceeds of $33.7 million after deducting underwriting commissions of $1.1 million and on February 26, 2021, the underwriters exercised the option to purchase an $8.9additional $3.6 million mezzanine loanof the notes for net proceeds of $3.5 million, after deducting underwriting commissions of $0.1 million (collectively the “7.00% Senior Notes Due 2026”).

Pursuant to the Merger Agreement, Terra LLC agreed to take all necessary action to assume the payment of the principal of and interest on all of the 7.00% Senior Notes Due 2026 outstanding as of the Effective Time and the performance of every covenant of the Indenture, dated February 10, 2021 (the “TIF6 Indenture”), between Terra BDC and the Trustee, as supplemented by the First Supplemental Indenture, dated February 10, 2021, by and between Terra BDC and the Trustee (the “First Supplemental Indenture”), to be performed or observed by Terra BDC, including, without limitation, the execution and delivery to the Trustee of a supplement to the TIF6 Indenture in form satisfactory to the Trustee.

On the Closing Date, Terra BDC, Terra LLC and the Trustee entered into a Second Supplemental Indenture pursuant to which Terra LLC assumed the payment of the 7.00% Senior Notes Due 2026 and the performance of every covenant of the TIF6 Indenture, as supplemented by the First Supplemental Indenture, to be performed or observed by Terra BDC.

The 7.00% Senior Notes Due 2026 will mature on March 31, 2026, unless earlier repurchased or redeemed. The 7.00% Senior Notes Due 2026 bear interest at a rate of 7.00% per annum, payable on March 30, June 30, September 30 and December 30 of each year. The 7.00% Senior Notes Due 2026 are Terra LLC’s direct unsecured obligations and rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by Terra LLC; effectively subordinated in right of payment to any of Terra LLC’s existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to all existing and future indebtedness and other obligations of any of Terra LLC’s subsidiaries and financing vehicles. Terra LLC may redeem the 7.00% Senior Notes Due 2026 in whole or in part at any time
37

Notes to Unaudited Consolidated Financial Statements

on or after February 10, 2023, at a redemption price equal to 100% of the outstanding principal amount thereof, plus accrued and unpaid interest.

The TIF6 Indenture contains certain covenants that, bearsamong other things, limit the ability of Terra LLC, subject to exceptions, to incur indebtedness in violation of the 1940 Act, and to make distributions, incur indebtedness or repurchase shares of Terra LLC’s capital stock unless it satisfies asset coverage requirements set forth in the First Supplemental Indenture after giving effect to such transaction. The TIF6 Indenture also provides for customary events of default which, if any of them occurs, would permit or require the principal of and accrued interest on the 7.00% Senior Notes Due 2026 to become or to be declared due and payable.

Summarized Information

The table below presents detailed information regarding the unsecured notes payable as of:
June 30, 2023December 31, 2022
Principal BalanceCarrying ValueFair ValuePrincipal BalanceCarrying ValueFair Value
6.00% Senior Notes Due 2026 (1)
$85,125,000 $82,821,395 $64,695,000 $85,125,000 $82,487,769 $68,100,000 
7.00% Senior Notes Due 2026 (2)
38,375,000 34,611,977 36,533,000 38,375,000 34,042,904 35,381,748 
$123,500,000 $117,433,372 $101,228,000 $123,500,000 $116,530,673 $103,481,748 
_______________
(1)Carrying value is net of unamortized issue discount of $1.7 million and $1.9 million, and unamortized deferred financing costs of $0.6 million and $0.7 million as of June 30, 2023 and December 31, 2022, respectively.
(2)Carrying value is net of unamortized purchase discount of $3.8 million and $4.3 million as of June 30, 2023 and December 31, 2022, respectively.

Revolving Line of Credit

On March 12, 2021, Terra Mortgage Portfolio II, LLC, an indirect wholly-owned subsidiary of the Company, entered into a Business Loan and Security Agreement (the “Revolving Line of Credit”) with Western Alliance Bank (“WAB”) to provide for advances up to the lesser of $75.0 million or the amount determined by the borrowing base, which is based on the eligible assets pledged to the lender. Prior to March 31, 2023 borrowings under the Revolving Line of Credit bore interest at an annual fixed rate of 12.75% and maturedLIBOR + 3.25% with a combined floor of 4.0%. In connection with the transition of LIBOR, on March 31, 2019. In2023, the Revolving Line of Credit was amended and the interest rate was changed to Term SOFR + 3.35% with a combined floor of 6.0%. The Revolving Line of Credit was scheduled to mature on March 2019,12, 2023. On January 4, 2022, the Company amended the Revolving Line of Credit to increase the maximum amount available to $125.0 million and extended the maturity date of the facility to March 12, 2024 with an annual 12-month extension available at the Company’s option, which are subject to certain conditions. On August 3, 2022, the Company further amended the Revolving Line of Credit to increase the borrowing sub-limit in New York City and to allow for loans acquired through participation agreements as eligible assets.

In connection with the Revolving Line of Credit, the Company entered into a limited guaranty (the “Guaranty”) in favor of WAB, pursuant to which the Company guarantees the payment of up to 25% of the amount outstanding under the Revolving Line of Credit. Under the Revolving Line of Credit and the Guaranty, the Company is required to maintain (i) a minimum total net worth of $250.0 million; (ii) a $3.5 million quarterly operating profit, as defined within the agreement; and (iii) a ratio of total debt to total net worth of no more than 2.50 to 1.00. As of June 30, 2023 and December 31, 2022, the Company was in compliance with these covenants.

The Revolving Line of Credit contains terms, conditions, covenants, and representations and warranties that are customary and typical for a transaction of this loan was extendednature. The Revolving Line of Credit contains various affirmative and negative covenants, including maintenance of a debt to July 1, 2019. total net worth ratio and limitations on the incurrence of liens and indebtedness, loans, distributions, change of management and ownership, changes in the nature of business and transactions with affiliates.

The Revolving Line of Credit also includes customary events of default, including a cross-default provision applicable to debt obligations of Terra Mortgage Portfolio II, LLC or the Company. The occurrence of an event of default may result in termination of the Revolving Line of Credit and acceleration of amounts due under the Revolving Line of Credit.

38

Notes to Unaudited Consolidated Financial Statements

In connection with the closing of the Revolving Line of Credit, the Company also incurred financing fees of $0.6 million, to be amortized to interest expense over the life of the Revolving Line of Credit.

As of June 2019,30, 2023 and December 31, 2022, borrowings under the maturityRevolving Line of this loan was further extended to SeptemberCredit were $105.4 million and $90.1 million, respectively, collateralized by $165.6 million and $177.4 million of eligible assets, respectively. For the six months ended June 30, 2019. In August 2019,2023 and 2022, the loan was repaid in full.Company received proceeds from the Revolving Line of Credit of $57.0 million and $41.2 million, respectively, and made repayments of $41.7 million and $30.9 million, respectively.

Note 8. DebtRepurchase Agreements


UBS Master Repurchase Agreement
    
On December 12, 2018,November 8, 2021, Terra Mortgage Capital I,III, LLC (the “Seller”), a special-purpose indirect wholly-owned subsidiary of the Company, entered into an Uncommitted Master Repurchase Agreement (the “Master“UBS Master Repurchase Agreement”) with Goldman

31


Notes to Unaudited Consolidated Financial Statements


Sachs Bank USA (theUBS AG ( the “Buyer”). The UBS Master Repurchase Agreement provides for advances of up to $150.0$195 million in the aggregate, which the Company expects to use to finance certain secured performing commercial real estate loans.loans, including senior mortgage loans, where the underlying mortgaged properties consist of value-added assets with loan-to-value ratio between 65% and 80% that are typically yielding between 2.5% and 5.0%.

Advances under the UBS Master Repurchase Agreement accrue interest at a per annum pricing rate equal to the sum of (i) the 30-day LIBOR or Term SOFR if LIBOR is not available and (ii) the applicable spread, which ranges from 1.60% to 2.25%, and have a maturity date of December 12, 2020.November 7, 2024. The actual terms of financing for each asset will be determined at the time of financing in accordance with the UBS Master Repurchase Agreement. Subject to satisfaction of certain conditions, the Seller may extend the maturity date of the UBS Master Repurchase Agreement for a periodannually thereafter on mutually agreeable terms. In connection with the UBS Master Repurchase Agreement, the Company incurred deferred financing costs of one year.$0.6 million, which are being amortized to interest expense over the term of the facility.

The UBS Master Repurchase Agreement contains margin call provisions that provide the Buyer with certain rights in the event of a decline in the market valuecredit of the underlying assets purchased under the UBS 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 obligationpurchase price to eliminate any margin deficit. During the three months ended March 31, 2020, the Company 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.


In connection with the UBS Master Repurchase Agreement, the Company entered into a Guarantee Agreement in favor of the Buyer (the “UBS Guarantee Agreement”), pursuant to which the Company will guarantee the payment of up to 25% of the amount outstanding under the UBS Master Repurchase Agreement. The UBS Master Repurchase Agreement and the UBS Guarantee Agreement contain various representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of these types. In addition, the UBS Guarantee Agreement contains financial covenants, which require the Company to maintain: (i) cash liquidity of at least the greater of $5 million or 5% of the then-current outstanding amount under the UBS Master Repurchase Agreement; (ii) total liquidity of at least the greater of $15 million or 10% of the then-current outstanding amount under the UBS Master Repurchase Agreement (iii) tangible net worth at an amount equal to or greater than $215.7 million plus 75% of new capital contributions thereafter; (iv) an EBITDA to interest expense ratio of not less than 1.50 to 1.00; and (v) a total indebtedness to tangible net worth ratio of not more than 3.50 to 1.00. In March 2022, the Company amended the UBS Guarantee Agreement to reduce the EBITDA to interest expense ratio of not less than 1.25 to 1.00, and as of June 30, 2023 and December 31, 2022, the Company was in compliance with these covenants.

The following tables present detailed information with respect to each borrowing under the UBS Master Repurchase Agreement as of:
June 30, 2023
CollateralBorrowings Under Master Repurchase Agreement
Principal AmountCarrying ValueFair
Value		Borrowing DatePrincipal AmountInterest
Rate
NB Factory TIC 1, LLC$28,000,000 $28,842,742 $28,917,484 11/8/2021$18,970,000 Term SOFR+1.75%
Grandview’s Remington Place,
   LLC		23,100,000 23,203,590 23,236,153 5/6/202218,480,000 Term SOFR + 1.965%
$51,100,000 $52,046,332 $52,153,637 $37,450,000 

39

Notes to Unaudited Consolidated Financial Statements

December 31, 2022
CollateralBorrowings Under Master Repurchase Agreement
Principal AmountCarrying ValueFair
Value		Borrowing DatePrincipal AmountInterest
Rate
NB Factory TIC 1, LLC$28,000,000 $28,857,892 $28,902,234 11/8/2021$18,970,000 LIBOR+1.74% (LIBOR floor of 0.1%)
Grandview’s Madison Place, LLC17,000,000 17,105,928 17,105,928 3/7/202213,600,000 Term SOFR + 1.965%
Grandview’s Remington Place,
   LLC		23,100,000 23,199,620 23,203,343 5/6/202218,480,000 Term SOFR + 1.965%
$68,100,000 $69,163,440 $69,211,505 $51,050,000 

For the six months ended June 30, 2023, the Company had no additional borrowings and made a repayment of $13.6 million under the UBS Master Repurchase Agreement. For the six months ended June 30, 2022, the Company borrowed $29.7 million and did not make any repayments under the UBS Master Repurchase Agreement.

Goldman Master Repurchase Agreement

The Company entered into a credit agreement with Goldman Sachs Banks to provide for a term loan of up to $103.0 million. On February 18, 2022, Terra Mortgage Capital I, LLC (the “GS Seller”), a special-purpose indirect wholly-owned subsidiary of the Company, entered into an Uncommitted Master Repurchase and Securities Contract Agreement (the “Repurchase Agreement”) with Goldman Sachs Bank USA ( the “GS Buyer”). The Repurchase Agreement provides for advances of up to $200.0 million in the aggregate, which the Company expects to use to finance the originations of certain secured performing commercial real estate loans and the acquisitions of certain secured non-performing commercial real estate loans. The Repurchase Agreement replaced the term loan, at which time all mortgage assets under the term loan were assigned as purchased assets under the Repurchase Agreement.

Advances under the Repurchase Agreement accrue interest at a per annum pricing rate equal to the sum of (i) Term SOFR (subject to underlying loan floors on a case-by-case basis) and (ii) the applicable spread, which ranges from 1.75% to 3.00%, and have a maturity date of February 18, 2024. The actual terms of financing for each asset will be determined at the time of financing in accordance with the Repurchase Agreement. Subject to satisfaction of certain conditions, the GS Seller may extend the maturity date of the Repurchase Agreement for another 12-month term. In connection with the Repurchase Agreement, the Company incurred financing costs of $0.6 million, which are being amortized to interest expense over the term of the facility. Additionally, because the Repurchase Agreement was accounted for as a loan modification of the term loan, the remaining unamortized deferred financing fees of $1.7 million under the term loan were carried over to the Repurchase Agreement to be amortized over the life of the Repurchase Agreement.

The Repurchase Agreement contains margin call provisions that provide the GS Buyer with certain rights in the event of a decline in debt yield, loan-to-value ratio, and value of the underlying loans purchased under the Repurchase Agreement. Upon the occurrence of a margin deficit event, the GS Buyer may require the GS Seller to make a payment to reduce the purchase price to eliminate any margin deficit.

In connection with the Repurchase Agreement, the Company entered into a Guarantee Agreement in favor of the GS Buyer (the “Guarantee Agreement”), pursuant to which the Company will guarantee the obligations of the GS Seller under the Master Repurchase Agreement. Subject to certain exceptions, the maximum liability under the Master Repurchase Agreement will not exceed 25% of the then currently outstanding repurchase obligations for performing loans and 50% of the then currently outstanding repurchase obligations for non-performing loans under the Master Repurchase Agreement.


Under the Master Repurchase Agreement, on the second anniversary of the closing date and on each anniversary thereafter, the Company 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. The Company 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, the Company accrued approximately $0.1 million for the three months ended March 31, 2020 to make up for the difference between the actual interest paid and the $4.2 million.

     The Master Repurchase Agreement and the Guarantee Agreement contain various representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of these types. In addition, the Guarantee Agreement contains financial covenants, which require the Company to maintain: (i) liquidity of at least 10% of the then-current outstanding amount under the Master Repurchase Agreement; (ii) cash liquidity of at least the greater of $5 million or 5% of the then-current outstanding amount under the Master Repurchase Agreement; (ii) total liquidity in an amount equal to or greater than the lesser of $15 million or 10% of the then-current outstanding amount under the Repurchase Agreement (iii) tangible net worth at an amount equal to or greaterno less than 75% of the Company’s tangible net worth as of December 12, 2018, plus 75% of new capital contributions thereafter;that at closing; (iv) an EBITDA to adjusted interest expense ratio of not less than 1.50 to 1.00; and (v) a total indebtedness to tangible net worth ratio of not more than 3.00 to 1.00. As of March 31, 2020June 30, 2023 and December 31, 2019,2022, the Company iswas in compliance with these covenants.

In connection with entering into the Master Repurchase Agreement, the Company incurred $2.8 million of deferred financing costs, which are being amortized to interest expense over the term of the facility. As of March 31, 2020 and December 31, 2019, unamortized deferred financing costs were $1.2 million and $1.5 million, respectively.

The following tables present summary information with respect to the Company’s outstanding borrowing under the Master Repurchase Agreement as of March 31, 2020 and December 31, 2019:
40
  March 31, 2020
Arrangement 
Weighted
Average
Rate (1)
 Amount Outstanding 
Amount
Remaining
Available
 
Weighted
Average
Term (2)
Master Repurchase Agreement 4.0% $92,546,530
 $57,453,470
 1.47 years
  December 31, 2019
Arrangement 
Weighted
Average
Rate (1)
 Amount Outstanding 
Amount
Remaining
Available
 
Weighted
Average
Term (2)
Master Repurchase Agreement 4.3% $81,134,436
 $68,865,564
 1.55 years
_______________
(1)Amount is calculated using LIBOR of 0.99% and 1.76% as of March 31, 2020 and December 31, 2019, respectively.

32



Notes to Unaudited Consolidated Financial Statements



(2)The weighted average term is determined based on the current maturity of the corresponding loan. Each transaction under the facility has its own specific term. The Company may extend the maturity date of the Master Repurchase Agreement for a period of one year, subject to satisfaction of certain conditions.


The following tables present detailed information with respect to each borrowing under the Master Repurchase Agreement as of March 31, 2020 and December 31, 2019:of:
June 30, 2023
CollateralBorrowings Under Repurchase Agreement
Principal AmountCarrying ValueFair
Value		Borrowing DatePrincipal AmountInterest
Rate
1389 Peachtree St, LP; 1401 Peachtree St, LP; and
   1409 Peachtree St, LP		$58,865,991 $59,155,584 $55,139,746 2/18/2022$42,888,134 Term SOFR + 2.465%
AGRE DCP Palm Springs, LLC43,222,382 43,826,614 43,499,719 2/18/202228,094,548 Term SOFR + 1.315% (1.8% floor)
Patrick Henry Recovery Acquisition, LLC18,000,000 18,043,198 17,923,436 2/18/202214,400,000 Term SOFR + 0.865% (1.5% floor)
$120,088,373 $121,025,396 $116,562,901 $85,382,682 
 March 31, 2020
 Collateral Borrowings Under Master Repurchase Agreement
 Principal Amount Carrying Value 
Fair
Value
 Borrowing Date Principal Amount 
Interest
Rate
330 Tryon DE LLC$22,800,000
 $22,893,646
 $22,862,074
 2/15/2019 $17,100,000
 LIBOR+2.25% (LIBOR floor of 2.52%)
1389 Peachtree St, LP;
   1401 Peachtree St, LP; and
   1409 Peachtree St, LP
41,523,796
 41,631,238
 41,676,800
 3/7/2019 24,448,102
 LIBOR+2.35%
AGRE DCP Palm Springs, LLC30,514,799
 30,522,379
 30,551,440
 12/23/2019 19,242,528
 LIBOR+2.50% (LIBOR floor of 1.8%)
MSC Fields Peachtree Retreat, LLC23,308,335
 23,444,431
 22,886,081
 3/25/2019 17,355,900
 LIBOR+2.25% (LIBOR floor of 2.00%)
Patrick Henry Recovery
   Acquisition, LLC
18,000,000
 18,038,146
 17,773,917
 1/6/2020 14,400,000
 LIBOR + 2.00% (1.5% Floor)
 $136,146,930
 $136,529,840
 $135,750,312
   $92,546,530
  

December 31, 2022
CollateralBorrowings Under Repurchase Agreement
Principal AmountCarrying ValueFair
Value		Borrowing DatePrincipal AmountInterest
Rate
330 Tryon DE LLC$22,800,000 $22,902,215 $22,687,235 2/18/2022$18,240,000 Term SOFR + 2.015% (0.01% floor)
1389 Peachtree St, LP; 1401 Peachtree St, LP; and
   1409 Peachtree St, LP		57,184,178 57,453,482 56,844,322 2/18/202241,587,275 Term SOFR + 2.465%
AGRE DCP Palm Springs, LLC43,222,382 43,758,804 43,062,933 2/18/202228,094,548 Term SOFR + 1.315% (1.8% floor)
Patrick Henry Recovery Acquisition, LLC18,000,000 18,041,782 17,824,300 2/18/202214,400,000 Term SOFR + 0.865% (1.5% floor)
University Park Berkeley, LLC26,342,468 26,536,122 26,472,938 2/18/202217,504,783 Term SOFR + 1.365% ( 1.50% floor)
$167,549,028 $168,692,405 $166,891,728 $119,826,606 
 December 31, 2019
 Collateral Borrowings Under Master Repurchase Agreement
 Principal Amount Carrying Value 
Fair
Value
 Borrowing Date Principal Amount 
Interest
Rate
330 Tryon DE LLC$22,800,000
 $22,891,149
 $22,906,207
 2/15/2019 $17,100,000
 LIBOR+2.25% (LIBOR floor of 2.49%)
1389 Peachtree St, LP;
   1401 Peachtree St, LP; and
   1409 Peachtree St, LP
38,464,429
 38,510,650
 38,655,000
 3/7/2019 24,040,268
 LIBOR+2.35%
AGRE DCP Palm Springs, LLC30,184,357
 30,174,455
 30,326,076
 12/23/2019 22,638,268
 LIBOR+2.50% (LIBOR floor of 1.8%)
MSC Fields Peachtree Retreat, LLC23,308,335
 23,446,793
 23,418,996
 3/25/2019 17,355,900
 LIBOR+2.25% (LIBOR floor of 2.00%)
 $114,757,121
 $115,023,047
 $115,306,279
   $81,134,436
  


For the threesix months ended March 31, 2020June 30, 2023 and 2019,2022 the Company borrowed $14.8$1.3 million and $3.4$118.3 million, respectively, under the Master Repurchase Agreement respectively, for the financingand made repayments of new$35.7 million and follow-on investments.zero, respectively.


For the three months ended March 31, 2020, the Company made a repayment of $3.4 millionTerm Loan

As previously reported by Terra BDC, on April 9, 2021, Terra BDC, as a result of a margin call described above. For the three months ended March 31, 2019, there was no repayment on borrowings under the Master Repurchase Agreement.

Revolving Credit Facility

On June 20, 2019, Terra LOC Portfolio I, LLC, a special-purpose indirect wholly-owned subsidiary of the Company,borrower, entered into a credit agreement (the “Credit Agreement”) with Israel Discount Bank of New York to provide for revolving credit loans of up to $35.0 million inEagle Point Credit Management LLC, as the aggregateadministrative agent and collateral agent (“Revolving Credit Facility”Eagle Point”), whichand certain funds and accounts managed by Eagle Point, as lenders (in such capacity, collectively, the Company expects to use solely“Lenders”). The Credit Agreement provides for short(i) a delayed draw term financing needed to bridge the timingloan of anticipated$25.0 million and (ii) additional incremental 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%. Each loan made under the Revolving Credit Facility shall be in a minimum aggregate principal amount of the lesser of $1.0 million and multiples of $0.5 million in excess thereof, which may be approved by a Lender in its sole discretion (the “Term Loan”).

The scheduled maturity date of the Term Loan was April 9, 2025. The Term Loan bore interest on the outstanding principal amount thereof at a rate equal to 5.625% per annum; provided that if at any time Terra BDC was rated below investment grade, the interest rate would increase to 6.625% until the rating is no longer below investment grade. In connection with the entry into the Credit Agreement, Terra BDC also agreed to pay Eagle Point an upfront fee in an amount equal to 2.50% of the loan commitment amount on the initial borrowing date as described in the Credit Agreement. Terra BDC also paid, with respect to any unused portion of the Term Loan, a commitment fee of 0.75% per annum.

Terra BDC could prepay any loan, in whole or the then unused amount under the facility and cannot bein part, together with all accrued but unpaid interest thereon, upon at least
30 but not more than $25.0 million in60 days’ prior notice to the aggregate with respectAgent. If Terra BDC elected to make such prepayments prior to October 9, 2023, Terra BDC would also be required to pay a make whole premium, being the present value at such date of (1) the principal

amount being prepaid of such loan, plus (2) all remaining required interest payments due on the principal amount being prepaid of such loan through the maturity date (excluding accrued but unpaid interest to the date on which the make whole premium
33
41



Notes to Unaudited Consolidated Financial Statements



becomes owed), computed using a discount rate equal to the applicable U.S. Treasury rate (as set forth in the Credit Agreement) plus 50 basis points, over (B) the principal amount being prepaid of such loan; provided that the make whole premium may in no event be less than zero.
each asset purchased with the proceeds from the Revolving Credit Facility. The Revolving Credit Facility matures on June 20, 2020.
In connection with obtainingits entry into the RevolvingCredit Agreement, Terra BDC also entered into a security agreement (the “Security Agreement”), by and among Terra BDC, as grantor, and Eagle Point, as administrative agent, for the benefit of the Lenders, their affiliates and Eagle Point as the secured parties thereunder. Pursuant to the Security Agreement, Terra BDC pledged substantially all of its then owned and thereafter acquired property as security for the obligations of Terra BDC under the Credit Agreement, subject to certain limitations and restrictions set forth in the Security Agreements.

On September 27, 2022, Terra BDC, Terra LLC, Eagle Point and the Lenders entered into a Consent Letter and Amendment (the “Credit Facility Amendment”) effective October 1, 2022. Pursuant to the Credit Facility Amendment (i) Eagle Point and the Lenders consented to the consummation of the BDC Merger and the assumption by Terra LLC of all of the obligations of Terra BDC under the Credit Agreement, (ii) and the Credit Agreement was amended to, among other things, change the scheduled maturity date to July 1, 2023, and remove the make whole premium on voluntary prepayments of the loans.

On June 30, 2023, the Company, incurred deferred financing costsEagle Point and the Lenders entered into an amendment to the Credit Agreement, pursuant to which the Credit Agreement was amended to, among other things, (i) extend the scheduled maturity date to March 31, 2024, and (ii) increase the rate on which the loans bear interest from a fixed rate of $0.3 million, which are being5.625% per annum to a floating rate based on SOFR plus 7.375% with a SOFR floor of 5.0%. In connection with the amendment, the Company paid Eagle Point a loan origination fee of $150,000, to be amortized to interest expense over the remaining term of the facility.Term Loan. As of MarchJune 30, 2023 and December 31, 2020,2022, the principal amount outstanding under the Revolving Credit FacilityTerm Loan was $35.0 million.$15.0 million and $25.0 million, respectively.

The Revolving Credit Facility requires the Company to maintain: (i) an EBITDA to interest expense ratio of not less than 1.00; (ii) cash liquidity of at least $7.0 million; (iii) tangible net worth of at least $200.0 million;Agreement contains customary representations, warranties, reporting requirements, borrowing conditions and (iii) a total indebtedness to tangible net worth ratio of not more than 1.75 to 1.00. Additionally, the Revolving Credit Facility requires Terra LOC Portfolio I, LLC to maintain a tangible net worth of at least $100.0 million.affirmative, negative and financial covenants. As of March 31, 2020June 30, 2023 and December 31, 2019, both the Company and2022 , Terra LOC Portfolio I, LLC arewas in compliance with these covenants.


For the three months ended March 31, 2020, the Company borrowed $35.0 million under the Revolving Credit Facility.Mortgage Loans Payable

Mortgage Loan PayableFinancing Activities


2023 — During the six months ended June 30, 2023, the Company entered into the following financing arrangements:
•A mortgage loan with total commitment of $37.0 million for the acquisition of three industrial buildings in March 2023. As of March 31, 2020, the Company had a $44.5 millionJune 30, 2023, total amount funded was $32.4 million; and
• A mortgage loan of $40.3 million to finance the acquisition of five industrial buildings in May 2023.
The following table presents certain information about mortgage loans payable as of:
June 30, 2023December 31, 2022
LenderCurrent
Interest Rate		Maturity
Date		Principal AmountCarrying ValueCarrying Value of
Collateral		Principal AmountCarrying ValueCarrying Value of
Collateral
Centennial
   Bank (1)
Term SOFR + 3.85%
(Term SOFR Floor of 2.23%)
May 31, 2023$27,603,118 $27,869,606 $27,603,118 $29,252,308 $29,488,326 $40,581,847 
TPG RE
  Finance
  24, LTD (2)
Term SOFR +3.5% (Term SOFR Floor of 3.75%April 9, 202732,368,367 31,581,757 48,498,431 — — — 
GSF Lender, LLC (3)
6.254%June 6, 202840,250,000 39,235,822 83,205,033 — — — 
$100,221,485 $98,687,185 $159,306,582 $29,252,308 $29,488,326 $40,581,847 
___________________
42

Notes to Unaudited Consolidated Financial Statements

(1)This loan is collateralized by a multi-tenant office building that the Company acquired through foreclosure. This loan is currently in maturity default. The following table presents certain information aboutCompany has sought to convey its interest in the mortgageoffice building and ground lease in lieu of foreclosure.
(2)This loan payable as ofis collateralized by three industrial buildings that the Company acquired in March 31, 2020 and December 31, 2019:2023.
(3)This loan is collateralized by five industrial buildings that the Company acquired in May 2023.
        March 31, 2020 December 31, 2019
Lender 
Current
Interest Rate
 
Maturity
Date (1)
 Principal Amount Carrying Value 
Carrying Value of
Collateral
 Carrying Value Carrying Value of
Collateral
Centennial Bank LIBOR + 3.85%
(LIBOR Floor of 2.23%)		 September 27, 2020 $44,481,855
 $44,687,123
 $51,974,077
 $44,753,633
 $52,776,236
_______________
(1)The Company has an option to extend the maturity of the mortgage loan payable by two years subject to certain conditions provided in the credit and security agreement.


Scheduled Debt Principal Payments


Scheduled debt principal payments for each of the five calendar years following March 31, 2020June 30, 2023 are as follows:

Years Ending December 31, TotalYears Ending December 31,Total
2020 (April 1 through December 31) $172,028,385
2021 —
2022 —
2023 —
2023 (July 1 through December 31)2023 (July 1 through December 31)$42,603,118 
2024 —
2024228,280,702 
20252025— 
20262026123,500,000 
2027202732,368,368 
ThereafterThereafter40,250,000 
 172,028,385
467,002,188 
Unamortized deferred financing costs (1,058,106)Unamortized deferred financing costs(8,700,440)
Total $170,970,279
Total$458,301,748 


At March 31, 2020June 30, 2023 and December 31, 2019,2022, the unamortized deferred financingdebt issuance costs were $1.1$8.7 million and $1.4$8.6 million, respectively.


Obligations Under Participation Agreements


As discussed in Note 2, the Company follows the guidance in ASC 860 when accounting for loan participations. Such guidance requires participationthe transferred interests meet certain criteria in order for the interest transaction to be recorded as a sale. Loan participations from the Company which do not qualify for sale treatment remain on the Company’s consolidated balance sheets and the proceeds are recorded as obligations under participation agreements. As of March 31, 2020June 30, 2023 and December 31, 2019,2022, obligations under participation agreements had a carrying value of approximately $67.7$13.8 million and $103.2$12.7 million, respectively, and the carrying value of the loans that are associated with these obligations under participation agreements was approximately $177.2$20.4 million and $203.0$18.7 million, respectively, (see “Participation Agreements” in Note 78). The weighted-average interest rate on the obligations under participation agreements was approximately 10.8%17.1% and 11.8%16.4% as of March 31, 2020June 30, 2023 and December 31, 2019,2022, respectively.


34


Notes to Unaudited Consolidated Financial Statements



Note 9.10. Commitments and Contingencies

Impact of COVID-19

As further discussed in Note 2, the full extent of the impact of COVID-19 on the global economy generally, and the Company’s business in particular, is uncertain. As of March 31, 2020, no contingencies have been recorded on the Company’s consolidated balance sheet as a result of COVID-19, however as the global pandemic continues and the economic implications worsen, it may have long-term impacts on the Company’s financial condition, results of operations, and cash flows. Refer to Note 2 for further discussion of COVID-19.


Unfunded Commitments on Loans Held for Investment


Certain of the Company’s loans contain provisions for future fundings, which are subject to the borrower meeting certain performance-related metrics that are monitored by the Company. These fundings amounted to approximately $107.0$53.2 million and $116.7$47.3 million as of March 31, 2020June 30, 2023 and December 31, 2019,2022, respectively. The Company expects to maintain sufficient cash on hand to fund such unfunded commitments primarily through matching these commitments with principal repayments on outstanding loans or draw downs on credit facilities.

Unfunded Investment Commitment

As discussed in Note 5, on August 3, 2020, the Company entered into a subscription agreement with RESOF whereby the Company committed to fund up to $50.0 million to purchase limited partnership interests in RESOF. As of June 30, 2023 and proceeds fromDecember 31, 2022, the Revolving Credit Facility.unfunded investment commitment was $37.4 million and $22.4 million, respectively.


Other


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
43

Notes to Unaudited Consolidated Financial Statements

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 and the Manager 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. Additionally, as described above under “Note 6. Real Estate Owned, Net—Real Estate Operating Revenue and Expenses,” as of June 30, 2023 and December 31, 2022, the Company owned a multi-tenant office building that is subject to a ground lease. The ground lease provides for a new base rent every 5 years based on the greater of the annual base rent for the prior lease year or 9% of the fair market value of the land. The next rent reset on the ground lease is scheduled for November 1, 2025. The Company is currently litigating with the landlord with respect to the appropriate method for determining the fair value of the land for purposes of setting the ground rent – Terra Ocean Ave., LLC v. Ocean Avenue Santa Monica Realty LLC, Superior Court of California, Los Angeles County, Case No. 20STCV34217. The Company believes this determination should be based on comparable sales, while the landlord insists that the rent under the ground lease itself is also relevant. The Company’s position has prevailed in all three of the prior arbitrations to reset the ground rent. Since future rent reset determinations under the ground lease cannot be known at this time, the Company did not include any potential future rent increases in calculating the present value of future rent payments. The Company intends vigorously to pursue the litigation. While the Company believes its arguments will likely prevail, the outcome of anythe legal proceedingsproceeding cannot be predicted with certainty,certainty. If the landlord prevails, the future rent reset determinations could result in significantly higher ground rent, which would likely result in a significant diminution in the value of the Company’s interest in the ground lease and the office building.

On July 7, 2023, Centennial Bank filed a complaint for breach of guaranty against the Company doesin the United States District Court, Southern District of New York (SDNY). The complaint relates to a loan made by Centennial Bank to Terra Ocean Ave., LLC (“Terra Ocean”), and alleges that Centennial Bank allegedly made a mistake in July 2021, in demanding a prepayment of $11.3 million instead of $28.5 million with respect to the loan, and that the Company, as guarantor in certain limited respects, must now pay the difference (i.e. $17.2 million) plus interest and attorneys’ fees and costs. Centennial Bank’s now alleges that its mistake in determining the prepayment amount was caused by the wrongful failure to disclose the then-current status of the Lease Litigation by Terra Ocean and/or the Company. On July 24, 2023, the Company, through counsel appeared in the action. Although the action is in its initial stages, the Company is seeking a dismissal of the complaint at the pleading stage and, if not expectsuccessful, is prepared to vigorously defend itself through trial. The Company believes the claim by Centennial Bank is without merit.

Also on July 17, 2023, Centennial Bank filed a complaint against Terra Ocean for: (i) Breach of Contract; (ii) Judicial Foreclosure and Deficiency Judgment; and (iii) Specific Performance and Appointment of Receiver in the Superior Court of the State of California, County of Los Angeles. Centennial Bank seeks to foreclose on the deed of trust encumbering the tenant’s interest in the above-mentioned multi-tenant office building and ground lease. In the complaint, Centennial Bank alleges that any such proceedings will have a material adverse effect upon its financial condition or resultsloan to Terra Ocean is in default and the outstanding principal amount of operations.the loan is $27.6 million as of the filing of the complaint. Prior to Centennial Bank filing its complaints against the Company and Terra Ocean, Terra Ocean sought to convey its interest in the ground lease in lieu of foreclosure. Terra Ocean is in the process of preparing an appropriate response to Centennial Bank’s claims in this action.


See Note 78 for a discussion of the Company’s commitments to the Manager.


Note 10.11. Equity


Earnings Per Share

The following table presents earnings per share:

Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Net (loss) income$(19,237,065)$1,292,434 $(18,689,586)$534,547 
Series A preferred stock dividend declared— (3,906)(3,907)(7,812)
Net (loss) income allocable to common stock$(19,237,065)$1,288,528 $(18,693,493)$526,735 
Weighted-average shares outstanding - basic and diluted24,335,430 19,487,460 24,335,402 19,487,460 
(Loss) income per share - basic and diluted$(0.79)$0.07 $(0.77)$0.03 

44

Notes to Unaudited Consolidated Financial Statements

Preferred Stock Classes


Preferred Stock
    
The Company’s charter gives it authority to issue 50,000,000 shares of preferred stock, $0.01 par value per share (“Preferred Stock”). The Company’s board of directorsBoard may classify any unissued shares of Preferred Stock and reclassify any previously classified but unissued shares of Preferred Stock of any series from time to time, into one or more classes or series of stock. As of March 31, 2020 and December 31, 2019,June 30, 2023, there were no Preferred Stock issued or outstanding. As of December 31, 2022 there were 125 shares of Series A Preferred Stock (as defined below) issued and outstanding.
    
Series A Preferred Stock
    
On November 30, 2016, the Company’s board of directorsBoard classified and designated 125 shares of preferred stockPreferred Stock as a separate class of preferred stockPreferred Stock to be known as the 12.5% Series A Redeemable Cumulative Preferred Stock, $1,000 liquidation value per share (“Series A Preferred Stock”). In December 2016, the Company sold 125 shares of the Series A Preferred Stock for $125,000. The Series A Preferred Stock payspaid dividends at an annual rate of 12.5% of the liquidation preference. These dividends arewere cumulative and payable semi-annually in arrears on June 30 and December 31 of each year.


The Series A Preferred Stock, with respect to dividend rights and rights upon liquidation, dissolution or winding up of the Company, rankranked senior to common stock. The Company, at its option, may redeem the shares, with written notice, at a redemption price of $1,000 per share, plus any accrued unpaid distribution through the date of the redemption. The Series A Preferred Stock carriescarried a redemption premium of $50 per share if redeemed prior to January 1, 2019. The Series A Preferred Stock generally hashad no voting rights. However, the Series A Preferred Stock holders’Stockholders’ voting iswas required if (i) authorization or issuance of any securities senior to the Series A Preferred Stock; (ii) an amendment to the Company’s charter that has a material adverse effect on the rights and preference of the Series A Preferred Stock; and (iii) any reclassification of the Series A Preferred Stock.


35In March 2023, the Series A Preferred Stock was fully redeemed at par for a total of $125,000 plus accrued dividends.


Notes to Unaudited Consolidated Financial Statements




Common Stock


As discussedOn October 1, 2022, inNote 3, on March 1, 2020, TPT2 merged with and into the Company with the Company continuing as the surviving corporation. In connection with the BDC Merger, the Company issued 2,116,785.76amended its charter to increase the shares authorized from 500,000,000 to 950,000,000, consisting of 450,000,000 shares of common stock of the Company to Terra Fund 7, the sole stockholder of TPT2, as consideration in the Merger. In addition, on March 2, 2020, the Company issued 2,457,684.59Class A Common Stock, $0.01 par value per share (“Class A Common Stock”), 450,000,000 shares of common stockClass B Common Stock, and 50,000,000 shares of the Company in exchange for the settlementPreferred Stock. Concurrently, 4,847,910 shares of certain participation interests in loans held by the CompanyClass B Common Stock were issued to former Terra BDC stockholders and cash. As described in Note 3, Terra Fund 7 contributed the shareseach share of the Company’s common stock received as consideration inissued and outstanding immediately prior to the effective time of the BDC Merger towas automatically changed into one issued and outstanding share of Class B Common Stock. As of June 30, 2023, Terra JV, and became a co-managing memberLLC, former shareholders of Terra JV pursuant to the JV Agreement. The JV Agreement and related stockholders agreement between Terra JV and the Company, dated March 2, 2020, provide for the joint approval of Terra Fund 5BDC and Terra Fund 7 with respect to certain major decisions that are taken by Terra JVOffshore Funds REIT, LLC held 70.0%, 19.9% and the Company. As of March 31, 2020, Terra JV owns 86.4%10.1% of the issued and outstanding shares of the Class B Common Stock, respectively.

The Class B Common Stock rank equally with and have identical preferences, rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, and terms and conditions of redemption as each other share of the Company’s common stock, except as set forth below with respect to conversion.

On the remainder held by TIF3 REIT, and Terra Fund 5 and Terra Fund 7 own an 87.6% and 12.4% interest, respectively, in Terra JV.

On September 30, 2019,date that is 180 calendar days (or, if such date is not a business day, the Company issued 212,691next business day) after the date (the “First Conversion Date”) of initial listing of shares of its common stockClass A Common Stock for trading on a national securities exchange or such earlier date as approved by the Board, one-third of the issued and outstanding shares of Class B Common Stock will automatically and without any action on the part of the holder thereof convert into an equal number of shares of Class A Common Stock. On the date that is 365 calendar days (or, if such date is not a business day, the next business day) after the date of initial listing of shares of Class A Common Stock for trading on a national securities exchange or such earlier date following the First Conversion Date as approved by the Board (the “Second Conversion Date”), one-half of the issued and outstanding shares of Class B Common Stock will automatically and without any action on the part of the holder thereof convert into an equal number of shares of Class A Common Stock. On the date that is 545 calendar days (or, if such date is not a business day, the next business day) after the date of initial listing of shares of Class A Common Stock for trading on a national securities exchange or such earlier date following the Second Conversion Date as approved by the Board, all of the issued and outstanding shares of Class B Common Stock will automatically and without any action on the part of the holder thereof convert into an equal number of shares of Class A Common Stock.

45

Notes to TIF3 REIT at a price of $17.02 per share for total proceeds of $3.6 million. On April 29, 2020, the Company repurchased the 212,691 shares it previously sold to TIF3 REIT (Note 7).Unaudited Consolidated Financial Statements


Distributions


The Company generally intends to distribute substantially all of its taxable income, which does not necessarily equal net income as calculated in accordance with U.S. GAAP, to its stockholders each year to comply with the REIT provisions of the Internal Revenue Code. All distributions will be made at the discretion of the Company’s board of directorsBoard and will depend upon its taxable income, financial condition, maintenance of REIT status, applicable law, and other factors as its board of directorsthe Board deems relevant.


For the three months ended March 31, 2020,June 30, 2023 and 2022, the Company made distributions to Terra Fund 5, Terra JVinvestors totaling $4.7 million and TIF3 REIT in the aggregate of $8.8$3.8 million, respectively, of which $8.3$4.7 million and $2.8 million were returns of capital.capital, respectively. For the threesix months ended March 31, 2019,June 30, 2023 and 2022, the Company made distributions to Terra Fund 5investors totaling $7.6$9.3 million and $7.7 million, respectively, of which $3.6$8.8 million and $5.7 million were returns of capital.capital, respectively. Additionally, for both the three and six months ended March 31, 2020June 30, 2023 and 2019,2022, the Company made distributions to preferred stockholders of $3,906.none and $3,906, respectively, and $3,907 and $7,812, respectively.


Dividend Reinvestment Plan

On January 20, 2023, the Board adopted a distribution reinvestment plan (the “Plan”), pursuant to which the Company’s stockholders may elect to reinvest cash distributions payable by the Company in additional shares of Class A Common Stock and Class B Common Stock, at the price per share determined pursuant to the Plan. For the six months ended June 30, 2023, the Company issued 143 shares of Class B Common Stock for a total of $1,988 pursuant to the Plan.

Note 11.12. 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 other than the ones below that would require adjustment to, or disclosure in, the Company’s consolidated financial statements.


Termination of WMC Merger Agreement


On June 28, 2023, the Company announced it entered into an Agreement and Plan of Merger, dated as of June 27, 2023 (the “WMC Merger Agreement”), with Western Asset Mortgage Capital Corporation, a Delaware corporation (“WMC”). On July 27, 2023, WMC notified the Company that its board of directors determined that a proposal from AG Mortgage Investment Trust, Inc. (“MITT”) to acquire WMC was a “Parent Superior Proposal” under the WMC Merger Agreement and that WMC’s board of directors intended to terminate the WMC Merger Agreement unless WMC received a revised proposal from the Company by a specified deadline such that WMC’s board of directors determined that MITT’s proposal was no longer a “Parent Superior Proposal.”

On August 8, 2023, WMC terminated the WMC Merger Agreement pursuant to its terms (the “Termination”), and the Company was paid a termination fee of $3.0 million.

Upon the Termination, the amended and restated management agreement the Company entered into with WMC and the Manager on June 27, 2023, terminated in accordance with its terms. The Company continues to be managed by the Manager pursuant to the terms of the existing Management Agreement between the Company and the Manager.




36
46




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, “we,” “us” and “our” refer to Terra Property Trust, Inc. (and, together with its consolidated subsidiaries, the “Company” or “Terra Property Trust”).


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 stockholders in the future;


•our ability to achieve the potential negative impacts of COVID-19 onexpected synergies, cost savings and other benefits from the global economyBDC Merger (as defined below);

•risks associated with achieving expected synergies, cost savings and the impacts of COVID-19 on the Company’s financial condition, results of operations, liquidity and capital resources and business operations;other benefits from our increased scale;


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 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 loans;


•our use of financial leverage;


•actual and potential conflicts of interest with any of the following affiliated entities: Terra Fund Advisors, LLC, Terra REIT Advisors, LLC (“Terra REIT Advisors” or theour “Manager”), Terra Income Advisors, LLC; Terra Capital Partners, LLC (“Terra Capital Partners”), our sponsor; Terra Secured Income Fund 5, LLC (“Terra Fund 5”); Terra JV, LLC (“Terra JV”); Terra Income Fund 6, Inc. (“Terra Fund 6” or “Terra BDC”); Terra Secured Income Fund 5 International; Terra Income Fund International; Terra Secured Income Fund 7, LLC (“Terra Fund 7”);Terra International Fund 3, L.P. (“Terra International 3”); Terra International Fund 3Offshore Funds REIT, LLC (“TIF3Terra Offshore REIT”); Terra Capital Advisors, LLC; Terra Capital Advisors 2, LLC; Terra Income Advisors 2, LLC;Mavik Real Estate Special Opportunities Fund, LP (“RESOF”); 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 anda listing of our shares of common stock on a national securities exchange, or an adoption of a share
47

repurchase plan or a strategic business combination, in each case, which may include the distribution of our common stock indirectly owned by certain of our affiliate funds (the “Terra Funds”) to the ultimate investors in the Terra Funds, and the timing of any such transactions;



37



•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 exemption exclusion or from registration under the Investment Company Act of 1940, as amended (the “1940 Act”), and to maintain our 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-looking statements for any reason, including the factors set forth in “Part I — Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 20192022 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. Stockholders
are advised to consult any additional disclosures that we may make directly to stockholders or through reports that we may file in the future with the Securities and Exchange Commission (the “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 real estate credit focused company that originates, structures, funds and manages high yielding commercial real estate credit investments, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments throughout the United States, which we collectively refer to as our targeted assets. From time to time, we may acquire real estate encumbering the senior loans through foreclosure, may invest in real estate related joint ventures and may directly acquire real estate properties. Our loans finance the acquisition, construction, development or redevelopment of quality commercial real estate in the 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 ofin this size range are subject to less competition, offer higher risk adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification. Our investment objective is to continue to provide attractive risk-adjusted returns to our stockholders, primarily through regular distributions. There can be no assurances that we will be successful in meeting our investment objective.


As of March 31, 2020,June 30, 2023, we held a net investmentloan portfolio (gross investmentsloans less obligations under participation agreements)agreements and secured borrowing) comprised of 22 investments23 loans in 10nine states with an aggregate net principal balance of $335.1$528.2 million, a weighted average coupon rate of 9.1%, a weighted average loan-to-value ratio of 81.4%12.7% and a weighted average remaining term to maturity of 2.10.7 years.


Each of our loans was originated by Terra Capital Partners or its affiliates. Our portfolio is diversified geographically withbased on location of the underlying properties, located in 22 markets across 10 states and by loan structure and property type. TheAs of June 30, 2023, our portfolio included underlying properties located in 23 markets, across nine states and includes diverse property types such as multifamily housing, condominiums, hotels, student housing, commercial offices, medical offices, mixed-use and mixed-useindustrial properties. The profile of these properties ranges from stabilized and value-added properties to pre-development and construction. Our loans are structured across mezzanine debt, first mortgages, and preferred equity investments.investments and credit facilities.


48

We were incorporated under the general corporation laws of the State of Maryland General Corporation Law on December 31, 2015. Through December 31, 2015, our business was conducted through a series of predecessor private partnerships. At the beginning of 2016, we completed the merger of these private partnerships into a single entity as part of our plan to reorganize our business as a REIT for federal income tax purposes (the “REIT formation transaction”).purposes. Following the REIT formation transaction, Terra Fund 5 contributed the consolidated portfolio of net assets of certain Terra Secured Income Fund, LLC, Terra Secured Income Fund 2, LLC, Terra Secured Income Fund 3, LLC, Terra Secured Income Fund 4, LLC and Terra Fund 5Funds to usour company in exchange for all of the shares of our common stock of our company.

38




stock. On March 1,2, 2020, Terra Property Trust 2, Inc. (“Terra Property Trust 2”) merged with and into us and we continued as the surviving corporation (the “Merger”). In connection with the Merger,engaged in a series of transactions pursuant to which we issued 2,116,785.76an aggregate of 4,574,470.35 shares of our common stock to Terra Fund 7, the sole stockholder of Terra Property Trust 2, in exchange for the settlement of $17.7an aggregate of $49.8 million of participation interests in loans held by us, cash of $16.9$25.5 million and other working capital. In addition, on March 2, 2020, we issued 2,457,684.59 sharesFollowing the consummation of the BDC Merger (as defined below) and as of June 30, 2023, former Terra BDC stockholders owned approximately 19.9% of our common stock to TIF3 REIT in exchange for the settlement of $32.1 million of participation interests in loans also held by us, $8.6 million in cash and other net working capital (“Issuance of Common Stock To TIF3 REIT”). The shares of common stock were issued in private placements 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. We consummated these transactions with the objective of increasing the size and scale of our loan portfolio, further strengthening our balance sheet and positioning us for future growth. Following the completion of these transactions, as of March 31, 2020,equity, Terra JV held 86.5%70.0% of the issued and outstanding shares of our common stock with the remainder of 10.1% held by TIF3 REIT,Terra Offshore REIT; and Terra Fund 5 and TIF7Terra Fund 7 owned an 87.6% and 12.4% interest, respectively, in Terra JV.

We have elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2016. So long as we qualify as a REIT, we generally are not subject to U.S. federal income tax on our net taxable income to the extent that we annually distribute all of our net taxable income to our stockholders.

Recent Developments

BDC Merger
During
On October 1, 2022 (the “Closing Date”), pursuant to that certain Agreement and Plan of Merger, dated as of May 2, 2022 (the "Merger Agreement"), Terra BDC merged with and into Terra LLC, our wholly owned subsidiary, with Terra LLC continuing as the first quartersurviving entity of 2020, there was a global outbreakthe merger (the "BDC Merger") and as our wholly owned subsidiary. The Certificate of a novel coronavirus, or COVID-19, which has spread to over 200 countriesMerger 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 emergenciesArticles of Merger with respect to COVID-19. The global impactthe BDC Merger were filed with the Secretary of State of the outbreak has been rapidly evolving,State of Delaware and as casesState Department of COVID-19 have continuedAssessments and Taxation of Maryland (the “SDAT”), respectively, with an effective time and date of 12:02 a.m., Eastern Time, on the Closing Date (the “Effective Time”).

At the Effective Time, except for any shares of Terra BDC Common Stock held by us or any of our wholly owned subsidiaries or Terra BDC, which shares were automatically retired and ceased to exist with no consideration paid therefor, each issued and outstanding share of Terra BDC Common Stock was automatically cancelled and retired and converted into the right to receive (i) 0.595 shares of our newly designated Class B Common Stock, par value $0.01 per share (“Class B Common Stock”) and (ii) cash, without interest, in lieu of any fractional shares of Class B Common Stock otherwise issuable in an amount, rounded to the nearest whole cent, determined by multiplying (x) the fraction of a share of Class B Common Stock to which such holder would otherwise be identified in additional countries, many countries have reactedentitled 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.(y) $14.38.

While we believe that compelling opportunities for us will emerge as a resultPursuant to the terms of the economic downtown caused by the COVID-19 pandemic, we aretransactions described in the early stagesMerger Agreement, approximately 4,847,910 shares of assessing its full impactClass B Common Stock were issued to former Terra BDC stockholders in connection with the BDC Merger, based on the commercial real estate market. While it has had a demonstrable effect on employment, the economy and the national psyche, the impactnumber of outstanding shares of Terra BDC Common Stock as of the pandemic on property values has yet to be fully realized. The reason is that property values areClosing Date. Following 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 new realitiesconsummation of the economy. BDC Merger, former Terra BDC stockholders owned approximately 19.9% of our common equity.


Portfolio Summary


Net Loan Portfolio

The following tables provide a summary of our net loan portfolio as of:
June 30, 2023
Fixed Rate
Floating
Rate (1)(2)(3)
Total Gross LoansObligations under Participation AgreementsTotal Net Loans
Number of loans5 18 23 1 23 
Principal balance$52,940,319 $488,915,124 $541,855,443 $13,678,820 $528,176,623 
Carrying value53,069,799 460,748,708 513,818,507 13,789,070 500,029,437 
Fair value52,504,064 464,990,667 517,494,731 13,789,071 503,705,660 
Weighted average coupon rate13.22 %12.77 %12.82 %17.14 %12.71 %
Weighted-average remaining term (years)1.470.590.691.190.68
49


December 31, 2022
Fixed Rate
Floating
Rate (1)(2)(3)
Total Gross LoansObligations under Participation AgreementsTotal Net Loans
Number of loans8 23 31 1 31 
Principal balance$90,990,183 $554,805,276 $645,795,459 $12,584,958 $633,210,501 
Carrying value92,274,998 534,215,769 626,490,767 12,680,594 613,810,173 
Fair value90,729,098 532,416,656 623,145,754 12,680,595 610,465,159 
Weighted average coupon rate13.82 %11.23 %11.59 %16.36 %11.50 %
Weighted-average remaining term (years)1.35 1.10 1.14 1.69 1.13 
_______________
(1)These loans pay a coupon rate of MarchLondon Interbank Offered Rate (“LIBOR”), Secured Overnight Financing Rate (“SOFR”), or forward-looking term rate SOFR (“Term SOFR”) plus a fixed spread. Coupon rates shown were determined using LIBOR of 5.22%, average SOFR of 5.07% and Term SOFR of 5.14% as of June 30, 2023, and LIBOR of 4.39%, average SOFR of 4.06% and Term SOFR of 4.36% as of December 31, 20202022.
(2)As of June 30, 2023 and December 31, 2019:2022, amount included $336.8 million and $413.1 million of senior mortgages used as collateral for $228.3 million and $261.0 million of borrowings under credit facilities, respectively.
(3)As of June 30, 2023 and December 31, 2022, 16 and 21 loans, respectively, are subject to a LIBOR, SOFR, or Term SOFR floor, as applicable.
 March 31, 2020
 Fixed Rate 
Floating
Rate (1)(2)(3)
 Total Gross Loans Obligations under Participation Agreements Total Net Loans
Number of loans8
 14
 22
 9
 22
Principal balance$81,751,847
 $320,935,591
 $402,687,438
 $67,624,467
 $335,062,971
Amortized cost82,483,887
 320,485,626
 402,969,513
 67,670,405
 335,299,108
Fair value82,249,333
 317,360,045
 399,609,378
 66,902,089
 332,707,289
Weighted average coupon rate12.76% 8.50% 9.36% 10.81% 9.07%
Weighted-average remaining term (years)1.76
 2.05
 1.99
 1.55
 2.08


39

Real Estate Ownership
    


 December 31, 2019
 Fixed Rate 
Floating
Rate (1)(2)(3)
 Total Gross Loans Obligations under Participation Agreements Total 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 0.99% and 1.76% as of March 31, 2020 and December 31, 2019.
(2)As of March 31, 2020 and December 31, 2019, amounts included $136.1 million and $114.8 million, respectively, of senior mortgages used as collateral for $92.5 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 March 31, 2020 and LIBOR plus a spread ranging from 2.25% to 2.50% as of December 31, 2019.
(3)As of both March 31, 2020 and December 31, 2019, twelve of these loans are subject to a LIBOR floor.

In addition to our net loan portfolio, as of March 31, 2020 and December 31, 2019,June 30, 2023, we own 4.9 acres of adjacent landowned eight industrial buildings acquired via deed in lieu of foreclosure2023 and a multi-tenant office building acquired viapursuant to a foreclosure; and as of December 31, 2022, we owned a multi-tenant office building acquired pursuant to a foreclosure. The land and buildingreal estate and related lease intangible assets and liabilities had a net carrying value of $65.4$159.3 million and $66.2$40.6 million as of March 31, 2020June 30, 2023 and December 31, 2019,2022, respectively. TheAs of June 30, 2023, the mortgage loanloans payable encumbering the industrial buildings and the multi-tenant office building had an outstanding principal amount of $44.5$100.2 million and $44.6 million as of MarchDecember 31, 20202022, the mortgage loans payable encumbering the multi-tenant office building had an outstanding principal amount of $29.3 million.

Equity Investments

Additionally, as of June 30, 2023 and December 31, 2019,2022, we owned 14.9% and 50.0%, respectively, of equity interest in a limited partnership that invests primarily in performing and non-performing mortgages, loans, mezzanines and other credit instruments supported by underlying commercial real estate assets. We also beneficially owned equity interests in three joint ventures that invest in real estate properties. In 2022, in connection with a mezzanine loan we originated, we entered into a residual profit sharing arrangement with the borrower. We accounted for this arrangement as an equity investment. In May 2023, we purchased the underlying assets and the $10.0 million mezzanine loan was settled in connection with the purchase. As of June 30, 2023 and December 31, 2022, these equity investments had total carrying value of $32.6 million and $62.5 million, respectively.

Book Value Per Share

We calculate our book value per share by dividing our net equity by the number of outstanding shares of our common stock, unless otherwise determined by our Board. Our book value per share of Class B Stock Common Stock as of June 30, 2023 and December 31, 2022 was $11.88 and $13.23, respectively.


Portfolio Investment Activity


Net Loan Portfolio

For the three months ended March 31, 2020June 30, 2023 and 2019,2022, we invested $9.3$7.5 million and $19.7$0.3 million in new and add-on loans, respectively,investments and had $10.0$6.4 million and $35.4$10.6 million of repayments, respectively, resulting in net repaymentsinvestments of $0.7$1.1 million and $15.7net repayment of investments of $10.9 million, respectively. Amounts are net of obligations under participation agreements,
50

secured borrowing, borrowings under the master repurchase agreement, the term loan, the repurchase agreements and proceeds from partial salethe revolving line of a loan.credit.

In addition,For the six months ended June 30, 2023 and 2022, we invested $33.2 million and $25.7 million in March 2020, we issued 4,574,470.35 shares of our common stock in exchange for the settlement of an aggregate of $49.8new and add-on investments and had $46.3 million and $11.9 million of repayments, resulting in net repayments of $13.1 million and net investments of $13.7 million, respectively. Amounts are net of obligations under participation interestsagreements, secured borrowing, borrowings under the master repurchase agreement, the term loan, the repurchase agreements and the revolving line of credit.

Real Estate Ownership

Additionally, in the first quarter of 2023, we purchased three industrial buildings in Texas for total capitalized costs of $48.8 million. In the second quarter of 2023, we purchased another five industrial buildings in Texas and the related mezzanine loan that was accounted for as an equity investment and five senior loans that we owned, cashwere accounted as loans held for investment were settled in connection with the acquisition. The five industrial buildings have total capitalized costs of $25.5 million and other working capital.$83.3 million. In connection with the Merger and Issuance of Common Stock to TIF3 REIT, the related participation obligations were settled.these acquisitions, we obtained mortgage financing totaling $72.6 million.


In January 2019, we 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.

Net Loan Portfolio Information


The tables below set forth the types of loans in our loan portfolio, as well as the property type and geographic location of the properties securing these loans, on a net loan basis, which represents our proportionate share of the loans, based on our economic ownership of these loans.loans as of:
June 30, 2023December 31, 2022
Loan StructurePrincipal BalanceCarrying
Value		% of TotalPrincipal BalanceCarrying
Value		% of Total
First mortgages$380,923,792 $385,177,670 77.0 %$456,408,889 $461,299,182 75.1 %
Preferred equity investments123,242,640 123,957,220 24.8 %121,231,434 122,132,177 19.9 %
Mezzanine loans24,010,191 24,023,343 4.8 %26,767,345 26,770,521 4.4 %
Credit facility— — — %28,802,833 29,080,183 4.7 %
Allowance for loan losses— (33,128,796)(6.6)%— (25,471,890)(4.1)%
Total$528,176,623 $500,029,437 100.0 %$633,210,501 $613,810,173 100.0 %

June 30, 2023December 31, 2022
Property TypePrincipal BalanceCarrying
Value		% of TotalPrincipal BalanceCarrying
Value		% of Total
Office$151,158,617 $151,538,052 30.2 %$171,611,750 $172,042,063 27.9 %
Multifamily103,427,397 104,222,850 20.8 %104,589,464 105,570,432 17.2 %
Industrial64,340,667 64,865,942 13.0 %147,796,164 148,891,742 24.3 %
Mixed-use62,746,351 63,257,099 12.7 %64,880,450 65,838,965 10.7 %
Infill land51,031,209 52,122,303 10.4 %48,860,291 49,565,437 8.1 %
Hotel - full/select service43,222,382 43,826,614 8.8 %43,222,382 43,758,804 7.1 %
Student housing31,000,000 31,768,579 6.4 %31,000,000 31,774,261 5.2 %
Infrastructure21,250,000 21,556,794 4.3 %21,250,000 21,840,359 3.6 %
Allowance for loan losses— (33,128,796)(6.6)%— (25,471,890)(4.1)%
Total$528,176,623 $500,029,437 100.0 %$633,210,501 $613,810,173 100.0 %

51
  March 31, 2020 December 31, 2019
Loan Structure Principal Balance Carrying
Value		 % of Total Principal Balance Carrying
Value		 % of Total
First mortgages $183,010,572
 $183,484,014
 54.7 % $160,984,996
 $160,948,585
 58.4%
Preferred equity investments 120,342,631
 120,792,169
 36.0 % 84,202,144
 84,485,061
 30.7%
Mezzanine loans 31,709,768
 32,167,919
 9.6 % 29,636,382
 29,992,795
 10.9%
Allowance for loan losses —
 (1,144,994) (0.3)% —
 —
 —%
Total $335,062,971
 $335,299,108
 100.0 % $274,823,522
 $275,426,441
 100.0%

40




June 30, 2023December 31, 2022
Geographic LocationPrincipal BalanceCarrying
Value		% of TotalPrincipal BalanceCarrying
Value		% of Total
United States
California$125,567,737 $126,944,398 25.3 %$151,668,387 $153,158,967 24.9 %
New York88,336,078 88,336,079 17.7 %91,845,479 91,877,084 14.9 %
New Jersey77,371,876 78,691,851 15.7 %62,228,622 62,958,482 10.3 %
Georgia75,205,257 75,840,968 15.2 %72,401,718 73,101,964 11.9 %
Washington52,969,210 53,070,927 10.6 %56,671,267 57,027,639 9.3 %
Utah49,250,000 50,399,536 10.1 %49,250,000 50,698,251 8.3 %
Arizona31,000,000 31,296,394 6.3 %31,000,000 31,276,468 5.1 %
North Carolina21,476,465 21,578,080 4.3 %43,520,028 44,041,162 7.2 %
Massachusetts7,000,000 7,000,000 1.4 %7,000,000 7,000,000 1.1 %
Texas— — — %67,625,000 68,142,046 11.1 %
Allowance for loan losses— (33,128,796)(6.6)%— (25,471,890)(4.1)%
Total$528,176,623 $500,029,437 100.0 %$633,210,501 $613,810,173 100.0 %
  March 31, 2020 December 31, 2019
Property Type Principal Balance Carrying
Value		 % of Total Principal Balance Carrying
Value		 % of Total
Office $118,299,787
 $118,461,624
 35.3 % $119,331,369
 $119,145,879
 43.3%
Student housing 67,775,455
 68,197,544
 20.4 % 26,470,740
 26,725,148
 9.7%
Multifamily 63,530,352
 64,014,983
 19.1 % 49,017,844
 49,331,885
 17.9%
Hotel 43,524,567
 43,657,531
 13.0 % 41,239,194
 41,327,772
 15.0%
Infill land 32,812,810
 32,972,810
 9.8 % 29,644,375
 29,756,375
 10.8%
Industrial 7,000,000
 7,000,000
 2.1 % 7,000,000
 7,000,000
 2.5%
Condominium 2,120,000
 2,139,610
 0.6 % 2,120,000
 2,139,382
 0.8%
Allowance for loan losses —
 (1,144,994) (0.3)% —
 —
 —%
Total $335,062,971
 $335,299,108
 100.0 % $274,823,522
 $275,426,441
 100.0%
  March 31, 2020 December 31, 2019
Geographic Location Principal Balance Carrying
Value		 % of Total Principal Balance Carrying
Value		 % of Total
United States            
California $138,966,630
 $139,295,735
 41.5 % $102,774,905
 $102,622,718
 37.3%
Georgia 64,832,131
 65,075,669
 19.4 % 61,772,764
 61,957,443
 22.5%
New York 53,197,176
 53,306,217
 15.9 % 52,909,847
 53,029,923
 19.3%
North Carolina 28,317,034
 28,458,437
 8.5 % 28,283,950
 28,421,676
 10.3%
Washington 23,500,000
 23,666,693
 7.1 % 13,525,556
 13,618,636
 4.9%
Massachusetts 7,000,000
 7,000,000
 2.1 % 7,000,000
 7,000,000
 2.5%
Texas 3,500,000
 3,532,794
 1.0 % 2,450,000
 2,472,244
 0.9%
Illinois 3,337,398
 3,366,198
 1.0 % 2,209,189
 2,227,593
 0.8%
Other (1)
 12,412,602
 12,742,359
 3.8 % 3,897,311
 4,076,208
 1.5%
Allowance for loan losses —
 (1,144,994) (0.3)% —
 —
 —%
Total $335,062,971
 $335,299,108
 100.0 % $274,823,522
 $275,426,441
 100.0%
_______________
(1)Other includes $4.2 million and $0.3 million of unused portion of a credit facility, $5.2 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 March 31, 2020 and December 31, 2019, respectively.


Factors Impacting Operating Results


Our results of operations are affected by a number of factors and primarily depend on, among other things, the level of the interest income from targeted assets, the market value of our assets and the supply of, and demand for, real estate-related loans, including mezzanine loans, first mortgage loans, subordinated mortgage 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 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.


Credit Risk


Credit risk represents the potential loss that we would incur if our borrowers failed to perform pursuant to the terms of their obligations to us. With respect to our loan portfolio, we seek to manage credit risk by limiting exposure to any one individual borrower and any one asset class.


Additionally, our 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. Our Manager also requires certain borrowers to establish a cashan interest reserve, as a form of additional collateral, for the purpose of providing for future interest or property-related operating payments.

41


    



The performance and value of our loans depends 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, we may not recover all of itsour investments.


In addition, we are 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 our control. We seek to manage these risks through our Manager's 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 our borrowers’ ability to pay principal and interest due to us under our loan agreements.

We maintain all of our cash at financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation.


52

Concentration Risk


We hold real estate-related loans. Thus, our 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 our capital.


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 our 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 our investments, prepayments on real estate-related loans to slow,slow; and (v) to the extent we enter into interest rate swap agreements as part of our 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 ratesrates; (iv) to the extent applicable under the terms of our investments, prepayments on real estate-related loans to increase,increase; and (v) to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to decrease.


Prepayment Risk


Prepayments can either positively or adversely affect the yields on our 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 we do 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, we may acquire 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 we may fail to recoup fully our cost of acquisition of certain loans.


Extension Risk


Extension risk is the risk that our assets will be repaid at a slower rate than anticipated and generally increases when interest rates rise. In which case, to the extent we have financed the acquisition of an asset, we may have to finance our 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 our net interest spread, and thus our net interest income.


42




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; and retroactive changes to building or similar codes; pandemics; natural disastersdisasters; 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 us 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


We deploy moderate amounts of leverage as part of our operating strategy, which may consist of borrowings under first mortgage financings, warehouse facilities, term loans, 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.


Market Risk


Our loans are highly illiquid, and there is no assurance that we will achieve our investment objectives, including targeted returns. Due to the illiquidity of the loans, valuation of our 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. Our 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 us to make a payment to reduce the outstanding obligation to eliminate any margin deficit.


4353





Results of Operations
The following table presents the comparative results of our operations for the three months ended March 31, 2020 and 2019:operations:
Three Months Ended June 30,Six Months Ended June 30,
20232022Change20232022Change
Revenues
Interest income$15,878,453 $10,274,051 $5,604,402 $31,494,260 $19,156,202 $12,338,058 
Real estate operating revenue2,803,934 2,991,321(187,387)4,136,903 5,970,775 (1,833,872)
Prepayment fee income—1,174,760 (1,174,760)— 1,174,760 (1,174,760)
Other operating income100,068 247,981(147,913)153,463 498,646 (345,183)
18,782,455 14,688,113 4,094,342 35,784,626 26,800,383 8,984,243 
Operating expenses
Operating expenses reimbursed to
    Manager		2,120,029 2,140,635(20,606)4,297,033 4,069,198 227,835 
Asset management fee2,105,049 1,640,628464,421 4,102,476 3,128,723 973,753 
Asset servicing fee496,374 395,718100,656 966,899 745,047 221,852 
Provision for credit losses4,652,644 25,6334,627,011 3,802,593 75,929 3,726,664 
Real estate operating expenses1,864,212 1,247,328616,884 3,074,124 2,465,291 608,833 
Depreciation and amortization1,756,664 1,718,37338,291 2,438,477 3,436,745 (998,268)
Impairment charge11,765,540 — 11,765,540 11,765,540 1,604,989 10,160,551 
Professional fees787,427 1,011,354(223,927)1,767,322 1,753,872 13,450 
Directors’ fees83,750 36,24747,503 180,214 72,499 107,715 
Other188,631 374,203(185,572)403,875 457,624 (53,749)
25,820,320 8,590,119 17,230,201 32,798,553 17,809,917 14,988,636 
Operating income(7,037,865)6,097,994 (13,135,859)2,986,073 8,990,466 (6,004,393)
Other income and expenses—
Interest expense from obligations
   under participation agreements		(576,915)(1,238,655)661,740 (1,109,061)(2,313,764)1,204,703 
Interest expense on repurchase
    agreements payable		(2,946,797)(1,665,283)(1,281,514)(6,003,303)(2,421,109)(3,582,194)
Interest expense on mortgage loans
    payable		(1,640,972)(520,829)(1,120,143)(2,387,100)(1,039,446)(1,347,654)
Interest expense on revolving line
    of credit		(2,540,047)(700,737)(1,839,310)(4,505,581)(1,225,031)(3,280,550)
Interest expense on term loan
   payable		(355,468)— (355,468)(707,031)(164,969)(542,062)
Interest expense on unsecured
   notes payable		(2,405,267)(1,432,877)(972,390)(4,799,573)(2,863,060)(1,936,513)
Interest expense on secured
   borrowing		— (556,855)556,855 — (1,109,640)1,109,640 
Unrealized gains (losses) on
   investments, net		51,224 (34,950)86,174 57,808 (133,994)191,802 
Loss on sale of real estate— (51,984)51,984 — (51,984)51,984 
(Loss) income from equity
   investment in unconsolidated
   investments		(1,759,934)1,364,332 (3,124,266)(2,196,794)2,783,667 (4,980,461)
Realized (losses) gains on
   investments, net		(25,024)32,278 (57,302)(25,024)83,411 (108,435)
(12,199,200)(4,805,560)(7,393,640)(21,675,659)(8,455,919)(13,219,740)
Net (loss) income$(19,237,065)$1,292,434 $(20,529,499)$(18,689,586)$534,547 $(19,224,133)


54
  Three Months Ended March 31,
  2020 2019 Change
Revenues      
Interest income $9,651,865
 $10,208,964
 $(557,099)
Real estate operating revenue 2,313,051
 2,321,238
 (8,187)
Prepayment fee income —
 98,775
 (98,775)
Other operating income 112,655
 108,957
 3,698
  12,077,571
 12,737,934
 (660,363)
Operating expenses      
Operating expenses reimbursed to Manager 1,367,189
 1,115,204
 251,985
Asset management fee 1,029,533
 880,355
 149,178
Asset servicing fee 234,208
 204,477
 29,731
Provision for loan losses 1,144,994
 —
 1,144,994
Real estate operating expenses 944,518
 755,855
 188,663
Depreciation and amortization 946,494
 946,494
 —
Professional fees 294,761
 172,786
 121,975
Directors fees 83,750
 83,750
 —
Other 64,949
 17,584
 47,365
  6,110,396
 4,176,505
 1,933,891
Operating income 5,967,175
 8,561,429
 (2,594,254)
Other income and expenses      
Interest expense from obligations under participation agreements (2,600,758) (2,924,310) 323,552
Interest expense on repurchase agreement payable (1,551,270) (933,973) (617,297)
Interest expense on mortgage loan payable (750,636) (780,271) 29,635
Interest expense on revolving credit facility (174,989) —
 (174,989)
Net loss on extinguishment of obligations under participation
   agreements
 (319,453) —
 (319,453)
Realized gains on marketable securities 8,894
 —
 8,894
  (5,388,212) (4,638,554) (749,658)
Net income $578,963
 $3,922,875
 $(3,343,912)


Net Loan Portfolio


In assessing the performance of our loans, we believe it is appropriate to evaluate the loans on an economic basis, that is, gross loans net of obligations under participation agreements, term loan payable, revolving credit facility and repurchase agreement payable.


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The following tablestable presents a reconciliation of our loan portfolio on a weighted average basis from a gross basis to net basis for the three months ended March 31, 2020 and 2019:
Three Months Ended June 30, 2023Three Months Ended June 30, 2022
Weighted Average Principal Amount (1)
Weighted Average Coupon Rate (2)
Weighted Average Principal Amount (1)
Weighted Average Coupon Rate (2)
Total portfolio
Gross loans$606,761,243 12.4 %$557,341,571 8.4 %
Obligations under participation agreements
   and secured borrowing		(13,459,586)17.1 %(85,476,509)10.5 %
Repurchase agreement payable(147,054,763)7.0 %(186,274,094)3.5 %
Revolving line of credit(117,050,294)8.5 %(61,522,134)4.0 %
Net loans (3)
$329,196,600 16.0 %$224,068,834 13.0 %
Senior loans
Gross loans$481,108,382 11.8 %417,597,2207.2 %
Obligations under participation agreements
   and secured borrowing		— — %(37,883,729)8.1 %
Repurchase agreement payable(147,054,763)7.0 %(186,274,094)3.5 %
Revolving line of credit(117,050,294)8.5 %(61,522,134)4.0 %
Net loans (3)
$217,003,325 16.8 %$131,917,263 13.5 %
Subordinated loans (4)
Gross loans125,652,86114.3 %139,744,35112.3 %
Obligations under participation agreements(13,459,586)17.1 %(47,592,780)12.5 %
Net loans (3)
$112,193,275 14.0 %$92,151,571 12.2 %

Six Months Ended June 30, 2023Six Months Ended June 30, 2022
Weighted Average Principal Amount (1)
Weighted Average Coupon Rate (2)
Weighted Average Principal Amount (1)
Weighted Average Coupon Rate (2)
Total portfolio
Gross loans$620,485,639 12.3 %$531,915,282 8.4 %
Obligations under participation agreements
   and secured borrowing		(13,181,738)17.1 %(82,267,911)10.5 %
Repurchase agreement payable(157,207,602)7.0 %(144,128,510)3.5 %
Term loan payable— — %(20,836,327)5.3 %
Revolving line of credit(107,111,725)8.5 %(53,252,643)5.0 %
Net loans (3)
$342,984,574 15.7 %$231,429,891 11.8 %
Senior loans
Gross loans$489,904,811 11.7 %394,099,1257.1 %
Obligations under participation agreements
   and secured borrowing		— — %(37,026,717)8.1 %
Repurchase agreement payable(157,207,602)7.0 %(144,128,510)3.5 %
Term loan payable— — %(20,836,327)5.3 %
Revolving line of credit(107,111,725)8.5 %(53,252,643)5.0 %
Net loans (3)
$225,585,484 16.5 %$138,854,928 11.7 %
Subordinated loans (4)
Gross loans130,580,82814.3 %137,816,15712.3 %
Obligations under participation agreements(13,181,738)17.1 %(45,241,194)12.4 %
Net loans (3)
$117,399,090 14.0 %$92,574,963 12.3 %
55
  Three Months Ended March 31, 2020 Three Months Ended March 31, 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 $388,164,960
 9.5% $353,616,681
 11.5%
Obligations under participation agreements (88,056,951) 11.7% (97,506,192) 12.2%
Repurchase agreement payable (94,465,741) 4.0% (48,910,708) 4.9%
Net loans (3)
 $205,642,268
 11.1% $207,199,781
 12.7%
Senior loans        
Gross loans $189,925,027
 6.9% $111,125,457
 8.7%
Obligations under participation agreements (17,680,599) 10.6% (11,627,551) 12.3%
Repurchase agreement payable (94,465,741) 4.0% (48,910,708) 4.9%
Net loans (3)
 $77,778,687
 9.7% $50,587,198
 11.6%
Subordinated loans (4)
        
Gross loans $198,239,933
 12.0% $242,491,224
 12.6%
Obligations under participation agreements (70,376,352) 12.0% (85,878,641) 12.2%
Net loans (3)
 $127,863,581
 12.0% $156,612,583
 12.7%

_______________
(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.

(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.

Interest Income

For the three and six months ended March 31, 2020June 30, 2023 as compared to the same periodperiods in 2019, the decrease in weighted average coupon rate was2022, interest income increased by $5.6 million and $12.3 million, respectively, primarily due to a higher volume of loan originations with lower coupon rates.

Interest Income

For the three months ended March 31, 2020 as compared to the same period in 2019, interest income decreased by approximately $0.6 million, primarily due to a $0.5 million decreasean increase in contractual interest income as a result of a decrease in the weighted average interest rate on gross loans driven by new loan originations having lower coupon rates than those of the loans that were repaid, partially offset by an increase in the weighted average principal balance of gross loans drivendue to new loans we originated in 2022 and loans we acquired in connection with the BDC Merger, as well as an increase in the weighted average coupon rate due to increases in the underlying index rates.

Real Estate Operating Revenue

For the three and six months ended June 30, 2023 as compared to the same periods in 2022, real estate operating revenue decreased by higher volume$0.2 million and $1.8 million, respectively, as a result of new loan originations than repayments.a decrease in rental income and lease termination income recognized in 2022 (there was no such lease termination income recognized in 2022), all of which were attributable to a lease termination in 2022.


Prepayment Fee Income


Prepayment fee income represents prepayment fees charged to borrowers forFor the three and six months ended June 30, 2023, there was no early repayment of loans.

loans and we did not recognize any prepayment fee income. For both thethree and six months ended March 31, 2019,June 30, 2022, we receivedrecognized prepayment fee income of $0.1$1.2 million on the early repayment of a loan. There was no prepayment fee income fortwo loans.

Other Operating Income

For the three and six months ended March 31, 2020.June 30, 2023 as compared to the same periods in 2022, other operating income decreased by $0.1 million and $0.3 million, respectively, primarily as a result of a decrease in application fees income on deals under application.


Operating Expenses Reimbursed to Manager


Under the terms of thea management agreement (the “Management Agreement”) with theour Manager, we reimburse theour Manager for operating expenses incurred in connection with services provided to us, including our allocableallowable share of theour Manager’s overhead, such as rent, employee costs, utilities and technology costs.


For the three and six months ended March 31, 2020June 30, 2023 as compared to the same periodperiods in 2019,2022, operating expenses reimbursed to our Manager decreased by $0.02 million and increased by $0.3 million,$0.2 million. The increase in the six-month period was primarily as a result of an increase in the allocation ratio resulting from an increase in total assets under management primarily due to an increaseloans acquired in gross allocable costs, mostly related to compensation expense, as well as an increase in our allocation ratio in relation to affiliated funds managed by our Manager and its affiliates.connection with the BDC Merger.


45




Asset Management Fee


Under the terms of the management agreementManagement Agreement with theour Manager, we paid theour Manager a monthly asset management fee at an annual rate of 1% of the aggregate funds under management, which included the aggregate gross acquisition price, net of participation interest sold to affiliates, for each real estate-related investment and cash held by us.


For the three and six months ended March 31, 2020June 30, 2023 as compared to the same periodperiods in 2019,2022, asset management feefees increased by $0.1$0.5 million and $1.0 million, respectively, primarily due to an increase in total fundsassets under management.management primarily resulting from loans acquired in connection with the BDC Merger.


56

Asset Servicing Fee

    Under the terms of the Management Agreement with our Manager, we paid our Manager a monthly servicing fee at an annual rate of 0.25% of the aggregate gross origination price or acquisition price for each real estate-related loan held by us.

    For the three and six months ended June 30, 2023 as compared to the same periods in 2022, asset servicing fees increased by $0.1 million and $0.2 million, respectively, primarily due to an increase in total assets under management primarily resulting from loans acquired in connection with the BDC Merger.

Provision for LoanCredit Losses


The Manager performs a quarterly evaluation for possible impairment    On January 1, 2023, we adopted the provisions of our portfolioAccounting Standards Update (“ASU”) 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of loans. We recordCredit Losses on Financial Instruments (“ASU 2016-13”), which requires entities to recognize credit losses on financial instruments based on an estimate of current expected credit losses. Prior to the adoption of ASU 2016-13, we recorded an allowance for loancredit losses equal to (i) 1.5% of the aggregate carrying amount of loans rated as a “4”, plus (ii) 5% of the aggregate carrying amount of loans rated as a “5”, plus (iii) impairedpast due loan reserves, if any.


As of March 31, 2020, we had    For the three loans with a loan risk rating of “4” and as a result,six months ended June 30, 2023, we recorded a provision for loancredit losses of $1.1$4.7 million forand $3.8 million, respectively, primarily due to a decline in the fair value of the collateral on a loan. For the three and six months ended March 31, 2020. There was noJune 30, 2022, we recorded provision for loancredit losses for the three months ended March 31, 2019 because we didn't have any loans with a loan risk rating of “4” or “5” as of March 31, 2019. For both the three months ended March 31, 2020$0.03 million and 2019, we did not record any specific allowance for loan losses.$0.1 million, respectively.


Real Estate Operating ExpensesDepreciation and Amortization

Real estate operating expenses represent expenses incurred by the multi-tenant office building and the land, which include repairs and maintenances, utilities, real estate taxes, management fees and other operating expenses incurred in connection with the operation of the office building and the maintenance of the land.


For the three months ended March 31, 2020June 30, 2023 as compared to the same period in 2019, real estate operating expenses2022, depreciation and amortization increased by $0.2$0.04 million primarily due to an increase in real estate taxes.

Professional Fees

For the three months ended March 31, 2020 as compared to the same period in 2019, professional fees increased by $0.1 million, primarily due additional professional fees incurred in connection with financial reporting compliance since becoming a public reporting entity in December 2019.

Interest Expense from Obligations under Participation Agreements

2022. For the threesix months ended March 31, 2020June 30, 2023 as compared to the same period in 2019,2022, depreciation and amortization decreased by $1.0 million, primarily due to a decrease in unamortized intangible assets as a result of a lease termination notice received in November 2021, at which time we accelerated the amortization of lease intangibles through November 2022, with no corresponding accelerated amortization recognized in six months ended June 30, 2023.

Impairment Charge

For both the three and six months ended June 30, 2023, we recognized an impairment charge of $11.8 million on the multi-tenant office building located in California in order to reduce the carrying value of the building to its estimated fair value. For the six months ended June 30, 2022, we recognized an impairment charge of $1.6 million, on 4.9 acres of the development land located in Pennsylvania 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. The development land was sold in the second quarter of 2022. There was no impairment charge recorded for the three months ended June 30, 2022.

Professional Fees

    For the three months ended June 30, 2023, as compared to the same period in 2022, professional fees decreased by $0.2 million, primarily due to higher legal costs incurred in 2022 in connection with the ground lease litigation. For the six months ended June 30, 2023 as compared to the same period in 2022, professional fees remained substantially the same.

Directors’ Fees

For the three and six months ended June 30, 2023 as compared to the same periods in 2022, directors’ fees increased by $0.05 million and $0.1 million, respectively, as a result of an increase in the size of our Board due to the BDC Merger.

Other

For the three and six months ended June 30, 2023 as compared to the same periods in 2022, other expense decreased by $0.2 million and $0.1 million, respectively, as a result of a fee paid to a third-party in connection with the sale of a parcel of land in June 2022.

57

Interest from Obligations under Participation Agreements

    For the three and six months ended June 30, 2023 as compared to the same periods in 2022, interest expense from obligations under participation agreements decreased by $0.3$0.7 million primarily due toand $1.2 million, respectively, as a result of a decrease in the weighted average outstanding principal balanceamount outstanding on obligations under participation agreements, as a resultprimarily due to the release of obligations under participation agreements with Terra BDC in connection with the Merger and Issuance of Common Stock to TIF3 REIT.BDC Merger.


Interest Expense on Repurchase AgreementAgreements Payable


On December 12, 2018,November 8, 2021, we entered into a master repurchase agreement that provides for advances of up to $150.0$195 million in the aggregate, which we expect to use to finance certain secured performing commercial real estate loans, including senior mortgage loans. Advances under theAdditionally, on February 18, 2022, we entered into another master repurchase agreement accrue interest at a per annum pricing rate equalthat provides for advances of up to $200 million, which we expect to use to finance the sumoriginations of (i)certain secured performing commercial real estate loans and the 30-day LIBOR and (ii) the applicable spread.acquisitions of certain secured non-performing commercial real estate loans.


For the three and six months ended March 31, 2020June 30, 2023, as compared to the same periodperiods in 2019,2022, interest expense on repurchase agreement payable increased by $0.6$1.3 million reflectingand $3.6 million, respectively, as a result of an increase in the weighted average principal amount outstanding underon repurchase agreements payable as well as an increase in the master repurchase agreement.weighted average coupon rate.


Interest Expense on Mortgage Loans Payable

For the three and six months ended June 30, 2023, as compared to the same periods in 2022, interest expense on mortgage loan payable increased by $1.1 million and $1.3 million, respectively, as a result of an increase in the weighted average principal amount outstanding on mortgage loan payable, primarily due to financing obtained in connection with an acquisitions of real estate in 2023, as well as in increase in the index rate on the existing mortgage loan payable.

Interest Expense on Revolving Line of Credit Facility


On June 20, 2019,March 12, 2021, we entered into a credit agreementBusiness Loan and Security Agreement (the “revolving line of credit”) to provide for revolving credit loans ofadvances up to $35.0the lesser of $75.0 million inor the aggregate,amount determined by the borrowing base, which is based on the eligible assets pledged to the lender. On January 4, 2022, we use solely for short term financing neededamended the revolving line of credit to bridgeincrease the timing of anticipated loans repayments and funding obligations.maximum amount available to $125.0 million.



46



For the three and six months ended March 31, 2020, we recordedJune 30, 2023, as compared to the same periods in 2022, interest expense on revolving line of credit facilityincreased by $1.8 million and $3.3 million, respectively, due to an increase in weighted average principal amount outstanding on the revolving line of $0.2credit as well as an increase in the index rate on the revolving line of credit.

Interest Expense on Term Loan Payable

On September 3, 2020, we entered into an indenture and credit agreement that provided for a floating rate loan of $103.0 million, $3.6 million of additional future advances, and up to $11.6 million of additional future discretionary advances, in connection with certain outstanding funding commitments under the mortgage assets owned by us and financed under the indenture and credit agreement. The loan bore interest at LIBOR plus 4.25% with a LIBOR floor of 1.0%. On February 18, 2022, we refinanced this loan with a new repurchase agreement. Additionally, in connection with the BDC Merger, we assumed a term loan of $25.0 million. ThereThe term loan bears interest at an annual rate of 5.625% and matures on July 1, 2023. In June 2023, the term loan was no credit facility agreementamended to extend the maturity date to March 31, 2024 and to increase the rate to a floating rate based on SOFR plus 7.375% with a SOFR floor of 5.0%. In connection with the amendment, we made a repayment of $10.0 million on the term loan. As of June 30, 2023, the term loan had an outstanding principal balance of $15.0 million.

For the three and six months ended June 30, 2023, as compared to the same periods in 2022, interest expense on term loan payable increased by $0.4 million and $0.5 million, respectively, as a result of interest expense recognized on the term loan that we acquired in connection with the BDC Merger on October 1, 2022, partially offset by the reversal of the previously accrued step-up interest of $0.4 million during the first quarter of 2022 in connection with the termination of the old term loan.

Interest Expense on Unsecured Notes Payable

In June 2021, we issued $85.1 million in aggregate principal amount of 6.00% notes due 2026. In connection with the BDC Merger, we assumed $38.4 million in aggregate principal amount of 7.00% notes due in 2026.

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For the three and six months ended March 31, 2019.June 30, 2023, as compared to the same periods in 2022, interest expense on unsecured notes payable increased by $1.0 million and $1.9 million, respectively, as a result of an increase in the weighted average principal amount outstanding due to the assumption of unsecured notes payable in connection with the BDC Merger.


Net LossInterest Expense on Extinguishment of Obligations under Participation AgreementsSecured Borrowing


In March 2020, aswe entered into a resultfinancing transaction where a third-party purchased an A-note position. However, the sale of the MergerA-note position did not qualify for sale accounting treatment and Issuancetherefore, the gross amount of Common Stock to TIF3 REIT,the loan remained in the consolidated balance sheets. The portion that was sold was reflected as secured borrowing in the consolidated balance sheets, and the associated interest was reflected as interest expense on secured borrowing in the consolidated statements of operations. The secured borrowing was repaid in August 2022.

For the three and six months ended June 30, 2023, there was no interest expense on secured borrowing as the secured borrowing was repaid in August 2022. For the three and six months ended June 30, 2022, interest expense on secured borrowing was $0.6 million and $1.1 million, respectively.

Loss on Sale of Real Estate

In June 2022, we settled an aggregatesold the 4.9acres of $49.8adjacent land located in Pennsylvania for net proceeds of $8.6 million, of participation interests in loans that we owned with affiliates and recognized a net loss on extinguishmentsale of obligations under participation agreements$0.1 million for three and six months ended June 30, 2022, excluding impairment charges of $0.3 million.$1.6 million recognized in March 2022 and $3.4 million recognized in December 2021.


Net(Loss) Income from Equity Investment in Unconsolidated Investments


In August 2020, we entered into a subscription agreement with RESOF, an affiliate managed by our Manager, whereby we committed to fund up to $50.0 million to purchase partnership interest in RESOF. RESOF’s primary investment objective is to generate attractive risk-adjusted returns by purchasing performing and non-performing mortgages, loans, mezzanines and other credit instruments supported by underlying commercial real estate assets. RESOF may also opportunistically originate high-yield mortgages or loans in real estate special situations including rescue financings, bridge loans, restructurings and bankruptcies (including debtor-in-possession loans). As of June 30, 2023 and 2022, we owned 14.9% and 27.9% of the equity interest in RESOF, respectively.

We also owned beneficial equity interests in three joint ventures that invest in real estate properties. In 2022, in connection with a mezzanine loan we originated, we entered into a residual profit sharing arrangement with the borrower. We accounted for this arrangement as an equity investment. In May 2023, the mezzanine loan that was accounted for as an equity investment and five senior loans that were held for investment were settled and exchanged for five industrial buildings.

For the three and six months ended March 31, 2020June 30, 2023, we recognized a loss from equity investment in unconsolidated investments of $1.8 million and $2.2 million, respectively, which consisted of equity loss from RESOF of $1.2 million and $0.9 million, respectively, and net equity loss from the joint ventures and the mezzanine loan of $0.6 million and $1.3 million, respectively. The equity loss from RESOF was a result of adjustments to equity income due to the dilution of our ownership interest in RESOF as new investors were admitted in 2022 and 2023. The equity loss from the joint ventures was result of depreciation and amortization and interest expense recognized by the joint ventures. For the three and six months ended June 30, 2022, we recognized income from equity investment in unconsolidated investments of $1.4 million and $2.8 million, which consisted of equity income from RESOF of $1.6 million and $2.9 million and equity loss from the joint ventures of $0.2 million and $0.1 million, respectively.

Net (Loss) Income

    For the three and six months ended June 30, 2023, net loss was $19.2 million and $18.7 million, respectively, compared to net income of $1.3 million and $0.5 million, respectively, for the same periodperiods in 2019, the resulting net income decreased by $3.3 million.2022.
    
Financial Condition, Liquidity and Capital Resources


Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, funding and maintaining our assets and operations, making distributions to our stockholders and other general business needs. We use significant cash to purchase our target assets, repay principal and interest on our borrowings, make distributions to our investors and fund our operations. Our primary sources of cash generally consist of payments of principal and interest we receive on our portfolio of investments, cash generated from our operating results and unused borrowing
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capacity under our financing sources. We deploy moderate amounts of leverage as part of our operating strategy and use a number of sources to finance our target assets, including our mastersenior notes, term loan, repurchase agreement and the revolving credit facility.line of credit. We may use other sources to finance our target assets, including bank financing and arranged financing facilities with domestic or international financing providers. In addition, we may divide the loans we originate into senior and junior tranches and dispose of the more senior tranches as an additional means of providing financing to our business.


We may also issue additional equity, equity-related and debt securities to fund our investment strategies. We may issue these securities to unaffiliated third parties or to vehicles advised by affiliates of Terra Capital Partners or third parties. As part of our capital raising transactions, we may grant to one or more of these vehicles certain control rights over our activities including rights to approve major decisions we take as part of our business. In order to qualify as a REIT, we must distribute to our stockholders, each calendar year, dividends equal to at least 90% of our REIT taxable income (including certain items of non-cash income), determined without regard to the deduction for dividends paid and excluding net capital gain. These distribution requirements limit our ability to retain earnings and thereby replenish or increase capital for our business.

Our obligations under participation agreements totaling $6.1 million will mature in the next twelve months.    We expect to use the proceeds from the repayment of the corresponding investments to repay the participation obligations. Additionally, we expect to fund approximately $84.8$35.4 million of the unfunded commitments to borrowers during the next twelve months. We expect to maintain sufficient cash on handliquidity to fund such commitments through matching these commitments with principal repayments on outstanding loans as well as from proceeds from the unused portionor draw downs on our credit facilities. Additionally, we had $27.6 million of borrowing facilities.

On December 12, 2018, we entered into a master repurchase agreement that provides for advances of up to $150 million in the aggregate, which we expect 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. As of March 31, 2020, the weighted average interest rate on borrowings outstanding under the master repurchase agreement was approximately 4.0%, calculated using the 30-day LIBOR of 0.99% as of March 31, 2020. As of March 31, 2020, the amount remaining available under the repurchase agreement was $57.5 million.

Under the master repurchase agreement, on the second anniversary of the closing date and on each anniversary thereafter, we are required to pay the buyer the difference, if positive, between $4.2 million and the interest paid during the immediately preceding 12-month period. We currently expect 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, we accrued approximately $0.1 million for the three months ended March 31, 2020 to make up for the difference between the actual interest paid and the $4.2 million.

The master repurchase agreement contains margin call provisionsmortgage loan payable 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

47



deficit. During the three months ended March 31, 2020, we 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, we entered into a credit agreement that provides for revolving credit loans of up to $35.0 million in the aggregate, which we expect to use solely 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 accruebear interest at an annual rate of prime rateTerm SOFR plus 1% or LIBOR plus 4%3.85% with a Term SOFR floor of 6%2.23%, that is collateralized by an office building. The mortgage loan payable matured on May 31, 2023. We have sought to convey our interest in the office building and ground lease in lieu of foreclosure. In connection with the BDC Merger, we assumed a $25.0 million term loan. This term loan bore interest at an annual rate of 5.625% and was to mature on July 1, 2023. In June 2023, the term loan was amended to extend the maturity date to March 31, 2024 and to increase the rate to a floating rate based on SOFR plus 7.375% with a SOFR floor of 5.0%. TheAs of June 30, 2023, the term loan had an outstanding principal balance of $15.0 million. We expect to either maintain sufficient liquidity to repay the facility or refinance the facility. Our line of credit facilitywith outstanding principal balance of $105.4 million matures on March 12, 2024 and our GS repurchase agreement with outstanding principal balance of $85.4 million matures on February 18, 2024 (see Summary of Financing below). We expect to extend the maturity of both facilities by another year.

Summary of Financing

The table below summarizes our debt financing as of June 20, 2020. As of March 31, 2020, the revolving credit facility was fully utilized.30, 2023:


Type of FinancingMaximum Amount AvailableOutstanding BalanceAmount Remaining AvailableInterest RateMaturity Date
Fixed Rate:
Senior unsecured notesN/A$85,125,000 N/A6.00%6/30/2026
Senior unsecured notesN/A38,375,000 N/A7.00%3/31/2026
Mortgage loan payableN/A40,250,000 N/A6.254%6/6/2028
$163,750,000 
Variable Rate:
Mortgage loan payableN/A$27,603,118 N/ATerm SOFR plus 3.85% with a Term SOFR floor of 2.23%5/31/2023
Mortgage loan payableN/A32,368,367 N/ATerm SOFR +3.5% (Term SOFR
Floor of 3.75%)		4/9/2027
Term loanN/A15,000,000 N/ASOFR plus 7.375% with a
SOFR floor of 5.0%		3/31/2024
Line of credit$125,000,000 105,448,019 $19,551,981 Term SOFR plus 3.35% with a combined floor of 6.00%3/12/2024
UBS repurchase agreement195,000,000 37,450,000 157,550,000 Term SOFR plus a spread ranging from 1.60% to 2.25%11/7/2024
GS repurchase agreement200,000,000 85,382,682 114,617,318 Term SOFR (subject to underlying loan floors on a case-by-case basis) plus a spread ranging from 1.75% to 3.00%2/18/2024
$520,000,000 $303,252,186 $291,719,299 

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Cash Flows fromProvided by Operating Activities


For the threesix months ended March 31, 2020June 30, 2023, as compared to the same period in 2019,2022, cash flows fromprovided by operating activities decreasedincreased by $0.8$8.6 million, primarily due to a decreasean increase in net contractual interest income.


Cash Flows usedUsed in Investing Activities


For the threesix months ended March 31, 2020,June 30, 2023, cash flows used in investing activities were $28.3$6.8 million, primarily related to origination and purchase of loans of $38.4$63.8 million, purchase of real estate properties of $52.3 million, and the purchase of marketabledebt securities of $3.4$21.1 million, partially offset by proceeds from repayments of loans of $13.4$99.0 million, proceeds from sale of debt securities of $20.0 million and return of capital on unconsolidated investments of $10.7 million.


For the threesix months ended March 31, 2019,June 30, 2022, cash flows used in investing activities were $10.7$74.4 million, primarily related to origination and purchase of loans of $70.8$120.4 million and purchase of equity interests in unconsolidated investments of $20.9 million, partially offset by proceeds from repayments of loans of $60.3$56.6 million, proceeds from sale of real estate of $8.6 million

and proceeds from sale of marketable securities of $1.3 million.

Cash Flows fromProvided by Financing Activities


For the threesix months ended March 31, 2020,June 30, 2023, cash flows provided by financing activities were $16.4 million, primarily due to proceeds from mortgage loan payable of $72.6 million, and borrowings under the revolving line of credit of $57.0 million, partially offset by repayments of borrowings under repurchase agreements of $49.3 million, repayments of borrowings under revolving line of credit of $41.7 million, repayments of borrowings under the term loan of $10.0 million, and distributions paid of $9.3 million.

For the six months ended June 30, 2022, cash flows from financing activities were $74.9$60.7 million, primarily due to proceeds from borrowings under revolving credit facilitythe repurchase agreements of $35.0 million, proceeds from borrowings under our repurchase agreement of $14.8 million, cash acquired from Terra Property Trust 2 of $16.9 million, cash contributed by TIF3 REIT of $8.6$148.1 million and proceeds from obligations under participation agreements and secured borrowing of $14.3 million,$20.2 million. These cash inflows were partially offset by distributions paid of $8.8 million, repayment ofrepayments on borrowings under repurchase agreementthe term loan of $3.4$93.8 million, and a decrease in interest reserve and other deposits hold on investmentsrepayments of $2.3 million.

For the three months ended March 31, 2019, cash flows from financing activities were $16.1 million, primarily due to proceeds from borrowings under repurchase agreement of $45.3 million, proceeds from obligations under participation agreements of $5.7$15.0 million partially offset by repayments on obligations under participation agreements of $24.9 million,and distributions paid of $7.6$7.7 million. Additionally, for the six months ended June 30, 2022, we received proceeds from borrowings under the revolving line of credit of $41.2 million and made repayments on borrowings under the revolving line of credit of $30.9 million.

Distribution Reinvestment Plan

On January 20, 2023, our Board adopted a decreasedistribution reinvestment plan (the “Plan”), pursuant to which our stockholders may elect to reinvest cash distributions payable by us in interest reserveadditional shares of Class A Common Stock and other deposits hold on investments of $2.3 million.Class B Common Stock, at the price per share determined pursuant to the Plan.


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
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Current Expected Credit Losses Reserve

On January 1, 2023, we adopted the provisions of ASU 2016-13, which requires entities to recognize credit losses on financial instruments based on an estimate of current expected credit losses (“CECL”). The CECL model requires the consideration of possible credit losses over the life of an instrument as opposed to only estimating credit losses upon the occurrence of a discrete loss event under the previous “incurred loss” methodology.

We utilize information obtained from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts about the future to determine the expected credit losses for Loan Losses

Our loans are typically collateralizedits loan portfolio. We utilize a loan loss model that is widely used among banks and commercial mortgage REITs and is marketed by eithera leading commercial mortgage-based security data analytics provider. It employs logistic regression to forecast expected losses at the sponsors’ equity interest in theloan level based on a commercial real estate properties or the underlying real estate properties. As a result, we regularly evaluate the extentloan securitization database that contains activity dating back to 1998. We provide specific loan-level inputs which include loan-to-value 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. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether

48



cash from operations and/or reserve balances are sufficient to cover the debt service requirements currently and into the future; (ii) the ability of the borrower to refinance the loan; and/or (iii) the property’s liquidation value. We also evaluate the financial wherewithal of the sponsor as well as its competency in managing and operating the real estate property. In addition, we consider the overall economic environment, real estate sector, and geographic submarket in which the borrower operates. Such analyses are completed and reviewed by asset management and finance personnel, who utilize various data sources, including (i) periodic financial data such as debt service coverage ratio metrics, as well as principal balances, property occupancy, tenant profile, rental rates, operating expenses,type, location, coupon rate, coupon rate type, original or remaining term, expected repayment dates and contractual future funding commitments. We select from a group of independent five-year macroeconomic forecasts included in the borrower’s exit plan,model that are updated regularly based on current economic trends. Based on the capitalizationinputs, the loan loss model determines a loan loss rate through the generation of probability of defaults (PD) and discount rates; (ii) site inspections; and (iii) current credit spreads and discussions with market participants.

Our Manager performs a quarterly evaluationloss given defaults (LGD) for possible impairment of our portfolio of loans. Aeach loan. The CECL reserve is then calculated by applying the loan is impaired if it is deemed probable that we will not be able to collect all amounts due accordingloss rate to the contractual terms of the loan. Impairment is measured based on the present value of expected future cash flows or the fair value of the collateral, if thetotal outstanding loan is collateral dependent. Upon measurement of impairment, we record an allowance to reduce the carrying value of the loan with a corresponding charge to net income.

In conjunction with the quarterly evaluation of loans not considered impaired, our Manager assesses the risk factorsbalance of each loanloan. These results require a significant amount of judgment applied in selecting inputs and assigns each loan a risk rating between 1 (very low risk) and 5 (highest risk), which is an average ofanalyzing the numerical ratings inresults produced by the following categories: (i) sponsor capability and financial conditions; (ii) loan and collateral performance relativemodels to underwriting; (iii) quality and stability of collateral cash flows and/or reserve balances; and (iv) loan to value. We record andetermine the allowance for loan losses equal to (i) 1.5% ofcredit losses. Changes in such estimates can significantly affect the aggregate carrying amount of loans rated as a “4”, plus (ii) 5% of the aggregate carrying amount of loans rated as a “5”, plus (iii) impaired loan reserves, if any.expected credit losses.


There may be circumstances where we modify a loan by granting the borrower a concession that we might not otherwise consider when a borrower is experiencing financial difficulty or is expected to experience financial difficulty in the foreseeable future. Such concessionary modifications are classified as troubled debt restructurings (“TDRs”), unless the modification solely results in a delay in a payment that is insignificant. Loans classified as TDRs are considered impaired loans for reporting and measurement purposes.

Income Taxes

We elected to be taxed as a REIT and to comply with the related provisions of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). Accordingly, we generally are not subject to U.S. federal income tax on income and gains distributed to our stockholders as long as certain asset, income and share ownership tests are met. To maintain our qualification as a REIT, we must annually distribute at least 90% of our net taxable income to our stockholders and meet certain other requirements. We may also be subject to certain state, local and franchise taxes. Under certain circumstances, U.S. federal income and excise taxes may be due on our undistributed taxable income. If we were to fail to meet these requirements, we would be subject to U.S. federal corporate income tax, which could have a material adverse impact on our results of operations and amounts available for distributions to our stockholders. We believe that all of the criteria to maintain our REIT qualification have been met for the applicable period, but there can be no assurance that these criteria will continue to be met in subsequent periods.

We did not have any uncertain tax positions that met the recognition or measurement criteria of ASC 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 months ended March 31, 2020 and 2019, we did not incur any interest or penalties.

Our inception-to-date tax return remains subject to examination and consequently, the taxability of the distributions and other tax positions taken by us may be subject to change. Distributions to stockholders generally will be taxable as ordinary income or may constitute a return of capital. We will furnish annually to each stockholder a statement setting forth distributions paid during the preceding year and their U.S. federal income tax treatment.


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Contractual Obligations

The following table provides a summary of our contractual obligations at March 31, 2020:
  Total 
Less than
1 year
 1-3 years 3-5 years More than 5 years
Obligations under participation
   agreements — principal (1)
 $67,624,467
 $6,100,000
 $61,524,467
 $—
 $—
Mortgage loan payable — principal (2)
 44,481,855
 44,481,855
 —
 —
 —
Repurchase agreement payable —
   principal (3)
 92,546,530
 92,546,530
 —
 —
 —
Revolving credit facility payable —
   principal (4)
 35,000,000
 35,000,000
 —
 —
 —
Interest on borrowings (5)
 16,097,781
 10,743,969
 5,353,812
 —
 —
Unfunded lending commitments (6)
 106,976,256
 84,773,975
 22,202,281
 —
 —
Ground lease commitment (7)
 84,141,938
 1,264,500
 2,529,000
 2,529,000
 77,819,438
  $446,868,827
 $274,910,829
 $91,609,560
 $2,529,000
 $77,819,438
___________________________
(1)In the normal course of business, we enter into participation agreements with related parties, and to a lesser extent, unrelated parties, whereby we transfer a portion of the loans to them. These loan participations do not qualify for sale treatment. As such, the loans remain on our 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. We have 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)We have 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 $0.2 million.
(3)We may extend the maturity date of the master repurchase agreement for a period of one year. Amount excludes unamortized deferred financing costs of $1.2 million.
(4)Our revolving credit facility matures on June 20, 2020. We have sufficient cash on hand to repay the amount outstanding under the revolving credit facility. Amount excludes unamortized deferred financing costs of $0.1 million.
(5)Interest was calculated using the applicable annual variable interest rate and balance outstanding at March 31, 2020. Amount represents interest expense through maturity plus exit fee as application.
(6)Certain of our loans provide for a commitment to fund the borrower at a future date. As of March 31, 2020, we had eight of such loans with total funding commitments of $308.3 million, of which $201.3 million had been funded.
(7)Represents rental obligation under the ground lease, inclusive of imputed interest, for our office building that it acquired through foreclosure.

Management Agreement with Terra REIT Advisors


We currently pay the following fees to Terra REIT Advisors pursuant to a management agreement:the Management Agreement:


Origination and Extension Fee. An origination fee in the amount of 1.0% of the amount used to originate, acquire, fund or structure real estate-related loans,investments, including any third-party expenses related to such loan. In the event that the term of any real estate-related loan is extended, our Manager also receives an origination 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.


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 us.


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 us (inclusive of closing costs and expenses).


Disposition Fee. A disposition fee in the amount of 1.0% of the gross sale price received by our company from the disposition of each loan, but not upon the maturity, prepayment, workout, modification or extension of a loan unless there is a corresponding

50



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 we take ownership of a property as a result of a workout or foreclosure of a loan, we 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 we receive 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, our Manager 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 our Manager with respect to its evaluation and pursuit of such transactions.


In addition to the fees described above, we reimburse our Manager for operating expenses incurred in connection with services provided to the operations of our company, including our allocable share of our Manager’s overhead, such as rent, employee costs, utilities, and technology costs.


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The following table presents a summary of fees paid and costs reimbursed to our Manager in connection with providing services to us:
Three Months Ended June 30,Six Months Ended June 30,
 Three Months Ended March 31,2023202220232022
 2020 2019
Origination and extension fee expense (1)
 $437,617
 $683,172
Origination and extension fee expense (1)(2)
Origination and extension fee expense (1)(2)
343,159 381,947$814,607 $1,068,312 
Asset management fee 1,029,533
 880,355
Asset management fee2,105,049 1,640,6284,102,476 3,128,723 
Asset servicing fee 234,208
 204,477
Asset servicing fee$496,374 $395,718 966,899 745,047 
Operating expenses reimbursed to Manager 1,367,189
 1,115,204
Operating expenses reimbursed to Manager2,120,029 2,140,6354,297,033 4,069,198 
Disposition fee (2)
 75,520
 469,933
Disposition fee (3)
Disposition fee (3)
917,750 479,5001,208,563 479,500 
Total $3,144,067
 $3,353,141
Total$5,982,361 $5,038,428 $11,389,578 $9,490,780 
_______________
(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 loan.
(2)Disposition fee is generally offset with exit fee income and included in interest income on the consolidated statements of operations.

(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 loan.
(2)Amount for the six months ended June 30, 2023 excluded $0.5 million of origination fee paid to the Manager in connection with the acquisition of the three industrial buildings in 2023. Amount for the six months ended June 30, 2022 excluded $0.2 million of origination fees paid to our Manager in connection with our equity investment in an unconsolidated investment. These origination fees were capitalized to the carrying value of the unconsolidated investment as a transaction cost.
(3)Disposition fee is generally offset with exit fee income and included in interest income on the consolidated statements of operations.

Cost Sharing and Reimbursement Agreement with Terra LLC

We have entered into a cost sharing and reimbursement agreement with Terra LLC, effective October 1, 2022 pursuant to which Terra LLC will be responsible for its allocable share of our expenses, including fees paid by us to our Manager based on relative assets under management. These fees are eliminated in consolidation and therefore have no impact on our consolidated financial statements.

Participation Agreements


We have further diversified our exposure to loans and borrowers by entering into participation agreements whereby we transferred a portion of certain of our loans on a pari passu basis to related parties, primarily other affiliated funds managed by our Manager or its affiliates, and to a lesser extent, unrelated parties.

In March 2020, we settled an aggregate We have also sold a portion of $49.8 million of participation interests in loans held by us with affiliates.a loan to a third party that did not qualify for sale accounting. In connection with the BDC Merger, and Issuance of Common Stock to TIF3 REIT, the relatedobligations under participation obligationsagreements with Terra BDC totaling $37.0 million were settled.effectively extinguished.


As of March 31, 2020,June 30, 2023, the principal balance of our participation obligations totaled $67.6obligation was $13.7 million, consisting of $43.7 million inwhich was a participation obligationsobligation to Terra Fund 6 and $23.9 million in participation obligations to third-parties.a third party.


Terra Fund 6 is managed by Terra Income Advisors, LLC, an affiliate of our Manager. If we enter into participation agreements in the future, we generally expect to enter into such agreements only at the time of origination of the investment. Our Manager may experience conflicts in allocating investments as a result of differing compensation arrangements of the Manager and its affiliates and Terra Fund 6.

The loans that are subject to participation agreements are held in our name, but each of the participant’s rights and obligations, including with respect to interest income and other income (e.g., exit fee, prepayment income) and related fees/expenses (e.g., disposition fees, asset management and asset servicing fees), are based upon their respective pro rata participation interest in such participated investments, as specified in the respective participation agreements. We do not have direct liability to a participant with respect to the underlying loan and the participants’ share of the investments is repayable only from the proceeds received from the related borrower/issuer of the investments and, therefore, the participants also are subject to credit risk (i.e., risk of default by the underlying borrower/issuer).


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Pursuant to the participation agreement with these entities, we receive and allocate the interest income and other related investment income to the participants based on their respective pro rata participation interest. The affiliated fund participants payparticipant pays related expenses also based on their respective pro rata participation interest (i.e., asset management and asset servicing fees, disposition fees) directly to our Manager, as per the terms of each respective affiliate’s management agreement.


Other than for U.S. federal income tax purposes, our loan participations do not qualify for sale treatment. As such, the investments remain on our combined 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
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interest related to the participation interest is recorded within “Interest expense from obligations under participation agreements” in the consolidated statements of operations.


For the three and six months ended March 31, 2020,June 30, 2023, the weighted average outstanding principal balance on obligations under participation agreements was approximately $88.1$13.5 million and $13.2 million, respectively, and for both periods, the weighted average interest rate was approximately 17.1% , compared to the weighted average outstanding principal balance on obligations under participation agreements and secured borrowing of approximately 85.5 million and $82.3 million, respectively, and the weighted average interest rate was approximately 11.7%10.5% and 10.5%, compared to weighted average outstanding principal balance of approximately $97.5 million, and weighted average interest rate of approximately 12.2% for the three months ended March 31, 2019.respectively. The secured borrowing was repaid in August 2022.


Additionally, we have entered into a participation agreement with Terra Fund 6 to purchase a 25% participation interest, or $4.3 million, in a $17.0 million mezzanine loan. As of March 31, 2020, the unfunded commitment was $0.3 million.

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.
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 March 31, 2020,June 30, 2023, we had 14two investments with an aggregate principal balance of $263.7$16.6 million, net of obligations under participation agreements, that provide for interest income at an annual rate of LIBOR plus a spread, 12one of which areis subject to a LIBOR floor. A decrease of 100 basis points in LIBOR would decrease our annual interest income, net of interest expense on participation agreements, by approximately $0.6$0.2 million, and an increase of 100 basis points in LIBOR would increase our annual interest income, net of interest expense on participation agreements, by approximately $0.8 million

$0.2 million. Additionally, we had $44.516 investments with an aggregate principal balance of $458.6 million that provide for interest income at an annual rate of SOFR or Term SOFR, plus a spread, 15 of which were subject to a SOFR or Term SOFR floor. A decrease of 100 basis points in SOFR or Term SOFR would decrease our annual interest income by $4.9 million, and an increase of 100 basis points in SOFR or Term SOFR would increase our annual interest income by $5.0 million.

    Additionally, as of June 30, 2023, we had $27.6 million of borrowings outstanding under a mortgage loan payable that bear interest at an annual rate of LIBORTerm SOFR plus 3.85% with a LIBOR floor of 2.23%,spread that is collateralized by an office building; and $92.5$32.4 million of borrowings outstanding under a repurchase agreementanother mortgage loan payable that bear interest an annual rate of Term SOFR plus a spread that is collateralized by three industrial buildings; a revolving line of credit with an outstanding balance of $105.4 million that bears interest at an annual rate of LIBORTerm SOFR plus a spread ranging from 2.00% to 2.50% with LIBOR floor ranging from no floor to 2.52% andthat is collateralized by $136.1$165.6 million of first mortgages.mortgages; a repurchase agreement with an outstanding balance of $37.5 million that bears interest at an annual rate of Term SOFR, as applicable, plus a spread that is collateralized by $51.1 million of first mortgages; another repurchase agreement with an outstanding balance of $85.4 million that bears interest at an annual rate of Term SOFR plus a spread that is collateralized by $120.1 million of first mortgages; and a $15.0 million of term loan that bears interest at an annual rate of SOFR plus a spread of 7.375% with a SOFR floor of 5.0%. A decrease of 100 basis points in LIBORTerm SOFR would decrease our total annual interest expense by approximately $0.2$2.9 million, and an increase of 100 basis points in LIBORTerm SOFR would increase our annual interest expense by approximately $0.4$3.0 million.


In July 2017, the U.K. Financial Conduct Authority, which regulates the LIBOR administrator, IBA, 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 continueswhich has subsequently been delayed to exist after 2021.June 30, 2023. 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”)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 our portfolio of LIBOR-indexed, floating-rate loans, or the cost of our borrowings. In addition, changes or reforms to

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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 our portfolio, or the cost of our borrowings. The potential effect ofIn the phase-out or replacement ofevent LIBOR is unavailable, our investment documents
64

provide for a substitute index, on our cost of capital and net investment income cannot yet be determined.a basis generally consistent with market practice, intended to put us in substantially the same economic position as LIBOR.


We may hedge against interest 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 three and six months ended March 31, 2020June 30, 2023 and 2019,2022, we did not engage in interest rate hedging activities.


Prepayment Risks


Prepayments can either positively or adversely affect the yields on our 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 we do 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, we may acquire 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 we may fail to recoup fully our cost of acquisition of certain loans.


Extension Risk


Extension risk is the risk that our assets will be repaid at a slower rate than anticipated and generally increases when interest rates rise. In which case, to the extent we have financed the acquisition of an asset, we may have to finance our 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 our net interest spread, and thus our 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; and retroactive changes to building or similar codes; pandemics; natural disastersdisasters; 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 us 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.


Credit Risk


We are subject to varying degrees of credit risk in connection with holding a portfolio of our target assets. With respect to our loan portfolio, we seek to manage credit risk by limiting exposure to any one individual borrower and any one asset class.


Additionally, our 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. Our 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 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 our borrowers’ ability to pay principal and interest due to us under our loan agreements.


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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 our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2020.June 30, 2023. Based on that evaluation, our chief executive officer and chief financial officer 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 the Company to disclose material information otherwise required to be set forth in our periodic reports.
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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.

PART II –- OTHER INFORMATION

Item 1. Legal Proceedings.
Neither we nor our Manager is currently subject to any material legal proceedings, nor, to our knowledge, are material legal proceedings threatened against us or our Manager. From time to time, we and individuals employed by our Manager or its affiliates may be a party to certain legal proceedings in the ordinary course of business.business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. Additionally, as of June 30, 2023, we owned a multi-tenant office building that is subject to a ground lease. The ground lease provides for a new base rent every 5 years based on the greater of the annual base rent for the prior lease year or 9% of the fair market value of the land. The next rent reset on the ground lease is scheduled for November 1, 2025. We are currently litigating with the landlord with respect to the appropriate method for determining the fair value of the land for purposes of setting the ground rent – Terra Ocean Ave., LLC v. Ocean Avenue Santa Monica Realty LLC, Superior Court of California, Los Angeles County, Case No. 20STCV34217. We believe this determination should be based on comparable sales, while the landlord insists that the rent under the ground lease itself is also relevant. Our position has prevailed in all three of the prior arbitrations to reset the ground rent. We intend vigorously to pursue the litigation. While we believe our arguments will likely prevail, the outcome of thesethe legal proceedingsproceeding cannot be predicted with certainty,certainty. If the landlord prevails, the future rent reset determinations could result in significantly higher ground rent, which would likely result in a significant diminution in the value of our interest in the ground lease and the office building.

On July 7, 2023, Centennial Bank filed a complaint for breach of guaranty against us in the United States District Court, Southern District of New York (SDNY). The complaint relates to a loan made by Centennial Bank to Terra Ocean Ave., LLC (“Terra Ocean”), and alleges that Centennial Bank allegedly made a mistake in July 2021, in demanding a prepayment of $11.3 million instead of $28.5 million with respect to the loan, and that we, doas guarantor in certain limited respects, must now pay the difference (i.e. $17.2 million) plus interest and attorneys’ fees and costs. Centennial Bank’s now alleges that its mistake in determining the prepayment amount was caused by the wrongful failure to disclose the then-current status of the Lease Litigation by Terra Ocean and/or us. On July 24, 2023, we, through counsel appeared in the action. Although the action is in its initial stages, we are seeking a dismissal of the complaint at the pleading stage and, if not expectsuccessful, is prepared to vigorously defend itself through trial. We believe the claim by Centennial Bank is without merit.

Also on July 17, 2023, Centennial Bank filed a complaint against Terra Ocean for: (i) Breach of Contract; (ii) Judicial Foreclosure and Deficiency Judgment; and (iii) Specific Performance and Appointment of Receiver in the Superior Court of the State of California, County of Los Angeles. Centennial Bank seeks to foreclose on the deed of trust encumbering the tenant’s interest in the above-mentioned multi-tenant office building and ground lease. In the complaint, Centennial Bank alleges that these proceedings will have a material effect upon our financial condition or resultsits loan to Terra Ocean is in default and the outstanding principal amount of operations.the loan is $27.6 million as of the filing of the complaint. Prior to Centennial Bank filing its complaints against the Company and Terra Ocean, Terra Ocean sought to convey its interest in the ground lease in lieu of foreclosure. Terra Ocean is in the process of preparing an appropriate response to Centennial Bank’s claims in this action.


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 year ended December 31, 2019 other than the one below.2022.


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 us 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 our 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

54



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 ability, as well as that of our Manager, to operate, our level of business activity and the profitability of our business, as well as the values of, and the cash flows from, the assets we own 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 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 business from such events.
The effects of COVID-19 have adversely impacted the value of our assets, our business, financial condition and results of operations and cash flows. Some of the factors that impacted us to date and may continue to affect us include the following:
the decline in the value of commercial real estate, which negatively impacts the value of our loans, potentially materially;

to the extent the value of commercial real estate declines, which would also likely negatively impact the value of the loans we own, we could become subject to additional margin calls under our master repurchase agreement with Goldman Sachs Bank USA, and if we fail 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 us of our aggregate outstanding financing obligations and/or taking ownership of the loans or other assets securing the applicable obligations. We may not have the funds available to repay such financing obligations, and we 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 our financing obligations in order to pay outstanding financing obligations may be on terms less favorable to us than might otherwise be available in a regularly functioning market and could result in deficiency judgments and other claims against us;

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 our or our 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 our loans for impairments and establishing allowances for loan losses;

our ability to remain in compliance with the financial covenants under our borrowings, including in the event of impairments in the value of the loans we own;

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 our ability to make new investments or to redeploy the proceeds from repayments of our existing investments;

disruptions to the efficient function of our operations because of, among other factors, any inability to access short-term or long-term financing for the loans we make;

our need to sell assets, including at a loss;

reductions in loan origination activities;

inability of other third-party vendors we rely on to conduct our business to operate effectively and continue to support 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 our business; and


55



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-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.
Holders of our common stock may not receive distributions or may receive them on a delayed basis and distributions may not be declared or paid or distributions may decrease over time. Distributions may be paid in shares of common stock, cash or a combination of shares of common stock and cash. Changes in the amount and timing of distributions we pay or in the tax characterization of distributions we pay may adversely affect the fair value of our common stock or may result in holders of our common stock being taxed on distributions at a higher rate than initially expected.

Our distributions are driven by a variety of factors, including our minimum distribution requirements under the REIT tax laws and our REIT taxable income (including certain items of non-cash income) as calculated pursuant to the Internal Revenue Code. We are generally required to distribute to our stockholders at least 90% of our REIT taxable income, although our reported financial results for U.S. GAAP purposes may differ materially from our REIT taxable income.
For the year ended December 31, 2019, we paid $30.4 million of cash distributions on our common stock, representing cumulative distributions of $2.03 per share. For the three months ended March 31, 2020, our board of directors declared cumulative cash distribution of $0.53 per share that were paid monthly in the same period in which each was declared.
We continue to prudently evaluate our liquidity and review the rate of future distributions in light of our financial condition and the applicable minimum distribution requirements under applicable REIT tax laws and regulations. We 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 we determine 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, we 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 our payment of distributions would not only reduce the amount of distributions you would receive as a holder of our common stock, but could also have the effect of reducing the fair value of our common stock and our ability to raise capital in future securities offerings.
In addition, the rate at which holders of our common stock are taxed on distributions we pay and the characterization of our distribution - be it ordinary income, capital gains, or a return of capital - could have an impact on the fair value of our common stock. After we announce the expected characterization of distributions we have paid, the actual characterization (and, therefore, the rate at which holders of our common stock are taxed on the distributions they have received) could vary from our expectations, including due to errors, changes made in the course of preparing our corporate tax returns, or changes made in response to an audit by the Internal Revenue Service (the “IRS”"), with the result that holders of our common stock could incur greater income tax liabilities than expected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On March 1, 2020, Terra Property Trust 2 merged with and into us with us continuing as the surviving company. In connection with the merger, we issued 2,116,785.76 shares of our common stock to Terra Fund 7, the sole stockholder of Terra Property Trust 2, as consideration in the merger. In addition, on March 2, 2020, Terra International 3 REIT contributed cash and released the obligations under certain participation agreements to us in exchange for the issuance of 2,457,684.59 shares of our common stock. The shares of common stock were issued in private placements in reliance on Section 4(a)(2) under the Securities Act and the rules and regulations promulgated thereunder.None.
Item 3. Defaults Upon Senior Securities.
Not applicable.

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Item 4. Mine Safety Disclosures.

Not applicable.
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Item 5. Other Information.
None.None


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
Contribution Agreement by and among Terra Secured Income Fund, LLC, Terra Secured Income Fund 2, LLC, Terra Secured Income Fund 3, LLC, Terra Secured Income Fund 4, LLC, the registrant, and Terra Property Trust, Inc., dated January 1, 2016 (incorporated by reference to Exhibit 2.1 to the Registration Statement on Form 10 (File No. 000-56117) filed with the SEC on November 6, 2019).
2.2
Amendment No. 1 to the Contribution Agreement by and among Terra Secured Income Fund, LLC, Terra Secured Income Fund 2, LLC, Terra Secured Income Fund 3, LLC, Terra Secured Income Fund 4, LLC, the registrant, and Terra Property Trust, Inc., dated December 31, 2016 (incorporated by reference to Exhibit 2.2 to the Registration Statement on Form 10 (File No. 000-56117) filed with the SEC on November 6, 2019).
2.3
Agreement and Plan of Merger, dated February 28, 2020, by and among Terra Property Trust, Inc., Terra Property Trust 2, Inc. and Terra Secured Income Fund 7, LLC (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K (File No. 000-56117) filed with the SEC on March 5, 2020).
2.4
Agreement and Plan of Merger, dated as of May 2, 2022, by and among Terra Property Trust, Inc., Terra Income Fund 6, Inc., Terra Merger Sub, LLC, Terra Income Advisors, LLC and Terra REIT Advisors, LLC (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on May 5, 2022).
3.1
Amended and Restated Bylaws of Terra Property Trust, Inc. (incorporated by reference to Exhibit 3.1 to the Registration Statement on Amendment No.1 to Form 10 (File No. 000-56117) filed with the SEC on December 16, 2019).
3.13.2
Amended and Restated Bylaws of Terra Property Trust, Inc. (incorporated by reference to Exhibit 3.1 to the Registration Statement on Amendment No.1 to Form 10 (File No. 000-56117) filed with the SEC on December 16, 2019).
3.2
Articles of Amendment and Restatement of Terra Property Trust, Inc. (incorporated by reference to Exhibit 3.2 to the Registration Statement on Amendment No.1 to Form 10 (File No. 000-56117) filed with the SEC on December 16, 2019).
3.3
Articles of Supplementary of Terra Property Trust, Inc. Designating 12.5% Services A Redeemable Cumulative Preferred Stock (incorporated by reference to Exhibit 3.3 to the Registration Statement on Amendment No.1 to Form 10 (File No. 000-56117) filed with the SEC on December 16, 2019).
3.4
Articles of Amendment and Restatement of Terra Property Trust, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 001-40496) filed with the SEC on October 3, 2022).
10.14.1
AmendedIndenture, dated June 10, 2021, by and Restated Voting Agreementbetween Terra Property Trust, Inc. and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A (File No. 001-40496) filed with the SEC on June 14, 2021).
4.2
First Supplemental Indenture, dated June 10, 2021, by and between Terra Property Trust, Inc. and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form 8-A (File No. 001-40496) filed with the SEC on June 14, 2021).
4.3
Form of Global Note representing the notes (included in Exhibit 4.2).
4.4
Indenture, dated February 10, 2021, by and between Terra Income Fund 6, Inc. and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 of Terra Income Fund 6, Inc.'s Current Report on Form 8-K filed with the SEC on February 10, 2021).
4.5
First Supplemental Indenture, dated February 10, 2021, by and between Terra Income Fund 6, Inc. and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 of Terra Income Fund 6, Inc.’s Current Report on Form 8-K filed with the SEC on February 10, 2021).
4.6
Second Supplemental Indenture, dated October 1, 2022, by and among Terra Property Trust,Income Fund 6, Inc., Terra Secured Income Fund 5, LLC, Terra JV,Merger Sub, LLC and Terra REIT Advisors, LLC, dated March 2, 2020.
10.2
Stockholder Rights Agreement among Terra JV, LLC and Terra Property Trust, Inc., dated March 2, 2020.
10.3
Contribution AgreementU.S. Bank National Association, as trustee (incorporated by and among Terra Property Trust, Terra International Fund 3 REIT, LLC andreference to exhibit 4.4 of Terra Income Fund International, dated March 2, 2020.6, LLC’s Current Report on Form 8-K filed with the SEC on October 3, 2022).
10.44.7
ContributionDescription of Securities Registered Under Section 12 of the Securities Exchange Act of 1934 (incorporated by reference to Exhibit 4.1 of the Company’s Annual Report on Form 10-K filed on March 13, 2023).
10.1*
Waiver and Amendment No. 2 to Credit Agreement, by anddated June 30, 2023, among Terra Property Trust, Terra InternationalIncome Fund 3 REIT,6, LLC, Eagle Point Credit Management, LLC, and Terra Secured Income Fund 5 International, dated March 2, 2020.the Lenders party thereto.
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Exhibit No.Description and Method of Filing
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32**
32** 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
101.INS**Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH**101.SCHInline XBRL Taxonomy Extension Schema Document
101.CAL**101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**101.LABInline XBRL Taxonomy Extension Label Linkbase Document
101.PRE**101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF**104Cover Page Interactive Data File Included as Exhibit 101 (embedded within the Inline XBRL Taxonomy Extension Definition Linkbase Documentdocument)
* Filed herewith.
** Furnished herewith.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Date: May 15, 2020
August 11, 2023
TERRA PROPERTY TRUST, INC.
By:/s/ Vikram S. Uppal
Vikram S. Uppal
Chief Executive Officer
(Principal Executive Officer)
By:/s/ Gregory M. Pinkus
Gregory M. Pinkus
Chief Financial Officer and Chief Operating Officer,
(Principal Financial and Accounting Officer)



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