Terra Secured Income Fund 5 10-Q 2018 Q3 Quarterly report

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 September 30, 2018

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-55780

Terra Secured Income Fund 5, LLC

(Exact name of registrant as specified in its charter)

Delaware	90-0967526
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

805 Third Avenue, 8^th Floor

New York, New York 10022

(Address of principal executive offices)

(212) 753-5100

(Registrant’s telephone number, including area code)

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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See 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 filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company þ
	Emerging growth company þ

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. þ

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

As of November 9, 2018, the registrant had 6,643.4 units of limited liability company interests outstanding.

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Financial Condition as of September 30, 2018 (unaudited) and December 31, 2017	1
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)	2
	Consolidated Statements of Changes in Members’ Capital for the Nine Months Ended September 30, 2018 and 2017 (unaudited)	3
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 (unaudited)	4
	Consolidated Schedules of Investments as of September 30, 2018 (unaudited) and December 31, 2017	5
	Notes to Consolidated Financial Statements as of September 30, 2018 (unaudited)	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	32
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults upon Senior Securities	33
Item 4.	Mine Safety Disclosures	33
Item 5.	Other Information	33
Item 6.	Exhibits	33
Signatures		35

i

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Terra Secured Income Fund 5, LLC

Consolidated Statements of Financial Condition

	September 30, 2018		December 31, 2017
	(unaudited)
Assets
Equity investment in Terra Property Trust, Inc. at fair value — controlled (cost    of $268,335,112 and $275,401,972, respectively)	$	268,006,493	$	275,428,953
Cash and cash equivalents	130,899		212,366
Other assets	20,551		3,864
Total assets	$	268,157,943	$	275,645,183
Liabilities and Members’ Capital
Liabilities
Accounts payable and accrued expenses	$	165,048	$	95,728
Total liabilities	165,048		95,728
Commitments and contingencies (Note 6)
Members’ capital:
Managing member	—		—
Non-managing members	267,992,895		275,549,455
Total members’ capital	267,992,895		275,549,455
Total liabilities and members’ capital	$	268,157,943	$	275,645,183

See notes to consolidated financial statements (unaudited).

1

Terra Secured Income Fund 5, LLC

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2018			2017		2018			2017
Investment income — controlled
Dividend income	$	5,487,805		$	4,448,792	$	17,829,718		$	15,703,171
Investment income
Other operating income	137			111		1,140			1,064
Total investment income	5,487,942			4,448,903		17,830,858			15,704,235
Operating expenses
Professional fees	126,966			104,100		334,802			431,465
Other	2,891			3,448		10,832			35,761
Total operating expenses	129,857			107,548		345,634			467,226
Net investment income	5,358,085			4,341,355		17,485,224			15,237,009
Net change in unrealized (depreciation) appreciation on investment — controlled	(179,846		)	428,032		(355,600		)	920,026
Net increase in members’ capital resulting from operations	$	5,178,239		$	4,769,387	$	17,129,624		$	16,157,035

See notes to consolidated financial statements (unaudited).

2

Terra Secured Income Fund 5, LLC

Consolidated Statements of Changes in Members’ Capital (Unaudited)

Nine Months Ended September 30, 2018 and 2017

	Managing Member		Non-Managing Members			Total
Balance, January 1, 2018	$	—	$	275,549,455		$	275,549,455
Capital distributions	—		(22,497,394		)	(22,497,394		)
Capital redemptions	—		(2,188,790		)	(2,188,790		)
Increase in members’ capital resulting from operations:
Net investment income	—		17,485,224			17,485,224
Net change in unrealized depreciation on investment	—		(355,600		)	(355,600		)
Net increase in members’ capital resulting from operations	—		17,129,624			17,129,624
Balance, September 30, 2018	$	—	$	267,992,895		$	267,992,895

	Managing Member		Non-Managing Members			Total
Balance, January 1, 2017	$	—	$	289,586,404		$	289,586,404
Capital distributions	—		(23,127,464		)	(23,127,464		)
Capital redemptions	—		(5,303,174		)	(5,303,174		)
Increase in members’ capital resulting from operations:
Net investment income	—		15,237,009			15,237,009
Net change in unrealized appreciation on investment	—		920,026			920,026
Net increase in members’ capital resulting from operations	—		16,157,035			16,157,035
Balance, September 30, 2017	$	—	$	277,312,801		$	277,312,801

See notes to consolidated financial statements (unaudited).

3

Terra Secured Income Fund 5, LLC

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	2018			2017
Cash flows from operating activities:
Net increase in members’ capital resulting from operations	$	17,129,624		$	16,157,035
Adjustments to reconcile net increase in members’ capital resulting from    operations to net cash provided by operating activities:
Return of capital on investment	7,066,860			14,012,486
Net change in unrealized depreciation (appreciation) on investment	355,600			(920,026		)
Changes in operating assets and liabilities:
(Increase) decrease in other assets	(16,716		)	898
Increase (decrease) in accounts payable and accrued expenses	69,320			(251,702		)
Decrease in due to Terra Property Trust, Inc.	—			(463,249		)
Net cash provided by operating activities	24,604,688			28,535,442
Cash flows from financing activities:
Distributions paid	(22,497,365		)	(23,129,410		)
Payments for capital redemptions	(2,188,790		)	(5,279,768		)
Net cash used in financing activities	(24,686,155		)	(28,409,178		)
Net (decrease) increase in cash and cash equivalents	(81,467		)	126,264
Cash and cash equivalents at beginning of period	212,366			41,520
Cash and cash equivalents at end of period	$	130,899		$	167,784
Supplemental Disclosure of Cash Flows Information:
Cash paid for income taxes	$	—		$	—
Cash paid for interest	$	—		$	—

See notes to consolidated financial statements (unaudited).

4

Terra Secured Income Fund 5, LLC

Consolidated Schedules of Investments

September 30, 2018 (unaudited) and December 31, 2017

As of September 30, 2018 and December 31, 2017, the Company’s only investment is its equity interest in a wholly-owned subsidiary as presented below:

		Number of Shares of Common Stock	September 30, 2018						December 31, 2017
Investment — Controlled	Date Acquired		Cost		Fair Value		% of Members’ Capital		Cost		Fair Value		% of Members’ Capital
Terra Property Trust, Inc. — 100% Owned	1/1/2016 and 3/7/2016	14,912,990	$	268,335,112	$	268,006,493	100.0	%	$	275,401,972	$	275,428,953	100.0	%

The following table presents a schedule of loans held for investment by Terra Property Trust, Inc. (“Terra Property Trust”), the Company’s wholly-owned subsidiary, as of September 30, 2018:

Portfolio Company	Collateral Location	Property Type	Coupon Rate		Current Interest Rate		Exit Fee		Acquisition Date	Maturity Date	Principal Amount		Amortized Cost		Fair Value (1)		% (2)
Loans held for investment — non-controlled:
Mezzanine loans:
150 Blackstone River Road, LLC	US - MA	Industrial	8.5	%	8.5	%	—	%	9/21/2017	9/6/2027	$	7,000,000	$	7,000,000	$	6,799,810	2.5	%
140 Schermerhorn Street Mezz LLC (3)(5)(6)	US - NY	Hotel	12.0	%	12.0	%	1.0	%	11/16/2016	12/1/2019	15,000,000		15,130,200		15,174,078		5.7	%
221 W. 17th Street Owner, LLC (3)(4)(5)	US - NY	Condominium	12.8	%	12.8	%	1.0	%	1/19/2018	3/31/2019	4,700,000		4,744,073		4,745,028		1.8	%
2539 Morse, LLC (3)(4)(5)	US - CA	Student housing	11.0	%	11.0	%	1.0	%	10/20/2017	11/1/2020	4,666,666		4,703,686		4,708,032		1.8	%
37 Gables Member LLC (4)(5)	US - FL	Multifamily	13.0	%	13.0	%	1.0	%	6/16/2016	6/16/2019	5,750,000		5,802,382		5,806,875		2.2	%
575 CAD I LLC (3)(4)(5)	US - NY	Condominium	12.0% current 2.5% PIK		14.5	%	1.0	%	1/31/2017	7/31/2019	14,517,192		14,641,091		14,644,145		5.5	%
Austin H. I. Owner LLC (3)(5)	US - TX	Hotel	12.5	%	12.5	%	1.0	%	9/30/2015	10/6/2020	3,500,000		3,527,143		3,505,642		1.3	%
CGI 1100 Biscayne Management Holdco, LLC (5)(6)(7)	US - FL	Hotel	12.0% current 4.0% PIK		16.0	%	1.0	%	11/17/2017	5/17/2019	23,450,016		23,653,730		23,672,509		8.8	%
High Pointe Mezzanine Investments, LLC (4)(5)	US - SC	Student housing	13.0	%	13.0	%	1.0	%	12/27/2013	1/6/2024	3,000,000		3,337,345		3,059,075		1.1	%
Kingsport 925-Mezz LLC (4)(5)	US - TN	Multifamily	13.0	%	13.0	%	1.0	%	1/6/2014	12/5/2018	3,000,000		3,045,087		3,037,332		1.1	%
KOP Hotel XXXI Mezz LP (3)(5)(8)	US - PA	Hotel	13.0	%	13.0	%	0.5	%	11/24/2015	12/6/2022	1,800,000		1,805,201		1,809,101		0.7	%
LD Milipitas Mezz, LLC (8)(9)	US - CA	Hotel	LIBOR +10.25% (2.75% Floor)		13.0	%	1.0	%	6/27/2018	6/27/2021	—		—		—		—	%
Northland Museo Member, LLC (4)(5)	US - TX	Multifamily	12.0	%	12.0	%	—	%	11/22/2013	12/6/2018	4,000,000		3,995,372		4,000,000		1.5	%
SparQ Mezz Borrower, LLC	US - CA	Multifamily	12.0	%	12.0	%	1.0	%	9/29/2017	10/1/2020	7,620,000		7,679,794		7,687,489		2.9	%
Stonewall Station Mezz LLC (5)(6)	US - NC	Hotel	12.0% current 2.0% PIK		14.0	%	1.0	%	6/1/2018	5/20/2021	8,059,559		8,114,824		8,122,926		3.0	%
WWML96MEZZ, LLC	US - NY	Condominium	13.0	%	13.0	%	1.0	%	12/18/2015	12/31/2018	14,337,270		14,476,020		14,479,085		5.4	%
											120,400,703		121,655,948		121,251,127		45.3	%

5

Terra Secured Income Fund 5, LLC

Consolidated Schedule of Investments (Continued)

September 30, 2018 (unaudited) and December 31, 2017

Terra Property Trust Schedule of Loans Held for Investment as of September 30, 2018 (Continued):

Portfolio Company	Collateral Location	Property Type	Coupon Rate		Current Interest Rate		Exit Fee		Acquisition Date	Maturity Date	Principal Amount			Amortized Cost			Fair Value (1)			% (2)
Loans held for investment — non-controlled:
Preferred equity investments:
ASA Mgt. Holdings, LLC	US - AL	Multifamily	16.0	%	16.0	%	1.0	%	4/7/2012	8/1/2022	$	2,100,000		$	2,136,357		$	2,120,720		0.8	%
City Gardens 333 LLC (5)(6)(7)	US - CA	Student housing	LIBOR + 9.95% (2.0% Floor)		12.2	%	—	%	4/11/2018	4/1/2021	19,497,232			19,497,232			19,497,232			7.3	%
Greystone Gables Holdings Member LLC (4)(5)	US - FL	Multifamily	13.0	%	13.0	%	1.0	%	6/16/2016	6/16/2019	500,000			504,555			504,946			0.2	%
L.A. Warner Hotel Partners, LLC (3)(4)(5)(10)	US - CA	Hotel	12.0	%	12.0	%	1.0	%	7/25/2014	8/2/2019	32,100,000			32,541,303			32,417,778			12.1	%
NB Private Capital, LLC (5)(6)(7)	US - IL	Student housing	LIBOR +10.5% (3.5% Floor)		14.0	%	1.0	%	7/27/2018	7/27/2020	25,500,000			25,598,552			25,598,552			9.6	%
Nelson Brothers Professional Real Estate, LLC	US - OH	Student housing	14.0	%	14.0	%	1.0	%	7/27/2016	2/1/2019	4,575,000			4,620,750			4,620,215			1.7	%
Orange Grove Property Investors, LLC (5)(6)	US - CA	Condominium	LIBOR + 8.0% (4.0% Floor)		12.0	%	1.0	%	5/24/2018	6/1/2021	8,350,000			8,410,443			8,414,279			3.1	%
REEC Harlem Holdings Company, LLC	US - NY	Infill land	LIBOR + 12.5% (no Floor)		14.8	%	—	%	3/9/2018	3/9/2023	20,619,375			20,619,375			20,619,375			7.7	%
RS JZ Driggs, LLC (5)(6)	US - NY	Multifamily	12.3	%	12.3	%	1.0	%	5/1/2018	5/1/2020	2,384,501			2,404,103			2,404,103			0.9	%
SVA Mgt. Holdings, LLC	US - AL	Multifamily	16.0	%	16.0	%	1.0	%	4/7/2012	8/1/2022	1,600,000			1,629,622			1,615,786			0.6	%
The Bristol at Southport, LLC (3)(4)(5)(7)	US - WA	Multifamily	10.0% current 2.0% PIK		12.0	%	1.0	%	9/22/2017	9/22/2022	22,984,018			23,123,032			23,030,885			8.6	%
Windy Hill PV Seven CM, LLC	US - CA	Office	10.0% current 2.5% PIK		12.5	%	1.0	%	1/9/2018	1/9/2021	15,149,586			15,262,246			15,262,246			5.7	%
WWML96, LLC	US - NY	Condominium	13.0	%	13.0	%	1.0	%	12/18/2015	12/31/2018	1,549,420			1,564,414			1,564,746			0.6	%
											156,909,132			157,911,984			157,670,863			58.9	%
First mortgages:
Millennium Waterfront Associates, L.P.	US - PA	Infill land	12.0	%	12.0	%	1.0	%	7/2/2015	12/28/2018	14,325,000			14,468,250			14,466,812			5.4	%
OHM Atlanta Owner, LLC (5)(6)(7)	US - GA	Infill land	LIBOR + 9.0% (3.0% Floor)		12.0	%	1.0	%	6/20/2017	12/20/2018	27,500,000			27,775,000			27,772,240			10.4	%
TSG-Parcel 1, LLC (3)(5)(6)	US - CA	Infill land	LIBOR + 10.0% (2.0% Floor)		12.3	%	1.0	%	7/10/2015	12/31/2018	18,000,000			18,180,000			18,178,154			6.8	%
											59,825,000			60,423,250			60,417,206			22.6	%
Total gross loans held for investment											337,134,835			339,991,182			339,339,196			126.6	%
Obligations under participation agreements (3)(4)(5)(6)(7)											(99,800,355		)	(100,740,686		)	(100,562,730		)	(37.5	)%
Allowance for loan losses											—			(375,603		)	—			—	%
Net loans held for investment (11)											$	237,334,480		$	238,874,893		$	238,776,466		89.1	%

6

Terra Secured Income Fund 5, LLC

Consolidated Schedule of Investments (Continued)

September 30, 2018 (unaudited) and December 31, 2017

^{___________________________} 

(1) Because there is no readily available market for these loans, these loans were valued using significant unobservable inputs under Level 3 of the fair value hierarchy and were approved in good faith by Terra REIT Advisors, LLC (“Terra REIT Advisors”), Terra Property Trust’s manager, pursuant to Terra Property Trust’s valuation policy.

(2) Percentages are based on the fair value of the Company’s investment in Terra Property Trust of $268.0 million as of September 30, 2018.

(3) Terra Property Trust sold a portion of its interests in these loans via participation agreements to Terra Secured Income Fund 5 International, an affiliated fund advised by Terra REIT Advisors.

(4) Terra Property Trust sold a portion of its interests in these loans via participation agreements to Terra Income Fund International, an affiliated fund advised by Terra REIT Advisors.

(5) The loan participations from Terra Property Trust do not qualify for sale accounting under Accounting Standards Codification (“ASC”) Topic 860, Transfers and Servicing, and therefore, the gross amount of these loans remain in the consolidated statements of financial condition.

(6) Terra Property Trust sold a portion of its interest in this loan through a participation agreement to Terra Income Fund 6, Inc., an affiliated fund advised by Terra Income Advisors, LLC (“Terra Income Advisors”), an affiliate of our sponsor and Terra Property Trust’s manager.

(7) Terra Property Trust sold a portion of its interest in this loan through a participation agreement to Terra Property Trust 2, Inc., an affiliated fund managed by Terra REIT Advisors.

(8) Terra Property Trust purchased its interest in this loan from Terra Income Fund 6, Inc. through a participation agreement.

(9) On June 27, 2018, Terra Property Trust entered into a participation agreement with Terra Income Fund 6, Inc. to purchase a 25% interest, or $4.3 million, in a mezzanine loan. As of September 30, 2018, none of the commitment has been funded.

(10) This loan was repaid on October 17, 2018.

(11) In addition to its net loan portfolio, on July 30, 2018, Terra Property Trust foreclosed on a multi-tenant office building encumbering a $54.0 million first mortgage in exchange for the relief of the first mortgage and related fees and expenses. As of September 30, 2018, the office building had a carrying value of $56.8 million and the mortgage loan payable encumbering the office building was $44.8 million for a net carrying value of approximately $12.0 million.

7

Terra Secured Income Fund 5, LLC

Consolidated Schedule of Investments (Continued)

September 30, 2018 (unaudited) and December 31, 2017

The following table presents a schedule of loans held for investment held by Terra Property Trust as of December 31, 2017:

Collateral Location	Portfolio Company	Structure	Property Type	Coupon Rate		Acquisition Date	Maturity Date	Principal Amount		Amortized Cost		Fair Value (1)		% (2)
	Loans held for investment — non-controlled:
US - AL	ASA Mgt. Holdings, LLC	Preferred equity investment	Multifamily	16.0	%	4/7/2012	8/1/2022	$	2,100,000	$	2,139,967	$	2,120,720	0.8	%
	SVA Mgt. Holdings, LLC	Preferred equity investment	Multifamily	16.0	%	4/7/2012	8/1/2022	1,600,000		1,632,749		1,615,787		0.6	%
	Total US - AL							3,700,000		3,772,716		3,736,507		1.4	%
US - CA	2539 Morse, LLC	Mezzanine loan	Student    housing	11.0	%	10/20/2017	11/1/2020	2,333,333		2,350,365		2,352,364		0.9	%
	Palmer City-Core Stockton Street, LLC (3)	Preferred equity investment	Hotel	12.0	%	1/17/2014	1/17/2018	4,325,000		4,368,250		4,367,816		1.6	%
	Maguire Partners-1733 Ocean, LLC	First mortgage	Office	LIBOR+8.5%		3/7/2016	3/9/2018	53,749,794		54,277,021		54,282,803		19.7	%
	L.A. Warner Hotel Partners, LLC (4)(5)(6)	Preferred equity investment	Hotel	12.0	%	7/25/2014	8/4/2018	32,100,000		32,640,675		32,417,778		11.8	%
	TSG-Parcel 1, LLC (4)(6)(7)	First mortgage	Infill land	12.0	%	7/10/2015	4/10/2018	18,000,000		18,180,000		18,178,193		6.6	%
	SparQ Mezz Borrower, LLC (8)	Mezzanine loan	Multifamily	12.0	%	9/29/2017	10/1/2020	449,140		452,358		452,772		0.2	%
	Total US - CA							110,957,267		112,268,669		112,051,726		40.8	%
US - DE	BPG Office Partners III/IV LLC (4)(5)(6)	Mezzanine loan	Office	13.5	%	6/5/2015	6/5/2018	10,000,000		10,094,309		10,098,872		3.7	%
US - FL	CGI 1100 Biscayne Management    Holdco, LLC (6)(7)(9)	Mezzanine loan	Hotel	12.0% current 4.0% PIK		11/17/2017	5/17/2019	24,522,523		24,717,857		24,734,246		9.0	%
	37 Gables Member LLC (5)(6)	Mezzanine loan	Multifamily	13.0	%	6/16/2016	6/16/2019	5,750,000		5,797,477		5,804,127		2.1	%
	Greystone Gables Holdings Member    LLC (5)(6)	Preferred equity investment	Multifamily	13.0	%	6/16/2016	6/16/2019	500,000		504,129		504,707		0.2	%
	RS JZ 2700 NW2, LLC (4)(6)	First mortgage	Infill land	12.0	%	9/1/2016	3/1/2018	21,360,000		21,573,600		21,571,456		7.8	%
	Total US - FL							52,132,523		52,593,063		52,614,536		19.1	%
US - GA	YMP Georgia Portfolio Mezzanine, LLC	Mezzanine loan	Multifamily	14.0	%	12/19/2013	1/6/2019	3,500,000		3,663,309		3,535,027		1.3	%
	OHM Atlanta Owner, LLC (6)(7)(9)	First mortgage	Infill land	12.0	%	6/20/2017	6/20/2018	27,500,000		27,759,721		27,759,721		10.1	%
	Total US - GA							31,000,000		31,423,030		31,294,748		11.4	%
US - IN	Muncie Mezz, LLC	Mezzanine loan	Student housing	13.0	%	8/29/2013	9/6/2023	2,700,000		2,689,608		3,033,655		1.1	%
US - MA	150 Blackstone River Road, LLC	Mezzanine loan	Industrial	8.5	%	9/21/2017	9/6/2027	7,000,000		7,000,000		7,000,000		2.5	%
US - NC	Milestone Greensboro Holdings,    LLC (5)(6)	Mezzanine loan	Hotel	14.0	%	3/1/2013	3/1/2018	3,500,000		3,537,223		3,534,591		1.3	%

8

Terra Secured Income Fund 5, LLC

Consolidated Schedule of Investments (Continued)

September 30, 2018 (unaudited) and December 31, 2017

Terra Property Trust Schedule of Loans Held for Investment as of December 31, 2017 (Continued):

Collateral Location	Portfolio Company	Structure	Property Type	Coupon Rate		Acquisition Date	Maturity Date	Principal Amount			Amortized Cost			Fair Value (1)			% (2)
	Loans held for investment — non-controlled:
US - NY	Cape Church Mezz, LLC (5)(6)(10)	Mezzanine loan	Condominium	12.0	%	3/15/2016	7/15/2019	$	17,178,883		$	17,321,426		$	17,348,948		6.3	%
	140 Schermerhorn Street Mezz LLC (4)(6)(7)	Mezzanine loan	Hotel	12.0	%	11/16/2016	12/1/2019	15,000,000			15,118,900			15,131,264			5.5	%
	575 CAD I LLC	Mezzanine loan	Condominium	12.0% current 2.5% PIK		1/31/2017	8/1/2019	12,512,370			12,609,885			12,612,289			4.6	%
	WWML96MEZZ, LLC	Mezzanine loan	Condominium	13.0	%	12/18/2015	12/31/2018	9,925,340			10,012,399			10,023,515			3.6	%
	WWML96, LLC	Preferred equity investment	Condominium	13.0	%	12/18/2015	12/31/2018	1,486,171			1,499,206			1,500,871			0.5	%
	Total US - NY							56,102,764			56,561,816			56,616,887			20.5	%
US - OR	Pollin Hotels PDX Mezzanine, LLC (5)(6)	Mezzanine loan	Hotel	13.0	%	9/23/2013	10/6/2018	5,000,000			5,181,187			5,196,794			1.9	%
US - PA	Millennium Waterfront Associates, L.P.	First mortgage	Infill land	12.0	%	7/2/2015	12/28/2018	14,325,000			14,468,250			14,466,812			5.3	%
US - SC	High Pointe Mezzanine Investments,    LLC (5)(6)	Mezzanine loan	Student housing	13.0	%	12/27/2013	1/6/2024	3,000,000			3,381,980			3,416,021			1.2	%
US - TN	Kingsport 925-Mezz LLC (5)(6)	Mezzanine loan	Multifamily	13.0	%	1/6/2014	12/5/2018	3,000,000			3,115,146			3,099,690			1.1	%
US - TX	Northland Museo Member, LLC (5)(6)	Mezzanine loan	Multifamily	12.0	%	11/22/2013	12/6/2018	4,000,000			3,974,543			4,054,106			1.5	%
	Austin H. I. Owner LLC (4)(6)	Mezzanine loan	Hotel	12.5	%	9/30/2015	10/6/2020	3,500,000			3,524,694			3,527,956			1.3	%
	AHF-Heritage #1, LLC	Mezzanine loan	Multifamily	14.0	%	7/30/2012	8/11/2022	1,131,243			1,223,634			1,142,423			0.4	%
	Total US - TX							8,631,243			8,722,871			8,724,485			3.2	%
US - UT	NB Factory JV, LLC (6)(7)	Preferred equity    investment	Student    housing	15.0	%	6/29/2017	6/26/2020	3,595,670			3,595,670			3,595,670			1.2	%
US - WA	The Bristol at Southport, LLC (6)(9)	Preferred equity    investment	Multifamily	10.0% current 2.0% PIK		9/22/2017	9/22/2022	22,616,528			22,743,477			22,807,927			8.3	%
US - Various	Nelson Brothers Professional Real    Estate, LLC	Preferred equity    investment	Student    housing	14.0	%	8/31/2016	2/1/2019	14,000,000			14,140,000			14,138,248			5.1	%
	Total loans held for investment — non-controlled:							351,260,995			355,289,015			355,427,169			129.1	%
	Loan held for investment through participation interest — non-controlled (11):
US - PA	KOP Hotel XXXI Mezz LP (4)(6)	Participation in mezzanine loan	Hotel	13.0	%	11/24/2015	12/6/2022	1,800,000			1,804,715			1,807,503			0.7	%
	Total loan held for investment through participation interest — non-controlled							1,800,000			1,804,715			1,807,503			0.7	%
	Total gross loans held for investment							353,060,995			357,093,730			357,234,672			129.7	%
	Obligations under participation agreements (4)(5)(6)(7)(9)							(75,077,891		)	(76,053,279		)	(75,991,436		)	(27.6	)%
	Net loans held for investment							$	277,983,104		$	281,040,451		$	281,243,236		102.1	%

9

Terra Secured Income Fund 5, LLC

Consolidated Schedule of Investments (Continued)

September 30, 2018 (unaudited) and December 31, 2017

Terra Property Trust Schedule of Loans Held for Investment as of December 31, 2017 (Continued):

^{___________________________} 

(1) Because there is no readily available market for these loans, these loans were valued using significant unobservable inputs under Level 3 of the fair value hierarchy and were approved in good faith by Terra Income Advisors, Terra Property Trust’s manager, pursuant to Terra Property Trust’s valuation policy.

(2) Percentages are based on the fair value of the Company’s investment in Terra Property Trust of $275.4 million as of December 31, 2017.

(3) This loan was repaid on January 17, 2018.

(4) Terra Property Trust sold a portion of its interests in these loans via participation agreements to Terra Secured Income Fund 5 International, an affiliated fund advised by Terra Income Advisors.

(5) Terra Property Trust sold a portion of its interests in these loans via participation agreements to Terra Income Fund International, an affiliated fund advised by Terra Income Advisors.

(6) The loan participations from Terra Property Trust do not qualify for sale accounting under ASC Topic 860, Transfers and Servicing, and therefore, the gross amount of these loans remain in the consolidated statements of financial condition.

(7) Terra Property Trust sold a portion of its interest in this loan through a participation agreement to Terra Income Fund 6, Inc., an affiliated fund advised by Terra Income Advisors.

(8) On September 29, 2017, Terra Property Trust entered into agreement with the borrower to provide funding commitment of up to $8.7 million. As of December 31, 2017, $0.4 million has been funded.

(9) Terra Property Trust sold a portion of its interest in this loan through a participation agreement to Terra Property Trust 2, Inc., an affiliated fund managed by a subsidiary of Terra Income Advisors.

(10) This loan was repaid on January 26, 2018.

(11) Terra Property Trust purchased its interest in this loan from Terra Income Fund 6, Inc. through a participation agreement.

See notes to consolidated financial statements (unaudited).

10

Notes to Consolidated Financial Statements (unaudited)

Terra Secured Income Fund 5, LLC

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2018

Note 1. Business

Terra Secured Income Fund 5, LLC (and, together with its consolidated subsidiaries, the “Company”), is a specialized real estate finance company that originates, structures, funds and manages high yielding commercial real estate investments, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments throughout the United States. The Company’s investments finance the acquisition, construction, development or redevelopment of quality commercial real estate in the United States. The Company focuses on smaller, middle market loans in the approximately $3 million to $50 million range which are financing properties in primary and secondary markets because it believes these loans are subject to less competition, offer higher risk adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification. The Company was formed as a Delaware limited liability company on April 24, 2013 and commenced operations on August 8, 2013. The Company makes substantially all of its investments and conduct substantially all of its real estate lending business through Terra Property Trust, which has elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2016. The Company’s objectives are to (i) preserve its members’ capital contributions, (ii) realize income from its investments and (iii) make monthly distributions to its members from cash generated from investments. There can be no assurances that the Company will be successful in meeting its objectives.

In December 2015, the members approved the merger of Terra Secured Income Fund, LLC (“Terra Fund 1”), Terra Secured Income Fund 2, LLC (“Terra Fund 2”), Terra Secured Income Fund 3, LLC (“Terra Fund 3”) and Terra Secured Income Fund 4, LLC (“Terra Fund 4”) with and into subsidiaries of the Company (individually, each a “Terra Fund” and collectively, the “Terra Funds”) through a series of separate mergers effective January 1, 2016 (collectively, the “Merger”). Following the Merger, the Company contributed the consolidated portfolio of net assets of the five Terra Funds to Terra Property Trust, a newly-formed and wholly-owned subsidiary of the Company that elected to be taxed as a REIT, in exchange for the shares of common stock of Terra Property Trust. Upon completion of the Merger, the Company became the parent company of Terra Funds 1 through 4 and the direct and indirect sole common stockholder of, and began conducting substantially all of its real estate lending business through, Terra Property Trust. The Company does not consolidate Terra Property Trust as Terra Property Trust is not an investment company.

The Company’s investment activities were externally managed by Terra Income Advisors, a private investment firm affiliated with the Company until February 8, 2018 when Terra Capital Partners, LLC (“Terra Capital Partners”), the Company’s sponsor, caused a new subsidiary of Terra Capital Partners, Terra Fund Advisors, LLC (“Terra Fund Advisors”), to be admitted as the replacement manager of the Company. When used herein the term “Manager” refers to Terra Income Advisors for periods prior to February 8, 2018 and refers to Terra Fund Advisors beginning on such date. The Company does not currently have any employees and does not expect to have any employees. Services necessary for the Company’s business are provided by individuals who are employees of the Manager or its affiliates or by individuals who were contracted by the Company or by the Manager or its affiliates to work on behalf of the Company pursuant to the terms of the operating agreement, as amended.

The Company will continue in existence until December 31, 2023; however, the Company expects to be terminated or to consummate an alternative liquidity transaction on or prior to the five-year anniversary of the completion of the Company’s original offering, which was January 31, 2015, unless extended for up to a maximum of two one-year extensions at the discretion of the Manager, in order to facilitate an orderly liquidation or to consummate such alternative liquidity transaction.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

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

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the

11

Notes to Consolidated Financial Statements (unaudited)

date of the consolidated financial statements and the reported amounts of gains (losses), income and expenses during the reporting period. Actual results could significantly differ from those estimates. The most significant estimates inherent in the preparation of the Company’s consolidated financial statements is the valuation of investments (Note 3).

Equity Investment in Terra Property Trust

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

Revenue Recognition

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

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

Cash and Cash Equivalents

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

Income Taxes

No provision for U.S. federal and state income taxes has been made in the accompanying consolidated financial statements, as individual members are responsible for their proportionate share of the Company’s taxable income. The Company, however, may be liable for New York City Unincorporated Business Tax (the “NYC UBT”) and similar taxes of various other municipalities. New York City imposes the NYC UBT at a statutory rate of 4% on net income generated from ordinary business activities carried on in New York City. For the three and nine months ended September 30, 2018 and 2017, none of the Company’s income was subject to the NYC UBT.

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

The Company did not have any uncertain tax positions that met the recognition or measurement criteria of ASC 740-10-25, Income Taxes, nor did the Company have any unrecognized tax benefits as of the periods presented herein. The Company recognizes interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in its consolidated statements of operations. For the three and nine months ended September 30, 2018 and 2017, the Company did not incur any interest or penalties. Although the Company files federal and state tax returns, its primary tax jurisdiction is federal. The Company’s inception-to-date federal tax years remain subject to examination by the Internal Revenue Service.

Recent Accounting Pronouncement

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services. The Company adopted this standard on January 1, 2018 using the cumulative effect transition method. The adoption of ASU 2014-09 did not have any impact on its consolidated financial statements and disclosures.

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

12

Notes to Consolidated Financial Statements (unaudited)

of financial instruments. The Company adopted this standard on January 1, 2018. The adoption of ASU 2016-01 did not have any impact on its consolidated financial statements and disclosures.

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

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, a Consensus of the FASB’s Emerging Issues Task Force (“ASU 2016-15”). ASU 2016-15 provides guidance on how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017. The guidance requires application using a retrospective transition method. The Company adopted this standard on January 1, 2018. The adoption of ASU 2016-15 did not have any impact on its consolidated financial statements and disclosures.

In June 2018, the Securities and Exchange Commission (the “SEC”) adopted amendments that raise the thresholds in the smaller reporting company definition. Under the new definition, generally, a company qualifies as a “smaller reporting company” if: (i) it has public float of less than $250 million; or (ii) it has less than $100 million in annual revenues and no public float or public float of less than $700 million. These amendments did not have any impact on the Company.

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. Early adoption is permitted upon issuance of ASU 2018-13. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements and disclosures.

In August 2018, the SEC adopted a final rule that eliminates or amends disclosure requirements that have become duplicative, overlapping, or outdated in light of other SEC disclosure requirements, U.S. GAAP, or changes in the information environment (the “Final Rule”). The Final Rule is intended to simplify and update the disclosure of information to investors and reduce compliance burdens for companies, without significantly altering the total mix of information available to investors. Among other items, the Final Rule requires registrants to include in their interim financial statements a reconciliation of changes in net assets or stockholders’ equity in the notes or as a separate statement. The Final Rule is effective for all filings made on or after November 5, 2018; however, the SEC would not object if a filer’s first presentation of the changes in net assets or stockholders' equity was included in its Form 10-Q for the quarter that begins after the effective date of the Final Rule. The Company intends to adopt the Final Rule in the first quarter of 2019. The adoption of the Final Rule is not expected to have a material impact on the Company’s consolidated financial statements and disclosures.

Note 3. Investment and Fair Value

Equity Investment in Terra Property Trust

The Company invests substantially all of its equity capital in the purchase of common shares of Terra Property Trust.

13

Notes to Consolidated Financial Statements (unaudited)

The following table presents a summary of the Company’s investment at September 30, 2018 and December 31, 2017:

	September 30, 2018						December 31, 2017
Investment	Cost		Fair Value		% of Members’ Capital		Cost		Fair Value		% of Members’ Capital
14,912,990 common shares    of Terra Property Trust, Inc.	$	268,335,112	$	268,006,493	100.0	%	$	275,401,972	$	275,428,953	100.0	%

For the three months ended September 30, 2018 and 2017, the Company received approximately $8.1 million and $13.1 million of distributions from Terra Property Trust, respectively, of which $2.6 million and $8.7 million was a return of capital, respectively. For the nine months ended September 30, 2018 and 2017, the Company received approximately $24.9 million and $29.7 million of distributions from Terra Property Trust, respectively, of which $7.1 million and $14.0 million were returns of capital, respectively.

The following tables present the summarized financial information of Terra Property Trust:

	September 30, 2018			December 31, 2017
Carrying value of loans held for investment	$	339,615,579		$	357,093,730
Real estate owned, net	56,756,051			—
Other assets	41,064,173			51,899,445
Total assets	437,435,803			408,993,175
Mortgage loan payable and obligations under participation agreements	(145,573,187		)	(110,175,525		)
Accounts payable, accrued expenses and other liabilities	(23,431,489		)	(23,307,944		)
Total liabilities	(169,004,676		)	(133,483,469		)
Stockholder’s equity	$	268,431,127		$	275,509,706

	Three Months Ended September 30,						Nine Months Ended September 30, 2018
	2018			2017			2018			2017
Revenues	$	12,788,205		$	9,651,677		$	35,751,197		$	28,197,274
Expenses	(7,300,400		)	(4,598,716		)	(17,921,479		)	(12,379,894		)
Realized gain on investments	—			(604,169		)	—			(114,209		)
Net income	$	5,487,805		$	4,448,792		$	17,829,718		$	15,703,171

Fair Value Measurements

The Company adopted the provisions of ASC 820, Fair Value Measurement (“ASC 820”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 established a fair value hierarchy that prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment, the characteristics specific to the investment, and the state of the marketplace (including the existence and transparency of transactions between market participants). Investments with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Investments measured and reported at fair value are classified and disclosed into one of the following categories based on the inputs as follows:

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

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

14

Notes to Consolidated Financial Statements (unaudited)

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.

Assets and Liabilities Reported at Fair Value

The following table summarizes the Company’s equity investment in Terra Property Trust at fair value on a recurring basis as of September 30, 2018 and December 31, 2017:

	September 30, 2018
	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
Investment:
Equity investment in Terra Property Trust	$	—	$	—	$	268,006,493	$	268,006,493

	December 31, 2017
	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
Investment:
Equity investment in Terra Property Trust	$	—	$	—	$	275,428,953	$	275,428,953

Changes in Level 3 investment for the nine months ended September 30, 2018 and 2017 were as follows:

	Equity Investment in Terra Property Trust
	Nine Months Ended September 30,
	2018			2017
Beginning balance	$	275,428,953		$	290,419,317
Return of capital	(7,066,860		)	(14,012,486		)
Net change in unrealized (depreciation) appreciation on investment	(355,600		)	920,026
Ending balance	$	268,006,493		$	277,326,857
Net change in unrealized (depreciation) appreciation on investment for the period    relating to those Level 3 assets that were still held by the Company	$	(355,600	)	$	920,026

Transfers between levels, if any, are recognized at the beginning of the period in which transfers occur. For the three and nine months ended September 30, 2018 and 2017, there were no transfers.

The Company estimated that its other financial assets and liabilities had fair values that approximated their carrying values at September 30, 2018 and December 31, 2017 due to their short-term nature.

Valuation Process for Fair Value Measurement

Market quotations are not readily available for the Company’s investment in Terra Property Trust, which is included in Level 3 of the fair value hierarchy. The fair value of the Company’s sole investment takes into consideration the fair value of Terra Property Trust’s assets and liabilities which are valued utilizing a yield approach, i.e. a discounted cash flow methodology. Terra Property Trust’s valuation considers fair value of each respective loan held for investment in the portfolio using an estimated

15

Notes to Consolidated Financial Statements (unaudited)

market yield. In following this methodology, loans are evaluated individually, and management takes into account, in determining the risk-adjusted discount rate for each of the Company’s loans, relevant factors, including available current market data on applicable yields of comparable debt/preferred equity instruments; market credit spreads and yield curves; the investment’s yield; covenants of the investment, including prepayment provisions; the portfolio company’s ability to make payments, its net operating income, debt-service coverage ratio (“DSCR”); construction progress reports and construction budget analysis; the nature, quality, and realizable value of any collateral (and loan-to-value ratio); and the forces that influence the local markets in which the asset (the collateral) is purchased and sold, such as capitalization rates, occupancy rates, rental rates, replacement costs and the anticipated duration of each real estate-related loan.

The Manager designates a valuation committee to oversee the entire valuation process of the Company’s Level 3 investments. The valuation committee is comprised of members of the Manager’s senior management, deal and portfolio management teams, who meet on a quarterly basis, or more frequently as needed, to review the 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.

The following tables summarize the valuation techniques and significant unobservable inputs used by the Company to value the Level 3 investments as of September 30, 2018 and December 31, 2017. 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		Primary Valuation Technique	Unobservable Inputs	September 30, 2018
Asset Category					Minimum		Maximum		Weighted Average
Assets:
Equity investment in Terra Property Trust	$	268,006,493	Discounted cash flow (1)	Discount rate (1)	7.30	%	16.00	%	14.35	%

	Fair Value		Primary Valuation Technique	Unobservable Inputs	December 31, 2017
Asset Category					Minimum		Maximum		Weighted Average
Assets:
Equity investment in Terra Property Trust	$	275,428,953	Discounted cash flow (1)	Discount rate (1)	2.56	%	16.00	%	13.50	%

_______________

(1) Discounted cash flows and discount rates applied to Terra Property Trust’s assets and liabilities.

Note 4. Related Party Transactions

Axar Transaction

On February 8, 2018, Terra Capital Partners caused (i) a new subsidiary of Terra Capital Partners, Terra REIT Advisors to become the external manager of Terra Property Trust, (ii) a new subsidiary of Terra Capital Partners, Terra Fund Advisors, to be admitted as the replacement manager of the Company and the equity interests in Terra Fund Advisors to be distributed to the equity owners of Terra Capital Partners on a pro rata basis and (iii) the equity interests in another subsidiary of Terra Capital Partners, Terra Income Advisors, which also serves as the external advisor to Terra Income Fund 6, Inc. (“Terra Fund 6”), to be distributed to the equity owners of Terra Capital Partners on a pro rata basis. After the completion of the above steps, an affiliate of Axar Capital Management L.P. (“Axar”) entered into an investment agreement with Terra Capital Partners and its affiliates (which is referred to collectively as the “Axar Transaction”), pursuant to which an affiliate of Axar acquired from the respective owners thereof: (i) a 49% economic interest in the Terra Fund Advisors; (ii) a 65.7% economic and voting interest in Terra Capital Partners (and thereby Terra REIT Advisors); and (iii) an initial 49% economic interest in Terra Income Advisors, with an agreement to acquire an additional 16.7% economic interest, and for the entire 65.7% stake to become a voting interest in Terra Income Advisors, subject to requisite approval by a majority of the outstanding voting securities (as defined by the Investment Company Act of 1940, as amended) of Terra Fund 6 of a new advisory and administrative services agreement between Terra Income Advisors and Terra Fund 6 and upon the satisfaction of certain other conditions.

Operating Agreement

The Company had an operating agreement, as amended, with Terra Income Advisors whereby Terra Income Advisors was responsible for the Company’s day-to-day operations. As part of the Axar Transaction, on February 8, 2018, Terra Income Advisors assigned all of its rights, title and interest in the Company pursuant to the Amended and Restated Limited Liability Company Agreement of the Company, dated January 1, 2016, to Terra Fund Advisors. The operating agreement, as amended, is scheduled

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Notes to Consolidated Financial Statements (unaudited)

to terminate on December 31, 2023 unless the Company is dissolved earlier. Starting January 1, 2016, the Company conducts all of its real estate lending business through Terra Property Trust. As such, Terra Property Trust is responsible for management compensation paid and operating expenses reimbursed to its manager pursuant to a management agreement with the manager.

Management Agreement

As part of the Axar Transaction, Terra Income Advisors, Terra Property Trust’s manager prior to February 8, 2018, assigned all of its rights, title and interest in and to its then current external management agreement with Terra Property Trust to Terra REIT Advisors and immediately thereafter, Terra REIT Advisors and Terra Property Trust amended and restated such management agreement. Such amended and restated management agreement has the same economic terms and is in all material respects otherwise on the same terms as the management agreement between Terra Income Advisors and Terra Property Trust in effect immediately prior to the Axar Transaction, except for the identity of the manager.

Dividend Income

As discussed in Note 3, for the three months ended September 30, 2018 and 2017, the Company received approximately $8.1 million and $13.1 million of distributions from Terra Property Trust, respectively, of which $2.6 million and $8.7 million was a return of capital, respectively. For the nine months ended September 30, 2018 and 2017, the Company received approximately $24.9 million and $29.7 million of distributions from Terra Property Trust, respectively, of which $7.1 million and $14.0 million was a return of capital, respectively.

Note 5. Risks and Uncertainties

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

Note 6. Commitments and Contingencies

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

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

Note 7. Members’ Capital

As of September 30, 2018 and December 31, 2017, the Company had 6,643.4 units and 6,697.4 units outstanding, respectively, and the net asset value per unit was $40,340 and $41,143, respectively.

Capital Contributions

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

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Capital Distributions

At the discretion of the Manager, the Company may make distributions from net cash flow from operations, net disposition proceeds, or other cash available for distribution. Distributions are made to holders of Continuing Income Units (regular units of limited liability company interest in the Company) in proportion to their unit holdings until they receive a return of their initial Deemed Capital Contribution, as defined in the operating agreement, plus a preferred return ranging from 8.5% to 9.0% depending on the historical preferred return applicable to their Terra Fund units, after which time distributions are made 15% to the Manager which the Company referred to as the carried interest distribution, and 85% to the holders of Continuing Income Units. The preferred return applicable to the Continuing Income Units sold in the offering concurrent with the Merger is 8.5%.

In addition, holders of Termination Units (membership interest in the Company that were issued to members of Terra Funds 1 through 4 who chose to enter the liquidation phase of their investments) receive monthly distributions at a fixed rate of 6.0% per annum of the Unreturned Invested Capital (capital contributions less cumulative stated distributions of principal and less any amounts paid in redemption).

For the nine months ended September 30, 2018 and 2017, the Company made total distributions to non-manager members of $22.5 million and $23.1 million, respectively. For the nine months ended September 30, 2018 and 2017, the Company did not make any carried interest distributions to the Manager.

Capital Redemptions

In the Merger, members of Terra Funds 1 through 4 who wished to enter the liquidation phase of their investments chose to receive Termination Units as merger consideration. These Termination Units will be redeemed on the original expected liquidation dates of the funds. For the nine months ended September 30, 2018 and 2017, 3.6 and 7.9 Continuing Income Units, respectively, were redeemed for $0.1 million and $0.3 million, respectively, and 50.4 and 121.1Termination Units, respectively, were redeemed for $2.1 million and $5.0 million, respectively. As of September 30, 2018, there were no Termination Units outstanding.

At the discretion of the Manager, a reserve of 5% of cash from operations may be established in order to repurchase units from non-managing members. The Manager is under no obligation to redeem non-managing members’ units. As of September 30, 2018 and December 31, 2017, no such reserve was established.

Allocation of Income (Loss)

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

Member Units

Each membership interest through the original offering was offered for a price of $50,000 per unit. The membership interests in Terra Funds 1 through 4 were exchanged for units of the Company at a price of $43,410 per unit, which was the exchange value per unit of the Company on December 31, 2015, and the units in the offering concurrent with the Merger was offered at a price of $47,000 per unit. The following table provides a roll forward of the units outstanding of the Company for the nine months ended September 30, 2018 and 2017:

	Nine Months Ended September 30, 2018					Nine Months Ended September 30, 2017
	Managing Member	Non-Managing Members		Total		Managing Member	Non-Managing Members		Total
Units outstanding, beginning of period	—	6,697.4		6,697.4		—	6,826.5		6,826.5
Early redemption of Continuing    Income Units	—	(3.6	)	(3.6	)	—	(7.9	)	(7.9	)
Termination Units redeemed	—	(50.4	)	(50.4	)	—	(121.1	)	(121.1	)
Units outstanding, end of period	—	6,643.4		6,643.4		—	6,697.5		6,697.5

Note 8. Financial Highlights

The financial highlights represent the per unit operating performance, return and ratios for the non-managing members’ class, taken as a whole, for the nine months ended September 30, 2018 and 2017. These financial highlights consist of the operating

18

performance, the internal rate of return (“IRR”) since inception of the Company, and the expense and net investment income ratios which are annualized except for the non-recurring expenses.

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

The following summarizes the Company’s financial highlights for the nine months ended September 30, 2018 and 2017:

	Nine Months Ended September 30,
	2018			2017
Per unit operating performance:
Net asset value per unit, beginning of period	$	41,143		$	42,423
Increase in members’ capital from operations (1):
Net investment income	2,622			2,240
Net change in unrealized (depreciation) appreciation on investment	(53		)	135
Total increase in members’ capital from operations	2,569			2,375
Distributions to member (2):
Capital distributions	(3,372		)	(3,401		)
Net decrease in members’ capital resulting from distributions	(3,372		)	(3,401		)
Capital share transactions:
Other (3)	—			8
Net increase in members’ capital resulting from capital share transactions	—			8
Net asset value per unit, end of period	$	40,340		$	41,405
Ratios to average net assets:
Expenses	0.17		%	0.22		%
Net investment income	8.61		%	7.13		%
IRR, beginning of period	6.26		%	5.43		%
IRR, end of period	6.70		%	6.07		%

_______________

(1) The per unit data was derived by using the weighted average units outstanding during the applicable periods, which were 6,670 units and 6,801 units for the nine months ended September 30, 2018 and 2017, respectively.

(2) The per unit data for distributions reflects the actual amount of distributions paid per share during the periods.

(3) Represents the impact of the different unit amounts used in calculating per unit data as a result of calculating certain per unit data based upon the weighted average units outstanding during the period and certain per unit data based on the units outstanding as of a period end or transaction date.

Note 9. Subsequent Events

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

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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 Secured Income Fund 5, LLC and its consolidated subsidiaries.

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

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

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

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

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

• changes in our investment objectives and business strategy;

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

• the performance and financial condition of our borrowers;

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

• borrower defaults or decreased recovery rates from our borrowers;

• changes in prepayment rates on our investments;

• our use of financial leverage;

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

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

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

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

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

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• 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, 2017. Other factors that could cause actual results to differ materially include:

• changes in the economy;

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

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

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

Overview

We are a specialized real estate finance company that originates, structures, funds and manages high yielding commercial real estate investments, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments throughout the United States. Our investments finance the acquisition, construction, development or redevelopment of quality commercial real estate in the United States. We focus on smaller, middle market loans in the approximately $3 million to $50 million range which are financing properties in primary and secondary markets because we believe these loans are subject to less competition, offer higher risk adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification. We were formed as a Delaware limited liability company on April 24, 2013 and commenced operations on August 8, 2013. We make substantially all of our investments and conduct substantially all of our real estate lending business through Terra Property Trust, which has elected to be taxed as a REIT for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2016. Our objectives are to (i) preserve our members’ capital contributions, (ii) realize income from our investments and (iii) make monthly distributions to our members from cash generated from investments. There can be no assurances that we will be successful in meeting our objectives.

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

As described in greater detail in our current report on Form 8-K filed with the SEC on February 14, 2018, on February 8, 2018, Terra Capital Partners caused (i) a new subsidiary of Terra Capital Partners, Terra REIT Advisors, to become the external manager of Terra Property Trust, (ii) a new subsidiary of Terra Capital Partners, Terra Fund Advisors, to be admitted as the replacement manager of the Company and the equity interests in Terra Fund Advisors to be distributed to the equity owners of Terra Capital Partners on a pro rata basis and (iii) the equity interests in another subsidiary of Terra Capital Partners, Terra Income Advisors, which also serves as the external advisor to Terra Income Fund 6, Inc. (“Terra Fund 6”), to be distributed to the equity owners of Terra Capital Partners on a pro rata basis. After the completion of the above steps, an affiliate of Axar Capital Management L.P. (“Axar”) entered into an investment agreement with Terra Capital Partners and its affiliates (which is referred to collectively as the “Axar Transaction”), pursuant to which an affiliate of Axar acquired from the respective owners thereof: (i) a 49% economic interest in Terra Fund Advisors; (ii) a 65.7% economic and voting interest in Terra Capital Partners (and thereby Terra REIT Advisors); and (iii) an initial 49% economic interest in Terra Income Advisors, with an agreement to acquire an additional 16.7% economic interest, and for the entire 65.7% stake to become a voting interest in Terra Income Advisors, subject to requisite approval by a majority of the outstanding voting securities (as defined by the 1940 Act) of Terra Fund 6 of a new advisory and administrative services agreement between Terra Income Advisors and Terra Fund 6 and upon the satisfaction of certain other conditions. When

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used herein the term “Manager” refers to Terra Income Advisors for periods prior to February 8, 2018 and refers to Terra Fund Advisors beginning on such date.

Portfolio Summary

The following tables provide a summary of Terra Property Trust’s net loan portfolio as of September 30, 2018 and December 31, 2017:

	September 30, 2018
	Fixed Rate (1)			Floating Rate (2)			Total Gross Loans			Obligations under Participation Agreements		Total Net Loans
Number of loans	25			7			32			21		32
Principal balance	$	217,668,228		$	119,466,607		$	337,134,835		99,800,355		$	237,334,480
Amortized cost	219,534,977			120,080,602			339,615,579			100,740,686		238,874,893
Fair value	219,259,364			120,079,832			339,339,196			100,562,730		238,776,466
Weighted average coupon rate	12.85		%	12.98		%	12.89		%	12.68	%	12.98		%
Weighted-average remaining    term (years)	1.71			1.84			1.75			1.50		1.86

	December 31, 2017
	Fixed Rate			Floating Rate (1)			Total Gross Loans			Obligations under Participation Agreements		Total Net Loans
Number of loans	33			1			34			19		34
Principal balance	$	299,311,201		$	53,749,794		$	353,060,995		75,077,891		$	277,983,104
Amortized cost	302,816,709			54,277,021			357,093,730			76,053,279		281,040,451
Fair value	302,951,869			54,282,803			357,234,672			75,991,436		281,243,236
Weighted average coupon rate	12.79		%	9.97		%	12.36		%	12.67	%	12.23		%
Weighted-average remaining    term (years)	1.62			0.19			1.40			1.14		1.47

_______________

(1) Amortized cost is net of an allowance for loan losses of $375,603 as of September 30, 2018. There was no allowance for loan losses as of December 31, 2017.

(2) These loans pay a coupon rate of London Interbank Offered Rate (“LIBOR”) plus a fixed spread, six of which are subject to a LIBOR floor. Coupon rate shown was determined using the applicable annual coupon rate as of September 30, 2018 and December 31, 2017.

In addition to its net loan portfolio, on July 30, 2018, Terra Property Trust foreclosed on a multi-tenant office building encumbering a $54.0 million first mortgage in exchange for the relief of the first mortgage and related fees and expenses. As of September 30, 2018, the office building had a carrying value of $56.8 million and the mortgage loan payable encumbering the office building had a carrying value of $44.8 million for a net carrying value of approximately $12.0 million.

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Portfolio Information

The tables below detail the types of loans in Terra Property Trust’s loan portfolio, as well as the property type and geographic location of the properties securing these loans, on a net loan basis, which represents Terra Property Trust’s proportionate share of the loans, based on its economic ownership of these loans.

	September 30, 2018									December 31, 2017
Loan Structure	Principal Balance		Amortized Cost			Fair Value		% of Total		Principal Balance		Amortized Cost		Fair Value		% of Total
Preferred equity investments	$	113,771,383	$	114,458,111		$	114,318,795	47.9	%	$	67,635,660	$	68,347,128	$	68,263,958	24.3	%
Mezzanine loans	85,691,158		86,541,727			86,210,838		36.1	%	101,115,711		102,386,404		102,670,907		36.5	%
First mortgages	37,871,939		38,250,658			38,246,833		16.0	%	109,231,733		110,306,919		110,308,371		39.2	%
Allowance for loan losses	—		(375,603		)	—		—	%	—		—		—		—	%
Total	$	237,334,480	$	238,874,893		$	238,776,466	100.0	%	$	277,983,104	$	281,040,451	$	281,243,236	100.0	%

	September 30, 2018									December 31, 2017
Property Type	Principal Balance		Amortized Cost			Fair Value		% of Total		Principal Balance		Amortized Cost		Fair Value		% of Total
Infill land	$	58,491,314	$	58,870,033		$	58,866,208	24.6	%	$	55,481,939	$	56,029,898	$	56,025,568	19.9	%
Hotel	53,365,865		53,896,236			53,860,279		22.6	%	59,319,892		60,026,750		59,958,385		21.3	%
Student housing	38,727,172		39,067,991			38,898,461		16.3	%	22,067,947		22,451,360		22,820,142		8.1	%
Multifamily	34,061,829		34,336,270			34,264,868		14.4	%	37,456,258		37,988,040		37,848,395		13.5	%
Condominium	30,538,714		30,817,720			30,824,594		12.9	%	38,511,274		38,829,923		38,868,479		13.8	%
Office	15,149,586		15,262,246			15,262,246		6.4	%	58,145,794		58,714,480		58,722,267		20.9	%
Industrial	7,000,000		7,000,000			6,799,810		2.8	%	7,000,000		7,000,000		7,000,000		2.5	%
Allowance for loan losses	—		(375,603		)	—		—	%	—		—		—		—	%
Total	$	237,334,480	$	238,874,893		$	238,776,466	100.0	%	$	277,983,104	$	281,040,451	$	281,243,236	100.0	%

	September 30, 2018									December 31, 2017
Geographic Location	Principal Balance		Amortized Cost			Fair Value		% of Total		Principal Balance		Amortized Cost		Fair Value		% of Total
United States
California	$	73,612,758	$	74,209,940		$	74,162,246	31.1	%	$	104,362,267	$	105,490,614	$	105,391,192	37.5	%
New York	55,930,339		56,252,628			56,274,092		23.6	%	43,761,274		44,121,538		44,164,421		15.7	%
Florida	21,512,512		21,701,054			21,718,205		9.1	%	39,926,892		40,281,901		40,296,964		14.3	%
Illinois	16,600,000		16,664,155			16,664,155		7.0	%	—		—		—		—	%
Pennsylvania	15,585,000		15,731,891			15,733,183		6.6	%	15,585,000		15,731,551		15,732,064		5.6	%
Washington	13,228,579		13,308,590			13,255,554		5.5	%	20,354,875		20,469,129		20,527,134		7.3	%
Georgia	12,346,939		12,470,408			12,469,169		5.2	%	15,846,939		16,126,857		15,998,575		5.7	%
Massachusetts	7,000,000		7,000,000			6,799,810		2.8	%	7,000,000		7,000,000		7,000,000		2.5	%
Texas	4,962,000		4,979,026			4,965,950		2.1	%	6,093,243		6,188,077		6,157,971		2.2	%
Ohio	4,575,000		4,620,750			4,620,215		1.9	%	4,000,000		4,040,000		4,039,499		1.4	%
North Carolina	4,513,353		4,544,301			4,548,838		1.9	%	2,198,000		2,220,813		2,219,723		0.8	%
Alabama	3,700,000		3,765,979			3,736,506		1.6	%	3,700,000		3,772,716		3,736,507		1.3	%
Other (1)	3,768,000		4,001,774			3,828,543		1.6	%	7,618,614		7,913,324		8,276,135		2.9	%
Delaware	—		—			—		—	%	4,396,000		4,437,459		4,439,464		1.6	%
Oregon	—		—			—		—	%	3,140,000		3,246,472		3,263,587		1.2	%
Allowance for loan losses	—		(375,603		)	—		—	%	—		—		—		—	%
Total	$	237,334,480	$	238,874,893		$	238,776,466	100.0	%	$	277,983,104	$	281,040,451	$	281,243,236	100.0	%

_______________

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(1) Other includes $1.9 million of properties in South Carolina and $1.9 million of properties in Tennessee at September 30, 2018. Other includes $2.7 million of properties in Indiana, $1.9 million of properties in South Carolina, $1.9 million of properties in Tennessee and $1.1 million of properties in Utah at December 31, 2017.

Factors Impacting Operating Results

Our operating results 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 and second mortgage loans, subordinated mortgage loans, bridge loans, preferred equity investments and other loans related to high quality commercial real estate in the United States, and the financing and other costs associated with our business. Interest income and borrowing costs may vary as a result of changes in interest rates, which could impact the net interest we receive on our assets. Our operating results may also be impacted by conditions in the financial markets and unanticipated credit events experienced by borrowers under our loan assets.

Market Risk

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

Credit Risk

Credit risk represents the potential loss that Terra Property Trust would incur if the borrowers failed to perform pursuant to the terms of their obligations to Terra Property Trust. Terra Property Trust minimizes its exposure to credit risk by limiting exposure to any one individual borrower and any one asset class. Additionally, Terra Property Trust employs an asset management approach and monitors the portfolio of loans, through, at a minimum, quarterly financial review of property performance including net operating income, loan-to-value ratio, debt service coverage ratio, and the debt yield. Terra Property Trust also requires certain borrowers to establish a cash reserve, as a form of additional collateral, for the purpose of providing for future interest or property-related operating payments.

Mezzanine loans and preferred equity investments are subordinate to senior mortgage loans and, therefore, involve a higher degree of risk. In the event of a default, mezzanine loans and preferred equity investments will be satisfied only after the senior lender’s investment is fully recovered. As a result, in the event of a default, Terra Property Trust may not recover all of its investments.

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

Concentration Risk

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

Liquidity Risk

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

Interest Rate Risk

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

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rate real estate-related loans to reset, although on a delayed basis, to lower interest rates (iv) to the extent applicable under the terms of Terra Property Trust’s investments, prepayments on real estate-related loans to increase, and (v) to the extent Terra Property Trust enters into interest rate swap agreements as part of its hedging strategy, the value of these agreements to decrease.

Prepayment Risk

Prepayments can either positively or adversely affect the yields on Terra Property Trust’s loans. Prepayments on debt instruments, where permitted under the debt documents, are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control, and consequently, such prepayment rates cannot be predicted with certainty. If Terra Property Trust does not collect a prepayment fee in connection with a prepayment or are unable to invest the proceeds of such prepayments received, the yield on the portfolio will decline. In addition, Terra Property Trust may acquire assets at a discount or premium and if the asset does not repay when expected, the anticipated yield may be impacted. Under certain interest rate and prepayment scenarios Terra Property Trust may fail to recoup fully its cost of acquisition of certain loans.

Use of Leverage

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

Results of Operations

The following table presents the comparative results of our operations for the three and nine months ended September 30, 2018 and 2017:

	Three Months Ended September 30,								Nine Months Ended September 30,
	2018			2017		Change			2018			2017		Change
Investment income
Dividend income	$	5,487,805		$	4,448,792	$	1,039,013		$	17,829,718		$	15,703,171	$	2,126,547
Other operating income	137			111		26			1,140			1,064		76
Total investment income	5,487,942			4,448,903		1,039,039			17,830,858			15,704,235		2,126,623
Operating expenses
Professional fees	126,966			104,100		22,866			334,802			431,465		(96,663		)
Other	2,891			3,448		(557		)	10,832			35,761		(24,929		)
Total operating expenses	129,857			107,548		22,309			345,634			467,226		(121,592		)
Net investment income	5,358,085			4,341,355		1,016,730			17,485,224			15,237,009		2,248,215
Net change in unrealized    (depreciation) appreciation on    investment	(179,846		)	428,032		(607,878		)	(355,600		)	920,026		(1,275,626		)
Net increase in members’ capital    resulting from operations	$	5,178,239		$	4,769,387	$	408,852		$	17,129,624		$	16,157,035	$	972,589

Dividend Income

Dividend income associated with our ownership of Terra Property Trust represents Terra Property Trust’s net income for the period. Any excess of distributions received from Terra Property Trust over its net income is recorded as return of capital.

For the three months ended September 30, 2018 and 2017, we received distributions of $8.1 million and $13.1 million, respectively, or $0.54 and $0.88 per share, respectively, from Terra Property Trust, of which $5.5 million and $4.4 million was recorded as dividend income, respectively, representing Terra Property Trust’s net income for the periods presented, and $2.6 million and $8.7 million was recorded as return of capital, respectively. The $1.0 million increase in Terra Property Trust’s net income was primarily due to (i) an increase in net interest income of $0.8 million; (ii) prepayment fee income of $0.5 million received during the three months ended September 30, 2018 as a result of the repayment of a loan by the borrower before the scheduled maturity date; and (iii) the recognition of a net realized loss of $0.6 million on the sale of investments to affiliates through participation interest during the three months ended September 30, 2017 whereas no such loss was recognized during the three months ended September 30, 2018. These increases in Terra Property Trust’s net income were partially offset by (i) an increase in total lending-related operating expenses of $0.4 million, primarily due to an increase in operating expenses reimbursed

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to Terra Property Trust’ manager of $0.3 million resulting from an increase in allocable costs; and (ii) a net loss generated from the operations of a foreclosed real estate property of $0.4 million, primarily related to non-cash depreciation and amortization expenses recorded, for the three months ended September 30, 2018. Net interest income increased as a result of an increase in weighted average principal balance of investments.

For the nine months ended September 30, 2018 and 2017, we received distributions of $24.9 million and $29.7 million, respectively, or $1.67 and $1.99 per share, respectively, from Terra Property Trust, of which $17.8 million and $15.7 million was recorded as dividend income, respectively, representing Terra Property Trust’s net income for the periods presented, and $7.1 million and $14.0 million was recorded as return of capital, respectively. The $2.1 million increase in Terra Property Trust’s net income was primarily due to (i) an increase in net interest income of $1.8 million; and (ii) an increase in prepayment fee income of $1.9 million primarily as a result of a $1.6 million prepayment fee received on an investment that the borrower repaid four years early in the current year period. These increases in Terra Property Trust’s net income were partially offset by (i) an increase in total lending-related operating expense of $1.3 million due to a $0.4 million provision for loan losses recorded in the nine months ended September 30, 2018 compared to a reversal of provision for loan losses of $0.2 million recorded in the same period in 2017 as well as increases in professional fees, directors fees and operating expenses reimbursed to Terra Property Trust’ manager in the current period; and (ii) a net loss generated from the operations of a foreclosed real estate property of $0.4 million as discussed above.

Net interest income increased by $1.8 million as a result of (i) a decrease in amortization of net purchase premium of $0.7 million as a result of the majority of the net purchase premium recognized in connection with the Merger in 2016 as well as a senior loan purchased in 2017 having already been amortized prior to the current period; (ii) a net origination fee income of $0.1 million received for the nine months ended September 30, 2018, compared to an origination fee expense of $0.4 million paid to Terra Property Trust’s manager for the same period in 2017 on a senior loan for which we did not receive an origination fee income; and (iii) in increase in contractual net interest income of $0.4 million primarily due to an increase in the weighted average interest rate on investments, partially offset by the decrease in weighted average principal balance of investments.

Net Loan Portfolio

In assessing the performance of Terra Property Trust’s loans, we believe it is appropriate to evaluate the loans on an economic basis, that is, gross loans net of obligations under participation agreements and mortgage loan payable. The following tables present a reconciliation of Terra Property Trust’s loan portfolio from a gross basis to a net basis for the three and nine months ended September 30, 2018 and 2017:

	Three Months Ended September 30, 2018				Three Months Ended September 30, 2017
	Weighted Average Principal Amount (1)			Weighted Average Coupon Rate (2)	Weighted Average Principal Amount (1)			Weighted Average Coupon Rate (2)
Total portfolio
Gross loans	$	348,579,866		12.7%	$	314,920,884		12.2%
Obligations under participation agreements	(94,438,132		)	12.7%	(68,237,323		)	12.5%
Mortgage loan payable	(11,389,269		)	7.3%	(34,000,000		)	6.5%
Net loans (3)	$	242,752,465		12.9%	$	212,683,561		13.0%
Senior loans
Gross loans	$	78,020,652		11.6%	$	141,402,331		11.0%
Obligations under participation agreements	(21,953,061		)	12.0%	(23,736,594		)	11.8%
Mortgage loan payable	(11,389,269		)	7.3%	(34,000,000		)	6.5%
Net loans (3)	$	44,678,322		12.5%	$	83,665,737		12.6%
Subordinated loans(4)
Gross loans	$	270,559,214		13.0%	$	173,518,553		13.1%
Obligations under participation agreements	(72,485,071		)	12.9%	(44,500,729		)	12.8%
Net loans (3)	$	198,074,143		13.1%	$	129,017,824		13.2%

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	Nine Months Ended September 30, 2018				Nine Months Ended September 30, 2017
	Weighted Average Principal Amount (1)			Weighted Average Coupon Rate (2)	Weighted Average Principal Amount (1)			Weighted Average Coupon Rate (2)
Total portfolio
Gross loans	$	349,249,585		12.6%	$	338,889,294		12.0%
Obligations under participation agreements	(81,621,459		)	12.7%	(57,727,421		)	12.3%
Mortgage loan payable	(26,313,017		)	7.1%	(36,928,955		)	6.3%
Net loans (3)	$	241,315,109		13.1%	$	244,232,918		12.7%
Senior loans
Gross loans	$	104,708,261		11.4%	$	155,449,688		10.5%
Obligations under participation agreements	(22,475,039		)	12.0%	(18,257,876		)	11.2%
Mortgage loan payable	(26,313,017		)	7.1%	(36,928,955		)	6.3%
Net loans (3)	$	55,920,205		13.3%	$	100,262,857		12.0%
Subordinated loans(4)
Gross loans	$	244,541,324		13.1%	$	183,439,606		13.2%
Obligations under participation agreements	(59,146,420		)	13.0%	(39,469,545		)	12.8%
Net loans (3)	$	185,394,904		13.1%	$	143,970,061		13.3%

_______________

(1) Amount is calculated based on the number of days each loan is outstanding.

(2) Amount is calculated based on the underlying principal amount of each loan.

(3) The weighted average coupon rate represents net interest income over the period calculated using the weighted average coupon rate and weighted average principal amount shown on the table (interest income on the loans less interest expense) divided by the weighted average principal amount of the net loans during the period.

(4) Subordinated loans include mezzanine loans, preferred equity investments and credit facilities.

For the nine months ended September 30, 2018 as compared to the same period in 2017, the increase in weighted average coupon rate was due to a decrease in investments in senior loans, which are typically larger principal-balance loans paying lower levels of interest reflecting the lower perceived risk due to their senior position in the borrower’s capital structure as compared to investments in subordinated loans, as well as the senior loans that matured in the prior year period having coupon rates that were lower than the current senior loans.

Professional Fees

For the three months ended September 30, 2018 as compared to the same period in 2017, professional fees remained substantially the same. For the nine months ended September 30, 2018 as compared to the same period 2017, professional fees decreased by $0.1 million primarily due to additional fees incurred in connection with the filing of our registration statement on

Form 10 in 2017.

Net Change in Unrealized (Depreciation) Appreciation on Investment

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

2018 — For the three and nine months ended September 30, 2018, we recorded a net change in unrealized depreciation on investments of $0.2 million and $0.4 million, respectively, primarily due to an increase in market interest rates and for one loan, an increase to its discount rate driven by a decrease in the net cash flow of the underlying property.

2017 — For the three and nine months ended September 30, 2017, we recorded a net change in unrealized appreciation on investments of $0.4 million and $0.9 million, respectively, as a result of the amortization of a substantial portion of the net purchase premiums recognized in connection with the Merger in 2016, which reduced the carrying value of the loans in 2017.

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Net Increase in Members’ Capital Resulting from Operations

For the three and nine months ended September 30, 2018 as compared to the same periods in 2017, the resulting net increase in members’ capital results from operations increased by $0.4 million and $1.0 million, respectively.

Financial Condition, Liquidity and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, including funding and maintaining our assets and operations, making distributions to our members and other general business needs. Our primary cash requirements for the next twelve months are making the discretionary recurring distributions to our members. We expect to use cash distributions received from Terra Property Trust to meet such cash requirements. Terra Property Trust’s obligations under participation agreements totaling $48.8 million will mature in the next twelve months. Terra Property Trust expects to use the proceeds from the repayment of the corresponding investments to repay the participation obligations. Additionally, Terra Property Trust expects to fund approximately $28.7 million of the unfunded commitments to borrowers during the next twelve months. Terra Property Trust expects to maintain sufficient cash on hand to fund such commitment through matching these commitments with principal repayments on outstanding loans.

Cash Flows Provided by Operating Activities

2018 — For the nine months ended September 30, 2018, cash flows provided by operating activities were $24.6 million, primarily due to $24.9 million of dividends received from Terra Property Trust, of which $7.1 million was recorded as a return of capital.

2017— For the nine months ended September 30, 2017, cash flows provided by operating activities were $28.5 million, primarily due to $29.7 million of dividends received from Terra Property Trust, of which $14.0 million was recorded as a return of capital.

Cash Flows used in Financing Activities

2018 — For the nine months ended September 30, 2018, cash flows used in financing activities were $24.7 million, consisting of distributions paid to members of $22.5 million, and $2.2 million used to redeem 50.4 Terra Fund 4 Termination Units and 3.6 continuing income units.

2017— For the nine months ended September 30, 2017, cash flows used in financing activities was $28.4 million consisting of

distributions paid to members of $23.1 million and cash of $5.3 million used to primarily redeem Terra Fund 3 Termination Units

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.

Fair Value Measurements

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

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

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

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

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

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

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

◦Pricing models whose inputs are derived principally from or corroborated by observable market data for

substantially full term of the asset or liability.

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

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

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

Income Taxes

No provision for U.S. federal and state income taxes has been made in the accompanying consolidated financial statements, as individual members are responsible for their proportionate share of our taxable income. We, however, may be liable for New York City Unincorporated Business Tax (the “NYC UBT”) and similar taxes of various other municipalities. New York City imposes the NYC UBT at a statutory rate of 4% on net income generated from ordinary business activities carried on in New York City. For the three and nine months ended September 30, 2018 and 2017, none of our income was subject to the NYC UBT.

We did not have any uncertain tax positions that met the recognition or measurement criteria of Accounting Standards Codification 740-10-25, Income Taxes, nor did we have any unrecognized tax benefits as of the periods presented herein. We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in our consolidated statements of operations. For the three and nine months ended September 30, 2018 and 2017, we did not incur any interest or penalties. Although we file federal and state tax returns, our major tax jurisdiction is federal. Our inception-to-date federal tax years remain subject to examination by the Internal Revenue Service.

Contractual Obligations of Terra Property Trust to Terra REIT Advisors

As part of the Axar Transaction, Terra Income Advisors assigned all of its rights, title and interest in and to its current external management agreement with Terra Property Trust to Terra REIT Advisors and immediately thereafter, Terra REIT Advisors and Terra Property Trust amended and restated such management agreement. Such amended and restated management agreement has the same economic terms and is in all material respects otherwise on the same terms as the management agreement between Terra Income Advisors and Terra Property Trust in effect immediately prior to the Axar Transaction, except for the identity of our manager.

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

Origination Fee. An origination fee in the amount of 1.0% of the amount used to originate, acquire, fund, acquire or structure real estate-related loans, including any third-party expenses related to such loan. In the event that the term of any real estate-related loan is extended, Terra REIT Advisors 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. The origination fee is offset by the amount of any origination fee received by Terra Property Trust from borrowers.

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

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

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

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

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

The following table presents a summary of fees paid and costs reimbursed to the predecessor to Terra REIT Advisors as well as Terra REIT Advisors in connection with providing services to Terra Property Trust:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Origination fee expense (1)	$	439,252	$	624,255	$	1,385,832	$	2,381,562
Asset management fee	762,470		785,748		2,285,610		2,397,595
Asset servicing fee	184,655		152,047		529,403		529,535
Operating expenses reimbursed to Manager	1,016,040		725,197		2,663,562		2,425,699
Disposition fee (2)	180,923		197,614		701,236		798,333
Total	$	2,583,340	$	2,484,861	$	7,565,643	$	8,532,724

_______________

(1) Origination fee expense is generally offset with origination fee income. Any excess is deferred and amortized to interest income over the term of the investment.

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

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.

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Recent Accounting Pronouncements

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

In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 retains many current requirements for the classification and measurement of financial instruments; however, it significantly revises an entity’s accounting related to (i) the classification and measurement of investments in equity securities and (ii) the presentation of certain fair value changes for financial liabilities measured at fair value. ASU 2016-01 also amends certain disclosure requirements associated with the fair value of financial instruments. We adopted this standard on January 1, 2018. The adoption of ASU 2016-01 did not have any impact on our consolidated financial statements and disclosures.

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

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, a Consensus of the FASB’s Emerging Issues Task Force (“ASU 2016-15”). ASU 2016-15 provides guidance on how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017. The guidance requires application using a retrospective transition method. We adopted this standard on January 1, 2018. The adoption of ASU 2016-15 did not have any impact on our consolidated financial statements and disclosures.

In June 2018, the SEC adopted amendments that raise the thresholds in the smaller reporting company definition. Under the new definition, generally, a company qualifies as a “smaller reporting company” if: (i) it has public float of less than $250 million; or (ii) it has less than $100 million in annual revenues and no public float or public float of less than $700 million. These amendments did not have any impact on us.

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. Early adoption is permitted upon issuance of ASU 2018-13. We do not expect the adoption of ASU 2018-13 to have a material impact on our consolidated financial statements and disclosures.

In August 2018, the SEC adopted a final rule that eliminates or amends disclosure requirements that have become duplicative, overlapping, or outdated in light of other SEC disclosure requirements, U.S. GAAP, or changes in the information environment (the “Final Rule”). The Final Rule is intended to simplify and update the disclosure of information to investors and reduce compliance burdens for companies, without significantly altering the total mix of information available to investors. Among other items, the Final Rule requires registrants to include in their interim financial statements a reconciliation of changes in net assets or stockholders’ equity in the notes or as a separate statement. The Final Rule is effective for all filings made on or after November

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5, 2018; however, the SEC would not object if a filer’s first presentation of the changes in net assets or stockholders' equity was included in its Form 10-Q for the quarter that begins after the effective date of the Final Rule. We intend to adopt the Final Rule in the first quarter of 2019. The adoption of the Final Rule is not expected to have a material impact on our consolidated financial statements and disclosures.

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 September 30, 2018, Terra Property Trust had seven investments with an aggregate principal balance of $75.3 million, net of obligations under participation agreements, that provide for interest income at an annual rate of LIBOR plus a spread, six of which are 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 $0.3 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 $0.5 million. Additionally, Terra Property Trust had $45.0 million of borrowings outstanding under a mortgage loan payable that bear interest at an annual rate of LIBOR plus 3.85% that is collateralized by an office building. A decrease of 100 basis points in LIBOR would decrease our annual interest expense by approximately $0.5 million and an increase of 100 basis points in LIBOR would increase our annual interest expense by approximately $0.5 million.

We may hedge against interest rate and currency exchange rate fluctuations by using standard hedging instruments, such as futures, options and forward contracts, subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in benefits of lower interest rates with respect to our portfolio of investments with fixed interest rates. For the three and nine months ended September 30, 2018 and 2017, we did not engage in interest rate hedging activities.

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including the chief executive officer and chief financial officer of our Manager (performing functions equivalent to those a principal executive officer and principal financial officer of our company would perform if we had any officers), of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2018. Based on that evaluation, the chief executive officer and chief financial officer of our Manager concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we would meet our disclosure obligations. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute assurance that it will detect or uncover failures within our company to disclose material information otherwise required to be set forth in our periodic reports.

Changes in Internal Control Over Financial Reporting

During the most recent fiscal quarter, there was no change in our internal controls over financial reporting, as defined under

Rule 13a-15(f) under the Exchange Act, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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PART II

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information

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	Agreement and Plan of Merger by and among the registrant, Terra Capital Advisors, LLC, Terra Secured Income Fund Merger Sub, LLC, and Terra Secured Income Fund, dated January 1, 2016 (incorporated by reference to Exhibit 2.1 to the Registration Statement on Form 10 (File No. 000-55780) filed with the SEC on April 28, 2017).
2.2	Agreement and Plan of Merger by and among the registrant, Terra Capital Advisors, LLC, Terra Secured Income Fund Merger Sub 2, LLC, and Terra Secured Income Fund 2, LLC, dated January 1, 2016 (incorporated by reference to Exhibit 2.2 to the Registration Statement on Form 10 (File No. 000-55780) filed with the SEC on April 28, 2017).
2.3	Agreement and Plan of Merger by and among the registrant, Terra Capital Advisors, LLC, Terra Secured Income Fund Merger Sub 3, LLC, and Terra Secured Income Fund 3, LLC, dated January 1, 2016 (incorporated by reference to Exhibit 2.3 to the Registration Statement on Form 10 (File No. 000-55780) filed with the SEC on April 28, 2017).
2.4	Agreement and Plan of Merger by and among the registrant, Terra Capital Advisors, Terra Capital Advisors 2, Terra Secured Income Fund 4, LLC, and Terra Secured Income Fund 4, LLC, dated January 1, 2016 (incorporated by reference to Exhibit 2.4 to the Registration Statement on Form 10 (File No. 000-55780) filed with the SEC on April 28, 2017).

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Exhibit No.	Description and Method of Filing
2.5	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 2.5 to the Registration Statement on Form 10 (File No. 000-55780) filed with the SEC on April 28, 2017).
2.6	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 2.6 to the Registration Statement on Form 10 (File No. 000-55780) filed with the SEC on April 28, 2017).
3.1	Amended and Restated Limited Liability Company Agreement of the registrant, dated January 1, 2016 (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form 10 (File No. 000-55780) filed with the SEC on April 28, 2017).
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*	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**	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**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema Document
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document

_______________

* Filed herewith.

** Furnished herewith.

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SIGNATURES

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

Date: November 9, 2018

TERRA SECURED INCOME FUND 5, LLC
By:	/s/ Bruce D. Batkin
	Bruce D. Batkin
	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)

___________

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

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