tpt-20240630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the Quarterly Period Ended June 30, 2024


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

For the Transition Period from to

Commission File Number: 001-40496

Terra Property Trust, Inc.

(Exact name of registrant as specified in its charter)


Maryland						81-0963486
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

205 West 28th Street, 12th Floor

New York, New York 10001

(Address of principal executive offices)

(212) 753-5100

(Registrant’s telephone number, including area code)

Securities registered pursuant to section 12(b) of the Securities Exchange Act of 1934:

Title of each class

Trading Symbol(s)

Name of exchange on
which registered

6.00% Notes due 2026

TPTA

New York Stock Exchange

Securities registered pursuant to section 12(g) of the Securities Exchange Act of 1934:

Class B Common Stock, $0.01 par value per share

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	þ	Smaller reporting company	☑
		Emerging growth company	☑

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. ☑

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

As of August 9, 2024, the registrant had 24,337,024 shares of Class B Common Stock, $0.01 par value, outstanding. No market value has been computed based upon the fact that no active trading market had been established as of the date of this document.

TABLE OF CONTENTS


		Page
PART I	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements:

	Consolidated Balance Sheets as of June 30, 2024 (unaudited) and December 31, 2023	2

	Consolidated Statements of Operations and Comprehensive (Loss) Income for the three and six months ended June 30, 2024 and 2023 (unaudited)	3

	Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2024 and 2023 (unaudited)	4

	Consolidated Statements of Cash Flows for the six months ended June 30, 2024 and 2023 (unaudited)	5

	Notes to Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53

Item 4.	Controls and Procedures	54

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	54

Item 1A.	Risk Factors	54

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 3.	Defaults upon Senior Securities	54

Item 4.	Mine Safety Disclosures	55

Item 5.	Other Information	55

Item 6.	Exhibits	55

Signatures		56

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Terra Property Trust, Inc.

Consolidated Balance Sheets


	June 30, 2024		December 31, 2023
	(Unaudited)
Assets
Cash and cash equivalents	$	18,937,034	$	10,674,475
Restricted cash	4,617,208		3,954,986
Cash held in escrow by lender	6,870,038		4,907,316
Marketable securities	1,129,263		4,961,879
Loans held for investment, net of allowance for credit losses of $34,653,587 and $56,749,498	345,816,691		417,913,773
Loans held for investment acquired through participation, net of allowance for credit losses of $251,722 and $226,527	38,535,503		38,558,485
Equity investment in unconsolidated investments	70,658,140		37,171,326
Real estate owned, net (Note 5)
Land, building and building improvements, net	125,168,010		126,724,333
Lease intangible assets, net	7,570,062		9,869,364
Interest receivable	8,051,555		6,537,368
Due from related parties	832,024		655,263
Other assets	6,196,900		8,811,583
Total assets	$	634,382,428	$	670,740,151
Liabilities and Equity
Liabilities:
Unsecured notes payable, net	$	119,376,974	$	118,380,897
Secured financing agreements, net	264,447,499		290,525,313
Obligations under participation agreements (Note 7 )	15,144,974		—
Interest reserve and other deposits held on investments	4,617,208		3,954,986
Lease intangible liabilities, net (Note 5)	5,310,159		6,838,875
Due to Manager (Note 7)	2,032,393		4,183,293
Interest payable	1,765,043		1,575,463
Accounts payable and accrued expenses	1,728,057		2,405,749
Unearned income	224,238		314,260
Other liabilities	1,116,579		907,507
Total liabilities	415,763,124		429,086,343
Commitments and contingencies (Note 9)
Equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized and none issued	—		—
Class A Common Stock, $0.01 par value, 450,000,000 shares authorized and no shares issued, as of both June 30, 2024 and December 31, 2023	—		—
Class B Common Stock, $0.01 par value, 450,000,000 shares authorized and 24,336,871 and 24,336,033 shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively	243,369		243,360
Additional paid-in capital	444,467,721		444,458,206
Accumulated deficit	(226,072,396)		(203,047,758)
Accumulated other comprehensive loss	(19,390)		—
Total equity	218,619,304		241,653,808
Total liabilities and equity	$	634,382,428	$	670,740,151

See notes to unaudited consolidated financial statements.

Terra Property Trust, Inc.

Consolidated Statements of Operations and Comprehensive (Loss) Income

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Revenues
Interest income	$	8,435,024	$	15,878,453	$	20,583,759	$	31,494,260
Real estate operating revenue	2,718,625		2,803,934		5,438,326		4,136,903
Other operating income	19,871		100,068		160,780		153,463
	11,173,520		18,782,455		26,182,865		35,784,626
Operating expenses
Operating expenses reimbursed to Manager	2,332,771		2,120,029		4,510,935		4,297,033
Asset management fee	1,619,971		2,105,049		3,335,013		4,102,476
Asset servicing fee	394,995		496,374		801,520		966,899
Provision for credit losses	2,576,325		4,652,644		4,449,436		3,802,593
Real estate operating expenses	782,271		1,864,212		1,473,277		3,074,124
Depreciation and amortization	1,747,119		1,756,664		3,863,801		2,438,477
Professional fees	826,080		787,427		1,711,649		1,767,322
Directors’ fees	91,560		83,750		175,310		180,214
Other	100,594		188,631		363,505		403,875
Impairment charge	—		11,765,540		—		11,765,540
	10,471,686		25,820,320		20,684,446		32,798,553
Operating income (loss)	701,834		(7,037,865)		5,498,419		2,986,073
Other income and expenses
Interest expense on secured financing	(6,580,840)		(7,483,284)		(13,870,752)		(13,603,015)
Interest expense on unsecured notes payable	(2,452,577)		(2,405,267)		(4,892,952)		(4,799,573)
Interest expense on obligations under participation agreements	(770,648)		(576,915)		(1,389,143)		(1,109,061)
Unrealized gain on investments, net	201,501		51,224		178,570		57,808
Income (loss) from equity investment in unconsolidated investments	1,671,970		(1,759,934)		1,198,583		(2,196,794)
Realized loss on investments, net	(310,550)		(25,024)		(446,009)		(25,024)
	(8,241,144)		(12,199,200)		(19,221,703)		(21,675,659)
Net loss	$	(7,539,310)	$	(19,237,065)	$	(13,723,284)	$	(18,689,586)
Series A preferred stock dividend declared	$	—	$	—	$	—	$	(3,907)
Net loss allocable to common stock	$	(7,539,310)	$	(19,237,065)	$	(13,723,284)	$	(18,693,493)
Other comprehensive income (loss)
Available-for-sale debt securities	316,392		—		(19,390)		—
	316,392		—		(19,390)		—
Comprehensive loss	$	(7,222,918)	$	(19,237,065)	$	(13,742,674)	$	(18,693,493)
Per share data
Loss per share — basic and diluted	$	(0.31)	$	(0.79)	$	(0.56)	$	(0.77)
Weighted-average shares — basic and diluted	24,336,577		24,335,430		24,336,368		24,335,402
Distributions declared per common share	$	0.19	$	0.19	$	0.38	$	0.38

See notes to unaudited consolidated financial statements.

Terra Property Trust, Inc.

Consolidated Statements of Changes in Equity

(Unaudited)


	Preferred Stock		Class A Common Stock			Class B Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)
			$0.01 Par Value			$0.01 Par Value
			Shares	Amount		Shares	Amount								Total Equity
Balance at January 1, 2024	$	—	—	$	—	24,336,033	$	243,360	$	444,458,206	$	(203,047,758)	$	—	$	241,653,808
Shares issued from reinvestment of shareholder distributions	—		—	—		391	4		4,470		—		—		4,474
Distributions declared on common shares ($0.19 per share)	—		—	—		—	—		—		(4,650,636)		—		(4,650,636)
Net loss	—		—	—		—	—		—		(6,183,974)		—		(6,183,974)
Other comprehensive loss:
Available-for-sale debt securities	—		—	—		—	—		—		—		(335,782)		(335,782)
Balance at March 31, 2024	—		—	—		24,336,424	243,364		444,462,676		(213,882,368)		(335,782)		230,487,890
Shares issued from reinvestment of shareholder distributions	—		—	—		447	5		5,045		—		—		5,050
Distributions declared on common shares ($0.19 per share)	—		—	—		—	—		—		(4,650,718)		—		(4,650,718)
Net loss	—		—	—		—	—		—		(7,539,310)		—		(7,539,310)
Other comprehensive income:	—		—	—		—	—		—		—		—
Available-for-sale debt securities	—		—	—		—	—		—		—		316,392		316,392
Balance at June 30, 2024	$	—	—	$	—	24,336,871	$	243,369	$	444,467,721	$	(226,072,396)	$	(19,390)	$	218,619,304


	Preferred Stock		12.5% Series A Cumulative Non-Voting Preferred Stock			Class A Common Stock			Class B Common Stock			Additional Paid-in Capital		Accumulated Deficit
						$0.01 Par Value			$0.01 Par Value
			Shares	Amount		Shares	Amount		Shares	Amount						Total Equity
Balance at January 1, 2023	$	—	125	$	125,000	—	$	—	24,335,370	$	243,354	$	444,449,813	$	(122,935,993)	$	321,882,174
Cumulative effect of credit loss accounting standard effective January 1, 2023 (Note 2)	—		—	—		—	—		—	—		—		(4,619,723)		(4,619,723)
Shares issued from reinvestment of shareholder distributions	—		—	—		—	—		34	—		478		—		478
Redemption of Series A Preferred Stock	—		(125)	(125,000)		—	—		—	—		—		—		(125,000)
Distributions declared on common shares ($0.19 per share)	—		—	—		—	—		—	—		—		(4,650,492)		(4,650,492)
Distributions declared on preferred shares	—		—	—		—	—		—	—		—		(3,907)		(3,907)
Net income	—		—	—		—	—		—	—		—		547,479		547,479
Balance at March 31, 2023	$	—	—	$	—	—	$	—	24,335,404	$	243,354	$	444,450,291	$	(131,662,636)	$	313,031,009
Shares issued from reinvestment of shareholder distributions	—		—	—		—	—		109	—		1,510		—		1,510
Distributions declared on common shares ($0.19 per share)	—		—	—		—	—		—	—		—		(4,650,501)		(4,650,501)
Net loss	—		—	—		—	—		—	—		—		(19,237,065)		(19,237,065)
Balance at June 30, 2023	$	—	—	$	—	—	$	—	24,335,513	$	243,354	$	444,451,801	$	(155,550,202)	$	289,144,953

See notes to unaudited consolidated financial statements.

Terra Property Trust, Inc.

Consolidated Statements of Cash Flows

(Unaudited)


	Six Months Ended June 30,
	2024		2023
Cash flows from operating activities:
Net loss	$	(13,723,284)	$	(18,689,586)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization	3,863,801		2,438,477
Provision for credit losses	4,449,436		3,802,593
Amortization of net purchase premiums on loans	152,872		823,785
Straight-line rent adjustments	(113,024)		22,197
Amortization of deferred financing costs	1,502,805		1,143,668
Amortization of discount on unsecured notes payable	901,728		815,300
Amortization of above- and below-market rent intangibles	(1,528,715)		(609,983)
Amortization and accretion of investment-related fees, net	(679,753)		(475,043)
Impairment charge	—		11,765,540
Amortization of above-market rent ground lease	—		(65,174)
Realized loss on investments, net	446,009		25,024
Unrealized gain on investments, net	(178,570)		(57,808)
Distributions received from equity investment in unconsolidated investments	1,684,877		5,087,025
(Income) loss from equity investment in unconsolidated investments	(1,198,583)		4,001,731
Changes in operating assets and liabilities:
Deal deposits	—		4,241,892
Interest receivable	(1,514,187)		(245,790)
Due from related parties	(176,761)		(255,142)
Other assets	805,507		(3,232,943)
Due to Manager	(1,355,066)		(439,232)
Unearned income	(90,022)		379,562
Interest payable	189,580		688,182
Accounts payable and accrued expenses	(677,692)		1,451,483
Other liabilities	(73,385)		(609,921)
Net cash (used in) provided by operating activities	(7,312,427)		12,005,837
Cash flows from investing activities:
Proceeds from repayments of loans	110,423,185		98,977,506
Origination, purchase and funding of loans	(42,609,078)		(63,775,372)
Purchase of equity interests in unconsolidated investments	(36,600,606)		—
Distributions received in excess of equity income	2,627,499		—
Repayments of promissory note receivable	9,020,609		—
Funding for promissory note receivable	(4,962,369)		—
Proceeds from sale of marketable securities	3,551,098		—
Purchase of marketable securities	—		(1,051,754)
Purchase of equity securities	(2,022,353)		—
Purchase of held-to-maturity securities	—		(20,025,024)
Proceeds from redemption of held-for-maturity securities	—		20,000,000
Purchase of real estate properties	—		(52,313,739)
Cash acquired in purchase of real estate	—		712,608
Return of capital on equity interests in unconsolidated investments	—		10,650,947
Net cash provided by (used in) investing activities	39,427,985		(6,824,828)

Terra Property Trust, Inc.

Consolidated Statements of Cash Flows (Continued)


	Six Months Ended June 30,
	2024		2023
Cash flows from financing activities:
Principal repayments on secured financing	(84,780,619)		(102,713,974)
Proceeds from secured financing	58,246,507		130,951,380
Proceeds from obligations under participation agreements	15,000,000		1,093,862
Distributions paid	(9,291,830)		(9,302,911)
Payment of financing costs	(1,064,335)		(2,025,783)
Change in interest reserve and other deposits held on investments	662,222		(1,431,269)
Redemption of Series A Preferred Stock	—		(125,000)
Net cash (used in) provided by financing activities	(21,228,055)		16,446,305
Net increase in cash, cash equivalents and restricted cash	10,887,503		21,627,314
Cash, cash equivalents and restricted cash at beginning of period	19,536,777		36,469,592
Cash, cash equivalents and restricted cash at end of period (Note 2)	$	30,424,280	$	58,096,906


	Six Months Ended June 30,
	2024		2023
Supplemental Disclosure of Cash Flows Information:
Cash paid for interest	$	17,557,985	$	16,864,499

Supplemental non-cash information:
Reinvestment of shareholder distributions	$	9,524	$	1,988

Supplemental non-cash investing information:

In May 2023, the Company acquired five industrial buildings for a $3.5 million cash payment and the settlement of a mezzanine loan that was accounted for as an equity investment and five senior loans that were held for investment. The following table presents a summary of the total capitalized costs and the values of the net assets acquired:


Total Capitalized Costs:
Cash and cash equivalents	$	3,515,466
Loans held for investment	68,737,877
Equity investment in unconsolidated investment	10,149,642
Interest receivable	456,650
Other assets	429,326
	$	83,288,961
Net Assets Acquired
Cash and cash equivalents	$	712,608
Other assets	33,802
Land	14,457,149
Buildings and Improvements	65,365,376
Intangible asset and liability:
In-please lease	8,403,667
Below-market rent	(4,770,870)
Accounts payable and accrued expenses	(912,771)
	$	83,288,961

See notes to unaudited consolidated financial statements.

Terra Property Trust, Inc.

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2024

Note 1. Business

Terra Property Trust, Inc. (and, together with its consolidated subsidiaries, the “Company” or “Terra Property Trust”) is a real estate investment trust (“REIT”) that originates, invests in and manages a diverse portfolio of real estate and real estate-related assets. The Company was incorporated under the Maryland General Corporation Law on December 31, 2015. The Company focuses primarily on commercial real estate credit investments, including first mortgage loans, subordinated loans (including B-notes, mezzanine and preferred equity) and credit facilities throughout the United States. The Company’s loans finance the acquisition, development or recapitalization of high-quality commercial real estate in the United States. The Company focuses on middle market loans in the approximately $10 million to $50 million range, which in the Company’s experience have been subject to less competition, offer higher risk-adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification. The Company may also make strategic real estate equity and non-real estate-related investments that align with its investment objectives and criteria.

On January 1, 2016, Terra Secured Income Fund 5, LLC (“Terra Fund 5”), the Company’s then parent, contributed its consolidated portfolio of net assets to the Company pursuant to a contribution agreement in exchange for shares of the Company’s common stock. Upon receipt of the contribution of the consolidated portfolio of net assets from Terra Fund 5, the Company commenced its operations on January 1, 2016. On March 2, 2020, the Company engaged in a series of transactions pursuant to which the Company issued an aggregate of 4,574,470.35 shares of its common stock in exchange for the settlement of an aggregate of $49.8 million of participation interests in loans held by the Company, cash of $25.5 million and other working capital.

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

The Company’s investment activities are externally managed by Terra REIT Advisors, LLC (the “Manager”), a subsidiary of the Company’s sponsor, Terra Capital Partners, LLC (“Terra Capital Partners”), pursuant to a management agreement (the “Management Agreement”), under the oversight of the Company’s board of directors (the “Board”) (Note 7). The Company does not currently have any employees and does not expect to have any employees. Services necessary for the Company’s business are provided by individuals who are employees of the Manager or by individuals who were contracted by the Company or by the Manager to work on behalf of the Company pursuant to the terms of the Management Agreement.

On October 1, 2022, pursuant to that certain Agreement and Plan of Merger, dated as of May 2, 2022 (the “Merger Agreement”), Terra Income Fund 6, Inc. (“Terra BDC”), merged with and into Terra Income Fund 6, LLC (“Terra LLC”), a wholly owned subsidiary of the Company, with Terra LLC continuing as the surviving entity of the merger (the “BDC Merger”) and as a wholly owned subsidiary of the Company. Pursuant to the terms of the transactions described in the Merger Agreement, approximately 4,847,910 shares of the Company’s Class B Common Stock, $0.01 par value per share (“Class B Common Stock”), were issued to former Terra BDC stockholders in connection with the BDC Merger, based on the number of outstanding shares of Terra BDC Common Stock as of October 1, 2022.

On December 20, 2023, Terra Fund 5 announced that effective December 29, 2023 (the “Distribution Date”), Terra Fund 5 would distribute all of its shares of the Company’s Class B Common Stock to its members as part of the winding up of Terra Fund 5. On the Distribution Date, each member of Terra Fund 5 received 2,252.02 shares of the Company’s Class B Common Stock for each unit of membership interest in Terra Fund 5 held by such member. Because Terra Fund 5 previously owned its interests in the shares of Class B Common Stock indirectly through its ownership of interests in Terra JV, LLC (“Terra JV”), prior to the Distribution Date, Terra JV first distributed the shares of Class B Common Stock to Terra Fund 5 and Terra Secured Income Fund 7, LLC (“Terra Fund 7”), and Terra Fund 5 then distributed those shares to its members on the Distribution Date and Terra Fund 7 became a direct stockholder of the Company’s Class B Common Stock.

Notes to Unaudited Consolidated Financial Statements

As of June 30, 2024, Terra Fund 7 and Terra Offshore Funds REIT, LLC (“Terra Offshore REIT”) held 8.7% and 10.1%, respectively, of the issued and outstanding shares of the Company’s common stock.

Note 2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include all of the Company’s accounts and those of its consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation.

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

The Company accounts for investments in which it has significant influence but not a controlling financial interest using the equity method of accounting (see Note 4).

VIE Model

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

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

Loans Held for Investment

The Company originates, acquires, and structures, or acquires through participations, real estate-related loans generally to be held to maturity (collectively the “loans”). Loans held for investment are carried at the principal amount outstanding, adjusted for the accretion of discounts on investments and exit fees, and the amortization of premiums on investments and origination fees. The Company’s preferred equity investments, which are economically similar to mezzanine loans and subordinate to any loans but senior to common equity, are accounted for as loans held for investment. Loans are carried at amortized cost less allowance for credit losses. Amortized cost is the amount at which a financing receivable or a loan is originated or acquired, adjusted for accretion, or amortization of premium, discount, and net deferred fees or costs, collection of cash and write-offs.

Allowance for Credit Losses

On January 1, 2023, the Company adopted the provisions of Accounting Standards Codification (“ASC”) 326, Financial Instruments – Credit Losses. ASC 326 mandates the use of a current expected credit loss (“CECL”) methodology for estimating future credit losses of certain financial instruments measured at amortized cost, instead of the “incurred loss” methodology previously required under United States generally accepted accounting principles (“U.S. GAAP”). The CECL methodology requires the consideration of possible credit losses over the life of an instrument as opposed to estimating credit losses upon the occurrence of an actual loss event under the previous “incurred loss” methodology. As permitted by ASC 326, the Company elected not to measure an allowance for credit losses on accrued interest receivable (which is presented separately on the consolidated balance sheet), but rather write off in a timely manner by reversing interest income that would likely be uncollectible. The Company’s adoption of the ASC 326 resulted in a $4.6 million increase to total reserve, including reserve on future funding commitments, which was recognized as a cumulative-effect adjustment to member’s capital as of January 1,

Notes to Unaudited Consolidated Financial Statements

2023. Subsequent to the adoption of the CECL methodology, any increase or decrease to the allowance for credit losses is recorded in earnings on the consolidated statement of operations.

Performing Loans

The Company uses a model-based approach for estimating the allowance for credit losses on performing loans on a collective basis, including future funding commitments for which the Company does not have the unconditional right to cancel, as these loans share similar risk characteristics. The Company utilizes information obtained from internal and external sources relating to past events, current economic conditions and reasonable and supportable forecasts about the future to determine the expected credit losses for its loan portfolio. The Company utilizes a commercial mortgage-based, third-party loan loss model and because the Company does not have a meaningful history of realized credit losses on its loan portfolio, it subscribes to a database service to provide historical proxy loan loss information. The Company employs logistic regression to forecast expected losses at the loan level based on a commercial real estate loan securitization database that contains activity dating back to 1998. The Company has chosen to incorporate a weighted average macroeconomic forecast that encompasses baseline, upside and downside scenarios, into its allowance for credit losses on performing loans estimate during the reasonable and supportable forecast period which is currently eight quarters. The Company selects certain economics variables from a group of independent variables such as Commercial Real Estate Price Index, unemployment and interest rate which are included in the model as part of macroeconomic forecast and updated regularly based on current economic trends. The specific loan level information input into the model includes loan-to-value and debt service coverage ratio metrics, as well as principal balances, property type, location, coupon rate, coupon rate type, original or remaining term, expected repayment dates and contractual future funding commitments. Based on the inputs, the loan loss model determines a loan loss rate through the generation of a probability of default (PD) and loss given default (LGD) for each loan. The allowance for credit losses on performing loans is then calculated by applying the loan loss rate to the total outstanding loan balance of each loan. A significant amount of judgment is applied in selecting inputs and analyzing results produced by the models to determine the allowance for credit losses on performing loans. Changes in such estimates can significantly affect the expected credit losses.

Beyond the Company’s reasonable and supportable forecast period, the Company reverts to historical loss information on a straight-line basis over the remaining contractual loan term, taken from a period that most accurately reflects the expectation of conditions expected to exist during the period of reversion. The Company may adjust historical loss information for differences in risk that may not reflect the characteristics of its current portfolio, including but not limited to, loan-to-value and debt service coverage ratios, among other relevant factors. The method of reversion selected represents the best estimate of the collectability of the investments and is reevaluated each reporting period.

The determination of the performing loans credit loss estimate considers historical loss information and current economic conditions for each loan, reversion period and reasonable and supportable forecasts about the future. The reasonable and supportable forecast period is determined based on the Company’s assessment of the most likely scenario of assumptions and plausible outcomes for the U.S. economy. The Company regularly evaluates the reasonable and supportable forecast period to determine if a change is needed.

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

Unfunded Commitments

Some of the Company’s performing loans include commitments to fund incremental proceeds to the borrowers over the life of the loan and these unfunded commitments are also subject to the CECL methodology because the Company does not have an unconditional right to cancel such commitments. The allowance for credit losses related to unfunded commitments is recorded as a component of other liabilities on the Company’s consolidated balance sheets. This allowance for credit losses is estimated using the same method outlined above for the Company’s outstanding performing loan balances and increases or decreases are also recorded in earnings on the consolidated statements of operations.

Notes to Unaudited Consolidated Financial Statements

Non-Performing Loans

During the loan review process, if the Company determines that it is not able to collect all amounts due for both principal and interest according to the contractual terms of a loan, the Company considers that loan non-performing. For all non-performing loans, such as those in default, collateral-dependent or modified loans, including historical troubled debt restructurings, the Company removes these loans from the industry loss rate approach described above and analyzes them separately. The credit loss reserve for these loans is calculated as any excess of the amortized cost of the loan over (i) the present value of expected future cash flows discounted at the appropriate discount rate or (ii) the fair value of collateral, if repayment is expected solely from the collateral.

Loans Not Secured by Real Estate

The Company has two loans that are not secured by real estate. These loans, which are included in other assets on the consolidated balance sheets, are recorded at amortized cost. The Company performs a separate analysis based on recoverability to determine the allowance for credit losses on these loans. As of June 30, 2024, the Company did not record any allowance for credit losses on these two loans because the Company believes that it will be able to collect all outstanding interest and principal on or before the maturity date of each loan.

Equity Investment in Unconsolidated Investments

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

The Company classifies distributions received from equity method investments using the cumulative earnings approach. Distributions received are considered returns on the investment and classified as cash inflows from operating activities. If, however, the investor’s cumulative distributions received, less distributions received in prior periods determined to be returns of investment, exceed cumulative equity in earnings recognized, the excess is considered a return of investment and is classified as cash inflows from investing activities.

The Company evaluates its equity investment unconsolidated investments on a periodic basis to determine if there are any indicators that the value of its equity investments may be impaired and whether or not that impairment is other-than-temporary. To the extent an impairment has occurred and is determined to be other-than-temporary, the Company measures the charge as the excess of the carrying value of its investment over its estimated fair value, which is determined by calculating its share of the estimated fair market value of the underlying net assets based on the terms of the applicable partnership or joint venture agreements.

Equity Securities Without Readily Determinable Fair Value

The Company accounts for its equity security without readily determinable fair value at cost, which is included in other assets on the consolidated balance sheets. The Company has elected the measurement alternative and therefore will evaluate whether the security continues to qualify for the alternative at each reporting period. The Company evaluates its equity security without readily determinable fair value on a periodic basis to determine if there is an observable price change in an orderly transaction for similar investments or if there are any indicators that the value of its equity security may be impaired. The Company will make fair value adjustments, if any, or reductions for any impairment to derive the carrying value of the investment..

Marketable Securities

From time to time, the Company may invest in short-term debt. These securities are classified as available-for-sale securities and are carried at fair value. Changes in the fair value of debt securities are reported in other comprehensive income until a gain or loss on the securities is realized. The Company may also invest in short-term equity securities. Changes in the fair value of equity securities are recognized in earnings.

Real Estate Owned, Net

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

Notes to Unaudited Consolidated Financial Statements

Acquisition of properties generally are accounted for as asset acquisitions. Under asset acquisition accounting, the costs to acquire real estate, including transaction costs, are accumulated and then allocated to individual assets and liabilities acquired based upon their relative fair value. The Company allocates the purchase price of its real estate acquisitions to land, building, tenant improvements, acquired in-place leases, intangibles for the value of any above or below market leases at fair value and to any other identified intangible assets or liabilities. The Company amortizes the value allocated to in-place leases over the remaining lease term, which is reported in depreciation and amortization expense on its consolidated statements of operations. The value allocated to above or below market leases are amortized over the remaining lease term as an adjustment to rental income.

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

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

Leases

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

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

As of October 19, 2023, in connection with the deed in lieu of foreclosure discussed in Note 5, the Company is no longer a party to the ground lease and the related ROU assets and liabilities were written off.

Revenue Recognition

Revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Interest Income: Interest income is accrued based upon the outstanding principal amount and contractual terms of the loans and preferred equity investments that the Company expects to collect, and it is accrued and recorded on a daily basis. Discounts and premiums on investments purchased are accreted or amortized over the expected life of the respective loan using the effective yield method, and are included in interest income in the consolidated statements of operations. Loan origination fees and exit fees, net of portions attributable to obligations under participation agreements, are capitalized and amortized or accreted to interest income over the life of the investment using the effective yield method. Outstanding interest receivable is assessed for recoverability. The Company generally reverses the accrued and unpaid interest against interest income and no longer accrues for the interest when, in the opinion of the Manager, recovery of interest and principal becomes not probable. Interest is then recorded on the basis of cash received until accrual is resumed when the loan becomes contractually current and performance is demonstrated. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability.

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

Notes to Unaudited Consolidated Financial Statements

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

Other Revenues: Prepayment fee income is recognized as prepayments occur. All other income is recognized when earned.

Cash, Cash Equivalents and Restricted Cash

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

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

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

The following table provides a reconciliation of cash, cash equivalents and restricted cash in the Company’s consolidated balance sheets to the total amount shown in its consolidated statements of cash flows as of:


	June 30,
	2024		2023
Cash and cash equivalents	$	18,937,034	$	51,808,573
Restricted cash	4,617,208		3,201,935
Cash held in escrow by lender	6,870,038		3,086,398
Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows	$	30,424,280	$	58,096,906

Participation Interests

Loan participations from the Company which do not qualify for sale treatment remain on the Company’s consolidated balance sheets and the proceeds are recorded as obligations under participation agreements. For the investments for which participation has been granted, the interest earned on the entire loan balance is recorded within “Interest income” and the interest related to the participation interest is recorded within “Interest expense from obligations under participation agreements” in the consolidated statements of operations. Interest expense from obligations under participation agreement is reversed when recovery of interest income on the related loan becomes not probable. See “Obligations Under Participation Agreements” in Note 8 for additional information.

Secured Financing Agreements, Net

The Company's secured financing agreements include two master repurchase agreements, a revolving line of credit, non-recourse property mortgages, note-on-note financing arrangements and a term loan. The Company accounts for borrowings under these financing arrangements as secured transactions, which are carried at their contractual amounts (cost), net of unamortized deferred financing fees. See “Secured Financing Arrangements” in Note 8 for additional information.

Fair Value Measurements

U.S. GAAP establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The Company has not elected the fair value option for its financial instruments, including loans held for investment, loans held for investment acquired through participation, obligations under participation agreements, secured borrowing, unsecured notes, mortgage loan payable, term loan payable, repurchase

Notes to Unaudited Consolidated Financial Statements

agreement payment and revolving line of credit. Such financial instruments are carried at amortized cost, less impairment, where applicable. Marketable securities are financial instruments that are reported at fair value.

Deferred Financing Costs

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

Income Taxes

The Company has elected to be taxed as a REIT under the Internal Revenue Code commencing with the taxable year ended December 31, 2016. In order to qualify as a REIT, the Company is required, among other things, to distribute dividends equal to at least 90% of its REIT net taxable income to the stockholders and meet certain tests regarding the nature of its income and assets. As a REIT, the Company is not subject to federal income taxes on income and gains distributed to the stockholders as long as certain requirements are satisfied, principally relating to the nature of income and the level of distributions, as well as other factors. If the Company fails to continue to qualify as a REIT in any taxable year and does not qualify for certain statutory relief provisions, the Company will be subject to U.S. federal and state income taxes at regular corporate rates (including any applicable alternative minimum tax) beginning with the year in which it fails to qualify and may be precluded from being able to elect to be treated as a REIT for the Company’s four subsequent taxable years. Any gains from the sale of foreclosed properties within two years are subject to U.S. federal and state income taxes at regular corporate rates. As of June 30, 2024, the Company has satisfied all the requirements for a REIT.

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 six months ended June 30, 2024 and 2023, the Company did not incur any interest or penalties. Although the Company files federal and state tax returns, its major tax jurisdiction is federal. The Company’s 2020-2023 federal tax returns remain subject to examination by the Internal Revenue Service.

Earnings Per Share

The Company has a simple equity capital structure with only common stock outstanding as of June 30, 2024 and December 31, 2023, and common stock and preferred stock outstanding prior to March 31, 2023. As a result, earnings per share, as presented, represents both basic and dilutive per-share amounts for the periods presented in the consolidated financial statements. Income per basic share of common stock is calculated by dividing net income allocable to common stock by the weighted-average number of shares of common stock issued and outstanding during such period.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may ultimately differ from those estimates, and those differences could be material.

Segment Information

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

Note 3. Loans Held for Investment

The Company elected the practical expedient under ASC 326 to exclude accrued interest from amortized cost. As of June 30, 2024 and December 31, 2023, accrued interest receivable of $8.1 million and $6.5 million, respectively, is included in interest receivable on the consolidated balance sheets, and is excluded from the amortized cost of loans held for investment.

Notes to Unaudited Consolidated Financial Statements

Portfolio Summary

The following table provides a summary of the Company’s loan portfolio as of:


	June 30, 2024									December 31, 2023
	Fixed Rate			Floating Rate (1)(2)(3)			Total			Fixed Rate			Floating Rate (1)(2)(3)			Total
Number of loans	3			14			17			5			16			21
Principal balance	$	15,340,352		$	399,941,496		$	415,281,848		$	53,998,648		$	455,462,178		$	509,460,826
Carrying value	$	15,170,142		$	369,182,052		$	384,352,194		$	54,095,173		$	402,377,085		$	456,472,258
Fair value	$	14,681,958		$	372,796,287		$	387,478,245		$	53,435,742		$	403,904,207		$	457,339,949
Weighted-average coupon rate	10.29		%	13.13		%	13.02		%	12.95		%	12.92		%	12.93		%
Weighted-average remaining term (years)	2.01			0.79			0.85			1.18			0.70			0.77

_______________

(1)These loans pay a coupon rate of Secured Overnight Financing Rate (“SOFR”) or forward-looking term rate based on SOFR (“Term SOFR”), as applicable, plus a fixed spread. Coupon rates shown were determined using the London Interbank Offered Rate (“LIBOR”) of 5.45%, average SOFR of 5.34% and Term SOFR of 5.34% as of June 30, 2024 and average SOFR of 5.34% and Term SOFR of 5.35% as of December 31, 2023.

(2)As of June 30, 2024 and December 31, 2023, amount included $302.6 million and $342.9 million of senior mortgages used as collateral for $192.5 million and $204.9 million of borrowings under secured financing arrangements, respectively (Note 9).

(3)As of June 30, 2024 and December 31, 2023, 13 and 14 loans, respectively, were subject to a SOFR or Term SOFR floor, as applicable.

Lending Activities

The following tables present the activities of the Company’s loan portfolio:


	Loans Held for Investment		Loans Held for Investment through Participation Interests		Total
Balance, January 1, 2024	$	417,913,773	$	38,558,485	$	456,472,258
Principal repayments received	(110,423,185)		—		(110,423,185)
New loans made	42,609,078		—		42,609,078
Net amortization of premiums on loans	(152,872)		—		(152,872)
Accrual, payment and accretion of investment-related fees and other, net	11,674		2,213		13,887
Provision for credit losses	(4,141,777)		(25,195)		(4,166,972)
Balance, June 30, 2024	$	345,816,691	$	38,535,503	$	384,352,194

Notes to Unaudited Consolidated Financial Statements


	Loans Held for Investment		Loans Held for Investment through Participation Interests		Total
Balance, January 1, 2023	$	584,417,939	$	42,072,828	$	626,490,767
Cumulative effect of credit loss accounting standard effective January 1, 2023 (Note 2)	(4,123,143)		(126,909)		(4,250,052)
New loans made	63,775,372		—		63,775,372
Principal repayments received	(95,695,298)		(3,282,208)		(98,977,506)
Net amortization of premiums on loans	(823,785)		—		(823,785)
Settlement of loans in exchange for real estate properties (Note 5)	(68,737,877)		—		(68,737,877)
Accrual, payment and accretion of investment-related fees and other, net	(242,361)		(9,197)		(251,559)
Provision for credit losses	(3,397,676)		(9,178)		(3,406,854)
Balance, June 30, 2023	$	475,173,171	$	38,645,336	$	513,818,507

Portfolio Information

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


	June 30, 2024						December 31, 2023
Loan Structure	Principal Balance		Carrying Value		% of Total		Principal Balance		Carrying Value		% of Total
First mortgages	$	303,953,051	$	307,692,865	80.1	%	$	365,465,500	$	368,918,890	80.9	%
Preferred equity investments	93,884,440		94,128,889		24.5	%	126,550,969		127,105,312		27.8	%
Mezzanine loans	17,444,357		17,435,749		4.5	%	17,444,357		17,424,081		3.8	%
Allowance for credit losses	—		(34,905,309)		(9.1)	%	—		(56,976,025)		(12.5)	%
Total	$	415,281,848	$	384,352,194	100.0	%	$	509,460,826	$	456,472,258	100.0	%


	June 30, 2024						December 31, 2023
Property Type	Principal Balance		Carrying Value		% of Total		Principal Balance		Carrying Value		% of Total
Office	$	115,976,792	$	116,315,046	30.3	%	$	144,812,619	$	144,853,769	31.7	%
Industrial	70,022,380		70,022,380		18.2	%	67,579,869		67,612,621		14.8	%
Infill land	53,900,000		55,341,248		14.4	%	52,839,509		54,172,663		11.9	%
Multifamily	53,322,162		53,659,242		14.0	%	85,660,082		86,210,868		18.9	%
Mixed-use	47,838,132		48,232,387		12.5	%	63,096,365		63,531,806		13.9	%
Hotel - full/select service	43,222,382		43,832,428		11.4	%	43,222,382		43,801,303		9.6	%
Student housing	31,000,000		31,854,772		8.3	%	31,000,000		31,821,832		7.0	%
Infrastructure	—		—		—	%	21,250,000		21,443,421		4.7	%
Allowance for credit losses	—		(34,905,309)		(9.1)	%	—		(56,976,025)		(12.5)	%
Total	$	415,281,848	$	384,352,194	100.0	%	$	509,460,826	$	456,472,258	100.0	%

Notes to Unaudited Consolidated Financial Statements


	June 30, 2024						December 31, 2023
Geographic Location	Principal Balance		Carrying Value		% of Total		Principal Balance		Carrying Value		% of Total
United States
California	$	117,279,912	$	118,453,411	30.9	%	$	119,093,246	$	120,296,944	26.4	%
New York	75,317,144		75,317,144		19.6	%	90,483,672		90,483,672		19.8	%
New Jersey	85,922,380		87,067,380		22.7	%	82,419,378		83,489,049		18.3	%
Arizona	31,000,000		31,296,248		8.1	%	31,000,000		31,296,235		6.9	%
Georgia	30,000,000		30,300,000		7.9	%	74,335,828		74,602,328		16.3	%
Utah	28,000,000		28,910,000		7.5	%	49,250,000		50,329,949		11.0	%
North Carolina	21,826,479		21,929,665		5.7	%	21,826,479		21,929,657		4.8	%
Washington	18,935,933		18,983,655		4.9	%	34,052,223		34,020,449		7.5	%
Massachusetts	7,000,000		7,000,000		1.8	%	7,000,000		7,000,000		1.5	%
Allowance for credit losses	—		(34,905,309)		(9.1)	%	—		(56,976,025)		(12.5)	%
Total	$	415,281,848	$	384,352,194	100.0	%	$	509,460,826	$	456,472,258	100.0	%

Allowance for Credit Losses

As described in Note 2, on January 1, 2023, the Company adopted the provisions of ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires entities to recognize credit losses on financial instruments based on an estimate of current expected credit losses. The adoption of ASU 2016-13 resulted in a $4.6 million increase to total reserve, including reserve on future funding commitments, which was recognized as a cumulative-effect adjustment to accumulated deficits as of January 1, 2023.

The following table presents the activity in allowance for credit loss for funded loans:


	Six Months Ended June 30,
	2024		2023
Allowance for credit losses, beginning of period	$	56,976,025	$	25,471,890
Cumulative effect of credit loss accounting standard effective January 1, 2023 (Note 2)	—		4,250,052
Provision for credit losses	4,166,972		3,406,854
Charge-offs	(26,237,688)		—
Recoveries	—		—
Allowance for credit losses, end of period	$	34,905,309	$	33,128,796

Certain of the Company’s performing loans contain provisions for future funding commitments, which are subject to the borrower meeting certain performance-related metrics that are monitored by the Company. These unfunded commitments amounted to approximately $27.8 million and $35.7 million as of June 30, 2024 and December 31, 2023, respectively. The liability for credit losses on unfunded commitments is included in other liabilities on the consolidated balance sheets.

The following table presents the activity in the liability for credit losses on unfunded commitments:


	Six Months Ended June 30,
	2024		2023
Liability for credit losses on unfunded commitments, beginning of period	$	326,907	$	—
Cumulative effect of credit loss accounting standard effective January 1, 2023 (Note 2)	—		369,671
Provision for credit losses	282,464		395,739
Liability for credit losses on unfunded commitments, end of period	$	609,371	$	765,410

Accrued Interest Receivable

The Company elected not to measure a CECL reserve on accrued interest receivable due to the Company’s policy of writing off uncollectible accrued interest receivable balances in a timely manner. If the Company determines it has uncollectible accrued interest receivable, it generally would reverse the accrued and unpaid interest against interest income and no longer accrue for interest. For the three and six months ended June 30, 2024, the Company reversed $0.7 million of accrued interest

Notes to Unaudited Consolidated Financial Statements

income because such income was deemed uncollectible. For the three and six months ended June 30, 2023, the Company did not reverse any interest income accrual because all accrued interest income was deemed collectible. For the three months ended June 30, 2024 and 2023, the Company suspended interest income accrual of $6.8 million and $3.7 million on five and three loans, respectively, because recovery of such income was not probable. For the six months ended June 30, 2024 and 2023, the Company suspended interest income accrual of $12.6 million and $7.2 million on five and three loans, respectively, because recovery of such income was not probable. As of June 30, 2024 and December 31, 2023, interest receivable recognized on these loans was $4.8 million and $3.4 million, respectively.

Non-Performing Loans

As discussed in Note 2, for loans that are considered non-performing, the Company removes them from the industry loss rate approach and analyzes them separately for recoverability. As of June 30, 2024 and December 31, 2023, the Company had six non-performing loans with total carrying value of $192.7 million and $209.3 million, respectively. Accordingly, the Company utilized the estimated fair value of the loan collateral or sponsor’s guarantee to estimate the total allowance for credit losses of $31.0 million and $54.6 million as of June 30, 2024 and December 31, 2023, respectively. Please see “Note 6. Fair Value Measurements – Significant Unobservable Inputs” for information on how the fair values of these loans were determined.

Loan Risk Rating

The Company assesses the risk factors of each loan and assigns each loan a risk rating between 1 and 5, which is an average of the numerical ratings in the following categories: (i) sponsor capability and financial condition; (ii) loan and collateral performance relative to underwriting; (iii) quality and stability of collateral cash flows and/or reserve balances; and (iv) loan to value. Based on a 5-point scale, the Company’s loans are rated “1” through “5”, from less risk to greater risk, as follows:


Risk Rating						Description
1						Very low risk
2						Low risk
3						Moderate/average risk
4						Higher risk
5						Highest risk

The following tables present the amortized cost of the Company’s loan portfolio by year of origination and loan risk rating:


	June 30, 2024
Loan Risk Rating	Number of Loans	Amortized Cost		% of Total		Amortized Cost by Year Originated
						2024		2023		2022		2021		2020		Prior
1	—	$	—	—	%	$	—	$	—	$	—	$	—	$	—	$	—
2	1	7,000,000		1.7	%	—		—		—		—		—		7,000,000
3	9	200,786,291		47.8	%	30,300,000		18,983,655		31,296,248		29,420,641		27,970,291		62,815,456
4	1	18,811,745		4.5	%	—		—		18,811,745		—		—		—
5	—	—		—	%	—		—		—		—		—		—
Non-performing	6	192,659,467		46.0	%	—		—		87,067,379		28,910,000		—		76,682,088
	17	419,257,503		100.0	%	$	30,300,000	$	18,983,655	$	137,175,372	$	58,330,641	$	27,970,291	$	146,497,544
Allowance for credit losses		(34,905,309)
Total, net of allowance for credit losses		$	384,352,194

Notes to Unaudited Consolidated Financial Statements


	December 31, 2023
Loan Risk Rating	Number of Loans	Amortized Cost		% of Total		Amortized Cost by Year Originated
						2023		2022		2021		2020		2019		Prior
1	—	$	—	—	%	$	—	$	—	$	—	$	—	$	—	$	—
2	1	7,000,000		1.4	%	—		—		—		—		—		7,000,000
3	13	278,296,080		54.2	%	10,809,959		77,383,153		97,514,884		27,810,327		61,842,453		2,935,304
4	1	18,855,139		3.7	%	—		18,855,139		—		—		—		—
5	—	—		—	%	—		—		—		—		—		—
Non-performing	6	209,297,064		40.7	%	—		60,612,621		—		—		58,200,770		90,483,673
	21	513,448,283		100.0	%	$	10,809,959	$	156,850,913	$	97,514,884	$	27,810,327	$	120,043,223	$	100,418,977
Allowance for credit losses		(56,976,025)
Total, net of allowance for credit losses		$	456,472,258

Note 4. Equity Investment in Unconsolidated Investments

The Company owns interests in a limited partnership, joint ventures and a preferred equity investment with profit-sharing feature. The Company accounts for its interests in these investments under the equity method of accounting (Note 2).

Equity Investment in a Limited Partnership

On August 3, 2020, the Company entered into a subscription agreement with Mavik Real Estate Special Opportunities Fund, LP (“RESOF”) whereby the Company committed to fund up to $50.0 million to purchase a limited partnership interest in RESOF. RESOF’s primary investment objective is to generate attractive risk-adjusted returns by purchasing performing and non-performing mortgages, loans, mezzanines and other credit instruments supported by underlying commercial real estate assets. RESOF may also opportunistically originate high-yield mortgages or loans in real estate special situations including rescue financings, bridge loans, restructurings and bankruptcies (including debtor-in-possession loans). The general partner of RESOF is Mavik Real Estate Special Opportunities Fund GP, LLC, which is a subsidiary of the Company’s sponsor, Terra Capital Partners. The Company evaluated its equity interest in RESOF and determined it does not have a controlling financial interest and is not the primary beneficiary. Accordingly, the equity interest in RESOF is accounted for as an equity method investment.

The following tables present a summary of information regarding the Company’ equity investment in RESOF:


	June 30, 2024					December 31, 2023
	Ownership Interest	Carrying Value		Unfunded Commitment		Ownership Interest	Carrying Value		Unfunded Commitment
Equity investment in RESOF	14.9%	$	33,452,393	$	23,277,662	14.9%	$	18,196,583	$	37,444,080


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Income (loss) from equity investment in RESOF	$	1,775,929	$	(1,159,388)	$	2,774,268	$	(855,788)
Distributions received from RESOF	$	1,035,966	$	921,887	$	1,684,877	$	4,709,670

Notes to Unaudited Consolidated Financial Statements

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


	June 30, 2024		December 31, 2023
Investments at fair value (cost of $359,640,878 and $196,129,031, respectively)	$	370,126,686	$	199,032,013
Other assets	16,076,100		16,502,225
Total assets	386,202,786		215,534,238
Revolving line of credit, net of financing costs	105,316,762		44,762,534
Obligations under participation agreement (proceeds of $48,487,413 and $38,444,357, respectively)	48,913,985		38,881,032
Other liabilities	12,731,638		13,641,742
Total liabilities	166,962,385		97,285,308
Partners’ capital	$	219,240,401	$	118,248,930


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Total investment income	$	14,200,717	$	8,264,132	$	25,033,864	$	16,375,911
Total expenses	5,559,608		3,827,584		9,741,937		6,994,379
Net investment income	8,641,109		4,436,548		15,291,927		9,381,532
Unrealized appreciation (depreciation) on investments	2,576,304		(288,031)		2,048,392		(883,942)
Provision for income tax	—		(138,944)		—		(138,944)
Net increase in partners’ capital resulting from operations	$	11,217,413	$	4,009,573	$	17,340,319	$	8,358,646

Equity Investment in Joint Ventures

The Company beneficially owns equity interests in joint ventures that invest in real estate properties, opportunistic debt and equity securities, and indirectly, together with other non-affiliated entities, a non-real estate operating company. The Company evaluated its equity interests in these entities and determined it does not have a controlling financial interest and is not the primary beneficiary. Accordingly, the equity interests in the joint ventures are accounted for as equity method investments.

The following tables present a summary of the Company’s equity investment in the joint ventures:


		June 30, 2024			December 31, 2023
Entity	Co-owner	Beneficial Ownership Interest	Carrying Value		Beneficial Ownership Interest	Carrying Value
LEL Arlington JV LLC	Third party/Affiliate	27.2%	$	6,629,749	27.2%	$	7,024,245
LEL NW 49th JV LLC (1)	Third party/Affiliate	27.2%	98,974		27.2%	1,619,157
TCG Corinthian FL Portfolio JV LLV	Third party/Affiliate	30.6%	6,757,895		30.6%	5,590,427
610 Walnut Investors LLC	Third party	38.4%	3,660,985		42.4%	4,740,914
MASPEN MS I LLC (2)	Affiliates	2.4%	50,500		—%	—
Axar Special Opportunity Fund VI-B LLC (3)	N/A	100.0%	5,314,958		—%	—
			$	22,513,061		$	18,974,743

_______________

(1)In June 2024, this joint venture sold its underlying real estate property and distributed proceeds to the members. The Company’s portion of the distribution was $2.6 million.

Notes to Unaudited Consolidated Financial Statements

(2)In May 2024, the Company contributed $50,000 to this entity for the purpose of investing in opportunistic equity and debt securities. This entity is jointly owned with two related parties managed by the Manager.

(3)In June 2024, the Company made a $20.0 million capital commitment to this fund that has indirectly invested, together with other non-affiliated entities, in a non-real estate operating company. As of June 30, 2024, the total amount contributed was $5.0 million. The Company determined it is not a primary beneficiary of the fund and therefore accounts for the investment using the equity method of accounting.


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Loss from equity investment in the joint ventures	$	(179,937)	$	(600,546)	$	(1,651,663)	$	(1,341,006)
Distributions received from the joint ventures	$	2,627,499	$	—	$	2,627,499	$	—

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


	June 30, 2024		December 31, 2023
Net investments in real estate	$	201,367,478	$	223,039,486
Other assets	25,415,540		18,362,425
Total assets	226,783,018		241,401,911
Mortgage loans payable	159,694,177		187,269,209
Other liabilities	14,400,636		4,509,167
Total liabilities	174,094,813		191,778,376
Members’ capital	$	52,688,205	$	49,623,535


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Revenues	$	4,462,447	$	4,243,689	$	8,925,318	$	8,168,268
Operating expenses	(2,753,672)		(2,181,707)		(5,226,641)		(4,324,974)
Depreciation and amortization expense	(2,005,343)		(1,728,214)		(3,960,419)		(3,693,251)
Interest expense	(3,534,694)		(2,595,844)		(6,897,252)		(5,155,798)
Gain on sale of real estate	4,816,477		—		4,816,477		—
Unrealized loss	(731,824)		(423,481)		(1,584,077)		(1,249,982)
Net income (loss)	$	253,391	$	(2,685,557)	$	(3,926,594)	$	(6,255,737)

Other Equity Investments

In June 2024, the Company entered into a preferred equity agreement with TCC Boundary Partners LLC. The investment carries interest at an annual rate of 15.0% and matures on June 30, 2029. Additionally, the Company will receive distributions in the event that net proceeds from the sale of underlying property exceed certain internal rate of return thresholds. Because the Company shares residual profit from the sale of underlying property with the borrower, the Company accounts for the investment using the equity method of accounting. As of June 30, 2024, the Company's investment had a carrying value of $14.7 million. For both the three and six months ended June 30, 2024, the Company recorded $0.1 million in equity income from TCC Boundary Partners LLC and did not receive any distributions.

Note 5. Real Estate Owned, Net

Real Estate Activities

2024 — In January 2024, a lease for a space in one of the industrial properties was terminated and the Company received a termination fee of $0.03 million. In connection with the lease termination, the Company wrote off the related unamortized in-place lease of $0.3 million and unamortized below-market rent of $0.1 million. Subsequent to the lease termination, the Company entered into a new lease with another tenant for the same space.

Notes to Unaudited Consolidated Financial Statements

2023 — During the three and six months ended June 30, 2023, the Company recorded an impairment charge of $11.8 million on the multi-tenant office building located in California in order to reduce the carrying value of the building to its estimated fair value.

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

Property
Location

Number of
Properties

Date of
Acquisition

Property Type

Total Capitalized
Costs

Texas, United States

3/24/2023

Industrial

48,798,273

Texas, United States

5/25/2023

Industrial

83,288,961

132,087,234

These acquisitions were deemed to be real estate asset acquisitions, and therefore total transaction costs were capitalized to the cost basis of the assets. The following table presents an allocation of the total capitalized costs:


Total Capitalized Costs:
Cash and cash equivalents	$	52,313,739
Loans held for investment	68,737,877
Equity investment in unconsolidated investment	10,149,642
Interest receivable	456,650
Other assets	429,326
	$	132,087,234
Net Assets Acquired
Cash and cash equivalents	$	712,608
Other assets	33,802
Land	23,785,004
Buildings and Improvements	104,613,728
Intangible assets and liabilities:
In-place lease (weighted-average expected life of 3.95 years)	12,719,000
Below-market rent (weighted-average expected life of 3.98 years)	(8,864,137)
Accounts payable and accrued expenses	(912,771)
	$	132,087,234

Notes to Unaudited Consolidated Financial Statements

Real Estate Owned, Net

Real estate owned is comprised of eight industrial buildings located in Texas with lease intangible assets and liabilities. The following table presents the components of real estate owned, net as of:


	June 30, 2024						December 31, 2023
	Cost		Accumulated Depreciation/Amortization		Net		Cost		Accumulated Depreciation/Amortization		Net
Real estate:
Land	$	23,785,004	$	—	$	23,785,004	$	23,785,004	$	—	$	23,785,004
Building and building improvements	104,924,922		(3,570,954)		101,353,968		104,915,714		(1,986,016)		102,929,698
Tenant improvements	29,585		(547)		29,038		25,032		(15,401)		9,631
Total real estate	128,739,511		(3,571,501)		125,168,010		128,725,750		(2,001,417)		126,724,333
Lease intangible assets:
In-place lease	12,060,731		(4,490,669)		7,570,062		12,719,000		(2,849,636)		9,869,364
Total intangible assets	12,060,731		(4,490,669)		7,570,062		12,719,000		(2,849,636)		9,869,364
Lease intangible liabilities:
Below-market rent	(8,649,073)		3,338,914		(5,310,159)		(8,864,138)		2,025,263		(6,838,875)
Total intangible liabilities	(8,649,073)		3,338,914		(5,310,159)		(8,864,138)		2,025,263		(6,838,875)
Total real estate	$	132,151,169	$	(4,723,256)	$	127,427,913	$	132,580,612	$	(2,825,790)	$	129,754,822

Real Estate Operating Revenues and Expenses

The following table presents the components of real estate operating revenues and expenses that are included in the consolidated statements of operations:


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Real estate operating revenues:
Lease revenue	$	2,063,600	$	2,283,272	$	4,167,822	$	3,368,731
Other operating income	655,025		520,662		1,270,504		768,172
Total	$	2,718,625	$	2,803,934	$	5,438,326	$	4,136,903
Real estate operating expenses:
Utilities	$	10,620	$	69,919	$	22,340	$	106,333
Real estate taxes	290,632		537,681		681,442		892,361
Repairs and maintenances	91,528		256,187		118,500		463,552
Management fees	64,147		86,880		126,401		126,298
Lease expense, including amortization of above- market ground lease	—		487,163		—		974,326
Other operating expenses	325,344		426,382		524,594		511,254
Total	$	782,271	$	1,864,212	$	1,473,277	$	3,074,124

The following table presents the amortization of intangibles that is included in the consolidated statements of operations:


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Net amortization of above- and below-market rent intangibles (1)	$	(703,872)	$	(575,219)	$	(1,528,715)	$	(609,983)
Amortization of in-place lease intangibles (2)	$	964,516	$	935,285	$	2,299,301	$	1,208,755

_______________

(1)Net amortization of above- and below-market rent intangibles is recorded as an adjustment to real estate operating revenue on the consolidated statements of operations.

Notes to Unaudited Consolidated Financial Statements

(2)Amortization of in-place lease intangibles is included in depreciation and amortization expense on the consolidated statements of operations.

Supplemental Ground Lease Disclosures

The Company previously owned an office building that was subject to a ground lease whereby the Company was the lessee (or a tenant) to the ground lease. On October 19, 2023, the Company conveyed its interest in the office building to a subsidiary of Centennial Bank by deed in lieu of foreclosure. Accordingly, the Company is no longer a party to the ground lease.

The component of lease expense for the ground lease was as follows:


	Three Months Ended June 30, 2023		Six Months Ended June 30, 2023
Operating lease cost	$	519,750	$	1,039,500

Supplemental non-cash information related to the ground lease was as follows:


	Six Months Ended June 30, 2023
Amounts included in the measurement of lease liability:
Operating cash flows from an operating lease	$	1,039,500

Right-of-use asset obtained in exchange for lease obligations:
Operating lease	$	1,039,500

Note 6. Fair Value Measurements

The Company follows 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, rate of prepayment, loss severities, credit risks and default rates) or other market corroborated inputs.

Level 3 — Significant unobservable inputs are based on the best information available in the circumstances, to the extent observable inputs are not available, including the Company’s own assumptions used in determining the fair value of investments. Fair value for these investments is 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

Notes to Unaudited Consolidated Financial Statements

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.

As of June 30, 2024 and December 31, 2023, the Company had not elected the fair value option for its financial instruments, including loans held for investment, loans held for investment acquired through participation, equity securities, secured financing agreements, unsecured notes payable and obligations under participation agreements. Such financial instruments are carried at cost, less impairment or less net deferred costs, where applicable. Marketable securities and derivatives are financial instruments that are reported at fair value.

Financial Instruments Carried at Fair Value on a Recurring Basis

From time to time, the Company may invest in short-term debt and equity securities which are classified as available-for-sale securities, which are presented at fair value and included in Other assets in the consolidated balance sheet. Changes in the fair value of equity securities are recognized in earnings. Changes in the fair value of debt securities are reported in other comprehensive income until the securities are realized.

As discussed in Note 8, in March 2023, the Company entered into a loan agreement with a lender to provide financing for the acquisition of real estate properties (Note 5). In connection with the financing, the Company purchased an interest rate cap for $258,500 to effectively cap the related index rate at 5.0%. The interest rate cap met all the criteria of a derivative under ASC 815, but it did not meet the criteria under ASC 815-20-25 to qualify for hedging accounting. As such, the interest rate cap is reported at fair value and is included in other assets in the consolidated balance sheet, and the change in the fair value of the interest rate cap is reported in the consolidated statements of operations.

The following tables present fair value measurements of marketable securities and derivatives, by major class according to the fair value hierarchy as of:


	June 30, 2024
	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
Money market fund (1)	$	2,303,992	$	—	$	—	$	2,303,992
Marketable securities - debt securities	1,129,263		—		—		1,129,263
Derivative - interest rate cap (2)	—		78,496		—		78,496
Total	$	3,433,255	$	78,496	$	—	$	3,511,751


	December 31, 2023
	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
Money market fund (1)	$	2,244,992	$	—	$	—	$	2,244,992
Marketable securities - debt securities	1,148,653		—		—		1,148,653
Marketable securities - equity securities	3,813,226		—		—		3,813,226
Derivative - interest rate cap (2)	—		83,807		—		83,807
Total	$	7,206,871	$	83,807	$	—	$	7,290,678

______________

(1)Amount is included in cash and cash equivalents on the consolidated balance sheets.

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

Notes to Unaudited Consolidated Financial Statements

The following table presents the activities of the marketable securities and derivatives:


	Six Months Ended June 30,
	2024				2023
	Marketable Securities		Derivatives		Marketable Securities		Derivatives
Beginning balance	$	4,961,879	$	83,807	$	147,960	$	—
Purchases	—		—		1,051,754		258,500
Proceeds from sale	(3,551,098)		—		—		—
Reclassification of net realized loss on marketable securities into earnings	(446,009)		—		—		—
Unrealized gain (loss) on marketable securities and derivatives	164,491		(5,311)		4,259		22,528
Ending balance	$	1,129,263	$	78,496	$	1,203,973	$	281,028

Financial Instruments Not Carried at Fair Value

The following table presents the carrying value and estimated fair value of the Company’s financial instruments that are not carried at fair value on the consolidated balance sheets as of:


		June 30, 2024						December 31, 2023
	Level	Principal Amount		Carrying Value		Fair Value		Principal Amount		Carrying Value		Fair Value
Assets:
Loans
Loans held for investment	3	$	376,837,491	$	380,470,278	$	348,656,397	$	471,016,469	$	474,663,271	$	418,458,916
Loans held for investment acquired through participation	3	38,444,357		38,787,225		38,821,848		38,444,357		38,785,012		38,881,033
Allowance for loan losses		—		(34,905,309)		—		—		(56,976,025)		—
Total loans		415,281,848		384,352,194		387,478,245		509,460,826		456,472,258		457,339,949
Equity securities (1)	3	2,000,000		2,022,353		2,000,000		—		—		—
Total assets		$	417,281,848	$	386,374,547	$	389,478,245	$	509,460,826	$	456,472,258	$	457,339,949
Liabilities:
Unsecured notes payable	1	$	123,500,000	$	119,376,974	$	97,655,250	$	123,500,000	$	118,380,897	$	98,020,050
Secured financing agreements	3	266,879,645		264,447,499		264,924,752		293,413,757		290,525,313		293,413,757
Obligations under participation agreements	3	15,000,000		15,144,974		15,203,048		—		—		—
Total liabilities		$	405,379,645	$	398,969,447	$	377,783,050	$	416,913,757	$	408,906,210	$	391,433,807

______________

(1)Amount is included in Other assets on the consolidated balance sheets.

The Company estimated that its other financial assets and liabilities, not included in the tables above, had fair values that approximated their carrying values at both June 30, 2024 and December 31, 2023 due to their short-term nature.

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

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

Notes to Unaudited Consolidated Financial Statements

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


	Three Months Ended June 30,
	2024				2023
	Fair Value		Impairment Charges		Fair Value		Impairment Charges
Impairment Charges
Real estate and intangibles	$	—	$	—	$	27,603,118	$	11,765,540
			$	—			$	11,765,540


	Six Months Ended June 30,
	2024				2023
	Fair Value		Impairment Charges		Fair Value		Impairment Charges
Impairment Charges
Real estate and intangibles	$	—	$	—	$	27,603,118	$	11,765,540
			$	—			$	11,765,540

There were no impairment charges for the three and six months ended June 30, 2024. Impairment charges, and their related triggering events and fair value measurements, recognized during the three and six months ended June 30, 2023 were as follows:

Real Estate and Intangibles

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

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

Valuation Process for Fair Value Measurement

The fair value of the Company’s investment in equity securities, held-to-maturity debt securities and its unsecured notes payable is determined based on quoted prices in an active market and is classified as Level 1 of the fair value hierarchy.

Market quotations are not readily available for the Company’s real estate-related loan investments, all of which are included in Level 3 of the fair value hierarchy, and therefore these investments are valued utilizing a yield approach, i.e., a discounted cash flow methodology to arrive at an estimate of the fair value of each respective investment in the portfolio using an estimated market yield. In following this methodology, investments are evaluated individually, and management takes into account, in determining the risk-adjusted discount rate for each of the Company’s investments, relevant factors, which may include 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 ability of our borrowers and investees to make payments and their net operating income and debt-service coverage ratio; construction progress reports and construction budget analysis; the nature, quality and realizable value of any collateral (and loan-to-value ratio); the forces that influence the local markets in which the asset (the collateral) is purchased and sold, such as capitalization rates, occupancy rates, rental rates and replacement costs; and the anticipated duration of each real estate-related loan investment.

The Manager designates a valuation committee to oversee the entire valuation process of the Company’s Level 3 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. Because there is

Notes to Unaudited Consolidated Financial Statements

no readily available market for these investments, the fair values of these investments are approved in good faith by the Company’s board of directors (which is made up exclusively of independent directors).

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

The following tables summarize the valuation techniques and significant unobservable inputs used by the Company to value the Level 3 loans as of June 30, 2024 and December 31, 2023. The tables are not intended to be all-inclusive, but instead identify the significant unobservable inputs relevant to the determination of fair values.


	Fair Value at June 30, 2024		Primary Valuation Technique	Unobservable Inputs	June 30, 2024
Asset Category					Minimum		Maximum		Weighted Average
Assets:
Loans held for investment, net (1)	$	348,656,397	Discounted cash flow	Discount rate	10.62	%	16.55	%	12.70	%
Loans held for investment acquired through participation, net	38,821,848		Discounted cash flow	Discount rate	15.56	%	18.33	%	17.79	%
Equity securities (2)	2,000,000		N/A	N/A	N/A		N/A		N/A
Total Level 3 Assets	$	389,478,245
Liabilities:
Secured financing agreements	$	264,924,752	Discounted cash flow	Discount rate	7.07	%	11.30	%	9.27	%
Obligation under participation agreement	15,203,048		Discounted cash flow	Discount rate	16.55	%	16.55	%	16.55	%
Total Level 3 Liabilities	$	280,127,800


	Fair Value at December 31, 2023		Primary Valuation Technique	Unobservable Inputs	December 31, 2023
Asset Category					Minimum		Maximum		Weighted Average
Assets:
Loans held for investment, net (1)	$	418,458,916	Discounted cash flow	Discount rate	9.58	%	16.95	%	7.02	%
Loans held for investment acquired through participation, net	38,881,033		Discounted cash flow	Discount rate	15.30	%	18.35	%	17.76	%
Total Level 3 Assets	$	457,339,949
Liabilities:
Secured financing agreements	$	293,413,757	Discounted cash flow	Discount rate	6.25	%	12.72	%	8.91	%
Total Level 3 Liabilities	$	293,413,757

_______________

(1)Amount includes $161.7 million and $154.6 million of non-performing loans (Note 3) as of June 30, 2024 and December 31, 2023, respectively. The fair market value estimates were determined primarily using discounted cash flow models and Level 3 inputs, which include estimates of property-specific cash flows over a specific holding period, a discount rate range of 6.75% to 7.00% and a terminal capitalization rate range of 5.75% to 6.00% as of both June 30, 2024 and December 31, 2023. These inputs are based on the location, type and nature of the property, current sales and lease comparables, anticipated real estate and capital market conditions, and management’s knowledge, experience and judgment. Additionally, the Company may use sales comparables, purchase price and appraisals to corroborate the estimated value of a loan’s collateral or may use sponsor’s guarantee to estimate the value of a non-performing loan.

(2)Fair market value is based on purchase price.

Note 7. Related Party Transactions

Management Agreement

The Company entered into the Management Agreement with the Manager whereby the Manager is responsible for its day-to-day operations. The following table presents a summary of fees paid and costs reimbursed to the Manager in connection with

Notes to Unaudited Consolidated Financial Statements

providing services to the Company that are included on the consolidated statements of operations:


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Origination and extension fee expense (1)	$	369,392	$	343,159	$	632,164	$	1,294,607
Asset management fee	1,619,971		2,105,049		3,335,013		4,102,476
Asset servicing fee	394,995		496,374		801,520		966,899
Operating expenses reimbursed to Manager	2,332,771		2,120,029		4,510,935		4,297,033
Disposition fee (2)	135,000		917,750		475,000		1,208,563
Total	$	4,852,129	$	5,982,361	$	9,754,632	$	11,869,578

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

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

Origination and Extension Fee Expense

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

Asset Management Fee

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

Asset Servicing Fee

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

Transaction Breakup Fee

In the event that the Company receives any “breakup fees,” “busted-deal fees,” termination fees, or similar fees or liquidated damages from a third-party in connection with the termination or non-consummation of any loan or disposition transaction, the Manager will be entitled to receive one-half of such amounts, in addition to the reimbursement of all out-of-pocket fees and expenses incurred by the Manager with respect to its evaluation and pursuit of such transactions. As of June 30, 2024 and December 31, 2023, the Company had not received any breakup fees.

Operating Expenses

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

Disposition Fee

Pursuant to the Management Agreement, the Manager or its affiliates receives a disposition fee in the amount of 1% of the gross sale price received by the Company from the disposition of any real estate-related loan, or any portion of, or interest in, any real estate-related loan. The disposition fee is paid concurrently with the closing of any such disposition of all or any portion of any real estate-related loan or any interest therein, which is the lesser of (i) 1% of the principal amount of the loan or

Notes to Unaudited Consolidated Financial Statements

debt-related loan prior to such transaction or (ii) the amount of the fee paid by the borrower in connection with such transaction. If the Company takes ownership of a property as a result of a workout or foreclosure of a loan, the Company will pay a disposition fee upon the sale of such property equal to 1% of the sales price.

Due From Affiliate

On December 1, 2022, the Company entered into a revolving promissory note receivable with Mavik Special Opps Co-Investments, LP, an affiliate of the Company. The promissory note receivable bears interest at the Prime Rate, as such Prime Rate is published in the Wall Street Journal, computed on the basis of the actual number of days elapsed and a year of 365 days. In January 2024, the promissory note was amended to (i) extend the maturity date from June 30, 2024 to April 30, 2025 and to (ii) modify the interest rate from Prime Rate, as such Prime Rate is published in the Wall Street Journal, computed on the basis of the actual number of days elapsed and a year of 365 days, to 15.0%. During the six months ended June 30, 2024 and 2023, the Company provided funding under the promissory note receivable of $5.0 million and $0.8 million, respectively, and received repayments of $8.5 million and zero, respectively. As of June 30, 2024 and December 31, 2023, amount outstanding under the promissory note receivable was $0.3 million and $3.8 million, respectively, which is included in Other assets on the consolidated balance sheets.

Due from Related Parties

As of June 30, 2024 and December 31, 2023, amount due from related parties was $0.8 million and $0.7 million, primarily related to operational cash requirements the Company paid on behalf of its affiliates.

Promissory Note Payable

On January 24, 2024, the Company, as borrower, entered into a revolving promissory note payable with Terra LLC. The promissory note payable bears interest at the Prime Rate, as such Prime Rate is published in the Wall Street Journal, computed on the basis of the actual number of days elapsed and a year of 365 days. The promissory note matures on March 31, 2027. As of June 30, 2024, amount outstanding under this promissory note payable was $34.3 million. The activity associated with this agreement is eliminated in consolidation and therefore has no impact on the Company’s consolidated financial statements.

Cost Sharing and Reimbursement Agreement

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

Distributions Paid

For the three months ended June 30, 2024 and 2023, the Company made distributions to investors totaling $4.7 million and $4.7 million, respectively, all of which were returns of capital. For the six months ended June 30, 2024 and 2023, the Company made distributions to investors totaling $9.3 million and $9.3 million, respectively, of which $9.3 million and $8.8 million were returns of capital, respectively (Note 10).

Due to Manager

As of June 30, 2024 and December 31, 2023, approximately $2.0 million and $4.2 million, respectively, was due to the Manager, as reflected on the consolidated balance sheets, primarily related to the present value of the disposition fees on individual loans due to the Manager.

Mavik Real Estate Special Opportunities Fund, LP

On August 3, 2020, the Company entered into a subscription agreement with RESOF whereby the Company committed to fund up to $50.0 million to purchase limited partnership interests in RESOF. For more information on this investment, please see Note 4.

Notes to Unaudited Consolidated Financial Statements

Participation Agreements

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

ASC 860, Transfers and Servicing (“ASC 860”), establishes accounting and reporting standards for transfers of financial assets. ASC 860-10 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The Company has determined that the participation agreements it enters into are accounted for as secured borrowings under ASC 860 (see “Participation Interests” in Note 2 and “Obligations Under Participation Agreements” in Note 8).

Participation Interests Purchased by the Company

From time to time, the Company may purchase investments from affiliates pursuant to participation agreements. In accordance with the terms of each participation agreement, each Participant’s rights and obligations, as well as the proceeds received from the related borrower/issuer of the loan, are based upon their respective pro rata participation interest in the loan.

The table below lists the participation interests purchased by the Company pursuant to participation agreements as of:


	June 30, 2024
	Participating Interests	Principal Balance		Carrying Value

Mesa AZ Industrial Owner, LLC (1)	38.27%	$	31,000,000	$	31,296,248
UNJ Sole Member, LLC (1)	40.80%	7,444,357		7,490,977
Allowance for credit losses		—		(251,722)
		$	38,444,357	$	38,535,503


	December 31, 2023
	Participating Interests	Principal Balance		Carrying Value

Mesa AZ Industrial Owner, LLC (1)	38.27%	$	31,000,000	$	31,296,235
UNJ Sole Member, LLC (1)	40.80%	7,444,357		7,488,777
Allowance for credit losses		—		(226,527)
		$	38,444,357	$	38,558,485

________________

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

Transfers of Participation Interests by the Company

The following table summarizes the investment that was subject to a PA with an investment partnership affiliated with the Manager as of June 30, 2024. There was no such investment as of December 31, 2023.


					June 30, 2024
					Transfers treated as obligations under participation agreements
	Principal		Carrying Value		% Transferred		Principal		Carrying Value
Asano Bankers Hill, LLC (1)	$	18,567,296	$	18,811,745	80.8	%	$	15,000,000	$	15,144,974

________________

(1)Participant is a certain separately managed account, an investment partnership managed by the Manager.

This investment is held in the name of the Company, but the Participant’s rights and obligations, including interest income and other income (e.g., exit fee, prepayment income) and related fees/expenses (e.g., disposition fees, asset management and

Notes to Unaudited Consolidated Financial Statements

asset servicing fees), are based upon its pro rata participation interest in such participated investment, as specified in the participation agreement. The Participant’s share of the investment is repayable only from the proceeds received from the related borrower/issuer of the investment and, therefore, the Participant also is subject to credit risk (i.e., risk of default by the underlying borrower/issuer). Pursuant to the participation agreement with this entity, the Company receives and allocates the interest income and other related investment income to the Participant based on its pro rata participation interest. The Participant pays any expenses, including any fees to the Manager, only on its pro rata participation interest, subject to the terms of the governing fee arrangements.

Note 8. Debt

Unsecured Notes Payable

The following table presents a summary of the Company’s unsecured notes payable outstanding as of:


	Coupon Rate		Effective Rate (1)		Maturity Date	June 30, 2024		December 31, 2023
6.00% Senior Notes Due 2026	6.00	%	6.85	%	6/30/2026	$	85,125,000	$	85,125,000
7.00% Senior Notes Due 2026 (2)	7.00	%	10.31	%	3/31/2026	38,375,000		38,375,000
Total principal amount						123,500,000		123,500,000
Unamortized issue discount						(1,179,002)		(1,444,813)
Unamortized purchase discount (2)						(2,525,542)		(3,161,457)
Unamortized deferred financing costs						(418,482)		(512,833)
Unsecured notes payable, net						$	119,376,974	$	118,380,897

_______________

(1)Includes issue discount, purchase discount and deferred financing costs that are amortized to interest expense over the life of the notes.

(2)In connection with the BDC Merger, Terra LLC assumed all the obligations under the 7.00% Senior Notes and recorded a purchase discount of $4.6 million, representing the difference between the carrying value and the fair value of the notes on the date of the merger.

The 6.00% Senior Notes Due 2026

On June 10, 2021, the Company issued $78.5 million in aggregate principal amount of its 6.00% notes due 2026, and on June 25, 2021, the underwriters partially exercised their option to purchase an additional $6.6 million of the notes (collectively the “6.00% Senior Notes Due 2026”). The 6.00% Senior Notes Due 2026 may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after June 10, 2023, at a redemption price equal to 100% of the outstanding principal amount thereof, plus accrued and unpaid interest.

The 7.00% Senior Notes Due 2026

On February 10, 2021, Terra BDC issued $34.8 million in aggregate principal amount of 7.00% fixed-rate notes due 2026, and on February 26, 2021, the underwriters exercised the option to purchase an additional $3.6 million of the notes (collectively the “7.00% Senior Notes Due 2026”). The 7.00% Senior Notes Due 2026 may be redeemed in whole or in part at any time or from time to time at Terra BDC’s option on or after February 10, 2023, at a redemption price equal to 100% of the outstanding principal amount thereof, plus accrued and unpaid interest. In connection with the BDC Merger, Terra LLC agreed to take all necessary action to assume the payment of the principal of and interest on all of the outstanding 7.00% Senior Notes Due 2026.

Covenant Compliance

The Company’s unsecured notes payable contain certain financial covenants. As of June 30, 2024, the Company was in compliance with such covenants.

Notes to Unaudited Consolidated Financial Statements

Secured Financing Arrangements

The following table is a summary of the Company’s secured financing agreements in place as of:


	June 30, 2024										December 31, 2023
	Current Maturity	Extended Maturity	Weighted Average Interest Rate (1)		Pledged Asset Carrying Value		Maximum Facility Size		Principal Amount		Principal Amount
Repurchase Agreements:
Goldman Sachs Bank facility (2)(3)	February 2025	February 2025	8.62	%	$	112,100,347	$	200,000,000	$	76,282,989	$	75,455,624
UBS AG facility (2)(4)	November 2024	(5)	(4)		—		—		—		18,480,000
Total					112,100,347		200,000,000		76,282,989		93,935,624
Non-Recourse Financing:
Promissory notes payable (2)(6)	March 2025 - March 2026	March 2026 - March 2027	10.88	%	134,961,035		N/A		81,485,545		63,509,518
Property mortgages - fixed rate	June 2028	June 2028	6.25	%	79,958,447		N/A		40,250,000		40,250,000
Property mortgages - variable rate (7)	April 2027	April 2028	8.84	%	47,469,466		N/A		34,100,000		33,256,885
Total					262,388,948				155,835,545		137,016,403
Other Secured Financing:
Revolving line of credit (2)(8)	December 2024	September 2025	8.69	%	59,266,539		34,761,111		34,761,111		47,461,730
Term loan (9)					—		—		—		15,000,000
Total					59,266,539		34,761,111		34,761,111		62,461,730
					$	433,755,834	$	234,761,111	266,879,645		293,413,757
Unamortized deferred financing costs and other									(2,432,146)		(2,888,444)
Secured financing agreements, net									$	264,447,499	$	290,525,313

_______________

(1)Amount is calculated using the applicable index rate as of June 30, 2024.

(2)These facilities were used to finance the Company’s senior loan investments.

(3)Interest rate is based on Term SOFR (subject to underlying loan floors on a case-by-case basis) plus a spread ranging from 2.0% to 5.00%. In March 2024, the Company amended the Goldman Sachs Bank facility agreement to extend the maturity date to February 18, 2025 and to reduce the minimum interest coverage ratio covenant.

(4)Interest rate is based on Term SOFR plus a spread of 1.965%. In February 2024, the outstanding balance was repaid. In March 2024, the Company amended the side letter to the UBS AG facility agreement to reduce the maximum amount available under this facility to zero. In connection with this amendment, UBS AG waived the payment of any fees and the meeting of any representations, warranties or covenants for the period commencing on December 31, 2023 until such time as there are amounts outstanding under the UBS AG facility agreement.

(5)The maturity of this facility can be extended annually on mutually agreeable terms.

(6)Interest rate is based on Term SOFR plus a spread ranging from 4.75% to 5.98% with a combined floor rate ranging from 9.0% to 11.28%.

(7)Interest rate is based on Term SOFR plus a spread of 3.5% with a Term SOFR floor of 3.75%.

(8)Interest rate is based on Term SOFR + 3.5% with a combined floor of 7.0%. In March 2024, the Company amended the facility agreement to extend the maturity date to September 12, 2024 with an option to extend the facility term for an additional 12-month period, reduce the credit limit to $75.0 million, increase the coupon rate and revise the minimum profitability and net worth covenants. In June 2024, the Company amended the facility agreement to extend the maturity date of the facility agreement to December 31, 2024, eliminate the ability to make additional revolving borrowings under the facility agreement, decrease the minimum net worth covenant of the Company for future quarterly measurement dates, introduce a minimum liquidity covenant of the Company, establish an interest reserve account and remove the minimum profitability and maximum global leverage covenants of the Company.

(9)In March 2024, the term loan was repaid in full.

In the normal course of business, the Company is in discussions with its lenders to extend, amend, or replace any financing facilities which contain near term expirations.

Notes to Unaudited Consolidated Financial Statements

The following table presents certain information about the Company’s secured financing arrangements:


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Amortization of deferred financing costs and others	$	575,236	$	524,492	$	1,521,384	$	1,016,470

Proceeds from secured financing					$	58,246,507	$	130,951,380
Repayments of secured financing					$	(84,780,619)	$	(102,713,974)

Repurchase Agreements

The Company seeks to mitigate risks associated with its repurchase agreements by managing risk related to the credit quality of its assets, interest rates, liquidity, the rate of prepayment and market value. The margin call provisions under the repurchase facilities provide the lender with certain rights in the event of a decline in the credit of the underlying assets purchased. To monitor credit risk associated with the performance and value of its loans and investments, the Company’s asset management team regularly reviews its investment portfolios and is in regular contact with its borrowers, monitoring performance of the collateral and enforcing its rights as necessary. The Company further seeks to manage risks associated with the repurchase agreements by matching the maturities and interest rate characteristics of its loans with the related repurchase agreement.

Covenant Compliance

The Company’s secured financing agreements contain certain financial tests and covenants. In the event of a default or any breach of covenant of a related agreement, the lender has the right to accelerate all amounts due, charge interest at a default rate, retain all cash flow from the loans originated and/or sell such loans in a private sale on terms possibly unfavorable to the Company. As of June 30, 2024, the Company was in compliance with all such covenants, as amended or waived.

Scheduled Debt Principal Payments

Scheduled debt principal payments for each of the five calendar years following June 30, 2024 are as follows:


Years Ending December 31,	Total
2024 (July 1 through December 31)	$	34,761,111
2025	144,782,989
2026	136,485,545
2027	34,100,000
2028	40,250,000
Thereafter	—
	390,379,645
Unamortized deferred financing costs and other	(6,555,172)
Total	$	383,824,473

Obligations Under Participation Agreements

As discussed in Note 2, the Company follows the guidance in ASC 860 when accounting for loan participations. Such guidance requires the transferred interests meet certain criteria in order for the transaction to be recorded as a sale. Loan participations from the Company which do not qualify for sale treatment remain on the Company’s consolidated balance sheets and the proceeds are recorded as obligations under participation agreements. As of June 30, 2024, obligations under participation agreements were $15.1 million (see “Participation Agreements” in Note 7). The interest rate on the obligations under participation agreements was 20.34%. There were no such obligations under participation agreements as of December 31, 2023.

Notes to Unaudited Consolidated Financial Statements

Note 9. Commitments and Contingencies

Unfunded Commitments on Loans Held for Investment

Certain of the Company’s loans contain provisions for future fundings, which are subject to the borrower meeting certain performance-related metrics that are monitored by the Company. These fundings amounted to approximately $27.8 million and $35.7 million as of June 30, 2024 and December 31, 2023, respectively. The Company expects to maintain sufficient cash on hand to fund such commitments through matching these commitments with principal repayments on outstanding loans or draw downs on credit facilities.

Unfunded Investment Commitment

As discussed in Note 4, on August 3, 2020, the Company entered into a subscription agreement with RESOF whereby the Company committed to fund up to $50.0 million to purchase limited partnership interests in RESOF. As of June 30, 2024 and December 31, 2023, the unfunded investment commitment was $23.3 million and $37.4 million, respectively.

Additionally, in June 2024, the Company made a $20.0 million capital commitment to an entity that will invest, indirectly, together with other non-affiliated entities, in a non-real estate operating company. As of June 30, 2024, the unfunded commitment was $15.0 million.

Other

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

Additionally, from time to time, we and individuals employed by us and our Manager may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our borrowers and investees. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that such proceedings will have a material effect upon our financial condition or results of operations.

See Note 7 for a discussion of the Company’s commitments to the Manager.

Note 10. Equity

Earnings Per Share

The following table presents earnings per share:


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Net loss	$	(7,539,310)	$	(19,237,065)	$	(13,723,284)	$	(18,689,586)
Series A preferred stock dividend declared	—		—		—		(3,907)
Net loss allocable to common stock	$	(7,539,310)	$	(19,237,065)	$	(13,723,284)	$	(18,693,493)
Weighted-average shares outstanding - basic and diluted	24,336,577		24,335,430		24,336,368		24,335,402
Loss per share - basic and diluted	$	(0.31)	$	(0.79)	$	(0.56)	$	(0.77)

Preferred Stock Classes

Preferred Stock

The Company’s charter gives it authority to issue 50,000,000 shares of preferred stock, $0.01 par value per share (“Preferred Stock”). The Board may classify any unissued shares of Preferred Stock and reclassify any previously classified but unissued shares of Preferred Stock of any series from time to time, into one or more classes or series of stock. As of June 30,

Notes to Unaudited Consolidated Financial Statements

2024, there were no shares of Preferred Stock issued or outstanding. As of December 31, 2023 there were no shares of Series A Preferred Stock (as defined below) issued and outstanding.

Series A Preferred Stock

On November 30, 2016, the Board classified and designated 125 shares of Preferred Stock as a separate class of Preferred Stock to be known as the 12.5% Series A Redeemable Cumulative Preferred Stock, $1,000 liquidation value per share (“Series A Preferred Stock”). In December 2016, the Company sold 125 shares of the Series A Preferred Stock for $125,000. The Series A Preferred Stock paid dividends at an annual rate of 12.5% of the liquidation preference. In March 2023, the Series A Preferred Stock was fully redeemed at par for a total of $125,000 plus accrued dividends.

Common Stock

On October 1, 2022, in connection with the BDC Merger, the Company amended its charter to increase the shares authorized from 500,000,000 to 950,000,000, consisting of 450,000,000 shares of Class A Common Stock, $0.01 par value per share (“Class A Common Stock”), 450,000,000 shares of Class B Common Stock, and 50,000,000 shares of Preferred Stock. Concurrently, 4,847,910 shares of Class B Common Stock were issued to former Terra BDC stockholders and each share of the Company’s common stock issued and outstanding immediately prior to the effective time of the BDC Merger was automatically changed into one issued and outstanding share of Class B Common Stock. As of June 30, 2024, Terra Fund 7 and Terra Offshore REIT held 8.7% and 10.1%, respectively, of the issued and outstanding shares of the Company’s common stock.

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

In connection with the potential liquidity transactions discussed in Note 1, on December 1, 2023, the Company amended its articles of amendment and restatement (the “A&R Articles”) to provide the Board with greater flexibility to pursue a direct listing. In connection with a listing of shares of Class A Common Stock on a national securities exchange, the outstanding shares of Class B Common Stock will be convertible on a one-for-one basis into listed shares of Class A Common Stock, subject to certain conversion terms and holding periods. Currently, there are no outstanding shares of Class A Common Stock.

The A&R Articles also incorporate the provisions generally required by state regulators in order to become a non-traded REIT and publicly sell shares of the Company’s stock not listed on an exchange. These non-traded REIT provisions will spring into effect and become operative if the Company ultimately decides to register and sell shares in a non-traded REIT format.

Distributions

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

For both the three months ended June 30, 2024 and 2023, the Company made distributions to investors totaling $4.7 million, all of which were returns of capital. For both the six months ended June 30, 2024 and 2023, the Company made distributions to investors totaling $9.3 million, of which $9.3 million and $8.8 million were returns of capital, respectively. Additionally, for the three and six months ended June 30, 2023, the Company made distributions to preferred stockholders of none and $3,907, respectively. There were no such distributions for the three and six months ended June 30, 2024.

Dividend Reinvestment Plan

On January 20, 2023, the Board adopted a distribution reinvestment plan (the “Plan”), pursuant to which the Company’s stockholders may elect to reinvest cash distributions payable by the Company in additional shares of Class A Common Stock and Class B Common Stock, at the price per share determined pursuant to the Plan. For the six months ended June 30, 2024 and 2023, the Company issued 838 and 143 shares of Class B Common Stock for a total of $9,524 and $1,988 pursuant to the Plan, respectively.

Note 11. 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.

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

The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and related notes thereto and other financial information included elsewhere in this quarterly report on Form 10-Q. In this report, “we,” “us” and “our” refer to Terra Property Trust, Inc. (and, together with its consolidated subsidiaries, the “Company” or “Terra Property Trust”).

FORWARD-LOOKING STATEMENTS

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

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

•our ability to achieve the expected synergies, cost savings and other benefits from the BDC Merger (as defined below);

•risks associated with achieving expected synergies, cost savings and other benefits from our increased scale;

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

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

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

•changes in our investment objectives and business strategy;

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

•the performance and financial condition of our borrowers;

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

•borrower defaults or decreased recovery rates from our borrowers;

•changes in prepayment rates on our loans;

•our use of financial leverage;

•actual and potential conflicts of interest with any of the following affiliated entities: Terra Fund Advisors, LLC, Terra REIT Advisors, LLC (our “Manager”); Terra Capital Partners, LLC (“Terra Capital Partners”), our sponsor; Terra Income Fund 6, Inc. (“Terra Fund 6” or “Terra BDC”); Terra Secured Income Fund 5 International; Terra Income Fund International; Terra Secured Income Fund 7, LLC (“Terra Fund 7”); Terra Offshore Funds REIT, LLC (“Terra Offshore REIT”); Mavik Real Estate Special Opportunities Fund, LP (“RESOF”); or any of their affiliates;

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

•liquidity transactions that may be available to us in the future, including a liquidation of our assets, a sale of our company, a listing of our shares of common stock on a national securities exchange, an amendment of our charter to incorporate certain provisions generally required by state securities regulators to allow us to publicly sell unlisted shares (provided that such provisions would only take effect when a registration statement related to the publicly offered unlisted shares is declared effective), an adoption of a share repurchase plan or a strategic business

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

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

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

•the degree and nature of our competition.

In addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Part I — Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2023. Other factors that could cause actual results to differ materially include:

•changes in the economy;

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

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

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

Overview

We are a real estate investment trust that originates, invests in and manages a diverse portfolio of real estate and real estate-related assets. We focus primarily on commercial real estate credit investments, including first mortgage loans, subordinated loans (including B-notes, mezzanine and preferred equity) and credit facilities throughout the United States, which we collectively refer to as our targeted assets. Our loans finance the acquisition, development or recapitalization of high-quality commercial real estate in the United States. We focus on middle market loans in the approximately $10 million to $50 million range, which we believe are subject to less competition, offer higher risk-adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification. Our investment objective is to provide attractive risk-adjusted returns to our stockholders, primarily by earning high current income that allows for regular distributions, and, in certain instances, benefiting from potential capital appreciation. There can be no assurances that we will be successful in meeting our investment objective. We may also make strategic real estate equity and non-real estate-related investments that align with our investment objectives and criteria.

As of June 30, 2024, we held a net loan portfolio (gross loans less obligations under participation agreements and secured borrowing) comprised of 17 loans in nine states with an aggregate net principal balance of $400.3 million, a weighted average coupon rate of 12.8% and a weighted average remaining term to maturity of 0.9 years.

Each of our loans was originated by Terra Capital Partners or its affiliates. Our portfolio is diversified based on location of the underlying properties, loan structure and property type. As of June 30, 2024, our portfolio included underlying properties located in 17 markets, across nine states and includes property types such as multifamily housing, student housing, commercial offices, medical offices, mixed-use and industrial properties. The profile of these properties ranges from stabilized and value-added properties to pre-development and construction. Our loans are structured across mezzanine debt, first mortgages, preferred equity investments and credit facilities.

We were incorporated under the Maryland General Corporation Law on December 31, 2015. Through December 31, 2015, our business was conducted through a series of predecessor private partnerships. At the beginning of 2016, we completed the merger of these private partnerships into a single entity as part of our plan to reorganize our business as a REIT for federal income tax purposes (the “REIT Formation Transaction”). Following the REIT Formation Transaction, Terra Secured Income Fund 5, LLC (“Terra Fund 5”) contributed the consolidated portfolio of net assets of certain Terra Funds to our company in exchange for all of the shares of our common stock. On March 2, 2020, we engaged in a series of transactions pursuant to which we issued an aggregate of 4,574,470.35 shares of common stock in exchange for the settlement of an aggregate of $49.8 million of participation interests in loans held by us, cash of $25.5 million and other working capital.

On October 1, 2022, pursuant to that certain Agreement and Plan of Merger, dated as of May 2, 2022 (the “Merger Agreement”), Terra BDC merged with and into Terra Income Fund 6, LLC (“Terra LLC”), our wholly owned subsidiary, with Terra LLC continuing as the surviving entity of the merger (the “BDC Merger”) and as our wholly owned subsidiary. Pursuant to the terms of the transactions described in the Merger Agreement, approximately 4,847,910 shares of our Class B Common Stock, $0.01 par value per share ("Class B Common Stock"), were issued to former Terra BDC stockholders in connection with the BDC Merger, based on the number of outstanding shares of Terra BDC Common Stock as of October 1, 2022.

As of June 30, 2024, Terra Fund 7 and Terra Offshore REIT held approximately 8.7% and 10.1%, respectively, of our issued and outstanding Class B Common Stock.

As previously disclosed, we continue to explore alternative liquidity transactions on an opportunistic basis to maximize stockholder value. Examples of the alternative liquidity transactions that, depending on market conditions, may be available to us include a listing of our shares of common stock on a national securities exchange, adoption of a share repurchase plan, a liquidation of our assets, a sale of our company or a strategic business combination, in each case, which may include the further in-kind distribution of our shares of common stock indirectly owned by certain of our affiliate funds to the ultimate investors in such affiliate funds. We cannot provide any assurance that any alternative liquidity transaction will be available or, if available, that we will pursue or be successful in completing any such alternative liquidity transaction.

One of the potential future liquidity transactions that we continue to evaluate is a “direct listing” of its Class A Common Stock, $0.01 par value per share (“Class A Common Stock”), on a national securities exchange (i.e., a listing not involving a concurrent public offering of newly issued shares). If market conditions are not supportive of a direct listing that would in our view lead to a constructive trading environment for the Class A Common Stock, we will explore alternative paths to pursue our investment strategy and provide liquidity to our investors, including converting our company into a traditional “non-traded REIT.” As part of a potential conversion to a non-traded REIT, we would adopt a customary share repurchase plan pursuant to which our investors could request to have their shares of its common stock redeemed for cash.

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

Portfolio Summary

Net Loan Portfolio

The following tables provide a summary of our net loan portfolio as of:


	June 30, 2024
	Fixed Rate			Floating Rate (1)(2)(3)			Total Gross Loans			Obligations under Participation Agreements			Total Net Loans
Number of loans	3			14			17			1			17
Principal balance	$	15,340,352		$	399,941,496		$	415,281,848		$	15,000,000		$	400,281,848
Carrying value	15,170,142			369,182,052			384,352,194			15,144,974			369,207,220
Fair value	14,681,958			372,796,287			387,478,245			15,203,048			372,275,197
Weighted average coupon rate	10.29		%	13.13		%	13.02		%	20.34		%	12.75		%
Weighted-average remaining term (years)	2.01			0.79			0.85			0.60			0.86


	December 31, 2023
	Fixed Rate			Floating Rate (1)(2)(3)			Total Gross Loans			Obligations under Participation Agreements			Total Net Loans
Number of loans	5			16			21			—			21
Principal balance	$	53,998,648		$	455,462,178		$	509,460,826		$	—		$	509,460,826
Carrying value	54,095,173			402,377,085			456,472,258			—			456,472,258
Fair value	53,435,742			403,904,207			457,339,949			—			457,339,949
Weighted average coupon rate	12.95		%	12.92		%	12.93		%	—		%	12.93		%
Weighted-average remaining term (years)	1.18			0.70			0.77			—			0.77

_______________

(1)These loans pay a coupon rate of London Interbank Offered Rate (“LIBOR”), Secured Overnight Financing Rate (“SOFR”), or forward-looking term rate SOFR (“Term SOFR”) plus a fixed spread. Coupon rates shown were determined using LIBOR of 5.45%, average SOFR of 5.34% and Term SOFR of 5.34% as of June 30, 2024, and LIBOR of 5.47%, average SOFR of 5.34% and Term SOFR of 5.35% as of December 31, 2023.

(3)As of June 30, 2024 and December 31, 2023, 13 and 14 loans, respectively, are subject to a SOFR, or Term SOFR floor, as applicable.

Real Estate Ownership

In addition to our net loan portfolio, we own eight industrial buildings. As of June 30, 2024 and December 31, 2023, the real estate and related lease intangible assets and liabilities had a net carrying value of $127.4 million and $129.8 million, respectively, and the mortgage loans payable encumbering the real estate properties had an outstanding principal amount of $74.4 million and $73.5 million, respectively.

Equity Investments

As of both June 30, 2024 and December 31, 2023, we owned 14.9% of equity interest in a limited partnership that invests primarily in performing and non-performing mortgages, loans, mezzanines and other credit instruments supported by underlying commercial real estate assets. We also beneficially own equity interests in joint ventures that invest in real estate properties, opportunistic debt and equity securities and, indirectly, together with other non-affiliated entities, a non-real estate operating company, as well as a preferred equity investment with residual profit sharing from sale of the underlying property. These investments are accounted for using the equity method of accounting. As of June 30, 2024 and December 31, 2023, these equity investments had total carrying value of $70.7 million and $37.2 million, respectively.

Book Value Per Share

We calculate our book value per share by dividing our net equity by the number of outstanding shares of our common stock, unless otherwise determined by our Board. Our book value per share of Class B Stock Common Stock as of June 30, 2024 and December 31, 2023 was $8.98 and $9.93, respectively.

Portfolio Investment Activity

Net Loan Portfolio

For the three months ended June 30, 2024 and 2023, we invested $46.3 million and $7.5 million in new and add-on investments and had $54.6 million and $6.4 million of repayments, resulting in net repayments of $8.3 million and net investments of $1.1 million, respectively. Amounts are net of obligations under participation agreements and secured financing agreements.

For the six months ended June 30, 2024 and 2023, we invested $57.7 million and $33.2 million in new and add-on investments and had $82.2 million and $46.3 million of repayments, resulting in net repayments of $24.5 million and $13.1 million, respectively. Amounts are net of obligations under participation agreements and secured financing agreements.

Net Loan Portfolio Information

The tables below set forth the types of loans in our loan portfolio, as well as the property type and geographic location of the properties securing these loans, on a net loan basis, which represents our proportionate share of the loans, based on our economic ownership of these loans as of:


	June 30, 2024						December 31, 2023
Loan Structure	Principal Balance		Carrying Value		% of Total		Principal Balance		Carrying Value		% of Total
First mortgages	$	303,953,051	$	307,692,865	83.4	%	$	365,465,500	$	368,918,890	80.9	%
Preferred equity investments	78,884,440		78,983,915		21.4	%	126,550,969		127,105,312		27.8	%
Mezzanine loans	17,444,357		17,435,749		4.7	%	17,444,357		17,424,081		3.8	%
Allowance for credit losses	—		(34,905,309)		(9.5)	%	—		(56,976,025)		(12.5)	%
Total	$	400,281,848	$	369,207,220	100.0	%	$	509,460,826	$	456,472,258	100.0	%


	June 30, 2024						December 31, 2023
Property Type	Principal Balance		Carrying Value		% of Total		Principal Balance		Carrying Value		% of Total
Office	$	115,976,792	$	116,315,046	31.5	%	$	144,812,619	$	144,853,769	31.7	%
Industrial	70,022,380		70,022,380		19.0	%	67,579,869		67,612,621		14.8	%
Infill land	53,900,000		55,341,248		15.0	%	52,839,509		54,172,663		11.9	%
Multifamily	53,322,162		53,659,242		14.5	%	85,660,082		86,210,868		18.9	%
Hotel - full/select service	43,222,382		43,832,428		11.9	%	43,222,382		43,801,303		9.6	%
Mixed-use	32,838,132		33,087,413		9.0	%	63,096,365		63,531,806		13.9	%
Student housing	31,000,000		31,854,772		8.6	%	31,000,000		31,821,832		7.0	%
Infrastructure	—		—		—	%	21,250,000		21,443,421		4.7	%
Allowance for credit losses	—		(34,905,309)		(9.5)	%	—		(56,976,025)		(12.5)	%
Total	$	400,281,848	$	369,207,220	100.0	%	$	509,460,826	$	456,472,258	100.0	%


	June 30, 2024						December 31, 2023
Geographic Location	Principal Balance		Carrying Value		% of Total		Principal Balance		Carrying Value		% of Total
United States
California	$	102,279,912	$	103,308,437	28.1	%	$	119,093,246	$	120,296,944	26.4	%
New York	75,317,144		75,317,144		20.4	%	90,483,672		90,483,672		19.8	%
New Jersey	85,922,380		87,067,380		23.6	%	82,419,378		83,489,049		18.3	%
Georgia	30,000,000		30,300,000		8.2	%	74,335,828		74,602,328		16.3	%
Utah	28,000,000		28,910,000		7.8	%	49,250,000		50,329,949		11.0	%
Washington	18,935,933		18,983,655		5.1	%	34,052,223		34,020,449		7.5	%
Arizona	31,000,000		31,296,248		8.5	%	31,000,000		31,296,235		6.9	%
North Carolina	21,826,479		21,929,665		5.9	%	21,826,479		21,929,657		4.8	%
Massachusetts	7,000,000		7,000,000		1.9	%	7,000,000		7,000,000		1.5	%
Allowance for credit losses	—		(34,905,309)		(9.5)	%	—		(56,976,025)		(12.5)	%
Total	$	400,281,848	$	369,207,220	100.0	%	$	509,460,826	$	456,472,258	100.0	%

Factors Impacting Operating Results

Our results of operations are affected by a number of factors and primarily depend on, among other things, the level of the interest income from targeted assets, the market value of our assets and the supply of, and demand for, real estate-related loans, including mezzanine loans, first mortgage loans, subordinated mortgage loans, preferred equity investments and other loans related to high quality commercial real estate in the United States, and the financing and other costs associated with our business. Interest income and borrowing costs may vary as a result of changes in interest rates, which could impact the net

interest we receive on our assets. Our operating results may also be impacted by conditions in the financial markets and unanticipated credit events experienced by borrowers under our loan assets.

Credit Risk

Our loans and investments are subject to credit risk. The performance and value of our loans and investments depend upon the owners’ ability to operate the properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due to us. To monitor this risk, our asset management team reviews our investment portfolios and is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary.

In addition, we are exposed to the risks generally associated with the commercial real estate market, including variances in occupancy rates, capitalization rates, absorption rates, and other macroeconomic factors beyond our control. We seek to manage these risks through our Manager's underwriting and asset management processes.

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

Concentration Risk

We hold real estate and real estate-related loans. Thus, our investment 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 investments could materially reduce our capital.

Interest Rate Risk

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

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

Prepayment Risk

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

Extension Risk

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

Real Estate Risk

The market values of commercial and residential mortgage assets are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; retroactive changes to building or similar codes; pandemics; natural disasters; and other acts of god. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loans, which could also cause us to suffer losses.

Use of Leverage

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

Market Risk

Our loans are highly illiquid, and there is no assurance that we will achieve our investment objectives, including targeted returns. Due to the illiquidity of the loans, valuation of our loans may be difficult, as there generally will be no established markets for these loans.

Results of Operations

The following table presents the comparative results of our operations:


	Three Months Ended June 30,						Six Months Ended June 30,
	2024		2023		Change		2024		2023		Change
Revenues
Interest income	$	8,435,024	$	15,878,453	$	(7,443,429)	$	20,583,759	$	31,494,260	$	(10,910,501)
Real estate operating revenue	2,718,625		2,803,934		(85,309)		5,438,326		4,136,903		1,301,423
Other operating income	19,871		100,068		(80,197)		160,780		153,463		7,317
	11,173,520		18,782,455		(7,608,935)		26,182,865		35,784,626		(9,601,761)
Operating expenses
Operating expenses reimbursed to Manager	2,332,771		2,120,029		212,742		4,510,935		4,297,033		213,902
Asset management fee	1,619,971		2,105,049		(485,078)		3,335,013		4,102,476		(767,463)
Asset servicing fee	394,995		496,374		(101,379)		801,520		966,899		(165,379)
Provision for credit losses	2,576,325		4,652,644		(2,076,319)		4,449,436		3,802,593		646,843
Real estate operating expenses	782,271		1,864,212		(1,081,941)		1,473,277		3,074,124		(1,600,847)
Depreciation and amortization	1,747,119		1,756,664		(9,545)		3,863,801		2,438,477		1,425,324
Professional fees	826,080		787,427		38,653		1,711,649		1,767,322		(55,673)
Directors’ fees	91,560		83,750		7,810		175,310		180,214		(4,904)
Other	100,594		188,631		(88,037)		363,505		403,875		(40,370)
Impairment charge	—		11,765,540		(11,765,540)		—		11,765,540		(11,765,540)
	10,471,686		25,820,320		(15,348,634)		20,684,446		32,798,553		(12,114,107)
Operating income (loss)	701,834		(7,037,865)		7,739,699		5,498,419		2,986,073		2,512,346
Other income and expenses
Interest expense on secured financing	(6,580,840)		(7,483,284)		902,444		(13,870,752)		(13,603,015)		(267,737)
Interest expense on unsecured notes payable	(2,452,577)		(2,405,267)		(47,310)		(4,892,952)		(4,799,573)		(93,379)
Interest expense on obligations under participation agreements	(770,648)		(576,915)		(193,733)		(1,389,143)		(1,109,061)		(280,082)
Unrealized gain on investments, net	201,501		51,224		150,277		178,570		57,808		120,762
Income (loss) from equity investment in unconsolidated investments	1,671,970		(1,759,934)		3,431,904		1,198,583		(2,196,794)		3,395,377
Realized loss on investments, net	(310,550)		(25,024)		(285,526)		(446,009)		(25,024)		(420,985)
	(8,241,144)		(12,199,200)		3,958,056		(19,221,703)		(21,675,659)		2,453,956
Net loss	$	(7,539,310)	$	(19,237,065)	$	11,697,755	$	(13,723,284)	$	(18,689,586)	$	4,966,302

Net Loan Portfolio

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

The following table presents a reconciliation of our loan portfolio on a weighted average basis from gross to net:


	Three Months Ended June 30, 2024				Three Months Ended June 30, 2023
	Weighted Average Principal Amount (1)		Weighted Average Coupon Rate (2)		Weighted Average Principal Amount (1)		Weighted Average Coupon Rate (2)
Total portfolio
Gross loans	$	460,924,737	13.1	%	$	606,761,243	12.4	%
Obligations under participation agreements	(15,000,000)		20.3	%	(13,459,586)		17.1	%
Promissory notes payable	(80,585,255)		10.9	%	—		—	%
Repurchase agreements payable	(74,175,716)		8.6	%	(147,054,763)		7.0	%
Revolving line of credit payable	(34,761,111)		8.7	%	(117,050,294)		8.5	%
Net loans (3)	$	256,402,655	15.3	%	$	329,196,600	16.0	%
Senior loans
Gross loans	$	353,025,921	12.9	%	$	481,108,382	11.8	%
Promissory notes payable	(80,585,255)		10.9	%	—		—	%
Repurchase agreements payable	(74,175,716)		8.6	%	(147,054,763)		7.0	%
Revolving line of credit payable	(34,761,111)		8.7	%	(117,050,294)		8.5	%
Net loans (3)	$	163,503,839	16.7	%	$	217,003,325	16.8	%
Subordinated loans (4)
Gross loans	$	107,898,816	14.0	%	$	125,652,861	14.3	%
Obligations under participation agreements	(15,000,000)		20.3	%	(13,459,586)		17.1	%
Net loans (3)	$	92,898,816	13.0	%	$	112,193,275	14.0	%


	Six Months Ended June 30, 2024				Six Months Ended June 30, 2023
	Weighted Average Principal Amount (1)		Weighted Average Coupon Rate (2)		Weighted Average Principal Amount (1)		Weighted Average Coupon Rate (2)
Total portfolio
Gross loans	$	473,466,860	13.1	%	$	620,485,639	12.3	%
Obligations under participation agreements	(13,516,484)		18.3	%	(13,181,738)		17.1	%
Promissory notes payable	(73,572,677)		10.9	%	—		—	%
Repurchase agreements payable	(77,498,307)		8.6	%	(157,207,602)		7.0	%
Revolving line of credit payable	(40,821,119)		8.7	%	(107,111,725)		8.5	%
Net loans (3)	$	268,058,273	15.4	%	$	342,984,574	15.7	%
Senior loans
Gross loans	$	365,553,392	12.9	%	$	489,904,811	11.7	%
Promissory notes payable	(73,572,677)		10.9	%	—		—	%
Repurchase agreements payable	(77,498,307)		8.6	%	(157,207,602)		7.0	%
Revolving line of credit payable	(40,821,119)		8.7	%	(107,111,725)		8.5	%
Net loans (3)	$	173,661,289	16.7	%	$	225,585,484	16.5	%
Subordinated loans (4)
Gross loans	$	107,913,468	14.0	%	$	130,580,828	14.3	%
Obligations under participation agreements	(13,516,484)		18.3	%	(13,181,738)		17.1	%
Net loans (3)	$	94,396,984	13.4	%	$	117,399,090	14.0	%

_______________

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

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

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

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

Interest Income

For the three and six months ended June 30, 2024 as compared to the three and six months ended June 30, 2023, interest income decreased by $7.4 million and $10.9 million, respectively primarily due to a decrease in contractual interest income as a result of a decrease in the weighted average principal balance of performing loans as well as an increase in suspended interest income accrual on non-performing loans of $3.0 million and $5.4 million, respectively, partially offset by an increase in the weighted average coupon rate due to increases in the underlying index rates.

Real Estate Operating Revenue

For the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, real estate operating revenue decreased by $0.1 million, primarily due to a reduction in lease revenue resulting from the disposal of the office building in October 2023, substantially offset by an increase in lease revenue contributed by the five industrial buildings acquired in May 2023.

For the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, real estate operating revenue increased by $1.3 million, primarily due to an increase in lease revenue contributed by the eight industrial buildings acquired in 2023, partially offset by a reduction in lease revenue resulting from the disposal of the office building in October 2023.

Operating Expenses Reimbursed to Manager

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

For both the three and six months ended June 30, 2024 as compared to the three and six months ended June 30, 2023, operating expenses reimbursed to our Manager increased by $0.2 million, primarily due to an increase in our Manager’s overhead costs.

Asset Management Fee

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

For the three and six months ended June 30, 2024 as compared to the three and six months ended June 30, 2023, asset management fees decreased by $0.5 million and $0.8 million, respectively, primarily due to a decrease in total assets under management primarily resulting from repayment of loans.

Asset Servicing Fee

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

For the three and six months ended June 30, 2024 as compared to the three and six months ended June 30, 2023, asset servicing fees decreased by $0.1 million and $0.2 million, respectively, primarily due to a decrease in total assets under management resulting from the repayment of loans.

Provision for Credit Losses

On January 1, 2023, we adopted the provisions of ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires entities to recognize credit losses on financial instruments based on an estimate of current expected credit losses.

For the three and six months ended June 30, 2024, provision for credit losses was $2.6 million and $4.4 million, respectively, primarily related to the decline in fair value of collateral underlying one loan in the investment portfolio as well as a decline in modeled macroeconomic forecasts for commercial real estate.

For the three and six months ended June 30, 2023, provision for credit losses was $4.7 million and $3.8 million, respectively, primarily due to a decline in the fair value of the collateral on a loan.

Real Estate Operating Expenses

For the three and six months ended June 30, 2024 as compared to the three and six months ended June 30, 2023, real estate operating expenses decreased by $1.1 million and $1.6 million, respectively, primarily due to a reduction in ground lease rent on the office building disposed of in October 2023, partially offset by an increase in real estate operating expenses related to the industrial buildings that we acquired in 2023.

Depreciation and Amortization

For the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, depreciation and amortization decreased by $0.01 million, primarily due to the disposal of the office building in October 2023, substantially offset by an increase in depreciation and amortization related to 5 industrial buildings that we acquired in May 2023.

For the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, depreciation and amortization increased by $1.4 million, primarily due to the industrial buildings that we acquired in 2023, partially offset by a reduction in depreciation and amortization related to the disposal of the office building in October 2023.

Impairment Charge

For both the three and six months ended June 30, 2023, we recognized an impairment charge of $11.8 million on the multi-tenant office building located in California in order to reduce the carrying value of the building to its estimated fair value. There was no impairment charge recorded for the three and six months ended June 30, 2024.

Interest Expense on Secured Financing

Our secured financing consists of repurchase agreements, revolving line of credit, term loan, promissory notes and property mortgages.

For the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, interest expense on secured financing decreased by $0.9 million as a result of a decrease in the weighted average principal amount outstanding, partially offset by an increase in the index rate on secured financing agreements.

For the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, interest expense on secured financing increased by $0.3 million as a result of an increase in the index rate on secured financing agreements, partially offset by a decrease in the weighted average principal amount outstanding.

Interest Expense on Unsecured Notes Payable

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

For the three and six months ended June 30, 2024 as compared to the three and six months ended June 30, 2023, interest expense on unsecured notes payable remained substantially the same.

Interest from Obligations under Participation Agreements

For the three and six months ended June 30, 2024 as compared to the three and six months ended June 30, 2023, interest expense from obligations under participation agreements increased by $0.2 million and $0.3 million, respectively, primarily as a result of an increase in the weighted average interest rate on the outstanding obligations under participation agreements as well as an increase in the weighted average principal amount outstanding.

Unrealized Gain on Investments, Net

For the three and six months ended June 30, 2024 as compared to the three and six months ended June 30, 2023, unrealized gain on investments, net increased by $0.2 million and $0.1 million, respectively, primarily due to an increase in the fair value of our marketable securities at period end.

Income (Loss) from Equity Investment in Unconsolidated Investments

As of both June 30, 2024 and December 31, 2023, we owned a 14.9% equity interest in RESOF, a limited partnership that invests primarily in performing and non-performing mortgages, loans, mezzanines and other credit instruments supported by underlying commercial real estate assets. We also beneficially owned equity interests in joint ventures that invest in real estate properties, opportunistic debt and equity securities and, indirectly, together with other non-affiliated entities, a non-real estate operating company, and a preferred equity investment with residual profit-sharing.

Our income (loss) from equity investment in unconsolidated investments are as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Income (loss) from equity investment in RESOF	$	1,775,929	$	(1,159,388)	$	2,774,268	$	(855,788)
Loss from equity investment in the joint ventures	(179,937)		(600,546)		(1,651,663)		(1,341,006)
Income from other equity investments	75,978		—		75,978		—
	$	1,671,970	$	(1,759,934)	$	1,198,583	$	(2,196,794)

For the three and six months ended June 30, 2024, we recognized equity income from RESOF as RESOF continues to invest its capital and generate positive income. For the three and six months ended June 30, 2023, we recognized equity loss from RESOF primarily due to adjustments made to equity income as a result of the dilution of our ownership interest in RESOF as new investors were admitted in 2022 and 2023.

For the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, equity loss from the joint ventures decreased primarily due to a gain on sale of a real estate property, partially offset by an increase in depreciation and amortization and interest expense recognized by the joint ventures.

For the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, equity loss from the joint ventures increased primarily due to an increase in depreciation and amortization and interest expense recognized by the joint ventures, partially offset by a gain on sale of a real estate property.

Realized Loss On Investments, Net

For the three and six months ended June 30, 2024, we sold a portion of our investments in marketable equity securities and recognized a net loss on sale of $0.3 million and $0.4 million, respectively.

For both the three and six months ended June 30, 2023, our held-to-maturity debt securities that we purchased at a premium was redeemed at par and we recognized a net loss investment of $0.03 million.

Net Loss

For the three and six months ended June 30, 2024 as compared to the three and six months ended June 30, 2023, the resulting net loss decreased by $11.7 million and $5.0 million, respectively.

Financial Condition, Liquidity and Capital Resources

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

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

We expect to fund approximately $19.1 million of the unfunded commitments to borrowers as well as $15.0 million of the unfunded commitment on a subscription agreement during the next twelve months. We expect to maintain sufficient liquidity to fund such commitments through matching these commitments with principal repayments on outstanding loans or draw downs on our credit facilities. Obligation under participation agreement of $15.0 million will mature in the next twelve months. We use the proceeds from the repayment of the corresponding investment to repay the participation obligation. Our revolving line of credit with outstanding principal balance of $34.8 million is to come due on December 31, 2024 and our Goldman Sachs Bank repurchase agreement with outstanding principal balance of $76.3 million is to come due on February 18, 2025. We expect to either extend the facility term of the facilities or convert the facilities to a term loan with maturity co-terminus with the underlying loans and use the proceeds from the repayment of the underlying loans to repay the term loans, or refinance with another lender. Additionally, two promissory notes payable with a total outstanding principal balance of $68.5 million that is collateralized by senior loans with aggregate principal balance of $113.9 million will mature within the next twelve months. We expect to use proceeds from the repayment of the underlying loans to repay the promissory notes payable.

Summary of Financing

The table below summarizes our debt financing as of June 30, 2024:


Type of Financing	Maximum Amount Available		Outstanding Balance		Amount Remaining Available		Interest Rate	Maturity Date
Fixed Rate:
Unsecured notes payable	N/A		$	85,125,000	N/A		6.00%	June 2026
Unsecured notes payable	N/A		38,375,000		N/A		7.00%	March 2026
Property mortgages	N/A		40,250,000		N/A		6.25%	June 2028
			$	163,750,000
Variable Rate:
Property mortgages	N/A		$	34,100,000	N/A		Term SOFR +3.5% (Term SOFR Floor of 3.75%)	April 2027
Promissory notes payable	N/A		81,485,545		N/A		Term SOFR plus a spread ranging from 4.75% to 5.98% with a combined floor rate ranging from 9.0% to 11.28%	March 2025 - March 2026
Revolving line of credit	$	34,761,111	34,761,111		$	—	Term SOFR + 3.5% (combined floor rate of 7.0%)	December 2024
Goldman Sachs Bank repurchase agreement	200,000,000		76,282,989		123,717,011		Term SOFR (subject to underlying loan floors on a case-by-case basis) plus a spread ranging from 2.0% to 5.00%)	February 2025
	$	234,761,111	$	226,629,645	$	123,717,011

Cash Flows (Used in) Provided by Operating Activities

For the six months ended June 30, 2024, cash flows used in operating activities was $7.3 million, compared to cash flow from operating activities of $12.0 million for the six months ended June 30, 2023. The decrease in operating cash flows was primarily due to a decrease in net contractual interest income.

Cash Flows Provided by (Used in) Investing Activities

For the six months ended June 30, 2024, cash flows provided by investing activities were $39.4 million, primarily related to proceeds from repayment of loans of $110.4 million and promissory note receivable of $9.0 million, partially offset by origination and purchase of loans of $42.6 million and purchase of equity interests in unconsolidated investments of $36.6 million.

For the six months ended June 30, 2023, cash flows used in investing activities were $6.8 million, primarily related to origination and purchase of loans of $63.8 million, purchase of real estate properties of $52.3 million, and purchase of held-to-maturity securities of $20.0 million, partially offset by proceeds from repayments of loans of $99.0 million, proceeds from sale of debt securities of $20.0 million and return of capital on unconsolidated investments of $10.7 million.

Cash Flows (Used in) Provided by Financing Activities

For the six months ended June 30, 2024, cash flows used in financing activities were $21.2 million, primarily related to principal repayments on secured financing of $84.8 million, distributions paid of $9.3 million and payment for financing costs of $1.1 million, partially offset by proceeds from secured financing of $58.2 million and proceeds from obligations under participation agreements of $15.0 million.

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

Distribution Reinvestment Plan

On January 20, 2023, our Board adopted a distribution reinvestment plan (the “Plan”), pursuant to which our stockholders may elect to reinvest cash distributions payable by us in additional shares of Class A Common Stock and Class B Common Stock, at the price per share determined pursuant to the Plan.

Critical Accounting Policies and Use of Estimates

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

Allowance for Credit Losses

On January 1, 2023, we adopted the provisions of ASU 2016-13, which requires entities to recognize credit losses on financial instruments based on an estimate of current expected credit losses (“CECL”). The CECL model requires the

consideration of possible credit losses over the life of an instrument as opposed to estimating credit losses upon the occurrence of an actual loss event under the previous “incurred loss” methodology.

We use a model-based approach for estimating the allowance for credit losses on performing loans on a collective basis, including future funding commitments for which we do not have the unconditional right to cancel, as these loans share similar risk characteristics. We utilize information obtained from internal and external sources relating to past events, current economic conditions and reasonable and supportable forecasts about the future to determine the expected credit losses for our loan portfolio. We utilize a commercial mortgage-based, third-party loan loss model and because we do not have a meaningful history of realized credit losses on our loan portfolio, we subscribe to a database service to provide historical proxy loan loss information. We employ logistic regression to forecast expected losses at the loan level based on a commercial real estate loan securitization database that contains activity dating back to 1998. We have chosen to incorporate a weighted average macroeconomic forecast that encompasses baseline, upside and downside scenarios, into our allowance for credit losses on performing loans estimate during the reasonable and supportable forecast period which is currently eight quarters. We select certain economics variables from a group of independent variables such as Commercial Real Estate Price Index, unemployment and interest rate which are included in the model as part of macroeconomic forecast and updated regularly based on current economic trends. The specific loan level information input into the model includes loan-to-value and debt service coverage ratio metrics, as well as principal balances, property type, location, coupon rate, coupon rate type, original or remaining term, expected repayment dates and contractual future funding commitments. Based on the inputs, the loan loss model determines a loan loss rate through the generation of a probability of default (PD) and loss given default (LGD) for each loan. The allowance for credit losses on performing loans is then calculated by applying the loan loss rate to the total outstanding loan balance of each loan. These results require a significant amount of judgment applied in selecting inputs and analyzing the results produced by the models to determine the allowance for credit losses. Changes in such estimates can significantly affect the expected credit losses.

Management Agreement with our Manager

We currently pay the following fees to our Manager pursuant to the Management Agreement:

Origination and Extension Fee. An origination fee in the amount of 1.0% of the amount used to originate, acquire, fund or structure real estate-related investments, including any third-party expenses related to such loan. In the event that the term of any real estate-related loan is extended, our Manager also receives an origination fee equal to the lesser of (i) 1.0% of the principal amount of the loan being extended or (ii) the amount of fee paid by the borrower in connection with such extension.

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

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

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

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

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

The following table presents a summary of fees paid and costs reimbursed to our Manager in connection with providing services to us:


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Origination and extension fee expense (1)	$	369,392	$	343,159	$	632,164	$	1,294,607
Asset management fee	1,619,971		2,105,049		3,335,013		4,102,476
Asset servicing fee	394,995		496,374		801,520		966,899
Operating expenses reimbursed to Manager	2,332,771		2,120,029		4,510,935		4,297,033
Disposition fee (2)	135,000		917,750		475,000		1,208,563
Total	$	4,852,129	$	5,982,361	$	9,754,632	$	11,869,578

_______________

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

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

Promissory Note Payable with Terra LLC

On January 24, 2024, we, as borrower, entered into a revolving promissory note payable with Terra LLC. The promissory note payable bears interest at the Prime Rate, as such Prime Rate is published in the Wall Street Journal, computed on the basis of the actual number of days elapsed and a year of 365 days. The promissory note matures on March 31, 2027. As of June 30, 2024, amount outstanding under the promissory note payable was $34.3 million. The activity associated with this agreement is eliminated in consolidation and therefore has no impact on our consolidated financial statements.

Cost Sharing and Reimbursement Agreement with Terra LLC

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

Participation Agreements

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

As of June 30, 2024, the principal balance of our participation obligation was $15.0 million, which was a participation obligation to a related-party managed by the Manager.

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

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

Other than for U.S. federal income tax purposes, our loan participations do not qualify for sale treatment. As such, the investments remain on our combined consolidated balance sheets and the proceeds are recorded as obligations under participation agreements. Similarly, interest earned on the entire loan balance is recorded within “Interest income” and the

interest related to the participation interest is recorded within “Interest expense from obligations under participation agreements” in the consolidated statements of operations.

For the three and six months ended June 30, 2024, the weighted average outstanding principal balance on obligations under participation agreements was approximately $15.0 million and $13.5 million, respectively, and the weighted average interest rate was approximately 20.3% and 18.3%, respectively. For the three and six months ended June 30, 2023, the weighted average outstanding principal balance on obligations under participation agreements of approximately $13.5 million and $13.2 million, respectively, and the weighted average interest rate was approximately 17.1 and 17.1%, respectively.

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.

The following table summarizes the aggregate principal balance of variable rate investments and indebtedness as of:


	June 30, 2024
Variable rate investments	$	383,576,552
Variable rate debt	$	226,629,645

The following table summarizes estimated changes in net investment income on our variable rate investments and indebtedness as of June 30, 2024 assuming hypothetical increases or decreases in Term SOFR or SOFR:


	1.00% Decrease		1.00% Increase
Increase (decrease) in investment income from variable rate investments	$	(3,962,820)	$	4,000,997
Decrease (increase) in interest expense from variable rate debt	1,616,258		(2,266,296)
Net increase (decrease) in investment income from variable rate instruments	$	(2,346,562)	$	1,734,701

We may hedge against interest rate fluctuations by using standard hedging instruments, such as futures, options and forward contracts. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in benefits of lower interest rates with respect to our portfolio of investments with fixed interest rates. For the three and six months ended June 30, 2024 and 2023, we did not engage in interest rate hedging activities that qualify for hedge accounting.

Prepayment Risks

Extension Risk

Real Estate Risk

Credit Risk

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

Additionally, our Manager employs an asset management approach and monitors the portfolio of investments through, at a minimum, quarterly financial review of property performance including net operating income, loan-to-value, debt service coverage ratio and the debt yield. Our Manager also requires certain borrowers to establish a cash reserve, as a form of additional collateral, for the purpose of providing for future interest or property-related operating payments.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2024. Based on that evaluation, our management concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we would meet our disclosure obligations. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports.

Changes in Internal Control Over Financial Reporting

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

PART II

Item 1. Legal Proceedings.

From time to time, we and individuals employed by us and our Manager may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our borrowers and investees. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that such 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, 2023.

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

None.

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
3.1						Amended and Restated Bylaws of Terra Property Trust, Inc. (incorporated by reference to Exhibit 3.1 to the Registration Statement on Amendment No.1 to Form 10 (File No. 000-56117) filed with the SEC on December 16, 2019).
3.2						Second Articles of Amendment and Restatement of Terra Property Trust, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K with the SEC on December 5, 2023).
3.3						Articles of Supplementary of Terra Property Trust, Inc. Designating 12.5% Series A Redeemable Cumulative Preferred Stock (incorporated by reference to Exhibit 3.3 to the Registration Statement on Amendment No.1 to Form 10 (File No. 000-56117) filed with the SEC on December 16, 2019).


4.1						Indenture, dated June 10, 2021, by and between Terra Property Trust, Inc. and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A (File No. 001-40496) filed with the SEC on June 14, 2021).
4.2						First Supplemental Indenture, dated June 10, 2021, by and between Terra Property Trust, Inc. and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form 8-A (File No. 001-40496) filed with the SEC on June 14, 2021).
4.3						Form of Global Note representing the notes (included in Exhibit 4.2).
4.4						Indenture, dated February 10, 2021, by and between Terra Income Fund 6, Inc. and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 of Terra Income Fund 6, Inc.'s Current Report on Form 8-K filed with the SEC on February 10, 2021).
4.5						First Supplemental Indenture, dated February 10, 2021, by and between Terra Income Fund 6, Inc. and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 of Terra Income Fund 6, Inc.’s Current Report on Form 8-K filed with the SEC on February 10, 2021).
4.6						Second Supplemental Indenture, dated October 1, 2022, by and among Terra Income Fund 6, Inc., Terra Merger Sub, LLC and U.S. Bank National Association, as trustee (incorporated by reference to exhibit 4.4 of Terra Income Fund 6, LLC’s Current Report on Form 8-K filed with the SEC on October 3, 2022).
4.7						Description of Securities Registered Under Section 12 of the Securities Exchange Act of 1934 (incorporated by reference to Exhibit 4.1 of the Company’s Annual Report on Form 10-K filed on March 13, 2023).
10.1*						Sixth Amendment to Loan Documents, dated as of June 26, 2024, between Terra Mortgage Portfolio II, LLC, as Borrower, and Terra Property Trust, Inc., as Guarantor, and Western Alliance Bank, as Lender.
10.2*						Security Agreement, Dated as of June 26, 2024, between Terra Mortgage Portfolio II, LLC as Assignor, and Western Alliance Bank, As Lender.
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						Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH						Inline XBRL Taxonomy Extension Schema Document
101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document
104						Cover Page Interactive Data File Included as Exhibit 101 (embedded within the Inline XBRL document)

* Filed herewith.

** Furnished herewith.

SIGNATURES

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

Date: August 9, 2024


			TERRA PROPERTY TRUST, INC.

			By:			/s/ Vikram S. Uppal
						Vikram S. Uppal
						Chief Executive Officer and Chief Investment Officer
						(Principal Executive Officer)

			By:			/s/ Gregory M. Pinkus
						Gregory M. Pinkus
						Chief Financial Officer, Treasurer and Secretary
						(Principal Financial and Accounting Officer)