TFSA 10-K
Terra Income Fund 6, LLC (TFSA)
10-K
2025-03-14
For: 2024-12-31
View Original
Added on
April 09, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the Fiscal Year Ended December 31 , 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: 000-55429
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices) (Zip Code)
(212 ) 753-5100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ¨ | 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. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 USC. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. o
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ☑
All of the limited liability company interest in the registrant is held by an affiliate of the registrant. 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.
Documents Incorporated by Reference
Omission of Certain Information
The registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Annual Report on Form 10-K with reduced disclosure format.
TABLE OF CONTENTS
| Page | ||||||||
| PART I | ||||||||
| PART II | ||||||||
| PART III | ||||||||
| PART IV | ||||||||
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this Annual Report on Form 10-K of Terra Income Fund 6, LLC (“Terra LLC”), a wholly owned subsidiary of Terra Property Trust, Inc. (“Terra REIT”), constitute forward-looking statements because they relate to future events or our future performance or financial condition. In this report, as context requires, “we,” “us” and “our” refer to Terra LLC. The forward-looking statements contained in this Annual Report on Form 10-K may include, but are not limited to, statements as to:
•our expected financial performance and operating results;
•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 strategic non-real estate investment opportunities;
•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 Capital Partners, LLC (“Terra Capital Partners”), our sponsor; Terra REIT Advisors, LLC, a subsidiary of Terra Capital Partners, and the external manager to our sole and managing member Terra REIT (“Terra REIT Advisors” or the “REIT Manager”); Terra Fund Advisors, LLC, an affiliate of Terra Capital Partners; Terra Secured Income Fund 5 International, Terra Income Fund International and Terra Secured Income Fund 7, LLC, (collectively, the “Terra Income Funds”); Terra Offshore Funds REIT, LLC; Mavik Capital Management, LP; Mavik Real Estate Special Opportunities Fund, LP; Mavik Real Estate Special Opportunities VS2, LP or any of their affiliates;
•our dependence on the REIT Manager or its affiliates and the availability of its senior management team and other personnel;
•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;
•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 Annual Report on Form 10-K 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 this Annual Report. 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 Annual Report on Form 10-K on information available to us on the date of this Annual Report on Form 10-K. 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. Readers are advised to consult any additional disclosures that we may make through reports that we may file in the
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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. The forward-looking statements and projections contained in this Annual Report on Form 10-K are excluded from the safe harbor protection provided by 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”).
RISK FACTOR SUMMARY
We are subject to numerous risks and uncertainties that could cause our actual results and future events to differ materially from those set forth or contemplated in our forward-looking statements, including those summarized below. The following list of risks and uncertainties is only a summary of some of the most important factors and is not intended to be exhaustive. This risk factor summary should be read together with the more detailed discussion of risks and uncertainties set forth under Item 1A — Risk Factors.
Risks Related to Our Business and Structure
•Our loan portfolio is concentrated in a limited number of industries and borrowers, which may subject us to a risk of significant loss if there is a downturn in a particular industry in which we are concentrated or if one of our larger borrowers encounters financial difficulties.
•Periods of higher inflation in the U.S. may have an adverse impact on the valuation of our investments.
•Terra REIT may change our operating policies, objectives or strategies without prior notice, and the effects of such a change may be adverse.
•Our ability to achieve our investment objectives depends on Terra REIT’s and Terra REIT Advisors’ ability to manage and support our investment process. If Terra REIT were to lose any members of its senior management team, our ability to achieve our investment objectives could be significantly harmed.
•The Current Expected Credit Loss (“CECL”) accounting standard requires us to make certain estimates and judgments, which may be difficult to determine and may have a material adverse effect on our financial condition and results of operations.
Risks Related to Terra REIT Advisors and its Affiliates
•Terra REIT Advisors and its affiliates, including some of Terra REIT’s directors, face conflicts of interest caused by compensation arrangements with us and our affiliates, which could result in actions that are not in our best interests.
•There may be conflicts of interest related to obligations Terra REIT Advisors has to our affiliates and to other clients.
Risks Related to Our Investments
•A covenant breach by any of our borrowers or investees may harm our operating results.
•A lack of liquidity in certain of our investments may adversely affect our business.
•Our real estate-related loans may be impacted by unfavorable real estate market conditions, which could decrease the value of our investments.
•Our real estate-related loans will be subject to interest rate fluctuations that could reduce our returns as compared to market interest rates.
•The mezzanine loans in which we may invest would involve greater risks of loss than senior loans secured by income-producing real properties.
•Investments in non-conforming or non-investment grade rated loans or securities involve greater risk of loss.
•We have no established investment criteria limiting the geographic concentration of our investments. If our investments are concentrated in an area that experiences adverse economic conditions, our investments may lose value and we may experience losses.
•Hedging against interest rate exposure may adversely affect our earnings, limit our gains or result in losses.
•If we overestimate the value or income-producing ability or incorrectly price the risks of our investments, we may experience losses.
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Risk Related to Debt Financing
•Changes in interest rates may affect our cost of capital
•Covenants in our debt agreements may restrict our operating activities and adversely affect our financial condition, operating results and cash flows.
General Risk Factors
•The future outbreak of highly infectious or contagious diseases could materially and adversely impact or disrupt our investments, business, financial condition and results of operations.
•Future recessions, downturns, disruptions or instability could have a materially adverse effect on our business.
•As a public company, we are subject to regulations not applicable to private companies, such as provisions of the Sarbanes-Oxley Act. Efforts to comply with such regulations involves significant expenditures, and non-compliance with such regulations may adversely affect us.
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PART I
Item 1. Business.
Overview
Terra Income Fund 6, LLC (“Terra LLC”) was formed as a Delaware limited liability company on April 29, 2022 as a wholly owned subsidiary of Terra Property Trust, Inc. (“Terra REIT”). On October 1, 2022, pursuant to an Agreement and Plan of Merger, dated as of May 2, 2022 (as amended, the “Merger Agreement”), Terra Income Fund 6, Inc. (“Terra BDC”) merged with and into Terra LLC, with Terra LLC continuing as the surviving entity of the merger (the “Merger”). Subsequent to the Merger, Terra LLC became the successor of Terra BDC and assumed all of Terra BDC’s rights and obligations. The former members of Terra BDC’s board of directors (the “Terra BDC Board”) joined the board of directors of Terra REIT. Terra LLC does not have a board of directors and Terra REIT is the sole and managing member of Terra LLC. As context requires, “we,” “us” and “our” refer to Terra BDC prior to the Merger and its successor, Terra LLC, after the Merger.
Terra BDC was a Maryland corporation, formed on May 15, 2013 and commenced operations on June 24, 2015. Terra BDC elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”) until it withdrew its election on September 29, 2022. Terra BDC was an externally managed, non-diversified, closed-end management investment company that initially elected to be taxed for federal income tax purposes as a regulated investment company (“RIC”) until December 31, 2018, when it changed its tax election from taxation as a RIC to taxation as a real estate investment trust (“REIT”). Terra BDC elected to be taxed as a REIT under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its short taxable year beginning October 1, 2018 and ending December 31, 2018. Concurrent with the change in its tax election, Terra BDC changed its fiscal year end from September 30 to December 31 to satisfy the REIT requirements under the Code. During the period beginning October 1, 2018 through our short taxable year ended October 1, 2022 (the “REIT Period”), as a REIT we were not subject to federal income taxes on income and gains distributed to the stockholders as long as certain requirements were satisfied, principally relating to the nature of income and the level of distributions, as well as other factors.
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. Interest on the notes is paid quarterly in arrears every March 30, June 30, September 30 and December 30, at an annual rate of 7.00% per year, beginning June 30, 2021. The notes mature on March 31, 2026. The notes may be redeemed in whole or in part at any time or from time to time at our option on or after February 10, 2023.
Pursuant to the terms of the Merger Agreement, on October 1, 2022, except for any shares of common stock, par value $0.001 per share, of Terra BDC (“Terra BDC Common Stock”) held by Terra REIT or any wholly owned subsidiary of Terra REIT or Terra BDC, which shares were automatically retired and ceased to exist with no consideration paid therefor, each issued and outstanding share of Terra BDC Common Stock was automatically cancelled and retired and converted into the right to receive (i) 0.595 shares of the newly designated Class B Common Stock, par value $0.01 per share, of Terra REIT (“Class B Common Stock”) and (ii) cash, without interest, in lieu of any fractional shares of Class B Common Stock otherwise issuable in an amount, rounded to the nearest whole cent, determined by multiplying (x) the fraction of a share of Class B Common Stock to which such holder would otherwise be entitled by (y) $14.38.
Pursuant to the terms of the transactions described in the Merger Agreement, 4,847,910 shares of Class B Common Stock were issued to former Terra BDC stockholders in connection with the Merger. Following the consummation of the Merger, former Terra BDC stockholders own approximately 19.9% of the common equity of Terra REIT as the combined company.
In connection with the Merger, we assumed the obligations of Terra BDC under the indenture of the unsecured notes payable as well as the credit agreement to provide for a delayed draw term loan of up to $25.0 million. Additionally, the investment advisory and administrative service agreement between Terra BDC and Terra Income Advisors (the “Investment Advisory Agreement”) and the servicing plan between Terra BDC and Terra Capital Markets, LLC (“Terra Capital Markets”) (the “Servicing Plan”) were terminated on October 1, 2022 and fees pursuant to such agreements are no longer payable. Management fees are now payable by our parent and sole member, Terra REIT, to its external manager, Terra REIT Advisors, pursuant to the amended and restated management agreement, dated as of February 8, 2018 (the “Management Agreement”), by and between Terra REIT and Terra REIT Advisors. We have entered into a cost sharing and reimbursement agreement (the “Cost Sharing Agreement”) with Terra REIT pursuant to which we will be responsible for our allocable share of Terra REIT’s expenses, including fees paid by Terra REIT to its manager. Terra REIT’s investment objective is to provide attractive risk-adjusted returns to its stockholders, primarily through regular distributions. There can be no assurances that Terra REIT will be successful in meeting its investment objective.
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Mavik Capital Management, LP and Terra Capital Partners
Mavik Capital Management, LP (“Mavik”), an entity controlled by Vikram S. Uppal, Terra REIT's Chief Executive Officer and Chief Investment Officer, is the sole and managing member of Terra Capital Partners. Terra Capital Partners is led by Mr. Uppal (Chief Executive Officer), Sarah Schwarzschild (Chief Operating Officer), Gregory M. Pinkus (Chief Financial Officer) and Daniel Cooperman (Chief Originations Officer). Mr. Uppal was a Partner of Axar Capital Management L.P. (“Axar Capital Management”) and its Head of Real Estate. Prior to Axar Capital Management, Mr. Uppal was a Managing Director on the Investment Team at Fortress Investment Group’s Credit and Real Estate Funds and Co-Head of North American Real Estate Investments at Mount Kellett Capital Management. Members of the Terra Capital Partners management team have broad based, long-term relationships with major financial institutions, property owners and commercial real estate service providers. The entire senior management team has held leadership roles at many top international real estate and investment banking firms, including Mount Kellett Capital Management, Fortress Investment Group and BGO Strategic Capital Partners.
Terra Capital Partners is a real estate credit focused investment manager based in New York City with a 20-year track record focused primarily on the origination and management of mezzanine loans, as well as first mortgage loans, bridge loans, and preferred equity investments in all major property types through multiple pooled investment vehicles. Since its formation in 2001 and its commencement of operations in 2002, Terra Capital Partners has been engaged in providing financing on commercial properties of all major property types throughout the United States. In the lead up to the global financial crisis in 2007, believing that the risks associated with commercial real estate markets had grown out of proportion to the potential returns from such markets, Terra Capital Partners sold 100% of its investment management interests prior to the global financial crisis. It was not until mid-2009, after its assessment that commercial mortgage markets would begin a period of stabilization and growth, that Terra Capital Partners began to sponsor new investment vehicles, which included the Terra Income Funds, to again provide debt capital to commercial real estate markets. The financings provided by all vehicles managed by Terra Capital Partners from January 2004 through December 31, 2024 have been secured by approximately 13.9 million square feet of office properties, 3.7 million square feet of retail properties, 7.2 million square feet of industrial properties, 5,215 hotel rooms and 31,898 apartment units. The value of the properties underlying this capital was approximately $12.8 billion based on appraised values as of the closing dates of each financing. In addition to its extensive experience originating and managing debt financings, Terra Capital Partners and its affiliates have owned and operated over six million square feet of office and industrial space between 2005 and 2007, and this operational experience further informs its robust origination and underwriting standards and would be beneficial should Terra REIT Advisors need to foreclose on a property underlying a financing. As of the date of this Annual Report on Form 10-K, Terra Capital Partners and its affiliates employed 28 persons.
Investment Objectives and Strategy
We are a wholly owned subsidiary of Terra REIT and our investment objective is to provide attractive risk-adjusted returns to Terra REIT’s stockholders, primarily through Terra REIT’s regular distributions. We originate, invest in and manage a diverse portfolio of real estate-related investments that generate a stable income stream. We directly originate, structure and underwrite most, if not all, of our loans, as we believe that doing so will provide us with the best opportunity to invest in loans that satisfy our standards, establish a direct relationship with the borrower and optimize the terms of our investments; however, we may acquire existing loans from the originating lender should our adviser determine such an investment is in our best interest. From time to time, we may acquire real estate encumbering the senior loans through foreclosure, may invest in real estate related joint ventures and may directly acquire real estate properties. We may also elect to make strategic non-real estate-related investments that align with our investment objectives and criteria. We may hold our investments until their scheduled maturity dates or may sell them if we are able to command favorable terms for their disposition. We may also seek to realize growth in the value of our investments by timing their sale to maximize value.
Terra REIT Advisors’ management team has extensive experience in originating, acquiring, structuring, managing and disposing of real estate-related loans similar to the types of loans in which we intend to invest. In order to meet our investment objectives, we generally seek to follow the following investment criteria:
•focus primarily on the origination of new loans;
•focus on loans backed by properties in the United States;
•invest primarily in floating rate rather than fixed rate loans, but we reserve the right to make debt investments that bear interest at a fixed rate;
•invest in loans expected to be repaid within one to five years;
•maximize current income;
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•lend to creditworthy borrowers;
•construct a portfolio that is diversified by property type, geographic location, tenancy and borrower;
•source off-market transactions;
•hold investments until maturity unless, in Terra REIT Advisors’ judgment, market conditions warrant earlier disposition; and
•invest in strategic non-real estate-related investments that align with our investment objectives and criteria.
While the size of each of our investments generally range between $3 million and $50 million, our investments ultimately are at the discretion of Terra REIT Advisors, subject to oversight by Terra REIT’s board of directors (the “Terra REIT Board”). We focus on smaller, middle market loans which are financing properties in primary and secondary markets because we believe these loans are subject to less competition, offer higher risk adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification.
To enhance our returns, we employ leverage, including leverage resulting from issuance of the notes, as market conditions permit and at the discretion of Terra REIT Advisors. See Item 1A “Risk Factors — Risk Related to Debt Financing” for a discussion of the risks inherent in employing leverage.
Our Business Strategy
In executing our business strategy, we believe that we benefited from Terra REIT Advisors’ affiliation with Terra Capital Partners, given its strong track record and extensive experience and capabilities as real estate investment manager and sponsor of the Terra Income Funds. We believe the following core strengths enable us to realize our investment objectives and provided us with significant competitive advantages in the marketplace, and attractive risk-adjusted returns to Terra REIT’s stockholders.
Significant Experience of Terra Capital Partners
Terra Capital Partners provides Terra REIT Advisors with all of its key investment personnel. Terra Capital Partners has developed a reputation within the commercial real estate finance industry as a leading sophisticated real estate investment and asset management company with a 20-year track record in originating, underwriting and managing commercial real estate and real estate-related loans, preferred equity investments and investments with similar characteristics to the assets that we acquire. We believe we benefit from the depth and the disciplined approach Terra Capital Partners brings to its underwriting and investment management processes to structure and manage investments prudently. In addition to its extensive experience originating and managing debt financings, Terra Capital Partners and its affiliates have owned and operated over six million square feet of office and industrial space between 2005 and 2007, and this operational experience has further informed its robust origination and underwriting standards.
Disciplined Investment Process
We follow a disciplined investment origination, underwriting and selection process. We follow an investment approach focused on long-term credit performance and capital protection. This investment approach involves a multi-phase evaluation, structuring and monitoring process for each potential investment opportunity. After investment, our management team focuses on a thorough review of our investments for potential credit quality deterioration and potential proactive steps to mitigate any losses to our invested capital. We believe this approach maximizes current income and minimizes capital loss.
Portfolio Construction
We construct a portfolio that is diversified by property type, geographic location and borrower. We construct our portfolio based on our evaluation of the impact of each potential investment on the risk/reward mix in our existing portfolio. By selecting those assets that we believe will maximize returns while minimizing investment-specific risk, we believe we can build and manage an investment portfolio that provides superior value to Terra REIT’s stockholders over time, both in absolute terms and relative to other commercial real estate loan and real estate-related investment vehicles.
Superior Analytical Approach
We believe that our management team possesses the superior analytical approach to evaluate each potential investment through the balanced use of qualitative and quantitative analysis, which helps us manage risk on an individual investment and portfolio basis. We rely on a variety of analytical approach and models to assess our investments and risk management. We also conduct an extensive evaluation of the numerous factors that affect our potential investments. These factors include:
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•Top-down review of both the current macroeconomic environment generally and the real estate and commercial real estate loan market specifically;
•Detailed evaluation of the real estate industry and its sectors;
•Bottom-up review of each individual investment’s attributes and risk/reward profile relative to the macroeconomic environment;
•Quantitative cash flow analysis and impact of the potential investment on our portfolio; and
•Ongoing management and monitoring of all investments to assess changing conditions on our original investment assumptions.
Extensive Strategic Relationships
Our management team maintains extensive relationships within the real estate industry, including real estate developers, institutional real estate sponsors and investors, real estate funds, investment and commercial banks, private equity funds, asset originators and broker-dealers, as well as the capital and financing markets generally. We believe these relationships enhance our ability to source and finance our investments as well as mitigate their credit and interest rate risk. We leverage the many years of experience and well-established contacts of our management team, and use these relationships for the benefit of Terra REIT’s stockholders.
Targeted Assets
Real Estate-Related Investments
We originate, structure, fund and manage commercial real estate loans, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments related to high-quality commercial real estate in the United States. We may invest in our targeted assets directly or through joint ventures and acquire some equity participations in the underlying collateral of such loans. Certain of our real estate-related loans require the borrower to make payments of interest on the fully committed principal amount of the loan regardless of whether the full loan amount is outstanding. We may also acquire real estate properties encumbering the first mortgage loans through foreclosure or deed-in-lieu of foreclosure, may invest in joint ventures that own real estate properties and may directly acquire real estate properties.
We originate, structure and underwrite most, if not all, of our loans. We, in reliance on the REIT Manager, use what we consider to be conservative underwriting criteria, and our underwriting process involves comprehensive financial, structural, operational and legal due diligence to assess the risks of financings so that we can optimize pricing and structuring. By originating, not purchasing, loans, we are able to structure and underwrite financings that satisfy our standards, utilize our proprietary documentation and establish a direct relationship with our borrower. Described below are some of the types of loans we own and seek to originate with respect to high-quality properties in the United States. We continue to see attractive lending opportunities, and we expect market conditions to remain favorable for our strategy for the foreseeable future.
First Mortgage Loans. These loans generally finance the acquisition, refinancing, rehabilitation or construction of commercial real estate. First mortgage loans may be either short-term (one-to-five year) or long-term (up to 10-year), may be fixed or floating rate and are predominantly current-pay loans. We originate current-pay first mortgage loans backed by high-quality properties in the United States that fit our investment strategy. We selectively syndicate portions of these loans, including senior or junior participations that will effectively provide permanent financing or optimize returns which may include retained origination fees.
First mortgages provide for a higher recovery rate and lower defaults than other debt positions due to the lender’s senior position. However, such loans typically generate lower returns than subordinate debt such as mezzanine loans or B-notes.
Subordinated Mortgage Loans (B-notes). B-notes include structurally subordinated first mortgage loans and junior participations in first mortgage loans or participations in these types of assets. Like first mortgage loans, these loans generally finance the acquisition, refinancing, rehabilitation or construction of commercial real estate. B-notes may be either short-term (one-to-five year) or long-term (up to 10-year), may be fixed or floating rate and are predominantly current-pay loans. We may create B-notes by tranching our directly originated first mortgage loans generally through syndications of senior first mortgages or buy these loans directly from third-party originators. We believe that the opportunities to both directly originate and to buy these types of loans from third parties on favorable terms will continue to be attractive.
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Investors in B-notes are compensated for the increased risk of such assets from a pricing perspective but still benefit from a lien on the related property. Investors typically receive principal and interest payments at the same time as senior debt unless a default occurs, in which case these payments are made only after any senior debt is made whole. Rights of holders of B-notes are usually governed by participation and other agreements that, subject to certain limitations, typically provide the holders of subordinated positions of the mortgage loan with the ability to cure certain defaults and control certain decisions of holders of senior debt secured by the same properties (or otherwise exercise the right to purchase the senior debt), which provides for additional downside protection and higher recoveries.
Mezzanine Loans. These are loans secured by ownership interests in an entity that owns commercial real estate and generally finance the acquisition, refinancing, rehabilitation or construction of commercial real estate. Mezzanine loans may be either short-term (one-to-five year) or long-term (up to 10-year) and may be fixed or floating rate. We may originate mezzanine loans backed by high-quality properties in the United States that fit our investment strategy. We may own such mezzanine loans directly or we may hold a participation in a mezzanine loan or a sub-participation in a mezzanine loan. These loans are predominantly current-pay loans (although there may be a portion of the interest that accrues) and may provide for participation in the value or cash flow appreciation of the underlying property as described below. Generally, we invest in mezzanine loans with last dollar loan-to-value ratios ranging from 60% to 85%.
Preferred Equity Investments. These are investments in preferred membership interests in an entity that owns commercial real estate and generally finance the acquisition, refinancing, rehabilitation or construction of commercial real estate. These investments are expected to have similar characteristics to and returns as mezzanine loans.
Equity Participations. In connection with our loan investments, we may pursue equity participation opportunities, or interests in the projects being financed, in instances when we believe that the risk-reward characteristics of the loan merit additional upside participation because of the possibility of appreciation in value of the underlying assets securing the loan. Equity participations can be paid in the form of additional interest, exit fees or warrants in the borrower. Equity participation can also take the form of a conversion feature, permitting the lender to convert a loan or preferred equity investment into equity in the borrower at a negotiated premium to the current net asset value (“NAV”) of the borrower. We expect to be able to obtain equity participations in certain instances where the loan collateral consists of an asset that is being repositioned, expanded or improved in some fashion which is anticipated to improve future cash flow. In such case, the borrower may wish to defer some portion of the debt service or obtain higher leverage than might be merited by the pricing and leverage level based on historical performance of the underlying asset. We generate additional revenues from these equity participations as a result of excess cash flows being distributed or as appreciated properties are sold or refinanced.
Equity Interest in Unconsolidated Investments and Joint Ventures. We may, to the extent consistent with our investment objectives and criteria, invest in our targeted assets directly or through joint ventures.
Other Real Estate-Related Securities. We may invest in other real estate-related securities, which may include marketable securities and securitizations, so long as such securities do not constitute more than 15% of our assets.
Non-Real Estate-Related Investments
From time to time, we invest in strategic non-real estate-related investments that align with our investment objectives and criteria. Non-real estate-related investments may take various forms, including preferred and common equity interests in private companies and other financial assets.
Human Capital Management
We do not currently have any employees and do not expect to have any employees. Services necessary for our business are provided by individuals who are employees of Terra Capital Partners, our sponsor, or by individuals who are contracted by Terra Capital Partners to work on behalf of us pursuant to the terms of the Management Agreement.
Available Information
We are required to file with or submit to the SEC annual, quarterly and current reports, proxy statements and other information meeting the informational requirements of the Exchange Act. Terra REIT, our parent and sole member, maintains a website at http://www.terrapropertytrust.com/filings-2-1-1-1-1, on which we make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Information contained on that webpage is not incorporated by reference into this Annual Report on Form 10-K and investors should not consider information contained on that webpage to be part of this Annual Report on Form 10-K or any other report we file with the SEC. The SEC
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maintains an internet site that contains reports, proxy and information statements and other information filed electronically by us with the SEC, which are available on the SEC’s website at www.sec.gov.
Item 1A. Risk Factors.
Investing in our notes involves certain risks relating to our structure and investment objectives. Investors should carefully consider these risk factors, together with all of the other information included in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes. The risks set forth below are not the only risks we face, and we may face other risks that we have not yet identified, which we do not currently deem material or which are not yet predictable. If any of the following risks occur, our business, financial condition and results of operations could be materially adversely affected. In such case, the trading price of the notes could decline, and investors may lose all or part of their investment.
Risks Related to Our Business and Structure
Our loan portfolio is concentrated in a limited number of industries and borrowers, which may subject us to a risk of significant loss if there is a downturn in a particular industry in which we are concentrated or if one of our larger borrowers encounters financial difficulties.
Our portfolio is concentrated in a limited number of industries and borrowers, and, as a result, a downturn in any particular industry or borrower in which we are heavily invested may significantly impact the aggregate returns we realize. A significant portion of our investment portfolio consists of an unsecured promissory note from Terra REIT, our parent and sole member. As of December 31, 2024, the amount outstanding under the promissory note was $45.1 million. This concentration exposes us to risks associated with intercompany financing, such as potential conflicts of interest, including the lack of covenants and limited events of default in the promissory note, and challenges in enforcing the promissory note’s terms. Should Terra REIT encounter financial difficulties or default on its obligations, our financial condition could be materially and adversely affected.
If an industry in which we are heavily invested suffers from adverse business or economic conditions, a material portion of our investment could be affected adversely, which, in turn, could adversely affect our financial position and results of operations. As of December 31, 2024, we held three loan investments secured by office, mixed use and multifamily properties. Our largest loan investment represented approximately 61.1% of the carrying value, net of allowance for credit losses, of our total loan investments. A covenant breach or other adverse event affecting a borrower would have a more weighted impact on our operating results and would require a write-down of a larger percentage of our assets. For further information on our loan portfolio, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors Impacting Operating Results” included in this Annual Report on Form 10-K.
Periods of higher inflation in the U.S. may have an adverse impact on the valuation of our investments.
Many factors, including heightened competition for workers, supply chain issues, the relocation of foreign production and manufacturing businesses to the U.S., increased tariffs and rising energy and commodity prices could lead to increasing wages and other economic inputs and result in higher than normal inflation. Elevated inflation and input costs may have adverse effects on our commercial real estate-related loans, commercial real estate-related debt securities and select commercial real estate equity investments, which are subject to the risks typically associated with real estate. Inflation can negatively impact the profitability of real estate assets with long-term leases that do not provide for short-term rent increases or that provide for rent increases with a lower annual percentage increase than inflation. Higher levels of inflation may have an adverse impact on the valuation of our investments.
Terra REIT may change our operating policies, objectives or strategies without prior notice, and the effects of such a change may be adverse.
Terra REIT has the authority to modify or waive our current operating policies, objectives or investment criteria and strategies without prior notice. As a result, we make strategic non-real estate-related investments that align with our investment objectives and criteria. We cannot predict the effect any changes to our current operating policies, investment criteria and strategies would have on our business, operating results and the value of the notes. However, the effects might be adverse, which could negatively impact our ability to pay principal and interest payments on the notes.
Our ability to achieve our investment objectives depends on Terra REIT’s and Terra REIT Advisors’ ability to manage and support our investment process. If Terra REIT were to lose any members of its senior management team, our ability to achieve our investment objectives could be significantly harmed.
Since we have no employees, we depend on the investment expertise, skill and network of business contacts of Terra REIT, which evaluates, negotiates, structures, executes, monitors and services our investments. Our future success depends to a
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significant extent on the continued service and coordination of Terra REIT and its senior management team. The departure of any members of Terra REIT’s senior management team could have a material adverse effect on our ability to achieve our investment objectives.
Our ability to achieve our investment objectives also depends on the ability of Terra REIT Advisors, the external manager to our sole and managing member, Terra REIT, to identify, analyze, invest in, finance and monitor companies that meet our investment criteria. Terra REIT Advisors’ capabilities in structuring the investment process, providing competent, attentive and efficient services to us and Terra REIT, and facilitating access to financing on acceptable terms depend on the employment of investment professionals in an adequate number and of adequate sophistication to match the corresponding flow of transactions. To achieve our investment objectives, Terra REIT Advisors may need to hire, train, supervise and manage new investment professionals to participate in our investment selection and monitoring process. Terra REIT Advisors may not be able to find investment professionals in a timely manner or at all. Failure to support our investment process could have a material adverse effect on our business, financial condition and results of operations.
In addition, the management agreement between Terra REIT and Terra REIT Advisors has termination provisions that allow the parties to terminate the agreement without penalty. The termination of this agreement may adversely impact the terms of any financing facility into which we may enter, which could have a material adverse effect on our business and financial condition.
We make strategic non-real estate-related investments that align with our investment objectives and criteria, which may expose us to risks from a number of diverse issuers, industries, and investment forms.
Though our investments are primarily in real estate-related loans and other commercial real estate assets or interests, we strategically invest in non-real estate-related investments that align with our focus on debt and debt-like instruments emphasizing the payment of current returns to investors and the preservation of invested capital. However, the underwriting process for non-real estate-related investments and the ongoing asset management and servicing of such investments is different from the investment process for real estate investments, and the REIT Manager has not historically focused on non-real estate investing. We may not be able to achieve the returns on any non-real estate-related investments that we achieved on our real estate-related investments.
Non-real estate-related investments are also not collateralized by real estate like our real estate investments and hence may be riskier because if the debt-like non-real estate-related investments default or do not perform, we may not have collateral to foreclose upon. Additionally, non-real estate-related investments may be less liquid than our real estate-related assets, limiting our ability to transfer or sell these positions on favorable terms, or at all. If market conditions or other factors constrain our liquidity, we may be required to hold these investments longer than anticipated, which could limit our ability to distribute or redeploy capital efficiently.
Further, non-real estate-related investments will be subject to different regulatory risks which may distract the attention of our management, and be difficult and costly to comply with. As a result, to the extent we hold, acquire or transact in such non-real estate-related investments, we may be exposed to risks from a number of diverse issuers, industries and investment forms which may be difficult to determine and may have a material adverse effect on our financial condition and results of operations. In addition, some non-real estate operating companies we may invest in may not generate consistent cash flows or returns, which could impact our overall liquidity.
Because our business model depends to a significant extent upon relationships with real estate and real estate-related industry participants, investment banks and commercial banks, the inability of Terra REIT or Terra REIT Advisors to maintain or develop these relationships, or the failure of these relationships to generate investment opportunities, could adversely affect our business.
We expect that Terra REIT and Terra REIT Advisors will depend on their relationships with real estate and real estate-related industry participants, investment banks and commercial banks, and we will rely to a significant extent upon these relationships, to provide us with potential investment opportunities. If Terra REIT or Terra REIT Advisors fail to maintain their existing relationships or develop new relationships or sources of investment opportunities, we may not be able to grow our investment portfolio. In addition, individuals with whom Terra REIT and Terra REIT Advisors have relationships are not obligated to provide us with investment opportunities, and therefore there is no assurance that such relationships will generate investment opportunities for us.
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We may face increasing competition for investment opportunities, which could delay deployment of our capital, reduce returns and result in losses.
We compete for investments with other alternative investment funds (including real estate and real estate-related investment funds, mezzanine funds and collateralized loan obligation funds), as well as traditional financial services companies such as commercial banks and other sources of funding. Moreover, alternative investment vehicles, such as hedge funds, have begun to invest in areas in which they have not traditionally invested, including assets of the type we intend to acquire. As a result of these new entrants, competition for investment opportunities in private real estate and real estate-related U.S. companies may intensify.
Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. These characteristics could allow our competitors to consider a wider variety of investments, establish more relationships and demand more favorable investment terms and more flexible structuring than we are able to do. We may lose investment opportunities if we do not match our competitors’ pricing, terms and structure. If we are forced to match our competitors’ terms and structure, we may not be able to achieve acceptable returns on our investments or may bear substantial risk of capital loss.
Changes in laws or regulations governing our operations or the operations of our business partners may adversely affect our business or cause us to alter our business strategy.
We and our borrowers and investees are subject to regulation at the local, state and federal level. New legislation may be enacted or new interpretations, rulings or regulations could be adopted, including those governing the types of investments we are permitted to make, any of which could harm us and holders of the notes, potentially with retroactive effect. Changes in laws or regulations governing the operations of those with whom we do business could also have a material adverse effect on our business, financial condition and results of operations.
In addition, any changes to the laws and regulations governing our operations relating to permitted investments may cause us to alter our investment strategy to avail ourselves of new or different opportunities. Such changes could result in material differences to our strategies and plans as set forth in this Annual Report on Form 10-K and may result in our investment focus shifting from the areas of expertise of Terra REIT Advisors to other types of investments in which Terra REIT Advisors may have less expertise or little or no experience. Thus, any such changes, if they occur, could have a material adverse effect on our results of operations and the value of each investor’s investment.
We may experience fluctuations in our quarterly results.
We could experience fluctuations in our quarterly operating results due to a number of factors, including our ability or inability to make investments in companies that meet our investment criteria, the interest rate payable on the debt securities we originate and acquire, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any previous period should not be relied upon as being indicative of performance in future periods.
The CECL accounting standard requires us to make certain estimates and judgments, which may be difficult to determine and may have a material adverse effect on our financial condition and results of operations.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) which replaces the “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the CECL model. We adopted this ASU and related amendments on January 1, 2023. Under the CECL model, we are required to present certain financial assets carried at amortized cost, such as performing loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current United States generally accepted accounting principles (“U.S. GAAP”), which delays recognition until it is probable a loss has been incurred. If we are required to materially increase our level of allowance for credit losses for any reason, such increase could adversely affect our business, financial condition and results of operations.
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Our ability to maintain the security of customer, associate, third-party or company information could have an impact on our reputation and our results.
We have been, and likely will continue to be, subject to computer hacking, acts of vandalism or theft, malware, computer viruses or other malicious codes, phishing, employee error or malfeasance, catastrophes, unforeseen events or other cyber-attacks. To date, we have seen no material impact on our business or operations from these attacks or events. Any future significant compromise or breach of our data security, whether external or internal, or misuse of customer, associate, supplier or Company data, could result in significant costs, lost sales, fines, lawsuits, and damage to our reputation. However, the ever-evolving threats mean we and our third-party service providers and vendors must continually evaluate and adapt our respective systems and processes and overall security environment, as well as those of any companies we acquire. There is no guarantee that these measures will be adequate to safeguard against all data security breaches, system compromises or misuses of data. In addition, as the regulatory environment related to information security, data collection and use, and privacy becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could also result in additional costs.
We are subject to environmental, social and governance (“ESG”) risks that could adversely affect our reputation, business,
operations and earnings.
Certain organizations that provide corporate risk information to investors and shareholders have developed scores and ratings to evaluate companies based upon various ESG metrics. Currently, there are no universal standards for such scores or ratings, but ESG evaluations are increasingly being integrated into investment analysis. Views about ESG matters are diverse and rapidly changing, and companies are facing increasing scrutiny from regulators, investors, and other stakeholders related to their ESG practices and disclosure. If we fail to adapt to or comply with regulatory requirements or investor or stakeholder ESG standards, our reputation, ability to do business with certain partners, access to capital, operations and earnings could be adversely affected.
Risks Related to Terra REIT Advisors and its Affiliates
Terra REIT Advisors and its affiliates, including some of Terra REIT’s directors, face conflicts of interest caused by compensation arrangements with us and our affiliates, which could result in actions that are not in our best interests.
Pursuant to the Cost Sharing Agreement, Terra REIT Advisors and its affiliates receive substantial fees in return for their services to us, and these fees could influence the advice provided to us. Among other matters, the compensation arrangements could affect their judgment with respect to public offerings of equity by us, and consequently Terra REIT Advisors to earn increased asset management fees. In addition, the decision to utilize leverage will increase our assets and, as a result, will increase the amount of management fees payable to Terra REIT Advisors.
There may be conflicts of interest related to obligations Terra REIT Advisors has to our affiliates and to other clients.
Terra REIT Advisors, our parent’s external manager, and its affiliates serve as investment advisers or managers to other entities that share the same senior management and investment teams. As a result, the members of the senior management and investment teams of Terra REIT Advisors serve as officers, directors or principals of entities that operate in the same or a related line of business as we do, or of investment funds managed by the same personnel. In serving in these multiple and other capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may not be in our best interests or in the best interest of our security holders. Our investment objectives may overlap with the investment objectives of such investment funds, accounts or other investment vehicles. As a result, Terra REIT Advisors and its affiliates, their employees and certain of their affiliates will have conflicts of interest in allocating their time between us and other activities in which they are or may become involved. Terra REIT Advisors and its employees will devote only as much of its or their time to our business as Terra REIT Advisors and its employees, in their judgment, determine is reasonably required, which may be substantially less than their full time.
The time and resources that individuals employed by Terra REIT Advisors and its affiliates devote to us may be diverted, and we may face additional competition due to the fact that individuals employed by Terra REIT Advisors are not prohibited from raising money for or managing another entity that makes the same types of investments that we target.
Neither Terra REIT Advisors nor individuals employed by it are prohibited from raising money for and managing another investment entity that makes the same types of investments as those we target. As a result, the time and resources that these individuals may devote to us may be diverted. In addition, we may compete with any such investment entity for the same investors and investment opportunities.
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Risks Related to Our Investments
Our exposure to a concentrated investment in an intercompany promissory note could adversely affect our liquidity and financial condition.
A significant portion of our investment portfolio is comprised of an unsecured promissory note from Terra REIT, our parent and sole member. As of December 31, 2024, the amount outstanding under the promissory note was $45.1 million. This concentration increases our exposure to Terra REIT’s financial condition and liquidity. If Terra REIT experiences financial distress, delays in repayment, or defaults on its obligations under the promissory note, our cash flows, investment returns, and ability to meet our own financial obligations could be adversely affected.
Unlike a diversified investment portfolio, our reliance on a single counterparty for a substantial portion of our assets heightens the potential impact of any adverse developments at Terra REIT. As of December 31, 2024, the unsecured promissory note from Terra REIT represented approximately 38.8% of our total assets. Additionally, enforcing the terms of an intercompany note presents unique challenges, particularly since Terra REIT controls us as our sole member and if disagreements arise over repayment or financial performance. If Terra REIT is unable or unwilling to satisfy its obligations under the note or if the maturity of the note is extended, we could face prolonged uncertainty in recovering amounts due, which may negatively affect our financial condition. For further information on our loan portfolio, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Portfolio Summary” included in this Annual Report on Form 10-K.
A covenant breach by any of our borrowers may harm our operating results.
A borrower’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize a borrower’s ability to meet its obligations under the debt or equity securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with a defaulting borrower. We may, in certain cases, provide a defaulting borrower with concessions that we would not typically offer. These modifications may include interest rate reductions, principal adjustments, term extensions, deferral of payments, or the capitalization of interest. Such adjustments are intended to mitigate potential losses and avoid foreclosure or asset repossession. However, these modifications may impact our liquidity and could have a material adverse effect on our operating results.
We may not realize gains from our preferred equity investments.
The preferred equity investments we make may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our preferred equity investments, and any gains that we do realize on the disposition of any preferred equity investments may not be sufficient to offset any other losses we experience.
A lack of liquidity in certain of our investments may adversely affect our business.
We invest in certain real estate and real estate-related companies whose securities are not publicly traded or actively traded on the secondary market and are, instead, traded on a privately negotiated over-the-counter secondary market for institutional investors and whose securities are subject to legal and other restrictions on resale or are otherwise less liquid than publicly traded securities. Additionally, because a significant portion of our investment portfolio is concentrated in a promissory note with Terra REIT, our liquidity position may be materially affected if Terra REIT experiences financial difficulties or delays in repayment. The illiquidity of certain of our investments may make it difficult for us to sell these investments when desired. If we are unable to obtain liquidity from other sources, we may not be able to meet our obligations or fund new investments, which could adversely impact our business.
In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded these investments. The reduced liquidity of our investments may make it difficult for us to dispose of them at a favorable price, and, as a result, we may suffer losses.
We may not have the funds or ability to make additional funding in our loan investments.
We may not have the funds or ability to make additional funding in our loan investments. After our initial funding in a loan, we may be called upon from time to time to provide additional funds to such company or have the opportunity to increase our investment. There is no assurance that we will make, or will have sufficient funds to make, follow-on investments. Any decisions not to make a follow-on investment or any inability on our part to make such an investment may have a negative
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impact on a loan investment in need of such an investment, may result in a missed opportunity for us to increase our participation in a successful operation or may reduce the expected return on the investment.
Our real estate-related loans may be impacted by unfavorable real estate market conditions, which could decrease the value of our investments.
The real estate-related loans we make or invest in will be at risk of defaults caused by many conditions beyond our control, including local and other economic conditions affecting real estate values and interest rate levels. We do not know whether the values of the property securing the real estate-related loans will remain at the levels existing on the dates of origination of such loans. If the values of the underlying properties drop, our risk will increase and the value of our investments may decrease.
Our real estate-related loans will be subject to interest rate fluctuations that could reduce our returns as compared to market interest rates.
If we invest in fixed-rate, long-term real estate-related loans and interest rates rise, such loans could yield a return lower than then-current market rates. If interest rates decrease, we will be adversely affected to the extent that real estate-related loans are prepaid, because we may not be able to make new loans at the previously higher interest rate. If we invest in floating-rate loans, the income from such loans will increase and decrease directly with the fluctuation in the floating rate.
Delays in liquidating defaulted mortgage loans could reduce our investment returns.
If there are defaults under our mortgage loans, we may not be able to repossess and sell the underlying properties quickly. The resulting time delay could reduce the value of our investment in the defaulted mortgage loans. An action to foreclose on a property securing a mortgage loan is regulated by state statutes and rules and is subject to many of the delays and expenses of other lawsuits if the mortgagor raises defenses or counterclaims. In the event of default by a mortgagor, these restrictions, among other things, may impede our ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due to us on the mortgage loan.
Returns on our real estate-related loans may be limited by regulations.
Our loan investments may be subject to regulation by federal, state and local authorities and subject to various laws and judicial and administrative decisions. We may determine not to make or invest in real estate-related loans in any jurisdiction in which we believe we have not complied in all material respects with applicable requirements. If we decide not to make or invest in real estate-related loans in several jurisdictions, it could reduce the amount of income we would otherwise receive.
Foreclosures create additional ownership risks that could adversely impact our returns on mortgage investments.
If we acquire property by foreclosure following defaults under our mortgage loans, we will have the same economic and liability risks as the previous owner.
The mezzanine loans in which we may invest would involve greater risks of loss than senior loans secured by income-producing real properties.
We may invest in mezzanine loans that take the form of subordinated loans secured by second mortgages on the underlying real property or loans secured by a pledge of the ownership interests of the entity owning the real property. These types of investments involve a higher degree of risk than long-term senior mortgage lending secured by income-producing real property because the investment may become unsecured as a result of foreclosure by the senior lender. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of such entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt. As a result, we may not recover some or all of our investment. In addition, mezzanine loans may have higher loan-to-value ratios than conventional mortgage loans, resulting in less equity in the real property and increasing the risk of loss of principal.
Our commercial real estate-related loans, commercial real estate-related debt securities and select commercial real estate equity investments will be subject to the risks typically associated with real estate.
Our commercial real estate-related loans, commercial real estate-related debt securities and select commercial real estate equity will generally be directly or indirectly secured by a lien on real property (or the equity interests in an entity that owns real property) that, upon the occurrence of a default on the loan, could result in our acquiring ownership of the property. We will not know whether the values of the properties ultimately securing our loans will remain at the levels existing on the dates of origination of those loans. If the values of the mortgaged properties drop, our risk will increase because of the lower value of the security associated with such loans. In this manner, real estate values could impact the values of our loan investments. Our
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investments in commercial real estate-related loans, commercial real estate-related debt securities and select commercial real estate equity investments (including potential investments in real property) may be similarly affected by real estate property values. Therefore, our investments will be subject to the risks typically associated with real estate.
The value of real estate may be adversely affected by a number of risks, including:
•natural disasters such as hurricanes, earthquakes and floods;
•acts of war or terrorism, including the consequences of terrorist attacks;
•adverse changes in national and local economic and real estate conditions;
•an oversupply of (or a reduction in demand for) space in the areas where particular properties are located and the attractiveness of particular properties to prospective tenants;
•changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance therewith and the potential for liability under applicable laws;
•costs of remediation and liabilities associated with environmental conditions affecting properties; and
•the potential for uninsured or underinsured property losses.
The value of each property is affected significantly by its ability to generate cash flow and net income, which in turn depends on the amount of rental or other income that can be generated net of expenses required to be incurred with respect to the property. Many expenditures associated with properties (such as operating expenses and capital expenditures) cannot be reduced when there is a reduction in income from the properties. These factors may have a material adverse effect on the ability of our borrowers to pay their loans, as well as on the value that we can realize from assets we originate, own or acquire.
Risks of cost overruns and non-completion of the construction or renovation of the properties underlying loans we make or acquire may materially adversely affect our investment.
The renovation, refurbishment or expansion by a borrower under a mortgaged or leveraged property involves risks of cost overruns and non-completion. Costs of construction or improvements to bring a property up to standards established for the market position intended for that property may exceed original estimates, possibly making a project uneconomical. Other risks may include environmental risks and construction, rehabilitation and subsequent leasing of the property not being completed on schedule. If such construction or renovation is not completed in a timely manner, or if it costs more than expected, the borrower may experience a prolonged impairment of net operating income and may not be able to make payments on our investment.
Our investments in commercial real estate-related loans are subject to changes in credit spreads.
Our investments in commercial real estate-related loans are subject to changes in credit spreads. When credit spreads widen, the economic value of such investments decrease. Even though a loan may be performing in accordance with its loan agreement and the underlying collateral has not changed, the economic value of the loan may be negatively impacted by the incremental interest foregone from the widened credit spread.
Investments in non-conforming or non-investment grade rated loans or securities involve greater risk of loss.
Some of our investments may not conform to conventional loan standards applied by traditional lenders and either will not be rated or will be rated as non-investment grade by the rating agencies. In addition, we may invest in securities that are rated below investment grade by rating agencies or that would be likely rated below investment grade if they were rated. Below investment grade securities, which are often referred to as “junk,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. They may also be difficult to value and illiquid. The non-investment grade ratings for these assets typically result from the overall leverage of the loans, the lack of a strong operating history for the properties underlying the loans, the borrowers’ credit history, the properties’ underlying cash flow or other factors. As a result, these investments may have a higher risk of default and loss than investment grade-rated assets. Any loss we incur may be significant and may reduce cash available for principal and interest payments on the notes and adversely affect the value of our securities.
Investments that are not U.S. government insured involve risk of loss.
We may originate and acquire uninsured loans and assets as part of our investment strategy. Such loans and assets may include mortgage loans, mezzanine loans and bridge loans. While holding such interests, we are subject to risks of borrower
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defaults, bankruptcies, fraud, losses and special hazard losses that are not covered by standard hazard insurance. In the event of any default under loans, we bear the risk of loss of principal and nonpayment of interest and fees to the extent of any deficiency between the value of the collateral and the principal amount of the loan.
We have no established investment criteria limiting the geographic concentration of our investments in commercial real estate-related loans, commercial real estate-related debt securities and select commercial real estate equity investments. If our investments are concentrated in an area that experiences adverse economic conditions, our investments may lose value and we may experience losses.
Certain commercial real estate-related loans, commercial real estate-related debt securities and select commercial real estate equity investments in which we invest may be secured by a single property or properties in one geographic location. Further, we intend that our secured investments will be collateralized by properties located solely in the United States. These investments may carry the risks associated with significant geographical concentration. As a result, properties underlying our investments may be overly concentrated in certain geographic areas, and we may experience losses as a result. A worsening of economic conditions in the geographic area in which our investments may be concentrated could have an adverse effect on our business, including reducing the demand for new financings, limiting the ability of customers to pay financed amounts and impairing the value of our collateral.
We may invest in adjustable rate mortgage loans, which may entail greater risks of default to lenders than fixed rate mortgage loans.
Adjustable rate mortgage loans may contribute to higher delinquency rates. Borrowers with adjustable rate mortgage loans may be exposed to increased monthly payments if the related mortgage interest rate adjusts upward from the initial fixed rate or a low introductory rate, as applicable, in effect during the initial period of the mortgage loan to the rate computed in accordance with the applicable index and margin. This increase in borrowers’ monthly payments, together with any increase in prevailing market interest rates, after the initial fixed rate period, may result in significantly increased monthly payments for borrowers with adjustable rate mortgage loans, which may make it more difficult for the borrowers to repay the loan or could increase the risk of default of their obligations under the loan.
Prepayments can adversely affect the yields on our investments.
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 are unable to invest the proceeds of such prepayments received or are forced to invest at yields lower than those on the debt instrument that was prepaid, the yield on our portfolio will decline. In addition, we may acquire assets at a discount or premium and if the asset does not repay when expected, our anticipated yield may be impacted. Under certain interest rate and prepayment scenarios we may fail to recoup fully our cost of acquisition of certain investments.
Hedging against interest rate exposure may adversely affect our earnings, limit our gains or result in losses, which could adversely affect cash available for distribution to Terra REIT and its stockholders and principal and interest payments on our outstanding notes.
We may enter into interest rate swap agreements or pursue other interest rate hedging strategies. Our hedging activity will vary in scope based on the level of interest rates, the type of portfolio investments held and other changing market conditions.
Any hedging activity we engage in may adversely affect our earnings, which could adversely affect cash available for distribution to Terra REIT and its stockholders and principal and interest payments on our outstanding notes. Therefore, while we may enter into such transactions to seek to reduce interest rate risks, unanticipated changes in interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss.
Hedging instruments often are not traded on regulated exchanges or guaranteed by an exchange or its clearing house and involve risks and costs.
The cost of using hedging instruments increases as the period covered by the instrument increases and during periods of rising and volatile interest rates. We may increase our hedging activity and thus increase our hedging costs during periods when interest rates are volatile or rising and hedging costs have increased. In addition, hedging instruments involve risk since they often are not traded on regulated exchanges or guaranteed by an exchange or its clearing house. Furthermore, the enforceability
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of agreements underlying derivative transactions may depend on compliance with applicable statutory, commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements.
Furthermore, derivative transactions are subject to increasing statutory and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. Recently, new regulations have been promulgated by U.S. and foreign regulators attempting to strengthen oversight of derivative contracts. Any actions taken by regulators could constrain our strategy and could increase our costs, either of which could materially and adversely impact our operations.
The business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in a default. Default by a party with whom we enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our resale commitments, if any, at the then current market price. It may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract in order to cover our risk. We cannot assure investors that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.
Our investments in debt securities and preferred equity securities will be subject to the specific risks relating to the particular issuer of the securities and may involve greater risk of loss than secured debt financings.
Our investments in debt securities and preferred and common equity securities involve special risks relating to the particular issuer of the securities, including the financial condition and business outlook of the issuer. Real estate company issuers are subject to the inherent risks associated with real estate and real estate-related investments discussed in this Annual Report on Form 10-K. Issuers that are debt finance companies are subject to the inherent risks associated with structured financing investments also discussed in this Annual Report on Form 10-K. Furthermore, debt securities and preferred and common equity securities may involve greater risk of loss than secured debt financings due to a variety of factors, including that such investments are generally unsecured and may also be subordinated to other obligations of the issuer. As a result, investments in debt securities and preferred and common equity securities are subject to risks of (i) limited liquidity in the secondary trading market, (ii) substantial market price volatility resulting from changes in prevailing interest rates, (iii) subordination to the prior claims of banks and other senior lenders to the issuer, (iv) the operation of mandatory sinking fund or call or redemption provisions during periods of declining interest rates that could cause the issuer to reinvest redemption proceeds in lower yielding assets, (v) the possibility that earnings of the issuer may be insufficient to meet its debt service and distribution obligations and (vi) the declining creditworthiness and potential for insolvency of the issuer during periods of rising interest rates and economic downturn. These risks may adversely affect the value of outstanding debt securities and preferred and common equity securities and the ability of the issuers thereof to make principal, interest and distribution payments to us.
Declines in the market values of our investments may adversely affect periodic reported results of operations and credit availability, which may reduce our earnings and, in turn, cash available for principal and interest payments on the notes.
A decline in the market value of our assets will reduce our earnings in the period recognized and may adversely affect us particularly in instances where we have borrowed money based on the market value of those assets. If the market value of those assets declines, the lender may require us to post additional collateral to support the loan. If we were unable to post the additional collateral, we may have to sell assets at a time when we might not otherwise choose to do so. A reduction in credit available may reduce our earnings and, in turn, cash available for principal and interest payments on the notes.
Further, credit facility providers may require us to maintain a certain amount of cash reserves or to set aside unlevered assets sufficient to maintain a specified liquidity position, which would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose, which could reduce our return on equity. In the event that we are unable to meet these contractual obligations, our financial condition could deteriorate rapidly.
Market values of our investments may decline for a number of reasons, such as changes in prevailing market rates, increases in defaults, increases in voluntary prepayments for those investments that we have that are subject to prepayment risk, widening of credit spreads and downgrades of ratings of the securities by ratings agencies.
With respect to mortgaged properties, options and other purchase rights may affect value or hinder recovery.
A borrower under certain mortgage loans may give its tenants or another person a right of first refusal or an option to purchase all or a portion of the related mortgaged property. These rights may impede the lender’s ability to sell the related mortgaged property at foreclosure or may adversely affect the value or marketability of the property.
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If we overestimate the value or income-producing ability or incorrectly price the risks of our investments, we may experience losses.
Analysis of the value or income-producing ability of a commercial property is highly subjective and may be subject to error. We value our potential investments based on yields and risks, taking into account estimated future losses on the commercial real estate-related loans and the mortgaged property included in the securitization’s pools or select commercial real estate equity investments, and the estimated impact of these losses on expected future cash flows and returns. In the event that we underestimate the risks relative to the price we pay for a particular investment, we may experience losses with respect to such investment.
The leases on the properties underlying our investments may not be renewed on favorable terms.
The properties underlying our investments could be negatively impacted by deteriorating economic conditions and weaker rental markets. Upon expiration or earlier termination of leases on these properties, the space may not be relet or, if relet, the terms of the renewal or reletting (including the cost of required renovations or concessions to tenants) may be less favorable than current lease terms. In addition, poor economic conditions may reduce a tenant’s ability to make rent payments under their leases. Any of these situations may result in extended periods where there is a significant decline in revenues or no revenues generated by these properties. Additionally, if market rental rates are reduced, property-level cash flows would likely be negatively affected as existing leases renew at lower rates. If the leases for these properties cannot be renewed for all or substantially all of the space at these properties, or if the rental rates upon such renewal or reletting are significantly lower than expected, the value of our investments may be adversely affected.
A borrower’s form of entity may cause special risks or hinder our recovery.
Since most of the borrowers for our commercial real estate loan investments are legal entities rather than individuals, our risk of loss may be greater than those of mortgage loans made to individuals. Unlike individuals involved in bankruptcies, most of the entities generally do not have personal assets and creditworthiness at stake. The terms of the mortgage loans generally require that the borrowers covenant to be single-purpose entities, although in some instances the borrowers are not required to observe all covenants and conditions that typically are required in order for them to be viewed under standard rating agency criteria as “single-purpose entities.”
The bankruptcy of a borrower, or a general partner or managing member of a borrower, may impair the ability of the lender to enforce its rights and remedies under the related mortgage. Borrowers that are not single-purpose entities structured to limit the possibility of becoming insolvent or bankrupt may be more likely to become insolvent or the subject of a voluntary or involuntary bankruptcy proceeding because the borrowers may be (i) operating entities with a business distinct from the operation of the mortgaged property with the associated liabilities and risks of operating an ongoing business or (ii) individuals that have personal liabilities unrelated to the property.
We may be exposed to environmental liabilities with respect to properties to which we take title.
In the course of our business, we may take title to real estate, and, if we do take title, we could be subject to environmental liabilities with respect to these properties. In such a circumstance, we may be held liable to a governmental entity or to third parties for property damage, personal injury, and investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases, at a property. The costs associated with investigation or remediation activities could be substantial. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.
Risk Related to Debt Financing
Changes in interest rates may affect our cost of capital
We use debt to finance investments, our net investment income will depend, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, we can offer no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates when we have debt outstanding, our cost of funds will increase, which could reduce our net investment income. We expect that any long-term fixed rate investments we acquire will be financed primarily with equity and long-term debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities. These activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations. Also, we have
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limited experience in entering into hedging transactions, and we will initially have to purchase or develop such expertise. A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to our debt investments.
Covenants in our debt agreements may restrict our operating activities and adversely affect our financial condition, operating results and cash flows.
Our debt agreements contain various financial and operating covenants, including, among other things, certain coverage ratios and limitations on our ability to incur secured and unsecured debt. These restrictive covenants and operating restrictions could have a material adverse effect on our operating results, restrict our ability to finance or securitize new originations and acquisitions, force us to liquidate collateral and negatively affect our financial condition. The breach of any of these covenants, if not cured within any applicable cure period, could result in a default, including a cross-default, and acceleration of certain of our indebtedness. Accelerating repayment and terminating the agreements will require immediate repayment by us of the borrowed funds, which may require us to liquidate assets at a disadvantageous time, causing us to incur further losses and adversely affecting our results of operations and financial condition, which may impair our ability to make principal and interest payments on our debt obligations. Any failure to make payments when due or upon acceleration could result in the foreclosure upon our assets by our lenders.
Risk Related to our REIT Status during the REIT Period
If we did not qualify as a REIT during the REIT Period, we will be subject to tax as a regular corporation and could face a substantial tax liability on our income earned during the REIT Period.
We elected to operate so as to qualify as a REIT under the Code during the REIT Period. However, qualification as a REIT involves the application of highly technical and complex Code provisions for which only a limited number of judicial or administrative interpretations exist. Notwithstanding the availability of cure provisions in the Code, we could have failed various compliance requirements and could have jeopardized our REIT status. If we failed to qualify as a REIT during the REIT Period, then:
•we would be taxed as a regular domestic corporation during the REIT Period, ineligible to deduct dividends paid to our stockholders in computing taxable income and would be subject to federal income tax on our taxable income at regular corporate income tax rates during the REIT Period; and
•any resulting tax liability could be substantial and could have a material adverse effect on our value.
General Risk Factors
The future outbreak of highly infectious or contagious diseases could materially and adversely impact or disrupt our investments, business, financial condition and results of operations.
As a result of a significant portion of our investments being in preferred equity, mezzanine loans, first mortgages, and credit facilities secured by office, multifamily, infrastructure and mixed-use properties located in the United States, any future local, regional, national or international outbreak of a contagious disease may impact our investments and operating results to the extent that it reduces occupancy, increases the cost of operation or results in limited hours or necessitates the closure of such properties. In addition, quarantines, states of emergencies and other measures taken to curb the spread of any such future outbreak may negatively impact the ability of such properties to continue to obtain necessary goods and services or provide adequate staffing, which may also adversely affect our investments, business, financial condition and results of operations. The borrowers under the mezzanine loans, first mortgages, credit facilities or preferred equity in which we invest may fail to make timely and required payments under the terms of such instruments.
Future recessions, downturns, disruptions or instability could have a materially adverse effect on our business.
From time to time, the global capital markets may experience periods of disruption and instability, which could cause disruptions in liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of major financial institutions. Despite actions of U.S. and foreign governments, these events could contribute to worsening general economic conditions that materially and adversely impact the broader financial and credit markets and reduce the availability of debt and equity capital for the market as a whole and financial services firms in particular.
Deterioration of economic and market conditions in the future could negatively impact credit spreads as well as our ability to obtain financing, particularly from the debt markets.
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Disruptions in the financial and banking sectors may adversely impact our access to capital and our cost of borrowing, which could adversely affect us, our business or our results of operations.
Disruptions and uncertainty in the financial and banking sectors, including due to regional bank failures and decreased consumer confidence in the banking system, may hinder our ability to access capital on reasonable terms or at all. The U.S. and global financial and banking sectors have experienced periods of increased turmoil and volatility in the recent past and may experience similar periods of disruption in the future due to factors beyond our control. Such periods of increased turmoil and volatility may adversely impact liquidity in the financial markets and make financings less attractive or, in some cases, unavailable. If our financing counterparties become capital constrained, tighten their lending standards or become insolvent, they may be unable or unwilling to fulfill their commitments to us. A material disruption to the banking system and financial markets could result in liquidity issues across the sector, which could adversely impact our access to capital and our cost of borrowing and adversely affect us, our business or our results of operations.
Continued concerns over U.S. fiscal and political policy could, among other things, lead to future downgrade of the U.S. government's sovereign credit rating and contribute to a U.S. economic slowdown, which could have a material adverse effect on our business, financial condition and results of operations.
In recent years, financial markets were affected by significant uncertainty relating to the stability of U.S. fiscal and political policy. On August 1, 2023, Fitch Ratings Inc. downgraded the U.S. government’s sovereign credit rating to AA+, down one notch from its highest rating of AAA, citing the country’s growing debt obligations, deterioration in governance and political polarization. Concerns related to political turmoil, federal borrowing and the federal budget deficit have increased the possibility of future credit rating downgrades and economic slowdowns in the U.S. Any continuing uncertainty, together with the continuing U.S. debt and budget deficit concerns, could contribute to a U.S. economic slowdown. The impact of U.S. fiscal and political uncertainty is inherently unpredictable and could adversely affect U.S. and global financial markets and economic conditions. These developments could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. Continued adverse economic conditions could have a material adverse effect on our business, financial condition and results of operations.
Cybersecurity risk and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of the security, confidentiality, or integrity of our company, employee, customer or third-party confidential information and/or damage to our reputation or business relationships, any of which could negatively impact our financial results.
Risk of a cyber incident or disruption, particularly through cyber-attacks or cyber intrusions, including by computer hackers, nation-state affiliated actors and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. The result of these incidents may include disrupted operations, misstated or unreliable financial data, misappropriation of assets, liability for stolen assets or information, increased cybersecurity protection and insurance cost, regulatory enforcement, litigation and damage to our relationships and reputation. These risks require continuous and likely increasing attention and other resources from us to, among other actions, identify and quantify these risks, upgrade and expand our technological capabilities, systems and processes to adequately address them. Such attention diverts time and other resources from other activities and there is no assurance that our efforts will be effective. Potential sources for disruption, damage or failure of our information technology systems include, without limitation, computer viruses, cyber incidents, human error, natural disasters and defects in design. In addition, we cannot be certain that our existing cyber insurance coverage will continue to be available on acceptable terms or that our insurers will not deny coverage as to all or part of any future claim or loss.
Additionally, we rely on third-party service providers for many aspects of our business. Notwithstanding our efforts to oversee and mitigate risks associated with our use of third-party service providers, we can provide no assurance that the networks and systems that our third-party vendors have established or use will be effective. As our reliance on technology has increased, so have the risks posed to both our information systems and those provided by third-party service providers. We have implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as our increased awareness of the nature and extent of a risk of a cyber incident, do not guarantee that our financial results, operations or confidential information will not be negatively impacted by such an incident.
Further, the SEC has recently adopted rules requiring public companies to disclose material cybersecurity incidents that they experience on a Current Report on Form 8-K within four business days of determining that a material cybersecurity incident has occurred and to disclose on an annual basis material information regarding their cybersecurity risk management, strategy and governance. These new reporting requirements became effective for us on June 15, 2024. If we fail to comply with these requirements, we could incur regulatory fines and our reputation, business, financial condition and results of operations could be harmed.
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As a public company, we are subject to regulations not applicable to private companies, such as provisions of the Sarbanes-Oxley Act. Efforts to comply with such regulations involves significant expenditures, and non-compliance with such regulations may adversely affect us.
As a public company, we are subject to regulations not applicable to private companies, including provisions of the Sarbanes-Oxley Act and the related rules and regulations promulgated by the SEC. Our management is required to report on our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act and rules and regulations of the SEC thereunder. We are required to review on an annual basis our internal control over financial reporting, and on a quarterly and annual basis, to evaluate and disclose changes in our internal control over financial reporting. This process diverts management’s time and attention. We cannot be certain as to the impact of our evaluation, testing and remediation actions on our operations, and we may not be able to ensure that the process is effective or that our internal control over financial reporting is or will be effective in a timely manner. In the event that we are unable to maintain an effective system of internal controls and maintain or achieve compliance with the Sarbanes-Oxley Act and related rules, we may be adversely affected.
Item 1B. Unresolved Staff Comments.
None.
Item 1C. Cybersecurity.
Our management recognizes the importance of implementing and maintaining robust cybersecurity measures designed to address cybersecurity threats that pose risks to our business and operations. Therefore, we have established a comprehensive framework to identify, protect against, detect, respond to, and recover from cybersecurity incidents (“Incidents”). Our cybersecurity measures are designed to provide a structured approach to managing cybersecurity risks for an effective, efficient, an orderly response to any Incident.
Further discussion of the potential impacts on our business from cyber intrusions is provided in “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.
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Item 2. Properties.
Our administrative and principal executive offices are located at 205 West 28th Street, 12th Floor, New York, New York 10001. We believe that our office facilities are suitable and adequate for our business as it is presently conducted.
Item 3. Legal Proceedings.
From time to time, we, Terra REIT and individuals employed by Terra REIT and Terra REIT Advisors 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 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
We are a wholly owned subsidiary of Terra REIT. Accordingly, there is no market for our equity.
Item 6. [Reserved].
Item 7. 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 audited consolidated financial statements and related notes thereto and other financial information included elsewhere in this Annual Report on Form 10-K.
Overview
Terra LLC was formed as a Delaware limited liability company on April 29, 2022 as a wholly owned subsidiary of Terra REIT. On October 1, 2022, pursuant to the Merger Agreement, Terra BDC merged with and into Terra LLC, with Terra LLC continuing as the surviving entity of the Merger. Subsequent to the Merger, Terra LLC became the successor of Terra BDC and assumed all of Terra BDC’s rights and obligations, including the obligations under the indenture governing Terra BDC’s unsecured notes payable.
We are a wholly owned subsidiary of Terra REIT. Terra REIT’s investments activities are externally managed by the REIT Manager, our affiliate. We originate, invest in and manage a diverse portfolio of real estate-related investments that generate a stable income stream. We directly originate, structure and underwrite most, if not all, of our loans, as we believe that doing so will provide us with the best opportunity to invest in loans that satisfy our standards, establish a direct relationship with the borrower and optimize the terms of its investments; however, we may acquire existing loans from the originating lender should its adviser determine such an investment is in its best interest. We may also make strategic non-real estate related investments that align with our investment objectives and criteria. We may hold our investments until their scheduled maturity dates or may sell them if we are able to command favorable terms for their disposition. We may seek to realize growth in the value of its investments by timing their sale to maximize value.
On November 8, 2022, we entered into the Cost Sharing Agreement with Terra REIT effective October 1, 2022, pursuant to which we reimburse Terra REIT for its allocable portion of management and transaction fees and operating expenses incurred by Terra REIT, including fees paid by Terra REIT to the REIT Manager.
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Portfolio Summary
Net Loan Portfolio
The following table provides a summary of our net loan portfolio as of:
| December 31, 2024 | |||||||||||||||||||||||||||||
| Fixed Rate | Floating Rate (1)(2) | Total Gross Loans | Obligations under Participation Agreements | Total Net Loans | |||||||||||||||||||||||||
| Number of loans | 1 | 2 | 3 | 1 | 3 | ||||||||||||||||||||||||
| Principal balance | $ | 2,843,280 | $ | 43,059,173 | $ | 45,902,453 | $ | 18,000,000 | $ | 27,902,453 | |||||||||||||||||||
| Carrying value | 2,573,280 | 27,814,616 | 30,387,896 | 18,173,962 | 12,213,934 | ||||||||||||||||||||||||
| Fair value | 2,573,280 | 28,068,902 | 30,642,182 | 18,254,853 | 12,387,329 | ||||||||||||||||||||||||
Weighted-average coupon rate (3) | —% | 19.5% | 19.5% | 19.5% | 19.5% | ||||||||||||||||||||||||
Weighted-average remaining term (years) (3) (4) | 0.00 | 0.10 | 0.10 | 0.10 | 0.10 | ||||||||||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||||||||
| Fixed Rate | Floating Rate (1)(2) | Total | Obligations under Participation Agreements | Total Net Loans | |||||||||||||||||||||||||
| Number of loans | 4 | 2 | 6 | — | 6 | ||||||||||||||||||||||||
| Principal balance | $ | 44,377,373 | $ | 43,059,173 | $ | 87,436,546 | $ | — | $ | 87,436,546 | |||||||||||||||||||
| Carrying value | 44,528,468 | 33,814,996 | 78,343,464 | — | 78,343,464 | ||||||||||||||||||||||||
| Fair value | 44,313,689 | 34,214,046 | 78,527,735 | — | 78,527,735 | ||||||||||||||||||||||||
Weighted-average coupon rate (3) | 13.8% | 20.3% | 15.8% | — | % | 15.8% | |||||||||||||||||||||||
Weighted-average remaining term (years) (3) (4) | 0.76 | 1.10 | 0.87 | — | 0.87 | ||||||||||||||||||||||||
(1)As of December 31, 2024 and 2023, 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 average SOFR and Term SOFR of 4.5% and 4.3%, respectively, as of December 31, 2024, and 5.3% and 5.4%, respectively, as of December 31, 2023.
(2)As of both December 31, 2024 and 2023, two loans were subject to SOFR or Term SOFR floor, as applicable.
(3)Excludes non-performing loans as of December 31, 2024 and 2023.
(4)Represents current effective maturity as of December 31, 2024 and 2023, exclusive of any extension options available.
Promissory Note Receivable
On January 24, 2024, we entered into a revolving promissory note receivable with Terra REIT. 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. The promissory note does not contain current interest payment obligations in cash and instead adds such interest amount to the principal balance of the promissory note on the last day of each calendar quarter. The promissory note matures on March 31, 2027. As of December 31, 2024, the amount outstanding under the promissory note receivable was $45.1 million. There was no such promissory note as of December 31, 2023.
Equity Investments
In addition to our loan portfolio, we owned equity interests in two joint ventures that own real estate properties. We account for our equity interest in the joint ventures as equity method investments because we do not have a controlling financial interest in the entities. As of December 31, 2024 and 2023, these equity investments had total carrying value of $36.3 million and $40.4 million, respectively.
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Portfolio Investment Activity
For the years ended December 31, 2024 and 2023, we invested $55.2 million and $48.3 million in new and add-on investments, and had $51.9 million and $52.0 million of repayments, resulting in net investment of $3.2 million and net repayment of $3.7 million, respectively. For the year ended December 31, 2024, new and add-on investments included $54.1 million of funding and $9.0 million of repayment under the promissory note receivable.
Senior Unsecured Notes
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 our 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 Merger, Terra LLC assumed all of Terra BDC’s rights and obligations under the indenture governing the 7.00% Senior Notes Due 2026.
Term Loan
In April 2021, Terra BDC entered into a credit agreement (the “Credit Agreement”) with a lender to provide for a delayed draw term loan of $25.0 million (the “Term Loan”). On September 27, 2022, the Credit Agreement was amended to, among other things, remove the make whole premium on voluntary prepayment of the loans as well as to provide consent to the consummation of the Merger and the assumption by Terra LLC of all of the rights and obligations of Terra BDC under the Credit Agreement. On June 30, 2023, we amended the Credit Agreement to, among other things, (i) decrease the principal amount to $15.0 million, (ii) extend the scheduled maturity date to March 31, 2024, and (iii) increase the rate on which the loans thereunder bear interest from a fixed rate of 5.625% per annum to a floating rate based on SOFR plus 7.375% with a SOFR floor of 5.0%, and repaid $10.0 million of the principal amount of the Term Loan. The Credit Agreement was secured by a lien on substantially all of Terra BDC’s, and, following the Merger, Terra LLC’s owned and thereafter acquired property. In March 2024, the Term Loan was repaid in full.
Factors Impacting Operating Results
Our portfolio is concentrated in a limited number of industries and borrowers, and, as a result, a downturn in any particular industry or borrower in which we are heavily invested may significantly impact the aggregate returns we realize. If an industry in which we are heavily invested suffers from adverse business or economic conditions, a material portion of our investment could be affected adversely, which, in turn, could adversely affect our financial position and results of operations. As of December 31, 2024, we held three loan investments secured by office, mixed use and multifamily properties. Our largest loan investment represented approximately 87.8% of the principal balance of our total net loan investments.
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Results of Operations
Operating results for the years ended December 31, 2024 and 2023 were as follows:
| Years Ended December 31, | ||||||||||||||||||||
| 2024 | 2023 | Change | ||||||||||||||||||
| Revenues | ||||||||||||||||||||
| Interest income | $ | 7,616,405 | $ | 10,226,670 | $ | (2,610,265) | ||||||||||||||
| Prepayment fee income | 435,677 | — | 435,677 | |||||||||||||||||
| Dividend and other income | 47,815 | 87,625 | (39,810) | |||||||||||||||||
| 8,099,897 | 10,314,295 | (2,214,398) | ||||||||||||||||||
| Operating expenses | ||||||||||||||||||||
Asset management and asset servicing fees paid/payable to Terra REIT (1) | 1,132,525 | 1,682,414 | (549,889) | |||||||||||||||||
Operating expense reimbursement to Terra REIT (1) | 1,083,857 | 1,606,470 | (522,613) | |||||||||||||||||
| Provision for credit losses | 5,997,074 | 5,113,660 | 883,414 | |||||||||||||||||
| Professional fees | 698,566 | 711,754 | (13,188) | |||||||||||||||||
| Insurance expense | 84,288 | 125,334 | (41,046) | |||||||||||||||||
| General and administrative expenses | 71,823 | 30,855 | 40,968 | |||||||||||||||||
| 9,068,133 | 9,270,487 | (202,354) | ||||||||||||||||||
| Operating (loss) income | (968,236) | 1,043,808 | (2,012,044) | |||||||||||||||||
| Other income and expenses | ||||||||||||||||||||
| Loss from equity interest in unconsolidated investments | (3,874,927) | (1,004,325) | (2,870,602) | |||||||||||||||||
| Interest expense on unsecured notes payable | (3,994,390) | (3,856,889) | (137,501) | |||||||||||||||||
| Interest expense on term loan | (517,528) | (1,776,596) | 1,259,068 | |||||||||||||||||
| Interest expense from obligation under participation agreement | (3,145,887) | — | (3,145,887) | |||||||||||||||||
| Unrealized loss on investments, net | — | (18,601) | 18,601 | |||||||||||||||||
| Realized loss on investments, net | — | (12,512) | 12,512 | |||||||||||||||||
| (11,532,732) | (6,668,923) | (4,863,809) | ||||||||||||||||||
| Net loss | $ | (12,500,968) | $ | (5,625,115) | $ | (6,875,853) | ||||||||||||||
(1)Fees were paid and payable, and expenses were reimbursed, to Terra REIT pursuant to the Cost Sharing Agreement with Terra REIT.
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. The following table presents a reconciliation of our loan portfolio on a weighted average basis from gross to net:
| Years Ended December 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Weighted Average Principal Amount | Weighted Average Coupon Rate | Weighted Average Principal Amount | Weighted Average Coupon Rate | ||||||||||||||||||||
| Gross loan investments | $ | 57,993,578 | 15.0% | $ | 95,719,669 | 14.9% | |||||||||||||||||
| Obligation under participation agreement | (14,450,820) | 18.6% | — | —% | |||||||||||||||||||
| Net loan investments | $ | 43,542,758 | 13.8% | $ | 95,719,669 | 14.9% | |||||||||||||||||
Interest Income
For the year ended December 31, 2024 as compared to the year ended December 31, 2023, interest income decreased by $2.6 million, primarily due to a decrease in the weighted average principal balance of gross loans, partially offset by an increase in the weighted average coupon rate due to increases in the underlying index rates and the interest income earned on the promissory note receivable.
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Prepayment Fee Income
For the year ended December 31, 2024, we recognized prepayment fee come of $0.4 million related to the early repayment of one of our loans. There was no such prepayment fee income recognized for the year ended December 31, 2023.
Dividend and Other Income
For the year ended December 31, 2024 as compared to the year ended December 31, 2023, dividend and other income decreased by $0.04 million, primarily due to a decline in dividend income earned on our marketable securities.
Asset Management and Asset Servicing Fees
On November 8, 2022, we entered into the Cost Sharing Agreement with Terra REIT effective October 1, 2022, pursuant to which we reimburse Terra REIT for our allocable portion of management and transaction fees and operating expenses incurred by Terra REIT, including fees paid by Terra REIT to the REIT Manager.
For the year ended December 31, 2024 as compared to the year ended December 31, 2023, management fees consisting of asset management and asset servicing fees paid/payable to Terra REIT pursuant to the Cost Sharing Agreement decreased by $0.5 million, primarily due to a decrease in total funds under management.
Operating Expense Reimbursement
For the year ended December 31, 2024 as compared to the year ended December 31, 2023, operating expense incurred on our behalf pursuant to the Cost Sharing Agreement decreased by $0.5 million, primarily due to a decrease in the allocation ratio as a result of a decrease in total funds under management.
Provision 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.
For the year ended December 31, 2024, we recorded a provision for credit losses of $6.0 million, primarily as a result of a decline in our estimated recoverable amount on a non-performing subordinated loan due to an increase in funding on the senior loan.
For the year ended December 31, 2023, we recorded a provision for credit losses of $5.1 million, primarily as a result of a decline in the fair value of the collateral of a loan due to a decline in the macroeconomic outlook for commercial real estate.
Loss From Equity Interest In Unconsolidated Investments
For the year ended December 31, 2024, we recognized a loss from equity interest in unconsolidated investment of $3.9 million, related to our portion of the net loss incurred by the two joint ventures that own real estate properties primarily as a result of depreciation expense and interest expense on floating rate loans.
For the year ended December 31, 2023, we recognized loss from equity interest in unconsolidated investment of $1.0 million, primarily related to our portion of the net loss incurred by the two joint ventures that own real estate properties primarily as a result of depreciation and interest expense on floating rate loans, partially offset by interest income earned on a $10.0 million mezzanine loan for which we accounted for using the equity method of accounting due to the profit sharing arrangement.
Interest Expense on Unsecured Notes Payable
As discussed in the section entitled “Senior Unsecured Notes” above, we assumed the $38.4 million 7.00% Senior Notes Due 2026 in connection with the Merger.
For the year ended December 31, 2024 as compared to the year ended December 31, 2023, interest expense on unsecured notes payable remained substantially the same.
Interest Expense on Term Loan
As discussed in the section entitled “Term Loan” above, we assumed the $25.0 million Term Loan in connection with the Merger. In June 30, 2023, we made a $10.0 million partial repayment on the Term Loan. In March 2024, the Term Loan was repaid in full.
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For the year ended December 31, 2024 as compared to the year ended December 31, 2023, interest expense on the Term Loan decreased by $1.3 million, primarily due to a decrease in the weighted average outstanding balance.
Interest Expense From Obligation Under Participation Agreement
For the year ended December 31, 2024, interest expense from obligation under participation agreement was $3.1 million, primarily related to a portion of a loan we transferred to an affiliate via a participation agreement for which it did not qualify for sale treatment. There was no such interest expense for the year ended December 31, 2023.
Net loss
For the year ended December 31, 2024 as compared to the year ended December 31, 2023, the resulting net loss increased by $6.9 million.
Terra REIT’s Management Agreement with the REIT Manager
Terra REIT is our parent and sole member. We have entered into a cost sharing arrangement with Terra REIT pursuant to which we will be responsible for our allocable share of Terra REIT’s expenses, including fees paid by Terra REIT to its manager, the REIT Manager. Terra REIT currently pays the following fees to the REIT Manager pursuant to a management agreement:
Origination and Extension Fee. An origination fee in the amount of 1.0% of the amount used to originate, acquire, fund 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, the REIT 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 Terra REIT.
Asset Servicing Fee. A monthly asset servicing fee at an annual rate equal to 0.25% of the aggregate gross origination price or aggregate gross acquisition price for each real estate related loan then held by Terra REIT (inclusive of closing costs and expenses).
Disposition Fee. A disposition fee in the amount of 1.0% of the gross sale price received by Terra REIT from the disposition of each loan, but not upon the maturity, prepayment, workout, modification or extension of a loan unless there is a corresponding fee paid by the borrower, in which case the disposition fee will be the lesser of (i) 1.0% of the principal amount of the loan and ii) the amount of the fee paid by the borrower in connection with such transaction. If Terra REIT takes ownership of a property as a result of a workout or foreclosure of a loan, Terra REIT will pay a disposition fee upon the sale of such property equal to 1.0% of the sales price.
Transaction Breakup Fee. In the event that Terra REIT 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, the REIT 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 REIT Manager with respect to its evaluation and pursuit of such transactions.
In addition to the fees described above, Terra REIT reimburses the REIT Manager for operating expenses incurred in connection with services provided to the operations of Terra REIT, including its allocable share of the REIT Manager’s overhead, such as rent, employee costs, utilities, and technology costs.
Financial Condition, Liquidity and Capital Resources
We currently generate cash primarily from cash flows from interest, dividends and fees earned from our investments, principal repayments, and proceeds from sales of our investments. Our primary use of cash is for our targeted assets and payments of our expenses.
We may borrow funds to make investments to the extent we determine that leveraging our portfolio would be appropriate. In February 2021, Terra BDC issued $38.4 million in aggregate principal amount of 7.00% fixed-rate notes due 2026, for net proceeds of $37.2 million after deducting underwriting commissions of $1.2 million. On October 1, 2022 in connection with the Merger, Terra BDC, Terra LLC and U.S. Bank National Association entered into a second supplemental indenture pursuant to
24
which Terra LLC assumed the payment of the notes and the performance of every covenant of the indenture, to be performed or observed by Terra BDC.
Certain of our loans provide for commitments to fund the borrower at a future date. As of December 31, 2024, we had one loan with funding commitments of $19.3 million, of which we funded $18.6 million. We do not expect to fund the remaining $0.7 million unfunded commitment to the borrower in the next twelve months as the borrower has not met the requirement for funding. Additionally, our $18.0 million obligation under participation agreement will mature in the next twelve months. We expect to use the proceeds from the repayment of the corresponding investment to repay the participation obligation.
Cash Flows (Used in) Provided by Operating Activities
For the year ended December 31, 2024, cash used in operating activities was $0.2 million. For the year ended December 31, 2023, cash provided by operating activities was $2.7 million. The decrease in operating cash was primarily due to a decrease in contractual interest income.
Cash Flows (Used in) Provided by Investing Activities
For the year ended December 31, 2024, cash used in investing activities was $3.0 million, primarily related to proceeds from repayment of loans of $42.9 million and proceeds from repayment of promissory note receivable of $9.0 million, partially offset by funding for promissory note receivable of $54.1 million and origination and purchase of loans of $1.1 million.
For the year ended December 31, 2023, cash provided by investing activities was $4.1 million, primarily related to proceeds from repayment of loans of $42.0 million, proceeds from sale of held-to-maturity debt securities of $10.0 million and distributions received from unconsolidated investment of $0.5 million, partially offset by purchase of equity interest in unconsolidated investment of $32.4 million, purchase of held-to-maturity debt securities of $10.0 million, payments for origination and purchase of loans of $5.4 million and payment for marketable securities of $0.5 million.
Cash Flows Provided by (Used in) Financing Activities
For the year ended December 31, 2024, cash provided by financing activities was $2.9 million, primarily due to proceeds from obligation under participation agreement of $18.0 million, partially offset by repayment of the Term Loan of $15.0 million as well as a decrease in interest reserve and other deposits held on investment of $0.1 million.
For the year ended December 31, 2023, cash used in financing activities was $10.2 million, primarily due to the repayments of borrowings under term loan payable of $10.0 million and payment for financing cost of $0.2 million.
Critical Accounting Policies and Use of Estimates
Our consolidated financial statements are prepared in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. 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. 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
25
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. A significant amount of judgment is applied in selecting inputs and analyzing results produced by the models to determine the allowance for credit losses. Changes in such estimates can significantly affect the expected credit losses.
During the loan review process, all non-performing loans are evaluated for collectability, which includes both loans in default and loans where we do not expect to collect all amounts due for both principal and interest according to the contractual terms of the loan. We remove these loans from the industry loss rate approach described above and analyze 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.
Item 7A. 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 the market interest rates will not have a material adverse effect on our net investment income.
As of December 31, 2024, we had two variable rate investments with an aggregate principal balance of $43.1 million that are indexed to SOFR or Term SOFR and are subject to an applicable index floor. The following table summarizes estimated changes in investment income on variable rate investments as of December 31, 2024 assuming hypothetical increases or decreases in the applicable index rates:
| 1.00% Decrease | 1.00% Increase | |||||||||||||
| Investment income from variable rate investments | $ | 430,592 | $ | (430,592) | ||||||||||
We may hedge against interest rate and currency exchange 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 years ended December 31, 2024 and 2023, we did not engage in interest rate hedging activities.
Item 8. Financial Statements and Supplementary Data.
Our financial statements are annexed to this Annual Report on Form 10-K beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. 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 both the Chief Executive Officer and Chief Investment Officer and the Chief Financial Officer of our sole and managing member, Terra REIT, performing functions equivalent to those a principal executive officer and principal financial officer of our company would perform if we had any officers, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2024. Based on that evaluation, our management
26
concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we would meet our disclosure obligations.
Evaluation of Internal Controls Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of Terra REIT Advisors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements in our financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including both the Chief Executive Officer and Chief Investment Officer and the Chief Financial Officer of our sole and managing member, Terra REIT, performing functions equivalent to those a principal executive officer and principal financial officer of our company would perform if we had any officers, we conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on its evaluation, our management concluded that our internal control over financial reporting was effective as of the end of the fiscal year covered by this Annual Report on Form 10-K.
The rules of the SEC do not require, and this Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.
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.
Item 9B. Other Information
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
This section has been omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 11. Executive Compensation.
This section has been omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
This section has been omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
This section has been omitted pursuant to General Instruction I(2)(c) of Form 10-K.
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Item 14. Principal Accountant Fees and Services.
On October 1, 2022, pursuant to the terms of the Merger Agreement, Terra BDC merged with and into us, with us continuing as the surviving entity of the Merger and as a wholly owned subsidiary of Terra REIT. We do not have a board of directors and Terra REIT is our sole and managing member. For the years ended December 31, 2024 and 2023, KPMG LLP (“KPMG”) served as our independent auditor and provided certain tax and other services. The Audit Committee of Terra REIT (the “Terra REIT Audit Committee”) currently anticipates that it will engage KPMG as our independent auditor to audit our consolidated financial statements for the year ended December 31, 2025, subject to agreeing on fee estimates for the audit work. The Terra REIT Audit Committee reserves the right, however, to select a new auditor at any time in the future in its discretion. Any such decision would be disclosed to Terra REIT’s stockholders in accordance with applicable securities laws.
Audit Fees
The following table displays fees for professional services by KPMG:
| Years Ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Audit Fees | $ | 321,000 | $ | 303,000 | |||||||
| Audit-Related Fees | — | — | |||||||||
| Tax Fees | — | 3,476 | |||||||||
| All Other Fees | — | — | |||||||||
| Total | $ | 321,000 | $ | 306,476 | |||||||
Audit Fees. Audit fees include fees for services that normally would be provided by KPMG in connection with statutory and regulatory filings or engagements and that generally only an independent accountant can provide. In addition to fees for the audit of our annual financial statements and the review of our quarterly financial statements in accordance with the standards of the Public Company Accounting Oversight Board, this category contains fees for comfort letters, statutory audits, consents, and assistance with and review of documents filed with the SEC.
Audit-Related Fees. Audit-related services consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees.” These services include attest services that are not required by statute or regulation and consultations concerning financial accounting and reporting standards.
Tax Services Fees. Tax services fees consist of fees billed for professional tax services. These services also include assistance regarding federal, state, and local tax compliance.
All Other Fees. Other fees would include fees for products and services other than the services reported above.
Pre-Approval Policies
Terra REIT has established a pre-approval policy that describes the permitted audit, audit-related, tax and other services to be provided by our independent auditor. Pursuant to this policy, the Terra REIT Audit Committee will pre-approve the audit and non-audit services performed by our independent auditor in order to assure that the provision of such services does not impair the auditor’s independence. Any requests for audit, audit-related, tax and other services that have not received general pre-approval must be submitted to the Terra REIT Audit Committee for specific pre-approval in accordance with the pre-approval policy, irrespective of the amount of fees associated with such services, and cannot commence until such approval has been granted. Normally, pre-approval is provided at the regularly scheduled meetings of the Terra REIT Audit Committee. However, the Terra REIT Audit Committee may delegate pre-approval authority to one or more of its members. The member or members to whom such authority is delegated must report any pre-approval decisions to the Terra REIT Audit Committee at its next scheduled meeting. The Terra REIT Audit Committee does not delegate its responsibilities to pre-approve services performed by our independent auditor to management. All services rendered by KPMG for the years ended December 31, 2024 and 2023 were pre-approved in accordance with the policies set forth above.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
The following documents are filed as part of this Annual Report on Form 10-K:
(1) Financial Statements
The index to our financial statements is on page F-1 of this Annual Report on Form 10-K.
(2) Financial Statement Schedule
The index to our financial schedules is on page F-1 of this Annual Report on Form 10-K.
(3) 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 | ||||||||
| 3.2 | ||||||||
| 3.3 | ||||||||
| 3.4 | ||||||||
| 3.5 | ||||||||
| 4.1 | ||||||||
| 4.2 | ||||||||
| 4.3 | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1** | ||||||||
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| Exhibit No. | Description and Method of Filing | |||||||
| 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 | XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File Included as Exhibit 101 (embedded within the Inline XBRL document) | |||||||
* Filed herewith.
** Furnished herewith.
Item 16. Form 10-K Summary.
None.
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Terra Income Fund 6, LLC
Index to Consolidated Financial Statements
| Page | ||||||||||||||||||||
| KPMG LLP | New York, NY | PCAOB ID: | ||||||||||||||||||
| Financial Statements: | ||||||||||||||||||||
F-26 | ||||||||||||||||||||
Schedules other than those listed are omitted as they are not applicable for the required or equivalent information has been included in the consolidated financial statements or notes thereto.
F-1
Report of Independent Registered Public Accounting Firm
To the Member
Terra Income Fund 6, LLC:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Terra Income Fund 6, LLC and subsidiaries (the Company) as of December 31, 2024 and 2023, the related consolidated statements of operations and comprehensive loss, changes in member’s capital, and cash flows for the years then ended, and the related notes and financial statement schedule IV (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for Credit Losses as of January 1, 2023 due to adoption of FASB Accounting Standard Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
F-2
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses on Performing Loans
As discussed in Notes 2 and 3 to the consolidated financial statements, on January 1, 2023, the Company adopted the provisions of ASC 326, Financial Instruments—Credit Losses. The Company’s collective allowance for credit losses (ACL) on performing loans held for investment (the ACL on performing loans) totaled $179,451 as of December 31, 2024. The Company uses a model based approach for estimating the ACL on performing loans, 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 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 back to 1998. The Company has chosen to incorporate a weighted average macroeconomic forecast that encompasses baseline, upside and downside scenarios, into its ACL on performing loans estimate during the reasonable and supportable forecast period which is currently eight quarters. Based on loan-level inputs and selection of macroeconomic forecasts and certain economics variables, the loan loss model determines a loan loss rate through the generation of probability of default and loss given default for each loan. The determination of the ACL on performing loans considers historical loss information and current economic conditions for each loan, reversion period, and reasonable and supportable forecasts about the future. The ACL on performing loans is then calculated by applying the loan loss rate to the total outstanding balance of each loan. The Company also performs a qualitative assessment and applies qualitative adjustments as necessary, usually due to limitations of the loan loss model.
We identified the assessment of the December 31, 2024 ACL on performing loans as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the December 31, 2024 ACL on performing loans due to significant measurement uncertainty. Specifically, the assessment encompassed the evaluation of the ACL on performing loans methodology, including the loan loss model, used to estimate expected credit losses and the significant assumptions that include the (1) selection and weighting of macroeconomic forecast scenarios, (2) selection of certain economic variables, (3) reasonable and supportable forecast period, (4) reversion period, and (5) period of historical loss information.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the Company’s process to develop the December 31, 2024 ACL on performing loans estimate by testing and evaluating the relevance and reliability of certain sources of data and assumptions that the Company used. We involved our credit risk professionals with specialized skills and knowledge to assist with:
•Evaluating the ACL on performing loans methodology for compliance with U.S. generally accepted accounting standards
•Assessing the conceptual soundness of the loan loss model by inspecting underlying documentation to determine whether the model is suitable for its intended use
F-3
•Evaluating the selection and weighting of the macroeconomic scenarios and the selection of certain economic variables used by comparing them to the Company's business environment and relevant industry practices
•Evaluating the length of the period from which historical loss information was used, the reasonable and supportable forecast period, and the reversion period by comparing to specific portfolio risk characteristics and trends
•Assessing the relevance of the proxy data by comparing to Company and specific portfolio risk characteristics.
We have served as the Company’s auditor since 2016.
/s/ KPMG LLP
We have served as the Company’s auditor since 2016.
March 13, 2025
F-4
Terra Income Fund 6, LLC
Consolidated Balance Sheets
| December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
Loans held for investment, net of allowance for credit losses of $ $ | |||||||||||
Loans held for investment acquired through participation, net of allowance for credit losses of $ | |||||||||||
| Equity interest in unconsolidated investments | |||||||||||
| Marketable securities | |||||||||||
| Interest receivable | |||||||||||
| Prepaid expenses and other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Equity | |||||||||||
| Liabilities: | |||||||||||
| Unsecured notes payable, net of purchase discount | |||||||||||
| Term loan payable, net of deferred financing cost | |||||||||||
| Interest payable from obligation under participation agreement | |||||||||||
| Interest reserve and other deposits held on investments | |||||||||||
| Other liabilities | |||||||||||
| Accrued expenses | |||||||||||
| Total liabilities | |||||||||||
| Member’s capital | |||||||||||
| Total liabilities and member’s capital | $ | $ | |||||||||
See notes to consolidated financial statements.
F-5
Terra Income Fund 6, LLC
Consolidated Statements of Operations and Comprehensive Loss
| Years Ended December 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Revenues | ||||||||||||||
| Interest income | $ | $ | ||||||||||||
| Prepayment fee income | ||||||||||||||
| Dividend and other income | ||||||||||||||
| Operating expenses | ||||||||||||||
Asset management and asset servicing fees paid/payable to Terra REIT (1) | ||||||||||||||
Operating expense reimbursement to Terra REIT (1) | ||||||||||||||
| Provision for credit losses | ||||||||||||||
| Professional fees | ||||||||||||||
| Insurance expense | ||||||||||||||
| General and administrative | ||||||||||||||
| Operating (loss) income | ( | |||||||||||||
| Other income and expenses | ||||||||||||||
| Loss from equity interest in unconsolidated investments | ( | ( | ||||||||||||
| Interest expense on unsecured notes payable | ( | ( | ||||||||||||
| Interest expense on term loan | ( | ( | ||||||||||||
| Interest expense from obligation under participation agreement | ( | |||||||||||||
| Unrealized loss on investments, net | ( | |||||||||||||
| Realized loss on investments, net | ( | |||||||||||||
| ( | ( | |||||||||||||
| Net loss | $ | ( | $ | ( | ||||||||||
| Other comprehensive loss | ||||||||||||||
| Unrealized loss on available-for-sale debt securities | ( | |||||||||||||
| ( | ||||||||||||||
| Comprehensive loss | $ | ( | $ | ( | ||||||||||
(1)Fees were paid and payable, and expenses were reimbursed, to Terra Property Trust, Inc. (“Terra REIT”) pursuant to a cost sharing agreement with Terra REIT (Note 6).
See notes to consolidated financial statements.
F-6
Terra Income Fund 6, LLC
Consolidated Statement of Changes in Member’s Capital
| Member’s Capital | ||||||||
Balance, January 1, 2024 | $ | |||||||
| Net loss | ( | |||||||
| Other comprehensive loss: | ||||||||
| Unrealized loss on available-for-sale debt securities | ( | |||||||
Balance, December 31, 2024 | $ | |||||||
| Member’s Capital | ||||||||
| Balance, January 1, 2023 | $ | |||||||
| ( | ||||||||
| Net loss | ( | |||||||
| Balance, December 31, 2023 | $ | |||||||
See notes to consolidated financial statements.
F-7
Terra Income Fund 6, LLC
Consolidated Statement of Cash Flows
| Years Ended December 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Net loss | $ | ( | $ | ( | ||||||||||
| Adjustments to reconcile net loss from operations to net cash (used in) provided by operating activities: | ||||||||||||||
| Provision for credit losses | ||||||||||||||
| Amortization of premiums and discounts on investments | ||||||||||||||
| Amortization and accretion of investment-related fees, net | ( | |||||||||||||
| Amortization of discount on debt | ||||||||||||||
| Amortization of deferred financing costs | ||||||||||||||
| Loss from equity interest in unconsolidated investments | ||||||||||||||
| Realized loss on investments, net | ||||||||||||||
| Unrealized loss on investments, net | ||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||
| Decrease in interest receivable | ||||||||||||||
| Decrease (increase) in prepaid expenses and other assets | ( | |||||||||||||
| Decrease in accrued expenses | ( | ( | ||||||||||||
| Increase in interest payable from obligation under participation agreement | ||||||||||||||
| (Decrease) increase in other liabilities | ( | |||||||||||||
| Net cash (used in) provided by operating activities | ( | |||||||||||||
| Cash flows from investing activities: | ||||||||||||||
| Repayment of loans | ||||||||||||||
| Origination, funding and purchase of loans | ( | ( | ||||||||||||
| Capital contributions to equity interest in unconsolidated investments | ( | ( | ||||||||||||
| Funding of promissory note receivable | ( | |||||||||||||
| Repayment of promissory note receivable | ||||||||||||||
| Distributions from equity interest in unconsolidated investments | ||||||||||||||
| Proceeds from redemption of held-to-maturity debt securities | ||||||||||||||
| Purchase of held-to-maturity debt securities | ( | |||||||||||||
| Purchase of marketable securities | ( | |||||||||||||
| Net cash (used in) provided by investing activities | ( | |||||||||||||
| Cash flows from financing activities: | ||||||||||||||
| Proceeds from obligation under participation agreement | ||||||||||||||
| Repayment of term loan | ( | ( | ||||||||||||
| Change in interest reserve and other deposits held on investments | ( | ( | ||||||||||||
| Payment of financing costs | ( | |||||||||||||
| Net cash provided by (used in) financing activities | ( | |||||||||||||
| Net decrease in cash, cash equivalents and restricted cash | ( | ( | ||||||||||||
| Cash, cash equivalents and restricted cash, at beginning of year | ||||||||||||||
| $ | $ | |||||||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||||
| Cash paid for interest | $ | $ | ||||||||||||
| Income taxes paid | $ | $ | ||||||||||||
| Supplemental non-cash information: | ||||||||||||||
Settlement of a mezzanine loan accounted for as an equity investment in | $ | $ | ||||||||||||
See notes to consolidated financial statements.
F-8
Terra Income Fund 6, LLC
Notes to Consolidated Financial Statements
Note 1. Principal Business and Organization
Terra Income Fund 6, LLC (“Terra LLC”, and together with its consolidated subsidiaries, the “Company”) was formed as a Delaware limited liability company on April 29, 2022 as a wholly owned subsidiary of Terra Property Trust, Inc. (“Terra REIT”). On October 1, 2022, pursuant to an Agreement and Plan of Merger, dated as of May 2, 2022 (as amended, the “Merger Agreement”), Terra Income Fund 6, Inc. (“Terra BDC”) merged with and into Terra LLC, with Terra LLC continuing as the surviving entity of the merger (the “Merger”). Subsequent to the Merger, Terra LLC became the successor of Terra BDC and assumed all of Terra BDC’s rights and obligations.
In February 2021, Terra BDC issued $38.4 million in aggregate principal amount of 7.00 % fixed-rate notes due 2026, for net proceeds of $37.2 million, after deducting underwriting commissions of $1.2 million, see “Unsecured Senior Notes” in Note 7 for more information. In connection with the Merger, Terra LLC assumed the obligations of Terra BDC under the indenture governing the 7.00 % fixed-rate notes due 2026.
The Company is a wholly owned subsidiary of Terra REIT, and its investment objective is to provide attractive risk-adjusted returns to Terra REIT’s stockholders, primarily through Terra REIT’s regular distributions. Terra REIT’s investments activities are externally managed by Terra REIT Advisors, LLC (the “REIT Manager”), an affiliate of the Company. The Company originates, invests in and manages a diverse portfolio of real estate-related investments that generate a stable income stream. The Company directly originates, structures and underwrites most, if not all, of its loans, as it believes that doing so will provide it with the best opportunity to invest in loans that satisfy its standards, establish a direct relationship with the borrower and optimize the terms of its investments; however, the Company may acquire existing loans from the originating lender should the REIT Manager determine such an investment is in its best interest. The Company may hold its investments until their scheduled maturity dates or may sell them if the Company is able to command favorable terms for their disposition. The Company may also seek to realize growth in the value of its investments by timing their sale to maximize value.
The Company may also make strategic non-real estate-related investments that align with its investment objectives and criteria.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying annual consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and include the accounts of the Company and its consolidated subsidiaries. The accompanying annual consolidated financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-K and Articles 6 or 10 of Regulation S-X. Certain prior period amounts have been reclassified to conform to the current period presentation.
Consolidation
Terra LLC consolidates entities in which it has a controlling financial interest based on either the variable interest entity (“VIE”) or voting interest entity (“VOE”) model. Terra LLC 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 Terra LLC determines the entity is not a VIE, it then applies the VOE model. Under the VOE model, Terra LLC consolidates an entity when it holds a majority voting interest in an entity.
Cash and Cash Equivalents
The Company considers all highly liquid investments, with original maturities of ninety days or less when purchased, as cash equivalents. Cash and cash equivalents held at financial institutions, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation.
F-9
Notes to Consolidated Financial Statements
Restricted Cash
Restricted cash represents cash held as additional collateral by the Company on behalf of the borrowers related to the investments for the purpose of such borrowers making interest and property-related operating payments. There is a corresponding liability of the same amount on the statements of assets and liabilities called “Interest reserve and other deposits held on investments.”
| December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows | $ | $ | |||||||||
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 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 $0.7 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, 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
F-10
Notes to Consolidated Financial Statements
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.
Non-Performing Loans
During the loan review process, all non-performing loans are evaluated for collectability, which includes both loans in default and loans where we do not expect to collect all amounts due for both principal and interest according to the contractual terms of the loan. 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.
Equity Interest 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, exceeds 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 interest in 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
F-11
Notes to Consolidated Financial Statements
the estimated fair market value of the underlying net assets based on the terms of the applicable partnership or joint venture agreements.
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.
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, if any, 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 REIT 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 may hold loans in its portfolio that contain paid-in-kind (“PIK”) interest provisions. The PIK interest, which represents contractually deferred interest that is added to the principal balance that is due at maturity, is recorded on the accrual basis.
Other Revenues: Prepayment fee income is recognized as prepayments occur. All other income is recognized when earned.
Deferred Debt Issuance Costs
The Company records issue discounts and other financing costs related to its debt obligation as deferred debt issuance costs, which are presented as a direct deduction from the carrying value of the related debt liability. These expenses are deferred and amortized using the effective interest method over the stated maturity of the debt obligation.
Use of Estimates
The preparation of the 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 at the date of the consolidated financial statements, and reported amounts of income, expenses and gains and losses 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 assume control of properties acquired in connection with foreclosures or deed in lieu of foreclosure, or it may acquire operating real estate properties that meet its investment criteria.
The Company operates as one
The Company generates its revenue primarily from originating, acquiring, investing in, and managing real estate-related debt investments. The CODM evaluates the performance of any real estate owned assets with that of its real estate-related debt investments. Additionally, the Company seeks to enhance its returns on equity by utilizing leverage, and generally finance its real estate-related investments with leverage obtained through a variety of sources, including secured and unsecured debt instruments.
F-12
Notes to Consolidated Financial Statements
The CODM evaluates performance and allocates resources based on consolidated net income (loss), which is also reported as consolidated net income (loss) on the Company’s consolidated statement of operations. The Company’s consolidated net income (loss) is primarily derived through the difference between the interest income earned on its loans and the cost to finance investments. Accordingly, interest expense, as reported on its consolidated statement of operations, is its most significant segment expense. Additionally, the measure of segment assets is reflected on the balance sheet as total consolidated assets.
The CODM uses consolidated net income (loss) to make key operating decisions, such as identifying attractive investment opportunities, evaluating underwriting standards, determining the appropriate level of leverage to enhance returns on equity and deciding on the sources of financing.
Recent Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update “ASU” 2023-07 “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”). ASU 2023-07 intends to improve reportable segment disclosure requirements, enhance interim disclosure requirements and provide new segment disclosure requirements for entities with a single reportable segment. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for interim periods with fiscal years beginning after December 15, 2024. ASU 2023-07 is to be adopted retrospectively to all prior periods presented. The Company adopted this ASU on December 31, 2024. The adoption of the standard has not impacted the Company's financial statements but has resulted in incremental disclosures, which are included within “Segment Information” above.
In December 2023, the FASB issued ASU 2023-09 “Improvements to Income Tax Disclosures” (“ASU 2023-09”). ASU 2023-09 intends to improve the transparency of income tax disclosures. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024 and is to be adopted on a prospective basis with the option to apply retrospectively. The Company is currently assessing the impact of this guidance; however, it does not expect the adoption of this standard to have a material impact to its consolidated financial statements.
Note 3. Loans Held for Investment
The Company elected the practical expedient under ASC 326 to exclude accrued interest from amortized cost. As of December 31, 2024 and 2023, accrued of $0.3 million and $1.2 million, respectively, is included in interest receivable on the consolidated balance sheets, and is excluded from the amortized cost of loans held for investment.
Portfolio Summary
The table below provides a summary of the Company’s loan portfolio. Carrying value represents the amortized cost of loan, net of applicable allowance for credit losses.
| December 31, 2024 | December 31, 2023 | ||||||||||||||||||||||||||||||||||
| Fixed Rate | Floating Rate (1)(2) | Total | Fixed Rate | Floating Rate (1)(2) | Total | ||||||||||||||||||||||||||||||
| Number of loans | |||||||||||||||||||||||||||||||||||
| Principal balance | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Carrying value | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Fair value | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Weighted-average coupon rate(3) | |||||||||||||||||||||||||||||||||||
Weighted-average remaining term (years) (3) (4) | |||||||||||||||||||||||||||||||||||
(1)As of December 31, 2024 and 2023, 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 average SOFR and Term SOFR of 4.5 % and 4.3 %, respectively, as of December 31, 2024, and 5.3 % and 5.4 %, respectively, as of December 31, 2023.
(2)As of both December 31, 2024 and 2023, two
(3)Excludes non-performing loans as of December 31, 2024 and 2023.
(4)Represents current effective maturity as of December 31, 2024 and 2023, exclusive of any extension options available.
F-13
Notes to Consolidated Financial Statements
Lending Activities
The following tables present the activities of the Company’s loan portfolio:
| Loans Held for Investment, Net | Loans Held for Investment through Participation Interests, Net | Total | |||||||||||||||
Balance, January 1, 2024 | $ | $ | $ | ||||||||||||||
| Origination, funding and purchase of loans | |||||||||||||||||
| Principal repayments received | ( | ( | |||||||||||||||
| Net amortization of premiums on loans | ( | ( | |||||||||||||||
| Accrual, payment and accretion of investment-related fees and other, net | |||||||||||||||||
| Reversal of (provision for) credit losses | ( | ( | |||||||||||||||
Balance, December 31, 2024 | $ | $ | $ | ||||||||||||||
| Loans Held for Investment, Net | Loans Held for Investment through Participation Interests, Net | Total | |||||||||||||||
| Balance, January 1, 2023 | $ | $ | $ | ||||||||||||||
Cumulative effect of adoption of credit loss accounting standard | ( | ( | |||||||||||||||
| Origination and purchase of loans | |||||||||||||||||
| Principal repayments received | ( | ( | ( | ||||||||||||||
| Net amortization of premiums on loans | ( | ( | ( | ||||||||||||||
| Accrual, payment and accretion of investment-related fees and other, net | |||||||||||||||||
| Reversal of (provision for) credit losses | ( | ( | |||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | ||||||||||||||
Portfolio Information
| December 31, 2024 | December 31, 2023 | |||||||||||||||||||||||||||||||||||||
| Loan Structure | Principal Balance | Carrying Value | % of Total | Principal Balance | Carrying Value | % of Total | ||||||||||||||||||||||||||||||||
| Preferred equity investments | $ | $ | % | $ | $ | % | ||||||||||||||||||||||||||||||||
| First mortgages | % | % | ||||||||||||||||||||||||||||||||||||
| Mezzanine loans | % | % | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | % | $ | $ | % | ||||||||||||||||||||||||||||||||
F-14
Notes to Consolidated Financial Statements
| December 31, 2024 | December 31, 2023 | |||||||||||||||||||||||||||||||||||||
| Property Type | Principal Balance | Carrying Value | % of Total | Principal Balance | Carrying Value | % of Total | ||||||||||||||||||||||||||||||||
| Mixed use | $ | $ | % | $ | $ | % | ||||||||||||||||||||||||||||||||
| Office | % | % | ||||||||||||||||||||||||||||||||||||
| Multifamily | % | % | ||||||||||||||||||||||||||||||||||||
| Infrastructure | % | % | ||||||||||||||||||||||||||||||||||||
| Student housing | % | % | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | % | $ | $ | % | ||||||||||||||||||||||||||||||||
| December 31, 2024 | December 31, 2023 | |||||||||||||||||||||||||||||||||||||
| Geographic Location | Principal Balance | Carrying Value | % of Total | Principal Balance | Carrying Value | % of Total | ||||||||||||||||||||||||||||||||
| United States | ||||||||||||||||||||||||||||||||||||||
| California | $ | $ | % | $ | $ | % | ||||||||||||||||||||||||||||||||
| New York | % | % | ||||||||||||||||||||||||||||||||||||
| Utah | % | % | ||||||||||||||||||||||||||||||||||||
| Georgia | % | % | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | % | $ | $ | % | ||||||||||||||||||||||||||||||||
Allowance for Credit Losses
As described in Note 2, on January 1, 2023, the Company adopted the provisions of ASU 2016-13, which requires entities to recognize credit losses on financial instruments based on an estimate of current expected credit losses. The adoption of ASU 2016-13 resulted in a $0.7 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, 2023.
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 on loans amounted to approximately $0.7 million and $0.7 million as of December 31, 2024 and 2023, respectively. The liability for credit losses on unfunded commitments is included in other liabilities on the consolidated balance sheets.
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 December 31, 2024 and 2023, the Company had two 27.3 million and $27.1 million, respectively. Accordingly, the Company utilized the estimated fair value of the loan collateral or sponsor’s guarantee to estimate the total specific allowance for credit losses of $15.5 million and $9.2 million as of December 31, 2024 and December 31, 2023, respectively. Please see “Significant Unobservable Inputs” in Note 5 for information on how the fair values of these loans were determined.
The following table presents the activity in allowance for credit losses:
| Year Ended December 31, 2024 | ||||||||||||||||||||||||||
| Allowance on Non-Performing Loans | Allowance on Performing Loans | Total | ||||||||||||||||||||||||
| Funded | Unfunded | |||||||||||||||||||||||||
| Allowance for credit losses, beginning of period | $ | $ | $ | $ | ||||||||||||||||||||||
| Provision for (reversal of provision for) credit losses | ( | ( | ||||||||||||||||||||||||
| Charge-offs | ||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||
| Allowance for credit losses, end of period | $ | $ | $ | $ | ||||||||||||||||||||||
F-15
Notes to Consolidated Financial Statements
| Year Ended December 31, 2023 | ||||||||||||||||||||||||||
| Allowance on Non-Performing Loans | Allowance on Performing Loans | Total | ||||||||||||||||||||||||
| Funded | Unfunded | |||||||||||||||||||||||||
| Allowance for credit losses, beginning of period | $ | $ | $ | $ | ||||||||||||||||||||||
Cumulative effect of adoption of ASU 2016-13 effective | ||||||||||||||||||||||||||
| Provision for (reversal of provision for) credit losses | ( | ( | ||||||||||||||||||||||||
| Charge-offs | ||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||
| Allowance for credit losses, end of period | $ | $ | $ | $ | ||||||||||||||||||||||
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 will reverse the accrued and unpaid interest against interest income and suspend the accrual for future interest income. For the years ended December 31, 2024 and 2023, the Company did not reverse any interest income accrual because all accrued interest income was deemed collectible. As of December 31, 2024 and 2023, the Company had two 5.0 million and $4.2 million for the years ended December 31, 2024 and 2023, respectively, because recovery of such income was not probable. As of December 31, 2024 and 2023, there was no
Loan Risk Rating
The Company assesses the risk factors of each performing loan and assigns each performing 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 performing 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 | |||||||
Additionally, as discussed in Note 2, 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, or if a loan is in maturity default, the Company considers that loan non-performing.
F-16
Notes to Consolidated Financial Statements
| December 31, 2024 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loan Risk Rating | Number of Loans | Amortized Cost | % of Total | Amortized Cost by Year Originated | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2022 | 2021 | 2020 | Prior | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 1 | $ | % | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| 2 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 3 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 4 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 5 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-performing | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| % | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for credit losses | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total, net of allowance for credit losses | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 3 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 4 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 5 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-performing | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| % | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for credit losses | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total, net of allowance for credit losses | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Held-to-Maturity Debt Securities
In the first quarter of 2023, the Company purchased $10.0 million of corporate bonds with a coupon rate of 6.125 % that matured on May 15, 2023. The Company classified these bonds as held-to-maturity debt securities, as it had the intent and ability to hold these securities until maturity. These securities were recorded at amortized cost and were fully redeemed at par on May 15, 2023.
Note 4. Equity Interest in Unconsolidated Investments
As of December 31, 2024 and 2023, the Company owns equity interests in two
The following table presents a summary of the Company’s equity interest in unconsolidated investments as of:
| December 31, 2024 | December 31, 2023 | |||||||||||||||||||||||||||||||
| Entity | Co-owner | Beneficial Ownership Interest | Carrying Value | Beneficial Ownership Interest | Carrying Value | |||||||||||||||||||||||||||
SF - Dallas Industrial, LLC (1) | Affiliate | $ | $ | |||||||||||||||||||||||||||||
610 Walnut Investors LLC (2) | Third party | |||||||||||||||||||||||||||||||
| $ | $ | |||||||||||||||||||||||||||||||
(1)On December 28, 2022, the Company originated a $10.0 million mezzanine loan to a borrower to finance the acquisition of a real estate portfolio. Additionally, the Company entered into a residual profit-sharing agreement with the borrower in
F-17
Notes to Consolidated Financial Statements
which the borrower would pay the Company an additional amount of 35.0 % of remaining net cash flow from the sale of the real estate portfolio. The Company accounted for the entire arrangement as equity interest in unconsolidated investment. In May 2023, the Company made a cash payment of $27.4 million and settled the $10.0 million mezzanine loan in exchange for an 80.0 % equity interest in a joint venture that owns the real estate portfolio. Terra REIT owns the other 20.0 % of the joint venture.
(2)In November 2023, the Company contributed $5.1 million to a joint venture that owns a real estate property.
The following table presents a summary of equity income of and distributions received from the Company’s equity interest in unconsolidated investments:
| Years Ended December 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Loss from equity interest in unconsolidated investments | $ | ( | $ | ( | ||||||||||
| Distributions received from unconsolidated investments | $ | $ | ||||||||||||
The following tables present estimated combined summarized financial information of the Company’s equity interest in the joint ventures. Amounts provided are the total amounts attributable to the joint ventures and do not represent the Company’s proportionate share:
| December 31, 2024 | December 31, 2023 | |||||||||||||
| Net investments in real estate | $ | $ | ||||||||||||
| Other assets | ||||||||||||||
| Total assets | ||||||||||||||
| Mortgage loan payable | ||||||||||||||
| Other liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Members’ capital | $ | $ | ||||||||||||
| Years Ended December 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Revenues | $ | $ | ||||||||||||
| Operating expenses | ( | ( | ||||||||||||
| Depreciation and amortization expense | ( | ( | ||||||||||||
| Interest expense | ( | ( | ||||||||||||
| Net loss | $ | ( | $ | ( | ||||||||||
Note 5. 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
F-18
Notes to Consolidated Financial Statements
are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market corroborated inputs.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and the Company considers factors specific to the investment.
As of December 31, 2024 and 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, term loan payable and unsecured notes payable. Such financial instruments are carried at cost, less impairment or less net deferred costs, where applicable. Held-to-maturity debt securities are financial instruments that are reported at amortized cost.
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, and are presented at fair value on 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. Additionally, the Company may invest in short-term money market funds. These funds are included in cash and cash equivalents on the consolidated balance sheet due to their short-term nature and can be easily converted to cash.
The following tables present fair value measurements of financial instruments that were carried at fair value, by major class, according to the fair value hierarchy:
| December 31, 2024 | ||||||||||||||||||||||||||
| Fair Value Measurements | ||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
| Marketable securities - debt securities | $ | $ | $ | $ | ||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||||
| Fair Value Measurements | ||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
| Marketable securities - debt securities | $ | $ | $ | $ | ||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
The following table presents the activities of the marketable securities:
| Years Ended December 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Beginning balance | $ | $ | ||||||||||||
| Purchases | ||||||||||||||
| Unrealized loss on available-for-sale debt securities | ( | ( | ||||||||||||
| Ending balance | $ | $ | ||||||||||||
F-19
Notes to Consolidated Financial Statements
Financial Instruments Not Carried at Fair Value
The following table presents the carrying value, which represents the amortized cost of loans, net of applicable allowance for credit losses, and estimated fair value of the Company’s financial instruments that are not carried at fair value on the consolidated balance sheets as of:
| December 31, 2024 | December 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||
| Level | Principal Balance | Carrying Value | Fair Value | Principal Balance | Carrying Value | Fair Value | ||||||||||||||||||||||||||||||||||||||
| Investments: | ||||||||||||||||||||||||||||||||||||||||||||
| Loans held for investment | 3 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Loans held for investment acquired through participation | 3 | |||||||||||||||||||||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||||||||||||||
Unsecured notes payable (1))(2) | 1 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Obligation under participation agreement | 3 | |||||||||||||||||||||||||||||||||||||||||||
Term loan payable (3)(4) | 3 | |||||||||||||||||||||||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
(1)Carrying value is net of unamortized purchase discount of $1.9 million and $3.2 million as of December 31, 2024 and 2023, respectively.
(2)Valuation falls under Level 1 of the fair value hierarchy, which is based on the trading price of $24.11 and $23.64 as of the close of the business day on December 31, 2024 and December 29, 2023, respectively.
(3)Carrying value is net of unamortized discount of $0.1 million as of December 31, 2023.
(4)Valuation falls under Level 3 of the fair value hierarchy, which is based on a discounted cash flow model with a discount rate of 12.48 %, as of December 31, 2023.
Valuation Methodology
The fair value of the Company’s investment in corporate bonds, preferred stock and common stock within the marketable securities portfolio, if any, is determined based on quoted prices in an active market and is classified as Level 1 of the fair value hierarchy. Additionally, the fair value of the Company’s unsecured notes payable is determined based on quoted price in an active market and is also classified as Level 1.
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, as 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, including available current market data on applicable yields of comparable debt/preferred equity instruments; market credit spreads and yield curves; the investment’s yield; covenants of the investment, including prepayment provisions; the ability of the Company’s borrowers and investees to make payments, net operating income and debt service coverage ratio; construction progress reports and construction budget analysis; the nature, quality and realizable value of any collateral (and loan-to-value ratio); the forces that influence the local markets in which the asset (the collateral) is purchased and sold, such as capitalization rates, occupancy rates, rental rates and replacement costs; and the anticipated duration of each real estate-related loan investment.
These valuation techniques are applied in a consistent and verifiable manner to all investments that are categorized within Level 3 of the fair value hierarchy and the REIT Manager provides the board of directors of Terra REIT (the “Terra REIT Board”), (a majority of which is made up of independent directors) with the investment valuations that are based on this discounted cash flow methodology. Valuations are prepared quarterly, or more frequently as needed, with each asset in the portfolio subject to a valuation prepared by a third-party valuation service at a minimum of once during every 12-month period. REIT Manager reviews the preliminary valuation with the Terra REIT Board and, together with an independent valuation firm, if applicable, responds and supplements the preliminary valuation to reflect any comments provided by the Terra REIT Board. The REIT Manager discusses valuations and determines the fair value of each investment in the portfolio in good faith based on various metrics and other factors, including the input and recommendation provided by the Terra REIT Board and any third-party valuation firm, if applicable.
F-20
Notes to Consolidated Financial Statements
Significant Unobservable Inputs
The following tables summarize the significant unobservable inputs used by the Company to value the Level 3 financial instruments as of December 31, 2024 and 2023. The following tables are not intended to be all-inclusive, but instead identify the significant unobservable inputs relevant to the determination of fair values.
| December 31, 2024 | ||||||||||||||||||||||||||||||||||||||
| Primary Valuation Technique | Unobservable Input | Range | Weighted | |||||||||||||||||||||||||||||||||||
| Asset Category | Fair Value | Minimum | Maximum | Average | ||||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||||
| Loans | $ | Discounted cash flow | Discount rate | % | % | % | ||||||||||||||||||||||||||||||||
Loans through participation interest (1) | Discounted cash flow | Discount rate | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||
| Total Level 3 Assets | $ | |||||||||||||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||||||||
| Obligation under participation agreement | $ | Discounted cash flow | Discount rate | % | % | % | ||||||||||||||||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||||||||||||||||
| Primary Valuation Technique | Unobservable Input | Range | Weighted | |||||||||||||||||||||||||||||||||||
| Asset Category | Fair Value | Minimum | Maximum | Average | ||||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||||
| Loans | $ | Discounted cash flow | Discount rate | % | % | % | ||||||||||||||||||||||||||||||||
Loans through participation interest (1) | Discounted cash flow | Discount rate | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||
| Total Level 3 Assets | $ | |||||||||||||||||||||||||||||||||||||
If the weighted average discount rate used to value the Company’s investments were to increase, the fair value of the Company’s investments would decrease. Conversely, if the weighted average discount rate used to value the Company’s investments were to decrease, the fair value of Company’s investments would increase.
Note 6. Related Party Transactions
Promissory Note Receivable
On January 24, 2024, the Company entered into a revolving promissory note receivable with Terra REIT. 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. The promissory note does not contain current interest payment obligations in cash and instead adds such interest amount to the principal balance of the promissory note on the last day of each calendar quarter. The promissory note matures on March 31, 2027. For the year ended December 31, 2024, the Company provided funding under the promissory note receivable of $54.1 million and received repayment of $9.0 million. As of December 31, 2024, the amount outstanding under the promissory note receivable was $45.1 million. For the year ended December 31, 2024, interest income recognized on the promissory note receivable was $2.0 million, which was included in Interest income on the consolidated statements of operations and comprehensive loss.
Cost Sharing Agreement
On November 8, 2022, the Company entered into the Cost Sharing Agreement with Terra REIT effective October 1, 2022, pursuant to which the Company reimburses Terra REIT for its allocable portion of management and transaction fees and operating expenses incurred by Terra REIT, including fees paid by Terra REIT to the REIT Manager.
F-21
Notes to Consolidated Financial Statements
The following table presents a summary of such fees and reimbursements incurred pursuant to the Cost Sharing Agreement between Terra LLC and Terra REIT:
| Years Ended December 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Amounts Included in the Statements of Operations | ||||||||||||||
| Asset management and asset servicing fees | $ | $ | ||||||||||||
Operating expense reimbursement to Adviser (1) | ||||||||||||||
| Origination, extension and disposition fees | ||||||||||||||
(1)Amounts were primarily compensation for time spent supporting the Company’s day-to-day operations.
Terra REIT’s Management Agreement with the REIT Manager
Terra REIT is the Company’s parent and sole member. The Company has entered into a cost sharing arrangement with Terra REIT pursuant to which the Company is responsible for its allocable share of Terra REIT’s expenses, including fees paid by Terra REIT to its manager, the REIT Manager. Terra REIT currently pays the following fees to the REIT 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, the REIT 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 Terra REIT.
Asset Servicing Fee. A monthly asset servicing fee at an annual rate equal to 0.25 % of the aggregate gross origination price or aggregate gross acquisition price for each real estate related loan then held by Terra REIT (inclusive of closing costs and expenses).
Disposition Fee. A disposition fee in the amount of 1.0 % of the gross sale price received by Terra REIT from the disposition of each loan, but not upon the maturity, prepayment, workout, modification or extension of a loan unless there is a corresponding fee paid by the borrower, in which case the disposition fee will be the lesser of (i) 1.0 % of the principal amount of the loan and ii) the amount of the fee paid by the borrower in connection with such transaction. If Terra REIT takes ownership of a property as a result of a workout or foreclosure of a loan, Terra REIT will pay a disposition fee upon the sale of such property equal to 1.0 % of the sales price.
Transaction Breakup Fee. In the event that Terra REIT 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, the REIT 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 REIT Manager with respect to its evaluation and pursuit of such transactions.
In addition to the fees described above, Terra REIT reimburses the REIT Manager for operating expenses incurred in connection with services provided to the operations of Terra REIT, including its allocable share of the REIT Manager’s overhead, such as rent, employee costs, utilities, and technology costs.
Participation Agreements
The Company may enter into participation agreements with related and unrelated parties, primarily other affiliated funds of the REIT Manager. The participation agreements provide the Company with the opportunity to invest along the same terms, conditions, price and rights in the specified investment. The purpose of the participation agreements is to allow the Company and an affiliate to originate a specified investment when, individually, the Company does not have the liquidity to do so or to
F-22
Notes to Consolidated Financial Statements
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 an investment held by another entity.
ASC Topic 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 Topic 860.
Participation interest purchased by the Company: The below tables list the investment interests purchased by the Company via participation agreements (each, a “PA”) as of December 31, 2024 and 2023. In accordance with the terms of each PA, each participant’s rights and obligations, including interest income and other income (e.g., exit fee and prepayment income) and related fees/expenses are based upon its respective pro-rata participation interest in such investments, as specified in the respective PA. The Company’s share of the investment is repayable only from the proceeds received from the related borrower/issuer of the investment, and therefore the Company is also subject to the credit risk (i.e., risk of default by the underlying borrower/issuer).
Pursuant to each PA, the affiliated fund receives and allocates the interest income and other related investment incomes in respect of the investment to the Company. The Company paid related expenses (i.e., the base management fee) directly to Terra REIT.
| December 31, 2024 | December 31, 2023 | |||||||||||||||||||||||||||||||||||||
| Participating Interests | Principal Balance | Carrying Value | Participating Interests | Principal Balance | Carrying Value | |||||||||||||||||||||||||||||||||
370 Lex Part Deux, LLC (1)(2) | % | $ | $ | % | $ | $ | ||||||||||||||||||||||||||||||||
RS JZ Driggs, LLC (2)(3) | % | % | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
(1)Carrying value is net of specific allowance for loan losses of $15.5 million and $9.2 million as of December 31, 2024 and December 31, 2023, respectively.
(2)The loan is held in the name of Terra REIT, the Company’s parent entity.
(3)The increase in principal balance as of December 31, 2024 when compared to December 31, 2023 is primarily related to legal fees incurred in connection with the Company's ongoing litigation to seek full repayment of the loan from the sponsor.
Transfers of participation interests by the Company: The following table summarizes the investment that was subject to a PA with investment partnership affiliated with the REIT Manager as of December 31, 2024. There was no such investment as of December 31, 2023.
| December 31, 2024 | ||||||||||||||||||||||||||||||||
| Transfers treated as obligations under participation agreements | ||||||||||||||||||||||||||||||||
| Principal | Carrying Value | % Transferred | Principal | Carrying Value | ||||||||||||||||||||||||||||
Asano Bankers Hill, LLC (1) | $ | $ | % | $ | $ | |||||||||||||||||||||||||||
________________
(1)Participant is a certain separately managed account, an investment partnership managed by the REIT 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 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 REIT Manager, only on its pro rata participation interest, subject to the terms of the governing fee arrangements.
F-23
Notes to Consolidated Financial Statements
Note 7. Debt
Senior Unsecured Notes
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 our 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 Merger, Terra LLC assumed all of Terra BDC’s rights and obligations under the indenture governing the 7.00 % Senior Notes Due 2026.
The indenture between Terra LLC (as successor to Terra BDC) and the trustee contains certain debt limitations and asset coverage covenants. As of December 31, 2024, the Company was in compliance with the asset coverage ratio requirements under the indenture.
The following table is a summary of the Company’s unsecured notes payable outstanding as of:
| Coupon Rate | Effective Rate (1) | Maturity Date | December 31, 2024 | December 31, 2023 | ||||||||||||||||||||||||||||
| % | % | 3/31/2026 | ||||||||||||||||||||||||||||||
Unamortized purchase discount (2) | ( | ( | ||||||||||||||||||||||||||||||
| Unsecured notes payable, net | $ | $ | ||||||||||||||||||||||||||||||
(1)Includes purchase discount that is amortized to interest expense over the remaining life of the notes.
(2)In connection with the 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.
Term Loan
In April 2021, Terra BDC entered into a credit agreement (the “Credit Agreement”) with a lender to provide for a delayed draw term loan of $25.0 million (the “Term Loan”). On September 27, 2022, the Credit Agreement was amended to, among other things, remove the make whole premium on voluntary prepayment of the loans as well as to provide consent to the consummation of the Merger and the assumption by Terra LLC of all of the rights and obligations of Terra BDC under the Credit Agreement. On June 30, 2023, Terra LLC amended the Credit Agreement to, among other things, (i) decrease the principal amount to $15.0 million, (ii) extend the scheduled maturity date to March 31, 2024, and (iii) increase the rate on which the loans thereunder bear interest from a fixed rate of 5.625 % per annum to a floating rate based on SOFR plus 7.375 % with a SOFR floor of 5.0 %, and repaid $10.0 million of the principal amount of the Term Loan. The Credit Agreement was secured by a lien on substantially all of Terra BDC's, and, following the Merger, Terra LLC’s owned and thereafter acquired property. In March 2024, the Term Loan was repaid in full.
The following table is a summary of the Company’s obligations under the Credit Agreement as of December 31, 2023. There was no such loan outstanding as of December 31, 2024.
| December 31, 2023 | ||||||||||||||||||||
| Maturity | Coupon Rate | Principal Amount | ||||||||||||||||||
Term loan payable | 3/31/2024 | % | $ | |||||||||||||||||
| Unamortized deferred financing cost | ( | |||||||||||||||||||
| Unsecured notes payable, net | $ | |||||||||||||||||||
F-24
Notes to Consolidated Financial Statements
Scheduled Debt Principal Payments
| Years Ending December 31, | Total | |||||||
| 2025 | $ | |||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| 2029 | ||||||||
| Thereafter | ||||||||
| Unamortized purchase discount | ( | |||||||
| Total | $ | |||||||
Obligation Under Participation Agreement
As discussed in Note 2, the Company follows the guidance in ASC 860 when accounting for loan participation. Such guidance requires the transferred interests meet certain criteria in order for the transaction to be recorded as a sale. Loan participation from the Company which does not qualify for sale treatment remains on the Company’s consolidated balance sheets and the proceeds are recorded as obligation under participation agreement. As of December 31, 2024, obligation under participation agreement had a carrying value of $18.2 million, and the carrying value of the loan that is associated this obligation under participation agreement was $18.6 million (see “Participation Agreements” in Note 6). The interest rate on the obligation under participation agreement was 19.5 %. There was no such obligation under participation agreement as of December 31, 2023.
Note 8. Commitments and Contingencies
Unfunded Commitments on Loans Held for Investment
In the ordinary course of business, the Company may enter into future funding commitments, which are subject to the borrower meeting certain performance-related metrics that are monitored by the Company. As of both December 31, 2024 and 2023, the Company had $0.7
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. Management of Terra Income Advisors has reviewed the Company’s existing contracts and expects the risk of loss to the Company to be remote.
The Company is not currently subject to any material legal proceedings and, to the Company’s knowledge, no material legal proceedings are threatened against the Company. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company’s rights under its contracts with its borrowers and investees. While the outcome of any legal proceedings cannot be predicted with certainty, the Company does not expect that any such proceedings will have a material adverse effect upon its financial condition or results of operations.
Note 9. Subsequent Events
F-25
Terra Income Fund 6, LLC
Schedule IV – Mortgage Loans on Real Estate
As of December 31 , 2024
Description (1) | Property Type/Location | Contractual Interest Rate (2) | Final Maturity Date (3) | Periodic Payment Terms | Prior Liens | Face Amount | Carrying Amount (4) | Principal Amount of Mortgages Subject to Delinquent Principal or Interest | ||||||||||||||||||||||||||||||||||||||||||
| Preferred equity investments: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Loan A (5)(6) | Multifamily/New York | % | 7/1/2021 | Interest Only | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
Loan B (5)(7) | Office/New York | % | 7/9/2022 | Interest Only | ||||||||||||||||||||||||||||||||||||||||||||||
Loan C (8)(9) | Mixed-use/California | % | 8/5/2025 | Interest Only | ||||||||||||||||||||||||||||||||||||||||||||||
| Total loans | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
___________________________
(1)All of the Company’s loans have a prepayment provision.
(2)For all floating rate loans, contractual interest rate was determined using the applicable benchmark rate as of December 31 , 2024
(3)Maximum maturity date assumes all extension options are exercised.
(4)Carrying value represents the amortized cost of loan, net of applicable allowance for credit losses, and excludes $6,599 of allowance for credit losses related to unfunded commitments.
(5)These investments were acquired by the Company through participation agreements with Terra REIT, the Company’s parent, managed by the REIT Manager. See “Participation Agreements” in Note 6 in the accompanying notes to the consolidated financial statements.
(6)This loan is currently in maturity default. The Company is in ongoing litigation to seek full repayment of the loan from the sponsor.
(7)This loan is currently in maturity default. The Company recorded an allowance of credit losses of $15.5 million on this loan as a result of a decline in our estimated recoverable amount on a non-performing subordinated loan due to an increase in funding on the senior loan.
(8)The Company sold a portion of its interest in this loan through a participation agreement to an affiliate managed by the REIT Manager (Note 6).
(9)The loan participation from the Company does not qualify for sale accounting under ASC 860 and therefore, the gross amount of this loan remains in the Company's consolidated balance sheets. See “Obligations under Participation Agreement in Note 7 and “Transfers of Participation Interest by the Company” in Note 6 in the accompanying notes to the consolidated financial statements.
F-26
Terra Income Fund 6, LLC
Notes to Schedule IV - Mortgage Loans on Real Estate
| Reconciliation of Mortgage Loans on Real Estate | |||||||||||
For the Year Ended | |||||||||||
| Balance, beginning of period | $ | ||||||||||
| Additions during the period: | |||||||||||
| New mortgage loans | |||||||||||
| Accrual, payment and accretion of investment-related fees and other, net | |||||||||||
| Deductions during the period: | |||||||||||
| Collections of principal | ( | ||||||||||
| Provision for credit losses | ( | ||||||||||
| Net amortization of discount on investments | ( | ||||||||||
| Balance, end of period | $ | ||||||||||
F-27
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: March 13, 2025
| TERRA INCOME FUND 6, LLC | |||||||||||
| By: Terra Property Trust, Inc., its sole and managing member | |||||||||||
| By: | /s/ Vikram S. Uppal | ||||||||||
| Vikram S. Uppal | |||||||||||
| Chairman of the Board, 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) | |||||||||||
31