Terra Property Trust, Inc 10-Q for FY2025 Q1
Terra Property Trust, Inc. (TPTS)
10-Q
2025-05-09
For: 2025-03-31
View Original
Added on
April 09, 2026
About this 10-Q
Terra Property Trust, Inc filed this 10-Q on May 9, 2025, covering the quarter ended March 31, 2025 (FY2025 Q1).
Headline figures
Quarter ended March 31, 2025, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $12.46M
- down 17.0% from $15.01M a year earlier
- Net loss
- $1.29M
- compared with a net loss of $6.18M a year earlier
- Diluted EPS
- -$0.05
- compared with -$0.25 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the Quarterly Period Ended March 31, 2025
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the Transition Period from to
Commission File Number: 001-40496
(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)
(212 ) 753-5100
(Registrant’s telephone number, including area code)
Securities registered pursuant to section 12(b) of the Securities Exchange Act of 1934:
| Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||||||||||||
Securities registered pursuant to section 12(g) of the Securities Exchange Act of 1934:
Class B Common Stock, $0.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ¨ | Accelerated filer | ¨ | ||||||||
| þ | Smaller reporting company | ||||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of May 9, 2025, the registrant had 24,338,690 shares of Class B Common Stock, $0.01 par value, outstanding. No market value has been computed based upon the fact that no active trading market had been established as of the date of this document.
TABLE OF CONTENTS
| Page | ||||||||
| PART I | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Terra Property Trust, Inc.
Consolidated Balance Sheets
| March 31, 2025 | December 31, 2024 | ||||||||||
| (Unaudited) | |||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Cash held in escrow by lender | |||||||||||
| Available-for-sale debt securities | |||||||||||
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 | |||||||||||
| Land, building and building improvements, net | |||||||||||
| Lease intangible assets, net | |||||||||||
| Interest receivable | |||||||||||
| Due from related parties | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Equity | |||||||||||
| Liabilities: | |||||||||||
| Unsecured notes payable, net | $ | $ | |||||||||
| Secured financing agreements, net | |||||||||||
| Interest reserve and other deposits held on investments | |||||||||||
| Interest payable | |||||||||||
| Accounts payable and accrued expenses | |||||||||||
| Unearned income | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Equity: | |||||||||||
Preferred stock, $ | |||||||||||
Class A Common Stock, $ issued, as of both March 31, 2025 and December 31, 2024 | |||||||||||
Class B Common Stock, $ and December 31, 2024, respectively | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
See notes to unaudited consolidated financial statements.
2
Terra Property Trust, Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2025 | 2024 | ||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Interest income | $ | $ | |||||||||||||||||||||
| Real estate operating revenue | |||||||||||||||||||||||
| Other operating income | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Operating expenses reimbursed to Manager | |||||||||||||||||||||||
| Asset management fee | |||||||||||||||||||||||
| Asset servicing fee | |||||||||||||||||||||||
| Provision for credit losses | |||||||||||||||||||||||
| Real estate operating expenses | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Professional fees | |||||||||||||||||||||||
| Directors’ fees | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Other income and expenses | |||||||||||||||||||||||
| Interest expense on secured financing | ( | ( | |||||||||||||||||||||
| Interest expense on unsecured notes payable | ( | ( | |||||||||||||||||||||
| Interest expense on obligations under participation agreements | ( | ( | |||||||||||||||||||||
| Unrealized loss on investments, net | ( | ( | |||||||||||||||||||||
| Income (loss) from equity interest in unconsolidated investments | ( | ||||||||||||||||||||||
| Realized loss on investments, net | ( | ||||||||||||||||||||||
| ( | ( | ||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | |||||||||||||||||||
| Other comprehensive income (loss) | |||||||||||||||||||||||
| Unrealized gain (loss) on available-for-sale debt securities | ( | ||||||||||||||||||||||
| ( | |||||||||||||||||||||||
| Comprehensive loss | $ | ( | $ | ( | |||||||||||||||||||
| Per share data | |||||||||||||||||||||||
Loss per share — basic and diluted | $ | ( | $ | ( | |||||||||||||||||||
Weighted-average shares — basic and diluted | |||||||||||||||||||||||
| Distributions declared per common share | $ | $ | |||||||||||||||||||||
See notes to unaudited consolidated financial statements.
3
Terra Property Trust, Inc.
Consolidated Statements of Changes in Equity
(Unaudited)
| Preferred Stock | Class A Common Stock | Class B Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
$ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2025 | $ | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued from reinvestment of shareholder distributions | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Distributions declared on common shares ($ | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on available-for-sale debt securities | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2025 | $ | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Class A Common Stock | Class B Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
$ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2024 | $ | $ | $ | $ | $ | ( | $ | — | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued from reinvestment of shareholder distributions | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Distributions declared on common shares ($ | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized loss on available-for-sale debt securities | $ | — | — | $ | — | — | $ | — | $ | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
See notes to unaudited consolidated financial statements.
4
Terra Property Trust, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Provision for credit losses | |||||||||||
| Amortization of net purchase premiums on loans | |||||||||||
| Straight-line rent adjustments | ( | ( | |||||||||
| Amortization of deferred financing costs | |||||||||||
| Amortization of discount on unsecured notes payable | |||||||||||
| Amortization of above- and below-market rent intangibles | ( | ( | |||||||||
| Amortization and accretion of investment-related fees, net | ( | ( | |||||||||
| Realized loss on investments, net | |||||||||||
| Unrealized loss on investments, net | |||||||||||
| Distributions received from equity interest in unconsolidated investments | |||||||||||
| (Income) loss from equity interest in unconsolidated investments | ( | ||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Interest receivable | ( | ( | |||||||||
| Due from related parties | ( | ( | |||||||||
| Other assets | |||||||||||
| Due to Manager | ( | ||||||||||
| Unearned income | |||||||||||
| Interest payable | ( | ( | |||||||||
| Accounts payable and accrued expenses | ( | ( | |||||||||
| Other liabilities | ( | ||||||||||
| Net cash provided by (used in) operating activities | ( | ||||||||||
| Cash flows from investing activities: | |||||||||||
| Proceeds from repayments of loans | |||||||||||
| Origination, purchase and funding of loans | ( | ( | |||||||||
| Capital contributions to and purchase of equity interests in unconsolidated investments | ( | ( | |||||||||
| Distributions in excess of income | |||||||||||
| Repayments of promissory note receivable | |||||||||||
| Funding for promissory note receivable | ( | ||||||||||
| Proceeds from sale of marketable securities | |||||||||||
| Net cash provided by investing activities | |||||||||||
See notes to unaudited consolidated financial statements.
5
Terra Property Trust, Inc.
Consolidated Statements of Cash Flows (Continued)
| Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Cash flows from financing activities: | |||||||||||
| Principal repayments on secured financing | ( | ( | |||||||||
| Proceeds from secured financing | |||||||||||
| Proceeds from obligations under participation agreements | |||||||||||
| Distributions paid | ( | ( | |||||||||
| Payment of financing costs | ( | ||||||||||
| Change in interest reserve and other deposits held on investments | ( | ||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net increase in cash, cash equivalents and restricted cash | |||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
| $ | $ | ||||||||||
| Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Supplemental non-cash information: | |||||||||||
| Reinvestment of shareholder distributions | $ | $ | |||||||||
See notes to unaudited consolidated financial statements.
6
Terra Property Trust, Inc.
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2025
Note 1. Business
Terra Property Trust, Inc. (and, together with its consolidated subsidiaries, the “Company” or “Terra Property Trust”) is a real estate investment trust (“REIT”) that originates, invests in and manages a diverse portfolio of real estate and real estate-related assets. The Company was incorporated under the Maryland General Corporation Law on December 31, 2015. The Company focuses primarily on commercial real estate credit investments, including first mortgage loans, subordinated loans (including B-notes, mezzanine and preferred equity) and credit facilities throughout the United States. The Company’s loans finance the acquisition, development or recapitalization of high-quality commercial real estate in the United States. The Company focuses on middle market loans in the approximately $10 million to $50 million range, which in the Company’s experience have been subject to less competition, offer higher risk-adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification. The Company may also make strategic real estate equity and non-real estate-related investments that align with its investment objectives and criteria.
On January 1, 2016, Terra Secured Income Fund 5, LLC (“Terra Fund 5”), the Company’s then parent, contributed its consolidated portfolio of net assets to the Company pursuant to a contribution agreement in exchange for shares of the Company’s common stock. Upon receipt of the contribution of the consolidated portfolio of net assets from Terra Fund 5, the Company commenced its operations on January 1, 2016. On March 2, 2020, the Company engaged in a series of transactions pursuant to which the Company issued an aggregate of 4,574,470.35 shares of its common stock in exchange for the settlement of an aggregate of $49.8 million of participation interests in loans held by the Company, cash of $25.5 million and other working capital.
The Company has elected to be taxed, and to qualify annually thereafter, as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), commencing with the taxable year ended December 31, 2016. As a REIT, the Company is not subject to federal income taxes on income and gains distributed to the stockholders as long as certain requirements are satisfied, principally relating to the nature of income and the level of distributions, as well as other factors. The Company also operates its business in a manner that permits it to maintain its exemption from registration as an “investment company” under the Investment Company Act of 1940, as amended (the “1940 Act”).
The Company’s investment activities are externally managed by Terra REIT Advisors, LLC (the “Manager”), a subsidiary of the Company’s sponsor, Terra Capital Partners, LLC (“Terra Capital Partners”), pursuant to a management agreement (the “Management Agreement”), under the oversight of the Company’s board of directors (the “Board”) (Note 7). The Company does not currently have any employees and does not expect to have any employees. Services necessary for the Company’s business are provided by individuals who are employees of the Manager or by individuals who were contracted by the Company or by the Manager to work on behalf of the Company pursuant to the terms of the Management Agreement.
On October 1, 2022, pursuant to that certain Agreement and Plan of Merger, dated as of May 2, 2022 (the “Merger Agreement”), Terra Income Fund 6, Inc. (“Terra BDC”), merged with and into Terra Income Fund 6, LLC (“Terra LLC”), a wholly owned subsidiary of the Company, with Terra LLC continuing as the surviving entity of the merger (the “BDC Merger”) and as a wholly owned subsidiary of the Company. Pursuant to the terms of the transactions described in the Merger Agreement, approximately 4,847,910 shares of the Company’s Class B Common Stock, $0.01 par value per share (“Class B Common Stock”), were issued to former Terra BDC stockholders in connection with the BDC Merger, based on the number of outstanding shares of Terra BDC Common Stock as of October 1, 2022.
On December 20, 2023, Terra Fund 5 announced that effective December 29, 2023 (the “Distribution Date”), Terra Fund 5 would distribute all of its shares of the Company’s Class B Common Stock to its members as part of the winding up of Terra Fund 5. On the Distribution Date, each member of Terra Fund 5 received 2,252.02 shares of the Company’s Class B Common Stock for each unit of membership interest in Terra Fund 5 held by such member. Because Terra Fund 5 previously owned its interests in the shares of Class B Common Stock indirectly through its ownership of interests in Terra JV, LLC (“Terra JV”), prior to the Distribution Date, Terra JV first distributed the shares of Class B Common Stock to Terra Fund 5 and Terra Secured Income Fund 7, LLC (“Terra Fund 7”), and Terra Fund 5 then distributed those shares to its members on the Distribution Date and Terra Fund 7 became a direct stockholder of the Company’s Class B Common Stock.
7
Notes to Unaudited Consolidated Financial Statements
As of March 31, 2025, Terra Fund 7 and Terra Offshore Funds REIT, LLC (“Terra Offshore REIT”) held 8.7 % and 10.1 %, respectively, of the issued and outstanding shares of the Company’s common stock.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying 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 consolidated financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Articles 6 or 10 of Regulation S-X. Certain prior period amounts have been reclassified to conform to the current period presentation.
Consolidation
The Company consolidates entities in which it has a controlling financial interest based on either the variable interest entity (“VIE”) or voting interest model. The Company is required to first apply the VIE model to determine whether it holds a variable interest in an entity, and if so, whether the entity is a VIE. If the Company determines it does not hold a variable interest in a VIE, it then applies the voting interest model. Under the voting interest model, the Company consolidates an entity when it holds a majority voting interest in an entity.
The Company accounts for investments in which it has significant influence but not a controlling financial interest using the equity method of accounting (see Note 4).
VIE Model
An entity is considered to be a VIE if any of the following conditions exist: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) the holders of the equity investment at risk, as a group, lack either the direct or indirect ability through voting rights or similar rights to make decisions that have a significant effect on the success of the entity or the obligation to absorb the entity’s expected losses or right to receive the entity’s expected residual returns, or (c) the voting rights of some equity investors are disproportionate to their obligation to absorb losses of the entity, their rights to receive returns from an entity, or both and substantially all of the entity’s activities either involve or are conducted on behalf of an investor with disproportionately few voting rights.
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
The Company follows the provisions of Accounting Standards Codification (“ASC”) 326, Financial Instruments – Credit Losses to estimate potential credit losses related to its loans. 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
8
Notes to Unaudited Consolidated Financial Statements
allowance for credit losses on accrued interest receivable (which is presented separately on the consolidated balance sheets), but rather write off in a timely manner by reversing interest income that would likely be uncollectible.
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 economic variables from a group of independent variables such as Commercial Real Estate Price Index, unemployment and interest rate which are included in the model as part of macroeconomic forecast and updated regularly based on current economic trends. The specific loan level information input into the model includes loan-to-value and debt service coverage ratio metrics, as well as principal balances, property type, location, coupon rate, coupon rate type, original or remaining term, expected repayment dates and contractual future funding commitments. Based on the inputs, the loan loss model determines a loan loss rate through the generation of a probability of default (PD) and loss given default (LGD) for each loan. The allowance for credit losses on performing loans is then calculated by applying the loan loss rate to the total outstanding loan balance of each loan. A significant amount of judgment is applied in selecting inputs and analyzing results produced by the models to determine the allowance for credit losses on performing loans. Changes in such estimates can significantly affect the expected credit losses.
Beyond the Company’s reasonable and supportable forecast period, the Company reverts to historical loss information on a straight-line basis over the remaining contractual loan term, taken from a period that most accurately reflects the expectation of conditions expected to exist during the period of reversion. The Company may adjust historical loss information for differences in risk that may not reflect the characteristics of its current portfolio, including but not limited to, loan-to-value and debt service coverage ratios, among other relevant factors. The method of reversion selected represents the best estimate of the collectability of the investments and is reevaluated each reporting period.
The determination of the performing loans credit loss estimate considers historical loss information and current economic conditions for each loan, reversion period and reasonable and supportable forecasts about the future. The reasonable and supportable forecast period is determined based on the Company’s assessment of the most likely scenario of assumptions and plausible outcomes for the U.S. economy. The Company regularly evaluates the reasonable and supportable forecast period to determine if a change is needed.
The Company also performs a qualitative assessment and applies qualitative adjustments as necessary, usually due to limitations of the loan loss model. The Company’s qualitative analysis includes a review of data that may directly impact its estimates including internal and external information about the loan or property including current market conditions, asset specific conditions, property operations or borrower/sponsor details (i.e., refinance, sale, bankruptcy) which allows the Company to determine the amount of the expected loss more accurately and reasonably for these investments. The Company also evaluates the contractual life of its loans to determine if changes are needed for certain contractual extension options, renewals, modifications, and prepayments.
Unfunded Commitments
Some of the Company’s performing loans include commitments to fund incremental proceeds to the borrowers over the life of the loan and these unfunded commitments are also subject to the CECL methodology because the Company does not have an unconditional right to cancel such commitments. The allowance for credit losses related to unfunded commitments is recorded as a component of other liabilities on the Company’s consolidated balance sheets. This allowance for credit losses is estimated using the same method outlined above for the Company’s outstanding performing loan balances and increases or decreases are also recorded in earnings on the consolidated statements of operations.
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 model-based approach described above and analyzes them
9
Notes to Unaudited Consolidated Financial Statements
separately. The credit loss reserve for these loans is calculated as any excess of the amortized cost of the loan over (i) the present value of expected future cash flows discounted at the appropriate discount rate or (ii) the fair value of collateral, if repayment is expected solely from the collateral.
Loans Not Secured by Real Estate
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, exceed cumulative equity in earnings recognized, the excess is considered a return of investment and is classified as cash inflows from investing activities.
The Company evaluates its equity 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 the estimated fair market value of the underlying net assets based on the terms of the applicable partnership or joint venture agreements.
Equity Securities Without Readily Determinable Fair Value
The Company accounts for its equity securities without readily determinable fair value at cost, which is included in other assets on the consolidated balance sheets. The Company has elected the measurement alternative and therefore will evaluate whether the security continues to qualify for the alternative at each reporting period. The Company evaluates its equity security without readily determinable fair value on a periodic basis to determine if there is an observable price change in an orderly transaction for similar investments or if there are any indicators that the value of its equity security may be impaired. The Company will make fair value adjustments, if any, or reductions for any impairment to derive the carrying value of the investment.
Available-For-Sale Debt Securities
From time to time, the Company may invest in debt securities. These securities are classified as available-for-sale debt securities and are carried at fair value. Changes in the fair value of the available-for-sale debt securities are reported in other comprehensive income or loss until a gain or loss on the securities is realized.
Real Estate Owned, Net
Real estate acquired is recorded at its estimated fair value at acquisition and is shown net of accumulated depreciation and impairment charges.
Acquisition of properties generally are accounted for as asset acquisitions. Under asset acquisition accounting, the costs to acquire real estate, including transaction costs, are accumulated and then allocated to individual assets and liabilities acquired based upon their relative fair value. The Company allocates the purchase price of its real estate acquisitions to land, building, tenant improvements, acquired in-place leases, intangibles for the value of any above or below market leases at fair value and to any other identified intangible assets or liabilities. The Company amortizes the value allocated to in-place leases over the remaining lease term, which is reported in depreciation and amortization expense on its consolidated statements of operations.
10
Notes to Unaudited Consolidated Financial Statements
The value allocated to above or below market leases are amortized over the remaining lease term as an adjustment to rental income.
Real estate assets are depreciated using the straight-line method over their estimated useful lives: buildings and improvements - not to exceed 40 years, and tenant improvements - shorter of the lease term or life of the asset. Ordinary repairs and maintenance which are not reimbursed by the tenants are expensed as incurred. Major replacements and betterments which improve or extend the life of the asset are capitalized and depreciated over their estimated useful life.
Revenue Recognition
Revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Interest Income: Interest income is accrued based upon the outstanding principal amount and contractual terms of the loans and preferred equity investments that the Company expects to collect, and it is accrued and recorded on a daily basis. Discounts and premiums on investments purchased are accreted or amortized over the expected life of the respective loan using the effective yield method, and are included in interest income in the consolidated statements of operations. Loan origination fees and exit fees, net of portions attributable to obligations under participation agreements, are capitalized and amortized or accreted to interest income over the life of the investment using the effective yield method. Outstanding interest receivable is assessed for recoverability. The Company generally reverses the accrued and unpaid interest against interest income and no longer accrues for the interest when, in the opinion of the Manager, recovery of interest and principal becomes not probable. Interest is then recorded on the basis of cash received until accrual is resumed when the loan becomes contractually current and performance is demonstrated. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability.
The Company holds loans in its portfolio that may contain paid-in-kind (“PIK”) interest provisions. The PIK interest, which represents contractually deferred interest that is added to the principal balance that is due at maturity, is recorded on the accrual basis.
Real Estate Operating Revenues: Real estate operating revenue is derived from leasing of space to various types of tenants. The leases are for fixed terms of varying length and generally provide for annual rent increases and expense reimbursements to be paid in monthly installments. Lease revenue, or rental income from leases, is recognized on a straight-line basis over the term of the respective leases. Additionally, the Company recorded above- and below-market lease intangibles, which are included in real estate owned, net, in connection with the acquisition of the real estate properties. These intangible assets and liabilities are amortized to lease revenue over the remaining contractual lease term.
Other Revenues: Prepayment fee income is recognized as prepayments occur. All other income is recognized when earned.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments, with original maturities of ninety days or less when purchased, as cash equivalents. Cash and cash equivalents are exposed to concentrations of credit risk. The Company maintains all of its cash at financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation.
Restricted cash represents cash held as additional collateral by the Company on behalf of the borrowers related to the investments in loans or preferred equity instruments for the purpose of such borrowers making interest and property-related operating payments. Restricted cash is not available for general corporate purposes. The related liability is recorded in “Interest reserve and other deposits held on investments” on the consolidated balance sheets.
11
Notes to Unaudited Consolidated Financial Statements
| March 31, | ||||||||||||||
| 2025 | 2024 | |||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Restricted cash | ||||||||||||||
| Cash held in escrow by lender | ||||||||||||||
| Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows | $ | $ | ||||||||||||
Secured Financing Agreements, Net
Fair Value Measurements
U.S. GAAP establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The Company has not elected the fair value option for its financial instruments, including loans held for investment, loans held for investment acquired through participation, obligations under participation agreements, secured borrowing, unsecured notes, mortgage loan payable, term loan payable, repurchase agreement payment and revolving line of credit. Such financial instruments are carried at amortized cost, less impairment, where applicable. Marketable securities are financial instruments that are reported at fair value.
Deferred Financing Costs
Income Taxes
The Company has elected to be taxed as a REIT under the Internal Revenue Code commencing with the taxable year ended December 31, 2016. In order to qualify as a REIT, the Company is required, among other things, to distribute dividends equal to at least 90% of its REIT net taxable income to the stockholders and meet certain tests regarding the nature of its income and assets. As a REIT, the Company is not subject to federal income taxes on income and gains distributed to the stockholders as long as certain requirements are satisfied, principally relating to the nature of income and the level of distributions, as well as other factors. If the Company fails to continue to qualify as a REIT in any taxable year and does not qualify for certain statutory relief provisions, the Company will be subject to U.S. federal and state income taxes at regular corporate rates (including any applicable alternative minimum tax) beginning with the year in which it fails to qualify and may be precluded from being able to elect to be treated as a REIT for the Company’s four subsequent taxable years. Any gains from the sale of foreclosed properties within two years are subject to U.S. federal and state income taxes at regular corporate rates. As of March 31, 2025, the Company had satisfied all the requirements for a REIT.
12
Notes to Unaudited Consolidated Financial Statements
Earnings Per Share
The Company has a simple equity capital structure with only common stock outstanding. As a result, earnings per share, as presented, represents both basic and dilutive per-share amounts for the periods presented in the consolidated financial statements. Income per basic share of common stock is calculated by dividing net income allocable to common stock by the weighted-average number of shares of common stock issued and outstanding during such period.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may ultimately differ from those estimates, and those differences could be material.
Segment Information
The Company’s primary business is originating, acquiring and structuring real estate-related loans related to high quality commercial real estate. From time to time, the Company may 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.
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 at which its to finance them. 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 within 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.
13
Notes to Unaudited Consolidated Financial Statements
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 March 31, 2025 and December 31, 2024, accrued of $6.1 million and $5.4 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.
| March 31, 2025 | December 31, 2024 | ||||||||||||||||||||||||||||||||||
| Fixed Rate | Floating Rate (1)(2)(3) | Total | Fixed Rate | Floating Rate (1)(2)(3) | Total | ||||||||||||||||||||||||||||||
| Number of loans | |||||||||||||||||||||||||||||||||||
| Principal balance | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Carrying value | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Fair value | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Weighted-average coupon rate (4) | % | % | % | % | % | % | |||||||||||||||||||||||||||||
Weighted-average remaining term (years) (5) | |||||||||||||||||||||||||||||||||||
_______________
(1)These loans pay a coupon rate of Secured Overnight Financing Rate (“SOFR”) or forward-looking term rate based on SOFR (“Term SOFR”), as applicable, plus a fixed spread. Coupon rates shown were determined using the average SOFR of 4.33 % and Term SOFR of 4.32 % as of March 31, 2025 and average SOFR of 4.53 % and Term SOFR of 4.33 % as of December 31, 2024.
(2)As of March 31, 2025 and December 31, 2024, amount included $169.1 million and $208.0 million of senior mortgages used as collateral for $82.8 million and $123.2 million of borrowings under secured financing agreements, respectively (Note 8).
(3)As of March 31, 2025 and December 31, 2024, 7 and 10 loans, respectively, were subject to a SOFR or Term SOFR floor, as applicable.
(4)Excludes non-performing loans for which recovery of interest income was not probable.
(5)Excludes loans that are in maturity default and represents current effective maturity as of March 31, 2025 and December 31, 2024, exclusive of any extension available.
14
Notes to Unaudited 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, 2025 | $ | $ | $ | ||||||||||||||
| Principal repayments received | ( | ( | ( | ||||||||||||||
| Origination, purchase and funding of loans | |||||||||||||||||
| Net amortization of premiums on loans | ( | ( | |||||||||||||||
| Accrual, payment and accretion of investment-related fees and other, net | ( | ( | ( | ||||||||||||||
| (Provision for) reversal of provision for credit losses | ( | ( | |||||||||||||||
Balance, March 31, 2025 | $ | $ | $ | ||||||||||||||
| Loans Held for Investment, Net | Loans Held for Investment through Participation Interests, Net | Total | |||||||||||||||
| Balance, January 1, 2024 | $ | $ | $ | ||||||||||||||
| Principal repayments received | ( | ( | |||||||||||||||
| Origination, purchase and funding of loans | |||||||||||||||||
| Net amortization of premiums on loans | ( | ( | |||||||||||||||
| Accrual, payment and accretion of investment-related fees and other, net | ( | ||||||||||||||||
| Provision for credit losses | ( | ( | ( | ||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | ||||||||||||||
Portfolio Information
| March 31, 2025 | December 31, 2024 | |||||||||||||||||||||||||||||||||||||
| Loan Structure | Principal Balance | Carrying Value | % of Total | Principal Balance | Carrying Value | % of Total | ||||||||||||||||||||||||||||||||
| First mortgages | $ | $ | % | $ | $ | % | ||||||||||||||||||||||||||||||||
| Preferred equity investments | % | % | ||||||||||||||||||||||||||||||||||||
| Mezzanine loans | % | % | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | % | $ | $ | % | ||||||||||||||||||||||||||||||||
15
Notes to Unaudited Consolidated Financial Statements
| March 31, 2025 | December 31, 2024 | |||||||||||||||||||||||||||||||||||||
| Property Type | Principal Balance | Carrying Value | % of Total | Principal Balance | Carrying Value | % of Total | ||||||||||||||||||||||||||||||||
| Multifamily | $ | $ | % | $ | $ | % | ||||||||||||||||||||||||||||||||
| Infill land | % | % | ||||||||||||||||||||||||||||||||||||
| Office | % | % | ||||||||||||||||||||||||||||||||||||
| Mixed-use | % | % | ||||||||||||||||||||||||||||||||||||
| Industrial | % | % | ||||||||||||||||||||||||||||||||||||
| Student housing | % | % | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | % | $ | $ | % | ||||||||||||||||||||||||||||||||
| March 31, 2025 | December 31, 2024 | |||||||||||||||||||||||||||||||||||||
| Geographic Location | Principal Balance | Carrying Value | % of Total | Principal Balance | Carrying Value | % of Total | ||||||||||||||||||||||||||||||||
| United States | ||||||||||||||||||||||||||||||||||||||
| California | $ | $ | % | $ | $ | % | ||||||||||||||||||||||||||||||||
| Arizona | % | % | ||||||||||||||||||||||||||||||||||||
| Washington | % | % | ||||||||||||||||||||||||||||||||||||
| Georgia | % | % | ||||||||||||||||||||||||||||||||||||
| New York | % | % | ||||||||||||||||||||||||||||||||||||
| New Jersey | % | % | ||||||||||||||||||||||||||||||||||||
| North Carolina | % | % | ||||||||||||||||||||||||||||||||||||
| Massachusetts | % | % | ||||||||||||||||||||||||||||||||||||
| Utah | % | % | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | % | $ | $ | % | ||||||||||||||||||||||||||||||||
Allowance for Credit Losses
As described in Note 2, the Company follows the provisions of ASC 326, which requires entities to recognize credit losses on financial instruments based on an estimate of current expected credit losses.
Certain of the Company’s performing loans contain provisions for future funding commitments, which are subject to the borrower meeting certain performance-related metrics that are monitored by the Company. These unfunded commitments amounted to approximately $11.2 million and $18.7 million as of March 31, 2025 and December 31, 2024, 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 model-based approach and analyzes them separately for recoverability. As of March 31, 2025 and December 31, 2024, the Company had four and four non-performing loans with total amortized cost of $119.3 million and $128.6 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 $46.8 million and $44.1 million as of March 31, 2025 and December 31, 2024, respectively. Please see “Note 6. Fair Value Measurements – Valuation Process for Fair Value Measurement” for information on how the fair values of these loans were determined.
The following table presents the activity in allowance for credit losses:
| Three Months Ended March 31, 2025 | ||||||||||||||||||||||||||
| 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 | ( | ( | ||||||||||||||||||||||||
| Allowance for credit losses, end of period | $ | $ | $ | $ | ||||||||||||||||||||||
16
Notes to Unaudited Consolidated Financial Statements
| Three Months Ended March 31, 2024 | ||||||||||||||||||||||||||
| Allowance on Non-Performing Loans | Allowance on Performing Loans | Total | ||||||||||||||||||||||||
| Funded | Unfunded | |||||||||||||||||||||||||
| Allowance for credit losses, beginning of period | $ | $ | $ | $ | ||||||||||||||||||||||
| Provision for credit losses | ||||||||||||||||||||||||||
| 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 would reverse the accrued and unpaid interest against interest income and no longer accrue for interest. For the three months ended March 31, 2025 and 2024, the Company did no 3.4 million and $5.8 million on two and four loans, respectively, because recovery of such income was not probable. As of both March 31, 2025 and December 31, 2024, there was no interest receivable recognized on these loans.
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.
| March 31, 2025 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loan Risk Rating | Number of Loans | Amortized Cost | % of Total | Amortized Cost by Year Originated | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2025 | 2024 | 2023 | 2022 | 2021 | Prior | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 1 | $ | % | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| 2 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
3 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 4 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 5 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-performing (1) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| % | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for credit losses | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total carrying value, net | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
_______________
(1)Amount includes two loans that are in maturity default with total amortized costs of $43.5 million. The Company expects to recover the principal and interest payments in full and therefore, no specific allowance for loan losses was recorded on these two loans.
17
Notes to Unaudited 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 carrying value, net | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 4. Equity Interest in Unconsolidated Investments
The Company owns interests in a limited partnership, joint ventures and a preferred equity investment with profit-sharing feature. The Company accounts for its interests in these investments under the equity method of accounting (Note 2).
Equity Interest in a Limited Partnership
On August 3, 2020, the Company entered into a subscription agreement with Mavik Real Estate Special Opportunities Fund, LP (“RESOF”) whereby the Company committed to fund up to $50.0 million to purchase a limited partnership interest in RESOF. RESOF’s primary investment objective is to generate attractive risk-adjusted returns by purchasing performing and non-performing mortgages, loans, mezzanines and other credit instruments supported by underlying commercial real estate assets. RESOF may also opportunistically originate high-yield mortgages or loans in real estate special situations including rescue financings, bridge loans, restructurings and bankruptcies (including debtor-in-possession loans). The general partner of RESOF is Mavik Real Estate Special Opportunities Fund GP, LLC, which is a subsidiary of the Company’s sponsor, Terra Capital Partners. The Company evaluated its equity interest in RESOF and determined it does not have a controlling financial interest and is not the primary beneficiary. Accordingly, the equity interest in RESOF is accounted for as an equity method investment.
The following tables present a summary of information regarding the Company’ equity interest in RESOF:
| March 31, 2025 | December 31, 2024 | |||||||||||||||||||||||||||||||||||||
| Ownership Interest | Carrying Value | Unfunded Commitment | Ownership Interest | Carrying Value | Unfunded Commitment | |||||||||||||||||||||||||||||||||
| Equity interest in RESOF | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2025 | 2024 | ||||||||||||||||||||||
| Income from equity interest in RESOF | $ | $ | |||||||||||||||||||||
| Distributions received from RESOF | $ | $ | |||||||||||||||||||||
18
Notes to Unaudited Consolidated Financial Statements
The following tables present summarized financial information of the Company’s equity interest in RESOF. Amounts provided are the total amounts attributable to the investment and do not represent the Company’s proportionate share:
| March 31, 2025 | December 31, 2024 | |||||||||||||
Investments at fair value (cost of $ | $ | $ | ||||||||||||
| Other assets | ||||||||||||||
| Total assets | ||||||||||||||
| Secured financing agreements, net of financing costs | ||||||||||||||
Obligations under participation agreement (proceeds of $ $ | ||||||||||||||
| Other liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Partners’ capital | $ | $ | ||||||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2025 | 2024 | ||||||||||||||||||||||
| Total investment income | $ | $ | |||||||||||||||||||||
| Total expenses | |||||||||||||||||||||||
| Net investment income | |||||||||||||||||||||||
| Net change in unrealized appreciation (depreciation) on investments | ( | ||||||||||||||||||||||
| Net increase in partners’ capital resulting from operations | $ | $ | |||||||||||||||||||||
Equity Interest in Joint Ventures
The Company beneficially owns equity interests in joint ventures that invest in real estate properties, opportunistic debt and equity securities, and indirectly, together with other non-affiliated entities, non-real estate operating companies. Non-real estate-related investments may take various forms, including preferred and common equity interests in private companies and other financial assets. The Company evaluated its equity interests in these entities and determined it does not have a controlling financial interest and is not the primary beneficiary. Accordingly, the equity interests in the joint ventures are accounted for as equity method investments.
The following tables present a summary of the Company’s equity interest in the joint ventures:
| March 31, 2025 | December 31, 2024 | |||||||||||||||||||||||||||||||
| Entity | Co-owner | Beneficial Ownership Interest | Carrying Value | Beneficial Ownership Interest | Carrying Value | |||||||||||||||||||||||||||
| LEL Arlington JV LLC | Third party/Affiliate | $ | $ | |||||||||||||||||||||||||||||
| TCG Corinthian FL Portfolio JV LLV | Third party/Affiliate | |||||||||||||||||||||||||||||||
| 610 Walnut Investors LLC | Third party | |||||||||||||||||||||||||||||||
MASPEN MS I LLC (1) | Affiliates | |||||||||||||||||||||||||||||||
Axar Special Opportunity Fund VI-B LLC (2) | N/A | |||||||||||||||||||||||||||||||
XS Acquisition Holdco LLC (3) | Third parties | |||||||||||||||||||||||||||||||
| $ | $ | |||||||||||||||||||||||||||||||
_______________
(1)In May 2024, the Company contributed $50,000 to this entity for the purpose of investing in opportunistic equity and debt securities. This entity is jointly owned with two related parties managed by the Manager.
(2)In June 2024, the Company made a $20.0 million capital commitment to an entity that has indirectly invested, together with other non-affiliated entities, in a non-real estate operating company. Through November 2024, $10.0 million of the
19
Notes to Unaudited Consolidated Financial Statements
commitment was funded. In December 2024, through a series of transactions, a wholly owned subsidiary of the Company issued a $10.0 million term loan payable to the entity in exchange for the satisfaction of the remaining funding commitment to this entity (Note 8). The Company determined it is not a primary beneficiary of the entity and therefore accounts for the investment using the equity method of accounting.
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2025 | 2024 | ||||||||||||||||||||||
| Loss from equity interest in the joint ventures | $ | ( | $ | ( | |||||||||||||||||||
| Distributions received from the joint ventures | $ | $ | |||||||||||||||||||||
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.
| March 31, 2025 | December 31, 2024 | |||||||||||||
| Net investments in real estate | $ | $ | ||||||||||||
| Other assets | ||||||||||||||
| Total assets | ||||||||||||||
| Secured financing agreements | ||||||||||||||
| Other liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Members’ capital | $ | $ | ||||||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2025 | 2024 | ||||||||||||||||||||||
| Revenues | $ | $ | |||||||||||||||||||||
| Operating expenses | ( | ( | |||||||||||||||||||||
| Depreciation and amortization expense | ( | ( | |||||||||||||||||||||
| Interest expense | ( | ( | |||||||||||||||||||||
| Unrealized gain (loss) | ( | ||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | |||||||||||||||||||
Other Equity Investments
In June 2024, the Company entered into a preferred equity agreement with TCC Boundary Partners LLC. The investment carries interest at an annual rate of 15.0 % and matures on June 30, 2029. Additionally, the Company will receive distributions in the event that net proceeds from the sale of underlying property exceed certain internal rate of return thresholds. Because the Company shares residual profit from the sale of underlying property with the borrower, the Company accounts for the investment using the equity method of accounting. As of March 31, 2025 and December 31, 2024, the Company's investment had a carrying value of $16.5 million and $15.9 million, respectively. For the three months ended March 31, 2025, the Company recorded $0.6 million in equity income from TCC Boundary Partners LLC and did not receive any distributions. There was no such equity income recorded or distributions received during the three months ended March 31, 2024.
Note 5. Real Estate Owned, Net
Real Estate Activities
2024 — In January 2024, a lease for a space in one of the industrial properties was terminated and the Company received a termination fee of $0.03 million. In connection with the lease termination, the Company wrote off the related unamortized in-
20
Notes to Unaudited Consolidated Financial Statements
place lease of $0.3 million and unamortized below-market rent of $0.1 million. Subsequent to the lease termination, the Company entered into a new lease with another tenant for the same space.
Real Estate Owned, Net
Real estate owned is comprised of eight industrial buildings located in Texas with lease intangible assets and liabilities. The following table presents the components of real estate owned, net as of:
| March 31, 2025 | December 31, 2024 | |||||||||||||||||||||||||||||||||||||
| Cost | Accumulated Depreciation/Amortization | Net | Cost | Accumulated Depreciation/Amortization | Net | |||||||||||||||||||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||||||||||||
| Land | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Building and building improvements | ( | ( | ||||||||||||||||||||||||||||||||||||
| Tenant improvements | ( | ( | ||||||||||||||||||||||||||||||||||||
| Total real estate | ( | ( | ||||||||||||||||||||||||||||||||||||
| Lease intangible assets: | ||||||||||||||||||||||||||||||||||||||
| In-place lease | ( | ( | ||||||||||||||||||||||||||||||||||||
| Total intangible assets | ( | ( | ||||||||||||||||||||||||||||||||||||
| Lease intangible liabilities: | ||||||||||||||||||||||||||||||||||||||
| Below-market rent | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||
| Total intangible liabilities | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||
| Total real estate | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
Real Estate Operating Revenues and Expenses
The following table presents the components of real estate operating revenues and expenses that are included in the consolidated statements of operations:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2025 | 2024 | ||||||||||||||||||||||
| Real estate operating revenues: | |||||||||||||||||||||||
| Lease revenue | $ | $ | |||||||||||||||||||||
| Other operating income | |||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||
| Real estate operating expenses: | |||||||||||||||||||||||
| Utilities | $ | $ | |||||||||||||||||||||
| Real estate taxes | |||||||||||||||||||||||
| Repairs and maintenances | |||||||||||||||||||||||
| Management fees | |||||||||||||||||||||||
| Other operating expenses | |||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2025 | 2024 | ||||||||||||||||||||||
Net amortization of above- and below-market rent intangibles (1) | $ | ( | $ | ( | |||||||||||||||||||
Amortization of in-place lease intangibles (2) | $ | $ | |||||||||||||||||||||
21
Notes to Unaudited Consolidated Financial Statements
(1)Net amortization of above- and below-market rent intangibles is recorded as an adjustment to real estate operating revenue on the consolidated statements of operations.
(2)Amortization of in-place lease intangibles is included in depreciation and amortization expense on the consolidated statements of operations.
Note 6. Fair Value Measurements
Level 1 — Quoted prices (unadjusted) in active markets for identical assets and liabilities that the Company has the ability to access.
Level 2 — Pricing inputs are other than quoted prices in active markets, including, but not limited to, quoted prices for similar assets and liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, rate of prepayment, loss severities, credit risks and default rates) or other market corroborated inputs.
Level 3 — Significant unobservable inputs are based on the best information available in the circumstances, to the extent observable inputs are not available, including the Company’s own assumptions used in determining the fair value of investments. Fair value for these investments is determined using valuation methodologies that consider a range of factors, including but not limited to the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance, and financing transactions subsequent to the acquisition of the investment. The inputs into the determination of fair value require significant management judgment.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.
As of March 31, 2025 and December 31, 2024, the Company had not elected the fair value option for its financial instruments, including loans held for investment, loans held for investment acquired through participation, equity securities without readily determinable fair value, secured financing agreements, unsecured notes payable and obligations under participation agreements. Such financial instruments are carried at cost, less impairment or less net deferred costs, where applicable. Marketable securities and derivatives are financial instruments that are reported at fair value.
Financial Instruments Carried at Fair Value on a Recurring Basis
From time to time, the Company may invest in debt securities. These securities are classified as available-for-sale debt securities and are carried at fair value. Changes in the fair value of the available-for-sale debt securities are reported in other comprehensive income or loss until a gain or loss on the securities is realized. In 2024, the Company owned certain trading equity securities that were carried at fair value. Changes in the fair value of the trading equity securities were reported in earnings. The trading equity securities were sold by April 2024. 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.
As discussed in Note 8, in March 2023, the Company entered into a loan agreement with a lender to provide financing for the acquisition of real estate properties (Note 5). In connection with the financing, the Company purchased an interest rate cap for $258,500 to effectively cap the related index rate at 5.0 %. The interest rate cap met all the criteria of a derivative under ASC
22
Notes to Unaudited Consolidated Financial Statements
815, but it did not meet the criteria under ASC 815-20-25 to qualify for hedging accounting. As such, the interest rate cap is reported at fair value and is included in other assets on the consolidated balance sheets, and the change in the fair value of the interest rate cap is reported in Unrealized gain (loss) on investments, net on the consolidated statements of operations.
The following tables present fair value measurements of marketable securities and derivatives, by major class according to the fair value hierarchy as of:
| March 31, 2025 | ||||||||||||||||||||||||||
| Fair Value Measurements | ||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
Money market fund (1) | $ | $ | $ | $ | ||||||||||||||||||||||
| Available-for-sale debt securities | ||||||||||||||||||||||||||
Derivative - interest rate cap (2) | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
| December 31, 2024 | ||||||||||||||||||||||||||
| Fair Value Measurements | ||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
Money market fund (1) | $ | $ | $ | $ | ||||||||||||||||||||||
| Available-for-sale debt securities | ||||||||||||||||||||||||||
Derivative - interest rate cap (2) | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
(1)Amount is included in cash and cash equivalents on the consolidated balance sheets.
The following table presents the activities of the securities and derivatives:
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||
| 2025 | 2024 | |||||||||||||||||||||||||||||||
| Available-For-Sale Debt Securities | Derivatives | Available-For-Sale Debt Securities | Trading Equity Securities | Derivatives | ||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Proceeds from sale | ( | |||||||||||||||||||||||||||||||
| Reclassification of net realized loss on investments into earnings | ( | |||||||||||||||||||||||||||||||
| Unrealized gain (loss) on investments | ( | ( | ( | |||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
23
Notes to Unaudited Consolidated Financial Statements
Financial Instruments Not Carried at Fair Value
The following table presents the carrying value, which represents the amortized cost of loan, 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:
| March 31, 2025 | December 31, 2024 | ||||||||||||||||||||||||||||||||||||||||
| Level | Principal Amount | Carrying Value | Fair Value | Principal Amount | Carrying Value | Fair Value | |||||||||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||||||||
| Loans | |||||||||||||||||||||||||||||||||||||||||
| Loans held for investment | 3 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Loans held for investment acquired through participation | 3 | ||||||||||||||||||||||||||||||||||||||||
| Total loans | |||||||||||||||||||||||||||||||||||||||||
Equity securities without readily determinable fair value (1) | 3 | ||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||||||||||||||
| Unsecured notes payable | 1 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Secured financing agreements | 3 | ||||||||||||||||||||||||||||||||||||||||
| Obligations under participation agreements | 3 | ||||||||||||||||||||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
(1)Amount is included in Other assets on the consolidated balance sheets.
The Company estimated that its other financial assets and liabilities, not included in the tables above, had fair values that approximated their carrying values at both March 31, 2025 and 2024 due to their short-term nature.
Valuation Process for Fair Value Measurement
The fair value of the Company’s investment in available-for-sale debt securities and its unsecured notes payable is determined based on quoted prices in an active market and is classified as Level 1 of the fair value hierarchy.
Market quotations are not readily available for the Company’s real estate-related loan investments, all of which are included in Level 3 of the fair value hierarchy, and therefore these investments are valued utilizing a yield approach, i.e., a discounted cash flow methodology to arrive at an estimate of the fair value of each respective investment in the portfolio using an estimated market yield. In following this methodology, investments are evaluated individually, and management takes into account, in determining the risk-adjusted discount rate for each of the Company’s investments, relevant factors, which may include available current market data on applicable yields of comparable debt/preferred equity instruments; market credit spreads and yield curves; the investment’s yield; covenants of the investment, including prepayment provisions; the ability of our borrowers and investees to make payments and their net operating income and debt-service coverage ratio; construction progress reports and construction budget analysis; the nature, quality and realizable value of any collateral (and loan-to-value ratio); the forces that influence the local markets in which the asset (the collateral) is purchased and sold, such as capitalization rates, occupancy rates, rental rates and replacement costs; and the anticipated duration of each real estate-related loan investment.
The Manager designates a valuation committee to oversee the entire valuation process of the Company’s Level 3 investments. The valuation committee is comprised of members of the Manager’s senior management, deal and portfolio management teams, who meet on a quarterly basis, or more frequently as needed, to review the Company investments being valued as well as the inputs used in the proprietary valuation model. Valuations determined by the valuation committee are supported by pertinent data and, in addition to a proprietary valuation model, are based on market data, industry accepted third-party valuation models and discount rates or other methods the valuation committee deems to be appropriate. Because there is no readily available market for these investments, the fair values of these investments are approved in good faith by the Company’s board of directors (which is made up exclusively of independent directors).
24
Notes to Unaudited Consolidated Financial Statements
The fair values of the Company’s secured financing agreements, which includes mortgage loan payable, secured borrowing, term loan payable and revolving line of credit are determined by discounting the contractual cash flows at the interest rate the Company estimates such arrangements would bear if executed in the current market.
The following tables summarize the valuation techniques and significant unobservable inputs used by the Company to value the Level 3 loans as of March 31, 2025 and December 31, 2024. The tables are not intended to be all-inclusive, but instead identify the significant unobservable inputs relevant to the determination of fair values.
Fair Value at March 31, 2025 | Primary Valuation Technique | Unobservable Inputs | March 31, 2025 | |||||||||||||||||||||||||||||
| Asset Category | Minimum | Maximum | Weighted Average | |||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||
| Loans held for investment, net | $ | Discounted cash flow | Discount rate | % | % | % | ||||||||||||||||||||||||||
| Discounted cash flow | Terminal capitalization rate | % | % | % | ||||||||||||||||||||||||||||
| Loans held for investment acquired through participation, net | Discounted cash flow | Discount rate | % | % | % | |||||||||||||||||||||||||||
Equity securities (1) | N/A | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||||
| Total Level 3 Assets | $ | |||||||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||
| Secured financing agreements | $ | Discounted cash flow | Discount rate | % | % | % | ||||||||||||||||||||||||||
| Obligation under participation agreement | Discounted cash flow | Discount rate | % | % | % | |||||||||||||||||||||||||||
| Total Level 3 Liabilities | $ | |||||||||||||||||||||||||||||||
Fair Value at December 31, 2024 | Primary Valuation Technique | Unobservable Inputs | December 31, 2024 | |||||||||||||||||||||||||||||
| Asset Category | Minimum | Maximum | Weighted Average | |||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||
| Loans held for investment, net | $ | Discounted cash flow | Discount rate | % | % | % | ||||||||||||||||||||||||||
| Discounted cash flow | Terminal capitalization rate | % | % | % | ||||||||||||||||||||||||||||
| Loans held for investment acquired through participation, net | Discounted cash flow | Discount rate | % | % | % | |||||||||||||||||||||||||||
Equity securities (1) | N/A | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||||
| Total Level 3 Assets | $ | |||||||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||
| Secured financing agreements | $ | Discounted cash flow | Discount rate | % | % | % | ||||||||||||||||||||||||||
| Obligation under participation agreement | Discounted cash flow | Discount rate | % | % | % | |||||||||||||||||||||||||||
| Total Level 3 Liabilities | $ | |||||||||||||||||||||||||||||||
(1)Fair market value is based on purchase price.
Note 7. Related Party Transactions
Management Agreement
The Company entered into the Management Agreement with the Manager whereby the Manager is responsible for its day-to-day operations. The following table presents a summary of fees paid and costs reimbursed to the Manager in connection with providing services to the Company that are included on the consolidated statements of operations:
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2025 | 2024 | |||||||||||||||||||||||||
Origination and extension fee expense (1) | $ | $ | ||||||||||||||||||||||||
| Asset management fee | ||||||||||||||||||||||||||
| Asset servicing fee | ||||||||||||||||||||||||||
| Operating expenses reimbursed to Manager | ||||||||||||||||||||||||||
Disposition fee (2) | ||||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||
25
Notes to Unaudited Consolidated Financial Statements
_______________
(1)Origination and extension fee expense is generally offset with origination and extension fee income. Any excess is deferred and amortized to interest income over the term of the loan on the consolidated statements of operations.
Origination and Extension Fee Expense
Pursuant to the Management Agreement, the Manager or its affiliates receives an origination fee in the amount of 1.0 % of the amount used to originate, fund, acquire or structure investments, including any third-party expenses related to such investments. In the event that the term of any loan held by the Company is extended, the Manager also receives an extension 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 to the Company by the borrower in connection with such extension.
Asset Management Fee
Under the terms of the Management Agreement, the Manager or its affiliates provides the Company with certain investment management services in return for a management fee. The Company pays a monthly asset management fee at an annual rate of 1.0 % of the aggregate funds under management, which includes the loan origination price or aggregate gross acquisition price, as defined in the Management Agreement, for each investment and cash held by the Company.
Asset Servicing Fee
The Manager or its affiliates receives from the Company a monthly servicing fee at an annual rate of 0.25 % of the aggregate gross origination price or acquisition price, as defined in the Management Agreement, for each investment held by the Company.
Transaction Breakup Fee
In the event that the Company receives any “breakup fees,” “busted-deal fees,” termination fees, or similar fees or liquidated damages from a third-party in connection with the termination or non-consummation of any investment or disposition transaction, the Manager will be entitled to receive one-half of such amounts, in addition to the reimbursement of all out-of-pocket fees and expenses incurred by the Manager with respect to its evaluation and pursuit of such transactions. As of March 31, 2025 and December 31, 2024, the Company had not
Operating Expenses
The Company reimburses the Manager for operating expenses incurred in connection with services provided to the operations of the Company, including the Company’s allocable share of the Manager’s overhead, such as rent, employee costs, utilities, and technology costs.
Disposition Fee
Pursuant to the Management Agreement, the Manager or its affiliates receive a disposition fee in the amount of 1.0 % of the gross sale price received by the Company from the disposition of an investment, 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 the Company takes ownership of a property as a result of a workout or foreclosure of a loan, the Company will pay a disposition fee upon the sale of such property equal to 1.0 % of the sales price.
The term of the Management Agreement will expire on December 31, 2027 (the “Initial Term”) and will automatically renew for an unlimited number of additional one-year terms upon each anniversary date of the last day of the Initial Term (each, a “Renewal Term”), unless terminated by the Company or the Manager during the Initial Term or a Renewal Term in accordance with the terms of the Management Agreement (as described below).
The Management Agreement may be terminated by the Company during the Initial Term or any Renewal Term upon a finding by either (i) at least two-thirds of the independent directors on the Board or (ii) the holders of a majority of the
26
Notes to Unaudited Consolidated Financial Statements
outstanding shares of the Company’s common stock (other than those shares held by members of the Company’s senior management team or affiliates of the Manager) that either (a) there has been unsatisfactory performance by the Manager that is materially detrimental to the Company, or (b) the compensation payable to the Manager pursuant to the Management Agreement is unfair; provided, however, that the Company will not have the right to terminate the Management Agreement on the basis of unfair compensation to the Manager if the Manager agrees to continue to provide its services under the Management Agreement in exchange for reduced fees that at least two-thirds of the independent directors on the Board determine to be fair pursuant to the procedures set forth in the Management Agreement. The Company must deliver prior written notice of any such termination to the Manager at least 180 days prior to the last calendar day of the Initial Term or the then-current Renewal Term, as applicable, and the Management Agreement will terminate effective as of the last calendar day of the Initial Term or the then-current Renewal Term, as applicable.
Upon any termination of the Management Agreement by the Company as discussed above, the Company will pay the Manager, on the date on which such termination is effective, a termination fee in an amount equal to three times the average annual fees of all types and expense reimbursements received by or owed to the Manager pursuant to the Management Agreement during the 24-month period immediately preceding such termination (the “Termination Fee”), calculated as of the end of the most recently completed monthly prior to the date of such termination.
The Company may also terminate the Management Agreement, effective upon 30 calendar days’ prior written notice from the Board to the Manager, without payment of any Termination Fees or other penalties, upon (i) the material breach of the Management Agreement by the Manager or its affiliates that continues for 30 days after written notice thereof to the Manager (or 45 days after delivery of written notice thereof if the Manager takes diligent steps to cure such breach within 30 days of delivery of the written notice), (ii) any fraud or other criminal conduct, gross negligence or breach of fiduciary duty by the Manager or its affiliates in connection with the Management Agreement, as determined by a final, non-appealable judgment of a court of competent jurisdiction, (iii) the Manager’s bankruptcy, insolvency or dissolution, or (iv) an Internalization Event (as defined in the Management Agreement). No Termination Fee or other penalty is payable upon such a termination by the Company.
The Manager may terminate the Management Agreement, effective upon 60 days’ prior written from the Manager to the Company, if the Company breaches the Management Agreement and such breach continues for 30 days after written notice thereof. The Company will pay the Manager the Termination Fee upon such termination by the Manager.
Management Agreement Amendment
As discussed herein, the Company may make real estate and non-real estate related investments of any type that align with its investment objectives and criteria. Accordingly, on May 8, 2025, the Company and the Manager entered into an amendment to the Management Agreement, effective as of January 1, 2025 (the “Amendment”), in order to clarify that the origination, asset management, asset servicing, disposition and breakup fees that the Company pays to the Manager pursuant to the Management Agreement are payable with respect to all real estate and non-real estate investments of any type that the Company originates or acquires. Unless otherwise specifically noted, all references herein to the “Management Agreement” refer to the Management Agreement as modified by the Amendment.
Due From Affiliate
On December 1, 2022, the Company entered into a revolving promissory note receivable with Mavik Special Opps Co-Investments, LP, an affiliate of the Company. The promissory note receivable bears interest at the Prime Rate, as such Prime Rate is published in the Wall Street Journal, computed on the basis of the actual number of days elapsed and a year of 365 days. In January 2024, the promissory note was amended to (i) extend the maturity date from June 30, 2024 to April 30, 2025 and to (ii) modify the interest rate from Prime Rate, as such Prime Rate is published in the Wall Street Journal, computed on the basis of the actual number of days elapsed and a year of 365 days, to 15.0 %. During the three months ended March 31, 2025 and 2024, the Company provided funding under the promissory note receivable of none and $1.2 million, respectively. In July 2024, the promissory note receivable was repaid in full, and has a balance of zero
Due from Related Parties
As of March 31, 2025 and December 31, 2024, amount due from related parties was $0.9 million and $0.9 million, primarily related to operational cash requirements the Company paid on behalf of its affiliates.
27
Notes to Unaudited Consolidated Financial Statements
Promissory Note Payable
On January 24, 2024, the Company, as borrower, entered into a revolving promissory note payable with Terra LLC. The promissory note payable bears interest at the Prime Rate, as such Prime Rate is published in the Wall Street Journal, computed on the basis of the actual number of days elapsed and a year of 365 days. The promissory note matures on March 31, 2027. As of March 31, 2025 and December 31, 2024, amount outstanding under this promissory note payable was $43.6 million and $45.1 million, respectively. The activity associated with this agreement is eliminated in consolidation and therefore has no impact on the Company’s consolidated financial statements.
Cost Sharing and Reimbursement Agreement
The Company and Terra LLC have entered into a cost sharing and reimbursement agreement effective October 1, 2022, pursuant to which Terra LLC is responsible for its allocable share of the Company’s expenses, including fees paid by the Company to the Manager based on relative assets under management. These fees are eliminated in consolidation and therefore have no impact on the Company’s consolidated financial statements.
Distributions Paid
For the three months ended March 31, 2025 and 2024, the Company made distributions to investors totaling $4.7 4.7
Due to Manager
As of March 31, 2025 and December 31, 2024, approximately $0.8 million and $1.6 million, respectively, was due to the Manager, as reflected on the consolidated balance sheets, primarily related to the present value of the disposition fees on individual loans due to the Manager.
Mavik Real Estate Special Opportunities Fund, LP
On August 3, 2020, the Company entered into a subscription agreement with RESOF whereby the Company committed to fund up to $50.0 million to purchase limited partnership interests in RESOF. For more information on this investment, please see Note 4.
Participation Agreements
In the normal course of business, the Company may enter into participation agreements with related parties, primarily other affiliated funds managed by the Manager, and to a lesser extent, unrelated parties (the “Participants”). The purpose of the participation agreements is to allow the Company and an affiliate to originate a specified loan when, individually, the Company does not have the liquidity to do so or to achieve a certain level of portfolio diversification. The Company may transfer portions of its investments to other Participants or it may be a Participant to a loan held by another entity.
ASC 860, Transfers and Servicing (“ASC 860”), establishes accounting and reporting standards for transfers of financial assets. ASC 860-10 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The Company has determined that the participation agreements it enters into are accounted for as secured borrowings under ASC 860 (see “Participation Interests” in Note 2 and “Obligations Under Participation Agreements” in Note 8).
Participation Interests Purchased by the Company
From time to time, the Company may purchase investments from affiliates pursuant to participation agreements. In accordance with the terms of each participation agreement, each Participant’s rights and obligations, as well as the proceeds received from the related borrower/issuer of the loan, are based upon their respective pro rata participation interest in the loan.
28
Notes to Unaudited Consolidated Financial Statements
The table below lists the participation interests purchased by the Company pursuant to participation agreements as of:
| March 31, 2025 | ||||||||||||||||||||
| Participating Interests | Principal Balance | Carrying Value | ||||||||||||||||||
Mesa AZ Industrial Owner, LLC (1) | $ | $ | ||||||||||||||||||
| $ | $ | |||||||||||||||||||
| December 31, 2024 | ||||||||||||||||||||
| Participating Interests | Principal Balance | Carrying Value | ||||||||||||||||||
Mesa AZ Industrial Owner, LLC (1) | $ | $ | ||||||||||||||||||
UNJ Sole Member, LLC (1)(2) | ||||||||||||||||||||
| $ | $ | |||||||||||||||||||
________________
(1)The loan is held in the name of Mavik Real Estate Special Opportunities Fund REIT, LLC, a related-party REIT managed by the Manager.
(2)This loan was repaid in January 2025.
Transfers of Participation Interests by the Company
The following table summarizes the investment that was subject to a participation agreement with an investment partnership affiliated with the Manager as of:
| March 31, 2025 | ||||||||||||||||||||||||||||||||
| Transfers treated as obligations under participation agreements | ||||||||||||||||||||||||||||||||
| Principal | Carrying Value | % Transferred | Principal | Carrying Value | ||||||||||||||||||||||||||||
Asano Bankers Hill, LLC (1) | $ | $ | % | $ | $ | |||||||||||||||||||||||||||
| 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 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 Manager, only on its pro rata participation interest, subject to the terms of the governing fee arrangements.
29
Notes to Unaudited Consolidated Financial Statements
Note 8. Debt
Unsecured Notes Payable
The following table presents a summary of the Company’s unsecured notes payable outstanding as of:
| Coupon Rate | Effective Rate (1) | Maturity Date | March 31, 2025 | December 31, 2024 | ||||||||||||||||||||||||||||
| % | % | 6/30/2026 | $ | $ | ||||||||||||||||||||||||||||
| % | % | 3/31/2026 | ||||||||||||||||||||||||||||||
| Total principal amount | ||||||||||||||||||||||||||||||||
| Unamortized issue discount | ( | ( | ||||||||||||||||||||||||||||||
Unamortized purchase discount (2) | ( | ( | ||||||||||||||||||||||||||||||
| Unamortized deferred financing costs | ( | ( | ||||||||||||||||||||||||||||||
| Unsecured notes payable, net | $ | $ | ||||||||||||||||||||||||||||||
_______________
(1)Includes issue discount, purchase discount and deferred financing costs that are amortized to interest expense over the life of the notes.
(2)In connection with the BDC Merger, Terra LLC assumed all the obligations under the 7.00 % Senior Notes and recorded a purchase discount of $4.6 million, representing the difference between the carrying value and the fair value of the notes on the date of the merger.
The 6.00 % Senior Notes Due 2026
On June 10, 2021, the Company issued $78.5 million in aggregate principal amount of its 6.00 % notes due 2026, and on June 25, 2021, the underwriters partially exercised their option to purchase an additional $6.6 million of the notes (collectively the “6.00 % Senior Notes Due 2026”). The 6.00 % Senior Notes Due 2026 may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after June 10, 2023, at a redemption price equal to 100 % of the outstanding principal amount thereof, plus accrued and unpaid interest.
The 7.00 % Senior Notes Due 2026
On February 10, 2021, Terra BDC issued $34.8 million in aggregate principal amount of 7.00 % fixed-rate notes due 2026, and on February 26, 2021, the underwriters exercised the option to purchase an additional $3.6 million of the notes (collectively the “7.00 % Senior Notes Due 2026”). In connection with the BDC Merger, Terra LLC agreed to take all necessary action to assume the payment of the principal of and interest on all of the outstanding 7.00 % Senior Notes Due 2026. The 7.00 % Senior Notes Due 2026 may be redeemed in whole or in part at any time or from time to time at Terra LLC’s option on or after February 10, 2023, at a redemption price equal to 100 % of the outstanding principal amount thereof, plus accrued and unpaid interest.
Covenant Compliance
The Company’s unsecured notes payable contain certain financial covenants. As of March 31, 2025, the Company was in compliance with such covenants.
30
Notes to Unaudited Consolidated Financial Statements
Secured Financing Arrangements
The following table is a summary of the Company’s secured financing agreements in place as of:
| March 31, 2025 | December 31, 2024 | |||||||||||||||||||||||||||||||||||||||||||
| Current Maturity | Extended Maturity | Weighted Average Interest Rate (1) | Pledged Asset Carrying Value | Maximum Facility Size | Principal Amount | Principal Amount | ||||||||||||||||||||||||||||||||||||||
| Repurchase Agreements: | ||||||||||||||||||||||||||||||||||||||||||||
Goldman Sachs Bank facility (2)(3) | February 2027 | February 2027 | % | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
UBS AG facility (2)(4) | November 2024 | (5) | (4) | |||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||||||
| Non-Recourse Financing: | ||||||||||||||||||||||||||||||||||||||||||||
Promissory notes payable (2)(6) | September 2025 - March 2026 | March 2026 - March 2027 | % | N/A | ||||||||||||||||||||||||||||||||||||||||
| Property mortgages - fixed rate | June 2028 | June 2028 | % | N/A | ||||||||||||||||||||||||||||||||||||||||
Property mortgages - variable rate (7) | April 2027 | April 2028 | % | N/A | ||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||||||
| Other Secured Financing: | ||||||||||||||||||||||||||||||||||||||||||||
Revolving line of credit (2)(8) | June 2025 | June 2025 | % | |||||||||||||||||||||||||||||||||||||||||
Term loan (9) | December 2027 | December 2028 | (9) | |||||||||||||||||||||||||||||||||||||||||
| Secured borrowing | November 2026 | November 2026 | % | |||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Unamortized deferred financing costs and other | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Secured financing agreements, net | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
(1)Amount is calculated using the applicable index rate as of March 31, 2025.
(2)These facilities were used to finance the Company’s senior loan investments.
(3)Interest rate is based on Term SOFR (subject to underlying loan floors on a case-by-case basis) plus a spread ranging from 4.25 % to 5.25 %.
(4)Interest rate is based on Term SOFR plus a spread of 1.97 %. In February 2024, the outstanding balance was repaid. In March 2024, the Company amended the side letter to the UBS AG facility agreement to reduce the maximum amount available under this facility to zero. In connection with this amendment, UBS AG waived the payment of any fees and the meeting of any representations, warranties or covenants for the period commencing on December 31, 2023 until such time as there are amounts outstanding under the UBS AG facility agreement.
(5)The maturity of this facility can be extended annually on mutually agreeable terms.
(6)Interest rate is based on Term SOFR plus a spread ranging from 4.75 % to 5.98 % with a combined floor rate ranging from 9.0 % to 11.28 %.
(7)Interest rate is based on Term SOFR plus a spread of 3.5 % with a Term SOFR floor of 3.75 %.
(8)Interest rate is based on Term SOFR + 3.5 % with a combined floor of 7.0 %.
(9)In December 2024, through a series of transactions, a wholly owned subsidiary of the Company issued a $10.0 million term loan payable to an entity in which the Company has an equity investment in exchange for the satisfaction of the remaining funding commitment of the Company to that entity (Note 4). This loan is interest-free until June 30, 2025, after that interest is charged at a fixed rate of 9.0 % per annum. The term loan payable is collateralized by the Company’s equity interest in RESOF and the Company serves as a guarantor under the loan. Under the terms of the loan agreement, the Company is required to maintain certain loan-to-value ratio and investment rating. Additionally, the Company’s interest in RESOF is only available to pay the debt under the term loan and not available to pay the debt under any other financing arrangements.
In the normal course of business, the Company is in discussions with its lenders to extend, amend, or replace any financing facilities which contain near term expirations.
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Notes to Unaudited Consolidated Financial Statements
The following table presents certain information about the Company’s secured financing agreements:
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2025 | 2024 | |||||||||||||||||||||||||
| Amortization of deferred financing costs and others | $ | $ | ||||||||||||||||||||||||
| Proceeds from secured financing | $ | $ | ||||||||||||||||||||||||
| Repayments of secured financing | $ | ( | $ | ( | ||||||||||||||||||||||
Repurchase Agreements
The Company seeks to mitigate risks associated with its repurchase agreements by managing risk related to the credit quality of its assets, interest rates, liquidity, the rate of prepayment and market value. The margin call provisions under the repurchase facilities provide the lender with certain rights in the event of a decline in the credit of the underlying assets purchased. To monitor credit risk associated with the performance and value of its loans and investments, the Company’s asset management team regularly reviews its investment portfolios and is in regular contact with its borrowers, monitoring performance of the collateral and enforcing its rights as necessary. The Company further seeks to manage risks associated with the repurchase agreements by matching the maturities and interest rate characteristics of its loans with the related repurchase agreement.
Covenant Compliance
The Company’s secured financing agreements contain certain financial tests and covenants. In the event of a default or any breach of covenant of a related agreement, the lender has the right to accelerate all amounts due, charge interest at a default rate, retain all cash flow from the loans originated and/or sell such loans in a private sale on terms possibly unfavorable to the Company. As of March 31, 2025, the Company was in compliance with all such covenants, as amended or waived.
Scheduled Debt Principal Payments
| Years Ending December 31, | Total | |||||||
| 2025 (April 1 through December 31) | $ | |||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| 2029 | ||||||||
| Unamortized deferred financing costs and other | ( | |||||||
| Total | $ | |||||||
Obligations Under Participation Agreements
Note 9. Commitments and Contingencies
Unfunded Commitments on Loans Held for Investment
Certain of the Company’s loans contain provisions for future fundings, which are subject to the borrower meeting certain performance-related metrics that are monitored by the Company. These fundings amounted to approximately $11.2 million and $18.7 million as of March 31, 2025 and December 31, 2024, respectively. The Company expects to maintain sufficient cash on
32
Notes to Unaudited Consolidated Financial Statements
hand to fund such commitments through matching these commitments with principal repayments on outstanding loans or draw downs on credit facilities.
Unfunded Investment Commitment
As discussed in Note 4, on August 3, 2020, the Company entered into a subscription agreement with RESOF whereby the Company committed to fund up to $50.0 million to purchase limited partnership interests in RESOF. As of March 31, 2025 and December 31, 2024, the unfunded investment commitment was $11.3 million and $10.1 million, respectively.
Other
The Company enters into contracts that contain a variety of indemnification provisions. The Company’s maximum exposure under these arrangements is unknown; however, the Company has not had prior claims or losses pursuant to these contracts. The Manager has reviewed the Company’s existing contracts and expects the risk of loss to the Company to be remote.
Additionally, from time to time, the Company and individuals employed by the Company and the Company’s Manager may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company’s rights under contracts with borrowers and investees. While the outcome of these legal proceedings cannot be predicted with certainty, the Company does not expect that such proceedings will have a material effect upon the financial condition or results of operations.
Note 10. Equity
Earnings Per Share
The following table presents earnings per share:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2025 | 2024 | ||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | |||||||||||||||||||
| Weighted-average shares outstanding - basic and diluted | |||||||||||||||||||||||
| Loss per share - basic and diluted | $ | ( | $ | ( | |||||||||||||||||||
Preferred Stock
The Company’s charter gives it authority to issue 50,000,000 0.01 no
Common Stock
On October 1, 2022, in connection with the BDC Merger, the Company amended its charter to increase the shares authorized from 500,000,000 to 950,000,000 , consisting of 450,000,000 shares of Class A Common Stock, $0.01 par value per share (“Class A Common Stock”), 450,000,000 shares of Class B Common Stock, and 50,000,000 shares of Preferred Stock. Concurrently, 4,847,910 shares of Class B Common Stock were issued to former Terra BDC stockholders and each share of the Company’s common stock issued and outstanding immediately prior to the effective time of the BDC Merger was automatically changed into one issued and outstanding share of Class B Common Stock. As of March 31, 2025, Terra Fund 7 and Terra Offshore REIT held 8.7 % and 10.1 %, respectively, of the issued and outstanding shares of the Company’s common stock.
The Class B Common Stock rank equally with and have identical preferences, rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, and terms and conditions of redemption as each other share of the Company’s common stock, except as set forth below with respect to conversion.
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Notes to Unaudited Consolidated Financial Statements
In connection with the potential liquidity transactions discussed in Note 1, on December 1, 2023, the Company amended its articles of amendment and restatement (the “A&R Articles”) to provide the Board with greater flexibility to pursue a direct listing. In connection with a listing of shares of Class A Common Stock on a national securities exchange, the outstanding shares of Class B Common Stock will be convertible on a one -for-one basis into listed shares of Class A Common Stock, subject to certain conversion terms and holding periods. Currently, there are no outstanding shares of Class A Common Stock.
The A&R Articles also incorporate the provisions generally required by state regulators in order to become a non-traded REIT and publicly sell shares of the Company’s stock not listed on an exchange. These non-traded REIT provisions will spring into effect and become operative if the Company ultimately decides to register and sell shares in a non-traded REIT format.
Distributions
The Company generally intends to distribute substantially all of its taxable income, which does not necessarily equal net income as calculated in accordance with U.S. GAAP, to its stockholders each year to comply with the REIT provisions of the Internal Revenue Code. All distributions will be made at the discretion of the Board and will depend upon its taxable income, financial condition, maintenance of REIT status, applicable law, and other factors as the Board deems relevant.
For the three months ended March 31, 2025 and 2024, the Company made distributions to investors totaling $4.7 4.7
Dividend Reinvestment Plan
On January 20, 2023, the Board adopted a distribution reinvestment plan (the “Plan”), pursuant to which the Company’s stockholders may elect to reinvest cash distributions payable by the Company in additional shares of Class A Common Stock and Class B Common Stock, at the price per share determined pursuant to the Plan. For the three months ended March 31, 2025 and 2024, the Company issued 629 and 391 shares of Class B Common Stock for a total of $6,165 and $4,474 pursuant to the Plan, respectively.
Note 11. Subsequent Events
34
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and related notes thereto and other financial information included elsewhere in this quarterly report on Form 10-Q. In this report, “we,” “us” and “our” refer to Terra Property Trust, Inc. (and, together with its consolidated subsidiaries, the “Company” or “Terra Property Trust”).
FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this quarterly report on Form 10-Q within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For these statements, we claim the protections of the safe harbor for forward-looking statements contained in such Sections. The forward-looking statements contained in this quarterly report on Form 10-Q may include, but are not limited to, statements as to:
•our expected financial performance, operating results and our ability to make distributions to our stockholders in the future;
•our ability to achieve the expected synergies, cost savings and other benefits from the BDC Merger (as defined below);
•risks associated with achieving expected synergies, cost savings and other benefits from our increased scale;
•the availability of attractive risk-adjusted investment opportunities in our target asset class and other real estate-related investments that satisfy our objectives and strategies;
•the origination or acquisition of our targeted assets, including the timing of originations or acquisitions;
•volatility in our industry, interest rates and spreads, the debt or equity markets, the general economy or the real estate market specifically, whether the results of market events or otherwise;
•changes in our investment objectives and business strategy;
•the availability of financing on acceptable terms or at all;
•the performance and financial condition of our borrowers;
•changes in interest rates and the market value of our assets;
•borrower defaults or decreased recovery rates from our borrowers;
•changes in prepayment rates on our loans;
•our use of financial leverage;
•actual and potential conflicts of interest with any of the following affiliated entities: Terra Fund Advisors, LLC, Terra REIT Advisors, LLC (our “Manager”); Terra Capital Partners, LLC (“Terra Capital Partners”), our sponsor; Terra Secured Income Fund 5 International; Terra Income Fund International; Terra Secured Income Fund 7, LLC (“Terra Fund 7”); Terra Offshore Funds REIT, LLC (“Terra Offshore REIT”); Mavik Real Estate Special Opportunities Fund, LP (“RESOF”); Mavik Real Estate Special Opportunities VS2, LP (“VS2”); or any of their affiliates;
•our dependence on our Manager or its affiliates and the availability of its senior management team and other personnel;
•liquidity transactions that may be available to us in the future, including a liquidation of our assets, a sale of our company, a listing of our shares of common stock on a national securities exchange, an amendment of our charter to incorporate certain provisions generally required by state securities regulators to allow us to publicly sell unlisted shares (provided that such provisions would only take effect when a registration statement related to the publicly offered unlisted shares is declared effective), an adoption of a share repurchase plan or a strategic business
35
combination, in each case, which may include the distribution of our common stock indirectly owned by certain of our affiliate funds (the “Terra Funds”) to the ultimate investors in the Terra Funds, and the timing of any such transactions;
•actions and initiatives of the U.S. federal, state and local government and changes to the U.S., federal, state and local government policies and the execution and impact of these actions, initiatives and policies;
•limitations imposed on our business and our ability to satisfy complex rules in order for us to maintain our exemption exclusion or from registration under the Investment Company Act of 1940, as amended (the “1940 Act”), and to maintain our qualification as a real estate investment trust (“REIT”) for U.S. federal income tax purposes; and
•the degree and nature of our competition.
In addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Part I — Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2024. Other factors that could cause actual results to differ materially include:
•changes in the economy;
•tariffs imposed by the current presidential administration and the threat of such tariffs;
•the availability of financing on acceptable terms or at all;
•risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters; and
•future changes in laws or regulations and conditions in our operating areas.
We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders are advised to consult any additional disclosures that we may make directly to stockholders or through reports that we may file in the future with the Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
Overview
We are a real estate investment trust that originates, invests in and manages a diverse portfolio of real estate and real estate-related assets. We focus primarily on commercial real estate credit investments, including first mortgage loans, subordinated loans (including B-notes, mezzanine and preferred equity) and credit facilities throughout the United States, which we collectively refer to as our targeted assets. Our loans finance the acquisition, development or recapitalization of high-quality commercial real estate in the United States. We focus on middle market loans in the approximately $10 million to $50 million range, which we believe are subject to less competition, offer higher risk-adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification. Our investment objective is to provide attractive risk-adjusted returns to our stockholders, primarily by earning high current income that allows for regular distributions, and, in certain instances, benefiting from potential capital appreciation. There can be no assurances that we will be successful in meeting our investment objective. We may also make strategic real estate equity and non-real estate-related investments that align with our investment objectives and criteria.
As of March 31, 2025, we held a net loan portfolio (gross loans less obligations under participation agreements and secured borrowing) comprised of 10 loans in eight states with an aggregate net principal balance of $252.5 million, a weighted average coupon rate of 13.3% and a weighted average remaining term to maturity of 0.8 years.
Each of our loans was originated by Terra Capital Partners or its affiliates. Our portfolio is diversified based on location of the underlying properties, loan structure and property type. As of March 31, 2025, our portfolio included underlying properties located in 10 markets, across eight states and includes property types such as multifamily housing, student housing, commercial offices, medical offices, mixed-use and infill properties. The profile of these properties ranges from stabilized and value-added properties to pre-development and construction. Our loans are structured across mezzanine debt, first mortgages, preferred equity investments and credit facilities.
36
We were incorporated under the Maryland General Corporation Law on December 31, 2015. Through December 31, 2015, our business was conducted through a series of predecessor private partnerships. At the beginning of 2016, we completed the merger of these private partnerships into a single entity as part of our plan to reorganize our business as a REIT for federal income tax purposes (the “REIT Formation Transaction”). Following the REIT Formation Transaction, Terra Secured Income Fund 5, LLC (“Terra Fund 5”) contributed the consolidated portfolio of net assets of certain Terra Funds to our company in exchange for all of the shares of our common stock. On March 2, 2020, we engaged in a series of transactions pursuant to which we issued an aggregate of 4,574,470.35 shares of common stock in exchange for the settlement of an aggregate of $49.8 million of participation interests in loans held by us, cash of $25.5 million and other working capital.
On October 1, 2022, pursuant to that certain Agreement and Plan of Merger, dated as of May 2, 2022 (the “Merger Agreement”), Terra Income Fund 6, Inc. (“Terra BDC”) merged with and into Terra Income Fund 6, LLC (“Terra LLC”), our wholly owned subsidiary, with Terra LLC continuing as the surviving entity of the merger (the “BDC Merger”) and as our wholly owned subsidiary. Pursuant to the terms of the transactions described in the Merger Agreement, approximately 4,847,910 shares of our Class B Common Stock, $0.01 par value per share (“Class B Common Stock”), were issued to former Terra BDC stockholders in connection with the BDC Merger, based on the number of outstanding shares of Terra BDC Common Stock as of October 1, 2022.
As of March 31, 2025, Terra Fund 7 and Terra Offshore REIT held approximately 8.7% and 10.1%, respectively, of our issued and outstanding Class B Common Stock.
As previously disclosed, we continue to explore alternative liquidity transactions on an opportunistic basis to maximize stockholder value. Examples of the alternative liquidity transactions that, depending on market conditions, may be available to us include a listing of our shares of common stock on a national securities exchange, adoption of a share repurchase plan, a liquidation of our assets, a sale of our company or a strategic business combination, in each case, which may include the further in-kind distribution of our shares of common stock indirectly owned by certain of our affiliate funds to the ultimate investors in such affiliate funds. We cannot provide any assurance that any alternative liquidity transaction will be available or, if available, that we will pursue or be successful in completing any such alternative liquidity transaction.
One of the potential future liquidity transactions that we continue to evaluate is a “direct listing” of its Class A Common Stock, $0.01 par value per share (“Class A Common Stock”), on a national securities exchange (i.e., a listing not involving a concurrent public offering of newly issued shares). If market conditions are not supportive of a direct listing that would in our view lead to a constructive trading environment for the Class A Common Stock, we will explore alternative paths to pursue our investment strategy and provide liquidity to our investors, including converting our company into a traditional “non-traded REIT.” As part of a potential conversion to a non-traded REIT, we would adopt a customary share repurchase plan pursuant to which our investors could request to have their shares of its common stock redeemed for cash.
We have elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2016. So long as we qualify as a REIT, we generally are not subject to U.S. federal income tax on our net taxable income to the extent that we annually distribute all of our net taxable income to our stockholders.
Portfolio Summary
Net Loan Portfolio
The following tables provide a summary of our net loan portfolio. Carrying value represents the amortized cost of loan, net of applicable allowance for credit losses.
| March 31, 2025 | |||||||||||||||||||||||||||||
| Fixed Rate | Floating Rate (1)(2)(3) | Total Gross Loans | Obligations under Participation Agreements | Total Net Loans | |||||||||||||||||||||||||
| Number of loans | 2 | 8 | 10 | 1 | 10 | ||||||||||||||||||||||||
| Principal balance | $ | 12,823,878 | $ | 258,356,255 | $ | 271,180,133 | $ | 18,668,574 | $ | 252,511,559 | |||||||||||||||||||
| Carrying value | 12,132,565 | 213,316,655 | 225,449,220 | 18,849,311 | 206,599,909 | ||||||||||||||||||||||||
| Fair value | 11,786,330 | 214,841,092 | 226,627,422 | 18,849,311 | 207,778,111 | ||||||||||||||||||||||||
Weighted average coupon rate (4) | 8.50 | % | 14.06 | % | 13.86 | % | 19.33 | % | 13.28 | % | |||||||||||||||||||
Weighted-average remaining term (years) (5) | 2.44 | 0.74 | 0.82 | — | 0.82 | ||||||||||||||||||||||||
37
| December 31, 2024 | |||||||||||||||||||||||||||||
| Fixed Rate | Floating Rate (1)(2)(3) | Total Gross Loans | Obligations under Participation Agreements | Total Net Loans | |||||||||||||||||||||||||
| Number of loans | 2 | 11 | 13 | 1 | 13 | ||||||||||||||||||||||||
| Principal balance | $ | 12,680,463 | $ | 304,574,560 | $ | 317,255,023 | $ | 18,000,000 | $ | 299,255,023 | |||||||||||||||||||
| Carrying value | 12,106,695 | 262,542,450 | 274,649,145 | 18,177,107 | 256,472,038 | ||||||||||||||||||||||||
| Fair value | 11,740,671 | 264,796,547 | 276,537,218 | 18,254,853 | 258,282,365 | ||||||||||||||||||||||||
Weighted average coupon rate (4) | 8.50 | % | 13.18 | % | 13.04 | % | 19.53 | % | 12.52 | % | |||||||||||||||||||
Weighted-average remaining term (years) (5) | 2.68 | 0.84 | 0.91 | 0.10 | 0.99 | ||||||||||||||||||||||||
_______________
(1)These loans pay a coupon rate of Secured Overnight Financing Rate (“SOFR”) or forward-looking term rate based on SOFR (“Term SOFR”), as applicable, plus a fixed spread. Coupon rates shown were determined using the average SOFR of 4.33% and Term SOFR of 4.32% as of March 31, 2025 and average SOFR of 4.53% and Term SOFR of 4.33% as of December 31, 2024.
(2)As of March 31, 2025 and December 31, 2024, amount included $169.1 million and $208.0 million of senior mortgages used as collateral for $82.8 million and $123.2 million of borrowings under secured financing agreements, respectively (Note 8).
(3)As of March 31, 2025 and December 31, 2024, 7 and 10 loans, respectively, were subject to a SOFR or Term SOFR floor, as applicable.
(4)Excludes non-performing loans for which recovery of interest income was not probable.
(5)Excludes loans that are in maturity default and represents current effective maturity as of March 31, 2025 and December 31, 2024, exclusive of any extension available.
Real Estate Ownership
In addition to our net loan portfolio, we own eight industrial buildings. As of March 31, 2025 and December 31, 2024, the real estate and related lease intangible assets and liabilities had a net carrying value of $124.4 million and $125.3 million, respectively, and the mortgage loans payable encumbering the real estate properties had an outstanding principal amount of $74.4 million and $74.4 million, respectively.
Equity Interest in Unconsolidated Investments
As of both March 31, 2025 and December 31, 2024, we owned 14.9% of equity interest in a limited partnership that invests primarily in performing and non-performing mortgages, loans, mezzanines and other credit instruments supported by underlying commercial real estate assets. We also beneficially own equity interests in joint ventures that invest in real estate properties, opportunistic debt and equity securities and, indirectly, together with other non-affiliated entities, non-real estate operating companies, as well as a preferred equity investment with residual profit sharing from sale of the underlying property. These investments are accounted for using the equity method of accounting. As of March 31, 2025 and December 31, 2024, these equity interests had total carrying value of $108.1 million and $106.8 million, respectively.
Book Value Per Share
We calculate our book value per share by dividing our net equity by the number of outstanding shares of our common stock, unless otherwise determined by our Board. Our book value per share of Class B Stock Common Stock as of March 31, 2025 and December 31, 2024 was $7.39 and $7.63, respectively.
Portfolio Investment Activity
Net Loan Portfolio
For the three months ended March 31, 2025 and 2024, we invested $29.0 million and $11.4 million in new and add-on investments and had $23.7 million and $27.5 million of repayments, resulting in net repayments of $5.3 million and $16.1 million, respectively. Amounts are net of obligations under participation agreements and secured financing agreements.
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Net Loan Portfolio Information
The tables below set forth the types of loans in our loan portfolio, as well as the property type and geographic location of the properties securing these loans, on a net loan basis, which represents our proportionate share of the loans, based on our economic ownership of these loans as of:
| March 31, 2025 | December 31, 2024 | |||||||||||||||||||||||||||||||||||||
| Loan Structure | Principal Balance | Carrying Value | % of Total | Principal Balance | Carrying Value | % of Total | ||||||||||||||||||||||||||||||||
| First mortgages | $ | 169,122,522 | $ | 170,022,605 | 82.3 | % | $ | 207,985,740 | $ | 209,496,879 | 81.6 | % | ||||||||||||||||||||||||||
| Preferred equity investments | 76,389,037 | 29,598,616 | 14.3 | % | 76,224,551 | 31,937,149 | 12.5 | % | ||||||||||||||||||||||||||||||
| Mezzanine loans | 7,000,000 | 6,978,687 | 3.4 | % | 15,044,732 | 15,038,010 | 5.9 | % | ||||||||||||||||||||||||||||||
| Total | $ | 252,511,559 | $ | 206,599,908 | 100.0 | % | $ | 299,255,023 | $ | 256,472,038 | 100.0 | % | ||||||||||||||||||||||||||
| March 31, 2025 | December 31, 2024 | |||||||||||||||||||||||||||||||||||||
| Property Type | Principal Balance | Carrying Value | % of Total | Principal Balance | Carrying Value | % of Total | ||||||||||||||||||||||||||||||||
| Multifamily | $ | 66,461,136 | $ | 66,128,293 | 32.0 | % | $ | 60,969,051 | $ | 60,662,514 | 23.7 | % | ||||||||||||||||||||||||||
| Infill land | 55,816,006 | 56,634,067 | 27.4 | % | 56,307,815 | 57,050,952 | 22.2 | % | ||||||||||||||||||||||||||||||
| Office | 100,819,571 | 54,785,090 | 26.5 | % | 116,539,650 | 72,991,791 | 28.4 | % | ||||||||||||||||||||||||||||||
| Mixed-use | 22,414,846 | 22,073,770 | 10.7 | % | 30,438,507 | 29,890,548 | 11.7 | % | ||||||||||||||||||||||||||||||
| Industrial | 7,000,000 | 6,978,688 | 3.4 | % | 7,000,000 | 6,966,233 | 2.7 | % | ||||||||||||||||||||||||||||||
| Student housing | — | — | — | % | 28,000,000 | 28,910,000 | 11.3 | % | ||||||||||||||||||||||||||||||
| Total | $ | 252,511,559 | $ | 206,599,908 | 100.0 | % | $ | 299,255,023 | $ | 256,472,038 | 100.0 | % | ||||||||||||||||||||||||||
| March 31, 2025 | December 31, 2024 | |||||||||||||||||||||||||||||||||||||
| Geographic Location | Principal Balance | Carrying Value | % of Total | Principal Balance | Carrying Value | % of Total | ||||||||||||||||||||||||||||||||
| United States | ||||||||||||||||||||||||||||||||||||||
| Arizona | $ | 32,909,916 | $ | 32,582,673 | 15.8 | % | $ | 33,407,815 | $ | 33,005,952 | 12.9 | % | ||||||||||||||||||||||||||
| Washington | 31,638,858 | 31,744,601 | 15.4 | % | 26,894,593 | 26,907,157 | 10.5 | % | ||||||||||||||||||||||||||||||
| Georgia | 30,842,779 | 30,934,415 | 15.0 | % | 30,562,858 | 30,586,450 | 11.9 | % | ||||||||||||||||||||||||||||||
| California | 29,586,767 | 29,823,877 | 14.4 | % | 53,006,023 | 53,096,008 | 20.6 | % | ||||||||||||||||||||||||||||||
| New York | 75,800,670 | 29,004,553 | 14.0 | % | 75,657,255 | 31,536,808 | 12.3 | % | ||||||||||||||||||||||||||||||
| New Jersey | 22,906,090 | 24,051,394 | 11.6 | % | 22,900,000 | 24,045,000 | 9.4 | % | ||||||||||||||||||||||||||||||
| North Carolina | 21,826,479 | 21,479,707 | 10.4 | % | 21,826,479 | 21,418,430 | 8.4 | % | ||||||||||||||||||||||||||||||
| Massachusetts | 7,000,000 | 6,978,688 | 3.4 | % | 7,000,000 | 6,966,233 | 2.7 | % | ||||||||||||||||||||||||||||||
| Utah | — | — | — | % | 28,000,000 | 28,910,000 | 11.3 | % | ||||||||||||||||||||||||||||||
| Total | $ | 252,511,559 | $ | 206,599,908 | 100.0 | % | $ | 299,255,023 | $ | 256,472,038 | 100.0 | % | ||||||||||||||||||||||||||
Factors Impacting Operating Results
Our results of operations are affected by a number of factors and primarily depend on, among other things, the level of the interest income from targeted assets, the market value of our assets and the supply of, and demand for, real estate-related loans, including mezzanine loans, first mortgage loans, subordinated mortgage loans, preferred equity investments and other loans related to high quality commercial real estate in the United States, and the financing and other costs associated with our business. Interest income and borrowing costs may vary as a result of changes in interest rates, which could impact the net interest we receive on our assets. Our operating results may also be impacted by conditions in the financial markets and unanticipated credit events experienced by borrowers under our loan assets.
Credit Risk
Our loans and investments are subject to credit risk. The performance and value of our loans and investments depend upon the owners’ ability to operate the properties that serve as our collateral so that they produce cash flows adequate to pay interest
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and principal due to us. To monitor this risk, our asset management team reviews our investment portfolios and is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary.
In addition, we are exposed to the risks generally associated with the commercial real estate market, including variances in occupancy rates, capitalization rates, absorption rates, and other macroeconomic factors beyond our control. We seek to manage these risks through our Manager's underwriting and asset management processes.
We maintain all of our cash at financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation.
Concentration Risk
We hold real estate and real estate-related loans. Thus, our investment portfolio may be subject to a more rapid change in value than would be the case if it were required to maintain a wide diversification among industries, companies and types of loans. The result of such concentration in real estate assets is that a loss in such investments could materially reduce our capital.
Interest Rate Risk
Interest rate risk represents the effect from a change in interest rates, which could result in an adverse change in the fair value of our interest-bearing financial instruments. With respect to our business operations, increases in interest rates, in general, may over time cause: (i) the interest expense associated with variable rate borrowings to increase; (ii) the value of real estate and real estate-related loans to decline; (iii) coupons on variable rate loans to reset, although on a delayed basis, to higher interest rates; (iv) to the extent applicable under the terms of our investments, prepayments on real estate-related loans to slow; and (v) to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to increase.
Conversely, decreases in interest rates, in general, may over time cause: (i) the interest expense associated with variable rate borrowings to decrease; (ii) the value of real estate and real estate-related loans to increase; (iii) coupons on variable rate real estate-related loans to reset, although on a delayed basis, to lower interest rates; (iv) to the extent applicable under the terms of our investments, prepayments on real estate-related loans to increase; and (v) to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to decrease.
Prepayment Risk
Prepayments can either positively or adversely affect the yields on our loans. Prepayments on debt instruments, where permitted under the debt documents, are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control, and consequently, such prepayment rates cannot be predicted with certainty. If we do not collect a prepayment fee in connection with a prepayment or are unable to invest the proceeds of such prepayments received, the yield on the portfolio will decline. In addition, we may acquire assets at a discount or premium and if the asset does not repay when expected, the anticipated yield may be impacted. Under certain interest rate and prepayment scenarios we may fail to recoup fully our cost of acquisition of certain loans.
Extension Risk
Extension risk is the risk that our assets will be repaid at a slower rate than anticipated and generally increases when interest rates rise. In which case, to the extent we have financed the acquisition of an asset, we may have to finance our asset at potentially higher costs without the ability to reinvest principal into higher yielding securities because borrowers prepay their mortgages at a slower pace than originally expected, adversely impacting our net interest spread, and thus our net interest income.
Real Estate Risk
The market values of commercial and residential mortgage assets are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; retroactive changes to building or similar codes; pandemics; natural disasters; and other acts of god. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loans, which could also cause us to suffer losses.
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Use of Leverage
We deploy moderate amounts of leverage as part of our operating strategy, which may consist of borrowings under first mortgage financings, warehouse facilities, term loans, repurchase agreements and other credit facilities. While borrowing and leverage present opportunities for increasing total return, they may have the effect of potentially creating or increasing losses.
Market Risk
Our loans are highly illiquid, and there is no assurance that we will achieve our investment objectives, including targeted returns. Due to the illiquidity of the loans, valuation of our loans may be difficult, as there generally will be no established markets for these loans.
Results of Operations
The following table presents the comparative results of our operations:
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| 2025 | 2024 | Change | |||||||||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||
| Interest income | $ | 10,205,897 | $ | 12,148,735 | $ | (1,942,838) | |||||||||||||||||||||||||||||
| Real estate operating revenue | 2,184,195 | 2,719,701 | (535,506) | ||||||||||||||||||||||||||||||||
| Other operating income | 66,657 | 140,909 | (74,252) | ||||||||||||||||||||||||||||||||
| 12,456,749 | 15,009,345 | (2,552,596) | |||||||||||||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||||
| Operating expenses reimbursed to Manager | 1,429,953 | 2,178,164 | (748,211) | ||||||||||||||||||||||||||||||||
| Asset management fee | 1,367,789 | 1,715,042 | (347,253) | ||||||||||||||||||||||||||||||||
| Asset servicing fee | 329,600 | 406,525 | (76,925) | ||||||||||||||||||||||||||||||||
| Provision for credit losses | 2,119,736 | 1,873,111 | 246,625 | ||||||||||||||||||||||||||||||||
| Real estate operating expenses | 975,228 | 691,006 | 284,222 | ||||||||||||||||||||||||||||||||
| Depreciation and amortization | 1,345,937 | 2,116,682 | (770,745) | ||||||||||||||||||||||||||||||||
| Professional fees | 518,354 | 885,569 | (367,215) | ||||||||||||||||||||||||||||||||
| Directors’ fees | 83,750 | 83,750 | — | ||||||||||||||||||||||||||||||||
| Other | 202,190 | 262,911 | (60,721) | ||||||||||||||||||||||||||||||||
| 8,372,537 | 10,212,760 | (1,840,223) | |||||||||||||||||||||||||||||||||
| Operating income | 4,084,212 | 4,796,585 | (712,373) | ||||||||||||||||||||||||||||||||
| Other income and expenses | |||||||||||||||||||||||||||||||||||
| Interest expense on secured financing | (4,548,870) | (7,289,912) | 2,741,042 | ||||||||||||||||||||||||||||||||
| Interest expense on unsecured notes payable | (2,491,537) | (2,440,375) | (51,162) | ||||||||||||||||||||||||||||||||
| Interest expense on obligations under participation agreements | (888,904) | (618,495) | (270,409) | ||||||||||||||||||||||||||||||||
| Unrealized loss on investments, net | (75) | (22,931) | 22,856 | ||||||||||||||||||||||||||||||||
| Income (loss) from equity interest in unconsolidated investments | 2,560,110 | (473,387) | 3,033,497 | ||||||||||||||||||||||||||||||||
| Realized loss on investments, net | — | (135,459) | 135,459 | ||||||||||||||||||||||||||||||||
| (5,369,276) | (10,980,559) | 5,611,283 | |||||||||||||||||||||||||||||||||
| Net loss | $ | (1,285,064) | $ | (6,183,974) | $ | 4,898,910 | |||||||||||||||||||||||||||||
Net Loan Portfolio
In assessing the performance of our loans, we believe it is appropriate to evaluate the loans on an economic basis, that is, gross loans net of obligations under participation agreements, promissory notes payable, revolving credit facility, secured borrowing and repurchase agreements payable.
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The following table presents a reconciliation of our loan portfolio on a weighted average basis from gross to net:
| Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | |||||||||||||||||||||||||
Weighted Average Principal Amount (1) | Weighted Average Coupon Rate (2) | Weighted Average Principal Amount (1) | Weighted Average Coupon Rate (2) | |||||||||||||||||||||||
| Total portfolio | ||||||||||||||||||||||||||
| Gross loans | $ | 301,186,692 | 13.0 | % | $ | 486,104,899 | 13.1 | % | ||||||||||||||||||
| Obligations under participation agreements | (18,349,524) | 19.3 | % | (12,032,967) | 20.3 | % | ||||||||||||||||||||
| Secured borrowing | (16,363,889) | 9.9 | % | — | — | % | ||||||||||||||||||||
| Promissory notes payable | (23,753,749) | 9.4 | % | (65,985,924) | 10.9 | % | ||||||||||||||||||||
| Repurchase agreements payable | (39,389,877) | 9.0 | % | (80,820,899) | 8.6 | % | ||||||||||||||||||||
| Revolving line of credit payable | (14,789,174) | 7.7 | % | (46,881,127) | 8.7 | % | ||||||||||||||||||||
Net loans (3) | $ | 188,540,479 | 14.4 | % | $ | 280,383,982 | 15.3 | % | ||||||||||||||||||
| Senior loans | ||||||||||||||||||||||||||
| Gross loans | $ | 215,794,304 | 13.2 | % | $ | 378,176,428 | 12.8 | % | ||||||||||||||||||
| Obligations under participation agreements | — | — | % | — | — | % | ||||||||||||||||||||
| Secured borrowing | (16,363,889) | 9.9 | % | — | — | % | ||||||||||||||||||||
| Promissory notes payable | (23,753,749) | 9.4 | % | (65,985,924) | 10.9 | % | ||||||||||||||||||||
| Repurchase agreements payable | (39,389,877) | 9.0 | % | (80,820,899) | 8.6 | % | ||||||||||||||||||||
| Revolving line of credit payable | (14,789,174) | 7.7 | % | (46,881,127) | 8.7 | % | ||||||||||||||||||||
Net loans (3) | $ | 121,497,615 | 16.4 | % | $ | 184,488,478 | 16.4 | % | ||||||||||||||||||
Subordinated loans (4) | ||||||||||||||||||||||||||
| Gross loans | $ | 85,392,388 | 12.4 | % | $ | 107,928,471 | 14.0 | % | ||||||||||||||||||
| Obligations under participation agreements | (18,349,524) | 19.3 | % | (12,032,967) | 20.3 | % | ||||||||||||||||||||
Net loans (3) | $ | 67,042,864 | 10.5 | % | $ | 95,895,504 | 13.2 | % | ||||||||||||||||||
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(1)Amount is calculated based on the number of days each loan is outstanding.
(2)Amount is calculated based on the underlying principal amount of each loan.
(3)The weighted average coupon rate represents net interest income over the period calculated using the weighted average coupon rate and weighted average principal amount shown on the table (interest income on the loans less interest expense) divided by the weighted average principal amount of the net loans during the period.
(4)Subordinated loans include mezzanine loans, preferred equity investments and credit facilities.
Interest Income
For the three months ended March 31, 2025 as compared to the three months ended March 31, 2024, interest income decreased by $1.9 million, primarily due to a decrease in contractual interest income as a result of a decrease in the weighted average principal balance of performing loans.
Real Estate Operating Revenue
For the three months ended March 31, 2025 as compared to the three months ended March 31, 2024, real estate operating revenue decreased by $0.5 million, primarily due to the write off of the unamortized below-market rent intangible in connection with a least termination in January 2024.
Other Operating Income
For the three months ended March 31, 2025 as compared to the three months ended March 31, 2024, other operating income decreased by $0.1 million, primarily due to dividend income earned on our trading equity securities in 2024 (there was no such dividend income earned in 2025).
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Operating Expenses Reimbursed to Manager
Under the terms of a management agreement (the “Management Agreement”) with our Manager, we reimburse our Manager for operating expenses incurred in connection with services provided to us, including our allowable share of our Manager’s overhead, such as rent, employee costs, utilities and technology costs.
For the three months ended March 31, 2025 as compared to the three months ended March 31, 2024, operating expenses reimbursed to our Manager decreased by $0.7 million, primarily due to a decrease in the allocation ratio as a result of a decrease in our total funds under management.
Asset Management Fee
Under the terms of the Management Agreement with our Manager, we paid our Manager a monthly asset management fee at an annual rate of 1% of the aggregate funds under management, which included the aggregate gross acquisition price, net of participation interest sold to affiliates, for each investment and cash held by us.
For the three months ended March 31, 2025 as compared to the three months ended March 31, 2024, asset management fees decreased by $0.3 million, primarily due to a decrease in total assets under management resulting from repayment of loans.
Asset Servicing Fee
Under the terms of the Management Agreement with our Manager, we paid our Manager a monthly servicing fee at an annual rate of 0.25% of the aggregate gross origination price or acquisition price for each investment held by us.
For the three months ended March 31, 2025 as compared to the three months ended March 31, 2024, asset servicing fees decreased by $0.1 million, primarily due to a decrease in total assets under management resulting from the repayment of loans.
Provision for Credit Losses
We follow the provisions of Accounting Standards Codification (“ASC”) 326, Financial Instruments – Credit Losses, which requires entities to recognize credit losses on financial instruments based on an estimate of current expected credit losses.
For the three months ended March 31, 2025 and 2024, provision for credit losses was $2.1 million and $1.9 million, respectively, primarily related to a decline in our estimated recoverable amount on a non-performing subordinated loan due to an increase in senior funding.
Real Estate Operating Expenses
For the three months ended March 31, 2025 as compared to the three months ended March 31, 2024, real estate operating expenses increased by $0.3 million, primarily due to an increase in repairs and maintenance as well as other expenses, partially offset by a decrease in real estate taxes.
Depreciation and Amortization
For the three months ended March 31, 2025 as compared to the three months ended March 31, 2024, depreciation and amortization decreased by $0.8 million, primarily due to a decrease in amortization of in-place lease intangibles related to the termination of a lease for a space in one of the industrial properties in January 2024, resulting in a write off of the related unamortized in-place lease.
Professional Fees
For the three months ended March 31, 2025 as compared to the three months ended March 31, 2024, professional fees decreased by $0.4 million, primarily due to legal fees incurred in connection with a review of strategic alternatives for our company in 2024.
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Interest Expense on Secured Financing
Our secured financing consists of repurchase agreements, revolving line of credit, term loan, promissory notes and property mortgages.
For the three months ended March 31, 2025 as compared to the three months ended March 31, 2024, interest expense on secured financing decreased by $2.7 million, as a result of a decrease in the weighted average principal amount outstanding.
Interest Expense on Unsecured Notes Payable
In June 2021, we issued $85.1 million in aggregate principal amount of 6.00% notes due 2026. In connection with the BDC Merger, we assumed $38.4 million in aggregate principal amount of 7.00% notes due in 2026.
For the three months ended March 31, 2025 as compared to the three months ended March 31, 2024, interest expense on unsecured notes payable increased by $0.1 million, primarily due to an increase in the amortization of financing costs using the effective interest rate method.
Interest from Obligations under Participation Agreements
For the three months ended March 31, 2025 as compared to the three months ended March 31, 2024, interest expense from obligations under participation agreements increased by $0.3 million, primarily as a result of an increase in the weighted average principal amount outstanding, partially offset by a decrease in the weighted average interest rate on the obligations under participation agreements.
Income (Loss) from Equity Interest in Unconsolidated Investments
As of both March 31, 2025 and December 31, 2024, we owned a 14.9% equity interest in RESOF, an affiliated limited partnership that invests primarily in performing and non-performing mortgages, loans, mezzanines and other credit instruments supported by underlying commercial real estate assets. We also beneficially owned equity interests in joint ventures that invest in real estate properties, opportunistic debt and equity securities and, indirectly, together with other non-affiliated entities, non-real estate operating companies, and a preferred equity investment with residual profit-sharing.
Our income (loss) from equity interest in unconsolidated investments are as follows:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2025 | 2024 | ||||||||||||||||||||||
| Income from equity interest in RESOF | $ | 2,206,934 | $ | 998,339 | |||||||||||||||||||
| Loss from equity interest in the joint ventures | (250,393) | (1,471,726) | |||||||||||||||||||||
| Income from other equity investment | 603,569 | — | |||||||||||||||||||||
| $ | 2,560,110 | $ | (473,387) | ||||||||||||||||||||
For the three months ended March 31, 2025 as compared to the three months ended March 31, 2024, equity income from RESOF increased as a result of an increase in RESOF’s net income associated with increased investments.
For the three months ended March 31, 2025 as compared to the three months ended March 31, 2024, equity loss from the joint ventures decreased primarily due to equity income recognized from our new investments in non-real estate operating companies as well as a decrease in the net loss of the real estate joint ventures resulting from the sale of a property in 2024.
Other equity investment relates to a preferred equity agreement in which we also share residual profit from the sale of underlying property with the borrower. There was no such investment during the three months ended March 31, 2024.
Realized Loss On Investments, Net
For the three months ended March 31, 2024, we sold a portion of our investments in trading securities and recognized a net loss on sale of $0.1 million. There was no such realized loss for the three months ended March 31, 2025.
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Net Loss
For the three months ended March 31, 2025 as compared to the three months ended March 31, 2024, the resulting net loss decreased by $4.9 million.
Financial Condition, Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, funding and maintaining our assets and operations, making distributions to our stockholders and other general business needs. We use significant cash to purchase our target assets, repay principal and interest on our borrowings, make distributions to our investors and fund our operations. Our primary sources of cash generally consist of payments of principal and interest we receive on our portfolio of investments, cash generated from our operating results and unused borrowing capacity under our financing sources. We deploy moderate amounts of leverage as part of our operating strategy and use a number of sources to finance our target assets, including our senior notes, term loan, repurchase agreement and revolving line of credit. We may use other sources to finance our target assets, including bank financing and arranged financing facilities with domestic or international financing providers. In addition, we may divide the loans we originate into senior and junior tranches and dispose of the more senior tranches as an additional means of providing financing to our business.
We may also issue additional equity, equity-related and debt securities to fund our investment strategies. We may issue these securities to unaffiliated third parties or to vehicles advised by affiliates of Terra Capital Partners or third parties. As part of our capital raising transactions, we may grant to one or more of these vehicles certain control rights over our activities including rights to approve major decisions we take as part of our business. In order to qualify as a REIT, we must distribute to our stockholders, each calendar year, dividends equal to at least 90% of our REIT taxable income (including certain items of non-cash income), determined without regard to the deduction for dividends paid and excluding net capital gain. These distribution requirements limit our ability to retain earnings and thereby replenish or increase capital for our business.
We expect to fund approximately $11.2 million of the unfunded commitments to borrowers during the next twelve months. We expect to maintain sufficient liquidity to fund such commitments through matching these commitments with principal repayments on outstanding loans or draw downs on our credit facilities. Obligations under participation agreements of $18.7 million will mature in the next twelve months. We will use the proceeds from the repayment of the corresponding investment to repay the participation obligations. Our revolving line of credit with outstanding principal balance of $12.6 million is scheduled to mature on June 30, 2025. We expect to use proceeds from repayment of the underlying loan to repay the outstanding principal or refinance with another lender. Additionally, two promissory notes payable with a total outstanding principal balance of $24.9 million that are collateralized by senior loans with an aggregate principal balance of $54.5 million will mature within the next twelve months. We expect to use proceeds from the repayment of the underlying loans to repay the promissory notes payable. Finally, our 7.00% Senior Notes Due 2026 with an outstanding principal balance of $38.4 million are scheduled to mature on March 31, 2026. We intend to refinance or repay the 7.00% Senior Notes Due 2026 through debt or equity capital sources or facilities. No assurance can be given about the availability of such financings on acceptable terms or at all.
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Summary of Financing
The table below summarizes our debt financing as of March 31, 2025:
| Type of Financing | Maximum Amount Available | Outstanding Balance | Amount Remaining Available | Interest Rate | Maturity Date | |||||||||||||||||||||||||||
| Fixed Rate: | ||||||||||||||||||||||||||||||||
| Unsecured notes payable | N/A | $ | 85,125,000 | N/A | 6.00% | June 2026 | ||||||||||||||||||||||||||
| Unsecured notes payable | N/A | 38,375,000 | N/A | 7.00% | March 2026 | |||||||||||||||||||||||||||
| Property mortgages | N/A | 40,250,000 | N/A | 6.25% | June 2028 | |||||||||||||||||||||||||||
| Term loan payable | N/A | 10,000,000 | N/A | Interest free until 6/30/2025, after that 9.00% | December 2027 | |||||||||||||||||||||||||||
| $ | 173,750,000 | |||||||||||||||||||||||||||||||
| Variable Rate: | ||||||||||||||||||||||||||||||||
| Property mortgages | N/A | $ | 34,100,000 | N/A | Term SOFR +3.5% (Term SOFR Floor of 3.75%) | April 2027 | ||||||||||||||||||||||||||
| Promissory notes payable | N/A | 24,948,481 | N/A | Term SOFR plus a spread ranging from 4.75% to 5.98% with a combined floor rate ranging from 9.0% to 11.28% | September 2025 - March 2026 | |||||||||||||||||||||||||||
| Secured borrowing | N/A | 13,250,000 | N/A | Term SOFR + 5%, (combined floor rate of 9.85% | November 2026 | |||||||||||||||||||||||||||
| Revolving line of credit | 12,571,390 | 12,571,390 | — | Term SOFR + 3.5% (combined floor rate of 7.0%) | June 2025 | |||||||||||||||||||||||||||
| Goldman Sachs Bank repurchase agreement | 32,027,813 | 32,027,813 | — | Term SOFR (subject to underlying loan floors on a case-by-case basis) plus a spread ranging from 4.25% to 5.25%) | February 2027 | |||||||||||||||||||||||||||
| $ | 44,599,203 | $ | 116,897,684 | $ | — | |||||||||||||||||||||||||||
Cash Flows Provided by (Used in) Operating Activities
For the three months ended March 31, 2025, cash flow provided by operating activities was $0.9 million, compared to cash flow used in operating activities of $4.2 million for the three months ended March 31, 2024. The increase in operating cash flows was primarily due to a decrease in interest expense on secured financing resulting from a decrease in the weighted average principal amount outstanding, a decrease in asset management fees resulting from the repayment of loans, as well as an increase in equity income distributions from RESOF resulting from an increase in income associated with increased investments.
Cash Flows Provided by Investing Activities
For the three months ended March 31, 2025, cash flows provided by investing activities were $46.2 million, primarily related to proceeds from repayment of loans of $54.0 million, partially offset by origination. purchase and funding of loans of $7.9 million.
For the three months ended March 31, 2024, cash flows provided by investing activities were $33.4 million, primarily related to proceeds from repayment of loans of $47.0 million, partially offset by origination, purchase and funding of loans of $7.2 million and purchase of equity interests in unconsolidated investments of $6.5 million.
Cash Flows Used in Financing Activities
For the three months ended March 31, 2025, cash flows used in financing activities were $45.9 million, primarily related to principal repayments on secured financing of $43.7 million, distributions paid of $4.6 million and a decrease in interest reserve and other deposits held on investments of $1.4 million, partially offset by proceeds from secured financing of $3.3 million and proceeds from obligations under participation agreements of $0.7 million.
For the three months ended March 31, 2024, cash flows used in financing activities were $22.2 million, primarily related to principal repayments on secured financing of $84.8 million, distributions paid of $4.6 million and payment for financing costs of $0.9 million, partially offset by proceeds from secured financing of $53.0 million and proceeds from obligations under participation agreements of $15.0 million.
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Distribution Reinvestment Plan
On January 20, 2023, our Board adopted a distribution reinvestment plan (the “Plan”), pursuant to which our stockholders may elect to reinvest cash distributions payable by us in additional shares of Class A Common Stock and Class B Common Stock, at the price per share determined pursuant to the Plan.
Critical Accounting Policies and Use of Estimates
Our consolidated financial statements are prepared in conformity with United States generally accepted accounting principles, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. In preparing the consolidated financial statements, management has utilized available information, including industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As we execute our expected operating plans, we will describe additional critical accounting policies in the notes to our future consolidated financial statements in addition to those discussed below.
Allowance for Credit Losses
We follow the provisions of ASC 326, which requires entities to recognize credit losses on financial instruments based on an estimate of current expected credit losses (“CECL”). The CECL model requires the consideration of possible credit losses over the life of an instrument as opposed to estimating credit losses upon the occurrence of an actual loss event under the previous “incurred loss” methodology.
We use a model-based approach for estimating the allowance for credit losses on performing loans on a collective basis, including future funding commitments for which we do not have the unconditional right to cancel, as these loans share similar risk characteristics. We utilize information obtained from internal and external sources relating to past events, current economic conditions and reasonable and supportable forecasts about the future to determine the expected credit losses for our loan portfolio. We utilize a commercial mortgage-based, third-party loan loss model and because we do not have a meaningful history of realized credit losses on our loan portfolio, we subscribe to a database service to provide historical proxy loan loss information. We employ logistic regression to forecast expected losses at the loan level based on a commercial real estate loan securitization database that contains activity dating back to 1998. We have chosen to incorporate a weighted average macroeconomic forecast that encompasses baseline, upside and downside scenarios, into our allowance for credit losses on performing loans estimate during the reasonable and supportable forecast period which is currently eight quarters. We select certain economics variables from a group of independent variables such as Commercial Real Estate Price Index, unemployment and interest rate which are included in the model as part of macroeconomic forecast and updated regularly based on current economic trends. The specific loan level information input into the model includes loan-to-value and debt service coverage ratio metrics, as well as principal balances, property type, location, coupon rate, coupon rate type, original or remaining term, expected repayment dates and contractual future funding commitments. Based on the inputs, the loan loss model determines a loan loss rate through the generation of a probability of default (PD) and loss given default (LGD) for each loan. The allowance for credit losses on performing loans is then calculated by applying the loan loss rate to the total outstanding loan balance of each loan. These results require a significant amount of judgment applied in selecting inputs and analyzing the results produced by the models to determine the allowance for credit losses. Changes in such estimates can significantly affect the expected credit losses.
Management Agreement with our Manager
We currently pay the following fees to our Manager pursuant to the Management Agreement:
Origination and Extension Fee. An origination fee in the amount of 1.0% of the amount used to originate, acquire, fund or structure investments, including any third-party expenses related to such investments. In the event that the term of any loan is extended, our Manager also receives an origination fee equal to the lesser of (i) 1.0% of the principal amount of the loan being extended or (ii) the amount of fee paid by the borrower in connection with such extension.
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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 investment and cash held by us.
Asset Servicing Fee. A monthly asset servicing fee at an annual rate equal to 0.25% of the aggregate gross origination price or aggregate gross acquisition price for each investment then held by us (inclusive of closing costs and expenses).
Disposition Fee. A disposition fee in the amount of 1.0% of the gross sale price received by our company from the disposition of an investment, but not upon the maturity, prepayment, workout, modification or extension of a loan unless there is a corresponding fee paid by the borrower, in which case the disposition fee will be the lesser of (i) 1.0% of the principal amount of the loan and (ii) the amount of the fee paid by the borrower in connection with such transaction. If we take ownership of a property as a result of a workout or foreclosure of a loan, we will pay a disposition fee upon the sale of such property equal to 1.0% of the sales price.
Transaction Breakup Fee. In the event that we receive any “breakup fees,” “busted-deal fees,” termination fees, or similar fees or liquidated damages from a third-party in connection with the termination or non-consummation of any investment or disposition transaction, our Manager will be entitled to receive one-half of such amounts, in addition to the reimbursement of all out-of-pocket fees and expenses incurred by our Manager with respect to its evaluation and pursuit of such transactions.
In addition to the fees described above, we reimburse our Manager for operating expenses incurred in connection with services provided to the operations of our company, including our allocable share of our Manager’s overhead, such as rent, employee costs, utilities, and technology costs.
The following table presents a summary of fees paid and costs reimbursed to our Manager in connection with providing services to us:
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2025 | 2024 | ||||||||||||||||||||||
Origination and extension fee expense (1) | $ | 698,879 | $ | 262,772 | |||||||||||||||||||
| Asset management fee | 1,367,789 | 1,715,042 | |||||||||||||||||||||
| Asset servicing fee | 329,600 | 406,525 | |||||||||||||||||||||
| Operating expenses reimbursed to Manager | 1,429,953 | 2,178,164 | |||||||||||||||||||||
Disposition fee (2) | 320,000 | 340,000 | |||||||||||||||||||||
| Total | $ | 4,146,221 | $ | 4,902,503 | |||||||||||||||||||
_______________
(1)Origination and extension fee expense is generally offset with origination and extension fee income. Any excess is deferred and amortized to interest income over the term of the loan.
(2)Disposition fee is generally offset with exit fee income and included in interest income on the consolidated statements of operations.
The term of the Management Agreement will expire on December 31, 2027 (the “Initial Term”) and will automatically renew for an unlimited number of additional one-year terms upon each anniversary date of the last day of the Initial Term (each, a “Renewal Term”), unless terminated by us or the Manager during the Initial Term or a Renewal Term in accordance with the terms of the Management Agreement (as described below).
The Management Agreement may be terminated by us during the Initial Term or any Renewal Term upon a finding by either (i) at least two-thirds of the independent directors on our Board or (ii) the holders of a majority of the outstanding shares of our common stock (other than those shares held by members of the our senior management team or affiliates of our Manager) that either (a) there has been unsatisfactory performance by our Manager that is materially detrimental to us, or (b) the compensation payable to our Manager pursuant to the Management Agreement is unfair; provided, however, that we will not have the right to terminate the Management Agreement on the basis of unfair compensation to our Manager if our Manager agrees to continue to provide its services under the Management Agreement in exchange for reduced fees that at least two-thirds of the independent directors on our Board determine to be fair pursuant to the procedures set forth in the Management Agreement. We must deliver prior written notice of any such termination to our Manager at least 180 days prior to the last
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calendar day of the Initial Term or the then-current Renewal Term, as applicable, and the Management Agreement will terminate effective as of the last calendar day of the Initial Term or the then-current Renewal Term, as applicable.
Upon any termination of the Management Agreement by us as discussed above, we will pay our Manager, on the date on which such termination is effective, a termination fee in an amount equal to three times the average annual fees of all types and expense reimbursements received by or owed to our Manager pursuant to the Management Agreement during the 24-month period immediately preceding such termination (the “Termination Fee”), calculated as of the end of the most recently completed monthly prior to the date of such termination.
We may also terminate the Management Agreement, effective upon 30 calendar days’ prior written notice from our Board to our Manager, without payment of any Termination Fees or other penalties, upon (i) the material breach of the Management Agreement by our Manager or its affiliates that continues for 30 days after written notice thereof to our Manager (or 45 days after delivery of written notice thereof if our Manager takes diligent steps to cure such breach within 30 days of delivery of the written notice), (ii) any fraud or other criminal conduct, gross negligence or breach of fiduciary duty by our Manager or its affiliates in connection with the Management Agreement, as determined by a final, non-appealable judgment of a court of competent jurisdiction, (iii) our Manager’s bankruptcy, insolvency or dissolution, or (iv) an Internalization Event (as defined in the Management Agreement). No Termination Fee or other penalty is payable upon such a termination by us.
Our Manager may terminate the Management Agreement, effective upon 60 days’ prior written from our Manager to us, if we breach the Management Agreement and such breach continues for 30 days after written notice thereof. We will pay our Manager the Termination Fee upon such termination by our Manager.
Management Agreement Amendment
As discussed herein, we may make real estate and non-real estate related investments of any type that align with our investment objectives and criteria. Accordingly, on May 8, 2025, we and our Manager entered into an amendment to the Management Agreement, effective as of January 1, 2025 (the “Amendment”), in order to clarify that the origination, asset management, asset servicing, disposition and breakup fees we pay to our Manager pursuant to the Management Agreement are payable with respect to all real estate and non-real estate investments of any type that we originate or acquire. Unless otherwise specifically noted, all references herein to the “Management Agreement” refer to the Management Agreement as modified by the Amendment.
Promissory Note Payable with Terra LLC
On January 24, 2024, we, as borrower, entered into a revolving promissory note payable with Terra LLC. The promissory note payable bears interest at the Prime Rate, as such Prime Rate is published in the Wall Street Journal, computed on the basis of the actual number of days elapsed and a year of 365 days. The promissory note matures on March 31, 2027. As of March 31, 2025 and December 31, 2024, amount outstanding under the promissory note payable was $43.6 million and $45.1 million, respectively. The activity associated with this agreement is eliminated in consolidation and therefore has no impact on our consolidated financial statements.
Cost Sharing and Reimbursement Agreement with Terra LLC
We have entered into a cost sharing and reimbursement agreement with Terra LLC, effective October 1, 2022 pursuant to which Terra LLC will be responsible for its allocable share of our expenses, including fees paid by us to our Manager based on relative assets under management. These fees are eliminated in consolidation and therefore have no impact on our consolidated financial statements.
Participation Agreements
We have further diversified our exposure to loans and borrowers by entering into participation agreements whereby we transferred a portion of certain of our loans on a pari passu basis to related parties, primarily other affiliated funds managed by our Manager or its affiliates, and to a lesser extent, unrelated parties.
As of March 31, 2025, the principal balance of our participation obligation was $18.7 million, which was a participation obligation to a related-party managed by the Manager.
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The loans that are subject to participation agreements are held in our name, but each of the participant’s rights and obligations, including with respect to interest income and other income (e.g., exit fee, prepayment income) and related fees/expenses (e.g., disposition fees, asset management and asset servicing fees), are based upon their respective pro rata participation interest in such participated investments, as specified in the respective participation agreements. We do not have direct liability to a participant with respect to the underlying loan and the participants’ share of the investments is repayable only from the proceeds received from the related borrower/issuer of the investments and, therefore, the participants also are subject to credit risk (i.e., risk of default by the underlying borrower/issuer).
Pursuant to the participation agreement with these entities, we receive and allocate the interest income and other related investment income to the participants based on their respective pro rata participation interest. The affiliated fund participant pays related expenses also based on their respective pro rata participation interest (i.e., asset management and asset servicing fees, disposition fees) directly to our Manager, as per the terms of each respective affiliate’s management agreement.
Other than for U.S. federal income tax purposes, our loan participations do not qualify for sale treatment. As such, the investments remain on our combined consolidated balance sheets and the proceeds are recorded as obligations under participation agreements. Similarly, interest earned on the entire loan balance is recorded within “Interest income” and the interest related to the participation interest is recorded within “Interest expense from obligations under participation agreements” in the consolidated statements of operations.
For the three months ended March 31, 2025 and 2024, the weighted average outstanding principal balance on obligations under participation agreements was approximately $18.3 million and $12.0 million, respectively, and the weighted average interest rate was approximately 19.3% and 20.3%, respectively.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We may be subject to financial market risks, including changes in interest rates. To the extent that we borrow money to make investments, our net investment income will be dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. In periods of rising interest rates, our cost of funds would increase, which may reduce our net investment income. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.
The following table summarizes the aggregate principal balance of variable rate investments and indebtedness as of:
| March 31, 2025 | ||||||||
| Variable rate investments | $ | 258,356,255 | ||||||
| Variable rate debt | $ | 116,897,684 | ||||||
The following table summarizes estimated changes in net investment income on our variable rate investments and indebtedness as of March 31, 2025 assuming hypothetical increases or decreases in Term SOFR or SOFR:
| 1.00% Decrease | 1.00% Increase | |||||||||||||
| Increase (decrease) in investment income from variable rate investments | $ | (2,091,750) | $ | 2,583,563 | ||||||||||
| Decrease (increase) in interest expense from variable rate debt | 632,492 | (1,066,798) | ||||||||||||
| Net increase (decrease) in investment income from variable rate instruments | $ | (1,459,258) | $ | 1,516,765 | ||||||||||
We may hedge against interest rate fluctuations by using standard hedging instruments, such as futures, options and forward contracts. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in benefits of lower interest rates with respect to our portfolio of investments with fixed interest rates. For the three months ended March 31, 2025 and 2024, we did not engage in interest rate hedging activities that qualify for hedge accounting.
Prepayment Risks
Prepayments can either positively or adversely affect the yields on our loans. Prepayments on debt instruments, where permitted under the debt documents, are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control, and consequently, such prepayment rates cannot be predicted with certainty. If we do not collect a prepayment fee in connection with a prepayment or are unable to invest the proceeds of such prepayments received,
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the yield on the portfolio will decline. In addition, we may acquire assets at a discount or premium and if the asset does not repay when expected, the anticipated yield may be impacted. Under certain interest rate and prepayment scenarios we may fail to recoup fully our cost of acquisition of certain loans.
Extension Risk
Extension risk is the risk that our assets will be repaid at a slower rate than anticipated and generally increases when interest rates rise. In which case, to the extent we have financed the acquisition of an asset, we may have to finance our asset at potentially higher costs without the ability to reinvest principal into higher yielding securities because borrowers prepay their mortgages at a slower pace than originally expected, adversely impacting our net interest spread, and thus our net interest income.
Real Estate Risk
The market values of commercial and residential mortgage assets are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; retroactive changes to building or similar codes; pandemics; natural disasters; and other acts of god. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loans, which could also cause us to suffer losses.
Credit Risk
We are subject to varying degrees of credit risk in connection with holding a portfolio of our target assets. With respect to our loan portfolio, we seek to manage credit risk by limiting exposure to any one individual borrower and any one asset class.
Additionally, our Manager employs an asset management approach and monitors the portfolio of investments through, at a minimum, quarterly financial review of property performance including net operating income, loan-to-value, debt service coverage ratio and the debt yield. Our Manager also requires certain borrowers to establish a cash reserve, as a form of additional collateral, for the purpose of providing for future interest or property-related operating payments.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2025. Based on that evaluation, our management concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we would meet our disclosure obligations. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports.
Changes in Internal Control Over Financial Reporting
During the most recent fiscal quarter, there was no change in our internal controls over financial reporting, as defined under Rule 13a-15(f) under the Exchange Act, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we and individuals employed by us and our Manager may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our borrowers and investees. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that such proceedings will have a material effect upon our financial condition or results of operations.
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Item 1A. Risk Factors.
There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2024.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other
On May 8, 2025, we and our Manager entered into an amendment to the Management Agreement, effective as of January 1, 2025, in order to clarify that the origination, asset management, asset servicing, disposition and breakup fees that we pay to our Manager pursuant to the Management Agreement are payable with respect to all investments of any type that we originate or acquire. For additional information on the Amendment, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Management Agreement Amendment” in this Quarterly Report on Form 10-Q.
Item 6. Exhibits
The following exhibits are filed with this report. Documents other than those designated as being filed herewith are incorporated herein by reference.
| Exhibit No. | Description and Method of Filing | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 3.3 | ||||||||
| 4.1 | ||||||||
| 4.2 | ||||||||
| 4.3 | ||||||||
| 4.4 | ||||||||
| 4.5 | ||||||||
| 4.6 | ||||||||
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| Exhibit No. | Description and Method of Filing | |||||||
| 4.7 | ||||||||
| 10.1 * | ||||||||
| 10.2 * | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32** | ||||||||
| 101.INS** | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |||||||
| 101.SCH** | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL** | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.LAB** | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE** | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 101.DEF** | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File Included as Exhibit 101 (embedded within the Inline XBRL document) | |||||||
______________
* Filed herewith.
** Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 9, 2025
| TERRA PROPERTY TRUST, INC. | ||||||||
| By: | /s/ Vikram S. Uppal | |||||||
| Vikram S. Uppal | ||||||||
| Chief Executive Officer and Chief Investment Officer | ||||||||
| (Principal Executive Officer) | ||||||||
| By: | /s/ Gregory M. Pinkus | |||||||
| Gregory M. Pinkus | ||||||||
| Chief Financial Officer, Treasurer and Secretary | ||||||||
| (Principal Financial and Accounting Officer) | ||||||||
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Exhibit 10.1
SECOND AMENDMENT TO UNCOMITTED MASTER REPURCHASE AND SECURITIES CONTRACT AGREEMENT
AND OTHER TRANSACTION DOCUMENTS
THIS SECOND AMENDMENT TO UNCOMITTED MASTER REPURCHASE AND SECURITIES CONTRACT AGREEMENT AND OTHER TRANSACTION DOCUMENTS (this “Amendment”), dated as of December 17, 2024, is entered into by and among TERRA MORTGAGE CAPITAL I, LLC, a Delaware limited liability company (“Seller”), TERRA PROPERTY TRUST, INC., a Maryland corporation (“Guarantor”), and GOLDMAN SACHS BANK USA, a New York State member bank (including any successor thereto, “Buyer”). Capitalized terms used and not otherwise defined herein shall have the meanings given to such terms in the Existing Repurchase Agreement (as defined below).
RECITALS
WHEREAS, Buyer and Seller are parties to that certain Uncommitted Master Repurchase and Securities Contract Agreement, dated as of February 18, 2022, as amended by that certain First Amendment to Uncommitted Master Repurchase and Securities Contract Agreement and Other Transaction Documents (the “First Amendment”), dated as of March 6, 2024, among Seller, Guarantor and Buyer (the “Existing Repurchase Agreement”, as amended by this Amendment, as the same may be further amended, replaced, restated, supplemented or otherwise modified from time to time, the “Repurchase Agreement”);
WHEREAS, in connection with the Existing Repurchase Agreement, Terra Property Trust, Inc., a Maryland corporation (“Guarantor”), delivered for the benefit of Buyer that certain Guarantee Agreement, dated as of February 18, 2022, as amended by the First Amendment (as amended, modified, restated, replaced, waived, substituted, supplemented or extended from time to time, the “Existing Guaranty”, as amended by this Amendment, as the same may be further amended, replaced, restated, supplemented or otherwise modified from time to time, the “Guaranty”);
WHEREAS, in connection with the Existing Repurchase Agreement, Terra Mortgage Portfolio I, LLC, a Delaware limited liability company (“Pledgor”), and Buyer are parties to that certain Pledge and Security Agreement, dated as of February 18, 2022 (the “Pledge and Security Agreement”);
WHEREAS, it is a condition to the effectiveness of this Amendment that Pledgor execute the Reaffirmation of Pledgor (attached hereto as Exhibit A) (the “Reaffirmation of Pledgor”);
WHEREAS, the parties hereto desire to make a certain amendments to the Existing Repurchase Agreement and the Existing Guaranty.
NOW THEREFORE, in consideration of the foregoing recitals, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:
1
BUSINESS.32400389.5 | ||
ARTICLE 1
AMENDMENTS TO THE EXTISTING REPURCHASE AGREEMENT
AMENDMENTS TO THE EXTISTING REPURCHASE AGREEMENT
(a)The following defined term set forth in Article 2 and any references thereto in the Existing Repurchase Agreement is hereby deleted in its entirety: “Outside Repurchase Date”.
(b)The definition of “Amortization Extension Period” in Article 2 of the Existing Repurchase Agreement is hereby amended and restated in its entirety as follows:
“Amortization Extension Period” shall mean an extension period commencing on December 17, 2024 and ending on the earliest to occur of (i) February 18, 2027, (ii) the date which is the Repurchase Date of the last remaining Purchased Asset subject to a Transaction and (iii) the date on which the payment in full of the unpaid principal balance of the last remaining Purchased Asset then subject to a Transaction occurs.
(c)The definition of “Termination Date” in Article 2 of the Existing Repurchase Agreement is hereby amended and restated in its entirety as follows:
“Termination Date” shall mean the last day of such Amortization Extension Period.
(d)Article 5(b)(iii) and (iv) of the Existing Repurchase Agreement are hereby deleted in their entirety and replaced with the following:
(iii) third, if a Principal Payment in respect of any Purchased Asset was received, to Buyer to be applied in reduction of the Purchase Price of the Purchased Assets, an amount equal to one hundred percent (100%) of all Principal Payments received until the Repurchase Price of all Purchased Assets is reduced to zero (0);
(iv) fourth, [reserved]; and
(e)Notwithstanding anything in the Repurchase Agreement to the contrary, Seller shall deliver to Purchaser the net proceeds of any disposition of any property owned by Guarantor or its subsidiaries which is hereafter acquired by foreclosure, deed-in-lieu of foreclosure , or other similar proceeding (the “REO Proceeds”), and such REO Proceeds will be applied in reduction of the Purchase Price of the Purchased Assets in such order as determined by Purchaser in its sole discretion until the Repurchase Price of all Purchased Assets is reduced to zero (0).
(f)Upon the effectiveness of this Amendment, the Amortization Extension Period will be deemed to be in effect without any further action by Seller or Buyer.
ARTICLE 2
AMENDMENT TO THE EXISTING GUARANTY
AMENDMENT TO THE EXISTING GUARANTY
(a)Section 2(b) of the Existing Guaranty is hereby amended and restated in its entirety as follows:
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(b) Reserved.
(b)Section 9(a)(iii) of the Existing Guaranty is hereby amended and restated in its entirety as follows:
(iii) permit its Tangible Net Worth at any time to be less than one hundred million dollars ($100,000,000.00);
ARTICLE 3
AMENDMENT TO OTHER TRANSACTION DOCUMENTS
AMENDMENT TO OTHER TRANSACTION DOCUMENTS
Each Transaction Document is hereby amended such that each reference to the Repurchase Agreement and/or the Guaranty, as applicable, shall mean the Existing Repurchase Agreement and/or the Existing Guaranty, as applicable, as modified pursuant to the terms of this Amendment.
ARTICLE 4
REPRESENTATIONS
REPRESENTATIONS
Seller and Guarantor each represents and warrants to Buyer, as of the date of this Amendment, as follows:
(a)all representations and warranties made by it in the Transaction Documents to which it is a party are true and correct in all respects as of the date hereof with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date);
(b)no Default or Event of Default has occurred and is continuing under or with respect to the Transaction Documents;
(c)no Margin Deficit Notice has been delivered and remains outstanding;
(d)it has no knowledge of any actual or prospective development, event or other fact that could reasonably be expected to have a Material Adverse Effect;
(e)this Amendment is a legal, valid and binding obligation of Seller and Guarantor, as applicable, enforceable against Seller and Guarantor in accordance with its terms subject to bankruptcy, insolvency, and other limitations on creditors’ rights generally and to equitable principles;
(f)it is duly authorized to execute and deliver this Amendment and has taken all necessary action to authorize such execution, delivery and performance;
(g)the person signing this Amendment on its behalf is duly authorized to do so on its behalf;
(h)no consent, approval or other action of, or filing by, Seller and/or Guarantor with any Governmental Authority or any other Person is required to authorize, or is otherwise
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required in connection with, the execution, delivery and performance of this Amendment (other than consents, approvals and filings that have been obtained or made, as applicable, and any such consents, approvals and filings that have been obtained are in full force and effect);
(i)the execution, delivery and performance of this Amendment will not violate any Requirement of Law applicable to it, any material contractual obligations by which Seller or Guarantor is bound or to which any assets of Seller or Guarantor are subject or constitute a default thereunder, or result thereunder in the creation or imposition of any Lien upon any of the assets of Seller or Guarantor, other than pursuant to this Amendment and the other Transaction Documents, any judgment or order, writ, injunction, decree or demand of any court applicable to Seller or Guarantor or their respective organizational documents or any agreement by which it is bound or by which any of its assets are affected; and
(j)this Amendment has been duly executed and delivered by it.
ARTICLE 5
EXPENSES
EXPENSES
Seller shall pay on demand all of Buyer’s actual out-of-pocket costs and expenses, including reasonable fees and expenses of Buyer’s outside counsel, incurred in connection with the preparation, negotiation, execution and consummation of this Amendment.
ARTICLE 6
CONDITIONS PRECEDENT
CONDITIONS PRECEDENT
(a)The effectiveness of this Amendment is subject to the delivery to Buyer of the following:
(1)the execution and delivery of this Amendment by a duly authorized officer(s) of Seller and Guarantor; and
(2)the execution and delivery of the Reaffirmation of Pledgor by a duly authorized officer of Pledgor.
ARTICLE 7
REAFFIRMATION AND ACKNOWLEDGMENT
REAFFIRMATION AND ACKNOWLEDGMENT
Seller and Guarantor each hereby (i) ratifies and reaffirms all of its payment and performance obligations, contingent or otherwise, and grants of security interests and liens in favor of Buyer, under each Transaction Document to which it is a party, (ii) agrees and acknowledges that such ratification and reaffirmation is not a condition to the continued effectiveness of such Transaction Documents, and (iii) agrees that neither such ratification and reaffirmation, nor Buyer’s solicitation of such ratification and reaffirmation, constitutes a course of dealing giving rise to any obligation or condition requiring a similar or any other ratification or reaffirmation from Seller, Guarantor and/or Pledgor with respect to any subsequent modifications to the Transaction
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Documents. The Existing Repurchase Agreement and the Existing Guaranty (each as amended by this Amendment) and the other Transaction Documents shall remain in full force and effect and are hereby ratified and confirmed.
ARTICLE 8
GOVERNING LAW
GOVERNING LAW
THIS AMENDMENT (AND ANY CLAIM OR CONTROVERSY HEREUNDER) SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AND THE OBLIGATIONS, RIGHTS, AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS WITHOUT REGARD TO THE CONFLICT OF LAWS DOCTRINE APPLIED IN SUCH STATE (OTHER THAN SECTION 5-1401 AND 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK).
ARTICLE 9
MISCELLANEOUS
MISCELLANEOUS
(a)Except as expressly amended or modified hereby, the Transaction Documents shall remain in full force and effect in accordance with their terms and are hereby ratified and confirmed. All references to the Transaction Documents shall be deemed to mean the Transaction Documents as modified by this Amendment.
(b)This Amendment may be executed in counterparts, each of which so executed shall be deemed to be an original, but all of such counterparts shall together constitute but one and the same instrument. Delivery of an executed counterpart of a signature page of this Amendment in electronic format shall be as effective as delivery of a manually executed original counterpart of this Amendment.
(c)The headings in this Amendment are for convenience of reference only and shall not affect the interpretation or construction of this Amendment.
(d)This Amendment may not be amended or otherwise modified, waived or supplemented except as provided in the Existing Repurchase Agreement.
(e)This Amendment contains a final and complete integration of all prior expressions by the parties with respect to the subject matter hereof and shall constitute the entire agreement between the parties with respect to such subject matter, superseding all prior oral or written understandings.
(f)This Amendment and the Master Repurchase Agreement, as amended hereby, are a single Transaction Document.
[SIGNATURES FOLLOW]
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IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed, as of the date first above written.
GOLDMAN SACHS BANK USA, as Buyer
By: /s/ Alex Spitzer
Name: Alex Spitzer
Title: Authorized Person
Name: Alex Spitzer
Title: Authorized Person
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
[GS/Mavik – Signature Page to Second Amendment to Uncommitted Master Repurchase and Securities Contract Agreement and Other Transaction Documents]
BUSINESS.32400389.5 | ||
TERRA MORTGAGE CAPITAL I, LLC, as Seller
By: _ /s/ Gregory Pinkus____________________
Name: Gregory Pinkus
Title: Authorized Signatory
Name: Gregory Pinkus
Title: Authorized Signatory
TERRA PROPERTY TRUST, INC., as Guarantor
By: _ /s/ Gregory Pinkus____________________
Name: Gregory Pinkus
Title: Authorized Signatory
Title: Authorized Signatory
[GS/Mavik – Signature Page to Second Amendment to Uncommitted Master Repurchase and Securities Contract Agreement and Other Transaction Documents]
BUSINESS.32400389.5 | ||
Exhibit A
Reaffirmation of Pledgor
BUSINESS.32400389.5 | ||
REAFFIRMATION OF PLEDGOR
THIS REAFFIRMATION OF PLEDGOR (this “Reaffirmation”), dated as of December 17, 2024, by TERRA MORTGAGE PORTFOLIO I, LLC, a Delaware limited liability company (“Pledgor) in connection with that certain First Amendment to Uncommitted Master Repurchase and Securities Contract Agreement and Other Transaction Documents, dated as of the date hereof (the “Amendment”), by and among TERRA MORTGAGE CAPITAL I, LLC, a Delaware limited liability company (“Seller”), TERRA PROPERTY TRUST, INC., a Maryland corporation (“Guarantor”), and Goldman Sachs Bank USA, a New York State member bank (including any successor thereto, “Buyer”), to which this Reaffirmation is attached. Capitalized terms used and not otherwise defined herein shall have the meanings given to such terms in the Pledge and Security Agreement (as defined below).
A. Pledgor hereby (i) ratifies and reaffirms all of its obligations, contingent or otherwise under that certain Pledge and Security Agreement, dated as of February 18, 2022, by and between Pledgor and Buyer (the “Pledge and Security Agreement”), made for the benefit of Buyer, (ii) agrees and acknowledges that such ratification and reaffirmation is not a condition to the continued effectiveness of the Pledge and Security Agreement and (iii) agrees that neither such ratification and reaffirmation, nor Buyer’s solicitation of such ratification and reaffirmation, constitutes a course of dealing giving rise to any obligation or condition requiring a similar or any other ratification or reaffirmation from Pledgor with respect to any subsequent modifications to the Master Repurchase Agreement or any other Transaction Document. The Pledge and Security Agreement remains in full force and effect and is hereby ratified and confirmed.
B. Pledgor hereby acknowledges, agrees and approves the Amendment.
C. Pledgor represents and warrants to Buyer, as of the date of this Reaffirmation, as follows:
1. all representations and warranties made by it in Section 4 of Pledge and Security Agreement true and correct in all material respects (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date);
2. it is duly authorized to execute and deliver this Reaffirmation and has taken all necessary action to authorize such execution, delivery and performance;
3. the person signing this Reaffirmation on its behalf is duly authorized to do so on its behalf;
4. the execution, delivery and performance by Pledgor of this Reaffirmation and the consummation of the transactions contemplated hereunder do not, and will not violate any Requirement of Law to which Pledgor is subject or constitute a default (or an event which with notice or lapse of time or both would constitute a default) under, or result in the breach of, any material contract, agreement or other instrument to which Pledgor is a party to or which Pledgor is bound by, and in each case that would have a Material Adverse Effect;
5. this Reaffirmation is a legal and binding obligation of Pledgor and is enforceable against Pledgor in accordance with its terms, except as limited by bankruptcy, insolvency or other laws of general application relating to the enforcement of creditors’ rights
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and subject, as to enforceability, to general principals of equity, regardless of whether enforcement is sought in a proceeding in equity or at law; and
6. this Reaffirmation has been duly executed and delivered by it.
D. THIS REAFFIRMATION SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AND THE OBLIGATIONS, RIGHTS, AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS WITHOUT REGARD TO THE CONFLICT OF LAWS DOCTRINE APPLIED IN SUCH STATE (OTHER THAN SECTIONS 5-1401 AND 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK).
E. This Reaffirmation may be executed in counterparts, each of which so executed shall be deemed to be an original, but all of such counterparts shall together constitute but one and the same instrument. Delivery of an executed counterpart of a signature page of this Reaffirmation in electronic format shall be as effective as delivery of a manually executed original counterpart of this Reaffirmation.
[SIGNATURES FOLLOW]
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PLEDGOR:
TERRA MORTGAGE PORTFOLIO I, LLC,
a Delaware limited liability company
By: _ /s/ Gregory Pinkus____________________
Name: Gregory Pinkus
Title: Authorized Signatory
Title: Authorized Signatory
[GS/Mavik – Signature Page to Reaffirmation of Pledgor]
BUSINESS.32400389.5 | ||
Exhibit 10.2
SEVENTH AMENDMENT TO LOAN DOCUMENTS
THIS SEVENTH AMENDMENT TO LOAN DOCUMENTS (this “Agreement”) is entered into as of January 31, 2025, by and between TERRA MORTGAGE PORTFOLIO II, LLC, a Delaware limited liability company (“Borrower”), and TERRA PROPERTY TRUST, INC., a Maryland corporation (“Guarantor”), on the one hand, and WESTERN ALLIANCE BANK, an Arizona corporation (“Lender”), on the other hand.
RECITALS
1.Lender heretofore extended to Borrower a revolving line of credit in the original maximum principal amount of Seventy-Five Million and No/100 Dollars ($75,000,000.00) (the “Loan”), which Loan was evidenced by, without limitation, that certain Promissory Note dated as of March 12, 2021, executed by Borrower in favor of Lender (together with any and all amendments thereto or modifications thereof, the “Original Note”).
2.In connection with the Loan, Borrower also executed and delivered to and in favor of Lender that certain Business Loan and Security Loan Agreement (Loan) dated March 12, 2021 (together with any and all amendments thereto or modifications thereof, the “Loan Agreement”), pursuant to which, among other things, Borrower granted to Lender a security interest in the Collateral (as defined in the Loan Agreement) to secure Borrower’s obligations to Lender in connection with the Loan.
3.Payment and performance of Borrower’s indebtedness and obligations in connection with the Loan was and is guaranteed by Guarantor to the extent set forth in the Limited Guaranty dated as of March 12, 2021 in favor of Lender (together with any and all amendments thereto or modifications thereof, the “Guaranty”).
4.Lender perfected its interest in and to the Collateral by causing to be filed a UCC-1 financing statement with the Delaware Secretary of State on March 12, 2021, as Filing No. 2021 2003482 (the “UCC Financing Statement”). Lender’s security interest in the Collateral is first in priority and duly perfected under applicable Law.
5.On or about June 9, 2021, Borrower, Guarantor and Lender entered into the First Amendment to Loan Documents (“First Amendment”), whereby the Advance Rate Schedule attached as Exhibit E to the Loan Agreement was modified, as more particularly set forth therein.
6.On or about January 4, 2022, Borrower, Guarantor and Lender entered into the Second Amendment to Loan Documents (“Second Amendment”), whereby, among other things, the Credit Limit (as defined in the Loan Agreement) of the Loan was increased to
$125,000,000.00 and Borrower executed in favor of Lender that certain Amended and Restated Promissory Note dated as of January 4, 2022 (together with any and all amendments thereto or modifications thereof, the “Note”), which amended, restated, and replaced the Original Note in its entirety.
7.On or about August 3, 2022, Borrower, Guarantor and Lender entered into the Third Amendment to Loan Documents (“Third Amendment”), whereby, among other things, the sublimit applicable to Collateral Loans secured by properties located in New York City was increased and Borrower was allowed to pledge to Lender certain Collateral Loans in which Borrower has granted Participation Interests (as therein defined) to third parties.
8.On or about March 31, 2023, Borrower, Guarantor and Lender entered into the Fourth Amendment to Loan Documents (“Fourth Amendment”), whereby, among other things, the index used to calculate interest under the Note were changed.
9.On or about March 7, 2024, Borrower, Guarantor and Lender entered into the Fifth Amendment to Loan Documents (“Fifth Amendment”), whereby, among other things, (i) certain covenants were either waived or modified, (ii) the Initial Maturity Date was extended, (iii) the Credit Limit of the Loan was decreased to $75,000,000.00, and (iv) the interest rate spread applicable to the Note was decreased.
10.On or about June 26, 2024, Borrower, Guarantor and Lender entered into the Sixth Amendment to Loan Documents (“Sixth Amendment”), whereby, among other things, (i) the Initial Maturity Date was extended, (ii) the option to convert the Loan to a term loan was removed, (iii) the Loan became non-revolving with no additional Advances permitted thereunder, and (iii) certain financial covenants were modified.
11.The Loan Agreement, Note, Guaranty, UCC Financing Statement, First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment and all other assignments, agreements, instruments and other documents executed by Borrower or Guarantor in connection with the Loan shall at times hereinafter be referred to collectively as the “Loan Documents.”
12.Borrower and Guarantor have requested that Lender, among other items, (i) extend the Maturity Date (as defined in the Loan Agreement) to June 30, 2025, (ii) require an additional monthly payment of principal under the Loan; (iii) include an additional financial covenant, and (iv) make certain other changes to the Loan Documents as more particularly set forth herein. Lender has agreed to do so, subject to the terms and conditions set forth herein.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto do hereby agree as follows:
1.Recitals; Defined Terms.
The recitals are incorporated herein by this reference as are all exhibits. Borrower and Guarantor, and each of them, agree and acknowledge that the factual information recited above is true and correct. Except as may be otherwise expressly defined in this Agreement, all terms used in this Agreement beginning with a capital letter shall have the meanings ascribed to them in the Loan Agreement.
2.Borrower and Guarantor Acknowledgments as to Obligations and Other Matters.
a.Borrower and Guarantor each acknowledge, confirm and agree that as of January 30, 2025, the total outstanding principal balance of the Note is $16,361,111.11, plus accrued and unpaid interest thereon.
b.Borrower and Guarantor, and each of them, specifically acknowledge, confirm and agree that they do not have any valid offset or defense to the obligations, indebtedness and liability under the Loan Documents.
3.Reaffirmation of Obligations.
This Agreement is, in part, a reaffirmation of the obligations, indebtedness and liability of Borrower and Guarantor, and each of them, to Lender as evidenced by the Loan Agreement, Guaranty and the other Loan Documents. Therefore, Borrower and Guarantor, and each of them, represent, warrant, acknowledge and agree that, except as specified herein, all of the terms and conditions of the Loan Documents are and shall remain in full force and effect, without waiver or modification of any kind whatsoever, and are ratified and confirmed in all respects.
4.Extension of Maturity Date.
a.The definition of “Maturity Date” in Section 1 of the Loan Agreement is hereby deleted in its entirety and replaced with the following:
“’Maturity Date’ means the June 30, 2025, at which time the entire principal balance under the Loan plus all accrued and unpaid interest thereon is and shall be due and payable as provided under the Loan Documents.”
b.The Section of the Note entitled “Maturity Date” is hereby deleted in its entirety and replaced with the following:
“MATURITY DATE. On June 30, 2025 (‘Maturity Date’), the entire unpaid principal balance, and all unpaid accrued interest thereon, and all fees, costs, expenses, and other amounts, shall be due and payable without demand or notice, subject to acceleration as provided in this Note. In the event that Borrower does not pay this Note in full on the Maturity Date then, as of the Maturity Date and thereafter until paid in full, the interest accruing on the outstanding principal balance hereunder shall be computed, calculated and accrued on a daily basis at the Default Rate (as defined hereinafter).”
5.Amendment to Loan Agreement.
a.A new Section 6.5.12 is hereby added, numerically, to Schedule 6.5 attached to the Loan Agreement to state the following:
“6.5.12 Borrower shall furnish to Lender, prior to 11:59 p.m. Phoenix, Arizona time on February 7, 2025 and every following Friday (or if such Friday is not a
Business Day, the next Business Day) thereafter, an updated 13-week cash flow forecast
setting forth all sources and uses of cash, and beginning and ending cash balances, as of the last Business Day of the last report, and receipts and disbursements details, presented in a format acceptable to Lender in its sole discretion.”
6.Additional Payments of Principal Required Under the Note.
In addition to the monthly installment payments of interest required under the Note, commencing on the Payment Date (as defined in the Note) of February 1, 2025 and continuing on each Payment Date until the Maturity Date, Borrower shall pay to Lender a monthly installment payment of principal in the amount of Five Hundred Thousand and 00/100 Dollars ($500,000.00). Borrower acknowledges and agrees that any failure to make the aforementioned payment of principal upon each Payment Date shall constitute an Event of Default under the Loan Documents.
7.Additional Liquidity Generating Activities of Borrower and/or Guarantor.
a.Borrower and Guarantor acknowledge and agree that they are undertaking certain efforts to raise additional capital to pay down the outstanding principal balance of the Loan, including, but not limited to, the following (collectively, the “Liquidity Generating Activities”):
i.Obtaining a payoff for that certain Collateral Loan extended by Borrower to NB FACTORY TIC 1, LLC, NB FACTORY TIC 2, LLC, NB FACTORY TIC 3, LLC, NB FACTORY TIC 4, LLC, NB FACTORY TIC 5, LLC, NB FACTORY TIC 6, LLC, NB FACTORY TIC 7, LLC, NB FACTORY TIC 8, LLC, NB FACTORY TIC 9, LLC, NB FACTORY TIC 10, LLC, NB FACTORY TIC 11, LLC AND NB FACTORY TIC 12, LLC, as
tenants-in-common, collectively, which had a principal balance of $28,000,000.00 as of January 31, 2025, and as evidenced by, among other things, that certain Promissory Note dated August 16, 2021, executed in favor of Borrower (the “Factory Loan Payoff”), which is expected to occur on or before March 31, 2025;
ii.Obtaining a payoff for that certain Collateral Loan extended by Borrower to FOURTH STREET'S KINGSWOOD, LLC, which had a principal balance of
$28,277,499.15 as of January 31, 2025, and as evidenced by, among other things, that certain Promissory Note dated March 24, 2023, executed in favor of Borrower (the “Kingswood Loan Payoff”), which is expected to occur on or before June 30, 2025;
iii.The sale or refinance of the Pinewood asset in the GSW industrial assets loan portfolio after the sale of the other two properties in that portfolio (the “GSW Portfolio Sale”), which is expected to occur on or before May 30, 2025;
iv.Increasing the maximum principal amount and/or availability under that certain line of credit in the current maximum principal amount of $10,000,000.00 extended by Revol One Insurance Company, as assignee, to a subsidiary of Guarantor (the “Facility Upsize”), which is expected to occur on or before May 30, 2025;
v.The receipt of proceeds from Mesa AZ Industrial Owner, LLC or its guarantors (William Shopoff, as Trustee of The Shopoff Revocable Trust dated August 12, 2004) related to any of the excess collateral related to the Newport Lease (Shopoff Credit Facility) or
sale of any other the assets of Guarantor (the “Shopoff – Newport Lease Transaction”), which is expected to occur on or before September 30, 2025; and
vi.Update on the progress of re-entitling the Mesa AZ Industrial Owner, LLC property to residential.
b.Upon the consummation or completion of any of the foregoing Liquidity Generating Activities and receipt of Net Proceeds (as hereafter defined) thereof by or for the benefit of Guarantor or any Affiliate, as determined by Lender in its reasonable opinion and judgment, Borrower and/or Guarantor shall be required to apply the specific amounts set forth below from such transactions to make payments to Lender to reduce the outstanding principal balance of the Loan :
i.Upon completion of the Factory Loan Payoff, the Net Proceeds from such transaction (which are expected to be at least $1,250,000.00) shall be paid to Lender and applied to the outstanding principal balance of the Loan;
ii.Upon completion of the Kingswood Loan Payoff, the Net Proceeds from such transaction (which are expected to be at least $5,100,000.00) shall be paid to Lender and applied to the outstanding principal balance of the Loan;
iii.Upon completion of the sale or refinance of the Pinewood property in the GSW Portfolio Sale, the Net Proceeds from such transaction (which are expected to be at least $4,500,000.00) shall be paid to Lender and applied to the outstanding principal balance of the Loan. In addition to the foregoing payment, concurrently with such transaction, Guarantor acknowledges and agrees that it shall pledge to Lender (x) the membership interests of the entity holding the remaining real property not subject to the sale, and (y) at Lender’s sole and absolute election, the mortgage held by Guarantor against the remaining unencumbered assets in the GSW portfolio. Lender may elect the form of such pledge in its reasonable discretion and such pledge shall otherwise be in form and content satisfactory to Lender in its reasonable opinion and judgment;
iv.Upon completion of the Facility Upsize, the Net Proceeds from such transaction (which are expected to be at least $1,500,000.00) shall be paid to Lender and applied to the outstanding principal balance of the Loan; and
v.Upon completion of the Shopoff – Newport Lease Transaction, the Net Proceeds from such transaction (adjusting for Borrower’s pro rata interest with its co- participant (Mavik, as defined in the Loan Agreement) in such transaction) shall be paid to Lender and applied to the outstanding principal balance of the Loan. Borrower acknowledges and agrees to (x) use any Net Proceeds from the excess collateral allocable to Borrower’s participation interest applicable to the Shopoff – Newport Lease Transaction to repay the outstanding principal balance of the Loan, and, to (y) cause Mavik to use any Net Proceeds from
Mavik’s participation interest applicable to the Shopoff – Newport Lease Transaction to repay the outstanding principal balance of the Mavik Loan (as defined in the Loan Agreement).
As used herein, “Net Proceeds” shall mean the gross selling price from the applicable transaction, minus associated debt repayments, and associated expenses (including but
not limited to, title, escrow, selling commissions, and normal and customary sale expenses) not to exceed ten percent (10%) of the total gross selling price, as determined by Lender. Under no circumstances will administrative overhead and related expenses be deducted from the gross selling price when calculating the amount of Net Proceeds available.
c.Commencing on February 15, 2025 and continuing on the 15th day of each calendar month thereafter (or if such date is not a Business Day, the next Business Day), Borrower and/or Guarantor shall furnish to Lender, prior to 11:59 p.m. Phoenix, Arizona time on such date, a written update on the status of the foregoing Liquidity Generating Activities, in form and content reasonably satisfactory to Lender.
8.Extension of Eligibility of Mesa Note.
a.Borrower and Guarantor acknowledge and agree that the Collateral Loan extended by Borrower to Mesa Sponsor, which has a principal balance of $31,985,641.65 as of January 31, 2025, and as evidenced by, among other things, that certain Promissory Note executed by Mesa Sponsor in favor of Borrower (the “Mesa Loan”) currently fails to meet the criteria making it an Eligible Receivable under the terms and conditions of the Loan Agreement, including, but not limited to, as a result of the Mesa Loan being pledged under the Borrowing Base in excess of its applicable twenty-four (24) month Dwell Time set forth in the Advance Rate Schedule attached as Exhibit “E” to the Loan Agreement. Notwithstanding the foregoing, and subject to the satisfaction of all conditions precedent set forth in this Agreement, including but not limited to those set forth in Section 12, below, Lender shall extend the Dwell Time applicable to the Mesa Loan to June 30, 2025, and otherwise permit the Mesa Loan to remain pledged under the Borrowing Base with a 55% LTB / 45% LTV Advance Rate in the event the Mesa Loan fails to satisfy any of the other conditions making it an Eligible Receivable until such date. After June 30, 2025, the Mesa Loan shall become an Ineligible Receivable, and Borrower shall be required to pay down the outstanding principal balance of the Loan by any requisite amounts due to its change in eligibility as more particularly set forth in Section 4.1.1(a) of the Loan Agreement.
b.Borrower and Guarantor further acknowledge and agree that the extension of eligibility for the Mesa Loan granted herein is expressly limited to the Mesa Loan and shall not be deemed to be, nor shall it constitute a waiver of Borrower's and/or Guarantor’s obligation to satisfy the eligibility requirements for any other Collateral Loans as set forth in the Loan Documents, or a waiver of any other condition, term or provision now existing or hereafter arising under the Loan Documents, or of Lender's right to insist upon strict compliance with each and every term, condition and provision of the Loan Documents.
9.Agreement as a Loan Document.
From and after the effective date of this Agreement, this Agreement and any other documents and instruments executed in connection herewith shall each constitute one of the “Loan Documents.”
10.Effective Date of Agreement.
This Agreement and the amendments provided for herein shall be effective as of the date set forth above, subject to the timely and complete satisfaction of each and all of the conditions precedent set forth in Section 12 of this Agreement.
11.Borrower’s and Guarantor’s Representations and Warranties.
Borrower and Guarantor, and each of them, hereby represent and warrant to Lender and covenant and agree with Lender as follows:
a.Borrower and Guarantor, and each of them, have full legal right, power and authority to enter into and perform this Agreement. The execution and delivery of this Agreement by Borrower and Guarantor and the consummation by Borrower and Guarantor of the transactions contemplated hereby have been duly authorized by all necessary action by or on behalf of Borrower and Guarantor. This Agreement is a valid and binding obligation of Borrower and Guarantor, and each of them, enforceable against Borrower and Guarantor in accordance with its terms.
b.Neither the execution and delivery of this Agreement by Borrower and Guarantor, or either of them, nor the consummation by Borrower and Guarantor, or either of them, of the transactions contemplated hereby, conflicts with or constitutes a violation or a default under any law applicable to Borrower and Guarantor, or either of them, or any contract, commitment, agreement, arrangement or restriction of any kind to which Borrower and Guarantor, or either of them, is a party, by which Borrower and Guarantor, or either of them, is bound or to which any of Borrower’s and Guarantor’s, or either of their, property or assets is subject.
c.There are no actions, suits or proceedings pending, or to the knowledge of Borrower and Guarantor, or either of them, threatened against or affecting Borrower and Guarantor, or either of them, respectively, in relation to their obligations to Lender or involving the validity and enforceability of this Agreement, the Loan Agreement, the Note, the Guaranty or any of the other Loan Documents, as applicable, or the priority of any liens given by Borrower to Lender in accordance with the Loan Agreement, and the other Loan Documents, at law or in equity, or before or by any governmental agency, or which could have an adverse effect on the financial condition, operations, properties, assets, liabilities or earnings of Borrower and Guarantor, or either of them, or the ability of Borrower and Guarantor, or either of them, to perform their respective obligations to Lender.
d.Borrower and Guarantor, and each of them, hereby reaffirm and confirm that the representations and warranties of Borrower and Guarantor, as applicable, contained in the Loan Documents are true, correct and complete in all respects as of the date of this Agreement.
e.Borrower and Guarantor, and each of them, are in full and complete compliance with the terms, covenants, provisions and conditions of the Loan Agreement, the Note, the Guaranty and the other Loan Documents to which they are a party.
All covenants, representations and warranties of Borrower and Guarantor herein are incorporated by reference and hereby made a part of the Loan Agreement and the Guaranty, as applicable.
12.Conditions Precedent to Effectiveness of Agreement.
The effectiveness of this Agreement shall be expressly conditioned upon the following having occurred or Lender having received all of the following on or before January 31, 2025, in form and content satisfactory to Lender and its counsel, in its or their sole and absolute discretion, and suitable for filing or recording, as the case may be, as required:
a.This Agreement, fully executed by Borrower and Guarantor;
b.Payment by Borrower or Guarantor to Lender of a non-refundable payment in the amount of $1,539,721.15 which shall be applied by Lender to the outstanding principal balance of the Loan (“Principal Payment”). The Principal Payment shall be paid Borrower from Borrower’s own immediately available funds;
c.Deposit by Borrower the sum of sum of $460,278.85 (“Additional Interest Reserve Deposit”) from Borrower’s or Guarantor’s own immediately available funds into the Interest Reserve Account (as defined in Section 4.2.5 of the Loan Agreement, as modified by the Sixth Amendment) to replenish the Interest Reserve (as defined in Section 4.2.5 of the Loan Agreement, as modified by the Sixth Amendment);
d.Payment by Borrower to Lender, from Borrower’s or Guarantor’s own immediately available funds, of an extension fee in the amount of $10,000.00, which shall be deemed fully earned by Lender and non-refundable to Borrower upon receipt;
e.Such additional information, assignments, agreements, resolutions, certificates, reports, approvals, instruments, documents, subordination agreements, financing statements, consents and opinions as Lender may request, in its sole and absolute opinion and judgment, in connection with this Agreement and/or any of the matters which are the subject of this Agreement; and
f.Payment of the fees and costs of Lender in connection with the preparation, negotiation, administration and execution of this Agreement including, but not limited to, attorneys’ fees, and other costs and fees of other professionals retained by Lender.
13.Additional Interest Reserve Deposit. Subject to the satisfaction of all conditions precedent set forth in this Agreement, including but not limited to those set forth in Section 12, above, Borrower shall have deposited the full amount of the Additional Interest Reserve Deposit into the Interest Reserve Account. The Additional Interest Reserve Deposit and any and all other funds on deposit in the Interest Reserve Account shall be and remain subject to the Assignment of Deposit Account (as defined in the Sixth Amendment), and Borrower hereby irrevocably authorizes Lender to disburse the same in accordance with Section 4.2.5 of the Loan Agreement.
For the avoidance of doubt, any deposits made by Borrower or Guarantor in the interest Reserve Account (including, but not limited to, the Additional Interest Reserve Deposit) shall be included
in Lender’s calculation of the Compensating Balance Requirement (as defined in the Loan Agreement)
14.Release. In consideration of the benefits provided by Lender through this Agreement, Borrower and Guarantor, and each of them, hereby fully, finally, and absolutely and forever release and discharge Lender and its present and former directors, shareholders, officers, employees, agents, representatives, attorneys, successors and assigns, and their separate and respective heirs, personal representatives, successors and assigns (the “Released Parties”), for, from, and against any and all actions, causes of action, claims, debts, damages, demands, liabilities, obligations, and suits, of whatever kind or nature, in law or equity of the Borrower and/or Guarantor, and, whether now known or which, upon reasonable investigation, would have been known to the Borrower and/or Guarantor, and whether contingent or matured: (i) in respect of any of the Loan Documents, or the actions or omissions of Lender occurring prior to the date of this Agreement in respect of the obligations, or any duties under the Loan Documents; and (ii) arising from events occurring prior to the date of this Agreement. Borrower and Guarantor, and each of them, acknowledge that they have been informed by their attorneys, and are aware of and familiar with the general principle of law which provides that a general release does not extend to claims which a creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with a debtor (the “Unknown Claims”). To the extent applicable, Borrower and Guarantor, and each of them, expressly waive and relinquish all rights and benefits they may have under the principle of law relating to the release of Unknown Claims.
15.Miscellaneous.
a.Section headings used in this Agreement are for convenience only and shall not affect the construction of this Agreement.
b.This Agreement may be executed in one or more counterparts but all of the counterparts shall constitute one agreement; provided, however, this Agreement shall not be effective and enforceable unless and until it is executed by all parties hereto.
c.GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE SUBSTANTIVE LAWS OF THE STATE OF ARIZONA WITHOUT REGARD TO ANY CONFLICTS OF LAW CONCEPTS AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
d.Counterparts. This Amendment may be executed in one or more counterparts, all of which when taken together shall constitute but one instrument, and in the event any signature is delivered by facsimile or “.pdf” transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or “.pdf” were an original thereof.
e.This Agreement and the other documents and instruments executed in connection therewith constitute the product of the negotiation of the parties hereto and the
enforcement hereof shall be interpreted in a neutral manner, and not more strongly for or against any party based upon the source of the draftsmanship hereof.
f.This Agreement shall be binding upon and inure to the benefit of Lender, Borrower and Guarantor, and each of them, and their respective successors and assigns, except that neither Borrower nor any Guarantor shall assign their rights hereunder or any interest therein without the prior written consent of Lender.
g.This Agreement is not a novation, nor, except as expressly provided in this Agreement, is it to be construed as a release or modification of any of the terms, conditions, warranties, waivers or rights set forth in the Loan Documents. Nothing contained in this Agreement shall be deemed to constitute a waiver by Lender of any required performance by Borrower or Guarantor, and each of them, of any Event of Default or default heretofore or hereafter occurring under or in connection with the other Loan Documents. In the event there is a conflict in any term, condition or provision of this Agreement, on the one hand, and the Loan Agreement, the Guaranty, or any of the other Loan Documents, on the other hand, the terms, conditions and provisions of this Agreement are to control.
[Signature Page Follows]
IN WITNESS WHEREOF, Borrower, Guarantor and Lender have executed and delivered this Agreement as of the date set forth above.
BORROWER:
TERRA MORTGAGE PORTFOLIO II, LLC,
a Delaware limited liability company
By: /s/ Gregory Pinkus Name: Gregory Pinkus
Its: Authorized Signatory
GUARANTOR:
TERRA PROPERTY TRUST, INC.,
a Maryland corporation
By: /s/ Gregory Pinkus Name: Gregory Pinkus
Its: Authorized Signatory
[SIGNATURE PAGE CONTINUES]
[Signature Page to Seventh Amendment To Loan Documents]
LENDER:
WESTERN ALLIANCE BANK,
an Arizona corporation
By: /s/ Maria Englert
Name: Maria Englert
Title: Vice President
[Signature Page to Seventh Amendment To Loan Documents]
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Vikram S. Uppal, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Terra Property Trust, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | May 9, 2025 | |||||||
| /s/ Vikram S. Uppal | ||||||||
| Vikram S. Uppal | ||||||||
| Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gregory M. Pinkus, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Terra Property Trust, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | May 9, 2025 | |||||||
| /s/ Gregory M. Pinkus | ||||||||
| Gregory M. Pinkus | ||||||||
| Chief Financial Officer and Chief Operating Officer | ||||||||
| (Principal Financial and Principal Accounting Officer) | ||||||||
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Terra Property Trust, Inc. (the “Company”) for the quarter ended March 31, 2025, as filed with the Securities Exchange Commission on the date hereof (the “Report”), I, Vikram S. Uppal, Chief Executive Officer, and I, Gregory M. Pinkus, Chief Financial Officer, each certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:
1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: | May 9, 2025 | ||||||||||
| /s/ Vikram S. Uppal | |||||||||||
| Vikram S. Uppal | |||||||||||
| Chief Executive Officer | |||||||||||
| (Principal Executive Officer) | |||||||||||
| /s/ Gregory M. Pinkus | |||||||||||
| Gregory M. Pinkus | |||||||||||
| Chief Financial Officer and Chief Operating Officer | |||||||||||
| (Principal Financial and Principal Accounting Officer) | |||||||||||
Pursuant to the Securities and Exchange Commission Release 33-8238, dated June 5, 2003, this certification is being furnished and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference in any registration statement of the Company filed under the Securities Act of 1933, as amended.