INVESTMENT IN REAL ESTATE LOANS

12 Months Ended

Dec. 31, 2020

Investment in real estate loans, net at December 31, 2020 and 2019 is as follows (in thousands):


	2020		2019
Real estate loans	$	28,671	$	32,831
Unamortized discount	—		(1,895)
Allowance for credit losses	(4,982)		—
	$	23,689	$	30,936

The amortized cost bases of our Investment in real estate loans, net approximate their fair value.

Real Estate Development Loans

We provided mezzanine loans on three real estate development projects to fund up to an aggregate of $29.6 million for the development of three hotel properties. The three real estate development loans closed in the fourth quarter of 2017 and each has a stated interest rate of 8% and an initial term of approximately three years. We have separate options related to each loan (each the "Initial Option") to purchase a 90% interest in each joint venture that owns the respective hotel upon completion of construction. The Initial Options are exercisable while the related real estate development loan is outstanding. We also have the right to purchase the remaining interests in each joint venture at future dates, generally five years after we exercise our Initial Option. We recorded the aggregate estimated fair value of the Initial Options totaling $6.1 million in Other assets and as a discount to the related real estate loans. The discount will be amortized as a component of non-cash interest income over the initial term of the real estate loans using the straight-line method, which approximates the interest method. We recorded amortization of the discount of $1.7 million and $2.1 million during the years ended December 31, 2020 and 2019, respectively. During the year ended December 31, 2020, we recorded a Loss on impairment of assets of $1.8 million related to two of the purchase options. See "Part II – Item 8. – Financial Statements and Supplementary Data – Note 10 – Fair Value Measurement" for further information.

During the year ended December 31, 2020, one of the real estate development loans with a principal balance of $3.8 million was repaid in full. As the Company elected not to exercise its purchase option related to this development project, a Loss on impairment and write-off of assets of $1.0 million was recorded to write-off the carrying amount of the purchase option.

The COVID-19 pandemic has adversely affected the operations of the hotels that collateralize our mezzanine loans. As a result, our mezzanine borrowers have requested, and we have granted, deferrals of interest payments through March 5, 2021. Therefore, we have suspended the recognition of interest income for these loans until the cash interest payments are received. At December 31, 2020, the amortized cost basis of the two real estate development loans was $26.3 million and we have recorded an allowance for credit losses of $2.6 million related to these loans. During the year ended December 31, 2020, we recorded interest income of $0.5 million related to these loans and non-cash interest income of $1.4 million due to the amortization of the related discounts. We are currently in negotiations with the borrowers to extend, restructure, or obtain full or partial repayment of the outstanding principal balance and related accrued interest. The current maturity dates for the loans are March 5, 2021.

During the year ended December 31, 2019, we provided a mezzanine loan to fund up to $28.9 million for a mixed-use development project that includes a hotel property, retail space, and parking. The loan closed in the third quarter of 2019 and has a stated interest rate of 9%. In November 2020, we extended the maturity date of the loan from February 15, 2022 to May 15, 2022. The loan is secured by a second mortgage on the development project and a pledge of the equity in the project owner. As of December 31, 2020, we have funded $17.7 million of the loan commitment. Upon completion of construction, we have an option to purchase a 90% interest in the hotel (the “Initial Purchase Option”). We also have the right to purchase the remaining interest in the hotel five years after the completion of construction. We have issued a $10.0 million letter of credit under our senior revolving credit facility to secure the exercise of the Initial Purchase Option. As such, we have classified the loan as Investment in hotel properties, net on our Consolidated Balance Sheets at December 31, 2020. Interest income on the mezzanine loan will be recorded in our Consolidated Statement of Operations as it is earned. We have recorded the aggregate estimated fair value of the Initial Purchase Option totaling $2.8 million in Other assets and as a contra-asset to Investment in hotel properties, net. The contra-asset will be amortized as a component of non-cash interest income over the term of the real estate development loan using the straight-line method, which approximates the interest method. During the years ended December 31, 2020 and 2019, we amortized $1.1 million and $0.4 million, respectively, as non-cash interest income. Including the amortization of the contra-asset, the current effective interest rate on this loan is approximately 13.8%.

Seller-Financing Loans

On June 29, 2018, we sold the Holiday Inn in Duluth, GA and the Hilton Garden Inn in Duluth, GA for an aggregate selling price of $24.9 million. We provided seller financing totaling $3.6 million on the sale of these properties under two, 3.5 year second mortgage notes with a blended interest rate of 7.38% that are further collateralized by a personal guarantee from the principal of the borrower. As of December 31, 2020, there was $2.4 million outstanding on the seller-financing loans. We are in negotiations with the borrower to secure repayment of the outstanding balance and unpaid interest on the loans. There can be no assurance that we will be successful in our negotiations with the borrower such that we will be able to secure full repayment of the outstanding obligations. As such, we have recorded an allowance for credit losses in an amount equal to the outstanding balance of the loans at December 31, 2020. Additionally, we have suspended the recognition of interest income for these loans until the cash interest payments are received.