Notes Receivable and Current Expected Credit Losses

3 Months Ended

Mar. 31, 2024

Notes Receivable and Current Expected Credit Losses

Notes Receivable

The Company had the following notes receivable outstanding as of March 31, 2024 and December 31, 2023 ($ in thousands):


	Outstanding loan amount															Interest compounding
	March 31, 2024							December 31, 2023
Real Estate Financing Project	Principal		Accrued interest and fees		Total loan amount			Total loan amount			Maximum principal commitment		Interest rate
Solis City Park II	$	20,594	$	4,466	$	25,060	(a)	$	24,313	(a)	$	20,594	13.0	%		Annually
Solis Gainesville II	19,595		3,460		23,055		(a)	22,268		(a)	19,595		14.0	%	(b)	Annually
Solis Kennesaw	23,067		3,478		26,545		(a)	15,922		(a)	37,870		14.0	%	(b)	Annually
Solis Peachtree Corners	11,832		1,936		13,768		(a)	11,092		(a)	28,440		15.0	%	(b)	Annually
The Allure at Edinburgh	9,228		947		10,175		(a)	9,830		(a)	9,228		15.0	%	(c)	None
Total mezzanine & preferred equity	$	84,316	$	14,287	98,603			83,425			$	115,727
Other notes receivable					12,404		(a)	12,219		(a)

Allowance for credit losses(d)					(1,725)			(1,472)

Total notes receivable					$	109,282		$	94,172

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(a) Outstanding loan amounts include any accrued and unpaid interest, and accrued fees, as applicable.

(b) The interest rate varies over the life of the loans and the Company also earns an unused commitment fee on amounts not drawn on the loans.

(d) The amounts as of March 31, 2024 and December 31, 2023 exclude $0.6 million and $0.7 million, respectively, of Current Expected Credit Losses (“CECL”) allowance that relates to the unfunded commitments, which were recorded as a liability under other liabilities in the consolidated balance sheets.

Interest on the notes receivable is accrued and funded utilizing the interest reserves for each loan and such accrued interest is generally added to the loan receivable balances. The Company recognized interest income for the three months ended March 31, 2024 and 2023 as follows (in thousands):


	Three Months Ended March 31,
Real Estate Financing Project	2024			2023




Solis City Park II	747		(a)	670		(a)
Solis Gainesville II	786		(a)(b)	593		(a)(b)
Solis Kennesaw	1,236		(a)(b)	—
Solis Peachtree Corners	887		(a)(b)	—
The Allure at Edinburgh	344			—
The Interlock(c)	—			2,273		(a)
Total mezzanine & preferred equity	4,000			3,536
Other interest income	626			183
Total interest income	$	4,626		$	3,719

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(a) Includes recognition of interest income related to fee amortization.

(b) Includes recognition of unused commitment fees.

Allowance for Loan Losses

The Company is exposed to credit losses primarily through its real estate financing investments. As of March 31, 2024, the Company had five real estate financing investments, which are financing development projects in various stages of completion or lease-up. Each of these projects is subject to a loan that is senior to the Company’s loan. Interest on these loans is paid in kind and is generally not expected to be paid until a sale of the project after completion of the development.

The Company's management performs a quarterly analysis of the loan portfolio to determine the risk of credit loss based on

the progress of development activities, including leasing activities, projected development costs, and current and projected

subordinated and senior loan balances. The Company estimates future losses on its notes receivable using risk

ratings that correspond to probabilities of default and loss given default. The Company's risk ratings are as follows:

•Pass: loans in this category are adequately collateralized by a development project with conditions materially consistent with the Company's underwriting assumptions.

•Special Mention: loans in this category show signs that the economic performance of the project may suffer as a result of slower-than-expected leasing activity or an extended development or marketing timeline. Loans in this category warrant increased monitoring by management.

•Substandard: loans in this category may not be fully collected by the Company unless remediation actions are taken. Remediation actions may include obtaining additional collateral or assisting the borrower with asset management activities to prepare the project for sale. The Company will also consider placing the loan on non-accrual status if it does not believe that additional interest accruals will ultimately be collected.

The Company updated the risk ratings for each of its notes receivable as of March 31, 2024 and obtained industry loan loss data relative to these risk ratings. Each of the outstanding loans as of March 31, 2024 was "Pass" rated. The Company's analysis resulted in an allowance for loan losses of approximately $2.3 million as of March 31, 2024, of which an allowance related to unfunded commitments of approximately $0.6 million as of March 31, 2024 was recorded as Other liabilities on the consolidated balance sheet.

At March 31, 2024, the Company reported $109.3 million of notes receivable, net of allowances of $1.7 million. At December 31, 2023, the Company reported $94.2 million of notes receivable, net of allowances of $1.5 million. Changes in the allowance for the three months ended March 31, 2024 and 2023 were as follows (in thousands):


	Three Months Ended March 31, 2024						Three Months Ended March 31, 2023
	Funded		Unfunded		Total		Funded		Unfunded		Total
Beginning balance	$	1,472	$	732	$	2,204	$	1,292	$	338	$	1,630

Unrealized credit loss provision (release)	253		(170)		83		203		(140)		63


Ending balance	$	1,725	$	562	$	2,287	$	1,495	$	198	$	1,693

The Company places loans on non-accrual status when the loan balance, together with the balance of any senior loan, approximately equals the estimated realizable value of the underlying development project. As of March 31, 2024, there were no loans on non-accrual status.