Related Party Transactions

9 Months Ended

Sep. 30, 2022

Note 4. Related Party Transactions

Terra BDC entered into various agreements with Terra Income Advisors whereby Terra BDC paid and reimbursed Terra Income Advisors for certain fees and expenses. Additionally, Terra BDC paid Terra Capital Markets certain fees for providing certain administrative support services. In connection with the Merger, the Investment Advisory Agreement was terminated and the Company no longer pays or reimburses the following fees. Such fees are now payable by Terra REIT pursuant to its management agreement with its manager. Terra LLC and Terra REIT have entered into a cost sharing arrangement pursuant to which Terra LLC will be responsible for its allocable share of Terra REIT’s expenses, including fees paid by Terra REIT to its manager.

The following table presents a summary of such fees and reimbursements in accordance with the terms of the related agreements:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Amounts Included in the Statements of Operations
Base management fees	$	672,685	$	566,213	$	1,964,830	$	1,606,881
(Reversal of incentive fees) incentive fees on capital gains (1)	(68,486)		(90,614)		(102,160)		167,393
Operating expense reimbursement to Adviser (2)	329,885		255,947		946,934		896,524

_______________

(1)For the three and nine months ended September 30, 2022, Terra BDC reversed previously accrued incentive fees on capital gains of $68,486 and $102,160, respectively. Terra BDC also reversed previously accrued incentive fees on capital gains of $90,614 for the three months ended September 30, 2021. Incentive fees on capital gains were based on 20% of net realized and unrealized capital gains. No incentive fees on capital gains are actually payable by Terra BDC with respect to unrealized gains unless and until those gains are realized.

(2)Amounts were primarily compensation for time spent supporting the Company’s day-to-day operations.

Due to Related Party

As of September 30, 2022, there was no amount due to related party. As of December 31, 2021, amount due to a related party was $3.1 million, primary related to reserve funding held by the Company on a loan originated by an affiliate. The reserve funding was transferred to the affiliate in February 2022.

Due to / Due from Adviser

The Company determines that it has the right of offset on the amounts due to and due from Terra Income Advisors under the guidance in ASC Topic 210, Balance Sheet. As such, the net amount is presented as Due to Adviser, net on the consolidated statements of assets and liabilities.

The following table presents a summary of Due to Adviser, net as of September 30, 2022 and December 31, 2021:


	September 30, 2022		December 31, 2021
Due to Adviser:
Base management fee and expense reimbursement payable	$	682,541	$	551,330
Incentive fees on capital gains (1)	—		291,710
	$	682,541	$	843,040

_______________

(1)As of September 30, 2022, Terra BDC recognized cumulative net realized and unrealized capital losses; therefore no incentive fees on capital gains were accrued. Incentive fees on capital gains are based on 20% of accumulated net realized and unrealized capital gains of $1.5 million as of December 31, 2021. No incentive fees on capital gains were actually payable by Terra BDC with respect to unrealized gains unless and until those gains are realized.

Management and Incentive Fee Compensation to Adviser

Pursuant to the Investment Advisory Agreement, Terra Income Advisors was responsible for Terra BDC’s day-to-day operations. Pursuant to the Investment Advisory Agreement, Terra Income Advisors was paid for its services in two components — a base management fee and an incentive fee. The base management fee was calculated at an annual rate of 2.0% of Terra BDC’s average gross assets. The base management fee was payable quarterly in arrears and calculated based on the average value of Terra BDC’s gross assets at the end of the two most recently completed calendar quarters.

The incentive fee consists of two parts. The first part, which was referred to as the subordinated incentive fee on income, was calculated and payable quarterly in arrears based upon Terra BDC’s “pre-incentive fee net investment income” for the immediately preceding quarter. The subordinated incentive fee on income was subject to a quarterly hurdle rate, expressed as a rate of return on adjusted capital at the beginning of the most recently completed calendar quarter, of 2.0% (8.0% annualized), subject to a “catch-up” feature. For this purpose, “pre-incentive fee net investment income” meant interest income, dividend income and any other income (including any other fees, other than fees for providing managerial assistance, such as commitment, origination, structuring, diligence and consulting fees or other fees that Terra BDC received from portfolio companies) accrued during the calendar quarter, minus Terra BDC’s operating expenses for the quarter (including the base management fee, expenses reimbursed to Terra Income Advisors under the Investment Advisory Agreement and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero-coupon securities), accrued income that the Company has not yet received in cash. Pre-incentive fee net investment income did not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. The calculation of the subordinated incentive fee on income for each quarter was as follows:

•No incentive fee was payable to Terra Income Advisors in any calendar quarter in which Terra BDC’s pre-incentive fee net investment income does not exceed the hurdle rate of 2.0% (8.0% annualized);

•100% of Terra BDC’s pre-incentive fee net investment income, if any, that exceeded the hurdle rate but was less than or equal to 2.5% in any calendar quarter (10.0% annualized) was payable to Terra Income Advisors, all or any portion of which may be waived or deferred in Terra Income Advisors’s discretion. This portion of the pre-incentive fee net investment income (which exceeds the hurdle rate but is less than or equal to 2.5%) was referred to as the “catch-up.” The catch-up provision was intended to provide Terra Income Advisors with an incentive fee of 20.0% on all of Terra BDC’s pre-incentive fee net investment income when Terra BDC’s pre-incentive fee net investment income reaches 2.5% in any calendar quarter; and

•20.0% of the amount of Terra BDC’s pre-incentive fee net investment income, if any, that exceeded 2.5% in any calendar quarter (10.0% annualized) was payable to Terra Income Advisors once the hurdle rate was reached and the catch-up was achieved.

The second part of the incentive fee, which was referred to as the incentive fee on capital gains, was an incentive fee on capital gains earned on liquidated investments from the portfolio and was determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement). This fee equaled 20.0% of Terra BDC’s incentive fee on capital gains, which equaled the realized capital gains on a cumulative basis from inception, calculated as of

the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. On a quarterly basis, Terra BDC accrued (but did not pay) for the unrealized capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.

Operating Expenses

Terra BDC reimbursed Terra Income Advisors for operating expenses incurred in connection with administrative services provided to Terra BDC, including compensation to administrative personnel. Terra BDC did not reimburse Terra Income Advisors for personnel costs in connection with services for which Terra Income Advisors receives a separate fee. In addition, Terra BDC did not reimburse Terra Income Advisors for (i) rent or depreciation, capital equipment or other costs of Terra Income Advisors’s own administrative items, or (ii) salaries, fringe benefits, travel expenses and other administrative items incurred or allocated to any controlling person of Terra Income Advisors.

Servicing Plan

On September 30, 2017, the Terra BDC Board adopted the servicing plan (the “Servicing Plan”). Pursuant to the Servicing Plan, Terra Capital Markets was entitled to receive a servicing fee at an annual rate of 1.125% of the most recently published NAV per share of Terra BDC’s common stock, of which up to 0.75% was reallowed to selected dealers, in exchange for providing certain administrative support services. With respect to each share sold, excluding shares sold through the DRIP, the servicing fee was payable annually on the anniversary of the applicable month of purchase.

On December 23, 2020, Terra Capital Markets assigned to Terra BDC certain of its administration support services and certain obligations under the Dealer Manager Agreement, including making future payments of the previously reallowed servicing fee under the Servicing Plan directly to selected dealers, effectively reducing the servicing fee to 0.75%. In connection with the Merger, the Servicing Plan was terminated.

Participation Agreements

The Company may enter into participation agreements with related and unrelated parties, primarily other affiliated funds of Terra Income Advisors. The participation agreements provide the Company with the opportunity to invest along the same terms, conditions, price and rights in the specified investment. The purpose of the participation agreements is to allow the Company and an affiliate to originate a specified investment when, individually, the Company does not have the liquidity to do so or to achieve a certain level of portfolio diversification. The Company may transfer portions of its investments to other participants or it may be a participant to an investment held by another entity.

ASC Topic 860, Transfers and Servicing (“ASC 860”), establishes accounting and reporting standards for transfers of financial assets. ASC 860-10 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The Company has determined that the participation agreements it enters into are accounted for as secured borrowings under ASC Topic 860 (see “Participation Interests” in Note 2 and “Obligations under Participation Agreements” in Note 3).

Participation interest purchased by the Company: The below tables list the investment interests participated by the Company via participation agreement (each, a “PA”) as of September 30, 2022 and December 31, 2021. In accordance with the terms of each PA, each participant’s rights and obligations, including interest income and other income (e.g., exit fee and prepayment income) and related fees/expenses are based upon its respective pro-rata participation interest in such investments, as specified in the respective PA. The Company’s share of the investment is repayable only from the proceeds received from the related borrower/issuer of the investment, and therefore the Company is also subject to the credit risk (i.e., risk of default by the underlying borrower/issuer).

Pursuant to each PA, the affiliated fund receives and allocates the interest income and other related investment incomes in respect of the investment to the Company. The Company pays related expenses (i.e., the base management fee) directly to Terra Income Advisors.


	September 30, 2022						December 31, 2021
	Participating Interests		Principal Balance		Fair Value		Participating Interests		Principal Balance		Fair Value
370 Lex Part Deux, LLC (1)	35.0	%	21,204,069		17,675,000		35.0	%	21,004,423		20,250,306
Havemeyer TSM LLC (2)	23.0	%	3,282,208		3,315,293		23.0	%	6,808,000		6,874,428
RS JZ Driggs, LLC (1)	50.0	%	2,389,951		2,389,951		50.0	%	7,806,257		7,877,552
William A. Shopoff & Cindy I. Shopoff (1)	53.0	%	13,237,500		13,358,705		53.0	%	13,237,500		13,347,088
Total			$	40,113,728	$	36,738,949			$	48,856,180	$	48,349,374

_______________

(1)The loan is held in the name of Terra REIT, an affiliated entity managed by a subsidiary of Terra Capital Partners.

(2)The loan is held in the name of Mavik Real Estate Special Opportunities Fund REIT, LLC.

Transfers of participation interests by the Company: The following table summarizes the investments that were subject to PAs with investment partnerships affiliated with Terra Income Advisors as of September 30, 2022 and December 31, 2021:


					September 30, 2022
					Transfers treated as obligations under participation agreements
	Principal		Fair Value		% Transferred		Principal		Fair Value
Hillsborough Owners LLC (1)	$	20,294,278	$	20,383,274	30.0	%	$	6,088,283	$	6,114,979


					December 31, 2021
					Transfers treated as obligations under participation agreements
	Principal		Fair Value		% Transferred		Principal		Fair Value
Hillsborough Owners LLC (1)	$	16,210,029	$	16,279,593	30.0	%	$	4,863,009	$	4,883,877

_______________

(1)Participant is Terra REIT.

Co-investment

As a BDC, Terra BDC was subject to certain regulatory restrictions in making its investments. For example, Terra BDC may have been prohibited under the 1940 Act from knowingly participating in certain transactions with its affiliates without the prior approval of its Board who are not interested persons and, in some cases, prior approval by the SEC. The SEC granted Terra BDC exemptive relief permitting it, subject to satisfaction of certain conditions, to co-invest in certain privately negotiated investment transactions with certain affiliates of Terra Income Advisors, including Terra Secured Income Fund, LLC, Terra Secured Income Fund 2, LLC, Terra Secured Income Fund 3, LLC, Terra Secured Income Fund 4, LLC, Terra Secured Income Fund 5, LLC, Terra Secured Income Fund 5 International, Terra Income Fund International and Terra Secured Income Fund 7, LLC, Terra REIT and any future BDC or closed-end management investment company that is registered under the 1940 Act and is advised by Terra Income Advisors or its affiliated investment advisers (the “Co-Investment Affiliates”). However, Terra BDC was prohibited from engaging in certain transactions with its affiliates even under the terms of this exemptive order.