QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||||||||||||
Large accelerated filer | ¨ | Accelerated filer | ¨ | ||||||||
þ | Smaller reporting company | ||||||||||
Emerging growth company |
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. | ||||||||
September 30, 2023 | December 31, 2022 | ||||||||||
(unaudited) | |||||||||||
Assets | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Restricted cash | |||||||||||
Loans held for investment, net of allowance for credit losses of $ | |||||||||||
Loans held for investment acquired through participation, net of allowance for credit losses of $ | |||||||||||
Equity investment in unconsolidated investment | |||||||||||
Marketable securities | |||||||||||
Interest receivable | |||||||||||
Prepaid expenses and other assets | |||||||||||
Total assets | $ | $ | |||||||||
Liabilities and Equity | |||||||||||
Liabilities: | |||||||||||
Unsecured notes payable, net of purchase discount | |||||||||||
Term loan payable, net of deferred financing cost | |||||||||||
Interest reserve and other deposits held on investments | |||||||||||
Accrued expenses | |||||||||||
Other liabilities | |||||||||||
Total liabilities | |||||||||||
Equity: | |||||||||||
Managing member | |||||||||||
Total equity | |||||||||||
Total liabilities and equity | $ | $ |
Three Months Ended September 30, 2023 | Nine Months Ended September 30, 2023 | |||||||||||||
Revenues | ||||||||||||||
Interest income | $ | $ | ||||||||||||
Dividend and other income | ||||||||||||||
Operating expenses | ||||||||||||||
Asset management and asset servicing fees paid to Terra REIT (1) | ||||||||||||||
Operating expense reimbursement to Terra REIT (1) | ||||||||||||||
Provision for credit losses | ||||||||||||||
Professional fees | ||||||||||||||
Insurance expense | ||||||||||||||
General and administrative | ||||||||||||||
Operating (loss) income | ( | |||||||||||||
Other income and expenses | ||||||||||||||
Unrealized gain on investments, net | ||||||||||||||
Realized loss on investments, net | ( | |||||||||||||
Loss from equity investment in unconsolidated investment | ( | ( | ||||||||||||
Interest expense on unsecured notes payable | ( | ( | ||||||||||||
Interest expense on term loan | ( | ( | ||||||||||||
( | ( | |||||||||||||
Net loss | $ | ( | $ | ( |
Three months ended September 30, 2022 | Nine Months Ended September 30, 2022 | |||||||||||||
Investment income | ||||||||||||||
Interest income | $ | $ | ||||||||||||
Dividend and other income | ||||||||||||||
Total investment income | ||||||||||||||
Operating expenses | ||||||||||||||
Base management fees | ||||||||||||||
Reversal of incentive fees on capital gains (1) | ( | ( | ||||||||||||
( | ( | |||||||||||||
Interest expense on unsecured notes payable | ||||||||||||||
Professional fees | ||||||||||||||
Interest expense on term loan | ||||||||||||||
Directors’ fees | ||||||||||||||
Insurance expense | ||||||||||||||
Transaction costs | ||||||||||||||
General and administrative expenses | ||||||||||||||
Total operating expenses | ||||||||||||||
Net investment income before income taxes | ||||||||||||||
Income tax expense | ||||||||||||||
Net investment income | ||||||||||||||
Net change in unrealized depreciation on investments | ( | ( | ||||||||||||
Net change in unrealized depreciation on obligations under participation agreements | ||||||||||||||
Net realized gain on investments | ||||||||||||||
Net decrease in net assets resulting from operations | $ | ( | $ | ( | ||||||||||
Per common share data: | ||||||||||||||
Net investment income per share | $ | $ | ||||||||||||
Net decrease in net assets resulting from operations per share | $ | ( | $ | ( | ||||||||||
Weighted average common shares outstanding |
Managing Member | Total | |||||||||||||
Balance, January 1, 2023 | $ | $ | ||||||||||||
( | ( | |||||||||||||
Net income | ||||||||||||||
Balance, March 31, 2023 | ||||||||||||||
Net income | ||||||||||||||
Balance, June 30, 2023 | ||||||||||||||
Net loss | ( | ( | ||||||||||||
Balance, September 30, 2023 | $ | $ |
Three Months Ended September 30, 2022 | Nine months ended September 30, 2022 | |||||||||||||
Operations | ||||||||||||||
Net investment income | $ | $ | ||||||||||||
Net change in unrealized depreciation on investments | ( | ( | ||||||||||||
Net change in unrealized depreciation on obligations under participation agreements | ||||||||||||||
Net realized gain on investments | ||||||||||||||
Net decrease in net assets resulting from operations | ( | ( | ||||||||||||
Stockholder distributions | ||||||||||||||
Distributions from return of capital | ( | |||||||||||||
Distributions from net investment income | ( | ( | ||||||||||||
Net decrease in net assets resulting from stockholder distributions | ( | ( | ||||||||||||
Capital share transactions | ||||||||||||||
Reinvestment of stockholder distributions | ||||||||||||||
Net increase in net assets resulting from capital share transactions | ||||||||||||||
Net decrease in net assets | ( | ( | ||||||||||||
Net assets, at beginning of period | ||||||||||||||
Net assets, at end of period | $ | $ | ||||||||||||
Capital share activity | ||||||||||||||
Shares outstanding, at beginning of period | ||||||||||||||
Shares issued from reinvestment of stockholder distributions | ||||||||||||||
Shares outstanding, at end of period |
Nine Months Ended September 30, 2023 | ||||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | ( | ||||||
Adjustments to reconcile net income from operations to net cash used in operating activities: | ||||||||
Provision for credit losses | ||||||||
Amortization of premiums and discounts on investments | ||||||||
Amortization and accretion of investment-related fees, net | ( | |||||||
Amortization of discount on debt | ||||||||
Amortization of deferred financing costs | ||||||||
Loss from equity investment in unconsolidated investments | ||||||||
Realized loss on investments, net | ||||||||
Unrealized gain on investments, net | ( | |||||||
Changes in operating assets and liabilities: | ||||||||
Decrease in interest receivable | ||||||||
Increase in prepaid expenses and other assets | ( | |||||||
Increase in interest reserve and other deposits held on investments | ||||||||
Decrease in accrued expenses | ( | |||||||
Decrease in other liabilities | ( | |||||||
Net cash provided by operating activities | ||||||||
Cash flows from investing activities: | ||||||||
Repayment of loans | ||||||||
Purchase of equity interest in unconsolidated investment | ( | |||||||
Purchase of held-to-maturity debt securities | ( | |||||||
Proceeds from redemption of held-to-maturity debt securities | ||||||||
Origination and purchase of loans | ( | |||||||
Purchase of marketable securities | ( | |||||||
Distributions received from equity investment in unconsolidated investments | ||||||||
Net cash provided by investing activities | ||||||||
Cash flows from financing activities: | ||||||||
Repayments of borrowings under term loan payable | ( | |||||||
Payment of financing costs | ( | |||||||
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 | ||||||||
$ | ||||||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | |||||||
Income taxes paid | $ | |||||||
Supplemental non-cash information: | ||||||||
Settlement of a mezzanine loan accounted for as an equity investment in exchange for equity interest | $ | |||||||
Nine Months Ended September 30, 2022 | ||||||||
Cash flows from operating activities: | ||||||||
Net decrease in net assets resulting from operations | $ | ( | ||||||
Adjustments to reconcile net decrease in net assets resulting from operations to net cash used in operating activities: | ||||||||
Net change in unrealized depreciation on investments | ||||||||
Net change in unrealized depreciation on obligations under participation agreements | ( | |||||||
Net realized gain on investments | ( | |||||||
Amortization and accretion of investment-related fees, net | ( | |||||||
Amortization of discount on debt issuance | ||||||||
Amortization of deferred financing costs | ||||||||
Purchases of investments | ( | |||||||
Repayments and proceeds from sale of investments | ||||||||
Changes in operating assets and liabilities: | ||||||||
Decrease in interest receivable | ||||||||
Decrease in prepaid expenses and other assets | ||||||||
Increase in interest reserve and other deposits held on investments | ||||||||
Decrease in due to related party | ( | |||||||
Decrease in due to Adviser, net | ( | |||||||
Increase in accrued expenses | ||||||||
Increase in interest payable from obligations under participation agreements | ||||||||
Decrease in other liabilities | ( | |||||||
Net cash used in operating activities | ( | |||||||
Cash flows from financing activities: | ||||||||
Proceeds from borrowings under term loan payable | ||||||||
Payments of stockholder distributions | ( | |||||||
Proceeds from obligations under participation agreements | ||||||||
Net cash provided by financing activities | ||||||||
Net increase in cash, cash equivalents and restricted cash | ||||||||
Cash, cash equivalents and restricted cash, at beginning of period | ||||||||
$ | ||||||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | |||||||
Income taxes paid | $ | |||||||
Supplemental non-cash information: | ||||||||
Reinvestment of stockholder distributions | $ |
September 30, 2023 | September 30, 2022 | |||||||||||||
Cash and cash equivalents | $ | $ | ||||||||||||
Restricted cash | ||||||||||||||
Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows | $ | $ |
September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
Fixed Rate | Floating Rate (1)(3) | Total | Fixed Rate | Floating Rate (2)(3) | Total | ||||||||||||||||||||||||||||||
Number of loans | |||||||||||||||||||||||||||||||||||
Principal balance | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Carrying value | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Fair value | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Weighted-average coupon rate | |||||||||||||||||||||||||||||||||||
Weighted-average remaining term (years) |
Loans Held for Investment | Loans Held for Investment through Participation Interests | Total | |||||||||||||||
Balance, January 1, 2023 | $ | $ | $ | ||||||||||||||
Cumulative effect of adoption of credit loss accounting standard | ( | ( | |||||||||||||||
New loans made | |||||||||||||||||
Principal repayments received | ( | ( | ( | ||||||||||||||
Net amortization of premiums on loans | ( | ( | ( | ||||||||||||||
Accrual, payment and accretion of investment-related fees and other, net | |||||||||||||||||
Reversal of (provision for) credit losses | ( | ( | |||||||||||||||
Balance, September 30, 2023 | $ | $ | $ |
September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||
Loan Structure | Principal Balance | Carrying Value | % of Total | Principal Balance | Carrying Value | % of Total | ||||||||||||||||||||||||||||||||
Preferred equity investments | $ | $ | % | $ | $ | % | ||||||||||||||||||||||||||||||||
First mortgages | % | % | ||||||||||||||||||||||||||||||||||||
Mezzanine loans | % | % | ||||||||||||||||||||||||||||||||||||
Credit facility | % | % | ||||||||||||||||||||||||||||||||||||
Allowance for credit losses | — | ( | ( | % | — | ( | ( | % | ||||||||||||||||||||||||||||||
Total | $ | $ | % | $ | $ | % |
September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||
Property Type | Principal Balance | Carrying Value | % of Total | Principal Balance | Carrying Value | % of Total | ||||||||||||||||||||||||||||||||
Office | $ | $ | % | $ | $ | % | ||||||||||||||||||||||||||||||||
Infrastructure | % | % | ||||||||||||||||||||||||||||||||||||
Multifamily | % | % | ||||||||||||||||||||||||||||||||||||
Mixed use | % | % | ||||||||||||||||||||||||||||||||||||
Student housing | % | % | ||||||||||||||||||||||||||||||||||||
Industrial | % | % | ||||||||||||||||||||||||||||||||||||
Allowance for credit losses | — | ( | ( | % | — | ( | ( | % | ||||||||||||||||||||||||||||||
Total | $ | $ | % | $ | $ | % |
September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||
Geographic Location | Principal Balance | Carrying Value | % of Total | Principal Balance | Carrying Value | % of Total | ||||||||||||||||||||||||||||||||
United States | ||||||||||||||||||||||||||||||||||||||
New York | $ | $ | % | $ | $ | % | ||||||||||||||||||||||||||||||||
Utah | % | % | ||||||||||||||||||||||||||||||||||||
California | % | % | ||||||||||||||||||||||||||||||||||||
Georgia | % | % | ||||||||||||||||||||||||||||||||||||
North Carolina | % | % | ||||||||||||||||||||||||||||||||||||
Allowance for credit losses | — | ( | ( | % | — | ( | ( | % | ||||||||||||||||||||||||||||||
Total | $ | $ | % | $ | $ | % |
Nine Months Ended September 30, | ||||||||||||||
2023 | 2022 | |||||||||||||
Successor Basis | Predecessor Basis | |||||||||||||
Allowance for credit losses, beginning of period | $ | $ | ||||||||||||
Provision for credit losses | ||||||||||||||
Charge-offs | ||||||||||||||
Recoveries | ||||||||||||||
Allowance for credit losses, end of period | $ | $ |
Nine Months Ended September 30, 2023 | |||||||||||
Liability for credit losses on unfunded commitments, beginning of period | $ | ||||||||||
Reversal of provision for credit losses | ( | ||||||||||
Liability for credit losses on unfunded commitments, end of period | $ |
Risk Rating | Description | |||||||
1 | Very low risk | |||||||
2 | Low risk | |||||||
3 | Moderate/average risk | |||||||
4 | Higher risk | |||||||
5 | Highest risk |
September 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loan Risk Rating | Number of Loans | Amortized Cost | % of Total | Amortized Cost by Year Originated | ||||||||||||||||||||||||||||||||||||||||||||||||||||
2023 | 2022 | 2021 | 2020 | 2019 | Prior | |||||||||||||||||||||||||||||||||||||||||||||||||||
1 | $ | % | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
2 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
3 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
4 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
5 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-performing | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
% | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for credit losses | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total, net of allowance for credit losses | $ |
December 31, 2022 | |||||||||||||||||||||||||||||
Loan Risk Rating | Number of Loans | Principal Balance | Amortized Cost | % of Total | |||||||||||||||||||||||||
1 | $ | $ | % | ||||||||||||||||||||||||||
2 | % | ||||||||||||||||||||||||||||
3 | % | ||||||||||||||||||||||||||||
4 | % | ||||||||||||||||||||||||||||
5 | % | ||||||||||||||||||||||||||||
Non-performing (1) | % | ||||||||||||||||||||||||||||
$ | % | ||||||||||||||||||||||||||||
Allowance for credit losses | ( | ||||||||||||||||||||||||||||
Total, net of allowance for credit losses | $ |
September 30, 2023 | ||||||||||||||||||||||||||
Fair Value Measurements | ||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
Marketable securities - debt securities | $ | $ | $ | $ | ||||||||||||||||||||||
Total | $ | $ | $ | $ |
Nine Months Ended September 30, | ||||||||||||||
2023 | 2022 | |||||||||||||
Beginning balance | $ | $ | ||||||||||||
Purchases | ||||||||||||||
Unrealized gain on marketable securities | ||||||||||||||
Ending balance | $ | $ |
September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||
(Successor Basis) | ||||||||||||||||||||||||||||||||||||||||||||
Level | Principal Balance | Carrying Value | Fair Value | Principal Balance | Carrying Value | Fair Value | ||||||||||||||||||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||||||||||||||||
Loans held for investment | 3 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
Loans held for investment acquired through participation | 3 | |||||||||||||||||||||||||||||||||||||||||||
Allowance for credit losses | — | ( | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||
Total loans | ||||||||||||||||||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||||||||||
Unsecured notes payable (1)(2) | 1 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
Term loan payable (3)(4) | 3 | |||||||||||||||||||||||||||||||||||||||||||
$ | $ | $ | $ | $ | $ |
September 30, 2023 | ||||||||||||||||||||||||||||||||||||||
Primary Valuation Technique | Unobservable Input | Range | Weighted | |||||||||||||||||||||||||||||||||||
Asset Category | Fair Value | Minimum | Maximum | Average | ||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||
Loans | $ | Discounted cash flow | Discount rate | % | % | % | ||||||||||||||||||||||||||||||||
Loans through participation interest (1) | Discounted cash flow | Discount rate | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||
Total Level 3 Assets | $ |
December 31, 2022 | ||||||||||||||||||||||||||||||||||||||
Primary Valuation Technique | Unobservable Input | Range | Weighted | |||||||||||||||||||||||||||||||||||
Asset Category | Fair Value | Minimum | Maximum | Average | ||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||
Loans | $ | Discounted cash flow | Discount rate | % | % | % | ||||||||||||||||||||||||||||||||
Loans through participation interest | Discounted cash flow | Discount rate | % | % | % | |||||||||||||||||||||||||||||||||
Total Level 3 Assets | $ |
Nine Months Ended September 30, 2022 (Predecessor Basis) | ||||||||||||||||||||||||||
Loans | Loans Through Participation | Total Loan Investments | Obligations under Participation Agreements | |||||||||||||||||||||||
Balance as of January 1, 2022 | $ | $ | $ | $ | ||||||||||||||||||||||
Purchases of investments | — | |||||||||||||||||||||||||
Repayments of investments | ( | ( | ( | — | ||||||||||||||||||||||
Net change in unrealized depreciation on investments | ( | ( | ( | — | ||||||||||||||||||||||
Amortization and accretion of investment-related fees, net | ||||||||||||||||||||||||||
Proceeds from obligations under participation agreements | — | — | — | |||||||||||||||||||||||
Net change in unrealized depreciation on obligations under participation agreements | — | — | — | ( | ||||||||||||||||||||||
Balance as of September 30, 2022 | $ | $ | $ | $ | ||||||||||||||||||||||
Net change in unrealized appreciation or depreciation for the period relating to those Level 3 assets that were still held by the Company at the end of the period: | ||||||||||||||||||||||||||
Net change in unrealized depreciation on loan investments and obligations under participation agreements | $ | ( | $ | ( | $ | ( | $ | ( |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2023 (1) | 2022 | 2023 (1) | 2022 | ||||||||||||||||||||
(Successor Basis) | (Predecessor Basis) | (Successor Basis) | (Predecessor Basis) | ||||||||||||||||||||
Amounts Included in the Statements of Operations | |||||||||||||||||||||||
Base management fees | $ | $ | $ | ||||||||||||||||||||
Reversal of incentive fees on capital gains (2) | N/A | ( | N/A | ( | |||||||||||||||||||
Operating expense reimbursement to Adviser (3) | |||||||||||||||||||||||
Origination, extension and disposition fees | N/A | N/A |
September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||
(Successor Basis) | ||||||||||||||||||||||||||||||||||||||
Participating Interests | Principal Balance | Carrying Value | Participating Interests | Principal Balance | Carrying Value | |||||||||||||||||||||||||||||||||
370 Lex Part Deux, LLC (1) | % | $ | $ | % | $ | $ | ||||||||||||||||||||||||||||||||
RS JZ Driggs, LLC (1) | % | % | ||||||||||||||||||||||||||||||||||||
William A. Shopoff & Cindy I. Shopoff (2) | % | % | ||||||||||||||||||||||||||||||||||||
Havemeyer TSM LLC (2)(3) | % | % | ||||||||||||||||||||||||||||||||||||
Allowance for credit losses | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
(Successor Basis) | (Predecessor Basis) | (Successor Basis) | (Predecessor Basis) | ||||||||||||||||||||
Stated interest expense | $ | $ | $ | $ | |||||||||||||||||||
Amortization of issue discount | |||||||||||||||||||||||
Amortization of financing costs | |||||||||||||||||||||||
Amortization of purchase discount (1) | |||||||||||||||||||||||
Total interest expense | $ | $ | $ | $ | |||||||||||||||||||
Weighted average debt outstanding | $ | $ | $ | $ | |||||||||||||||||||
Cash paid for interest expense | $ | $ | $ | $ | |||||||||||||||||||
Stated interest rate | % | % | % | % | |||||||||||||||||||
Effective interest rate (2) | % | % | % | % |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
(Successor Basis) | (Predecessor Basis) | (Successor Basis) | (Predecessor Basis) | ||||||||||||||||||||
Stated interest expense | $ | $ | $ | $ | |||||||||||||||||||
Amortization of issue discount | |||||||||||||||||||||||
Amortization of financing costs | |||||||||||||||||||||||
Unused fee | |||||||||||||||||||||||
Total interest expense | $ | $ | $ | $ | |||||||||||||||||||
Weighted average debt outstanding | $ | $ | $ | $ | |||||||||||||||||||
Cash paid for interest expense | $ | $ | $ | $ | |||||||||||||||||||
Stated interest rate | % | % | % | % | |||||||||||||||||||
Effective interest rate (1) | % | % | % | % |
Years Ending December 31, | Total | |||||||
2023 (October 1 through December 31) | $ | |||||||
2024 | ||||||||
2025 | ||||||||
2026 | ||||||||
2027 | ||||||||
Thereafter | ||||||||
Unamortized discount, net | ( | |||||||
Total | $ |
Nine Months Ended September 30, 2022 | ||||||||
(Predecessor Basis) | ||||||||
Net decrease in net assets resulting from operations | $ | ( | ||||||
Net change in unrealized depreciation on investments | ||||||||
Net change in unrealized depreciation on obligations under participation agreements | ( | |||||||
Income tax expense | ||||||||
Reversal of incentive fees on capital gains | ( | |||||||
Other temporary differences (1) | ( | |||||||
Total taxable income | $ |
Nine Months Ended September 30, 2022 | ||||||||||||||
(Predecessor Basis) | ||||||||||||||
Source of Distribution | Distribution Amount (1) | % | ||||||||||||
Return of capital | $ | % | ||||||||||||
Net investment income (2) | % | |||||||||||||
Distributions on a tax basis: | $ | % |
Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2022 | ||||||||||
Basic | (Predecessor Basis) | ||||||||||
Net decrease in net assets resulting from operations | $ | ( | $ | ( | |||||||
Weighted average common shares outstanding | |||||||||||
Net decrease in net assets per share resulting from operations | $ | ( | $ | ( |
Record Date | Payment Date | Per Share Per Day | Distributions Paid in Cash | Distributions Paid through the DRIP | Total Distributions Paid/Accrued | |||||||||||||||||||||||||||
January 26, 2022 | January 31, 2022 | $ | $ | $ | $ | |||||||||||||||||||||||||||
February 23, 2022 | February 28, 2022 | |||||||||||||||||||||||||||||||
March 28, 2022 | March 31, 2022 | |||||||||||||||||||||||||||||||
April 27, 2022 | April 30, 2022 | |||||||||||||||||||||||||||||||
May 26, 2022 | May 29, 2022 | |||||||||||||||||||||||||||||||
June 25, 2022 | June 30, 2022 | |||||||||||||||||||||||||||||||
July 26, 2022 | July 30, 2022 | |||||||||||||||||||||||||||||||
August 26, 2022 | August 31, 2022 | |||||||||||||||||||||||||||||||
September 27, 2022 | September 30, 2022 | |||||||||||||||||||||||||||||||
$ | $ | $ |
Nine Months Ended September 30, 2022 | ||||||||
(Predecessor Basis) | ||||||||
Per share data: | ||||||||
Net asset value at beginning of period | $ | |||||||
Results of operations (1): | ||||||||
Net investment income | ||||||||
Net change in unrealized depreciation on investments | ( | |||||||
Net change in unrealized depreciation on obligations under participation agreements | ||||||||
Net realized gain on investments | ||||||||
Net decrease in net assets resulting from operations | ( | |||||||
Stockholder distributions (2): | ||||||||
Distributions from return of capital | ( | |||||||
Distributions from net investment income | ( | |||||||
Net decrease in net assets resulting from stockholder distributions | ( | |||||||
Net asset value, end of period | $ | |||||||
Shares outstanding at end of period | ||||||||
Total return (3) | ( | % |
Ratio/Supplemental data: | ||||||||
Net assets, end of period | $ | |||||||
Ratio of net investment income to average net assets (4) | % | |||||||
Ratio of operating expenses to average net assets (4) (5) (6) | % | |||||||
Portfolio turnover | % |
September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
Fixed Rate | Floating Rate (1)(3) | Total | Fixed Rate | Floating Rate (2)(3) | Total | ||||||||||||||||||||||||||||||
Number of loans | 4 | 2 | 6 | 6 | 3 | 9 | |||||||||||||||||||||||||||||
Principal balance | $ | 43,771,242 | $ | 43,076,673 | $ | 86,847,915 | $ | 61,913,795 | $ | 61,826,028 | $ | 123,739,823 | |||||||||||||||||||||||
Carrying value | $ | 43,925,195 | $ | 37,349,830 | $ | 81,275,025 | $ | 62,781,893 | $ | 58,631,133 | $ | 121,413,026 | |||||||||||||||||||||||
Fair value | $ | 43,698,400 | $ | 39,886,083 | $ | 83,584,483 | $ | 62,035,611 | $ | 58,244,737 | $ | 120,280,348 | |||||||||||||||||||||||
Weighted-average coupon rate | 13.7% | 16.5% | 15.1% | 14.1% | 14.4% | 14.2% | |||||||||||||||||||||||||||||
Weighted-average remaining term (years) | 0.96 | 0.67 | 0.77 | 0.86 | 0.77 | 0.80 |
Three Months Ended September 30, | |||||||||||||||||||||||
2023 | 2022 | ||||||||||||||||||||||
Successor Basis | Predecessor Basis | ||||||||||||||||||||||
Weighted Average Principal Amount | Weighted Average Coupon Rate | Weighted Average Principal Amount | Weighted Average Coupon Rate | ||||||||||||||||||||
Gross loan investments | $ | 86,005,460 | 15.1% | $ | 120,904,902 | 13.4% | |||||||||||||||||
Obligations under participation agreements | — | — | % | (5,942,171) | 11.1% | ||||||||||||||||||
Net loan investments | $ | 86,005,460 | 15.1% | $ | 114,962,731 | 13.5% |
Nine Months Ended September 30, | |||||||||||||||||||||||
2023 | 2022 | ||||||||||||||||||||||
Successor Basis | Predecessor Basis | ||||||||||||||||||||||
Weighted Average Principal Amount | Weighted Average Coupon Rate | Weighted Average Principal Amount | Weighted Average Coupon Rate | ||||||||||||||||||||
Gross loan investments | $ | 98,569,922 | 14.9% | $ | 124,239,298 | 13.4% | |||||||||||||||||
Obligations under participation agreements | — | —% | (5,567,579) | 11.1% | |||||||||||||||||||
Net loan investments | $ | 98,569,922 | 14.9% | $ | 118,671,719 | 13.5% |
Three Months Ended September 30, 2023 | Nine Months Ended September 30, 2023 | ||||||||||
Revenues | |||||||||||
Interest income | $ | 2,321,378 | $ | 7,848,610 | |||||||
Dividend and other income | 19,162 | 56,637 | |||||||||
2,340,540 | 7,905,247 | ||||||||||
Operating expenses | |||||||||||
Asset management and asset servicing fees paid to Terra REIT (1) | 408,726 | 1,272,159 | |||||||||
Operating expense reimbursement to Terra REIT (1) | 395,041 | 1,107,401 | |||||||||
Provision for credit losses | 1,710,516 | 1,642,528 | |||||||||
Professional fees | 152,868 | 618,910 | |||||||||
Insurance expense | 21,072 | 104,263 | |||||||||
General and administrative expenses | 32,238 | 59,625 | |||||||||
2,720,461 | 4,804,886 | ||||||||||
Operating (loss) income | (379,921) | 3,100,361 | |||||||||
Other income and expenses | |||||||||||
Unrealized gain on investments, net | 16,790 | 22,619 | |||||||||
Realized loss on investments, net | — | (12,512) | |||||||||
Loss from equity investment in unconsolidated investment | (543,934) | (353,027) | |||||||||
Interest expense on unsecured notes payable | (968,170) | (2,880,368) | |||||||||
Interest expense on term loan | (532,387) | (1,239,418) | |||||||||
(2,027,701) | (4,462,706) | ||||||||||
Net Loss | $ | (2,407,622) | $ | (1,362,345) |
Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2022 | |||||||||||||
Investment income | ||||||||||||||
Interest income | $ | 3,483,242 | $ | 11,648,944 | ||||||||||
Dividend and other income | 5,864 | 62,821 | ||||||||||||
Total investment income | 3,489,106 | 11,711,765 | ||||||||||||
Operating expenses | ||||||||||||||
Base management fees | 672,685 | 1,964,830 | ||||||||||||
Reversal of incentive fees on capital gains | (68,486) | (102,160) | ||||||||||||
Operating expense reimbursement to Adviser | 329,885 | 946,934 | ||||||||||||
Servicing fees | (361,611) | (121,504) | ||||||||||||
Interest expense on unsecured notes payable | 768,500 | 2,299,538 | ||||||||||||
Professional fees | 550,367 | 1,139,775 | ||||||||||||
Interest expense from obligations under participation agreements | 171,740 | 433,622 | ||||||||||||
Interest expense on term loan | 419,516 | 1,101,797 | ||||||||||||
Directors’ fees | 27,126 | 84,378 | ||||||||||||
Insurance expense | 61,571 | 190,293 | ||||||||||||
Transaction costs | 313,882 | 1,459,762 | ||||||||||||
General and administrative expenses | 54,051 | 76,625 | ||||||||||||
Total operating expenses | 2,939,226 | 9,473,890 | ||||||||||||
Net investment income before income taxes | 549,880 | 2,237,875 | ||||||||||||
Income tax expense | 109,129 | 605,787 | ||||||||||||
Net investment income | 440,751 | 1,632,088 | ||||||||||||
Net change in unrealized depreciation on investments | (3,193,123) | (3,444,211) | ||||||||||||
Net change in unrealized depreciation obligations under participation agreements | 15,188 | 42,128 | ||||||||||||
Net realized gain on investments | — | 55,783 | ||||||||||||
Net decrease in net assets resulting from operations | $ | (2,737,184) | $ | (1,714,212) |
Exhibit No. | Description and Method of Filing | |||||||
31.1* | ||||||||
31.2* | ||||||||
32.1** | ||||||||
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |||||||
101.SCH | XBRL Taxonomy Extension Schema Document | |||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
104 | Cover Page Interactive Data File Included as Exhibit 101 (embedded within the Inline XBRL document) |
TERRA INCOME FUND 6, LLC | |||||||||||
By: Terra Property Trust, Inc., its sole member | |||||||||||
By: | /s/ Vikram S. Uppal | ||||||||||
Vikram S. Uppal | |||||||||||
Chairman of the Board, Chief Executive Officer and President | |||||||||||
(Principal Executive Officer) | |||||||||||
By: | /s/ Gregory M. Pinkus | ||||||||||
Gregory M. Pinkus | |||||||||||
Chief Financial Officer, Chief Operating Officer, | |||||||||||
Treasurer and Secretary | |||||||||||
(Principal Financial and Accounting Officer) |
/s/ Vikram S. Uppal | ||||||||
Vikram S. Uppal | ||||||||
Chairman of the Board, Chief Executive Officer and President | ||||||||
(Principal Executive Officer) | ||||||||
Terra Property Trust, Inc., the sold member of Terra Income Fund 6, LLC |
/s/ Gregory M. Pinkus | ||||||||
Gregory M. Pinkus | ||||||||
Chief Financial Officer, | ||||||||
Chief Operating Officer, Treasurer and Secretary | ||||||||
(Principal Financial and Principal Accounting Officer) | ||||||||
Terra Property Trust, Inc., the sold member of Terra Income Fund 6, LLC |
/s/ Vikram S. Uppal | ||||||||
Vikram S. Uppal | ||||||||
Chairman of the Board, Chief Executive Officer and President | ||||||||
(Principal Executive Officer) | ||||||||
Terra Property Trust, Inc., the sold member of Terra Income Fund 6, LLC | ||||||||
/s/ Gregory M. Pinkus | ||||||||
Gregory M. Pinkus | ||||||||
Chief Financial Officer, | ||||||||
Chief Operating Officer, Treasurer and Secretary | ||||||||
(Principal Financial and Principal Accounting Officer) | ||||||||
Terra Property Trust, Inc., the sold member of Terra Income Fund 6, LLC |
Consolidated Balance Sheet (Successor Basis) (Parenthetical) - USD ($) |
Sep. 30, 2023 |
Dec. 31, 2022 |
---|---|---|
Allowance for credit losses | $ 6,234,008 | $ 3,937,050 |
Loans Held for Investment | ||
Allowance for credit losses | 526,665 | 0 |
Loans held for investment acquired through participation | ||
Allowance for credit losses | $ 5,707,343 | $ 3,937,050 |
Consolidated Statement of Operations (Successor And Predecessor Basis) - USD ($) |
3 Months Ended | 9 Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2023 |
Sep. 30, 2022 |
Sep. 30, 2023 |
Sep. 30, 2022 |
|||||||
Investment income | ||||||||||
Interest income | $ 2,321,378 | $ 7,848,610 | ||||||||
Dividend and other income | 19,162 | 56,637 | ||||||||
Revenues | 2,340,540 | 7,905,247 | ||||||||
Interest income | $ 3,483,242 | $ 11,648,944 | ||||||||
Dividend and other income | 5,864 | 62,821 | ||||||||
Revenues | 3,489,106 | 11,711,765 | ||||||||
Operating expenses | ||||||||||
Base management fees | 408,726 | [1] | 672,685 | 1,272,159 | [1] | 1,964,830 | ||||
Operating expense reimbursement to Adviser (Note 5) | 395,041 | [1] | 329,885 | 1,107,401 | [1] | 946,934 | ||||
Provision for credit losses | 1,710,516 | 1,642,528 | ||||||||
Reversal of incentive fees on capital gains | [2] | (68,486) | (102,160) | |||||||
Servicing fees (Note 2, Note 5) | (361,611) | (121,504) | ||||||||
Interest expense on unsecured notes payable | 968,170 | 768,500 | 2,880,368 | 2,299,538 | ||||||
Professional fees | 152,868 | 550,367 | 618,910 | 1,139,775 | ||||||
Interest expense from obligations under participation agreements (Note 5) | 171,740 | 433,622 | ||||||||
Interest expense on term loan | 532,387 | 419,516 | 1,239,418 | 1,101,797 | ||||||
Directors’ fees | 27,126 | 84,378 | ||||||||
Insurance expense | 21,072 | 61,571 | 104,263 | 190,293 | ||||||
Transaction costs | 313,882 | 1,459,762 | ||||||||
General and administrative | 32,238 | 54,051 | 59,625 | 76,625 | ||||||
Total operating expenses | 2,939,226 | 9,473,890 | ||||||||
Operating (loss) income | (379,921) | 549,880 | 3,100,361 | 2,237,875 | ||||||
Net change in unrealized depreciation on investments | 16,790 | 22,619 | ||||||||
Realized loss on investments, net | 0 | 0 | (12,512) | 55,783 | ||||||
Loss from equity investment in unconsolidated investment | (543,934) | (353,027) | ||||||||
Interest expense on unsecured notes payable | (968,170) | (768,500) | (2,880,368) | (2,299,538) | ||||||
Interest expense on term loan | (532,387) | (419,516) | (1,239,418) | (1,101,797) | ||||||
Income tax expense | 109,129 | 605,787 | ||||||||
Net investment income | 440,751 | 1,632,088 | ||||||||
Net loss | (2,407,622) | $ (2,737,184) | (1,362,345) | $ (1,714,212) | ||||||
Per common share data: | ||||||||||
Net investment income per share (in USD per share) | $ 0.05 | $ 0.20 | ||||||||
Net decrease in net assets resulting from operations per share (in USD per share) | $ (0.34) | $ (0.21) | ||||||||
Weighted average common shares outstanding (in shares) | 8,133,695 | 8,110,351 | ||||||||
Costs and Expenses | 2,720,461 | 4,804,886 | ||||||||
Other income and expenses | $ (2,027,701) | (4,462,706) | ||||||||
Loans Held for Investment | ||||||||||
Operating expenses | ||||||||||
Provision for credit losses | $ (66,375) | |||||||||
Net change in unrealized depreciation on investments | $ (3,193,123) | $ (3,444,211) | ||||||||
Obligations under Participation Agreements | ||||||||||
Operating expenses | ||||||||||
Net change in unrealized depreciation on investments | $ 15,188 | $ 42,128 | ||||||||
|
Consolidated Statement of Operations (Successor And Predecessor Basis) (Parenthetical) - USD ($) |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2022 |
|||
Reversal of incentive fees on capital gains | [1] | $ (68,486) | $ (102,160) | |
Related Party | ||||
Reversal of incentive fees on capital gains | $ 68,486 | $ 102,160 | ||
|
Consolidated Statement of Changes in Member’s Capital (Successor Basis) - USD ($) |
3 Months Ended | 9 Months Ended | 12 Months Ended | ||
---|---|---|---|---|---|
Sep. 30, 2023 |
Jun. 30, 2023 |
Mar. 31, 2023 |
Sep. 30, 2023 |
Dec. 31, 2022 |
|
Accounting Standards Update [Extensible Enumeration] | Accounting Standards Update 2016-13 | ||||
Changes in Members' Capital [Roll Forward] | |||||
Beginning balance | $ 80,075,687 | $ 79,996,808 | $ 79,691,832 | $ 79,691,832 | |
Net loss | (2,407,622) | 78,879 | 966,398 | (1,362,345) | |
Ending balance | 77,668,065 | 80,075,687 | 79,996,808 | 77,668,065 | $ 79,691,832 |
Cumulative effect of credit loss accounting standard | |||||
Changes in Members' Capital [Roll Forward] | |||||
Beginning balance | (661,422) | (661,422) | |||
Ending balance | (661,422) | ||||
Managing Member | |||||
Changes in Members' Capital [Roll Forward] | |||||
Beginning balance | 80,075,687 | 79,996,808 | 79,691,832 | 79,691,832 | |
Net loss | (2,407,622) | 78,879 | 966,398 | ||
Ending balance | $ 77,668,065 | $ 80,075,687 | 79,996,808 | 77,668,065 | 79,691,832 |
Managing Member | Cumulative effect of credit loss accounting standard | |||||
Changes in Members' Capital [Roll Forward] | |||||
Beginning balance | $ (661,422) | $ (661,422) | |||
Ending balance | $ (661,422) |
Principal Business and Organization |
9 Months Ended |
---|---|
Sep. 30, 2023 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
Principal Business and Organization | Principal Business and Organization Terra Income Fund 6, LLC (“Terra LLC”) was formed as a Delaware limited liability company on April 29, 2022 as a wholly owned subsidiary of Terra Property Trust, Inc. (“Terra REIT”). On October 1, 2022, pursuant to an Agreement and Plan of Merger, dated as of May 2, 2022 (as amended, the “Merger Agreement”), Terra Income Fund 6, Inc. (“Terra BDC”) merged with and into Terra LLC, with Terra LLC continuing as the surviving entity of the merger (the “Merger”) (Note 5). Subsequent to the Merger, Terra LLC became the successor of Terra BDC and assumed all of Terra BDC’s rights and obligations. As context requires, the “Company” refers to Terra BDC prior to the Merger and its successor, Terra LLC, after the Merger. Terra BDC was incorporated under the general corporation laws of the State of Maryland on May 15, 2013. Terra BDC elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). On September 29, 2022, Terra BDC withdrew its election to be regulated as a BDC. Terra BDC was an externally managed, non-diversified, closed-end management investment company that elected to be taxed and qualified annually thereafter, as a real estate investment trust (“REIT”) for U.S. federal income tax purposes under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). Subsequent to the Merger, Terra LLC’s sole member is responsible for paying tax, if any, on the Company’s taxable income. Terra BDC’s investment activities were externally managed by Terra Income Advisors, LLC (“Terra Income Advisors” or the “Adviser”), a private investment firm affiliated with Terra BDC, pursuant to an investment advisory and administrative services agreement (the “Investment Advisory Agreement”), under the oversight of Terra BDC’s board of directors (the “Terra BDC Board”), a majority of whom were independent directors. In connection with the Merger, the Investment Advisory Agreement was terminated, and the former members of the Terra BDC Board were elected to the board of directors of Terra REIT (the “Terra REIT Board”). Terra LLC does not have a board of directors and Terra REIT is the sole and managing member of Terra LLC. Terra REIT’s investments activities are externally managed by Terra REIT Advisors, LLC (“REIT Manager”), an affiliate of the Company. In February 2021, Terra BDC issued $38.4 million in aggregate principal amount of 7.00% fixed-rate notes due 2026, for net proceeds of $37.2 million, after deducting underwriting commissions of $1.2 million, see “Unsecured Notes Payable” in Note 6 for more information. The Company is a wholly owned subsidiary of Terra REIT, and its investment objective is to provide attractive risk-adjusted returns to Terra REIT’s stockholders, primarily through Terra REIT’s regular distributions. The Company structures, acquires and maintains a portfolio of investments that generate a stable income stream. The Company directly structures, underwrites and originates most of its investments, as it believes that doing so will provide it with the best opportunity to invest in loans that satisfy its standards, establish a direct relationship with the borrower and optimize the terms of its investments; however, the Company may acquire existing loans from the originating lender should its adviser determine such an investment is in its best interest. The Company may hold its investments until their scheduled maturity dates or may sell them if the Company is able to command favorable terms for their disposition. The Company may also seek to realize growth in the value of its investments by timing their sale to maximize value.
|
Summary of Significant Accounting Policies |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Significant Accounting Policies | Summary of Significant Accounting Policies Basis of Presentation The accompanying interim 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 interim 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. Prior to the Merger, Terra BDC operated as and met the criteria of an investment company, as defined under U.S. GAAP, and applied accounting and reporting guidance in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 946, Financial Services — Investment Companies (the “Predecessor Basis”). As a result of the Merger, Terra LLC has not met the requirements to be classified as an investment company since October 1, 2022. As such, Terra LLC is an operating company and reports its investments at historical cost (the “Successor Basis”). The consolidated financial statements reflect all adjustments and reclassifications that, in the opinion of management, are necessary for the fair presentation of the results of operations and financial condition as of and for the periods presented. The interim consolidated financial statements for the three and nine months ended September 30, 2022, reflect Terra BDC’s financial results as an investment company. The consolidated financial statements as of September 30, 2023 and December 31, 2022, and for the three and nine months ended September 30, 2023, reflect Terra LLC’s financial results as an operating company. Consolidation As provided under Regulation S-X and ASC Topic 946, the Terra BDC generally did not consolidate its investment in a company other than an investment company or controlled operating company whose business consists of providing services to Terra BDC. Accordingly, Terra BDC consolidated the accounts of its wholly-owned subsidiaries that meet the aforementioned criteria in its consolidated financial statements as of September 30, 2022. Terra LLC consolidates entities in which it has a controlling financial interest based on either the variable interest entity (“VIE”) or voting interest entity (“VOE”) model. Terra LLC is required to first apply the VIE model to determine whether it holds a variable interest in an entity, and if so, whether the entity is a VIE. If Terra LLC determines the entity is not a VIE, it then applies the VOE model. Under the VOE model, Terra LLC consolidates an entity when it holds a majority voting interest in an entity. Terra LLC accounts for investments in which it has significant influence but not a controlling financial interest using the equity method of accounting. All significant intercompany balances and transactions have been eliminated in consolidation. Cash and Cash Equivalents The Company considers all highly liquid investments, with original maturities of ninety days or less when purchased, as cash equivalents. Cash and cash equivalents held at financial institutions, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation. Restricted Cash Restricted cash represents cash held as additional collateral by the Company on behalf of the borrowers related to the investments for the purpose of such borrowers making interest and property-related operating payments. There is a corresponding liability of the same amount on the statements of assets and liabilities called “Interest reserve and other deposits held on investments.” The following table provides a reconciliation of cash, cash equivalents and restricted cash in the Company’s consolidated balance sheets to the total amount shown in its statements of cash flows:
Loans Held for Investment The Company originates, acquires, and structures, or acquires through participations, real estate-related loans generally to be held to maturity (collectively the “loans”). Loans held for investment are carried at the principal amount outstanding, adjusted for the accretion of discounts on investments and exit fees, and the amortization of premiums on investments and origination fees. The Company’s preferred equity investments, which are economically similar to mezzanine loans and subordinate to any loans but senior to common equity, are accounted for as loans held for investment. Loans are carried at amortized cost less allowance for credit losses. Prior to the Merger and under Predecessor Basis of accounting, the Company’s investments were reported at fair value, with the changes in fair value recorded as changes in unrealized gains or losses on investments in the consolidated statements of operations. Current Expected Credit Losses Reserve ASC 326, Financial Instruments – Credit Losses, became effective for the Company on January 1, 2023. ASC 326 mandates the use of a current expected credit loss (“CECL”) model for estimating future credit losses of certain financial instruments measured at amortized cost, instead of the “incurred loss” credit model previously required under U.S. GAAP. The CECL model requires the consideration of possible credit losses over the life of an instrument as opposed to only estimating credit losses upon the occurrence of a discrete loss event under the previous “incurred loss” methodology. The CECL model applies to the Company’s loan portfolio and the held-to-maturity debt securities which are carried at amortized cost, including future funding commitments, for which the Company does not have the unconditional right to cancel. Amortized cost is defined as the principal amount outstanding, adjusted for the accretion of purchase discounts and disposition fees, and amortization of purchase premiums and origination fees, and includes accrued interest receivable related to these loans and securities. As permitted by ASC 326, the Company elected not to measure an allowance for credit losses on accrued interest receivable (which is presented separately on the consolidated balance sheet), but rather write off in a timely manner by reversing interest income that would likely be uncollectible. The Company’s adoption of the CECL model resulted in a $0.7 million increase to total reserve, including reserve on future funding commitments, which was recognized as a cumulative-effect adjustment to member’s capital as of January 1, 2023. Subsequent to the adoption of the CECL model, any increase or decrease to the CECL reserve is recorded in earnings on the consolidated statement of operations. The Company utilizes information obtained from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts about the future to determine the expected credit losses for its loan portfolio. The Company does not have a meaningful history of realized credit losses on its loan portfolio so it has subscribed to a third-party database service to provide the Company with industry losses for its loans. The Company utilizes a loan loss model that is widely used among banks and commercial mortgage REITs and is marketed by a leading commercial mortgage-based security data analytics provider. It 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 provides specific loan-level inputs which include 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. The Company selects from a group of independent five-year macroeconomic forecasts included in the model that are updated regularly based on current economic trends. Because the Company’s loan portfolio is comprised of a small number of loans, the Company measures the CECL reserve based on an evaluation of each loan as its own segregated asset. Based on the inputs, the loan loss model determines a loan loss rate through the generation of probability of defaults (PD) and loss given defaults (LGD) for each loan. The CECL reserve 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. The calculation of the estimate of expected credit loss considers historical experience and current conditions for each loan 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, current portfolio composition, level of historical loss forecast estimates, material changes in growth and credit strategy and other factors that may affect its loss experience. The Company regularly evaluates the reasonable and supportable forecast period to determine if a change is needed. Beyond the Company’s reasonable and supportable forecast period, the Company generally reverts to historical loss information, pooled by asset type and investment structure, over the remaining loan period, 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 Company generally expects to use an average historical loss for reversion, utilizing an immediate or straight-line method for the remaining life of the loans. The Company also performs a qualitative assessment beyond model estimates and applies qualitative adjustments as necessary. 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 contractual extension options, renewals, modifications, and prepayments. 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, the Company considers that loan non-performing. For all non-performing loans, such as those in default, collateral-dependent or modified loans, including historical troubled debt restructurings, the Company removes these loans from the industry loss rate approach described above and analyzes them separately. The credit loss reserve for these loans is calculated as any excess of the amortized cost of the loan over (i) the present value of expected future cash flows discounted at the appropriate discount rate or (ii) the fair value of collateral, if repayment is expected solely from the collateral. Some of the Company’s 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 model because the Company does not have an unconditional right to cancel such commitments. The CECL reserve related to unfunded commitments is recorded as a component of other liabilities on the Company’s consolidated balance sheets. This CECL reserve is estimated using the same method outlined above for the Company’s outstanding loan balances and increases or decreases in the CECL reserve relating to unfunded commitments are also recorded in earnings on the consolidated statements of operations. As discussed below in Recent Accounting Pronouncements, the Company adopted the provisions of Accounting Standards Update (“ASU”) 2022-02 Financial Instruments—Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) concurrently with the adoption of CECL on January 1, 2023, prospectively. Marketable Securities From time to time, the Company may invest in short term debt and equity securities. These securities are classified as available-for-sale securities and are carried at fair value. Changes in the fair value of equity securities are recognized in earnings. Changes in the fair value of debt securities are reported in other comprehensive income until a gain or loss on the securities is realized. Held-to-Maturity Debt Securities The Company classifies debt securities for which it has both the positive intent and ability to hold until maturity of the security as held-to-maturity debt securities. These securities are recorded at amortized cost with changes in amortized cost recognized in earnings until realized. Held-to-maturity debt securities are subject to the CECL reserve described above. 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 income and principal becomes doubtful. 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 contain paid-in-kind (“PIK”) interest provisions. The PIK interest, which represents contractually deferred interest that is added to the principal balance that is due at maturity, is recorded on the accrual basis. Other Revenues: Prepayment fee income is recognized as prepayments occur. All other income is recognized when earned. Deferred Debt Issuance Costs The Company records issue discounts and other financing costs related to its debt obligation as deferred debt issuance costs, which are presented as a direct deduction from the carrying value of the related debt liability. These expenses are deferred and amortized using the effective interest method over the stated maturity of the debt obligation. Stockholder Dividends and Distributions Dividends and distributions to stockholders, which were determined in accordance with federal income tax regulations, were recorded on the declaration date. The amount to be paid out as a dividend or distribution was approved by the Terra BDC Board. Net realized capital gains, if any, were generally distributed or deemed distributed at least annually. Terra BDC adopted an “opt in” DRIP pursuant to which stockholders may elect to have the full amount of stockholders cash distributions reinvested in additional shares of common stock. Participants in the DRIP were free to elect to participate or terminate participation in the plan within a reasonable time as specified in the plan. For stockholders who have opted into the DRIP, they had their cash distributions reinvested in additional shares of common stock, rather than receiving the cash distributions. Pursuant to the DRIP, shares were issued at a price equal to Terra BDC’s most recently disclosed net asset value (“NAV”) per share of its common stock immediately prior to the applicable distribution payment date. In connection with the Merger, the DRIP was terminated and Terra REIT will make monthly distributions to stockholders. On January 20, 2023, the Terra REIT Board adopted a distribution reinvestment plan (the “Plan”), pursuant to which Terra REIT’s stockholders may elect to reinvest cash distributions payable by Terra REIT in additional shares of Class A Common Stock and Class B Common Stock, at the price per share determined pursuant to the Plan. Incentive Fee on Capital Gains Pursuant to the terms of the Investment Advisory Agreement, the incentive fee on capital gains was determined and payable in arrears as of the end of each fiscal 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 capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period. While the Investment Advisory Agreement neither included nor contemplated the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an American Institute of Certified Public Accountants Technical Practice Aid for investment companies, Terra BDC accrued for this incentive fee to include unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflected the incentive fees that would be payable to Terra Income Advisors if Terra BDC’s entire portfolio was liquidated at its fair value as of the balance sheet date even though Terra Income Advisors was not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized. In connection with the Merger, the Investment Advisory Agreement was terminated and the Company no longer pays any fees to the Adviser. Such fees are now payable by Terra REIT pursuant to its management agreement with the REIT Manager. Terra LLC and Terra REIT have entered into a cost sharing and reimbursement agreement (the “Cost Sharing Agreement”) pursuant to which Terra LLC will be responsible for its allocable share of Terra REIT’s expenses, including fees paid by Terra REIT to the REIT Manager. Servicing Fee Terra BDC paid selected dealers a servicing fee at an annual rate of 0.75% of the most recently published NAV per share, excluding shares sold through the DRIP, in exchange for providing certain administrative support services (Note 5) to stockholders such as establishing and maintaining stockholder accounts, customer service support and assisting stockholders in changing account options, account designations and account addresses. The servicing fee was recorded as expense on the consolidated statements of operations in the period in which it was incurred. In connection with the Merger, the servicing plan was terminated and the servicing fee is no longer payable. Income Taxes Terra BDC elected to be taxed as a REIT under the Code commencing with its short taxable year beginning October 1, 2018 and ending December 31, 2018. In order to qualify as a REIT, Terra BDC was required, among other things, to distribute dividends equal to at least 90% of its REIT net taxable income to the stockholders annually and meet certain tests regarding the nature of its income and assets. As a REIT, Terra BDC was not subject to U.S. federal income taxes on income and gains distributed to the stockholders as long as certain requirements were satisfied, principally relating to the nature of income and the level of distributions, as well as other factors. For the nine months ended September 30, 2022, Terra BDC satisfied all the requirements for a REIT. Subsequent to the Merger, Terra REIT, the sole member of Terra LLC, will be responsible for paying tax, if any, on the Company’s taxable income. Terra BDC held certain portfolio company investments through consolidated taxable REIT subsidiaries (“TRSs”). Such subsidiaries may be subject to U.S. federal and state corporate-level income taxes. These consolidated subsidiaries recognized deferred tax assets and liabilities for the estimated future tax effects attributable to temporary differences between the tax basis of certain assets and liabilities and the reported amounts included in the accompanying consolidated statements of assets and liabilities using the applicable statutory tax rates in effect for the year in which any such temporary differences are expected to reverse. In connection with the Merger on October 1, 2022, Terra BDC’s TRS became a qualified REIT subsidiary of Terra REIT. Terra BDC did not have any uncertain tax positions that met the recognition or measurement criteria under accounting for income taxes, nor did Terra BDC have any unrecognized tax benefits as of the periods presented herein. Terra BDC recognized interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in its statements of operations. For the nine months ended September 30, 2022, Terra BDC did not incur any interest or penalties. Terra BDC’s 2020-2022 federal tax years remain subject to examination by the Internal Revenue Service and the state department of revenue. Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and reported amounts of income, expenses and gains and losses during the reporting period. Actual results may ultimately differ from those estimates, and those differences could be material. Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. In April 2019, the FASB issued additional amendments to clarify the scope of ASU 2016-13 and address issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, among other things. In May 2019, the FASB issued ASU 2019-05 — Targeted Transition Relief, which provides an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. In October 2019, the FASB decided that for smaller reporting companies, ASU 2016-13 and related amendments will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company meets the definition of a smaller reporting company under the regulation of the Securities and Exchange Commission. The Company adopted this ASU and related amendments on January 1, 2023. The adoption of ASU 2016-13 resulted in an incremental reserve of approximately $0.7 million, which included reserve on future loan funding commitments. The Company recorded the cumulative effect of initially applying this guidance as an adjustment to member’s equity using the modified retrospective method of adoption. London Interbank Offered Rate (“LIBOR”) is a benchmark interest rate referenced in a variety of agreements that are used by all types of entities. In July 2017, the U.K. Financial Conduct Authority, which regulates the LIBOR administrator, ICE Benchmark Administration Limited (“IBA”), announced that it would cease to compel banks to participate in setting LIBOR as a benchmark by the end of 2021, which was subsequently delayed to June 30, 2023. In March 2020, the FASB issued ASU. 2020-04, Reference Rate Reform (Topic 848) — Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The amendments in ASU 2020-04 provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848), which expanded the scope of Topic 848 to include derivative instruments impacted by discounting transition (“ASU 2021-01”). As of September 30, 2023, all of the Company’s floating rate loans and related financings have transitioned to the applicable replacement benchmark rate, or reference a benchmark rate that is not expected to be replaced. In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”). ASU 2022-02 eliminates troubled debt restructuring guidance for organizations that adopted the amendments in ASU 2016-13 while providing for additional disclosures for loan modifications. ASU 2022-02 also amends the vintage disclosure guidance for public business entities. The Company adopted the provisions of ASU 2022-02 concurrently with the adoption of ASU 2016-13. The adoption of ASU 2022-02 did not have any material impact on the Company’s financial condition and results of operations.
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Loans Held for Investment | Loans Held for InvestmentThe Company elected the practical expedient under ASC 326 to exclude accrued interest from amortized cost. As of September 30, 2023 and December 31, 2022, accrued interest receivable of $1.2 million and $1.4 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 following table provides a summary of the Company’s loan portfolio:
(1)As of September 30, 2023, these loans pay a coupon rate of Secured Overnight Financing Rate (“SOFR”) or forward-looking term rate based on SOFR (“Term SOFR”), as applicable, plus a fixed spread. Coupon rates shown were determined using average SOFR and Term SOFR of 5.3%. (2)As of December 31, 2022, these loans paid a coupon rate of LIBOR or average SOFR, as applicable, plus a fixed spread. Coupon rates shown were determined using LIBOR of 4.4% and average SOFR of 4.1%. (3)As of September 30, 2023 and December 31, 2022, two and three loans, respectively, were subject to a LIBOR, SOFR or Term SOFR floor, as applicable. Lending Activities The following table presents the activities of the Company’s loan portfolio for the nine months ended September 30, 2023:
Portfolio Information The tables below detail the types of loans in the Company’s loan portfolio, as well as the property type and geographic location of the properties securing these loans:
Current Expected Credit Losses Reserve As described in Note 2, on January 1, 2023, the Company adopted the provisions of ASU 2016-13, which requires entities to recognize credit losses on financial instruments based on an estimate of current expected credit losses. The adoption of ASU 2016-13 resulted in a $0.7 million increase to total reserve, including reserve on future funding commitments, which was recognized as a cumulative-effect adjustment to member’s capital as of January 1, 2023. The following table presents the activity in allowance for credit losses for funded loans:
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 unfunded commitments amounted to approximately $1.2 million and $5.9 million as of September 30, 2023 and December 31, 2022, respectively. The following table presents the activity in the liability for credit losses on unfunded commitments:
The allowance for credit losses for unfunded commitments is included in other liabilities on the consolidated balance sheets. 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 matter. 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 interest. For the three and nine months ended September 30, 2023 and 2022, the Company did not reverse any interest income accrual because all accrued interest income was deemed collectible. As of both September 30, 2023 and December 31, 2022, the Company had two loans that were in default, and suspended interest income accrual of $1.1 million and $3.1 million for the three and nine months ended September 30, 2023, respectively, because recovery of such income was doubtful. As of September 30, 2023 and December 31, 2022, there was no outstanding interest receivable on these loans. Non-Performing Loans As discussed in Note 2, for loans that are considered non-performing, the Company removes them from the industry loss rate approach and analyzes them separately. As of both September 30, 2023 and December 31, 2022, the Company had two non-performing loans with total carrying value of $27.1 million and $26.2 million, respectively. The allowance for credit losses for these non-performing loans were $3.9 million as of both September 30, 2023 and December 31, 2022. Loan Risk Rating The Company assesses the risk factors of each loan and assigns each 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 loans are rated “1” through “5”, from less risk to greater risk as follows:
The following table presents the amortized cost of the Company's loan portfolio by year of origination and loan risk rating as of September 30, 2023:
The following table presents the principal balance and the amortized cost of the Company’s loans based on the loan risk rating as of December 31, 2022:
(1)Because these loans have an event of default, they were removed from the pool of loans on which a general allowance was calculated and were evaluated for collectability individually. As of December 31, 2022, the specific allowance for credit losses on these loans were $3.9 million, as a result of a decline in the fair value of the respective collateral. Equity Investment in Unconsolidated Investment On December 28, 2022, the Company originated a $10.0 million mezzanine loan to a borrower to finance the acquisition of a real estate portfolio. Additionally, the Company entered into a residual profit-sharing agreement with the borrower in which the borrower would pay the Company an additional amount of 35.0% of remaining net cash flow from the sale of the real estate portfolio. The Company accounted for the entire arrangement as equity investment in unconsolidated investment. In May 2023, the Company made a cash payment of $27.4 million and settled the $10.0 million mezzanine loan in exchange for an 80.0% equity interest in a joint venture that owns the real estate portfolio. The Company accounts for its equity interest in the joint venture as an equity method investment because the Company does not have a controlling financial interest in the entity. As of September 30, 2023 and December 31, 2022, equity investment in unconsolidated investment had a carrying value of $36.1 million and $10.0 million, respectively. For the three and nine months ended September 30, 2023, the Company recorded net equity loss from equity investment in unconsolidated investment of $0.5 million and $0.4 million, respectively, and received distribution from equity investment in unconsolidated investment of $0.4 million and $0.9 million respectively. Held-to-Maturity Debt Securities In the first quarter of 2023, the Company purchased $10.0 million of corporate bonds with a coupon rate of 6.125% that matured on May 15, 2023. The Company classified these bonds as held-to-maturity debt securities, as it had the intent and ability to hold these securities until maturity. These securities were recorded at amortized cost and were fully redeemed at par on May 15, 2023.
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Fair Value Measurements |
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Fair Value Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Measurements | Fair Value Measurements The Company follows the provisions of ASC 820, Fair Value Measurement (“ASC 820”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 established a fair value hierarchy that prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment, the characteristics specific to the investment, and the state of the marketplace (including the existence and transparency of transactions between market participants). Investments with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Investments measured and reported at fair value are classified and disclosed into one of the following categories based on the inputs as follows: Level 1 — Quoted prices (unadjusted) in active markets for identical assets and liabilities that the Company has the ability to access. Level 2 — Pricing inputs are other than quoted prices in active markets, including, but not limited to, quoted prices for similar assets and liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market corroborated inputs. 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 the Company considers factors specific to the investment. As of September 30, 2023 and December 31, 2022, the Company had not elected the fair value option for its financial instruments, including loans held for investment, loans held for investment acquired through participation, term loan payable and unsecured notes payable. Such financial instruments are carried at cost, less impairment or less net deferred costs, where applicable. Held-to-maturity debt securities are financial instruments that are reported at amortized cost. Financial Instruments Carried at Fair Value on a Recurring Basis From time to time, the Company may invest in short-term debt and equity securities which are classified as available-for-sale securities, and are presented at fair value on the consolidated balance sheet. Changes in the fair value of equity securities are recognized in earnings. Changes in the fair value of debt securities are reported in other comprehensive income until the securities are realized. Additionally, the Company may invest in short-term money market funds. These funds are included in cash and cash equivalents on the consolidated balance sheet due to their short-term nature and can be easily converted to cash. As of December 31, 2022, the Company did not own financial instruments that were carried at fair value. The following table presents fair value measurements of financial instruments that were carried at fair value, by major class, as of September 30, 2023, according to the fair value hierarchy:
The following table presents the activities of the marketable securities for the periods presented.
Financial Instruments Not Carried at Fair Value The following table presents the carrying value and estimated fair value of the Company’s financial instruments that are not carried at fair value on the consolidated balance sheets as of:
(1)Carrying value is net of unamortized purchase discount of $3.5 million and $4.3 million as of September 30, 2023 and December 31, 2022, respectively. (2)Valuation falls under Level 1 of the fair value hierarchy, which is based on the trading price of $23.61 and $23.05 as of the close of business day on September 30, 2023 and December 31, 2022, respectively. (3)Carrying value is net of unamortized discount of $0.1 million as of September 30, 2023. (4)Valuation falls under Level 3 of the fair value hierarchy, which is based on a discounted cash flow model with a discount rate of 12.71% and 5.625%, as of September 30, 2023 and December 31, 2022, respectively Valuation Methodology The fair value of the Company’s investment in corporate bonds, preferred stock and common stock within the marketable securities portfolio, if any, is determined based on quoted prices in an active market and is classified as Level 1 of the fair value hierarchy. Additionally, the fair value of the Company’s unsecured notes payable is determined based on quoted price in an active market and is also classified as Level 1. Market quotations are not readily available for the Company’s real estate-related loan investments, all of which are included in Level 3 of the fair value hierarchy, as these investments are valued utilizing a yield approach, i.e., a discounted cash flow methodology to arrive at an estimate of the fair value of each respective investment in the portfolio using an estimated market yield. In following this methodology, investments are evaluated individually, and management takes into account, in determining the risk-adjusted discount rate for each of the Company’s investments, relevant factors, including available current market data on applicable yields of comparable debt/preferred equity instruments; market credit spreads and yield curves; the investment’s yield; covenants of the investment, including prepayment provisions; the portfolio company’s ability to make payments, net operating income and debt service coverage ratio; construction progress reports and construction budget analysis; the nature, quality and realizable value of any collateral (and loan-to-value ratio); the forces that influence the local markets in which the asset (the collateral) is purchased and sold, such as capitalization rates, occupancy rates, rental rates and replacement costs; and the anticipated duration of each real estate-related loan investment. These valuation techniques are applied in a consistent and verifiable manner to all investments that are categorized within Level 3 of the fair value hierarchy and Terra REIT Advisors provides the Terra REIT Board, (a majority of which is made up of independent directors) with the investment valuations that are based on this discounted cash flow methodology. Valuations are prepared quarterly, or more frequently as needed, with each asset in the portfolio subject to a valuation prepared by a third-party valuation service at a minimum of once during every 12-month period. Terra REIT Advisors reviews the preliminary valuation with the Terra REIT Board and, together with an independent valuation firm, if applicable, responds and supplements the preliminary valuation to reflect any comments provided by the Terra REIT Board. Terra REIT Advisors discusses valuations and determines the fair value of each investment in the portfolio in good faith based on various metrics and other factors, including the input and recommendation provided by the Terra REIT Boards and any third-party valuation firm, if applicable. Significant Unobservable Inputs The following tables summarize the significant unobservable inputs used by the Company to value the Level 3 investments as of September 30, 2023 and December 31, 2022. The following tables are not intended to be all-inclusive, but instead identify the significant unobservable inputs relevant to the determination of fair values.
(1)Valuation for these loans is based on recovery analysis.
If the weighted average discount rate used to value the Company’s investments were to increase, the fair value of the Company’s investments would decrease. Conversely, if the weighted average discount rate used to value the Company’s investments were to decrease, the fair value of Company’s investments would increase. Changes in the Company’s Level 3 investments for the nine months ended September 30, 2022 were as follows:
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Related Party Transactions |
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Related Party Transactions | 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 the Cost Sharing Agreement pursuant to which Terra LLC is 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:
(1)These fees were incurred pursuant to the Cost Sharing Agreement between Terra LLC and Terra REIT. (2)For the three and nine months ended September 30, 2022, the Company reversed previously accrued incentive fees on capital gains of $68,486 and $102,160, respectively. Incentive fees on capital gains were based on 20.0% of net realized and unrealized capital gains. No incentive fees on capital gains were actually payable by the Company with respect to unrealized gains unless and until those gains were realized. (3)Amounts were primarily compensation for time spent supporting the Company’s day-to-day operations. Merger On October 1, 2022, pursuant to the terms of the Merger Agreement, Terra BDC merged with and into Terra LLC, with Terra LLC continuing as the surviving entity of the Merger. Immediately following the Merger, Terra LLC remained a wholly owned subsidiary of Terra REIT. The Certificate of Merger and Articles of Merger with respect to the Merger were filed with the Secretary of State of the State of Delaware and State Department of Assessments and Taxation of Maryland, respectively, with an effective time and date of 12:02 a.m., Eastern Time, on October 1, 2022 (the “Effective Time”). Effective immediately following the Merger, Terra LLC changed its name to “Terra Income Fund 6, LLC.” At the Effective Time, except for any shares of common stock, par value $0.001 per share, of Terra BDC (“Terra BDC Common Stock”) held by Terra REIT or any wholly owned subsidiary of Terra REIT or Terra BDC, which shares were automatically retired and ceased to exist with no consideration paid therefor, each issued and outstanding share of Terra BDC Common Stock was automatically cancelled and retired and converted into the right to receive (i) 0.595 shares of the newly designated Class B Common Stock, par value $0.01 per share, of Terra REIT (“Class B Common Stock”) and (ii) cash, without interest, in lieu of any fractional shares of Class B Common Stock otherwise issuable in an amount, rounded to the nearest whole cent, determined by multiplying (x) the fraction of a share of Class B Common Stock to which such holder would otherwise be entitled by (y) $14.38. Pursuant to the terms of the transactions described in the Merger Agreement, 4,847,910 shares of Class B Common Stock were issued to former Terra BDC stockholders in connection with the Merger. Following the consummation of the Merger, former Terra BDC stockholders own approximately 19.9% of the common equity of Terra REIT as the combined company. In connection with the Merger, the Company incurred transaction costs totaling $1.5 million for the year ended December 31, 2022. In connection with the Merger, Terra LLC assumed the obligations of Terra BDC under the indenture and supplemental indentures between Terra BDC and the Trustee as well as the Credit Agreement with Eagle Point (Note 6). Additionally, the Investment Advisory Agreement between Terra BDC and the Adviser and the Servicing Plan (as defined below) were terminated and fees pursuant to such agreements are no longer payable. These advisory/management fees are now payable by the Company’s parent, Terra REIT, to its manager pursuant to the management agreement with its manager. 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 consisted 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' 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. In connection with the Merger, the Investment Advisory Agreement was terminated and the Company no longer pays management and incentive fees to the Adviser. Such fees are now payable by Terra REIT pursuant to its management agreement with the REIT Manager. Terra REIT charges the Company for its allocable share of the management fees through the Cost Sharing Agreement. 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' 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. In connection with the Merger, the Company no longer reimburses Terra Income Advisors for operating expenses incurred in connection with administrative services provided to the Company. Such expenses are now reimbursable by Terra REIT to the REIT Manager pursuant to its management agreement with the REIT manager. Terra REIT charges the Company for its allocable share of the operating expense reimbursement through the Cost Sharing Agreement. Servicing Plan Terra BDC Board adopted the servicing plan (the “Servicing Plan”) pursuant to which Terra BDC paid selected dealers a servicing fee to up 0.75% of the most recently published NAV per share 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. In connection with the Merger, the Servicing Plan was terminated. Cost Sharing Agreement On November 8, 2022, the Company entered into the Cost Sharing Agreement with Terra REIT effective October 1, 2022, pursuant to which the Company reimburses Terra REIT for its allocable portion of management and transaction fees and operating expenses incurred by Terra REIT, including fees paid by Terra REIT to the REIT Manager. Terra REIT’s Management Agreement with Terra REIT Advisors Terra REIT is the Company’s parent and sole managing member. The Company has entered into a cost sharing arrangement with Terra REIT pursuant to which the Company is responsible for its allocable share of Terra REIT’s expenses, including fees paid by Terra REIT to its manager, Terra REIT Advisors. Terra REIT currently pays the following fees to Terra REIT Advisors pursuant to the Management Agreement: Origination and Extension Fee. An origination fee in the amount of 1.0% of the amount used to originate, acquire, fund or structure real estate-related investments, including any third-party expenses related to such loan. In the event that the term of any real estate-related loan is extended, Terra REIT Advisors also receives an origination fee equal to the lesser of (i) 1.0% of the principal amount of the loan being extended or (ii) the amount of fee paid by the borrower in connection with such extension. Asset Management Fee. A monthly asset management fee at an annual rate equal to 1.0% of the aggregate funds under management, which includes the loan origination amount or aggregate gross acquisition cost, as applicable, for each real estate-related loan and cash held by Terra REIT. Asset Servicing Fee. A monthly asset servicing fee at an annual rate equal to 0.25% of the aggregate gross origination price or aggregate gross acquisition price for each real estate related loan then held by Terra REIT (inclusive of closing costs and expenses). Disposition Fee. A disposition fee in the amount of 1.0% of the gross sale price received by Terra REIT from the disposition of each loan, but not upon the maturity, prepayment, workout, modification or extension of a loan unless there is a corresponding fee paid by the borrower, in which case the disposition fee will be the lesser of (i) 1.0% of the principal amount of the loan and ii) the amount of the fee paid by the borrower in connection with such transaction. If Terra REIT takes ownership of a property as a result of a workout or foreclosure of a loan, Terra REIT will pay a disposition fee upon the sale of such property equal to 1.0% of the sales price. Transaction Breakup Fee. In the event that Terra REIT receive any “breakup fees,” “busted-deal fees,” termination fees, or similar fees or liquidated damages from a third-party in connection with the termination or non-consummation of any loan or disposition transaction, Terra REIT Advisors 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 Terra REIT Advisors with respect to its evaluation and pursuit of such transactions. In addition to the fees described above, Terra REIT reimburses Terra REIT Advisors for operating expenses incurred in connection with services provided to the operations of Terra REIT, including its allocable share of Terra REIT Advisors’ overhead, such as rent, employee costs, utilities, and technology costs. Participation Agreements The Company may enter into participation agreements with related and unrelated parties, primarily other affiliated funds of Terra REIT 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. Participation interest purchased by the Company: The below tables list the investment interests purchased by the Company via participation agreements (each, a “PA”) as of September 30, 2023 and December 31, 2022. In accordance with the terms of each PA, each participant’s rights and obligations, including interest income and other income (e.g., exit fee and prepayment income) and related fees/expenses are based upon its respective pro-rata participation interest in such investments, as specified in the respective PA. The Company’s share of the investment is repayable only from the proceeds received from the related borrower/issuer of the investment, and therefore the Company is also subject to the credit risk (i.e., risk of default by the underlying borrower/issuer). Pursuant to each PA, the affiliated fund receives and allocates the interest income and other related investment incomes in respect of the investment to the Company. The Company paid related expenses (i.e., the base management fee) directly to Terra Income Advisors prior to the Merger and to Terra REIT after the Merger.
(1)The loan is held in the name of Terra REIT, the Company’s parent entity. (2)This loan was repaid in the first quarter of 2023. (3)The loan was held in the name of Mavik Real Estate Special Opportunities Fund REIT, LLC. 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. Terra LLC is not subject to any such regulatory restrictions in making its investments.
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Debt |
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Debt Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt | Debt Senior Unsecured Notes On February 10, 2021, Terra BDC issued $34.8 million in aggregate principal amount of 7.00% fixed-rate notes due 2026, pursuant to an indenture between Terra BDC and U.S. Bank National Association, for net proceeds of $33.7 million after deducting underwriting commissions of $1.1 million. On February 26, 2021, the underwriters exercised the option to purchase an additional $3.6 million of the notes for net proceeds of $3.5 million, after deducting underwriting commissions of $0.1 million. Interest on the notes is paid quarterly in arrears every March 30, June 30, September 30 and December 30, at a rate of 7.00% per year, beginning June 30, 2021. The notes mature on March 31, 2026. The notes may be redeemed in whole or in part at any time or from time to time at Terra BDC’s option on or after February 10, 2023. In connection with the issuance of the notes, Terra BDC incurred deferred financing costs totaling $1.0 million, to be amortized to interest expense over the term of the notes. On October 1, 2022 in connection with the Merger, Terra BDC, Terra LLC and U.S. Bank National Association entered into a second supplemental indenture pursuant to which Terra LLC assumed the payment of the notes and the performance of every covenant of the indenture, to be performed or observed by Terra BDC. The indenture between Terra LLC (as successor to Terra BDC) and the trustee contains certain debt limitations and asset coverage covenants. As of September 30, 2023 and December 31, 2022, the Company was in compliance with the asset coverage ratio requirements under the indenture. For the three and nine months ended September 30, 2023 and 2022, the components of interest expense were as follows:
(2)The effective interest rate of the debt component is equal to the stated interest rate plus the amortization of issue discount, if any. Term Loan On April 9, 2021, Terra BDC, as borrower, entered into a credit agreement (the “Credit Agreement”) with Eagle Point Credit Management LLC, as the administrative agent and collateral agent (“Eagle Point”), and certain funds and accounts managed by Eagle Point, as lenders (in such capacity, collectively, the “Lenders”). The Credit Agreement provides for (i) a delayed draw term loan to Terra BDC of $25.0 million (the “Term Loan”) and (ii) additional incremental loans in a minimum amount of $1.0 million and multiples of $0.5 million in excess thereof, which may be approved by a Lender in its sole discretion (“Incremental Loans,” and together with the Term Loan, the “Loans”). The scheduled maturity date of the Loans was April 9, 2025. The Loans bore interest on the outstanding principal amount thereof at a rate equal to 5.625% per annum; provided that if at any time Terra BDC was rated below investment grade, the interest rate would increase to 6.625% until the rating is no longer below investment grade. In connection with the entry into the Credit Agreement, Terra BDC also agreed to pay Eagle Point an upfront fee in an amount equal to 2.50% of the loan commitment amount on the initial borrowing date as described in the Credit Agreement. Terra BDC also paid, with respect to any unused portion of the Term Loan, a commitment fee of 0.75% per annum. In connection with entering into the Credit Agreement, Terra BDC incurred deferred financing costs totaling $0.3 million, to be amortized to interest expense over the term of the Term Loan. On August 31, 2021, Terra BDC made an initial draw on the Term Loan of $5.0 million and incurred an upfront fee of $0.6 million, which was deducted from proceeds from borrowings under the Term Loan. The discount is amortized to interest expense over the term of the Term Loan. During 2022, Terra BDC drew down an additional $20.0 million on the Term loan. Terra BDC could prepay any Loan, in whole or in part, together with all accrued but unpaid interest thereon, upon at least 30 but not more than 60 days’ prior notice to the Agent. If Terra BDC elected to make such prepayments prior to October 9, 2023, Terra BDC would also be required to pay a make whole premium, being the present value at such date of (1) the principal amount being prepaid of such Loan, plus (2) all remaining required interest payments due on the principal amount being prepaid of such Loan through the maturity date (excluding accrued but unpaid interest to the date on which the make whole premium becomes owed), computed using a discount rate equal to the applicable U.S. Treasury rate (as set forth in the Credit Agreement) plus 50 basis points, over (B) the principal amount being prepaid of such Loan; provided that the make whole premium may in no event be less than zero. In connection with its entry into the Credit Agreement, Terra BDC also entered into a security agreement (the “Security Agreement”), by and among Terra BDC, as grantor, and Eagle Point, as administrative agent, for the benefit of the Lenders, their affiliates and Eagle Point as the secured parties thereunder. Pursuant to the Security Agreement, Terra BDC pledged substantially all of its now owned and hereafter acquired property as security for the obligations of Terra BDC under the Credit Agreement, subject to certain limitations and restrictions set forth in the Security Agreements. The Credit Agreement contains customary representations, warranties, reporting requirements, borrowing conditions and affirmative, negative and financial covenants, including REIT status requirements and minimum asset coverage ratio requirements. As of September 30, 2023 and December 31, 2022, the Company was in compliance with these covenants. The Credit Agreement also includes usual and customary events of default and remedies for credit agreements of this nature. Events of default under the Credit Agreement include, but are not limited to: (i) the failure by Terra BDC to make any payments when due under the Credit Agreement; (ii) the failure of Terra BDC to perform or observe any term, covenant or agreement under the Credit Agreement or any other loan document, subject to applicable cure periods; (iii) an event of default on other material indebtedness of Terra BDC; (iv) the bankruptcy or insolvency of Terra BDC; and (v) judgments and attachments, with customary limits and grace periods, against Terra BDC or its property. In addition, the Loans are subject to mandatory prepayment, at the option of each Lender, upon a change in control of Terra BDC (as defined by the Credit Agreement). On September 27, 2022, Terra BDC, Terra LLC and Eagle Point and the Lenders entered into a Consent Letter and Amendment (the “Credit Facility Amendment”) effective October 1, 2022. Pursuant to the Credit Facility Amendment, (i) Eagle Point and the Lenders consented to the consummation of the Merger and the assumption by Terra LLC of all of the obligations of Terra BDC under the Credit Agreement, (ii) and the Credit Agreement was amended to, among other things, change the scheduled maturity date to July 1, 2023, and remove the make whole premium on voluntary prepayments of the loans. On June 30, 2023, the Company, Eagle Point and the Lenders entered into an amendment to the Credit Agreement, pursuant to which the Credit Agreement was amended to, among other things, (i) extend the scheduled maturity date to March 31, 2024, and (ii) increase the rate on which the Term Loan bears interest from a fixed rate of 5.625% per annum to a floating rate based on SOFR plus 7.375% with a SOFR floor of 5.0%. In connection with the amendment, the Company paid Eagle Point an amendment fee of $150,000, to be amortized to interest expense over the remaining term of the Term Loan. Additionally, the Company made a repayment of $10.0 million on the Term Loan. As of September 30, 2023 and December 31, 2022, the principal amount outstanding under the Term Loan was $15.0 million and $25.0 million, respectively. For the three and nine months ended September 30, 2023 and 2022, the components of interest expense were as follows:
(1)The effective interest rate of the debt component is equal to the stated interest rate plus the amortization of issue discount and fees paid to the lender, if any. Scheduled Debt Principal Payments Scheduled debt principal payments for each of the five calendar years following September 30, 2023 are as follows:
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Commitments and Contingencies |
9 Months Ended |
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Sep. 30, 2023 | |
Commitments and Contingencies Disclosure [Abstract] | |
Commitments and Contingencies | Commitments and Contingencies Funding Commitments In the ordinary course of business, the Company may enter into future funding commitments, which are subject to the borrower meeting certain performance-related metrics that are monitored by the Company. As of September 30, 2023 and December 31, 2022, the Company had $1.2 million and $5.9 million of unfunded commitments, respectively. The Company maintained sufficient cash on hand to fund such unfunded commitments, including matching these commitments with principal repayments on outstanding loans. Other The Company enters into contracts that contain a variety of indemnification provisions. The Company’s maximum exposure under these arrangements is unknown; however, the Company has not had prior claims or losses pursuant to these contracts. Management of Terra Income Advisors has reviewed the Company’s existing contracts and expects the risk of loss to the Company to be remote. The Company is not currently subject to any material legal proceedings and, to the Company’s knowledge, no material legal proceedings are threatened against the Company. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company’s rights under contracts with its portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, the Company does not expect that any such proceedings will have a material adverse effect upon its financial condition or results of operations. See Note 5. “Related Party Transactions”, for a discussion of the Company’s commitments to Terra Income Advisors.
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Income Taxes |
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Income Tax Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income Taxes | Income Taxes Terra BDC elected to be taxed as a REIT under the Code commencing with its short taxable year beginning October 1, 2018 and ending December 31, 2018. In order to qualify as a REIT, Terra BDC was required, among other things, to distribute dividends equal to at least 90% of its REIT net taxable income to the stockholders annually and meet certain tests regarding the nature of its income and assets. Because federal income tax regulations differ from U.S. GAAP, distributions in accordance with tax regulations may differ from net investment for financial reporting purposes. Differences may be permanent or temporary in nature. Permanent differences are reclassified among capital accounts in the consolidated financial statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. Taxable income generally differs from net increase in net assets resulting from operations for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses and generally excludes unrealized appreciation (depreciation) on investments as investment gains and losses are not included in taxable income until they are realized. The following table reconciles net increase in net assets resulting from operations to taxable income:
(1)Other temporary differences primarily related to capitalization and amortization of transaction-related fees. Taxable REIT Subsidiary Terra BDC held certain portfolio company investments through consolidated taxable REIT subsidiaries, of which it was the parent. Such subsidiaries may be subject to U.S. federal and state corporate-level income taxes. These consolidated subsidiaries recognize deferred tax assets and liabilities for the estimated future tax effects attributable to temporary differences between the tax basis of certain assets and liabilities and the reported amounts included in the accompanying consolidated statements of assets and liabilities using the applicable statutory tax rates in effect for the year in which any such temporary differences are expected to reverse. Terra BDC had one TRS prior to the Merger. In connection with the Merger on October 1, 2022, the TRS became a qualified REIT subsidiary of Terra REIT. For the three and nine months ended September 30, 2022, pre-tax income attributable to the TRS was $0.5 million and $2.1 million. Based on the effective income tax rate of 21.4% and 28.2%, the provision for income tax for the TRS was $0.1 million and $0.6 million, respectively. Additionally, for the three and nine months ended September 30, 2022, the Company had temporary differences between the tax basis and book basis of certain assets and liabilities totaling $4.5 thousand and $0.1 million, resulting in a deferred tax asset, net of a deferred tax liability, and corresponding deferred income tax benefit of $3.0 thousand and $21.6 thousand, respectively. The Company did not provide a valuation allowance for the deferred tax asset because the Company expected the deferred tax asset to be realized in future periods. Source of Distribution The following table reflects, for tax purposes, the estimated sources of the cash distributions that Terra BDC has paid on its common stock:
(1)The Distribution Amount and Percentage reflected are estimated figures. The actual source of distributions was calculated in connection with the filing of Terra BDC’s tax return. (2)The TRS’s taxable income was not available for distribution to Terra BDC’s stockholders until the income was distributed to the parent company. For the nine months ended September 30, 2022, all of the TRS’s taxable income was distributed to the parent company. As of September 30, 2022, Terra BDC did not have differences between amortized cost basis and tax basis cost of investments.
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Directors' Fees |
9 Months Ended |
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Sep. 30, 2023 | |
Other Income and Expenses [Abstract] | |
Directors' Fees | Directors’ Fees Terra BDC’s directors who did not serve in an executive officer capacity for Terra BDC or Terra Income Advisors were entitled to receive annual cash retainer fees, fees for attending board and committee meetings and annual fees for serving as a committee chairperson. These directors received an annual fee of $20,000, plus $2,500 for each board meeting attended in person, $1,000 for each board meeting attended via teleconference and $1,000 for each committee meeting attended. In addition, the chairman of the audit committee received an annual fee of $7,500 and the chairman of each of the nominating and corporate governance and the valuation committees, and any other committee, received an annual fee of $2,500 for their additional services. In connection with the Merger on October 1, 2022, Terra BDC’s directors were elected to the Terra REIT Board to fill the vacancies created by the Merger and Terra REIT will pay the fees to directors directly. For the three and nine months ended September 30, 2022, Terra BDC recorded $27,126 and $84,378 of directors’ fees expense. Terra BDC also reimbursed each of the above directors for all reasonable and authorized business expenses in accordance with Terra BDC policies as in effect from time to time, including reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting and each committee meeting not held concurrently with a board meeting. Terra BDC did not pay compensation to the directors who also served in an executive officer capacity for Terra BDC or Terra Income Advisors.
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Capital |
9 Months Ended |
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Sep. 30, 2023 | |
Equity [Abstract] | |
Capital | Capital As of September 30, 2023 and December 31, 2022, all of the limited liability company interest in Terra LLC was held by Terra REIT. Share Repurchase Program Terra BDC implemented a share repurchase program whereby every quarter Terra BDC offered to repurchase up to 2.5% of the weighed-average number of shares outstanding in the prior calendar year at a price per share equal to the most recently disclosed NAV per share of its common stock immediately prior to the date of repurchase. The purpose of the share repurchase program was to provide stockholders with liquidity, because there was otherwise no public market for Terra BDC’s common stock. The Terra BDC Board was permitted to amend, suspend or terminate the share repurchase program upon 30 days’ notice. On March 30, 2022, the Terra BDC Board unanimously approved the suspension of the operation of the share repurchase program, effective as of April 30, 2022. There were no shares repurchased for the nine months ended September 30, 2022.
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Net Increase in Net Assets |
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Earnings Per Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Increase in Net Assets | Net Increase in Net Assets Income per share is computed by dividing income available to common stockholders by the weighted average number of shares outstanding during the period. Other potentially dilutive shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis. The following information sets forth the computation of the weighted average net increase in net assets per share from operations:
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Distributions |
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Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Distributions | Distributions Distributions from net investment income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which differ from U.S. GAAP. Subsequent to the Merger on October 1, 2022, Terra LLC has not made a distribution to Terra REIT. The following table reflects Terra BDC’s distributions for the nine months ended September 30, 2022:
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Financial Highlights |
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Investment Company, Financial Highlights [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial Highlights | Financial Highlights The following is a schedule of financial highlights for Terra BDC:
_______________ (1)The per share data was derived by using the weighted average shares outstanding during the applicable period. (2)The per share data for distributions reflects the actual amount of distributions declared per share during the applicable period. (3)Total return is calculated assuming a purchase of shares of common stock at the current net asset value on the first day and a sale at the current net asset value on the last day of the periods reported. Distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the DRIP. The total return does not consider the effect of any selling commissions or charges that may have been incurred in connection with the sale of shares of our common stock. (4)These ratios are calculated using annualized net investment income and operating expenses. (5)Excluding the reversal of accrued incentive fees on capital gains and transaction costs, the ratio of operating expenses to average net assets was 16.03%, (6)Excluding the reversal of accrued incentive fees on capital gains, transaction costs and interest expense on debt, the ratio of operating expenses to average net assets was 8.98%
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Subsequent Events |
9 Months Ended |
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Sep. 30, 2023 | |
Subsequent Events [Abstract] | |
Subsequent Events | Subsequent EventsThe management of the Company has evaluated events and transactions through the date the consolidated financial statements were issued and has determined that there are no material events that would require adjustment to or disclosure in the Company’s consolidated financial statements. |
Summary of Significant Accounting Policies (Policies) |
9 Months Ended |
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Sep. 30, 2023 | |
Accounting Policies [Abstract] | |
Basis of Presentation | Basis of Presentation The accompanying interim 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 interim 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. Prior to the Merger, Terra BDC operated as and met the criteria of an investment company, as defined under U.S. GAAP, and applied accounting and reporting guidance in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 946, Financial Services — Investment Companies (the “Predecessor Basis”). As a result of the Merger, Terra LLC has not met the requirements to be classified as an investment company since October 1, 2022. As such, Terra LLC is an operating company and reports its investments at historical cost (the “Successor Basis”). The consolidated financial statements reflect all adjustments and reclassifications that, in the opinion of management, are necessary for the fair presentation of the results of operations and financial condition as of and for the periods presented. The interim consolidated financial statements for the three and nine months ended September 30, 2022, reflect Terra BDC’s financial results as an investment company. The consolidated financial statements as of September 30, 2023 and December 31, 2022, and for the three and nine months ended September 30, 2023, reflect Terra LLC’s financial results as an operating company.
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Consolidation | Consolidation As provided under Regulation S-X and ASC Topic 946, the Terra BDC generally did not consolidate its investment in a company other than an investment company or controlled operating company whose business consists of providing services to Terra BDC. Accordingly, Terra BDC consolidated the accounts of its wholly-owned subsidiaries that meet the aforementioned criteria in its consolidated financial statements as of September 30, 2022. Terra LLC consolidates entities in which it has a controlling financial interest based on either the variable interest entity (“VIE”) or voting interest entity (“VOE”) model. Terra LLC is required to first apply the VIE model to determine whether it holds a variable interest in an entity, and if so, whether the entity is a VIE. If Terra LLC determines the entity is not a VIE, it then applies the VOE model. Under the VOE model, Terra LLC consolidates an entity when it holds a majority voting interest in an entity. Terra LLC accounts for investments in which it has significant influence but not a controlling financial interest using the equity method of accounting. All significant intercompany balances and transactions have been eliminated in consolidation.
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Cash and Cash Equivalents | Cash and Cash Equivalents The Company considers all highly liquid investments, with original maturities of ninety days or less when purchased, as cash equivalents. Cash and cash equivalents held at financial institutions, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation.
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Restricted Cash | Restricted Cash Restricted cash represents cash held as additional collateral by the Company on behalf of the borrowers related to the investments for the purpose of such borrowers making interest and property-related operating payments. There is a corresponding liability of the same amount on the statements of assets and liabilities called “Interest reserve and other deposits held on investments.”
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Loans Held for Investment | 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. Prior to the Merger and under Predecessor Basis of accounting, the Company’s investments were reported at fair value, with the changes in fair value recorded as changes in unrealized gains or losses on investments in the consolidated statements of operations. Current Expected Credit Losses Reserve ASC 326, Financial Instruments – Credit Losses, became effective for the Company on January 1, 2023. ASC 326 mandates the use of a current expected credit loss (“CECL”) model for estimating future credit losses of certain financial instruments measured at amortized cost, instead of the “incurred loss” credit model previously required under U.S. GAAP. The CECL model requires the consideration of possible credit losses over the life of an instrument as opposed to only estimating credit losses upon the occurrence of a discrete loss event under the previous “incurred loss” methodology. The CECL model applies to the Company’s loan portfolio and the held-to-maturity debt securities which are carried at amortized cost, including future funding commitments, for which the Company does not have the unconditional right to cancel. Amortized cost is defined as the principal amount outstanding, adjusted for the accretion of purchase discounts and disposition fees, and amortization of purchase premiums and origination fees, and includes accrued interest receivable related to these loans and securities. As permitted by ASC 326, the Company elected not to measure an allowance for credit losses on accrued interest receivable (which is presented separately on the consolidated balance sheet), but rather write off in a timely manner by reversing interest income that would likely be uncollectible. The Company’s adoption of the CECL model resulted in a $0.7 million increase to total reserve, including reserve on future funding commitments, which was recognized as a cumulative-effect adjustment to member’s capital as of January 1, 2023. Subsequent to the adoption of the CECL model, any increase or decrease to the CECL reserve is recorded in earnings on the consolidated statement of operations. The Company utilizes information obtained from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts about the future to determine the expected credit losses for its loan portfolio. The Company does not have a meaningful history of realized credit losses on its loan portfolio so it has subscribed to a third-party database service to provide the Company with industry losses for its loans. The Company utilizes a loan loss model that is widely used among banks and commercial mortgage REITs and is marketed by a leading commercial mortgage-based security data analytics provider. It 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 provides specific loan-level inputs which include 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. The Company selects from a group of independent five-year macroeconomic forecasts included in the model that are updated regularly based on current economic trends. Because the Company’s loan portfolio is comprised of a small number of loans, the Company measures the CECL reserve based on an evaluation of each loan as its own segregated asset. Based on the inputs, the loan loss model determines a loan loss rate through the generation of probability of defaults (PD) and loss given defaults (LGD) for each loan. The CECL reserve 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. The calculation of the estimate of expected credit loss considers historical experience and current conditions for each loan 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, current portfolio composition, level of historical loss forecast estimates, material changes in growth and credit strategy and other factors that may affect its loss experience. The Company regularly evaluates the reasonable and supportable forecast period to determine if a change is needed. Beyond the Company’s reasonable and supportable forecast period, the Company generally reverts to historical loss information, pooled by asset type and investment structure, over the remaining loan period, 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 Company generally expects to use an average historical loss for reversion, utilizing an immediate or straight-line method for the remaining life of the loans. The Company also performs a qualitative assessment beyond model estimates and applies qualitative adjustments as necessary. 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 contractual extension options, renewals, modifications, and prepayments. 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, the Company considers that loan non-performing. For all non-performing loans, such as those in default, collateral-dependent or modified loans, including historical troubled debt restructurings, the Company removes these loans from the industry loss rate approach described above and analyzes them separately. The credit loss reserve for these loans is calculated as any excess of the amortized cost of the loan over (i) the present value of expected future cash flows discounted at the appropriate discount rate or (ii) the fair value of collateral, if repayment is expected solely from the collateral. Some of the Company’s 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 model because the Company does not have an unconditional right to cancel such commitments. The CECL reserve related to unfunded commitments is recorded as a component of other liabilities on the Company’s consolidated balance sheets. This CECL reserve is estimated using the same method outlined above for the Company’s outstanding loan balances and increases or decreases in the CECL reserve relating to unfunded commitments are also recorded in earnings on the consolidated statements of operations. As discussed below in Recent Accounting Pronouncements, the Company adopted the provisions of Accounting Standards Update (“ASU”) 2022-02 Financial Instruments—Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) concurrently with the adoption of CECL on January 1, 2023, prospectively.
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Marketable Securities | Marketable Securities From time to time, the Company may invest in short term debt and equity securities. These securities are classified as available-for-sale securities and are carried at fair value. Changes in the fair value of equity securities are recognized in earnings. Changes in the fair value of debt securities are reported in other comprehensive income until a gain or loss on the securities is realized.
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Held-to-Maturity Debt Securities | Held-to-Maturity Debt Securities The Company classifies debt securities for which it has both the positive intent and ability to hold until maturity of the security as held-to-maturity debt securities. These securities are recorded at amortized cost with changes in amortized cost recognized in earnings until realized. Held-to-maturity debt securities are subject to the CECL reserve described above.
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Revenue Recognition | 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 income and principal becomes doubtful. 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 contain paid-in-kind (“PIK”) interest provisions. The PIK interest, which represents contractually deferred interest that is added to the principal balance that is due at maturity, is recorded on the accrual basis. Other Revenues: Prepayment fee income is recognized as prepayments occur. All other income is recognized when earned.
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Deferred Debt Issuance Costs | Deferred Debt Issuance Costs The Company records issue discounts and other financing costs related to its debt obligation as deferred debt issuance costs, which are presented as a direct deduction from the carrying value of the related debt liability. These expenses are deferred and amortized using the effective interest method over the stated maturity of the debt obligation.
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Stockholder Dividends and Distributions | Stockholder Dividends and Distributions Dividends and distributions to stockholders, which were determined in accordance with federal income tax regulations, were recorded on the declaration date. The amount to be paid out as a dividend or distribution was approved by the Terra BDC Board. Net realized capital gains, if any, were generally distributed or deemed distributed at least annually. Terra BDC adopted an “opt in” DRIP pursuant to which stockholders may elect to have the full amount of stockholders cash distributions reinvested in additional shares of common stock. Participants in the DRIP were free to elect to participate or terminate participation in the plan within a reasonable time as specified in the plan. For stockholders who have opted into the DRIP, they had their cash distributions reinvested in additional shares of common stock, rather than receiving the cash distributions. Pursuant to the DRIP, shares were issued at a price equal to Terra BDC’s most recently disclosed net asset value (“NAV”) per share of its common stock immediately prior to the applicable distribution payment date. In connection with the Merger, the DRIP was terminated and Terra REIT will make monthly distributions to stockholders. On January 20, 2023, the Terra REIT Board adopted a distribution reinvestment plan (the “Plan”), pursuant to which Terra REIT’s stockholders may elect to reinvest cash distributions payable by Terra REIT in additional shares of Class A Common Stock and Class B Common Stock, at the price per share determined pursuant to the Plan.
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Incentive Fee on Capital Gains | Incentive Fee on Capital Gains Pursuant to the terms of the Investment Advisory Agreement, the incentive fee on capital gains was determined and payable in arrears as of the end of each fiscal 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 capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period. While the Investment Advisory Agreement neither included nor contemplated the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an American Institute of Certified Public Accountants Technical Practice Aid for investment companies, Terra BDC accrued for this incentive fee to include unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflected the incentive fees that would be payable to Terra Income Advisors if Terra BDC’s entire portfolio was liquidated at its fair value as of the balance sheet date even though Terra Income Advisors was not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized. In connection with the Merger, the Investment Advisory Agreement was terminated and the Company no longer pays any fees to the Adviser. Such fees are now payable by Terra REIT pursuant to its management agreement with the REIT Manager. Terra LLC and Terra REIT have entered into a cost sharing and reimbursement agreement (the “Cost Sharing Agreement”) pursuant to which Terra LLC will be responsible for its allocable share of Terra REIT’s expenses, including fees paid by Terra REIT to the REIT Manager.
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Servicing Fee | Servicing Fee Terra BDC paid selected dealers a servicing fee at an annual rate of 0.75% of the most recently published NAV per share, excluding shares sold through the DRIP, in exchange for providing certain administrative support services (Note 5) to stockholders such as establishing and maintaining stockholder accounts, customer service support and assisting stockholders in changing account options, account designations and account addresses. The servicing fee was recorded as expense on the consolidated statements of operations in the period in which it was incurred. |
Income Taxes | Income Taxes Terra BDC elected to be taxed as a REIT under the Code commencing with its short taxable year beginning October 1, 2018 and ending December 31, 2018. In order to qualify as a REIT, Terra BDC was required, among other things, to distribute dividends equal to at least 90% of its REIT net taxable income to the stockholders annually and meet certain tests regarding the nature of its income and assets. As a REIT, Terra BDC was not subject to U.S. federal income taxes on income and gains distributed to the stockholders as long as certain requirements were satisfied, principally relating to the nature of income and the level of distributions, as well as other factors. For the nine months ended September 30, 2022, Terra BDC satisfied all the requirements for a REIT. Subsequent to the Merger, Terra REIT, the sole member of Terra LLC, will be responsible for paying tax, if any, on the Company’s taxable income. Terra BDC held certain portfolio company investments through consolidated taxable REIT subsidiaries (“TRSs”). Such subsidiaries may be subject to U.S. federal and state corporate-level income taxes. These consolidated subsidiaries recognized deferred tax assets and liabilities for the estimated future tax effects attributable to temporary differences between the tax basis of certain assets and liabilities and the reported amounts included in the accompanying consolidated statements of assets and liabilities using the applicable statutory tax rates in effect for the year in which any such temporary differences are expected to reverse. In connection with the Merger on October 1, 2022, Terra BDC’s TRS became a qualified REIT subsidiary of Terra REIT. Terra BDC did not have any uncertain tax positions that met the recognition or measurement criteria under accounting for income taxes, nor did Terra BDC have any unrecognized tax benefits as of the periods presented herein. Terra BDC recognized interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in its statements of operations. For the nine months ended September 30, 2022, Terra BDC did not incur any interest or penalties. Terra BDC’s 2020-2022 federal tax years remain subject to examination by the Internal Revenue Service and the state department of revenue.Terra BDC elected to be taxed as a REIT under the Code commencing with its short taxable year beginning October 1, 2018 and ending December 31, 2018. In order to qualify as a REIT, Terra BDC was required, among other things, to distribute dividends equal to at least 90% of its REIT net taxable income to the stockholders annually and meet certain tests regarding the nature of its income and assets. Because federal income tax regulations differ from U.S. GAAP, distributions in accordance with tax regulations may differ from net investment for financial reporting purposes. Differences may be permanent or temporary in nature. Permanent differences are reclassified among capital accounts in the consolidated financial statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.
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Use of Estimates | Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and reported amounts of income, expenses and gains and losses during the reporting period. Actual results may ultimately differ from those estimates, and those differences could be material.
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Recent Accounting Pronouncements | Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. In April 2019, the FASB issued additional amendments to clarify the scope of ASU 2016-13 and address issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, among other things. In May 2019, the FASB issued ASU 2019-05 — Targeted Transition Relief, which provides an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. In October 2019, the FASB decided that for smaller reporting companies, ASU 2016-13 and related amendments will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company meets the definition of a smaller reporting company under the regulation of the Securities and Exchange Commission. The Company adopted this ASU and related amendments on January 1, 2023. The adoption of ASU 2016-13 resulted in an incremental reserve of approximately $0.7 million, which included reserve on future loan funding commitments. The Company recorded the cumulative effect of initially applying this guidance as an adjustment to member’s equity using the modified retrospective method of adoption. London Interbank Offered Rate (“LIBOR”) is a benchmark interest rate referenced in a variety of agreements that are used by all types of entities. In July 2017, the U.K. Financial Conduct Authority, which regulates the LIBOR administrator, ICE Benchmark Administration Limited (“IBA”), announced that it would cease to compel banks to participate in setting LIBOR as a benchmark by the end of 2021, which was subsequently delayed to June 30, 2023. In March 2020, the FASB issued ASU. 2020-04, Reference Rate Reform (Topic 848) — Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The amendments in ASU 2020-04 provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848), which expanded the scope of Topic 848 to include derivative instruments impacted by discounting transition (“ASU 2021-01”). As of September 30, 2023, all of the Company’s floating rate loans and related financings have transitioned to the applicable replacement benchmark rate, or reference a benchmark rate that is not expected to be replaced. In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”). ASU 2022-02 eliminates troubled debt restructuring guidance for organizations that adopted the amendments in ASU 2016-13 while providing for additional disclosures for loan modifications. ASU 2022-02 also amends the vintage disclosure guidance for public business entities. The Company adopted the provisions of ASU 2022-02 concurrently with the adoption of ASU 2016-13. The adoption of ASU 2022-02 did not have any material impact on the Company’s financial condition and results of operations.
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Summary of Significant Accounting Policies (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Cash, Cash Equivalents and Restricted Cash | The following table provides a reconciliation of cash, cash equivalents and restricted cash in the Company’s consolidated balance sheets to the total amount shown in its statements of cash flows:
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Loans Held for Investment (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Receivables [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Company's Portfolio | The following table provides a summary of the Company’s loan portfolio:
(1)As of September 30, 2023, these loans pay a coupon rate of Secured Overnight Financing Rate (“SOFR”) or forward-looking term rate based on SOFR (“Term SOFR”), as applicable, plus a fixed spread. Coupon rates shown were determined using average SOFR and Term SOFR of 5.3%. (2)As of December 31, 2022, these loans paid a coupon rate of LIBOR or average SOFR, as applicable, plus a fixed spread. Coupon rates shown were determined using LIBOR of 4.4% and average SOFR of 4.1%. (3)As of September 30, 2023 and December 31, 2022, two and three loans, respectively, were subject to a LIBOR, SOFR or Term SOFR floor, as applicable.
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Schedule of Accounts, Notes, Loans and Financing Receivable | The following table presents the activities of the Company’s loan portfolio for the nine months ended September 30, 2023:
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Schedule of Allowances of Loan Losses | The following table presents the activity in allowance for credit losses for funded loans:
The following table presents the activity in the liability for credit losses on unfunded commitments:
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Schedule of Financing Receivable Credit Quality Indicators | Based on a 5-point scale, the Company’s loans are rated “1” through “5”, from less risk to greater risk as follows:
The following table presents the principal balance and the amortized cost of the Company’s loans based on the loan risk rating as of December 31, 2022:
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Fair Value Measurements (Tables) |
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Fair Value Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Fair Value Measurements | The following table presents fair value measurements of financial instruments that were carried at fair value, by major class, as of September 30, 2023, according to the fair value hierarchy:
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Schedule of Activities of the Marketable Securities | The following table presents the activities of the marketable securities for the periods presented.
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Schedule of Carrying Values and Estimated Fair Values of Debt Instruments | The following table presents the carrying value and estimated fair value of the Company’s financial instruments that are not carried at fair value on the consolidated balance sheets as of:
(1)Carrying value is net of unamortized purchase discount of $3.5 million and $4.3 million as of September 30, 2023 and December 31, 2022, respectively. (2)Valuation falls under Level 1 of the fair value hierarchy, which is based on the trading price of $23.61 and $23.05 as of the close of business day on September 30, 2023 and December 31, 2022, respectively. (3)Carrying value is net of unamortized discount of $0.1 million as of September 30, 2023. (4)Valuation falls under Level 3 of the fair value hierarchy, which is based on a discounted cash flow model with a discount rate of 12.71% and 5.625%, as of September 30, 2023 and December 31, 2022, respectively
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Schedule of Fair Value Measurement Inputs and Valuation Techniques | The following tables summarize the significant unobservable inputs used by the Company to value the Level 3 investments as of September 30, 2023 and December 31, 2022. The following tables are not intended to be all-inclusive, but instead identify the significant unobservable inputs relevant to the determination of fair values.
(1)Valuation for these loans is based on recovery analysis.
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Schedule of Changes in Fair Value Investment | Changes in the Company’s Level 3 investments for the nine months ended September 30, 2022 were as follows:
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Related Party Transactions (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Related Party Transactions [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Related Party Transactions | The following table presents a summary of such fees and reimbursements in accordance with the terms of the related agreements:
(1)These fees were incurred pursuant to the Cost Sharing Agreement between Terra LLC and Terra REIT. (2)For the three and nine months ended September 30, 2022, the Company reversed previously accrued incentive fees on capital gains of $68,486 and $102,160, respectively. Incentive fees on capital gains were based on 20.0% of net realized and unrealized capital gains. No incentive fees on capital gains were actually payable by the Company with respect to unrealized gains unless and until those gains were realized. (3)Amounts were primarily compensation for time spent supporting the Company’s day-to-day operations.
(1)The loan is held in the name of Terra REIT, the Company’s parent entity. (2)This loan was repaid in the first quarter of 2023. (3)The loan was held in the name of Mavik Real Estate Special Opportunities Fund REIT, LLC.
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Debt (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Debt | For the three and nine months ended September 30, 2023 and 2022, the components of interest expense were as follows:
(2)The effective interest rate of the debt component is equal to the stated interest rate plus the amortization of issue discount, if any. For the three and nine months ended September 30, 2023 and 2022, the components of interest expense were as follows:
(1)The effective interest rate of the debt component is equal to the stated interest rate plus the amortization of issue discount and fees paid to the lender, if any.
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Schedule of Debt Maturity | Scheduled debt principal payments for each of the five calendar years following September 30, 2023 are as follows:
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Income Taxes (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income Tax Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Income Tax Net Increase in Assets | The following table reconciles net increase in net assets resulting from operations to taxable income:
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Schedule of Components of Cash Distribution | The following table reflects, for tax purposes, the estimated sources of the cash distributions that Terra BDC has paid on its common stock:
(1)The Distribution Amount and Percentage reflected are estimated figures. The actual source of distributions was calculated in connection with the filing of Terra BDC’s tax return. (2)The TRS’s taxable income was not available for distribution to Terra BDC’s stockholders until the income was distributed to the parent company. For the nine months ended September 30, 2022, all of the TRS’s taxable income was distributed to the parent company.
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Net Increase in Net Assets (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings Per Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Earnings Per Share, Basic and Diluted | The following information sets forth the computation of the weighted average net increase in net assets per share from operations:
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Distributions (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Dividend Distribution | The following table reflects Terra BDC’s distributions for the nine months ended September 30, 2022:
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Financial Highlights (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investment Company, Financial Highlights [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Financial Highlights | The following is a schedule of financial highlights for Terra BDC:
_______________ (1)The per share data was derived by using the weighted average shares outstanding during the applicable period. (2)The per share data for distributions reflects the actual amount of distributions declared per share during the applicable period. (3)Total return is calculated assuming a purchase of shares of common stock at the current net asset value on the first day and a sale at the current net asset value on the last day of the periods reported. Distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the DRIP. The total return does not consider the effect of any selling commissions or charges that may have been incurred in connection with the sale of shares of our common stock. (4)These ratios are calculated using annualized net investment income and operating expenses. (5)Excluding the reversal of accrued incentive fees on capital gains and transaction costs, the ratio of operating expenses to average net assets was 16.03%, (6)Excluding the reversal of accrued incentive fees on capital gains, transaction costs and interest expense on debt, the ratio of operating expenses to average net assets was 8.98%
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Principal Business and Organization (Details) - USD ($) |
1 Months Ended | ||
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Feb. 28, 2021 |
Sep. 30, 2023 |
Dec. 31, 2022 |
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Financial Highlights | |||
Unsecured debt | $ 34,908,585 | $ 34,042,904 | |
Terra BDC | Fixed rate due 2026 | |||
Financial Highlights | |||
Unsecured debt | $ 38,400,000 | ||
Fixed rate (as a percent) | 7.00% | ||
Medium-term notes | $ 37,200,000 | ||
Expense related to underwriting fees | $ 1,200,000 |
Summary of Significant Accounting Policies - Schedule of Cash (Details) - USD ($) |
Sep. 30, 2023 |
Dec. 31, 2022 |
Sep. 30, 2022 |
Dec. 31, 2021 |
---|---|---|---|---|
Accounting Policies [Abstract] | ||||
Cash and cash equivalents | $ 7,967,175 | $ 6,524,596 | $ 24,321,951 | |
Restricted cash | 1,000,000 | 260,614 | ||
Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows | $ 8,967,175 | $ 6,739,953 | $ 24,582,565 | $ 12,456,874 |
Summary of Significant Accounting Policies - Narrative (Details) - USD ($) $ in Millions |
9 Months Ended | |
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Sep. 30, 2023 |
Jan. 01, 2023 |
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Schedule of Investments | ||
Incentive fee on capital gains (as a percent) | 20.00% | |
Servicing fee, annual rate (as a percent) | 0.75% | |
Accounting Standards Update 2016-13 | ||
Schedule of Investments | ||
Cumulative effect of adoption of credit loss | $ 0.7 |
Fair Value Measures - Schedule of Activities of the Marketable Securities (Details) - USD ($) |
9 Months Ended | |
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Sep. 30, 2023 |
Sep. 30, 2022 |
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Fair Value Reconciliation [Roll Forward] | ||
Beginning balance | $ 0 | $ 0 |
Purchases | 525,867 | 0 |
Unrealized gain on marketable securities | 22,619 | 0 |
Ending balance | $ 548,486 | $ 0 |
Related Party Transactions - Summary of Fees and Reimbursement (Details) - USD ($) |
3 Months Ended | 9 Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2023 |
Sep. 30, 2022 |
Sep. 30, 2023 |
Sep. 30, 2022 |
|||||||
Related Party Transaction | ||||||||||
Base management fees | $ 408,726 | [1] | $ 672,685 | $ 1,272,159 | [1] | $ 1,964,830 | ||||
Reversal of incentive fees on capital gains | [2] | 68,486 | 102,160 | |||||||
Operating expense reimbursement to Adviser | 395,041 | [1] | 329,885 | 1,107,401 | [1] | 946,934 | ||||
Reversal of incentive fees on capital gains | [2] | (68,486) | (102,160) | |||||||
Related Party | ||||||||||
Related Party Transaction | ||||||||||
Base management fees | 408,726 | 672,685 | 1,272,159 | 1,964,830 | ||||||
Reversal of incentive fees on capital gains | (68,486) | (102,160) | ||||||||
Operating expense reimbursement to Adviser | 395,041 | 329,885 | 1,107,401 | 946,934 | ||||||
Origination, extension and disposition fees | $ 226,172 | $ 543,924 | ||||||||
Reversal of incentive fees on capital gains | $ 68,486 | $ 102,160 | ||||||||
Net realized and unrealized capital gains percentage | 20.00% | 20.00% | ||||||||
|
Related Party Transactions - Merger (Details) |
3 Months Ended | 9 Months Ended | 12 Months Ended | |
---|---|---|---|---|
Oct. 01, 2022
$ / shares
shares
|
Sep. 30, 2022
USD ($)
|
Sep. 30, 2022
USD ($)
|
Dec. 31, 2022
USD ($)
|
|
Related Party Transaction | ||||
Transaction costs | $ | $ 313,882 | $ 1,459,762 | $ 1,500,000 | |
Class B Common Stock | ||||
Related Party Transaction | ||||
Conversion ratio | 0.595 | |||
Share price (in dollars per share) | $ 14.38 | |||
Class B Common Stock | Terra REIT | ||||
Related Party Transaction | ||||
Common stock, par or stated value per share (in USD per share) | 0.01 | |||
Terra BDC | ||||
Related Party Transaction | ||||
Common stock, par or stated value per share (in USD per share) | $ 0.001 | |||
Sale of stock, percentage | 19.90% | |||
Terra BDC | Class B Common Stock | ||||
Related Party Transaction | ||||
Shares issued (in shares) | shares | 4,847,910 |
Debt - Unsecured Notes Payable (Details) - USD ($) |
Feb. 26, 2021 |
Feb. 10, 2021 |
Sep. 30, 2023 |
Feb. 10, 2023 |
Dec. 31, 2022 |
Sep. 30, 2022 |
---|---|---|---|---|---|---|
Debt Instrument | ||||||
Principal balance | $ 53,375,000 | $ 63,375,000 | ||||
Unsecured note payable | ||||||
Debt Instrument | ||||||
Fixed rate (as a percent) | 7.00% | 7.00% | ||||
Terra BDC | Unsecured note payable | ||||||
Debt Instrument | ||||||
Principal balance | $ 3,600,000 | $ 34,800,000 | ||||
Fixed rate (as a percent) | 7.00% | 7.00% | ||||
Proceeds from issuance of debt | $ 3,500,000 | $ 33,700,000 | ||||
Underwriting commissions | $ 100,000 | $ 1,100,000 | ||||
Unamortized debt issuance expense | $ 1,000,000 |
Debt - Component of Interest Expense (Details) - USD ($) |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2023 |
Sep. 30, 2022 |
Sep. 30, 2023 |
Sep. 30, 2022 |
|
Debt Instrument | ||||
Stated interest expense | $ 968,170 | $ 768,500 | $ 2,880,368 | $ 2,299,538 |
Amortization of discount on debt | 865,681 | |||
Cash paid for interest | 3,254,105 | 3,229,592 | ||
Unsecured note payable | ||||
Debt Instrument | ||||
Stated interest expense | 671,562 | 671,563 | 2,014,687 | 2,014,687 |
Amortization of issue discount | 0 | 53,016 | 0 | 155,787 |
Amortization of financing costs | 0 | 43,921 | 0 | 129,064 |
Amortization of discount on debt | 296,608 | 0 | 865,681 | 0 |
Total interest expense | 968,170 | 768,500 | 2,880,368 | 2,299,538 |
Weighted average debt outstanding | 38,375,000 | 38,375,000 | 38,375,000 | 38,375,000 |
Cash paid for interest | $ 671,562 | $ 671,563 | $ 2,014,687 | $ 2,014,687 |
Stated interest rate (as a percent) | 7.00% | 7.00% | 7.00% | 7.00% |
Effective interest rate (as a percent) | 7.00% | 7.63% | 7.00% | 7.63% |
Term Loan | ||||
Debt Instrument | ||||
Stated interest expense | $ 483,953 | $ 359,376 | $ 1,190,984 | $ 909,454 |
Amortization of issue discount | 0 | 41,925 | 0 | 117,506 |
Amortization of financing costs | 48,434 | 18,215 | 48,434 | 53,910 |
Unused fee | 0 | 0 | 0 | 20,927 |
Total interest expense | 532,387 | 419,516 | 1,239,418 | 1,101,797 |
Weighted average debt outstanding | 15,000,000 | 25,000,000 | 21,538,462 | 21,390,110 |
Cash paid for interest | $ 483,953 | $ 359,376 | $ 1,190,984 | $ 930,381 |
Stated interest rate (as a percent) | 5.625% | 5.625% | ||
Fixed rate (as a percent) | 12.91% | 5.625% | 7.373% | 5.625% |
Effective interest rate (as a percent) | 14.20% | 6.25% | 7.673% | 6.25% |
Debt - Schedule of Debt Maturity (Details) |
Sep. 30, 2023
USD ($)
|
---|---|
Debt Disclosure [Abstract] | |
2023 (October 1 through December 31) | $ 0 |
2024 | 15,000,000 |
2025 | 0 |
2026 | 38,375,000 |
2027 | 0 |
Thereafter | 0 |
Long-term debt, gross | 53,375,000 |
Unamortized discount, net | (3,567,981) |
Total | $ 49,807,019 |
Commitments and Contingencies (Details) - USD ($) $ in Millions |
Sep. 30, 2023 |
Dec. 31, 2022 |
---|---|---|
Commitments and Contingencies Disclosure [Abstract] | ||
Unfunded commitments | $ 1.2 | $ 5.9 |
Income Taxes - Reconciliation of Net Increase in Net Assets Resulting From Operations (Details) - USD ($) |
3 Months Ended | 9 Months Ended | ||||||
---|---|---|---|---|---|---|---|---|
Sep. 30, 2023 |
Jun. 30, 2023 |
Mar. 31, 2023 |
Sep. 30, 2022 |
Sep. 30, 2023 |
Sep. 30, 2022 |
|||
Investments | ||||||||
Net decrease in net assets resulting from operations | $ (2,407,622) | $ 78,879 | $ 966,398 | $ (2,737,184) | $ (1,362,345) | $ (1,714,212) | ||
Net change in unrealized depreciation on investments | $ (16,790) | $ (22,619) | ||||||
Income tax expense | 109,129 | 605,787 | ||||||
Reversal of incentive fees on capital gains | [1] | (68,486) | (102,160) | |||||
Other temporary differences | (475,851) | |||||||
Total taxable income | 1,715,647 | |||||||
Loans Held for Investment | ||||||||
Investments | ||||||||
Net change in unrealized depreciation on investments | 3,193,123 | 3,444,211 | ||||||
Obligations under Participation Agreements | ||||||||
Investments | ||||||||
Net change in unrealized depreciation on investments | $ (15,188) | $ (42,128) | ||||||
|
Income Taxes - Narrative (Details) - USD ($) |
3 Months Ended | 9 Months Ended |
---|---|---|
Sep. 30, 2022 |
Sep. 30, 2022 |
|
Income Tax Disclosure [Line Items] | ||
Income tax expense | $ 109,129 | $ 605,787 |
Taxable REIT Subsidiary | Terra BDC | ||
Income Tax Disclosure [Line Items] | ||
Pre-tax income attributable to taxable subsidiaries | $ 500,000 | $ 2,100,000 |
Effective Income Tax Rate Reconciliation, Percent | 21.40% | 28.20% |
Income tax expense | $ 100,000 | $ 600,000 |
Change in deferred tax assets | 4,500 | 100,000 |
Provision for deferred income tax | $ 3,000 | $ 21,600 |
Income Taxes - Source Distribution (Details) - USD ($) |
3 Months Ended | 9 Months Ended |
---|---|---|
Sep. 30, 2022 |
Sep. 30, 2022 |
|
Income Tax Disclosure [Abstract] | ||
Return of capital | $ 0 | $ 789,506 |
Net investment income | $ 932,777 | 1,970,476 |
Distributions on a tax basis: | $ 2,759,982 | |
Return of capital % | 28.60% | |
Net investment income % | 71.40% | |
Distributions on a tax basis % | 100.00% | |
Distributions on a tax basis: | $ 2,759,982 |
Directors' Fees (Details) - USD ($) |
3 Months Ended | 9 Months Ended |
---|---|---|
Sep. 30, 2022 |
Sep. 30, 2022 |
|
Other income and expense line items | ||
Directors’ fees | $ 27,126 | $ 84,378 |
Terra BDC | ||
Other income and expense line items | ||
Directors’ fees | 84,378 | |
Director | Terra BDC | ||
Other income and expense line items | ||
Directors’ fees | 20,000 | |
Director | In Person meeting | Terra BDC | ||
Other income and expense line items | ||
Directors’ fees | 2,500 | |
Director | Teleconference meeting | Terra BDC | ||
Other income and expense line items | ||
Directors’ fees | 1,000 | |
Director | Committee meeting | Terra BDC | ||
Other income and expense line items | ||
Directors’ fees | 1,000 | |
Chairman of audit committee | Terra BDC | ||
Other income and expense line items | ||
Directors’ fees | 7,500 | |
Chairman of audit committee | Other meeting or services | Terra BDC | ||
Other income and expense line items | ||
Directors’ fees | $ 2,500 |
Capital (Details) - shares |
9 Months Ended | |
---|---|---|
Sep. 30, 2022 |
Sep. 30, 2023 |
|
Equity [Abstract] | ||
Number of shares repurchase, percent | 2.50% | |
Shares repurchased (in shares) | 0 |
Net Increase in Net Assets (Details) - USD ($) |
3 Months Ended | 9 Months Ended | ||||
---|---|---|---|---|---|---|
Sep. 30, 2023 |
Jun. 30, 2023 |
Mar. 31, 2023 |
Sep. 30, 2022 |
Sep. 30, 2023 |
Sep. 30, 2022 |
|
Earnings Per Share [Abstract] | ||||||
Net decrease in net assets resulting from operations | $ (2,407,622) | $ 78,879 | $ 966,398 | $ (2,737,184) | $ (1,362,345) | $ (1,714,212) |
Weighted average common shares outstanding (in shares) | 8,133,695 | 8,110,351 | ||||
Net decrease in net assets per share resulting from operations (in USD per share) | $ (0.34) | $ (0.21) |
Distributions (Details) - USD ($) |
3 Months Ended | 9 Months Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2022 |
Aug. 31, 2022 |
Jul. 30, 2022 |
Jun. 30, 2022 |
May 29, 2022 |
Apr. 30, 2022 |
Mar. 31, 2022 |
Feb. 28, 2022 |
Jan. 31, 2022 |
Sep. 30, 2022 |
Sep. 30, 2022 |
|
Equity [Abstract] | |||||||||||
Per Share Per Day (in USD per share) | $ 0.001247 | $ 0.001247 | $ 0.001247 | $ 0.001247 | $ 0.001247 | $ 0.001247 | $ 0.001247 | $ 0.001247 | $ 0.001247 | ||
Distributions Paid in Cash | $ 233,783 | $ 241,462 | $ 241,188 | $ 232,797 | $ 240,446 | $ 233,306 | $ 240,331 | $ 216,361 | $ 238,677 | $ 2,118,351 | |
Distributions Paid through the DRIP | 70,691 | 72,842 | 72,811 | 70,783 | 72,948 | 69,693 | 72,452 | 65,899 | 73,512 | $ 216,344 | 641,631 |
Total Distributions Paid/Accrued | $ 304,474 | $ 314,304 | $ 313,999 | $ 303,580 | $ 313,394 | $ 302,999 | $ 312,783 | $ 282,260 | $ 312,189 | $ 2,759,982 |
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