0001674356-22-000015.txt : 20220512 0001674356-22-000015.hdr.sgml : 20220512 20220512172348 ACCESSION NUMBER: 0001674356-22-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 105 CONFORMED PERIOD OF REPORT: 20220331 FILED AS OF DATE: 20220512 DATE AS OF CHANGE: 20220512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Terra Property Trust, Inc. CENTRAL INDEX KEY: 0001674356 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 000000000 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-40496 FILM NUMBER: 22919128 BUSINESS ADDRESS: STREET 1: 805 THIRD AVENUE CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 212-754-5100 MAIL ADDRESS: STREET 1: 805 THIRD AVENUE CITY: NEW YORK STATE: NY ZIP: 10022 10-Q 1 tpt-20220331.htm 10-Q tpt-20220331
0001674356--12-312022-03-312022Q1false0.010.0150,000,00050,000,00012.512.51251251251251251250.010.01450,000,000450,000,00019,487,46019,487,46019,487,46019,487,4600.200.20117,840,659107,261,02215,523,10714,252,3570LIBORLIBOR3.852.233.852.231.450.11.450.11.740.101.740.11.9652.0150.102.4651.3151.800.8651.501.3651.50All of the Company’s loans have a prepayment penalty provision.Maximum maturity date assumes all extension options are exercised.Participation interest is with Mavik Real Estate Special Opportunities Fund REIT, LLC, a related-party real estate investment trust managed by the Manager (Note 8). In September 2021, the Company refinanced a previously-defaulted mezzanine loan with a new first mortgage. This refinancing was accounted for as a troubled debt restructuring and the Company recognized a loss of $0.3 million on the restructuring.Participation interest is with Terra Fund 6, an affiliated fund advised by the Terra Income Advisors, an affiliate of the Company’s sponsor and Manager (Note 8).The loan participations from the Company do not qualify for sale accounting under ASC 860 and therefore, the gross amount of these loans remain in Schedule IV. See “Obligations under Participation Agreements” in Note 9 and “Transfers of Participation Interest by the Company” in Note 8 in the accompanying notes to the consolidated financial statements. The Company sold a portion of its interest in this loan through a participation agreement to Terra Fund 6 (Note 8).The Company recorded a specific allowance for loan loss of $12.8 million on this loan as a result of a decline in the value of the collateral (Note 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2022
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-40496
Terra Property Trust, Inc.
(Exact name of registrant as specified in its charter)
Maryland81-0963486
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
550 Fifth Avenue, 6th Floor
New York, New York 10036
(Address of principal executive offices)
(212) 753-5100
(Registrant’s telephone number, including area code)
Securities registered pursuant to section 12(b) of the Securities Exchange Act of 1934:
Title of each classTrading Symbol(s)Name of exchange on
which registered
6.00% Notes due 2026TPTANew York Stock Exchange
Securities registered pursuant to section 12(g) of the Securities Exchange Act of 1934:
Common Stock $0.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨Accelerated filer ¨
Non-accelerated filer þSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☑
As of May 12, 2022, the registrant had 19,487,460 shares of common stock, $0.01 par value, outstanding. No market value has been computed based upon the fact that no active trading market had been established as of the date of this document.



TABLE OF CONTENTS
Page
PART I
Item 1.
Item 2.
Item 3.
Item 4.
PART II
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.




1


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Terra Property Trust, Inc.
Consolidated Balance Sheets
March 31, 2022December 31, 2021
(unaudited)
Assets
Cash and cash equivalents$9,858,153 $35,783,956 
Restricted cash8,058,767 7,411,811 
Cash held in escrow by lender7,651,900 7,902,880 
Marketable securities510,151 1,310,000 
Loans held for investment, net545,081,696 457,329,582 
Loans held for investment acquired through participation, net12,937,304 12,343,732 
Equity investment in unconsolidated investments91,662,090 69,713,793 
Real estate owned, net (Note 5)
Land, building and building improvements, net47,908,857 58,325,068 
Lease intangible assets, net6,145,077 7,451,771 
Assets held for sale8,395,011  
Operating lease right-of-use asset27,391,012 27,394,936 
Interest receivable3,020,009 2,463,037 
Due from related party 2,605,639 
Other assets3,976,018 3,505,953 
Total assets$772,596,045 $693,542,158 
Liabilities and Equity
Liabilities:
Term loan payable, net of deferred financing fees$ $91,940,062 
Unsecured notes payable, net of debt issuance cost82,010,107 81,856,799 
Repurchase agreements payable, net of deferred financing fees173,698,002 43,974,608 
Obligations under participation agreements (Note 7 )
58,587,148 42,232,027 
Mortgage loan payable, net of deferred financing fees and other31,963,840 32,134,295 
Revolving line of credit payable, net of deferred financing fees64,414,007 38,186,472 
Secured borrowing37,503,542 34,586,129 
Interest reserve and other deposits held on investments8,058,767 7,411,811 
Operating lease liability27,391,012 27,394,936 
Lease intangible liabilities, net (Note 5)
9,426,358 9,709,710 
Due to Manager (Note 7)
3,462,062 2,388,317 
Interest payable 1,450,843 1,879,626 
Accounts payable and accrued expenses1,581,660 1,264,131 
Unearned income364,630 449,690 
Distributions payable3,906  
Other liabilities3,491,971 4,289,967 
Total liabilities503,407,855 419,698,580 
Commitments and contingencies (Note 9)
Equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized and none issued  
12.5% Series A Cumulative Non-Voting Preferred Stock at liquidation preference,
   125 shares authorized and 125 shares issued and outstanding at March 31, 2022
   December 31, 2021
125,000 125,000 
Common stock, $0.01 par value, 450,000,000 shares authorized and 19,487,460
   shares issued and outstanding at March 31, 2022 and December 31, 2021
194,875 194,875 
Additional paid-in capital373,443,672 373,443,672 
Accumulated deficit(104,575,357)(99,919,969)
Total equity269,188,190 273,843,578 
Total liabilities and equity$772,596,045 $693,542,158 
See notes to unaudited consolidated financial statements.
2


Terra Property Trust, Inc.
Consolidated Statements of Operations
(Unaudited)

Three Months Ended March 31,
20222021
Revenues
Interest income$8,882,151 $8,120,949 
Real estate operating revenue2,979,454 2,011,641 
Other operating income250,665 156,662 
12,112,270 10,289,252 
Operating expenses
Operating expenses reimbursed to Manager1,928,563 1,342,758 
Asset management fee 1,488,095 1,156,543 
Asset servicing fee 349,329 273,207 
Provision for loan losses50,296 276,020 
Real estate operating expenses1,217,963 971,315 
Depreciation and amortization1,718,372 931,725 
Impairment charge1,604,989  
Professional fees 742,518 520,419 
Directors fees36,252 36,250 
Other83,421 71,488 
9,219,798 5,579,725 
Operating income2,892,472 4,709,527 
Other income and expenses
Interest expense from obligations under participation agreements(1,075,109)(1,880,081)
Interest expense on repurchase agreement payable(755,826) 
Interest expense on mortgage loan payable(518,617)(686,150)
Interest expense on revolving line of credit(524,294)(17,846)
Interest expense on term loan payable(164,969)(1,672,768)
Interest expense on unsecured notes payable(1,430,183)
Interest expense on secured borrowing(552,785)(299,805)
Net unrealized losses on marketable securities(99,044)(14,608)
Income from equity investment in unconsolidated investments 1,419,335 1,337,827 
Realized gains on marketable securities51,133  
(3,650,359)(3,233,431)
Net (loss) income$(757,887)$1,476,096 
Series A preferred stock dividend declared(3,906)(3,906)
Net (loss) income allocable to common stock$(761,793)$1,472,190 
(loss) earnings per share basic and diluted
$(0.04)$0.08 
Weighted-average shares basic and diluted
19,487,460 19,487,460 
Distributions declared per common share$0.20 $0.20 

See notes to unaudited consolidated financial statements.

3


Terra Property Trust, Inc.
Consolidated Statements of Changes in Equity
(Unaudited)


Preferred Stock12.5% Series A Cumulative Non-Voting Preferred StockCommon StockAdditional
Paid-in
Capital
Accumulated Deficit
$0.01 Par Value
SharesAmountSharesAmountTotal equity
Balance at January 1, 2022$ 125$125,000 19,487,460$194,875 $373,443,672 $(99,919,969)$273,843,578 
Distributions declared on common shares
   ($0.20 per share)
— — — — (3,893,595)(3,893,595)
Distributions declared on preferred shares— — — — (3,906)(3,906)
Net loss— — — — (757,887)(757,887)
Balance at March 31, 2022$ 125$125,000 19,487,460 $194,875 $373,443,672 $(104,575,357)$269,188,190 


Preferred Stock12.5% Series A Cumulative Non-Voting Preferred StockCommon StockAdditional
Paid-in
Capital
Accumulated Deficit
$0.01 Par Value
SharesAmountSharesAmountTotal equity
Balance at January 1, 2021$ 125$125,000 19,487,460$194,875 $373,443,672 $(70,438,482)$303,325,065 
Distributions declared on common shares
   ($0.20 per share)
— — — — (3,893,595)(3,893,595)
Distributions declared on preferred shares— — — — (3,906)(3,906)
Net income— — — — 1,476,096 1,476,096 
Balance at March 31, 2021$ 125 $125,000 19,487,460 $194,875 $373,443,672 $(72,859,887)$300,903,660 

See notes to unaudited consolidated financial statements.

4


Terra Property Trust, Inc.
Consolidated Statements of Cash Flows
(Unaudited)

Three Months Ended March 31,
20222021
Cash flows from operating activities:
Net (loss) income$(757,887)$1,476,096 
Adjustments to reconcile net (loss) income to net cash provided by operating
   activities:
Paid-in-kind interest income, net (224,197)
Depreciation and amortization1,718,516 931,725 
Provision for loan losses50,296 276,020 
Impairment charge1,604,989  
Amortization of net purchase premiums on loans15,348 15,348 
Straight-line rent adjustments359,056 (12,008)
Amortization of deferred financing costs520,991 172,692 
Amortization of discount on unsecured notes payable113,147  
Amortization of above- and below-market rent intangibles(246,375)(84,555)
Amortization and accretion of investment-related fees, net(195,932) 
Amortization of above-market rent ground lease(32,588)(32,588)
Realized gains on marketable securities(51,133) 
Net unrealized losses on marketable securities99,044 14,608 
Income from equity investment in excess of distributions received(1,119,913)(1,337,827)
Changes in operating assets and liabilities:
Interest receivable(556,972)(472)
Due from related party2,605,639  
Other assets(705,897)(528,133)
Due to Manager336,805 93,228 
Unearned income261,193 (391,727)
Interest payable(428,783)27,716 
Accounts payable and accrued expenses317,529 (2,146,110)
Other liabilities(797,996)(6,964)
Net cash provided by (used in) operating activities3,109,077 (1,757,148)
Cash flows from investing activities:
Origination and purchase of loans(88,119,821)(14,410,706)
Proceeds from repayments of loans750,000 31,531,804 
Purchase of equity interests in unconsolidated investments(21,164,384)(12,907,725)
Distributions in excess of net income336,000  
Purchase of marketable securities (4,979,088)
Proceeds from sale of marketable securities628,715  
Net cash used in investing activities(107,569,490)(765,715)


5



Terra Property Trust, Inc.
Consolidated Statements of Cash Flows (Continued)
(Unaudited)

Three Months Ended March 31,
20222021
Cash flows from financing activities:
Repayments of obligations under participation agreements (3,962,509)
Proceeds from obligations under participation agreements15,863,187 3,520,514 
Proceeds from borrowings under repurchase agreement131,949,549  
Proceeds from borrowings under revolving line of credit26,377,654 8,030,611 
Distributions paid(3,893,595)(3,893,595)
Repayment of borrowings under the term loan(93,763,471)(2,600,000)
Proceeds from secured borrowing2,850,520 3,751,680 
Repayment of mortgage principal(204,967)(3,423,245)
Proceeds from borrowings under the term loan 1,469,656 
Change in interest reserve and other deposits held on investments646,956 (5,049,067)
Payment of financing costs(895,247)(641,446)
Net cash provided by (used in) financing activities78,930,586 (2,797,401)
Net decrease in cash, cash equivalents and restricted cash(25,529,827)(5,320,264)
Cash, cash equivalents and restricted cash at beginning of period51,098,647 32,920,323 
Cash, cash equivalents and restricted cash at end of period (Note 2)
$25,568,820 $27,600,059 
Three Months Ended March 31,
20222021
Supplemental Disclosure of Cash Flows Information:
Cash paid for interest$4,920,363 $4,094,327 




















See notes to unaudited consolidated financial statements.

6


Terra Property Trust, Inc.
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2022

Note 1. Business

    Terra Property Trust, Inc. (and, together with its consolidated subsidiaries, the “Company” or “Terra Property Trust”) was incorporated under the general corporation laws of the State of Maryland on December 31, 2015. Terra Property Trust is a real estate credit focused company that originates, structures, funds and manages commercial real estate investments, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments. The Company’s loans finance the acquisition, construction, development or redevelopment of quality commercial real estate in the United States. The Company focuses on the origination of middle market loans in the approximately $10 million to $50 million range, to finance properties in primary and secondary markets.
    On January 1, 2016, Terra Secured Income Fund 5, LLC (“Terra Fund 5”), the Company’s then parent, contributed its consolidated portfolio of net assets to the Company pursuant to a contribution agreement in exchange for shares of the Company’s common stock. Upon receipt of the contribution of the consolidated portfolio of net assets from Terra Fund 5, the Company commenced its operations on January 1, 2016. On March 2, 2020, the Company engaged in a series of transactions pursuant to which the Company issued an aggregate of 4,574,470.35 shares of its common stock in exchange for the settlement of an aggregate of $49.8 million of participation interests in loans held by the Company, cash of $25.5 million and other working capital. As of March 31, 2022, Terra JV, LLC (“Terra JV”) held 87.4% of the issued and outstanding shares of the Company’s common stock with the remainder held by Terra Offshore Funds REIT, LLC (“Terra Offshore REIT”).

    The Company has elected to be taxed, and to qualify annually thereafter, as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), commencing with the taxable year ended December 31, 2016. As a REIT, the Company is not subject to federal income taxes on income and gains distributed to the stockholders as long as certain requirements are satisfied, principally relating to the nature of income and the level of distributions, as well as other factors. The Company also operates its business in a manner that permits it to maintain its exemption from registration as an “investment company” under the Investment Company Act of 1940, as amended.

    The Company’s investment activities are externally managed by Terra REIT Advisors, LLC (“Terra REIT Advisors” or the “Manager”), a subsidiary of the Company’s sponsor, Terra Capital Partners, LLC (“Terra Capital Partners”), pursuant to a management agreement (the “Management Agreement”), under the oversight of the Company’s board of directors (Note 7). The Company does not currently have any employees and does not expect to have any employees. Services necessary for the Company’s business are provided by individuals who are employees of the Manager or by individuals who were contracted by the Company or by the Manager to work on behalf of the Company pursuant to the terms of the Management Agreement. On April 1, 2021, Mavik Capital Management, LP (“Mavik”), an entity controlled by Vikram S. Uppal, the Chief Executive Officer of the Company, completed a series of related transactions that resulted in all of the outstanding interests in Terra Capital Partners, being acquired by Mavik for a combination of cash and interests in Mavik (the “Recapitalization”). No amendments or other modifications were made to the Management Agreement in connection with the Recapitalization, and the Manager and its personnel continue to serve as the external manager of the Company pursuant to the terms of the Management Agreement.

Note 2. Summary of Significant Accounting Policies

Principles of Consolidation

    The consolidated financial statements include all of the Company’s accounts and those of its consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation.

The Company consolidates entities in which it has a controlling financial interest based on either the variable interest entity (“VIE”) or voting interest model. The Company is required to first apply the VIE model to determine whether it holds a variable interest in an entity, and if so, whether the entity is a VIE. If the Company determines it does not hold a variable interest in a VIE, it then applies the voting interest model. Under the voting interest model, the Company consolidates an entity when it holds a majority voting interest in an entity.

The Company accounts for investments in which it has significant influence but not a controlling financial interest using the equity method of accounting (see Note 4).
7


Notes to Unaudited Consolidated Financial Statements


VIE Model

An entity is considered to be a VIE if any of the following conditions exist: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) the holders of the equity investment at risk, as a group, lack either the direct or indirect ability through voting rights or similar rights to make decisions that have a significant effect on the success of the entity or the obligation to absorb the entity’s expected losses or right to receive the entity’s expected residual returns, or (c) the voting rights of some equity investors are disproportionate to their obligation to absorb losses of the entity, their rights to receive returns from an entity, or both and substantially all of the entity’s activities either involve or are conducted on behalf of an investor with disproportionately few voting rights.

Under the VIE model, limited partnerships are considered a VIE unless the limited partners hold substantive kick-out or participating rights over the general partner. The Company consolidates entities that are VIEs when the Company determines it is the primary beneficiary. Generally, the primary beneficiary of a VIE is a reporting entity that has (a) the power to direct the activities that most significantly affect the VIE’s economic performance, and (b) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE.

Loans Held for Investment

    The Company originates, acquires, and structures real estate-related loans generally to be held to maturity. 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 cost less allowance for loan losses.

Allowance for Loan Losses
    
    The Company’s loans are typically collateralized by either the sponsors’ equity interest in the real estate properties or the underlying real estate properties. As a result, the Company regularly evaluates the extent and impact of any credit migration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower/sponsor on a loan-by-loan basis. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash from operations and/or reserve balances are sufficient to cover the debt service requirements currently and into the future; (ii) the ability of the borrower to refinance the loan; and/or (iii) the property’s liquidation value. The Company also evaluates the financial wherewithal of the sponsor as well as its competency in managing and operating the real estate property. In addition, the Company considers the overall economic environment, real estate sector, and geographic sub-market in which the borrower operates. Such analyses are completed and reviewed by asset management and finance personnel, who utilize various data sources, including (i) periodic financial data such as debt service coverage ratio, property occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, the capitalization and discount rates; (ii) site inspections; and (iii) current credit spreads and discussions with market participants.

    The Manager performs a quarterly evaluation for possible impairment of the Company’s portfolio of loans. A loan is impaired if it is deemed probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan. Impairment is measured based on the present value of expected future cash flows or the fair value of the collateral if the loan is collateral dependent. Upon measurement of impairment, the Company records an allowance to reduce the carrying value of the loan with a corresponding charge to net income.

    In conjunction with the quarterly evaluation of loans not considered impaired, the Manager 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:
Risk RatingDescription
1Very low risk
2Low risk
3Moderate/average risk
4Higher risk
5Highest risk
8


Notes to Unaudited Consolidated Financial Statements


    The Company records an allowance for loan losses equal to (i) 1.5% of the aggregate carrying amount of loans rated as a “4”, plus (ii) 5% of the aggregate carrying amount of loans rated as a “5”, plus (iii) impaired loan reserves, if any.

    There may be circumstances where the Company modifies a loan by granting the borrower a concession that it might not otherwise consider when a borrower is experiencing financial difficulty or is expected to experience financial difficulty in the foreseeable future. Such concessionary modifications are classified as troubled debt restructurings (“TDR”s) unless the modification solely results in a delay in a payment that is insignificant. Loans classified as TDRs are considered impaired loans for reporting and measurement purposes.

Equity Investment in Unconsolidated Investments

The Company accounts for its equity interests in unconsolidated investments under the equity method of accounting, i.e., at cost, increased or decreased by its share of earnings or losses, less distributions, plus contributions and other adjustments required by equity method accounting.

The Company evaluates its equity investment unconsolidated investments on a periodic basis to determine if there are any indicators that the value of its equity investments may be impaired and whether or not that impairment is other-than-temporary. To the extent an impairment has occurred and is determined to be other-than-temporary, the Company measures the charge as the excess of the carrying value of its investment over its estimated fair value, which is determined by calculating its share of the estimated fair market value of the underlying net assets based on the terms of the applicable partnership or joint venture agreements.

Marketable Securities

    The Company from time to time invests in short term debt and equity securities. These securities are classified as available-for-sale 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.
    
Real Estate Owned, Net

    Real estate acquired is recorded at its estimated fair value at acquisition and is shown net of accumulated depreciation and impairment charges.

    Acquisition of properties generally are accounted for as asset acquisitions. Under asset acquisition accounting, the costs to acquire real estate, including transaction costs, are accumulated and then allocated to individual assets and liabilities acquired based upon their relative fair value. The Company allocates the purchase price of its real estate acquisitions to land, building, tenant improvements, acquired in-place leases, intangibles for the value of any above or below market leases at fair value and to any other identified intangible assets or liabilities. The Company amortizes the value allocated to in-place leases over the remaining lease term, which is reported in depreciation and amortization expense on its consolidated statements of operations. The value allocated to above or below market leases are amortized over the remaining lease term as an adjustment to rental income.

    Real estate assets are depreciated using the straight-line method over their estimated useful lives: buildings and improvements - not to exceed 40 years, and tenant improvements - shorter of the lease term or life of the asset. Ordinary repairs and maintenance which are not reimbursed by the tenants are expensed as incurred. Major replacements and betterments which improve or extend the life of the asset are capitalized and depreciated over their estimated useful life.

    Management reviews the Company’s real estate for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of recoverability is based on estimated future cash flows and the estimated liquidation value of such real estate assets, and provide for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the real estate assets. If impaired, the real estate asset will be written down to its estimated fair value.

9


Notes to Unaudited Consolidated Financial Statements

Assets Held for Sale

The Company generally classifies real estate assets as held for sale when it has entered into a contract to sell the property, all material due diligence requirements have been satisfied, the Company received a non-refundable deposit, and it is probable that the disposition will occur within one year.

Leases

    The Company determines if an arrangement is a lease at inception. Operating leases in which the Company is the lessee are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in the consolidated balance sheets. 

    ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s lease typically does not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made in advance and excludes lease incentives if there were any. The Company’s lease term may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

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. Income accrual is generally suspended for loans at the earlier of the date at which payments become 90 days past due or when, in the opinion of the Manager, recovery of income and principal becomes doubtful. Outstanding interest receivable is assessed for recoverability. Interest is then recorded on the basis of cash received until accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. 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.

    Real Estate Operating Revenues: Real estate operating revenue is derived from leasing of space to various types of tenants. The leases are for fixed terms of varying length and generally provide for annual rent increases and expense reimbursements to be paid in monthly installments. Lease revenue, or rental income from leases, is recognized on a straight-line basis over the term of the respective leases. Additionally, the Company recorded above- and below-market lease intangibles, which are included in real estate owned, net, in connection with the acquisition of the real estate properties. These intangible assets and liabilities are amortized to lease revenue over the remaining contractual lease term.
    
    Other Revenues: Prepayment fee income is recognized as prepayments occur. All other income is recognized when earned.

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments, with original maturities of ninety days or less when purchased, as cash equivalents. Cash and cash equivalents are exposed to concentrations of credit risk. The Company maintains all of its cash at financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation.
    Restricted cash represents cash held as additional collateral by the Company on behalf of the borrowers related to the investments in loans or preferred equity instruments for the purpose of such borrowers making interest and property-related
10


Notes to Unaudited Consolidated Financial Statements

operating payments. Restricted cash is not available for general corporate purposes. The related liability is recorded in “Interest reserve and other deposits held on investments” on the consolidated balance sheets.

    Cash held in escrow by lender represents amounts funded to an escrow account for debt services and tenant improvements.

    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 consolidated statements of cash flows:
March 31,
20222021
Cash and cash equivalents$9,858,153 $18,464,161 
Restricted cash8,058,767 7,096,549 
Cash held in escrow by lender (1)
7,651,900 2,039,349 
Total cash, cash equivalents and restricted cash shown in the consolidated
   statements of cash flows
$25,568,820 $27,600,059 
_______________
(1)The Company has a cash management account with the lender to collect rental payment on the property used as collateral for a mortgage loan payable. As of March 31, 2022, approximately $3.8 million of the cash in the account was available for operational needs.

 Participation Interests

Loan participations from the Company which do not qualify for sale treatment remain on the Company’s consolidated balance sheets and the proceeds are recorded as obligations under participation agreements. For the investments for which participation has been granted, the interest earned on the entire loan balance is recorded within “Interest income” and the interest related to the participation interest is recorded within “Interest expense from obligations under participation agreements” in the consolidated statements of operations. Interest expense from obligations under participation agreement is reversed when recovery of interest income on the related loan becomes doubtful. See “Obligations under Participation Agreements” in Note 8 for additional information.

Term Loan

    The Company previously financed certain of its senior loans through borrowings under an indenture and credit agreement. The Company accounted for the borrowings as a term loan, which was carried at the contractual amount (cost), net of unamortized deferred financing fees. On February 18, 2022, the Company refinanced the Term Loan (as defined below) with a new repurchase agreement. See “Term Loan” in Note 8 for additional information.

Repurchase Agreements

The Company finances certain of its senior loans held for investment through repurchase transactions under master repurchase agreements. The Company accounts for the repurchase transactions as secured borrowing transactions, which are carried at their contractual amounts (cost), net of unamortized deferred financing fees. See “Repurchase Agreements” in Note 8 for additional information.

Fair Value Measurements

    United States generally accepted accounting principles (“U.S. GAAP”) establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The Company has not elected the fair value option for its financial instruments, including loans held for investment, loans held for investment acquired through participation, obligations under participation agreements, secured borrowing, unsecured notes, mortgage loan payable, term loan payable, repurchase agreement payment and revolving line of credit. Such financial instruments are carried at cost, less impairment, where applicable. Marketable securities are financial instruments that are reported at fair value.

11


Notes to Unaudited Consolidated Financial Statements

Deferred Financing Costs

    Deferred financing costs represent fees and expenses incurred in connection with obtaining financing for investments. These costs are presented in the consolidated balance sheets as a direct deduction of the debt liability to which the costs pertain. These costs are amortized using the effective interest method and are included in interest expense on the applicable borrowings in the consolidated statements of operations over the life of the borrowings.

Income Taxes

    The Company has elected to be taxed as a REIT under the Internal Revenue Code commencing with the taxable year ended December 31, 2016. In order to qualify as a REIT, the Company is required, among other things, to distribute at least 90% of its REIT net taxable income to the stockholders and meet certain tests regarding the nature of its income and assets. As a REIT, the Company is not subject to federal income taxes on income and gains distributed to the stockholders as long as certain requirements are satisfied, principally relating to the nature of income and the level of distributions, as well as other factors. If the Company fails to continue to qualify as a REIT in any taxable year and does not qualify for certain statutory relief provisions, the Company will be subject to U.S. federal and state income taxes at regular corporate rates (including any applicable alternative minimum tax for taxable years before 2018) beginning with the year in which it fails to qualify and may be precluded from being able to elect to be treated as a REIT for the Company’s four subsequent taxable years. Any gains from the sale of foreclosed properties within two years are subject to U.S. federal and state income taxes at regular corporate rates. As of March 31, 2022, the Company has satisfied all the requirements for a REIT.

The Company did not have any uncertain tax positions that met the recognition or measurement criteria of Accounting Standards Codification (“ASC”) 740-10-25, Income Taxes, nor did the Company have any unrecognized tax benefits as of the periods presented herein. The Company recognizes interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in its consolidated statements of operations. For the three months ended March 31, 2022 and 2021, the Company did not incur any interest or penalties. Although the Company files federal and state tax returns, its major tax jurisdiction is federal. The Company’s 2018-2020 federal tax returns remain subject to examination by the Internal Revenue Service.

Earnings Per Share

    The Company has a simple equity capital structure with only common stock and preferred stock outstanding. As a result, earnings per share, as presented, represent both basic and dilutive per-share amounts for the periods presented in the consolidated financial statements. Income per basic share of common stock is calculated by dividing net income allocable to common stock by the weighted-average number of shares of common stock issued and outstanding during such period.

Use of Estimates

    The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may ultimately differ from those estimates, and those differences could be material.

The coronavirus (“COVID-19”) pandemic has had a significant impact on local, national and global economies and has resulted in a world-wide economic slowdown. However, after two years into the COVID-19 pandemic, the real estate market has started to recover from the dislocation it experienced. A strong pace of vaccination along with aggressive fiscal stimulus, has improved the outlook for the real estate market. The Company continues to closely monitor the impact of the COVID-19 pandemic on all aspects of its investments and operations. The Company believes the estimates and assumptions underlying its financial statements are reasonable and supportable based on the information available as of March 31, 2022; however, the extent to which the COVID-19 pandemic may impact the Company’s investments and operations going forward will depend on future developments, which are highly uncertain and cannot be predicted with confidence. These developments include the duration of the outbreak, the impact of the global vaccination effort, any new strains of the virus that are resistant to available vaccines, the impact of government stimulus, new information that may emerge concerning the severity of the COVID-19 pandemic, and actions taken by federal, state and local agencies as well as the general public to contain the COVID-19 pandemic or treat its impact, among others. Accordingly, any estimates and assumptions as of March 31, 2022 are inherently less certain than they would be absent the current and potential impacts of the COVID-19 pandemic.

12


Notes to Unaudited Consolidated Financial Statements

Segment Information

    The Company’s primary business is originating, acquiring and structuring real estate-related loans related to high quality commercial real estate. From time to time, the Company may acquire real estate encumbering the senior loans through foreclosure. However, management treats the operations of the real estate acquired through foreclosure as the continuation of the original senior loans. The Company operates in a single segment focused on mezzanine loans, other loans and preferred equity investments, and to a lesser extent, owning and managing real estate.
    
Recent Accounting Pronouncements

    In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. As such, the Company will adopt this ASU and related amendments on January 1, 2023. Management is currently evaluating the impact this change will have on the Company’s consolidated financial statements and disclosures.

    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 has subsequently been delay 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”). ASU 2020-04 and ASU 2021-01 are effective for all entities through December 31, 2022. The expedients and exceptions provided by the amendments do not apply to contract modifications and hedging relationships entered into or evaluated after December 31, 2022, except for hedging transactions as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. In the event LIBOR is unavailable, the Company’s investment documents provide for a substitute index, on a basis generally consistent with market practice, intended to put the Company in substantially the same economic position as LIBOR. As a result, the Company does not expect the reference rate reform and the adoption of ASU 2020-04 and ASU 2021-01 to have a material impact on its consolidated financial statements and disclosures.

Note 3. Loans Held for Investment

Portfolio Summary

The following table provides a summary of the Company’s loan portfolio as of March 31, 2022 and December 31, 2021:
March 31, 2022December 31, 2021
Fixed Rate
Floating
Rate
(1)(2)(3)
TotalFixed Rate
Floating
Rate
(1)(2)(3)
Total
Number of loans7 18 25 6 15 21 
Principal balance$97,914,340 $469,606,633 $567,520,973 $74,880,728 $405,270,423 $480,151,151 
Carrying value$99,264,597 $458,754,403 $558,019,000 $75,520,212 $394,153,102 $469,673,314 
Fair value$99,045,593 $457,961,364 $557,006,957 $75,449,410 $391,752,209 $467,201,619 
Weighted-average coupon rate12.92 %7.16 %8.15 %12.39 %7.01 %7.85 %
Weighted-average remaining
 term (years)
1.981.321.441.931.451.53
13


Notes to Unaudited Consolidated Financial Statements

_______________
(1)These loans pay a coupon rate of LIBOR or Secured Overnight Financing Rate (“SOFR”), as applicable, plus a fixed spread. Coupon rate shown was determined using LIBOR of 0.45% and SOFR of 0.16% as of March 31, 2022 and LIBOR of 0.10% as of December 31, 2021.
(2)As of March 31, 2022 and December 31, 2021, amount included $351.1 million and $290.6 million of senior mortgages used as collateral for $241.5 million and $176.9 million of borrowings under credit facilities, respectively (Note 8).
(3)As of March 31, 2022 and December 31, 2021, sixteen and thirteen of these loans, respectively, are subject to a LIBOR or SOFR floor, as applicable.

Lending Activities

The following table presents the activities of the Company’s loan portfolio for the three months ended March 31, 2022 and 2021:
Loans Held for InvestmentLoans Held for Investment through Participation InterestsTotal
Balance, January 1, 2022$457,329,582 $12,343,732 $469,673,314 
New loans made87,538,133 581,688 88,119,821 
Principal repayments received(750,000) (750,000)
Net amortization of premiums on loans(15,348) (15,348)
Accrual, payment and accretion of investment-related fees and other,
   net
1,029,625 11,884 1,041,509 
Provision for loan losses(50,296) (50,296)
Balance, March 31, 2022$545,081,696 $12,937,304 $558,019,000 
Loans Held for InvestmentLoans Held for Investment through Participation InterestsTotal
Balance, January 1, 2021$417,986,462 $4,294,053 $422,280,515 
New loans made14,410,706  14,410,706 
Principal repayments received(31,531,804) (31,531,804)
PIK interest (1)
676,646  676,646 
Net amortization of premiums on loans(15,348) (15,348)
Accrual, payment and accretion of investment-related fees and other,
   net
526,081 (1,905)524,176 
Provision for loan losses(276,020) (276,020)
Balance, March 31, 2021$401,776,723 $4,292,148 $406,068,871 
_______________
(1)Certain loans in the Company’s portfolio contain PIK interest provisions. The PIK interest represents contractually deferred interest that is added to the principal balance. PIK interest related to obligations under participation agreements amounted $0.5 million for the three months ended March 31, 2021.

14


Notes to Unaudited Consolidated Financial Statements

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 as of March 31, 2022 and December 31, 2021:

March 31, 2022December 31, 2021
Loan StructurePrincipal BalanceCarrying Value% of Total Principal BalanceCarrying Value% of Total
First mortgages$410,635,036 $413,619,050 74.1 %$345,454,454 $348,101,455 74.0 %
Preferred equity investments93,441,580 93,607,463 16.8 %92,252,340 92,400,572 19.7 %
Credit facility46,000,000 46,885,375 8.4 %25,000,000 25,206,964 5.4 %
Mezzanine loans17,444,357 17,615,889 3.2 %17,444,357 17,622,804 3.8 %
Allowance for loan losses— (13,708,777)(2.5)%— (13,658,481)(2.9)%
Total$567,520,973 $558,019,000 100.0 %$480,151,151 $469,673,314 100.0 %

March 31, 2022December 31, 2021
Property TypePrincipal BalanceCarrying Value% of Total Principal BalanceCarrying Value% of Total
Office$229,192,520 $230,101,500 41.2 %$221,596,870 $222,426,872 47.3 %
Multifamily120,216,869 122,074,241 21.9 %80,805,787 81,835,756 17.4 %
Industrial67,571,608 67,606,537 12.1 %32,000,000 32,206,964 6.9 %
Hotel - full/select service56,918,328 57,520,720 10.3 %56,847,381 57,395,682 12.2 %
Infill land33,807,563 33,895,151 6.1 %28,960,455 28,923,827 6.2 %
Student housing31,000,000 31,667,292 5.7 %31,000,000 31,565,670 6.7 %
Mixed use28,814,085 28,862,336 5.2 %28,940,658 28,977,024 6.2 %
Allowance for loan losses— (13,708,777)(2.5)%— (13,658,481)(2.9)%
Total$567,520,973 $558,019,000 100.0 %$480,151,151 $469,673,314 100.0 %

March 31, 2022December 31, 2021
Geographic LocationPrincipal BalanceCarrying Value% of Total Principal BalanceCarrying Value% of Total
United States
California$241,635,304 $