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 June 30, 2024

☐ 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)

Maryland	81-0963486
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

205 West 28th Street, 12th Floor

New York, New York 10001

(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 class	Trading Symbol(s)	Name of exchange on which registered
6.00% Notes due 2026	TPTA	New York Stock Exchange

Securities registered pursuant to section 12(g) of the Securities Exchange Act of 1934:

Class B 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	þ	Smaller 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 August 9, 2024, the registrant had 24,337,024 shares of Class B 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	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements:
	Consolidated Balance Sheets as of June 30, 2024 (unaudited) and December 31, 2023	2
	Consolidated Statements of Operations and Comprehensive (Loss) Income for the three and six months ended June 30, 2024 and 2023 (unaudited)	3
	Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2024 and 2023 (unaudited)	4
	Consolidated Statements of Cash Flows for the six months ended June 30, 2024 and 2023 (unaudited)	5
	Notes to Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	54
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3.	Defaults upon Senior Securities	54
Item 4.	Mine Safety Disclosures	55
Item 5.	Other Information	55
Item 6.	Exhibits	55
Signatures		56

1

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Terra Property Trust, Inc.

Consolidated Balance Sheets

	June 30, 2024		December 31, 2023
	(Unaudited)
Assets
Cash and cash equivalents	$	18,937,034	$	10,674,475
Restricted cash	4,617,208		3,954,986
Cash held in escrow by lender	6,870,038		4,907,316
Marketable securities	1,129,263		4,961,879
Loans held for investment, net of allowance for credit losses of $34,653,587    and $56,749,498	345,816,691		417,913,773
Loans held for investment acquired through participation, net of allowance for credit losses    of $251,722 and $226,527	38,535,503		38,558,485
Equity investment in unconsolidated investments	70,658,140		37,171,326
Real estate owned, net (Note 5)
Land, building and building improvements, net	125,168,010		126,724,333
Lease intangible assets, net	7,570,062		9,869,364
Interest receivable	8,051,555		6,537,368
Due from related parties	832,024		655,263
Other assets	6,196,900		8,811,583
Total assets	$	634,382,428	$	670,740,151
Liabilities and Equity
Liabilities:
Unsecured notes payable, net	$	119,376,974	$	118,380,897
Secured financing agreements, net	264,447,499		290,525,313
Obligations under participation agreements (Note 7 )	15,144,974		—
Interest reserve and other deposits held on investments	4,617,208		3,954,986
Lease intangible liabilities, net (Note 5)	5,310,159		6,838,875
Due to Manager (Note 7)	2,032,393		4,183,293
Interest payable	1,765,043		1,575,463
Accounts payable and accrued expenses	1,728,057		2,405,749
Unearned income	224,238		314,260
Other liabilities	1,116,579		907,507
Total liabilities	415,763,124		429,086,343
Commitments and contingencies (Note 9)
Equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized and none issued	—		—
Class A Common Stock, $0.01 par value, 450,000,000 shares authorized and no shares     issued, as of both June 30, 2024 and December 31, 2023	—		—
Class B Common Stock, $0.01 par value, 450,000,000 shares authorized and 24,336,871     and 24,336,033 shares issued and outstanding as of June 30, 2024 and     December 31, 2023, respectively	243,369		243,360
Additional paid-in capital	444,467,721		444,458,206
Accumulated deficit	(226,072,396)		(203,047,758)
Accumulated other comprehensive loss	(19,390)		—
Total equity	218,619,304		241,653,808
Total liabilities and equity	$	634,382,428	$	670,740,151

See notes to unaudited consolidated financial statements.

2

Terra Property Trust, Inc.

Consolidated Statements of Operations and Comprehensive (Loss) Income

(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Revenues
Interest income	$	8,435,024	$	15,878,453	$	20,583,759	$	31,494,260
Real estate operating revenue	2,718,625		2,803,934		5,438,326		4,136,903
Other operating income	19,871		100,068		160,780		153,463
	11,173,520		18,782,455		26,182,865		35,784,626
Operating expenses
Operating expenses reimbursed to Manager	2,332,771		2,120,029		4,510,935		4,297,033
Asset management fee	1,619,971		2,105,049		3,335,013		4,102,476
Asset servicing fee	394,995		496,374		801,520		966,899
Provision for credit losses	2,576,325		4,652,644		4,449,436		3,802,593
Real estate operating expenses	782,271		1,864,212		1,473,277		3,074,124
Depreciation and amortization	1,747,119		1,756,664		3,863,801		2,438,477
Professional fees	826,080		787,427		1,711,649		1,767,322
Directors’ fees	91,560		83,750		175,310		180,214
Other	100,594		188,631		363,505		403,875
Impairment charge	—		11,765,540		—		11,765,540
	10,471,686		25,820,320		20,684,446		32,798,553
Operating income (loss)	701,834		(7,037,865)		5,498,419		2,986,073
Other income and expenses
Interest expense on secured financing	(6,580,840)		(7,483,284)		(13,870,752)		(13,603,015)
Interest expense on unsecured notes payable	(2,452,577)		(2,405,267)		(4,892,952)		(4,799,573)
Interest expense on obligations under participation agreements	(770,648)		(576,915)		(1,389,143)		(1,109,061)
Unrealized gain on investments, net	201,501		51,224		178,570		57,808
Income (loss) from equity investment in unconsolidated    investments	1,671,970		(1,759,934)		1,198,583		(2,196,794)
Realized loss on investments, net	(310,550)		(25,024)		(446,009)		(25,024)
	(8,241,144)		(12,199,200)		(19,221,703)		(21,675,659)
Net loss	$	(7,539,310)	$	(19,237,065)	$	(13,723,284)	$	(18,689,586)
Series A preferred stock dividend declared	$	—	$	—	$	—	$	(3,907)
Net loss allocable to common stock	$	(7,539,310)	$	(19,237,065)	$	(13,723,284)	$	(18,693,493)
Other comprehensive income (loss)
Available-for-sale debt securities	316,392		—		(19,390)		—
	316,392		—		(19,390)		—
Comprehensive loss	$	(7,222,918)	$	(19,237,065)	$	(13,742,674)	$	(18,693,493)
Per share data
Loss per share — basic and diluted	$	(0.31)	$	(0.79)	$	(0.56)	$	(0.77)
Weighted-average shares — basic and diluted	24,336,577		24,335,430		24,336,368		24,335,402
Distributions declared per common share	$	0.19	$	0.19	$	0.38	$	0.38

See notes to unaudited consolidated financial statements.

3

Terra Property Trust, Inc.

Consolidated Statements of Changes in Equity

(Unaudited)

	Preferred Stock		Class A Common Stock			Class B Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)
			$0.01 Par Value			$0.01 Par Value
			Shares	Amount		Shares	Amount								Total Equity
Balance at January 1, 2024	$	—	—	$	—	24,336,033	$	243,360	$	444,458,206	$	(203,047,758)	$	—	$	241,653,808
Shares issued from reinvestment of shareholder    distributions	—		—	—		391	4		4,470		—		—		4,474
Distributions declared on common shares ($0.19 per share)	—		—	—		—	—		—		(4,650,636)		—		(4,650,636)
Net loss	—		—	—		—	—		—		(6,183,974)		—		(6,183,974)
Other comprehensive loss:
Available-for-sale debt securities	—		—	—		—	—		—		—		(335,782)		(335,782)
Balance at March 31, 2024	—		—	—		24,336,424	243,364		444,462,676		(213,882,368)		(335,782)		230,487,890
Shares issued from reinvestment of shareholder    distributions	—		—	—		447	5		5,045		—		—		5,050
Distributions declared on common shares ($0.19 per share)	—		—	—		—	—		—		(4,650,718)		—		(4,650,718)
Net loss	—		—	—		—	—		—		(7,539,310)		—		(7,539,310)
Other comprehensive income:	—		—	—		—	—		—		—		—
Available-for-sale debt securities	—		—	—		—	—		—		—		316,392		316,392
Balance at June 30, 2024	$	—	—	$	—	24,336,871	$	243,369	$	444,467,721	$	(226,072,396)	$	(19,390)	$	218,619,304

	Preferred Stock		12.5% Series A Cumulative Non-Voting Preferred Stock			Class A Common Stock			Class B Common Stock			Additional Paid-in Capital		Accumulated Deficit
						$0.01 Par Value			$0.01 Par Value
			Shares	Amount		Shares	Amount		Shares	Amount						Total Equity
Balance at January 1, 2023	$	—	125	$	125,000	—	$	—	24,335,370	$	243,354	$	444,449,813	$	(122,935,993)	$	321,882,174
Cumulative effect of credit loss accounting standard effective   January 1, 2023 (Note 2)	—		—	—		—	—		—	—		—		(4,619,723)		(4,619,723)
Shares issued from reinvestment of shareholder distributions	—		—	—		—	—		34	—		478		—		478
Redemption of Series A Preferred Stock	—		(125)	(125,000)		—	—		—	—		—		—		(125,000)
Distributions declared on common shares ($0.19 per share)	—		—	—		—	—		—	—		—		(4,650,492)		(4,650,492)
Distributions declared on preferred shares	—		—	—		—	—		—	—		—		(3,907)		(3,907)
Net income	—		—	—		—	—		—	—		—		547,479		547,479
Balance at March 31, 2023	$	—	—	$	—	—	$	—	24,335,404	$	243,354	$	444,450,291	$	(131,662,636)	$	313,031,009
Shares issued from reinvestment of      shareholder distributions	—		—	—		—	—		109	—		1,510		—		1,510
Distributions declared on common shares ($0.19 per share)	—		—	—		—	—		—	—		—		(4,650,501)		(4,650,501)
Net loss	—		—	—		—	—		—	—		—		(19,237,065)		(19,237,065)
Balance at June 30, 2023	$	—	—	$	—	—	$	—	24,335,513	$	243,354	$	444,451,801	$	(155,550,202)	$	289,144,953

See notes to unaudited consolidated financial statements.

4

Terra Property Trust, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended June 30,
	2024		2023
Cash flows from operating activities:
Net loss	$	(13,723,284)	$	(18,689,586)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization	3,863,801		2,438,477
Provision for credit losses	4,449,436		3,802,593
Amortization of net purchase premiums on loans	152,872		823,785
Straight-line rent adjustments	(113,024)		22,197
Amortization of deferred financing costs	1,502,805		1,143,668
Amortization of discount on unsecured notes payable	901,728		815,300
Amortization of above- and below-market rent intangibles	(1,528,715)		(609,983)
Amortization and accretion of investment-related fees, net	(679,753)		(475,043)
Impairment charge	—		11,765,540
Amortization of above-market rent ground lease	—		(65,174)
Realized loss on investments, net	446,009		25,024
Unrealized gain on investments, net	(178,570)		(57,808)
Distributions received from equity investment in unconsolidated investments	1,684,877		5,087,025
(Income) loss from equity investment in unconsolidated investments	(1,198,583)		4,001,731
Changes in operating assets and liabilities:
Deal deposits	—		4,241,892
Interest receivable	(1,514,187)		(245,790)
Due from related parties	(176,761)		(255,142)
Other assets	805,507		(3,232,943)
Due to Manager	(1,355,066)		(439,232)
Unearned income	(90,022)		379,562
Interest payable	189,580		688,182
Accounts payable and accrued expenses	(677,692)		1,451,483
Other liabilities	(73,385)		(609,921)
Net cash (used in) provided by operating activities	(7,312,427)		12,005,837
Cash flows from investing activities:
Proceeds from repayments of loans	110,423,185		98,977,506
Origination, purchase and funding of loans	(42,609,078)		(63,775,372)
Purchase of equity interests in unconsolidated investments	(36,600,606)		—
Distributions received in excess of equity income	2,627,499		—
Repayments of promissory note receivable	9,020,609		—
Funding for promissory note receivable	(4,962,369)		—
Proceeds from sale of marketable securities	3,551,098		—
Purchase of marketable securities	—		(1,051,754)
Purchase of equity securities	(2,022,353)		—
Purchase of held-to-maturity securities	—		(20,025,024)
Proceeds from redemption of held-for-maturity securities	—		20,000,000
Purchase of real estate properties	—		(52,313,739)
Cash acquired in purchase of real estate	—		712,608
Return of capital on equity interests in unconsolidated investments	—		10,650,947
Net cash provided by (used in) investing activities	39,427,985		(6,824,828)

5

Terra Property Trust, Inc.

Consolidated Statements of Cash Flows (Continued)

	Six Months Ended June 30,
	2024		2023
Cash flows from financing activities:
Principal repayments on secured financing	(84,780,619)		(102,713,974)
Proceeds from secured financing	58,246,507		130,951,380
Proceeds from obligations under participation agreements	15,000,000		1,093,862
Distributions paid	(9,291,830)		(9,302,911)
Payment of financing costs	(1,064,335)		(2,025,783)
Change in interest reserve and other deposits held on investments	662,222		(1,431,269)
Redemption of Series A Preferred Stock	—		(125,000)
Net cash (used in) provided by financing activities	(21,228,055)		16,446,305
Net increase in cash, cash equivalents and restricted cash	10,887,503		21,627,314
Cash, cash equivalents and restricted cash at beginning of period	19,536,777		36,469,592
Cash, cash equivalents and restricted cash at end of period (Note 2)	$	30,424,280	$	58,096,906

	Six Months Ended June 30,
	2024		2023
Supplemental Disclosure of Cash Flows Information:
Cash paid for interest	$	17,557,985	$	16,864,499
Supplemental non-cash information:
Reinvestment of shareholder distributions	$	9,524	$	1,988

6

Supplemental non-cash investing information:

In May 2023, the Company acquired five industrial buildings for a $3.5 million cash payment and the settlement of a mezzanine loan that was accounted for as an equity investment and five senior loans that were held for investment. The following table presents a summary of the total capitalized costs and the values of the net assets acquired:

Total Capitalized Costs:
Cash and cash equivalents	$	3,515,466
Loans held for investment	68,737,877
Equity investment in unconsolidated investment	10,149,642
Interest receivable	456,650
Other assets	429,326
	$	83,288,961
Net Assets Acquired
Cash and cash equivalents	$	712,608
Other assets	33,802
Land	14,457,149
Buildings and Improvements	65,365,376
Intangible asset and liability:
In-please lease	8,403,667
Below-market rent	(4,770,870)
Accounts payable and accrued expenses	(912,771)
	$	83,288,961

See notes to unaudited consolidated financial statements.

7

Terra Property Trust, Inc.

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2024

Note 1. Business

    Terra Property Trust, Inc. (and, together with its consolidated subsidiaries, the “Company” or “Terra Property Trust”) is a real estate investment trust (“REIT”) that originates, invests in and manages a diverse portfolio of real estate and real estate-related assets. The Company was incorporated under the Maryland General Corporation Law on December 31, 2015. The Company focuses primarily on commercial real estate credit investments, including first mortgage loans, subordinated loans (including B-notes, mezzanine and preferred equity) and credit facilities throughout the United States. The Company’s loans finance the acquisition, development or recapitalization of high-quality commercial real estate in the United States. The Company focuses on middle market loans in the approximately $10 million to $50 million range, which in the Company’s experience have been subject to less competition, offer higher risk-adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification. The Company may also make strategic real estate equity and non-real estate-related investments that align with its investment objectives and criteria.

    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.

    The Company has elected to be taxed, and to qualify annually thereafter, as a 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 “1940 Act”).

    The Company’s investment activities are externally managed by Terra REIT Advisors, LLC (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 (the “Board”) (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 October 1, 2022, pursuant to that certain Agreement and Plan of Merger, dated as of May 2, 2022 (the “Merger Agreement”), Terra Income Fund 6, Inc. (“Terra BDC”), merged with and into Terra Income Fund 6, LLC (“Terra LLC”), a wholly owned subsidiary of the Company, with Terra LLC continuing as the surviving entity of the merger (the “BDC Merger”) and as a wholly owned subsidiary of the Company. Pursuant to the terms of the transactions described in the Merger Agreement, approximately 4,847,910 shares of the Company’s Class B Common Stock, $0.01 par value per share (“Class B Common Stock”), were issued to former Terra BDC stockholders in connection with the BDC Merger, based on the number of outstanding shares of Terra BDC Common Stock as of October 1, 2022.

On December 20, 2023, Terra Fund 5 announced that effective December 29, 2023 (the “Distribution Date”), Terra Fund 5 would distribute all of its shares of the Company’s Class B Common Stock to its members as part of the winding up of Terra Fund 5. On the Distribution Date, each member of Terra Fund 5 received 2,252.02 shares of the Company’s Class B Common Stock for each unit of membership interest in Terra Fund 5 held by such member. Because Terra Fund 5 previously owned its interests in the shares of Class B Common Stock indirectly through its ownership of interests in Terra JV, LLC (“Terra JV”), prior to the Distribution Date, Terra JV first distributed the shares of Class B Common Stock to Terra Fund 5 and Terra Secured Income Fund 7, LLC (“Terra Fund 7”), and Terra Fund 5 then distributed those shares to its members on the Distribution Date and Terra Fund 7 became a direct stockholder of the Company’s Class B Common Stock.

8

Notes to Unaudited Consolidated Financial Statements

As of June 30, 2024, Terra Fund 7 and Terra Offshore Funds REIT, LLC (“Terra Offshore REIT”) held 8.7% and 10.1%, respectively, of the issued and outstanding shares of the Company’s common stock.

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).

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 VIEs unless a limited partner holds substantive kick-out or participating rights over a 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, 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. Amortized cost is the amount at which a financing receivable or a loan is originated or acquired, adjusted for accretion, or amortization of premium, discount, and net deferred fees or costs, collection of cash and write-offs.

Allowance for Credit Losses

On January 1, 2023, the Company adopted the provisions of Accounting Standards Codification (“ASC”) 326, Financial Instruments – Credit Losses. ASC 326 mandates the use of a current expected credit loss (“CECL”) methodology for estimating future credit losses of certain financial instruments measured at amortized cost, instead of the “incurred loss” methodology previously required under United States generally accepted accounting principles (“U.S. GAAP”). The CECL methodology requires the consideration of possible credit losses over the life of an instrument as opposed to estimating credit losses upon the occurrence of an actual loss event under the previous “incurred loss” methodology. 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 ASC 326 resulted in a $4.6 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,

9

Notes to Unaudited Consolidated Financial Statements

2023. Subsequent to the adoption of the CECL methodology, any increase or decrease to the allowance for credit losses is recorded in earnings on the consolidated statement of operations.

Performing Loans

The Company uses a model-based approach for estimating the allowance for credit losses on performing loans on a collective basis, including future funding commitments for which the Company does not have the unconditional right to cancel, as these loans share similar risk characteristics. The Company utilizes information obtained from internal and external sources relating to past events, current economic conditions and reasonable and supportable forecasts about the future to determine the expected credit losses for its loan portfolio. The Company utilizes a commercial mortgage-based, third-party loan loss model and because the Company does not have a meaningful history of realized credit losses on its loan portfolio, it subscribes to a database service to provide historical proxy loan loss information. The Company 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 has chosen to incorporate a weighted average macroeconomic forecast that encompasses baseline, upside and downside scenarios, into its allowance for credit losses on performing loans estimate during the reasonable and supportable forecast period which is currently eight quarters. The Company selects certain economics variables from a group of independent variables such as Commercial Real Estate Price Index, unemployment and interest rate which are included in the model as part of macroeconomic forecast and updated regularly based on current economic trends. The specific loan level information input into the model includes 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. Based on the inputs, the loan loss model determines a loan loss rate through the generation of a probability of default (PD) and loss given default (LGD) for each loan. The allowance for credit losses on performing loans is then calculated by applying the loan loss rate to the total outstanding loan balance of each loan. A significant amount of judgment is applied in selecting inputs and analyzing results produced by the models to determine the allowance for credit losses on performing loans. Changes in such estimates can significantly affect the expected credit losses.

Beyond the Company’s reasonable and supportable forecast period, the Company reverts to historical loss information on a straight-line basis over the remaining contractual loan term, 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 determination of the performing loans credit loss estimate considers historical loss information and current economic conditions for each loan, reversion period 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. The Company regularly evaluates the reasonable and supportable forecast period to determine if a change is needed.

The Company also performs a qualitative assessment and applies qualitative adjustments as necessary, usually due to limitations of the loan loss model. 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 certain contractual extension options, renewals, modifications, and prepayments.

Unfunded Commitments

Some of the Company’s performing 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 methodology because the Company does not have an unconditional right to cancel such commitments. The allowance for credit losses related to unfunded commitments is recorded as a component of other liabilities on the Company’s consolidated balance sheets. This allowance for credit losses is estimated using the same method outlined above for the Company’s outstanding performing loan balances and increases or decreases are also recorded in earnings on the consolidated statements of operations.

10

Notes to Unaudited Consolidated Financial Statements

Non-Performing Loans

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.

Loans Not Secured by Real Estate

The Company has two loans that are not secured by real estate. These loans, which are included in other assets on the consolidated balance sheets, are recorded at amortized cost. The Company performs a separate analysis based on recoverability to determine the allowance for credit losses on these loans. As of June 30, 2024, the Company did not record any allowance for credit losses on these two loans because the Company believes that it will be able to collect all outstanding interest and principal on or before the maturity date of each loan.

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 classifies distributions received from equity method investments using the cumulative earnings approach. Distributions received are considered returns on the investment and classified as cash inflows from operating activities. If, however, the investor’s cumulative distributions received, less distributions received in prior periods determined to be returns of investment, exceed cumulative equity in earnings recognized, the excess is considered a return of investment and is classified as cash inflows from investing activities.

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.

Equity Securities Without Readily Determinable Fair Value

The Company accounts for its equity security without readily determinable fair value at cost, which is included in other assets on the consolidated balance sheets. The Company has elected the measurement alternative and therefore will evaluate whether the security continues to qualify for the alternative at each reporting period. The Company evaluates its equity security without readily determinable fair value on a periodic basis to determine if there is an observable price change in an orderly transaction for similar investments or if there are any indicators that the value of its equity security may be impaired. The Company will make fair value adjustments, if any, or reductions for any impairment to derive the carrying value of the investment..

Marketable Securities

    From time to time, the Company may invest in short-term debt. These securities are classified as available-for-sale securities and are carried at fair value. Changes in the fair value of debt securities are reported in other comprehensive income until a gain or loss on the securities is realized. The Company may also invest in short-term equity securities. Changes in the fair value of equity securities are recognized in earnings.

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.

11

Notes to Unaudited Consolidated Financial Statements

    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 provides 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.

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 is recognized on a straight-line basis over the lease term.

As of October 19, 2023, in connection with the deed in lieu of foreclosure discussed in Note 5, the Company is no longer a party to the ground lease and the related ROU assets and liabilities were written off.

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 interest and principal becomes not probable. 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 may 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.

12

Notes to Unaudited Consolidated Financial Statements

    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 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. Cash held in escrow is restricted and is not available for general corporate purposes.

    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 as of:

	June 30,
	2024		2023
Cash and cash equivalents	$	18,937,034	$	51,808,573
Restricted cash	4,617,208		3,201,935
Cash held in escrow by lender	6,870,038		3,086,398
Total cash, cash equivalents and restricted cash shown in the consolidated    statements of cash flows	$	30,424,280	$	58,096,906

 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 not probable. See “Obligations Under Participation Agreements” in Note 8 for additional information.

Secured Financing Agreements, Net

The Company's secured financing agreements include two master repurchase agreements, a revolving line of credit, non-recourse property mortgages, note-on-note financing arrangements and a term loan. The Company accounts for borrowings under these financing arrangements as secured transactions, which are carried at their contractual amounts (cost), net of unamortized deferred financing fees. See “Secured Financing Arrangements” in Note 8 for additional information.

Fair Value Measurements

    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

13

Notes to Unaudited Consolidated Financial Statements

agreement payment and revolving line of credit. Such financial instruments are carried at amortized cost, less impairment, where applicable. Marketable securities are financial instruments that are reported at fair value.

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 dividends equal to 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) 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 June 30, 2024, 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 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 and six months ended June 30, 2024 and 2023, 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 2020-2023 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 outstanding as of June 30, 2024 and December 31, 2023, and common stock and preferred stock outstanding prior to March 31, 2023. As a result, earnings per share, as presented, represents 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.

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, may invest in real estate related joint ventures and may directly acquire real estate properties. 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.

Note 3. Loans Held for Investment

The Company elected the practical expedient under ASC 326 to exclude accrued interest from amortized cost. As of June 30, 2024 and December 31, 2023, accrued interest receivable of $8.1 million and $6.5 million, respectively, is included in interest receivable on the consolidated balance sheets, and is excluded from the amortized cost of loans held for investment.

14

Notes to Unaudited Consolidated Financial Statements

Portfolio Summary

The following table provides a summary of the Company’s loan portfolio as of:

	June 30, 2024									December 31, 2023
	Fixed Rate			Floating Rate (1)(2)(3)			Total			Fixed Rate			Floating Rate (1)(2)(3)			Total
Number of loans	3			14			17			5			16			21
Principal balance	$	15,340,352		$	399,941,496		$	415,281,848		$	53,998,648		$	455,462,178		$	509,460,826
Carrying value	$	15,170,142		$	369,182,052		$	384,352,194		$	54,095,173		$	402,377,085		$	456,472,258
Fair value	$	14,681,958		$	372,796,287		$	387,478,245		$	53,435,742		$	403,904,207		$	457,339,949
Weighted-average coupon rate	10.29		%	13.13		%	13.02		%	12.95		%	12.92		%	12.93		%
Weighted-average remaining  term (years)	2.01			0.79			0.85			1.18			0.70			0.77

_______________

(1)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 the London Interbank Offered Rate (“LIBOR”) of 5.45%, average SOFR of 5.34% and Term SOFR of 5.34% as of June 30, 2024 and average SOFR of 5.34% and Term SOFR of 5.35% as of December 31, 2023.

(2)As of June 30, 2024 and December 31, 2023, amount included $302.6 million and $342.9 million of senior mortgages used as collateral for $192.5 million and $204.9 million of borrowings under secured financing arrangements, respectively (Note 9).

(3)As of June 30, 2024 and December 31, 2023, 13 and 14 loans, respectively, were subject to a SOFR or Term SOFR floor, as applicable.

Lending Activities

The following tables present the activities of the Company’s loan portfolio:

	Loans Held for Investment		Loans Held for Investment through Participation Interests		Total
Balance, January 1, 2024	$	417,913,773	$	38,558,485	$	456,472,258
Principal repayments received	(110,423,185)		—		(110,423,185)
New loans made	42,609,078		—		42,609,078
Net amortization of premiums on loans	(152,872)		—		(152,872)
Accrual, payment and accretion of investment-related fees and other,    net	11,674		2,213		13,887
Provision for credit losses	(4,141,777)		(25,195)		(4,166,972)
Balance, June 30, 2024	$	345,816,691	$	38,535,503	$	384,352,194

15

Notes to Unaudited Consolidated Financial Statements

	Loans Held for Investment		Loans Held for Investment through Participation Interests		Total
Balance, January 1, 2023	$	584,417,939	$	42,072,828	$	626,490,767
Cumulative effect of credit loss accounting standard effective    January 1, 2023 (Note 2)	(4,123,143)		(126,909)		(4,250,052)
New loans made	63,775,372		—		63,775,372
Principal repayments received	(95,695,298)		(3,282,208)		(98,977,506)
Net amortization of premiums on loans	(823,785)		—		(823,785)
Settlement of loans in exchange for real estate properties (Note 5)	(68,737,877)		—		(68,737,877)
Accrual, payment and accretion of investment-related fees and other,    net	(242,361)		(9,197)		(251,559)
Provision for credit losses	(3,397,676)		(9,178)		(3,406,854)
Balance, June 30, 2023	$	475,173,171	$	38,645,336	$	513,818,507

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:

	June 30, 2024						December 31, 2023
Loan Structure	Principal Balance		Carrying Value		% of Total		Principal Balance		Carrying Value		% of Total
First mortgages	$	303,953,051	$	307,692,865	80.1	%	$	365,465,500	$	368,918,890	80.9	%
Preferred equity investments	93,884,440		94,128,889		24.5	%	126,550,969		127,105,312		27.8	%
Mezzanine loans	17,444,357		17,435,749		4.5	%	17,444,357		17,424,081		3.8	%
Allowance for credit losses	—		(34,905,309)		(9.1)	%	—		(56,976,025)		(12.5)	%
Total	$	415,281,848	$	384,352,194	100.0	%	$	509,460,826	$	456,472,258	100.0	%

	June 30, 2024						December 31, 2023
Property Type	Principal Balance		Carrying Value		% of Total		Principal Balance		Carrying Value		% of Total
Office	$	115,976,792	$	116,315,046	30.3	%	$	144,812,619	$	144,853,769	31.7	%
Industrial	70,022,380		70,022,380		18.2	%	67,579,869		67,612,621		14.8	%
Infill land	53,900,000		55,341,248		14.4	%	52,839,509		54,172,663		11.9	%
Multifamily	53,322,162		53,659,242		14.0	%	85,660,082		86,210,868		18.9	%
Mixed-use	47,838,132		48,232,387		12.5	%	63,096,365		63,531,806		13.9	%
Hotel - full/select service	43,222,382		43,832,428		11.4	%	43,222,382		43,801,303		9.6	%
Student housing	31,000,000		31,854,772		8.3	%	31,000,000		31,821,832		7.0	%
Infrastructure	—		—		—	%	21,250,000		21,443,421		4.7	%
Allowance for credit losses	—		(34,905,309)		(9.1)	%	—		(56,976,025)		(12.5)	%
Total	$	415,281,848	$	384,352,194	100.0	%	$	509,460,826	$	456,472,258	100.0	%

16

Notes to Unaudited Consolidated Financial Statements

	June 30, 2024						December 31, 2023
Geographic Location	Principal Balance		Carrying Value		% of Total		Principal Balance		Carrying Value		% of Total
United States
California	$	117,279,912	$	118,453,411	30.9	%	$	119,093,246	$	120,296,944	26.4	%
New York	75,317,144		75,317,144		19.6	%	90,483,672		90,483,672		19.8	%
New Jersey	85,922,380		87,067,380		22.7	%	82,419,378		83,489,049		18.3	%
Arizona	31,000,000		31,296,248		8.1	%	31,000,000		31,296,235		6.9	%
Georgia	30,000,000		30,300,000		7.9	%	74,335,828		74,602,328		16.3	%
Utah	28,000,000		28,910,000		7.5	%	49,250,000		50,329,949		11.0	%
North Carolina	21,826,479		21,929,665		5.7	%	21,826,479		21,929,657		4.8	%
Washington	18,935,933		18,983,655		4.9	%	34,052,223		34,020,449		7.5	%
Massachusetts	7,000,000		7,000,000		1.8	%	7,000,000		7,000,000		1.5	%
Allowance for credit losses	—		(34,905,309)		(9.1)	%	—		(56,976,025)		(12.5)	%
Total	$	415,281,848	$	384,352,194	100.0	%	$	509,460,826	$	456,472,258	100.0	%

Allowance for Credit Losses

As described in Note 2, on January 1, 2023, the Company adopted the provisions of ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“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 $4.6 million increase to total reserve, including reserve on future funding commitments, which was recognized as a cumulative-effect adjustment to accumulated deficits as of January 1, 2023.

The following table presents the activity in allowance for credit loss for funded loans:

	Six Months Ended June 30,
	2024		2023
Allowance for credit losses, beginning of period	$	56,976,025	$	25,471,890
Cumulative effect of credit loss accounting standard effective January 1, 2023 (Note 2)	—		4,250,052
Provision for credit losses	4,166,972		3,406,854
Charge-offs	(26,237,688)		—
Recoveries	—		—
Allowance for credit losses, end of period	$	34,905,309	$	33,128,796

Certain of the Company’s performing loans contain provisions for future funding commitments, which are subject to the borrower meeting certain performance-related metrics that are monitored by the Company. These unfunded commitments amounted to approximately $27.8 million and $35.7 million as of June 30, 2024 and December 31, 2023, respectively. The liability for credit losses on unfunded commitments is included in other liabilities on the consolidated balance sheets.

The following table presents the activity in the liability for credit losses on unfunded commitments:

	Six Months Ended June 30,
	2024		2023
Liability for credit losses on unfunded commitments, beginning of period	$	326,907	$	—
Cumulative effect of credit loss accounting standard effective January 1, 2023 (Note 2)	—		369,671
Provision for credit losses	282,464		395,739
Liability for credit losses on unfunded commitments, end of period	$	609,371	$	765,410

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 manner. 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 for interest. For the three and six months ended June 30, 2024, the Company reversed $0.7 million of accrued interest

17

Notes to Unaudited Consolidated Financial Statements

income because such income was deemed uncollectible. For the three and six months ended June 30, 2023, the Company did not reverse any interest income accrual because all accrued interest income was deemed collectible. For the three months ended June 30, 2024 and 2023, the Company suspended interest income accrual of $6.8 million and $3.7 million on five and three loans, respectively, because recovery of such income was not probable. For the six months ended June 30, 2024 and 2023, the Company suspended interest income accrual of $12.6 million and $7.2 million on five and three loans, respectively, because recovery of such income was not probable. As of June 30, 2024 and December 31, 2023, interest receivable recognized on these loans was $4.8 million and $3.4 million, respectively.

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 for recoverability. As of June 30, 2024 and December 31, 2023, the Company had six non-performing loans with total carrying value of $192.7 million and $209.3 million, respectively. Accordingly, the Company utilized the estimated fair value of the loan collateral or sponsor’s guarantee to estimate the total allowance for credit losses of $31.0 million and $54.6 million as of June 30, 2024 and December 31, 2023, respectively. Please see “Note 6. Fair Value Measurements – Significant Unobservable Inputs” for information on how the fair values of these loans were determined.

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:

Risk Rating	Description
1	Very low risk
2	Low risk
3	Moderate/average risk
4	Higher risk
5	Highest risk

    The following tables present the amortized cost of the Company’s loan portfolio by year of origination and loan risk rating:

 

	June 30, 2024
Loan Risk Rating	Number of Loans	Amortized Cost		% of Total		Amortized Cost by Year Originated
						2024		2023		2022		2021		2020		Prior
1	—	$	—	—	%	$	—	$	—	$	—	$	—	$	—	$	—
2	1	7,000,000		1.7	%	—		—		—		—		—		7,000,000
3	9	200,786,291		47.8	%	30,300,000		18,983,655		31,296,248		29,420,641		27,970,291		62,815,456
4	1