The accounting guidance on fair value measurements and disclosures requires the categorization of fair value measurement into three broad levels of the fair value hierarchy as follows:

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Our development of fair value estimates, particularly Level 3 fair value assets and liabilities with significant unobservable inputs, involves judgment and a high degree of subjectivity. While we anticipate that our valuation methods are appropriate and consistent with valuation methods used by other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Likewise, due to the general illiquidity of some of these assets and liabilities, subsequent transactions may be at values significantly different from those reported.

The following tables present estimated fair values of our financial instruments, as of the date indicated, whether or not recognized or recorded in the consolidated balance sheets at the periods indicated:


	December 31, 2022				Fair Value Measurements Using
(dollars in thousands)	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	54,964	$	54,964	$	54,964	$	—	$	—
Mortgage notes receivable, net		881,950		865,304		—		—		865,304
Interest and fees receivable, net		14,775		14,775		—		14,775		—
Financial Liabilities
Senior unsecured notes, net		97,789		99,990		99,990		—		—
Private placement warrant liability		25		25		—		25		—


	December 31, 2021				Fair Value Measurements Using
(dollars in thousands)	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	132,889	$	132,889	$	132,889	$	—	$	—
Mortgage notes receivable, net		901,350		901,350		—		—		901,350
Interest and fees receivable, net		17,526		17,526		—		17,526		—
Financial Liabilities
Senior unsecured notes, net		97,223		100,000		100,000		—		—
Private placement warrant liability		1,838		1,838		—		1,838		—

The following table sets forth assets measured and reported at fair value on a nonrecurring basis as of December 31, 2022 and 2021. All of these values are categorized as Level 3. The table also contains information about valuation methodologies and inputs for:


	Carrying Value				Fair Value
(dollars in thousands)	December 31, 2022		December 31, 2021		December 31, 2022		December 31, 2021		Valuation Technique	Unobservable Inputs	Range of Inputs
Investment in real property held for sale(1)	$	14,628	$	—	$	15,075	$	—	Collateral valuations	Discount to appraised value based on comparable market prices, broker opinion of value, discounted cash flows or capitalization rate applied to estimate net operating income	0 - 10%
Investment in real property held for use (1)	$	25,167	$	—	$	33,379	$	—	Collateral valuations	Discount to appraised value based on comparable market prices, broker opinion of value, discounted cash flows or capitalization rate applied to estimate net operating income	0 - 10%
Collateral dependent loans, net of allowance for credit losses(1)		81,470		436		87,622		835	Collateral valuations	Discount to appraised value based on comparable market prices or broker opinion of value, discounted cash flows or capitalization rate applied to estimate net operating income	0 - 10%
Total	$	121,265	$	436	$	136,076	$	835

(1)

Previously reported amounts included all real properties and collateral dependent loans regardless of whether an adjustment was required to mark to fair value in the reporting period. The current disclosure represents only those loans and properties for which an adjustment was required to report at fair value on a nonrecurring basis during the reporting periods.

The private placement warrants are carried at fair value. Initially, the fair value of the private placement warrants was classified as Level 3 within the fair value hierarchy as it was valued using a lattice model, which primarily incorporates observable inputs such as our common stock price, exercise price, term of the warrant, dividend yield and the risk-free rate; however, it also incorporates an assumption for equity volatility. For the unobservable volatility input, we solved for the volatility of the public warrants using the lattice model that captures the redemption right and analyzed the calculated equity volatility based on the volatility of the common stock of comparable public companies. This valuation methodology resulted in the same value per share for both the public warrants and private placement warrants, indicating the redemption right, a feature excluded from private placement warrants, did not change the valuation; and therefore, the quoted price per share of the public warrants was used to value the private placement warrants on a recurring basis beginning September 30, 2021. As we utilized observable inputs in the valuation, specifically a quoted price for a similar item in an active market, we re-classified the private placement warrant liability from a Level 3 to a Level 2 within the fair value hierarchy as of September 30, 2021. The fair value of the 5.2 million private placement warrants, estimated using the quoted share price of the public warrants, was approximately $0.001 and $0.09 per warrant or $0.005 and $0.35 per share to arrive at $0.02 and $1.8 million, respectively, as of December 31, 2022 and 2021. Refer to Note 9 for additional details on the private placement warrants.

For our investments in real property held for sale, we compare the cost basis to the fair value of real properties at each reporting period, based upon the most recent independent third-party appraisals of value discounted based upon our experience with actual liquidation values. These discounts to the appraisals generally range from 0% to 10% and are considered unobservable inputs in Level 3 within the fair value hierarchy. Any decline in the fair value of real property held for sale will be recorded in a valuation account to offset the cost basis and carry at fair value on a non-recurring basis. Similarly, whenever changes in circumstances indicate that the carrying amounts may not be recoverable for our investments in real property held for use, we evaluate the undiscounted net cash flows that are expected to be generated from the property, including any estimated proceeds from the eventual disposition of the property. If the carrying value of a property held for use exceeds its undiscounted net cash flows, an impairment loss is recognized for the excess of the carrying value of the property over the estimated fair value of the property and will be recorded in a valuation account on a non-recurring basis.

The fair value of collateral dependent loans is based upon the most recent independent third-party appraisal of value, discounted between 0% to 10% based upon our experience with actual liquidation values. For certain collateral dependent loans, where a recent appraisal is either unavailable or not most representative of fair value, the fair value is based on a broker opinion of value including a capitalized income analysis and replacement cost analysis considering historical operating results, market rents, vacancy rates, capitalization rates, land cost comparisons, market trends and economic conditions. The assessment of fair value of real property is subject to uncertainty and, in certain cases, sensitive to the selection of comparable properties. As the result of using unobservable inputs in the valuation, we classify collateral dependent as Level 3 within the fair value hierarchy.

Impairment indicators may subject goodwill to nonrecurring fair value measurements when certain triggering events occur. In the fourth quarter of 2022, the Company recorded impairment charges for goodwill. The implied fair value of our goodwill was estimated using both the discounted cash flow and market multiple approaches, which are Level 3 valuation techniques. Refer to Note 6 for additional details on significant inputs used in our analysis.

For our financial instruments, including cash equivalents, which are classified under Level 1 within the fair value hierarchy as well as interest and fees receivable, accounts payable and accrued liabilities which are classified under Level 2 within the fair value hierarchy, the carrying amounts approximate fair value due to their short-term maturities.

Our mortgage notes receivable are evaluated for expected credit losses and are presented net of an allowance for credit losses. We determined the fair value of our mortgage notes receivable based on a discounted cash flow methodology, taking into consideration various factors including discount rates, interest rate spreads and third-party appraisals for estimating as-complete appraised values. The interest rate spreads range from 0.01% to 0.14%, with a weighted average spread of 0.04%. As we utilize unobservable inputs, we classify mortgage notes receivable as Level 3 within the fair value hierarchy.

Our senior unsecured notes were purchased at par by investors in a private placement, but trade in the secondary market. Fair value is estimated using current market quotes received from active markets and we classify as Level 1 within the fair value hierarchy.