Loans Held For Investment, Net

9 Months Ended

Sep. 30, 2024

Loans Held For Investment, Net [Abstract]

3. LOANS HELD FOR INVESTMENT, NET

As of September 30, 2024 and December 31, 2023, the Company's portfolio included loans to 29 and 27 borrowers, respectively, that the Company has the ability and intent to hold until maturity or payoff. Loans held for investment are reported on the consolidated balance sheets at amortized cost. During the nine months ended September 30, 2024, the Company advanced approximately $76.1 million in gross loan principal.

As of September 30, 2024 and December 31, 2023, approximately 62.2% and 80.5%, respectively, of the Company’s portfolio of loans held for investment was comprised of floating rate loans that pay interest at the Prime Rate plus an applicable margin, and were subject to Prime Rate ceilings and floors as disclosed in the tables below. The carrying value of floating rate loans held for investment was approximately $220.2 million and $284.5 million as of September 30, 2024 and December 31, 2023, respectively.

The remaining 37.8% and 19.5% of the portfolio of loans held for investment is comprised of loans that pay interest at a fixed rate. The carrying value of fixed rate loans held for investment was approximately $134.5 million and $69.1 million as of September 30, 2024 and December 31, 2023, respectively.

The following tables summarize the Company’s loans held for investment as of September 30, 2024 and December 31, 2023:


	As of September 30, 2024
	Outstanding Principal (1)		Original Issue Discount			Carrying Value (1)			Weighted Average Remaining Life (Years) (2)
Senior Term Loans	$	356,285,780	$	(1,613,270	)	$	354,672,510			2.1
Current expected credit loss reserve		-		-			(4,090,950	)
Total loans held at carrying value, net	$	356,285,780	$	(1,613,270	)	$	350,581,560


	As of December 31, 2023
	Outstanding Principal (1)		Original Issue Discount			Carrying Value (1)			Weighted Average Remaining Life (Years) (2)
Senior Term Loans	$	355,745,305	$	(2,104,695	)	$	353,640,610			2.1
Current expected credit loss reserve		-		-			(4,972,647	)
Total loans held at carrying value, net	$	355,745,305	$	(2,104,695	)	$	348,667,963

(1)

The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted original issue discount, deferred loan fees and other upfront fees. Outstanding principal balance includes capitalized paid-in-kind ("PIK") interest, if applicable.

(2)

Weighted average remaining life is calculated based on the carrying value of the loans as of September 30, 2024 and December 31, 2023, respectively.

The following tables present changes in loans held at carrying value as of and for the nine months ended September 30, 2024 and 2023.


	Principal			Original Issue Discount			Current Expected Credit Loss Reserve			Carrying Value (1)
Balance at December 31, 2023	$	355,745,305		$	(2,104,695	)	$	(4,972,647	)	$	348,667,963
New fundings		76,051,190			(820,335	)		-			75,230,855
Principal repayment of loans		(64,198,999	)		-			-			(64,198,999	)
Accretion of original issue discount		-			1,311,760			-			1,311,760
Transfer of loan held for investment to loan held for sale (2)(3)		(19,000,000	)					213,913			(18,786,087	)
PIK Interest		7,688,284			-			-			7,688,284
Decrease in provision for current expected credit losses		-			-			667,784			667,784
Balance at September 30, 2024	$	356,285,780		$	(1,613,270	)	$	(4,090,950	)	$	350,581,560

(1)

(2)

During the three months ended September 30, 2024, the Company entered into a conditional assignment agreement with an affiliate under common control to sell $6.0 million of principal of Loan #11. Upon the change in management's intent to hold this portion of Loan #11 to maturity or payoff, the loan was transferred from loans held for investment to loans held for sale on the consolidated balance sheets, and was recorded at fair value of approximately $6.0 million (Note 4) (Note 8). As a result of the expected repayment of this loan at the contractual maturity date of October 4, 2024, there was no decrease to the current expected credit loss ("CECL") reserve as a result of this transfer.

(3)

On September 27, 2024, the Company transferred $13.0 million of principal of Loan #2 from loans held for investment to loans held for sale upon receipt of an offer from a third party to purchase such loan (Note 4). On September 30, 2024, the Company sold $13.0 million of Loan #2 to a third party for a selling price of $13.0 million. In connection with the transfer to held for sale classification, the Company reversed approximately $0.2 million of the CECL reserve.


	Principal			Original Issue Discount			Current Expected Credit Loss Reserve			Carrying Value (1)
Balance at December 31, 2022	$	343,029,334		$	(3,755,796	)	$	(3,940,939	)	$	335,332,599
New fundings		68,677,238			(1,254,590	)		-			67,422,648
Principal repayment of loans		(62,837,108	)		-			-			(62,837,108	)
Accretion of original issue discount		-			1,989,374			-			1,989,374
Sale of loan (2)		(13,399,712	)		-			-			(13,399,712	)
PIK Interest		6,343,749			-			-			6,343,749
Increase in provision for current expected credit losses		-			-			(1,171,256	)		(1,171,256	)
Balance at September 30, 2023	$	341,813,501		$	(3,021,012	)	$	(5,112,195	)	$	333,680,294

(1)

(2)

One loan was reclassified as held for sale from loans held for investment as the decision was made to sell the loan during the nine months ended September 30, 2023 to a syndicate of co-lenders which includes a third party and two affiliates under common control with the Manager. The sale was executed on March 31, 2023 (Note 8).

A more detailed listing of the Company’s loans held at carrying value based on information available as of September 30, 2024, is as follows:


Loan (1)	Location(s)	Initial Funding Date (1)	Maturity Date (2)	Principal Balance		Original Issue Discount			Carrying Value		Percentage of Our Loan Portfolio			Future Fundings		Interest Rate (3)	Periodic Payment (4)	YTM IRR (5)
1	Various	10/27/2022	10/30/2026	$	25,354,286	$	(467,213	)	$	24,887,073		7.0	%		-	P+6.5% Cash(8)	I/O	17.2%
2	Michigan	1/13/2022	12/31/2024		27,030,728		(13,737	)		27,016,991		7.6	%		-	P+6.65% Cash, 4.25% PIK(6)(14)(21)	P&I	18.0%
3	Various	3/25/2021	1/29/2027		21,066,738		(593,996	)		20,472,742		5.8	%		-	P+9.69% Cash, 2.6% PIK(11)(15)	P&I	23.2%
4	Arizona	4/19/2021	6/17/2026		6,626,809		-			6,626,809		1.9	%		-	11.91% Cash	I/O	17.0%
5	Massachusetts	4/19/2021	4/30/2025		2,721,680		-			2,721,680		0.8	%		-	P+12.25% Cash(6)	P&I	22.7%
6	Michigan	8/20/2021	1/30/2026		4,818,354		-			4,818,354		1.4	%		-	15% Cash	P&I	17.7%
7	Illinois, Arizona	8/24/2021	6/30/2025		20,579,082		(64,158	)		20,514,924		5.8	%		-	P+6% Cash, 2% PIK(9)	P&I	19.4%
8	West Virginia	9/1/2021	12/31/2025		8,491,943		-			8,491,943		2.4	%		-	10% Cash	P&I	15.0%
9	Pennsylvania	9/3/2021	6/30/2024		16,402,488		-			16,402,488		4.6	%		-	P+10.75% Cash, 3% PIK(6)(16)	P&I	16.3%
11	Maryland	9/30/2021	10/4/2024		27,824,509		-			27,824,509		7.8	%		-	P+8.75% Cash, 2% PIK(6)(17)	I/O	22.0%
12	Various	11/8/2021	4/30/2025		8,676,876		(16,447	)		8,660,429		2.4	%		-	P+7% Cash(10)	P&I	19.6%
16	Florida	12/30/2021	8/31/2025		6,557,500		(34,791	)		6,522,709		1.8	%		-	16.75% Cash	I/O	33.1%
18	Ohio	2/3/2022	12/31/2025		23,639,667		(51,891	)		23,587,776		6.7	%		-	P+1.75% Cash, 5% PIK(9)(18)	P&I	16.6%
19	Florida	3/11/2022	12/31/2025		19,029,907		(29,862	)		19,000,045		5.4	%		-	11% Cash, 5% PIK	P&I	16.5%
20	Missouri	5/9/2022	5/30/2025		17,111,787		(36,831	)		17,074,956		4.8	%		-	11% Cash, 2% PIK	P&I	14.7%
21	Illinois	7/1/2022	7/29/2026		6,718,164		(40,316	)		6,677,848		1.9	%		-	P+7% Cash, 2% PIK(9)	P&I	23.4%
23	Arizona	3/27/2023	3/31/2026		1,680,000		(24,864	)		1,655,136		0.5	%		-	P+7.5% Cash(12)	P&I	18.7%
24	Oregon	3/31/2023	9/27/2026		660,000		-			660,000		0.2	%		-	P+10.5% Cash(7)	P&I	21.5%
25	New York	8/1/2023	6/29/2036		25,849,894		-			25,849,894		7.3	%		-	15% Cash	P&I	16.6%
26	Connecticut	8/31/2023	4/30/2026		6,450,000		(77,024	)		6,372,976		1.8	%		-	14% Cash	P&I	19.0%
27	Nebraska	8/15/2023	6/30/2027		13,000,000		-			13,000,000		3.7	%		-	P+6.5% Cash(19)	P&I	16.1%
28	Ohio	9/13/2023	3/13/2025		2,466,705		-			2,466,705		0.7	%		-	15% Cash	P&I	17.4%
29	Illinois	10/11/2023	10/9/2026		2,025,634		-			2,025,634		0.6	%		-	11.4% Cash, 1.5% PIK	P&I	14.7%
30	Missouri, Arizona	12/20/2023	12/31/2026		19,600,000		(156,863	)		19,443,137		5.5	%		-	P+7.75% Cash(13)	I/O	18.7%
31	California, Arizona	1/3/2024	5/3/2026		6,680,000		-			6,680,000		1.9	%		-	P+8.75% Cash(10)	I/O	18.6%
32	Nevada	4/15/2024	8/15/2027		-		-			-		0.0	%		6,000,000	P+6.5% Cash(12)(20)	I/O	17.7%
33	Minnesota	5/20/2024	5/28/2027		1,152,000		(5,277	)		1,146,723		0.3	%		-	12% Cash	P&I	12.9%
34	Arizona	6/17/2024	5/29/2026		10,000,000		-			10,000,000		2.8	%		-	11.91% Cash	I/O	12.8%
35	California	8/23/2024	8/23/2027		24,071,029		-			24,071,029		6.8	%		-	12% Cash, 3% PIK	P&I	16.3%
			Total	$	356,285,780	$	(1,613,270	)	$	354,672,510		100	%	$	6,000,000		Wtd Average	18.2%

(1)

All loans originated prior to April 1, 2021 were purchased from affiliated entities at fair value plus accrued interest on or subsequent to April 1, 2021. Loan numbering in the table above is maintained from origination for purposes of comparability and may not be sequential due to maturities, payoffs, or refinancings.

(2)

Certain loans are subject to contractual extension options and may be subject to performance based on other conditions as stipulated in the loan agreement. Actual maturities may differ from contractual maturities stated herein and certain borrowers may have the right to prepay with or without a contractual prepayment penalty. The Company may also extend contractual maturities and amend other terms of the loans in connection with loan modifications.

(3)

"P" = prime rate and depicts floating rate loans that pay interest at the prime rate plus a specific percentage; "PIK" = paid-in-kind interest.

(4)

P&I = principal and interest. I/O = interest only. P&I loans may include interest only periods for a portion of the loan term.

(5)

Estimated YTM, calculated on a weighted average principal basis, includes a variety of fees and features that affect the total yield, which may include, but is not limited to, OID, exit fees, prepayment fees, unused fees and contingent features. OID is recognized as a discount to the funded loan principal and is accreted to income over the term of the loan. The estimated YTM calculations require management to make estimates and assumptions, including, but not limited to, the timing and amounts of loan draws on delayed draw loans, the timing and collectability of exit fees, the probability and timing of prepayments and the probability of contingent features occurring. For example, certain credit agreements contain provisions pursuant to which certain PIK interest rates and fees earned by us under such credit agreements will decrease upon the satisfaction of certain specified criteria which we believe may improve the risk profile of the applicable borrower. To be conservative, we have not assumed any prepayment penalties or early payoffs in our estimated YTM calculation. Estimated YTM is based on current management estimates and assumptions, which may change. Actual results could differ from those estimates and assumptions.

(6)

This Loan is subject to a prime rate floor of 3.25%

(7)

This Loan is subject to a prime rate floor of 5.50%

(8)

This Loan is subject to a prime rate floor of 6.25%

(9)

This Loan is subject to a prime rate floor of 7.00%

(10)

This Loan is subject to a prime rate floor of 7.50%

(11)

This Loan is subject to a prime rate floor of 7.75%

(12)

This Loan is subject to a prime rate floor of 8.00%

(13)

This Loan is subject to a prime rate floor of 8.50%

(14)

This Loan is subject to a prime rate cap of 5.85%

(15)

The aggregate principal balance outstanding of Loan #3 is comprised of two tranches. The first tranche has a principal balance $16.8 million, a floating interest rate of prime plus 7.75% cash and 2.75% PIK and a maturity date of January 29, 2027. The second tranche has a principal balance of $4.3 million, and bears an interest rate of 15.00% and 2.00% PIK, and a maturity date of November 29, 2024. The statistics presented reflect the weighted average of the rate terms under both tranches for the total aggregate loan commitment.

(16)

As of May 1, 2023, Loan #9 was placed on non-accrual status and remains on non-accrual as of September 30, 2024. Loan #9 is included on the consolidated balance sheet as a loan held for investment – related party (Note 8). This loan had an original maturity date of June 30, 2024 and is included in amounts past due in the tables below.

(17)

This loan was repaid in full in October 2024 and carried a zero CECL reserve as of September 30, 2024. The maturity date presented reflects the date of repayment. During the quarter ended September 30, 2024, $6.0 million of principal of Loan #11 was reclassified as held for sale, at fair value (Note 4).

(18)

An affiliate under common control holds a controlling equity investment in this portfolio company (Note 8).

(19)

This loan has floating grid pricing based on the Prime Rate plus a spread of 5.00% to 8.75% based on monthly annualized EBITDA performance. As of September 30, 2024, the applied interest rate is Prime Rate + 6.50%.

(20)

This loan earns an unused fee on the unfunded commitment at an annual rate of 1.2%. The unfunded commitment of $6.0 million was advanced in October 2024 (Note 15).

(21)

On September 27, 2024, $13.0 million of principal of Loan #2 was reclassified to held for sale, and was subsequently sold to a third party at a price of $13.0 million on September 30, 2024. The remaining balance presented is held for investment as of September 30, 2024.

The following table presents aging analyses of past due loans by amortized cost, excluding the CECL reserve, as of September 30, 2024 and December 31, 2023. As of September 30, 2024 and December 31, 2023, there was one loan with principal greater than 90 days past due.


	As of September 30, 2024
	Current Loans (1)		31-60 Days Past Due		61-90 Days Past Due		90+ Days Past Due (2)		Total Past Due		Total Loans		Non- Accrual(2)
Senior Term Loans	$	338,270,022	$	-	$	-	$	16,402,488	$	16,402,488	$	354,672,510	$	16,402,488
Total	$	338,270,022	$	-	$	-	$	16,402,488	$	16,402,488	$	354,672,510	$	16,402,488

(1)

Loans 1-30 days past due are included in the current loans.

(2)

On May 1, 2023, Loan #9 was placed on non-accrual status. On June 20, 2023, the Administrative Agent to Loan #9 issued an acceleration notice requesting immediate payment of all amounts outstanding and therefore is greater than 90 days past due as of September 30, 2024. . On December 1, 2023 Loan #6 was placed on non-accrual status. In March 2024, the Company entered into an amendment to Loan #6, which extended the maturity date to April 15, 2024. In the second quarter, the Company entered into an additional amendment to Loan #6, which extended the maturity date from April 15, 2024 to January 30, 2026 and restored Loan #6 to accrual status.


	As of December 31, 2023
	Current Loans (1)		31-60 Days Past Due		61-90 Days Past Due		90+ Days Past Due		Total Past Due		Total Loans		Non- Accrual(2)
Senior Term Loans	$	337,238,122	$	-	$	-	$	16,402,488	$	16,402,488	$	353,640,610	$	20,666,374
Total	$	337,238,122	$	-	$	-	$	16,402,488	$	16,402,488	$	353,640,610	$	20,666,374

(1)

Loans 1-30 days past due are included in the current loans.

(2)

Non-Accrual Loans

As of September 30, 2024 and December 31, 2023, there were one and two loans placed on non-accrual status, respectively.

Loan #9 was placed on non-accrual status as of May 1, 2023 and has both an outstanding principal balance and carrying value of approximately $16.4 million as of September 30, 2024 and December 31, 2023, respectively, and carries a reserve for current expected credit losses of approximately $1.4 million as of September 30, 2024. The Company ceased accruing interest on the first date of delinquency, based on expectation of its ability to collect all amounts then due from the borrower. As a result, there was no accrued interest to write-off when the loan was placed on non-accrual.

Loan #6 was placed on non-accrual status as of December 1, 2023 and had an outstanding principal balance and carrying value of approximately $4.3 million as of December 31, 2023. In March 2024, the Company entered into an amendment to Loan #6, which extended the maturity date to April 15, 2024. In connection with this amendment, Loan #6 was restored to accrual status. In the second quarter, the Company entered into an additional amendment to Loan #6, which extended the maturity date from April 15, 2024 to January 30, 2026.

Credit Quality Indicators

The Company assesses the risk factors of each loan, and assigns a risk rating based on a variety of factors, including, without limitation, payment history, real estate collateral coverage, property type, geographic and local market dynamics, financial performance, loan to enterprise value and fixed charge coverage ratios, loan structure and exit strategy, and project sponsorship. This review is performed quarterly. Based on a 5-point scale, the Company’s loans are rated “1” through “5,” from less risk to greater risk, which ratings are defined as follows:


Rating		Definition
1		Very low risk
2		Low risk
3		Moderate/average risk
4		High risk/potential for loss: a loan that has a risk of realizing a principal loss


5		Impaired/loss likely: a loan that has a high risk of realizing principal loss, has incurred principal loss or an impairment has been recorded

The risk ratings are primarily based on historical data and current conditions specific to each portfolio company, as well as consideration of future economic conditions and each borrower’s estimated ability to meet debt service requirements. The risk ratings shown in the following table as of September 30, 2024 and December 31, 2023 consider borrower specific credit history and performance and reflect a quarterly re-evaluation of overall current macroeconomic conditions affecting the Company’s borrowers. As interest rates have decreased due to declining rates from the Federal Reserve Board, it has positively impacted borrowers’ ability to service their debt obligations on a global scale. The changes in risk ratings had an effect on the level of the CECL reserve though, other than the one loan placed on non-accrual status, the loans continued to perform as expected. For approximately 60.9% of the portfolio, the fair value of the underlying real estate collateral exceeded the amounts outstanding under the loans as of September 30, 2024. The remaining approximately 39.1% of the portfolio, while not fully collateralized by real estate, is generally secured by some real estate and is secured by other forms of collateral including equipment, receivables, licenses and/or other assets of the borrowers to the extent permitted by applicable laws and regulations governing such borrowers. The amounts below exclude the apportionment of real estate collateral permissible under the applicable income and asset tests for REIT eligibility.

As of September 30, 2024 and December 31, 2023, the carrying value, excluding the CECL reserve, of the Company’s loans held for investment within each risk rating category by year of origination is as follows:


Risk	As of September 30, 2024(1)(2)										As of December 31, 2023(1)(2)
Rating	2024		2023		2022		2021		Total		2023		2022		2021		Total
1	$	-	$	660,000	$	36,075,001	$	27,824,512	$	64,559,513	$	820,000	$	37,644,911	$	-	$	38,464,911
2		41,394,426		68,346,777		59,448,763		20,514,924		189,704,890		51,320,161		107,007,422		46,792,941		205,120,524
3		21,694,652		2,466,705		27,016,991		11,382,108		62,560,456		2,466,705		5,296,308		58,829,717		66,592,730
4		10,000,000		-		-		27,847,651		37,847,651		-		-		43,462,445		43,462,445
5		-		-		-		-		-		-		-		-		-
Total	$	73,089,078	$	71,473,482	$	122,540,755	$	87,569,195	$	354,672,510	$	54,606,866	$	149,948,641	$	149,085,103	$	353,640,610

(1)

Amounts are presented by loan origination year with subsequent advances shown in the original year of origination.

(2)

Loan #9 placed on non-accrual status is included in risk rating category “4” and has a reserve for current expected credit losses of approximately $1.4 million as of September 30, 2024 and $1.5 million as of December 31, 2023.

Real estate collateral coverage is also a significant credit quality indicator, and real estate collateral coverage, excluding the CECL Reserve, was as follows as of September 30, 2024 and December 31, 2023:


As of September 30, 2024(1)
	< 1.0x		1.0x – 1.25x		1.25x – 1.5x		1.50x – 1.75x		1.75x – 2.0x		> 2.0x		Total
Fixed-rate	$	25,522,754	$	69,462,584	$	17,773,533	$	-	$	-	$	8,398,610	$	121,157,481
Floating-rate		112,344,705		36,917,412		6,677,848		32,079,719		27,016,991		18,478,354		233,515,029
	$	137,867,459	$	106,379,996	$	24,451,381	$	32,079,719	$	27,016,991	$	26,876,964	$	354,672,510


As of December 31, 2023(1)
	< 1.0x		1.0x – 1.25x		1.25x – 1.5x		1.50x – 1.75x		1.75x – 2.0x		> 2.0x		Total
Fixed-rate	$	2,466,706	$	-	$	49,041,867	$	17,613,043	$	-	$	-	$	69,121,616
Floating-rate		104,322,083		35,491,887		38,729,046		15,396,370		5,296,308		85,283,300		284,518,994
	$	106,788,789	$	35,491,887	$	87,770,913	$	33,009,413	$	5,296,308	$	85,283,300	$	353,640,610

(1)

Real estate collateral coverage is calculated based upon most recent third party appraised values. The Company generally obtains a new appraisal of all material real estate collateral at least once annually.

Geography concentration of our loans held for investment is also a significant credit quality indicator. As of September 30, 2024 and December 31, 2023, our borrowers have operations in the jurisdictions in the table below:


As of September 30, 2024						As of December 31, 2023
Jurisdiction	Outstanding Principal (1)		Percentage of Our Loan Portfolio			Jurisdiction	Outstanding Principal (1)		Percentage of Our Loan Portfolio
Maryland	$	48,829,536		14	%	Maryland	$	53,907,352		15	%
Pennsylvania		41,756,774		12	%	Pennsylvania		21,674,160		6	%
Ohio		34,783,248		10	%	Ohio		27,902,362		8	%
Missouri		34,327,575		10	%	Missouri		25,191,575		7	%
Michigan		31,849,084		9	%	Michigan		56,466,635		16	%
Illinois		28,625,165		8	%	Illinois		25,599,133		7	%
California		26,739,191		8	%	California		-		-	%
New York		25,849,894		7	%	New York		22,611,938		6	%
Florida		25,587,407		7	%	Florida		48,815,066		14	%
Arizona		25,400,574		7	%	Arizona		24,466,609		7	%
Nebraska		13,000,000		4	%	Nebraska		13,061,667		4	%
West Virginia		8,491,943		2	%	West Virginia		11,706,059		3	%
Connecticut		6,450,000		2	%	Connecticut		5,450,000		2	%
Massachusetts		2,783,391		1	%	Massachusetts		12,308,310		3	%
Minnesota		1,152,000		0	%	Minnesota		-		-	%
Oregon		660,000		0	%	Oregon		820,000		-	%
Nevada		-		-	%	Nevada		5,764,439		2	%
Total	$	356,285,780		100	%	Total	$	355,745,305		100	%

(1)

The principal balance of the loans not secured by real estate collateral are included in the jurisdiction representing the principal place of business.

CECL Reserve

The Company records an allowance for current expected credit losses for its loans held for investment. The allowances are deducted from the gross carrying amount of the assets to present the net carrying value of the amounts expected to be collected on such assets. The Company estimates its CECL Reserve using among other inputs, third party valuations, and a third party probability-weighted model that considers the likelihood of default and expected loss given default for each individual loan based on the risk profile for approximately three years after which we immediately revert to use of historical loss data.

ASC 326 requires an entity to consider historical loss experience, current conditions, and a reasonable and supportable forecast of the macroeconomic environment. The Company considers multiple datapoints and methodologies that may include likelihood of default and expected loss given default for each individual loan, valuations derived from discount cash flows (“DCF”), and other inputs including the risk rating of the loan, how recently the loan was originated compared to the measurement date, and expected prepayment, if applicable. The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost, and off-balance sheet credit exposures such as unfunded loan commitments.

The Company evaluates its loans on a collective (pool) basis by aggregating on the basis of similar risk characteristics as explained above. We make the judgment that loans to cannabis-related borrowers that are fully collateralized by real estate exhibit similar risk characteristics and are evaluated as a pool. Further, loans that have no real estate collateral, but are secured by other forms of collateral, including equity pledges of the borrower, and otherwise have similar characteristics as those collateralized by real estate are evaluated as a pool. All other loans are analyzed individually, either because they operate in a different industry, may have a different risk profile, or maturities that extend beyond the forecast horizon for which we are able to derive reasonable and supportable forecasts.

Estimating the CECL Reserve also requires significant judgment with respect to various factors, including (i) the appropriate historical loan loss reference data, (ii) the expected timing of loan repayments, (iii) calibration of the likelihood of default to reflect the risk characteristics of the Company’s loan portfolio, and (iv) the Company’s current and future view of the macroeconomic environment. From time to time, the Company may consider loan-specific qualitative factors on certain loans to estimate its CECL Reserve, which may include (i) whether cash from the borrower’s operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan, and (iii) the liquidation value of collateral. For loans where we have deemed the borrower/sponsor to be experiencing financial difficulty, we may elect to apply a practical expedient, in which the fair value of the underlying collateral is compared to the amortized cost of the loan in determining a CECL Reserve.

To estimate the historic loan losses relevant to the Company’s portfolio, the Company evaluates its historical loan performance, which includes zero realized loan losses since the inception of its operations. Additionally, the Company analyzed its repayment history,

noting it has limited “true” operating history, since the incorporation date of March 30, 2021. However, the Company’s Sponsor and its affiliates have had operations for the past four fiscal years and have made investments in similar loans that have similar characteristics including interest rate, collateral coverage, guarantees, and prepayment/make whole provisions, which fall into the pools identified above. Given the similarity of the structuring of the credit agreements for the loans in the Company’s portfolio to the loans originated by its Sponsor, management considered it appropriate to consider the past repayment history of loans originated by the Sponsor and its affiliates in determining the extent to which a CECL Reserve shall be recorded.

In addition, the Company reviews each loan on a quarterly basis and evaluates the borrower’s ability to pay the monthly interest and principal, if required, as well as the loan-to-value (LTV) ratio. When evaluating qualitative factors that may indicate the need for a CECL Reserve, the Company forecasts losses considering a variety of factors. In considering the potential current expected credit loss, the Manager primarily considers significant inputs to the Company’s forecasting methods, which include (i) key loan-specific inputs such as the value of the real estate collateral, liens on equity (including the equity in the entity that holds the state-issued license to cultivate, process, distribute, or retail cannabis), presence of personal or corporate guarantees, among other credit enhancements, LTV ratio, rate type (fixed or floating) and IRR, loan-term, geographic location, and expected timing and amount of future loan fundings, (ii) performance against the underwritten business plan and the Company’s internal loan risk rating, and (iii) a macro-economic forecast. Estimating the enterprise value of our borrowers in order to calculate LTV ratios is often a significant estimate. The Manager utilizes a third party valuation appraiser to assist with the Company’s valuation process primarily using comparable transactions to estimate enterprise value of its portfolio companies and supplement such analysis with a multiple-based approach to enterprise value to revenue multiples of publicly-traded comparable companies obtained from S&P Capital IQ as of September 30, 2024, to which the Manager may apply a private company discount based on the Company’s current borrower profile. During the nine-month period ended September 30, 2024, the Company observed that valuation multiples of publicly traded companies in the industry generally improved as a result of macro-economic factors. Such factors include, but are not limited to, expectations surrounding future interest rate changes by the Federal Reserve and public announcements about proposed regulatory reform relating to a potential rescheduling of cannabis at the federal level. Management contemplates the impacts of these macro-economic factors during the forecast period when determining enterprise value and ultimately, the CECL reserve. Estimates may change in future periods based on available future macro-economic data and might result in a material change in the Company’s future estimates of expected credit losses for its loan portfolio.

During the three months ended September 30, 2024, we received full repayments of three loans which had an aggregate principal balance of $32.3 million at the date of repayment. These loans carried an aggregate CECL reserve of $0.6 million as of June 30, 2024, thereby contributing to $0.6 million of the $1.0 million reversal of the CECL provision during the third quarter. Furthermore, during the quarter ended September 30, 2024, the Company transferred $13.0 million of principal of Loan #2 from loans held for investment to loans held for sale, and reversed approximately $0.2 million of the CECL reserve in connection with the transfer. Additionally, loans risk rated "3" and "4" decreased to approximately 28.3% of the portfolio at September 30, 2024 from 38.7% of the portfolio at June 30, 2024, as a result of improved valuations and borrower specific performance. Meanwhile, loans risk rated "1" and "2" increased to approximately 71.7% from 61.3% during the same period. Loans risk rated "1" and "2" both generally are expected to result in a full repayment of principal and generally do not carry materially different CECL reserves based on risk ratings alone. The improvement in portfolio risk ratings during the three months ended September 30, 2024 correspond to the remaining reversal of the CECL reserve during the third quarter of 2024.

Regarding real estate collateral, the Company generally cannot take the position of mortgagee-in-possession as long as the property is used by a cannabis operator, but it can request that the court appoint a receiver to manage and operate the subject real property until the foreclosure proceedings are completed. Additionally, while the Company cannot foreclose under state Uniform Commercial Code (“UCC”) and take title or sell equity in a licensed cannabis business, a potential purchaser of a delinquent or defaulted loan could.

In order to estimate the future expected loan losses relevant to the Company’s portfolio, the Company utilizes historical market loan loss data obtained from a third party database for commercial real estate loans, which the Company believes is a reasonably comparable and available data set to use as an input for its type of loans. The Company believes this dataset to be representative for future credit losses whilst considering that the cannabis industry is maturing, and consumer adoption, demand for production, and retail capacity are increasing akin to commercial real estate over time. For periods beyond the reasonable and supportable forecast period, the Company reverts back to historical loss data.

All of the above assumptions, although made with the most available information at the time of the estimate, are subjective and actual activity may not follow the estimated schedule. These assumptions impact the future balances that the loss rate will be applied to and as such impact the Company’s CECL Reserve. As the Company acquires new loans and the Manager monitors loan and borrower performance, these estimates will be revised each period.

Activity related to the CECL Reserve for outstanding balances and unfunded commitments on the Company’s loans held at carrying value and loans receivable at carrying value as of and for the nine months ended September 30, 2024 and 2023 is presented in the table below.


	Outstanding			Unfunded			Total
Balance at December 31, 2023	$	4,972,647		$	3,092		$	4,975,739
Decrease in provision for current expected credit losses		(881,697	)		(3,092	)		(884,789	)
Balance at September 30, 2024	$	4,090,950		$	-		$	4,090,950


	Outstanding		Unfunded		Total
Balance at December 31, 2022	$	3,940,939	$	94,415	$	4,035,354
Increase in provision for current expected credit losses		1,171,256		22,623		1,193,880
Balance at September 30, 2023	$	5,112,195	$	117,038	$	5,229,234

The Company has made an accounting policy election to exclude accrued interest receivable from the amortized cost basis of the related loans held for investment in determining the CECL Reserve, as any uncollectible accrued interest receivable is written off in a timely manner. To date, the Company has had zero write-offs related to uncollectible interest receivable, but will discontinue accrual of interest on loans if deemed to be uncollectible, with any previously accrued uncollected interest on the loan charged to interest income in the same period. For the two loans on non-accrual as of December 31, 2023, one of which remained on non-accrual as of September 30, 2024, the Company ceased accruing interest on the first date of delinquency, based on expectation of its ability to collect all amounts then due from the borrower. As a result, there was no accrued interest to write-off when the loan was placed on non-accrual status.