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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 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)
Maryland81-0963486
(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 classTrading Symbol(s)Name of exchange on
which registered
6.00% Notes due 2026TPTANew York Stock Exchange
Securities registered pursuant to section 12(g) of the Securities Exchange Act of 1934:
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 þSmaller reporting company ☑
Emerging growth company ☑
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of November 8, 2024, the registrant had 24,337,549 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
Item 1.
Item 2.
Item 3.
Item 4.
PART II
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


1

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Terra Property Trust, Inc.
Consolidated Balance Sheets
September 30, 2024December 31, 2023
(Unaudited)
Assets
Cash and cash equivalents$21,192,776 $10,674,475 
Restricted cash3,710,161 3,954,986 
Cash held in escrow by lender8,272,332 4,907,316 
Marketable securities1,134,314 4,961,879 
Loans held for investment, net of allowance for credit losses of $33,021,571
   and $56,749,498
243,502,933 417,913,773 
Loans held for investment acquired through participation, net of allowance for credit losses
   of $165,877 and $226,527
39,608,554 38,558,485 
Equity investment in unconsolidated investments80,800,634 37,171,326 
Real estate owned, net (Note 5)
Land, building and building improvements, net124,382,821 126,724,333 
Lease intangible assets, net6,605,546 9,869,364 
Interest receivable4,652,434 6,537,368 
Due from related parties826,087 655,263 
Other assets12,080,707 8,811,583 
Total assets$546,769,299 $670,740,151 
Liabilities and Equity
Liabilities:
Unsecured notes payable, net$119,893,927 $118,380,897 
Secured financing agreements, net193,028,598 290,525,313 
Obligations under participation agreements (Note 7 )
15,140,347 — 
Interest reserve and other deposits held on investments3,710,161 3,954,986 
Lease intangible liabilities, net (Note 5)
4,606,288 6,838,875 
Due to Manager (Note 7)
600,566 4,183,293 
Interest payable 1,264,714 1,575,463 
Accounts payable and accrued expenses1,448,428 2,405,749 
Unearned income126,157 314,260 
Other liabilities775,125 907,507 
Total liabilities340,594,311 429,086,343 
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 September 30, 2024 and December 31, 2023
— — 
Class B Common Stock, $0.01 par value, 450,000,000 shares authorized and 24,337,371
    and 24,336,033 shares issued and outstanding as of September 30, 2024 and
    December 31, 2023, respectively
243,374 243,360 
Additional paid-in capital444,473,089 444,458,206 
Accumulated deficit(238,527,136)(203,047,758)
Accumulated other comprehensive loss(14,339)— 
Total equity206,174,988 241,653,808 
Total liabilities and equity$546,769,299 $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 September 30,Nine Months Ended September 30,
2024202320242023
Revenues
Interest income$9,404,033 $12,712,587 $29,987,792 $44,206,847 
Real estate operating revenue2,736,8814,121,0408,175,207 8,257,943 
Other operating income65,385275,944226,165 429,407 
12,206,299 17,109,571 38,389,164 52,894,197 
Operating expenses
Operating expenses reimbursed to Manager1,341,587 2,407,757 5,852,522 6,704,790 
Asset management fee 1,504,536 2,049,916 4,839,549 6,152,392 
Asset servicing fee 360,606 487,210 1,162,126 1,454,109 
(Reversal of) provision for credit losses(687,598)27,096,841 3,761,838 30,899,434 
Real estate operating expenses586,293 1,912,322 2,059,570 4,986,446 
Depreciation and amortization1,746,737 2,551,323 5,610,538 4,989,800 
Professional fees 573,526 1,081,803 2,285,175 2,849,125 
Directors’ fees83,750 83,750 259,060 263,964 
Other89,286 92,112 452,791 495,987 
Impairment charge— — — 11,765,540 
5,598,723 37,763,034 26,283,169 70,561,587 
Operating income (loss)6,607,576 (20,653,463)12,105,995 (17,667,390)
Other income and expenses
Interest expense on secured financing(6,487,146)(7,244,798)(20,357,898)(20,847,813)
Interest expense on unsecured notes payable(2,465,390)(2,416,518)(7,358,342)(7,216,091)
Interest expense on obligations under participation
   agreements		(779,793)(243,945)(2,168,936)(1,353,006)
Unrealized (loss) gain on investments, net(74,849)(1,040,192)103,721 (982,384)
Income (loss) from equity investment in
   unconsolidated investments		1,025,17641,8392,223,759 (2,154,955)
Loss on repayment of loan(5,629,510)—(5,629,510)—
Gain on extinguishment of debt—14,079,379—14,079,379
Realized loss on investments, net——(446,009)(25,024)
(14,411,512)3,175,765 (33,633,215)(18,499,894)
Net loss$(7,803,936)$(17,477,698)$(21,527,220)$(36,167,284)
Series A preferred stock dividend declared$— $— $— $(3,907)
Net loss allocable to common stock$(7,803,936)$(17,477,698)$(21,527,220)$(36,171,191)
Other comprehensive income (loss)
Unrealized gain (loss) on available-for-sale debt securities5,051 — (14,339)— 
5,051 — (14,339)— 
Comprehensive loss$(7,798,885)$(17,477,698)$(21,541,559)$(36,171,191)
Per share data
Loss per share — basic and diluted
$(0.32)$(0.72)$(0.88)$(1.49)
Weighted-average shares — basic and diluted
24,337,029 24,335,576 24,336,591 24,335,460 
Distributions declared per common share$0.19 $0.19 $0.57 $0.57 

See notes to unaudited consolidated financial statements.
3

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

Preferred StockClass A Common StockClass B Common StockAdditional
Paid-in
Capital		Accumulated DeficitAccumulated Other Comprehensive Income (Loss)
$0.01 Par Value
$0.01 Par Value
SharesAmountSharesAmountTotal Equity
Balance at January 1, 2024$— —$— 24,336,033$243,360 $444,458,206 $(203,047,758)$— $241,653,808 
Shares issued from reinvestment of shareholder
   distributions		— ——39144,470 — — 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:
Unrealized loss on 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:— — — — — — — — 
Unrealized gain on 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 
Shares issued from reinvestment of shareholder
   distributions		— — — 500 5 5,368 — — 5,373 
Distributions declared on common shares ($0.19 per share)
— — — — — — (4,650,804)— (4,650,804)
Net loss— — — — — — (7,803,936)— (7,803,936)
Other comprehensive income:— — — — — — — — 
Unrealized gain on available-for-sale debt securities— — — — — — — 5,051 5,051 
Balance at September 30, 2024
$— — $— 24,337,371 $243,374 $444,473,089 $(238,527,136)$(14,339)$206,174,988 

See notes to unaudited consolidated financial statements.











4

Terra Property Trust, Inc.
Consolidated Statements of Changes in Equity (Continued)
(Unaudited)
Preferred Stock
12.5% Series A Cumulative Non-Voting Preferred Stock
Class A Common StockClass B Common StockAdditional
Paid-in
Capital		Accumulated Deficit
$0.01 Par Value
$0.01 Par Value
SharesAmountSharesAmountSharesAmountTotal equity
Balance at January 1, 2023$— 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 
Shares issued from reinvestment of
     shareholder distributions		— — — — — 198 3 2,572 — 2,575 
Distributions declared on common
   shares ($0.19 per share)
— — — — — — — — (4,650,531)(4,650,531)
Net loss— — — — — — — — (17,477,698)(17,477,698)
Balance at September 30, 2023$— — $— — $— 24,335,711 $243,357 $444,454,373 $(177,678,431)$267,019,299 

See notes to unaudited consolidated financial statements.
5

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

Nine Months Ended September 30,
20242023
Cash flows from operating activities:
Net loss$(21,527,220)$(36,167,284)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization5,610,538 4,989,800 
Provision for credit losses3,761,838 30,899,434 
Amortization of net purchase premiums on loans177,180 1,023,275 
Straight-line rent adjustments(158,945)(10,364)
Amortization of deferred financing costs2,115,382 1,752,299 
Amortization of discount on unsecured notes payable1,370,084 1,238,461 
Amortization of above- and below-market rent intangibles(2,232,587)(1,385,358)
Amortization and accretion of investment-related fees, net(591,147)(1,016,972)
Amortization of above-market rent ground lease— (97,761)
Impairment charge— 11,765,540 
Loss on repayment of loan5,629,510 — 
Gain on extinguishment of debt— (14,079,379)
Realized loss on investments, net446,009 25,024 
Unrealized (gain) loss on investments, net(103,721)982,384 
Distributions received from equity investment in unconsolidated investments2,918,307 5,805,494 
 (Income) loss from equity investment in unconsolidated investments(2,223,759)3,959,892 
Changes in operating assets and liabilities:
Deal deposits— 4,241,892 
Interest receivable1,884,934 (660,452)
Due from related parties(170,824)(453,597)
Other assets1,446,291 (7,580,704)
Due to Manager(2,423,553)189,486 
Unearned income(188,103)342,767 
Interest payable(310,749)989,554
Accounts payable and accrued expenses(957,321)(273,220)
Other liabilities(43,599)(522,258)
Net cash (used in) provided by operating activities(5,571,455)5,957,953 

See notes to unaudited consolidated financial statements.
6

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

Nine Months Ended September 30,
20242023
Cash flows from investing activities:
Proceeds from repayments of loans206,024,968 123,364,974 
Origination, purchase and funding of loans(49,803,811)(73,104,166)
Purchase of equity interests in unconsolidated investments(47,159,126)(1,218,449)
Distributions received in excess of equity income2,835,270 — 
Repayments of promissory note receivable9,455,442 — 
Funding for promissory note receivable(4,962,369)— 
Proceeds from sale of marketable securities3,551,098 — 
Purchase of marketable securities— (7,905,211)
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— (52,508,252)
Cash acquired in purchase of real estate— 712,608 
Return of capital on equity interests in unconsolidated investments— 11,287,839 
Net cash provided by investing activities117,919,119 604,319 
Cash flows from financing activities:
Principal repayments on secured financing(159,125,167)(180,608,288)
Proceeds from secured financing60,663,166 181,026,715 
Proceeds from obligations under participation agreements15,000,000 1,494,422 
Distributions paid(13,937,261)(13,950,868)
Payment of financing costs(1,065,085)(2,098,725)
Change in interest reserve and other deposits held on investments(244,825)785,728 
Redemption of Series A Preferred Stock— (125,000)
Net cash used in financing activities(98,709,172)(13,476,016)
Net increase (decrease) in cash, cash equivalents and restricted cash13,638,492 (6,913,744)
Cash, cash equivalents and restricted cash at beginning of period19,536,777 36,469,592 
Cash, cash equivalents and restricted cash at end of period (Note 2)
$33,175,269 $29,555,848 

Nine Months Ended September 30,
20242023
Supplemental Disclosure of Cash Flows Information:
Cash paid for interest$26,710,460 $25,436,596 
Supplemental non-cash information:
Reinvestment of shareholder distributions$14,897 $4,563 

See notes to unaudited consolidated financial statements.
7

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

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 investment68,737,877 
Equity investment in unconsolidated investment10,149,642 
Interest receivable456,650 
Other assets429,326 
$83,288,961 
Net Assets Acquired
Cash and cash equivalents$712,608 
Other assets33,802 
Land14,457,149 
Buildings and Improvements65,365,376 
Intangible asset and liability:
In-please lease8,403,667 
Below-market rent(4,770,870)
Accounts payable and accrued expenses(912,771)
$83,288,961 

See notes to unaudited consolidated financial statements.

8

Terra Property Trust, Inc.
Notes to Consolidated Financial Statements (Unaudited)
September 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.

9

Notes to Unaudited Consolidated Financial Statements

As of September 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

Basis of Presentation
The accompanying interim consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and include the accounts of the Company and its consolidated subsidiaries. The accompanying interim consolidated financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Articles 6 or 10 of Regulation S-X. Certain prior period amounts have been reclassified to conform to the current period presentation.
Consolidation

    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
10

Notes to Unaudited Consolidated Financial Statements

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, 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.
11

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, or if a loan is in maturity default, 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
As of September 30, 2024 and December 31, 2023, the Company has one loan and two loans, respectively, that were 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 September 30, 2024 and December 31, 2023, the Company did not record any allowance for credit losses on these 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 securities. 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 classified as held for trading. Changes in the fair value of equity securities are recognized in earnings.
    
12

Notes to Unaudited Consolidated Financial Statements

Real Estate Owned, Net

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

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

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

    Management reviews the Company’s real estate for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of recoverability is based on estimated future cash flows and the estimated liquidation value of such real estate assets, and 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.

13

Notes to Unaudited Consolidated Financial Statements

    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.

    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:
September 30,
20242023
Cash and cash equivalents$21,192,776 $19,242,370 
Restricted cash3,710,161 5,418,932 
Cash held in escrow by lender8,272,332 4,894,546 
Total cash, cash equivalents and restricted cash shown in the consolidated
   statements of cash flows		$33,175,269 $29,555,848 

 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.

14

Notes to Unaudited Consolidated Financial Statements

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 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 September 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 nine months ended September 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 September 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.
15

Notes to Unaudited Consolidated Financial Statements


Note 3. Loans Held for Investment

The Company elected the practical expedient under ASC 326 to exclude accrued interest from amortized cost. As of September 30, 2024 and December 31, 2023, accrued interest receivable of $4.7 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.

Portfolio Summary

The following table provides a summary of the Company’s loan portfolio as of:
September 30, 2024December 31, 2023
Fixed Rate
Floating
Rate (1)(2)(3)
TotalFixed Rate
Floating
Rate (1)(2)(3)
Total
Number of loans3111451621
Principal balance$15,541,030$297,353,935$312,894,965$53,998,648$455,462,178$509,460,826
Carrying value$15,447,005$267,664,482$283,111,487$54,095,173$402,377,085$456,472,258
Fair value$15,022,619$269,460,235$284,482,854$53,435,742$403,904,207$457,339,949
Weighted-average coupon rate10.32 %13.20 %13.06 %12.95 %12.92 %12.93 %
Weighted-average remaining
 term (years)		1.820.890.971.180.700.77
_______________
(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 average SOFR of 5.16% and Term SOFR of 4.85% as of September 30, 2024 and average SOFR of 5.34% and Term SOFR of 5.35% as of December 31, 2023.
(2)As of September 30, 2024 and December 31, 2023, amount included $201.4 million and $342.9 million of senior mortgages used as collateral for $120.6 million and $204.9 million of borrowings under secured financing arrangements, respectively (Note 9).
(3)As of September 30, 2024 and December 31, 2023, 10 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, NetLoans Held for Investment through Participation Interests, NetTotal
Balance, January 1, 2024
$417,913,773 $38,558,485 $456,472,258 
Principal repayments received(213,137,530)— (213,137,530)
Origination, purchase and funding of loans48,833,299 970,512 49,803,811 
Loss on repayment of loan (1)
(5,629,510)— (5,629,510)
Net amortization of premiums on loans(177,180)— (177,180)
Accrual, payment and accretion of investment-related fees and other,
   net		(388,655)18,907 (369,748)
(Provision for) reversal of provision for credit losses(3,911,264)60,650 (3,850,614)
Balance, September 30, 2024
$243,502,933 $39,608,554 $283,111,487 
_______________
(1)In August 2024, a $65.0 million senior loan was repaid, resulting in a loss on repayment of $5.6 million, which included the write-off of interest receivable of $4.8 million.
16

Notes to Unaudited Consolidated Financial Statements

Loans Held for Investment, NetLoans Held for Investment through Participation Interests, NetTotal
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)
Origination, purchase and funding of loans73,104,166 — 73,104,166 
Principal repayments received(120,082,766)(3,282,208)(123,364,974)
Net amortization of premiums on loans(1,023,275)— (1,023,275)
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		(658,926)(20,893)(679,819)
Provision for credit losses(30,568,286)(288,359)(30,856,645)
Balance, September 30, 2023$432,327,832 $38,354,459 $470,682,291 

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. Carrying value represents the amortized cost of loan, net of applicable allowance for credit losses.

September 30, 2024December 31, 2023
Loan StructurePrincipal BalanceCarrying Value% of Total Principal BalanceCarrying Value% of Total
First mortgages$201,365,490 $203,274,827 71.8 %$365,465,500 $354,004,530 77.6 %
Preferred equity investments94,085,118 62,474,865 22.1 %126,550,969 85,222,201 18.6 %
Mezzanine loans17,444,357 17,361,795 6.1 %17,444,357 17,245,527 3.8 %
Total$312,894,965 $283,111,487 100.0 %$509,460,826 $456,472,258 100.0 %

September 30, 2024December 31, 2023
Property TypePrincipal BalanceCarrying Value% of Total Principal BalanceCarrying Value% of Total
Office$116,221,158 $84,604,062 29.8 %$144,812,619 $106,462,535 23.3 %
Infill land54,870,512 56,197,733 19.9 %52,839,509 54,024,545 11.8 %
Multifamily55,965,163 56,118,383 19.8 %85,660,082 84,417,184 18.5 %
Mixed-use47,838,132 47,375,334 16.7 %63,096,365 47,362,653 10.4 %
Student housing31,000,000 31,859,506 11.3 %31,000,000 31,758,493 7.0 %
Industrial7,000,000 6,956,469 2.5 %67,579,869 67,543,553 14.8 %
Hotel - full/select service— — — %43,222,382 43,460,206 9.5 %
Infrastructure— — — %21,250,000 21,443,089 4.7 %
Total$312,894,965 $283,111,487 100.0 %$509,460,826 $456,472,258 100.0 %

17

Notes to Unaudited Consolidated Financial Statements

September 30, 2024December 31, 2023
Geographic LocationPrincipal BalanceCarrying Value% of Total Principal BalanceCarrying Value% of Total
United States
California$72,976,512 $73,183,770 25.8 %$119,093,246 $117,955,109 25.9 %
New York75,517,822 43,916,695 15.5 %90,483,672 49,041,668 10.7 %
Arizona 31,970,512 32,152,733 11.4 %31,000,000 31,151,623 6.8 %
Georgia30,244,366 30,225,371 10.7 %74,335,828 62,564,770 13.7 %
Utah28,000,000 28,910,000 10.2 %49,250,000 50,293,850 11.0 %
New Jersey22,900,000 24,045,000 8.5 %82,419,378 83,485,543 18.4 %
Washington22,459,274 22,360,105 7.9