UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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| ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 20212022
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition periodTransition Period from to
Commission File Number: 000-55780
Terra Secured Income Fund 5, LLC
(Exact name of registrant as specified in its charter)
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| Delaware | | 90-0967526 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
550 Fifth Avenue, 6205 West 28th Street, 12th Floor
New York, New York 1003610001
(Address of principal executive offices) (Zip Code)
(212) 753-5100
(Registrant’s telephone number, including area code)
Securities registered pursuant to section 12(b) of the Securities Exchange Act of 1934:
None
Securities registered pursuant to section 12(g) of the Securities Exchange Act of 1934:
Units of Limited Liability Company Interests
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933. Yes ¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
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 (§ 232.405 of this chapter) 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☑ | Smaller reporting company | ☑ |
| | Emerging growth company | ☑ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☑
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
As of March 11, 2022,10, 2023, the registrant had 6,636.66,622.2 units of limited liability company interests 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.
Documents Incorporated by Reference
None.
TABLE OF CONTENTS
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| PART I | |
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| PART II | |
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| PART III | |
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| PART IV | |
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CERTAIN DEFINITIONS
Except as otherwise specified in this annual report on Form 10-K, the terms: “we,” “us,” “our,” “our Fund” and the “Company” refer to Terra Secured Income Fund 5, LLC, a Delaware limited liability company. Additionally, the following defined terms are used in this annual report on Form 10-K.
•“Terra Property Trust” refers to Terra Property Trust, Inc., an entity we have an indirect ownership interest in;
•“Terra Capital Advisors” refers to Terra Capital Advisors, LLC, a subsidiary of Terra Capital Partners, LLC;
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•“Terra Capital Advisors 2” refers to Terra Capital Advisors 2, LLC, ana subsidiary of Terra Capital Advisors;
•“Terra Capital Partners” refers to Terra Capital Partners, LLC, our sponsor;
•“Terra Fund 1” refers to Terra Secured Income Fund, LLC; “Terra Fund 2” refers to Terra Secured Income Fund 2, LLC; “Terra Fund 3” refers to Terra Secured Income Fund 3, LLC; “Terra JV” refers to Terra JV, LLC (formerly known as Terra Secured Income Fund 4, LLC, or “Terra Fund 4”); “Fund 5 International” refers to Terra Secured Income Fund 5 International; “Terra Fund 6”BDC” refers to Terra Income Fund 6, Inc.; “Terra International” refers to Terra Income Fund International; “Terra Fund 7” refers to Terra Secured Income Fund 7, LLC; “Terra Offshore REIT” refers to Terra Offshore Funds REIT, LLC; “Terra Property Trust 2” refers to Terra Property Trust 2, Inc., formerly a subsidiary of Terra Fund 7; “RESOF” refers to Mavik Real Estate Special Opportunities Fund, L.P. (formerly known as Terra Real Estate Credit Opportunities Fund, L.P.); “RESOF REIT” refers to Mavik Real Estate Special Opportunities Fund REIT, LLC, (formerly known as Terra Real Estate Credit Opportunities Fund REIT, LLC), a subsidiary of RESOF; and “Terra LLC” refers to Terra Income Fund 6, LLC (formerly Terra Merger Sub, LLC), a wholly owned subsidiary of Terra Property Trust.
•“Terra Fund Advisors” or our “Manager” refers to Terra Fund Advisors, LLC, an affiliate of Terra Capital Partners;
•Our “Manager or its affiliates” refers to Terra Fund Advisors, as the managing member of Terra Secured Income Fund 5, LLC, and/or Terra REIT Advisors, as the external manager of Terra Property Trust, as the context requires;
•“Terra Funds” refer to Terra Fund 1, Terra Fund 2, Terra Fund 3, Terra Fund 4 and our Fund, collectively;
•“Terra Income Advisors” refers to Terra Income Advisors, LLC, an affiliate of Terra Capital Partners;
•“Terra Income Advisors 2” refers to Terra Income Advisors 2, LLC, an affiliate of Terra Capital Partners;
•“Terra REIT Advisors” or the “REIT Manager” refers to Terra REIT Advisors, LLC, a subsidiary of Terra Capital Partners; and
SPECIAL NOTE FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this annual report on Form 10-K within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For these statements, we claim the protections of the safe harbor for forward-looking statements contained in such Sections. The forward-looking statements contained in this annual report on Form 10-K may include, but are not limited to, statements as to:
•our expected financial performance, operating results and our ability to make distributions to our members in the future;
•Terra Property Trust’s ability to achieve the potential negative impacts of a novel coronavirus (“COVID-19”) onexpected synergies, cost savings and other benefits from the global economy and the impacts of COVID-19 on our financial condition, results of operations, liquidity and capital resources and business operations;BDC Merger (as defined below);
•actions that may be taken by governmental authorities to contain the COVID-19 outbreak or to treat its impact;
•the availability of attractive risk-adjusted investment opportunities in our target asset classRisks associated with achieving expected synergies, cost savings and other real estate-related investments that satisfy our objectives and strategies;benefits from Terra Property Trust’s increased scale.
•the availability of attractive risk-adjusted investment opportunities in our target asset class and other real estate-related investments that satisfy our objectives and strategies;
•the origination or acquisition of our targeted assets, including the timing of originations or acquisitions;
•volatility in our industry, interest rates and spreads, the debt or equity markets, the general economy or the real estate market specifically, whether the results of market events or otherwise;
•changes in our investment objectives and business strategy;
•the availability of financing on acceptable terms or at all;
•the performance and financial condition of our borrowers;
•changes in interest rates and the market value of our assets;
•borrower defaults or decreased recovery rates from our borrowers;
•changes in prepayment rates on our loans;
•our use of financial leverage;
•actual and potential conflicts of interest with any of the following affiliated entities: Terra Income Advisors; the REIT Manager; Terra Capital Partners; Terra Property Trust, Terra Fund 6,LLC, Terra Fund 7, Fund 5 International, Terra International, Terra Offshore REIT and RESOF; or any of their affiliates;
•our dependence on our Manager or its affiliates and the availability of its senior management teams and other personnel;
•liquidity transactions that may be available to us or our subsidiaries or affiliates in the future, including a liquidation of assets, a sale of our company or its subsidiaries or affiliates, or a strategic business combination, a listing of the shares of common stock of Terra Property Trust on a national securities exchange, or an adoption of a share repurchase plan, in each case, which may include the distribution of our common stock of Terra Property Trust indirectly owned by our company and certain other fund vehicles managed by Terra Capital Partners or its affiliates to the ultimate investors in these vehicles, and the timing of any such transactions;
•actions and initiatives of the U.S. federal, state and local government and changes to the U.S. federal, state and local government policies and the execution and impact of these actions, initiatives and policies;
•limitations imposed on our business and our ability to satisfy complex rules in order for us to maintain our exclusion or exemption from registration under the Investment Company Act of 1940, as amended (the “1940 Act”), and our Terra Property Trust to maintain its qualification as a real estate investment trust (“REIT”) for U.S. federal income tax purposes; and
•the degree and nature of our competition.
In addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this annual report on Form 10-K involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-lookingforward-
looking statements for any reason, including the factors set forth in “Part I — Item 1A. Risk Factors” in this annual report on Form 10-K. Other factors that could cause actual results to differ materially include:
•changes in the economy;
•risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters; and
•future changes in laws or regulations and conditions in our operating areas.
We have based the forward-looking statements included in this annual report on Form 10-K on information available to us on the date of this annual report on Form 10-K. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. Members are advised to consult any additional disclosures that we may make directly to members or through reports that we may file in the future with the Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
RISK FACTOR SUMMARY
We are subject to numerous risks and uncertainties (many of which may be amplified by the COVID-19 pandemic), that could cause our actual results and future events to differ materially from those set forth or contemplated in our forward-looking statements, including those summarized below. The following list of risks and uncertainties is only a summary of some of the most important factors and is not intended to be exhaustive. This risk factor summary should be read together with the more detailed discussion of risks and uncertainties set forth under Item 1A — Risk Factors.
Risks Related to Our Business
•Changes in national, regional or local economic, demographic or real estate market conditions may adversely affect our results of operations, the value of our assets and returns to our investors.
•Inflation in the U.S. has accelerated recently and is currently expected to continue at an elevated level in the near-to medium-term, which may have an adverse impact on the valuation of our investments.
•The lack of liquidity of our assets may adversely affect our business, including our ability to value and sell our assets.
•Terra Property Trust’s investments are selected by ourthe REIT Manager or its affiliates and our unitholders will not have input into investment decisions.
•If ourthe REIT Manager or its affiliates underestimates the borrower’s credit analysis or originates loans by using an exception to their loan underwriting guidelines, we may experience losses.
•Changes in interest rates could adversely affect the demand for our target loans, the value of our loans, commercial mortgage-backed securities (“CMBS”), and other real-estate debt or equity assets and the availability and yield on our targeted assets.
•New entrants in the market for commercial loan originations and acquisitions could adversely impact our ability to originate and acquire real estate-related loans at attractive risk-adjusted returns.
•Our loan portfolio may at times be concentrated in certain property types or secured by properties concentrated in a limited number of geographic areas, which increases our exposure to economic downturn with respect to those property types or geographic locations.
•The mezzanine loans, preferred equity and other subordinated loans in which we invest involve greater risks of loss than senior loans secured by income-producing commercial properties.
Risks Related to Regulation
•Maintenance of our 1940 Act exclusion imposes limits on our operations.
Risks Related to Our Management and Our Relationship With Our Manager and its Affiliates
•We rely entirely on our Manager or its affiliates and the directors, employees and officers of our Manager or its affiliates for our day-to-day operations, and the directors, officers and employees of our Manager or its affiliates will face competing demands to their allocation of time and investment opportunities.
•We face certain conflicts of interest with respect to our operations and our relationship with our Manager and Terra Property Trust’s relationship with the REIT Manager.
•The compensation that the REIT Manager receives was not determined on an arm’s-length basis and therefore may not be on the same terms as we could achieve from a third-party.
•Our Manager and its affiliates have limited prior experience operating a REIT and therefore may have difficulty in successfully and profitably operating our business or complying with regulatory requirements, including REIT provisions of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), which may hinder their ability to achieve our objectives or result in loss of Terra Property Trust’s qualification as a REIT.
Risks Related to Financing and Hedging
•Our inability to access funding could have a material adverse effect on our results of operations, financial condition and business. We may rely on short-term financing and thus are especially exposed to changes in the availability of financing.
•We may enter into hedging transactions that could expose us to contingent liabilities in the future and adversely impact our financial condition.
Risks Related to Owning Our Units
•Units issued by us that you hold are not freely transferrable; thus, investors may not be able to liquidate their investment.
•Rapid changes in the values of our assets may make it more difficult for Terra Property Trust to maintain its qualification as a REIT or our exclusion from the 1940 Act.
Tax Risks
•Income taxes of members may exceed cash distributions.
•If Terra Property Trust does not qualify or maintain its qualification as a REIT, it will be subject to tax as a regular corporation and could face a substantial tax liability as a result, which would result in reduced returns to our members.
PART I
Item 1. Business.
Overview
We are a real estate credit focused company that originates, structures, funds and manages commercial real estate investments, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments throughout the United States, which we collectively refer to as our targeted assets. Our loans finance the acquisition, construction, development or redevelopment of quality commercial real estate in the United States. We focus on the origination of middle market loans in the approximately $10 million to $50 million range, to finance properties primarily in primary and secondary markets. We believe loans in this size range are subject to less competition, offer higher risk adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification. We were formed as a Delaware limited liability company on April 24, 2013 and commenced operations on August 8, 2013. We make substantially all of our investments, and conduct substantially all of our real estate lending business, through Terra Property Trust, which has elected to be taxed as a REIT for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2016. Our investment objectives are to (i) preserve our members’ capital contributions, (ii) realize income from our investments and (iii) make monthly distributions to our members from cash generated from investments. There can be no assurances that we will be successful in meeting our investment objectives.
On January 1, 2016, the Terra Funds merged with and into our subsidiaries through a series of separate mergers (collectively, the “Merger”). Following the Merger, we contributed the consolidated portfolio of net assets of the Terra Funds to Terra Property Trust in exchange for all of its common shares. We elected to engage in these transactions, which we refer to as the “REIT formation transactions,” to make our investments through Terra Property Trust and to provide our members with a more broadly diversified portfolio of assets, while providing us with enhanced access to capital and borrowings, lower operating costs and enhanced opportunities for growth.
On March 2, 2020, Terra Fund 1, Terra Fund 2 and Terra Fund 3 merged with and into Terra Fund 4, with Terra Fund 4 continuing as the surviving company (the “Terra Fund Merger”), and we consolidated our holdings of shares of common stock of Terra Property Trust in Terra Fund 4. Subsequent to the Terra Fund Merger, the legal name of Terra Fund 4 was changed to Terra JV. On March 2, 2020, Terra Property Trust engaged in a series of transactions pursuant to which Terra Property Trust 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 that Terra Property Trust owned, cash of $25.5 million and other working capital. On April 29, 2020, Terra Property Trust repurchased, at a purchase price of $17.02 per share, 212,691 shares of common stock that Terra Property Trust had previously sold to Terra Offshore REIT on September 30, 2019.
As
On October 1, 2022, pursuant to that certain Agreement and Plan of Merger, dated as of May 2, 2022, Terra BDC merged with and into Terra LLC, with Terra LLC continuing as the surviving entity of the merger (the “BDC Merger”) and as a wholly owned subsidiary of Terra Property Trust. Following the consummation of the BDC Merger and as of December 31, 2021,2022, Terra JV, former shareholders of Terra BDC and Terra Offshore REIT held 87.4%70.0%, 19.9% and 10.1% of the issued and outstanding shares of Terra Property Trust’s common stock with the remainder held by Terra Offshore REIT;newly designated Class B Common Stock, par value $0.01 per share (“TPT Class B Common Stock”), respectively; and we and Terra Fund 7 owned an 87.6% and 12.4% percentage interest, respectively, in Terra JV. Accordingly, as of December 31, 2021,2022, we indirectly beneficially owned 76.5%61.3% of the outstanding shares of common stockTPT Class B Common Stock of Terra Property Trust through Terra JV.
On the date that is 180 calendar days (or, if such date is not a business day, the next business day) after the date (the “First Conversion Date”) of initial listing of shares of Terra Property Trust’s Class A Common Stock, $0.01 par value per share (“TPT Class A Common Stock”), for trading on a national securities exchange or such earlier date as approved by Terra Property Trust’s board of directors (the “TPT Board”), one-third of the issued and outstanding shares of TPT Class B Common Stock will automatically and without any action on the part of the holder thereof convert into an equal number of shares of TPT Class A Common Stock. On the date that is 365 calendar days (or, if such date is not a business day, the next business day) after the date of initial listing of shares of TPT Class A Common Stock for trading on a national securities exchange or such earlier date following the First Conversion Date as approved by the TPT Board (the “Second Conversion Date”), one-half of the issued and outstanding shares of TPT Class B Common Stock will automatically and without any action on the part of the holder thereof convert into an equal number of shares of TPT Class A Common Stock. On the date that is 545 calendar days (or, if such date is not a business day, the next business day) after the date of initial listing of shares of TPT Class A Common Stock for trading on a national securities exchange or such earlier date following the Second Conversion Date as approved by the TPT Board(the
“Third Conversion Date”), all of the issued and outstanding shares of TPT Class B Common Stock will automatically and without any action on the part of the holder thereof convert into an equal number of shares of TPT Class A Common Stock.
Each of the loans was originated by Terra Capital Partners or its affiliates. The portfolio is diversified based on location of the underlying properties, loan structure and property type. As of December 31, 2021,2022, the portfolio includingincluded underlying properties located in 2131 markets, across 9ten states and includes diverse property types such as offices, multifamily housing, hotels, student housing, commercial offices, medical offices, mixed-use and industrial properties. The profile of these properties ranges from stabilized and value-added properties to pre-development and construction. The loans are structured across mezzanine debt, first mortgages, preferred equity investments and credit facilities.
Our sole member and managing member is Terra Fund Advisors, a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). Terra Property Trust’s investment activities are externally managed by Terra REIT Advisors, a private investment firm affiliated with us, pursuant to a management agreement dated February 8, 2018 (the “Management Agreement”). Under the terms of the Management Agreement, the REIT Manager provides certain services to Terra Property Trust and Terra Property Trust pays fees associated with such services.
We believe that compelling opportunities for us will emerge as a result of the economic downturn caused by the ongoing COVID-19 pandemic. While the COVID-19 pandemic has had a demonstrable effect on employment, the economy and the public’s morale, its impact on property values has yet to be fully realized because property values are the result of slow moving forces, including consumer behavior, supply and demand for space, availability and pricing of mortgage financing and investor demand. As these factors become clear and commercial real estate is repriced accordingly, we believe there will be abundant
opportunities available to experienced alternative lenders like us to provide financing for property acquisition, refinancing, development and redevelopment on attractive terms that reflect the new realities of the economy.
Our Manager intends to treat us as a partnership and not as an association or “publicly traded partnership,” taxed as a corporation for U.S. federal income tax purposes. Terra Property Trust has elected to be taxed as a REIT for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2016. So long as Terra Property Trust qualifies as a REIT, it generally is not subject to U.S. federal income tax on its net taxable income to the extent that it annually distributes all of its net taxable income to its stockholders. We also operate our business in a manner that will permit us to be excluded from registration as an investment company under the 1940 Act.
Our Manager and Terra Capital Partners
Our sole member and managing member is our Manager. The external manager of Terra Property Trust is the REIT Manager. Both our Manager and the REIT Manager are registered as investment advisers under the Advisers Act.
On April 1, 2021, MAVIK Capital Management, LP (“Mavik”), an entity controlled by Vikram S. Uppal, our Chief Executive Officer, completed a series of related transactions that resulted in all of the outstanding interests in Terra Capital Partners being acquired by Mavik for a combination of cash and interests in Mavik (the “Recapitalization”). As part of the Recapitalization, a private fund managed by a division of a publicly-traded alternative asset manager, acquired a passive interest consisting of “non-voting securities,” as that term is defined under the 1940 Act, in Mavik.
Terra Capital Partners is led by Vikram S. Uppal (Chief Executive Officer), Gregory M. Pinkus (Chief Financial Officer) and Daniel Cooperman (Chief Originations Officer). Mr. Uppal was a Partner of Axar Capital Management L.P. (“Axar Capital Management”) and its Head of Real Estate. Prior to Axar Capital Management, Mr. Uppal was a Managing Director on the Investment Team at Fortress Investment Group’s Credit and Real Estate Funds and Co-Head of North American Real Estate Investments at Mount Kellett Capital Management. Members of the Terra Capital Partners management team have broad based, long-term relationships with major financial institutions, property owners and commercial real estate service providers. The entire senior management team has held leadership roles at many top international real estate and investment banking firms, including Mount Kellett Capital Management and Fortress Investment Group.
The REIT Manager is a subsidiary, and our Manager is an affiliate, of Terra Capital Partners, a real estate credit focused investment manager based in New York City with a 19-year track record focused primarily on the origination and management of mezzanine loans, as well as first mortgage loans, bridge loans and preferred equity investments in all major property types through multiple public and private pooled investment vehicles. Since its formation in 2001 and its commencement of operations in 2002, Terra Capital Partners has been engaged in providing financing on commercial properties of all major property types throughout the United States. In the lead up to the global financial crisis in 2007, believing that the risks associated with commercial real estate markets had grown out of proportion to the potential returns from such markets, Terra Capital Partners sold 100% of its investment management interests prior to the global financial crisis. It was not until mid-2009, after its assessment that commercial mortgage markets would begin a period of stabilization and growth, that Terra Capital Partners began to sponsor new investment vehicles, which included the predecessor private partnerships, to again provide debt capital to commercial real estate markets. The financings provided by all vehicles managed by Terra Capital Partners from January 2004 through December 31, 20212022 have been secured by approximately 13.9 million square feet of office properties, 3.7 million square feet of retail properties, 5.55.9 million square feet of industrial properties, 5,058 hotel rooms and 27,92528,493 apartment units. The value of the properties underlying this capital was approximately $10.6$11.2 billion based on appraised values as of the closing dates of each financing. In addition to its extensive experience originating and managing debt financings, Terra Capital Partners and its affiliates owned and operated over six million square feet of office and industrial space between 2005
and 2007, and this operational experience further informs its robust origination and underwriting standards and enables ourthe REIT Manager to effectively operate property underlying a financing upon a foreclosure.
Our Investment Objective and Strategy
Our primary investment objectives are to:
•preserve our members’ capital contributions;
•realize income from our investment; and
•make monthly distributions to our members from cash generated by our investment.
We focus on providing commercial real estate loans to creditworthy borrowers and seek to generate an attractive and consistent low volatility cash income stream. Our focus on originating debt and debt-like instruments emphasizes the payment of current returns to investors and the preservation of invested capital.
The management teams of our Manager and the REIT Manager have extensive experience in originating, managing and disposing of real estate-related loans. The REIT Manager seeks to:
•target on middle market loans of approximately $10 million to $50 million;
•focus on the origination of new loans, not on the acquisition of loans originated by other lenders;
•invest primarily in floating rate rather than fixed rate loans, but the REIT Manager reserves the right to make debt investments that bear interest at a fixed rate;
•originate loans expected to be repaid within one to five years;
•maximize current income;
•lend to creditworthy borrowers;
•construct a portfolio that is diversified by property type, geographic location, tenancy and borrower;
•source off-market transactions; and
•hold loans until maturity unless, in the REIT Manager’s judgment, market conditions warrant earlier disposition.
Our Financing Strategy
We have historically utilized only limited amounts of borrowings as part of our financing strategy. One of the reasons we completed the REIT formation transactions, as described under “— Overview,” is to expand our financing options, access to capital and capital flexibility in order to position us for future growth. We deploy moderate amounts of leverage as part of our operating strategy, which currently consists of unsecured notes payable, borrowings under first mortgage financings, a revolving line of credit, repurchase agreements and a term loan. We may in the future also deploy leverage through other credit facilities and senior notes and we may divide the loans we originate into senior and junior tranches and dispose of the more senior tranches as an additional means of providing financing to our business. In addition, we intend to match our use of floating rate leverage with floating rate investments.
As of December 31, 2021,2022, Terra Property Trust had outstanding indebtedness, consisting of borrowings under a mortgage loan of $32.0$29.3 million, unsecured notes payable of $85.1$123.5 million, thea term loan of $93.8$25.0 million, a line of credit of $38.6$90.1 million and the repurchase agreementagreements of $44.6$170.9 million. As of December 31, 2021,2022, the amount remaining available under the line of credit and the repurchase agreementagreements was $36.4$34.9 million and $150.4$224.1 million, respectively.
Additionally, as of December 31, 2021,2022, Terra Property Trust had obligations under participation agreements and secured borrowing with an aggregate outstanding principal amount of $76.6$12.6 million. However, Terra Property Trust does not have direct liability to a participant under the participation agreements with respect to the underlying loan and the participants’ share of the investments is repayable only from the proceeds received from the related borrower/issuer of the investments and, therefore, the participants also are subject to credit risk (i.e., risk of default
by the underlying borrower/ issuer). With its larger size and enhanced access to capital and capital flexibility, Terra Property Trust expects to deemphasize its use of participation arrangements. For additional information concerning our indebtedness, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this annual report on Form 10‑K.
Targeted Assets
Real Estate-Related Loans
Through Terra Property Trust, we originate, structure, fund and manage commercial real estate loans, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments related to high-quality commercial real estate in the United States. We may also, to the extent consistent with Terra Property Trust’s qualification as a REIT,
acquire equity participations in the underlying collateral of some of such loans. Terra Property Trust originates, structures and underwrites most, if not all, of its loans. Terra Property Trust, in reliance on the REIT Manager, uses what we consider to be conservative underwriting criteria, and our underwriting process involves comprehensive financial, structural, operational and legal due diligence to assess the risks of financings so that we can optimize pricing and structuring. By originating, not purchasing, loans, Terra Property Trust is able to structure and underwrite financings that satisfy our standards, utilize our proprietary documentation and establish a direct relationship with our borrower. Described below are some of the types of loans we own and seek to originate with respect to high-quality properties in the United States. We continue to see attractive lending opportunities, and we expect market conditions to remain favorable for our strategy for the foreseeable future.
Mezzanine Loans. These are loans secured by ownership interests in an entity that owns commercial real estate and that generally finance the acquisition, refinancing, rehabilitation or construction of commercial real estate. Mezzanine loans may be either short-term (one to five years) or long-term (up to 10 years) and may be fixed or floating rate. We may own mezzanine loans directly or we may hold a participation in a mezzanine loan or a sub-participation in a mezzanine loan. These loans generally pay interest on a specified due date (although there may be a portion of the interest that is deferred) and may, to the extent consistent with Terra Property Trust’s qualification as a REIT, provide for participation in the value or cash flow appreciation of the underlying property as described below. Generally, we invest in mezzanine loans with last dollar loan-to-value ratios ranging from 60% to 85%. As of December 31, 2021,2022, Terra Property Trust owned threefive mezzanine loans with a total net principal amount of $17.4$26.8 million, which constituted 4.3%4.2% of its net loan investment portfolio.
Preferred Equity Investments. These are investments in preferred membership interests in an entity that owns commercial real estate and generally finance the acquisition, refinancing, rehabilitation or construction of commercial real estate. These investments are expected to have characteristics and returns similar to mezzanine loans. As of December 31, 2021,2022, Terra Property Trust owned threefive preferred equity investments with a total net principal amount of $63.4$121.2 million, which constituted 15.7%19.1% of its net loan investment portfolio.portfolio..
First Mortgage Loans. These loans generally finance the acquisition, refinancing, rehabilitation or construction of commercial real estate. First mortgage loans may be either short-term (one to five years) or long-term (up to 10 years), may be fixed or floating rate and are predominantly current-pay loans. OurThe REIT Manager originates current-pay first mortgage loans backed by high-quality properties in the United States. that fit our investment strategy. Certain of our first mortgage loans finance the acquisition, rehabilitation and construction of infill land property and for these loans we target a weighted average last dollar loan-to-value of 70%. We may selectively syndicate portions of our first mortgage loans, including senior or junior participations to provide third-party financing for a portion of the loan or optimize returns which may include retained origination fees.
First mortgage loans are expected to provide for a higher recovery rate and lower defaults than other debt positions due to the lender’s senior position. However, such loans typically generate lower returns than subordinate debt such as mezzanine loans, B-notes, or preferred equity investments. As of December 31, 2021,2022, Terra Property Trust owned 1420 first mortgage loans with a total net principal amount of $310.9$456.4 million, which constituted 77.0%72.1% of its net loan investment portfolio. As of December 31, 2021,2022, Terra Property Trust used $163.1$413.1 million of senior mortgage loans as collateral for $93.8 million of borrowings under a term loan; $60.1 million of senior mortgage loans as collateral for $38.6$261.0 million of borrowings under a revolving line of credit and $67.4 million of senior mortgage loans as collateral for $44.6 million of borrowings under atwo repurchase agreement.agreements.
Subordinated Mortgage Loans (B-notes). B-notes include structurally subordinated mortgage loans and junior participations in first mortgage loans or participations in these types of assets. Like first mortgage loans, these loans generally finance the acquisition, refinancing, rehabilitation or construction of commercial real estate. B-notes may be either short-term (one to five years) or long-term (up to 10 years), may be fixed or floating rate and are predominantly current-pay loans. We may create B-notes by tranching our directly originated first mortgage loans generally through syndications of senior first mortgages or buy these loans directly from third-party originators. As a result of the current credit market disruption related to
the most recent recession and the decrease in capital available in this part of the capital structure, we believe that the opportunities to both directly originate and to buy these types of loans from third-parties on favorable terms will continue to be attractive.
Investors in B-notes are compensated for the increased risk of such assets from a pricing perspective but still benefit from a mortgage lien on the related property. Investors typically receive principal and interest payments at the same time as senior debt unless a default occurs, in which case any such payments are made only after any senior debt is made whole. Rights of holders of B-notes are usually governed by participation and other agreements that, subject to certain limitations, typically provide the holders of subordinated positions of the mortgage loan with the ability to cure certain defaults and control certain decisions of holders of senior debt secured by the same properties (or otherwise exercise the right to purchase the senior debt),
which provides for additional downside protection and higher recoveries. As of December 31, 2021,2022, Terra Property Trust did not own any B-notes.
Equity Participations. In connection with our loan origination activities, we may pursue equity participation opportunities, or interests in the projects being financed, in instances when we believe that the risk-reward characteristics of the loan merit additional upside participation because of the possibility of appreciation in value of the underlying properties securing the loan. Equity participations can be paid in the form of additional interest, exit fees or warrants in the borrower. Equity participation can also take the form of a conversion feature, permitting the lender to convert a loan or preferred equity investment into equity in the borrower at a negotiated premium to the current net asset value of the borrower. We expect to obtain equity participations in certain instances where the loan collateral consists of a property that is being repositioned, expanded or improved in some fashion which is anticipated to improve future cash flow. In such case, the borrower may wish to defer some portion of the debt service or obtain higher leverage than might be merited by the pricing and leverage level based on historical performance of the underlying property. We can generate additional revenues from these equity participations as a result of excess cash flows being distributed or as appreciated properties are sold or refinanced. As of December 31, 2021,2022, Terra Property Trust did not own any equity participations.
Other Real Estate-Related Investments. We may, through Terra Property Trust, invest in other real estate-related investments, which may include CMBS or other real estate debt or equity securities, so long as such investments do not constitute more than 15% of our assets. Certain of our real estate-related loans require the borrower to make payments of interest on the fully committed principal amount of the loan regardless of whether the full loan amount is outstanding. As of December 31, 2021,2022, Terra Property Trust owned 50.0%27.9% equity interest in a limited partnership that invests in performing and non-performing mortgages, loans, mezzanines, B-notes and other credit instruments supported by underlying commercial real estate assets. Additionally, Terra Property Trust beneficially owned equity interests in twothree joint ventures that invest in real estate properties. Terra Property Trust also owned a credit facility that is collateralized by underlying commercial real estate assets. TheIn 2022, in connection with a mezzanine loan Terra Property Trust originated, Terra Property Trust entered into a residual profit sharing arrangement with the borrower. Terra Property Trust accounted for this arrangement as an equity investment. These equity interests had a total carrying value of $69.762.5 million and the credit facility had a net principal balance of $11.8$28.8 million as of December 31, 20212022.
Operating Real Estate
From time to time, Terra Property Trust may acquire operating real estate properties, including properties acquired in connection with foreclosures or deed in lieu of foreclosure. In July 2018, Terra Property Trust acquired a multi-tenant office building through foreclosure of a first mortgage loan. In January 2019, Terra Property Trust acquired a 4.9 acre development parcel through deed in lieu of foreclosure. In June 2022, the development parcel was sold. As of December 31, 2021,2022, the multi-tenant office building and the development parcel had a carrying value of $56.1$40.6 million, and the mortgage loan payable encumbering the office building had a principal amount of $32.0$29.3 million.
Investment Guidelines
Terra Property Trust’s board of directorsThe TPT Board adopted investment guidelines, which may be amended from time to time, that set forth certain criteria for the REIT Manager to use when evaluating specific investment opportunities as well as its overall portfolio composition. Terra Property Trust’s board of directorsThe TPT Board will review the REIT Manager’s compliance with the investment guidelines periodically and receive an investment report at each quarter-end in conjunction with the review of its quarterly results by its board of directors.
Terra Property Trust’s board of directorsThe TPT Board adopted the following investment guidelines:
•no origination or acquisition shall be made that would cause Terra Property Trust to fail to qualify as a REIT;
•no origination or acquisition shall be made that would cause Terra Property Trust or any of its subsidiaries to be required to register as an investment company under the 1940 Act; and
•until appropriate investments can be identified, Terra Property Trust may invest the proceeds of its equity or debt offerings in interest-bearing, short-term investments, including money market accounts and/or funds, that are consistent with its intention to qualify as a REIT.
These investment guidelines may be changed from time to time by a majority of Terra Property Trust’s board of directorsthe TPT Board without the approval of its stockholders.
Disposition Policies
The period Terra Property Trust holds its investments in real estate-related loans varies depending on the type of asset, interest rates and other factors. OurThe REIT Manager or its affiliates havehad developed a well-defined exit strategy for each of Terra Property Trust’s investments. OurThe REIT Manager or its affiliates continually performperforms a hold-sell analysis on each asset in order to determine the optimal time to hold the asset and generate a strong return to Terra Property Trust’s stockholders. Economic and market conditions may influence Terra Property Trust to hold investments for longer or shorter periods of time. Terra Property Trust may sell an asset before the end of the expected holding period if it believes that market conditions have maximized its value to us or the sale of the asset would otherwise be in our best interests. Terra Property Trust intends to make any such dispositions in a manner consistent with its qualification as a REIT and its desire to avoid being subject to the “prohibited transaction” penalty tax.
Operating and Regulatory Structure
REIT Qualification
Terra Property Trust elected to be taxed as a REIT under the Internal Revenue Code commencing with its taxable year ended December 31, 2016. We believe that Terra Property Trust has been organized and havehas operated in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code, and that its manner of operation will enable it to continue to meet the requirements for qualification and taxation as a REIT. To qualify as a REIT, Terra Property Trust must meet on a continuing basis, through its organization and actual investment and operating results, various requirements under the Internal Revenue Code relating to, among other things, the sources of its gross income, the composition and values of its assets, its distribution levels and the diversity of ownership of shares of its stock. If Terra Property Trust fails to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, it will be subject to U.S. federal income tax at regular corporate rates and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which it failed to qualify as a REIT. Even if Terra Property Trust qualifies for taxation as a REIT, it may be subject to some U.S. federal, state and local taxes on its income or property. In addition, subject to maintaining Terra Property Trust’s qualification as a REIT, a portion of its business may be conducted through, and a portion of its income may be earned with respect to, its taxable REIT subsidiaries (“TRSs”), should it decidesdecide to form TRSs in the future, which are subject to corporate income tax. Any distributions paid by Terra Property Trust generally will not be eligible for taxation at the preferential U.S. federal income tax rates that currently apply to certain distributions received by individuals from taxable corporations, unless such distributions are attributable to dividends received by Terra Property Trust from its TRSs, should it form a TRS in the future.
1940 Act Exclusion
Neither we nor Terra Property Trust are registered as an investment company under the 1940 Act. If we or Terra Property Trust were obligated to register as an investment company, we or Terra Property Trust would have to comply with a variety of substantive requirements under the 1940 Act that impose, among other things:
•limitations on our capital structure orand the use of leverage;
•restrictions on specified investments;
•prohibitions on transactions with affiliates; and
•compliance with reporting, record keeping, and other rules and regulations that would significantly change our and Terra Property Trust’s operations.
We and Terra Property Trust conduct our operations, and intend to continue to conduct our operations, so that we are not required to register as an investment company under the 1940 Act. Section 3(a)(1)(A) of the 1940 Act defines an investment company as any issuer that is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities. Section 3(a)(1)(C) of the 1940 Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. Excluded from the term “investment securities,” among other things, are U.S. government securities and securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on the exemptionexclusion from the definition of investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the 1940 Act. Because we are organized as a holding company and conduct our business primarily through Terra Property
Trust, the value of the “investment securities” held by an issuer must be less than 40% of the value of such issuer’s total assets on an unconsolidated basis (exclusive of U.S. government securities and cash items). In addition, we conduct our operations so that we will not be considered an investment company under Section 3(a)(1)(A) of the 1940 Act, as we are not engaged primarily nor do we hold ourselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, through Terra Property Trust, we are primarily engaged in the non-investment company businesses of Terra Property Trust.businesses.
Terra Property Trust and certain of its subsidiaries may at times reply primarily on the exclusion from the definition of an investment company under Section 3(c)(5)(C) of the 1940 Act, or any other exclusions available to Terra Property Trust and its subsidiaries (other than Section 3(c)(1) or Section 3(c)(7)). Section 3(c)(5)(C) of the 1940 Act is available for entities “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exclusion generally requires that at least 55% of Terra Property Trust’s (and any of its subsidiaries relying on Section 3(c)(5)(C)) portfolio must be comprised of “qualifying real estate” assets and at least 80% of Terra Property Trust’s (and any of its subsidiaries’, in relying on Section 3(c)(5)(C)) portfolio must be comprised of “qualifying real estate” assets and “real estate-related” assets (and no more than 20% comprised of miscellaneous assets) as determined in accordance with the 1940 Act and the rules and regulations promulgated thereunder. For purposes of the exclusion provided by Section 3(c)(5)(C) of the 1940 Act, Terra Property Trust (and any of its subsidiaries relying on Section 3(c)(5)(C)) classifies its investments based in large measure on no-action letters issued by the SEC staff and other SEC interpretive guidance and, in the absence of SEC guidance, on our view of what constitutes a “qualifying real estate” asset and a “real estate-related” asset. These no-action positions were issued in accordance with factual situations that may be substantially different from the factual situations Terra Property Trust (and any of its subsidiaries relying on Section 3(c)(5)(C)) may face, and a number of these no-action positions were issued more than twenty years ago. Pursuant to this guidance, and depending on the characteristics of the specific investments, certain mortgage loans, participations in mortgage loans, mortgage-backed securities, mezzanine loans, joint venture investments, preferred equity and equity securities of other entities may not constitute qualifying real estate assets and therefore investments in these types of assets may be limited. No assurance can be given that the SEC or its staff will concur with our classification of the assets held by Terra Property Trust and any of its subsidiaries for the purposes of the 3(c)(5)(C) exclusion or any other exclusion or exemption under the 1940 Act. Future revisions to the 1940 Act or further guidance from the SEC or its staff may cause us, Terra Property Trust, or any of its subsidiaries relying on Section 3(c)(5)(C) to lose our or their exclusion from registration, or force us, Terra Property Trust, or any of its subsidiaries to re-evaluate our or their portfolios and our or their investment strategy. Such changes may prevent us from operating our business successfully.
Further, in order to maintain an exclusion from registration under the 1940 Act, we may be unable to sell assets that we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional income or loss generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire assets that we would otherwise want to acquire and would be important to its strategy.
Although we monitor the portfolio of Terra Property Trust and its subsidiaries periodically and prior to each acquisition and disposition, Terra Property Trust or its subsidiaries may not be able to maintain an exclusion from registration as an investment company. If Terra Property Trust or its subsidiaries were required to register as an investment company, but failed to do so, Terra Property Trust or its subsidiaries failing to so qualify would be prohibited from engaging in their business, and legal proceedings could be instituted against Terra Property Trust or any of its subsidiaries failing to so qualify. In addition, the contracts of Terra Property Trust or any of its subsidiaries failing to so qualify may be unenforceable, and a court could appoint a receiver to take control of Terra Property Trust or any of its subsidiaries failing to so qualify and liquidate their business.
Emerging Growth Company Status
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”), and as such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, reduced disclosure obligations
regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and unitholder approval of any golden parachute payments not previously approved. A number of these exemptions are not relevant to us, but we intend to take advantage of the exemption from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002.
In addition, Section 107 of the JOBS Act provides that an emerging growth company can use the extended transition period provided in Section 13(a) of the Exchange Act for complying with new or revised accounting standards. This permits an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to take advantage of this extended transition period and, as a result, we will
adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.
We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (ii) the date on which we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, (iii) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period, and (iv) the end of the year in which the five yearfive-year anniversary of an initial public offering of our units occurs.
Term and Liquidity
Our amended and restated operating agreement provides that our existence will continue until December 31, 2023, unless sooner terminated. However, we expect that prior to such date we will consummate a liquidity transaction, which could occur as early as this year2023 and may include an orderly liquidation of our assets or an alternative liquidity event such as a strategic business combination, a sale of our company or an initial public offering and listing or a direct listing of Terra Property Trust’s shares of common stock on a national securities exchange. The Manager would pursue an alternative liquidity event only if it believes such a transaction would be in the best interests of our members.
Competition
We compete with REITs, numerous regional and community banks, specialty finance companies, savings and loan associations and other entities, and we expect that others may be organized in the future. The effect of the existence of additional REITs and other institutions may be increased competition for the available supply of our targeted assets suitable for purchase, which may cause the price for such assets to rise.
In the face of this competition, we expect to have access to our Manager’s professionals and their industry expertise, which may provide us with a competitive advantage in sourcing transactions and help us assess origination and acquisition risks and determine appropriate pricing for potential assets. The more conservative underwriting standards used by many large commercial banks and traditional providers of commercial real estate capital following the 2008 downturn has, and we believe, will continue to constrain the lending capacity of these institutions. However, we may not be able to achieve our business goals or expectations due to the competitive risks that we face. For additional information concerning these competitive risks, see “Item 1A. Risk Factors — New entrants in the market for commercial loan originations and acquisitions could adversely impact our ability to originate and acquire real estate-related loans at attractive risk-adjusted returns” in this annual report on Form 10–K.
Governmental Regulations
As an owner of real estate, our operations are subject, in certain instances, to supervision and regulation by U.S. and other governmental authorities, and may be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, which, include among other things: (i) federal and state securities laws and regulations; (ii) federal, state and local tax laws and regulations, (ii) state and local laws relating to real property; (iv) federal, state and local environmental laws, ordinances, and regulations, and (v) various laws relating to housing, including permanent and temporary rent control and stabilization laws, the Americans with Disabilities Act of 1990 and the Fair Housing Amendment Act of 1988, among others.
Compliance with the federal, state and local laws described above has not had a material, adverse effect on our business, assets, results of operations, financial condition and ability to pay distributions, and we do not believe that our existing portfolio will require us to incur material expenditures to comply with these laws and regulations.
Employees; Staffing; Human Capital
Our sole managing member is our Manager. We conduct substantially all of our business through Terra Property Trust, which is supervised by its board of directorsthe TPT Board consisting of foursix directors. Terra Property Trust has entered into a Management Agreement with the REIT Manager pursuant to which certain services are provided by the REIT Manager and paid for by Terra Property Trust. The REIT Manager is not obligated under the Management Agreement to dedicate any of its personnel exclusively to us, nor is it or its personnel obligated to dedicate any specific portion of its or their time to our business. We are responsible for the costs of our own employees; however, we do not currently have any employees and do not currently expect to have any employees. See “Item 10. Directors, Executive Officers and Corporate Governance” in this annual report on Form 10-K.
Available Information
We are subject to the information requirements of the Exchange Act. Therefore, we file periodic reports and other information with the SEC. The SEC maintains a website at www.sec.gov where our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other filings we make with the SEC, including amendments to such filings, may be obtained free of charge. Our reports can be viewed and downloaded from our password protected website free of charge. Our investors and advisors may submit a request for access to the website at www.terrafund5.com. The information on our website does not form a part of and is not incorporated by reference into this annual report on Form 10-K.
Item 1A. Risk Factors.
Investing in our units involves a high degree of risk. Investors should carefully consider the following risk factors and all other information contained in this annual report on Form 10-K. The risks set forth below are not the only risks we face, and we may face other risks that we have not yet identified, which we do not currently deem material or which are not yet predictable. If any of the following risks occur, our business, financial condition, liquidity and results of operations could be materially and adversely affected. In that case, the value of our units could decline, and members may lose some or all of their investment. Some statements in this section constitute forward-looking statements. See “Forward-Looking Statements.”
Risks Related to Our Business
Changes in national, regional or local economic, demographic or real estate market conditions may adversely affect our results of operations, our financial position, the value of our assets and our cash flows.
We are subject to risks incident to the ownership of real estate-related assets including: changes in national, regional or local economic, demographic or real estate market conditions; changes in supply of, or demand for, similar properties in an area; increased competition for real estate assets targeted by our investment strategy; bankruptcies, financial difficulties or lease defaults by property owners and tenants; inflation; changes in interest rates and availability of financing; and changes in government rules, regulations and fiscal policies, including changes in tax, real estate, environmental and zoning laws. Our assets are also subject to the risk of significant adverse changes in financial market conditions that can result in a deleveraging of the global financial system and the forced sale of large quantities of mortgage-related and other financial assets. Concerns over economic recession, inflation, geopolitical issues, including events such as Russia’s invasion of Ukraine, the United Kingdom’s exit from the European Union, unemployment, the availability and cost of finance, or a prolonged government shutdown may contribute to increased volatility and diminished expectations for the economy and markets, which could result in an increase in mortgage defaults or a decline in the value of our assets. In addition, any increase in mortgage defaults in the residential market may have a negative impact on the credit markets generally as well as on economic conditions generally. We do not know whether the values of the property securing our real estate-related loans will remain at the levels existing on the dates of origination of such loans, and we are unable to predict future changes in national, regional or local economic, demographic or real estate market conditions. These conditions, or others we cannot predict, may adversely affect our results of operations, our financial position, the value of our assets and our cash flows.
Inflation in the U.S. has accelerated recently and is currently expected to continue at an elevated level in the near-to medium-term, which may have an adverse impact on the valuation of our investments.
Inflation in the U.S. has accelerated recently and is currently expected to continue at an elevated level in the near-to medium-term. Further, heightened competition for workers, supply chain issues, the relocation of foreign production and manufacturing businesses to the U.S., and rising energy and commodity prices have contributed to increasing wages and other economic inputs. Higher inflation and rising input costs may have adverse effects on our commercial real estate-related loans,
commercial real estate-related debt securities and select commercial real estate equity investments, which are subject to the risks typically associated with real estate. Inflation can negatively impact the profitability of real estate assets with long-term leases that do not provide for short-term rent increases or that provide for rent increases with a lower annual percentage increase than inflation. Continued inflation, particularly at higher levels, may have an adverse impact on the valuation of our investments.
The lack of liquidity of our assets may adversely affect our business, including our ability to value and sell our assets.
A portion of the real estate-related loans and other assets we originate or acquire may be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly-traded securities. The illiquidity of our assets may make it difficult for us to sell such assets if the need or desire arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less value than the value at which we have previously recorded our assets. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited, which could adversely affect our results of operations, financial condition and cash flows.
Terra Property Trust’s investments are selected by ourthe REIT Manager or its affiliates and our unitholders will not have input into investment decisions.
Pursuant to the terms of the Management Agreement, the REIT Manager is responsible for, among other services, managing the investment and reinvestment of Terra Property Trust’s assets, subject to the oversight and supervision of the board of directors of Terra Property Trust.TPT Board. Our unitholders will not have input into investment decisions. This will increase the uncertainty, and thus the risk, of investing in our units, as we may make investments with which you may not agree. Our Manager or its affiliates intends to conduct due diligence with respect to each investment and suitable investment opportunities may not be immediately available. The failure of our Manager or its affiliates to find investments that meet our investment
criteria in sufficient time or on acceptable terms could result in unfavorable returns and could cause a material adverse effect on our results of operations, financial condition and cash flows. Even if investment opportunities are available, there can be no assurance that the due diligence processes of our Manager or its affiliates will uncover all relevant facts or that any particular investment will be successful.
From time to time, before appropriate real estate-related investments can be identified, our Manager or its affiliates may choose to have us invest in interest-bearing, short-term investments, including money market accounts and/or funds, that are consistent with Terra Property Trust’s intention to maintain its qualification as a REIT. These short-term, non-real estate-related investments, if any, are expected to provide a lower net return than we will seek to achieve from investments in real estate-related loans and other commercial real estate assets. Furthermore, when our Manager or its affiliates does identify suitable real estate-related loans and other commercial real estate assets that are the types of assets which we target, you will be unable to influence the decision of our Manager or its affiliates ultimately to invest in, or refrain from investing in, such assets.
Our Manager’s or its affiliates’ due diligence of potential real estate-related loans and other commercial real estate assets may not reveal all of the liabilities associated with such assets and may not reveal other weaknesses in our assets, which could lead to investment losses.
Before originating or acquiring a financing, our Manager or its affiliates calculates the level of risk associated with the real estate-related loans and other commercial real estate assets to be originated or acquired based on several factors which include the following: top-down reviews of both the current macroeconomic environment generally and the real estate and commercial real estate loan market specifically; detailed evaluation of the real estate industry and its sectors; bottom-up reviews of each individual investment’s attributes and risk/reward profile relative to the macroeconomic environment; and quantitative cash flow analysis and impact of the potential investment on our portfolio. In making the assessment and otherwise conducting customary due diligence, we employ standard documentation requirements and require appraisals prepared by local independent third-party appraisers selected by us. Additionally, we seek to have borrowers or sellers provide representations and warranties on loans we originate or acquire, and if we are unable to obtain representations and warranties, we factor the increased risk into the price we pay for such loans. Despite our review process, there can be no assurance that our due diligence process will uncover all relevant facts or that any investment will be successful.
If our Manager or its affiliates underestimates the borrower’s credit analysis or originates loans by using an exception to their loan underwriting guidelines, we may experience losses.
Our Manager or its affiliates values our real estate-related loans based on an initial credit analysis and the investment’s expected risk-adjusted return relative to other comparable investment opportunities available to us, taking into account estimated future losses on the loans, and the estimated impact of these losses on expected future cash flows. The loss estimates
may not prove accurate, as actual results may vary from estimates. In the event that our Manager or its affiliates underestimates the losses relative to the price we pay for a particular investment, we may experience losses with respect to such investment, which in turn may have a material adverse effect on our results of operations, financial condition and cash flows.
Further, from time to time and in the ordinary course of business, our Manager or its affiliates may make exceptions to our predetermined loan underwriting guidelines. Loans originated with exceptions may result in a higher number of delinquencies and defaults, which could have a material and adverse effect on our results of operations, financial condition and cash flows.
Deficiencies in appraisal quality in the mortgage loan origination process may result in increased principal loss severity.
During the loan underwriting process, appraisals are generally obtained on the collateral underlying each prospective loan. The quality of these appraisals may vary widely in accuracy and consistency. The appraiser may feel pressure from the broker or lender to provide an appraisal in the amount necessary to enable the originator to make the loan, whether or not the value of the property justifies such an appraised value. Inaccurate or inflated appraisals may result in an increase in the severity of losses on the loans, which could have a material and adverse effect on our results of operations, financial condition and cash flows.
Our Manager or its affiliates utilizes analytical models and data in connection with the valuation of our real estate-related loans and other commercial real estate assets, and any incorrect, misleading or incomplete information used in connection therewith would subject us to potential risks.
As part of the risk management process our Manager or its affiliates uses detailed proprietary models, including loan level non-performing loan models, to evaluate collateral liquidation timelines and price changes by region, along with the impact of different loss mitigation plans. Additionally, our Manager or its affiliates uses information, models and data supplied by third parties. Models and data are used to value potential targeted assets. In the event models and data prove to be incorrect,
misleading or incomplete, any decisions made in reliance thereon expose us to potential risks. For example, by relying on incorrect models and data, especially valuation models, our Manager or its affiliates may be induced to buy certain targeted assets at prices that are too high, to sell certain other assets at prices that are too low or to miss favorable opportunities altogether. Similarly, any hedging based on faulty models and data may prove to be unsuccessful. If any of the aforementioned occur, such event could have a material adverse effect on our results of operations, financial condition and cash flows.
Changes in interest rates could adversely affect the demand for our target loans, the value of our loans, CMBS, and other real-estate debt or equity assets and the availability and yield on our targeted assets.
We invest in real estate-related loans and other commercial real estate assets, which are subject to changes in interest rates. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Rising interest rates generally reduce the demand for mortgage loans due to the higher cost of borrowing. A reduction in the volume of mortgage loans originated may affect the volume of our targeted assets available to us, which could adversely affect our ability to originate and acquire assets that satisfy our objectives. Rising interest rates may also cause our targeted assets that were issued prior to an interest rate increase to provide yields that are below prevailing market interest rates. If rising interest rates cause us to be unable to originate or acquire a sufficient volume of our targeted assets with a yield that is above our borrowing cost, our ability to satisfy our objectives and to generate income and make distributions may be materially and adversely affected. Conversely, if interest rates decrease, we will be adversely affected to the extent that real estate-related loans are prepaid, because we may not be able to make new loans at the previously higher interest rate.
The relationship between short-term and longer-term interest rates is often referred to as the “yield curve.” Ordinarily, short-term interest rates are lower than longer-term interest rates. If short-term interest rates rise disproportionately relative to longer-term interest rates (a flattening of the yield curve), our borrowing costs may increase more rapidly than the interest income earned on our assets. Because our loans and CMBS assets generally will bear, on average, interest based on longer-term rates than our borrowings, a flattening of the yield curve would tend to decrease our net income and the fair market value of our net assets. Additionally, to the extent cash flows from loans and CMBS assets that return scheduled and unscheduled principal are reinvested, the spread between the yields on the new loans and CMBS assets and available borrowing rates may decline, which would likely decrease our net income. It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve inversion), in which event our borrowing costs may exceed our interest income and we could incur operating losses.
The values of our loans and CMBS assets may decline without any general increase in interest rates for a number of reasons, such as increases or expected increases in defaults, or increases or expected increases in voluntary prepayments for those loans and CMBS assets that are subject to prepayment risk or widening of credit spreads.
In addition, in a period of rising interest rates, our operating results will depend in large part on the difference between the income from our assets and our financing costs. We anticipate that, in most cases, the income from such assets will respond more slowly to interest rate fluctuations than the cost of our borrowings. Consequently, changes in interest rates, particularly short-term interest rates, may significantly influence our net income. Increases in these rates will tend to decrease our net income, which may have a material adverse effect on our results of operations, financial condition and cash flows.
The expected discontinuance of regarding the London interbank offered rate (“LIBOR”(“LIBOR”) and transition to alternative reference rates may adversely impact our borrowings and assets.
In July 2017, the U.K.The United Kingdom Financial Conduct Authority (“FCA”), which regulates LIBOR, has announced that the LIBORmostcommonly used tenors (overnight and one, three, six and 12 months) will cease to be published or will no longer be representative after June 30, 2023. The FCA’s announcement coincided with the March 5, 2021 announcement of LIBOR’s administrator, the ICE Benchmark Administration Limited (“IBA”) announced, indicating that, it would cease to compel banks to participate in setting LIBOR as a benchmark byresult of not having access to input data necessary to calculate LIBOR tenors relevant to us on a representative basis after June 30, 2023, IBA would have to cease publication of such LIBOR tenors immediately after the end of 2021, which has subsequently been delayed tolast publication on June 30, 2023. Such announcement indicatesThese announcements mean that market participants cannot rely on LIBOR being published afterany of our LIBOR-based borrowings and assets that mature beyond June 30, 2023.2023 need to be converted to alternative interest rates. Many of Terra Property Trust’s counterparties are now subject to regulatory guidance not to enter new LIBOR contracts except in limited circumstances.
The Alternative Reference Rates Committee (“ARRC”), a group of private-market participantparticipants convened by the U.S. Federal Reserve Board and the New York Federal Reserve, has recommended the Secured Overnight Financing Rate (“SOFR”), a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, as a more robust reference rate alternative to U.S. dollar LIBOR. The use of SOFR as a substitute for U.S. dollar LIBOR is voluntary and may not be suitable for all market participants. To approximate economic equivalence to LIBOR, SOFR can be compounded over a relevant term and a spread adjustment may be added. There are significant differences between LIBOR and SOFR, such as LIBOR being an unsecured lending rate while SOFR is a secured lending rate, and SOFR is an overnight rate while LIBOR reflects term rates at different maturities. If our LIBOR-based borrowings are converted to SOFR, the differences between LIBOR and SOFR, plus the recommended spread adjustment, could result in interest costs that are higher than if LIBOR remained available, which could have a material adverse effect on our results. Although SOFR is the ARRC's recommended replacement rate, it is also possible that lenders may instead choose alternative replacement rates that may differ from LIBOR in ways similar to SOFR or in other ways that would result in higher borrowing costs for us. It is not yet possible to predict the magnitude of LIBOR’s end on Terra Property Trust’s borrowing costs given the uncertainty about which rates will replace LIBOR and the timing of actual replacement. Market practices related to SOFR calculation conventions continue to develop and may vary, and inconsistent calculation conventions may develop among financial products.
Certain of Terra Property Trust’s indebtedness, including the term loan, the repurchase agreement, the mortgage loan payable and its credit facility, as well as certain of its floating rate loan assets, are, and other future financings may be, linked to LIBOR. We are not able to predict when LIBOR will cease to be available; however, we expect that a significant portion of these financing arrangements and loan assets will not have matured, been prepaid or otherwise terminated prior to the time at which the IBA ceases to publish LIBOR. It is not possible to predict all consequences of the IBA's proposals to cease
publishing LIBOR, any related regulatory actions and the expected discontinuance of the use of LIBOR as a reference rate for financial contracts. Some of our debt and loan assets may not include robust fallback language that would facilitate replacing LIBOR with a clearly defined alternative reference rate after LIBOR’s discontinuation, and we may need to amend these before the IBA ceases to publish LIBOR. If such debt or loan assets mature after LIBOR ceases to be published, our counterparties may disagree with us about how to calculate or replace LIBOR.Even when robust fallback language is included, there can be no assurance that the replacement rate plus any spread adjustment will be economically equivalent to LIBOR, which could result in a lower interest rate being paid to us on such assets. Modifications to any debt, loan assets, interest rate hedging transactions or other contracts to replace LIBOR with an alternative reference rate could result in adverse tax consequences. In addition, any resulting differences in interest rate standards among Terra Property Trust’s assets and its financing arrangements may result in interest rate mismatches between its assets and the borrowings used to fund such assets and accordingly impact the Company’s investment.
We and other market participants have less experience understanding and modeling SOFR-based assets and liabilities than LIBOR-based assets and liabilities, increasing the difficulty of investing, hedging, and risk management. Because the impact of LIBOR cessation is dependent on unknown future facts, the language of individual contracts, and the outcome of potential future legislation or litigation, it is not currently practical for our valuation models to account for the cessation of LIBOR.
The process of transition involves operational risks. References to LIBOR may be embedded in computer code or models, and we may not identify and correct all of those references. Because compounded SOFR is backward-looking rather than forward-looking, parties making or receiving LIBOR-based payments may be unable to calculate payment amounts until the day that payment is due. Proposed mechanisms to solve the operational timing issue may result in a payment amount that does not fully reflect interest rates during the calculation period.
Potential changes, or uncertainty related to such potential changes, may also adversely affect the market for LIBOR-based loans, including our portfolio of LIBOR-indexed, floating-rate loans, or the cost of our borrowings. In addition, changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based loans, including the value of the LIBOR-indexed, floating-rate loans in Terra Property Trust’s portfolio, or the cost of its borrowings. There is no guarantee that a transition from LIBOR to an alternative will not result in financial market disruptions, significant increases in benchmark rates, or borrowing costs to borrowers, any of which could have a material adverse effect on our results of operations, financial condition, and cash flows.
New entrants in the market for commercial loan originations and acquisitions could adversely impact our ability to originate and acquire real estate-related loans at attractive risk-adjusted returns.
New entrants in the market for commercial loan originations and acquisitions could adversely impact our ability to execute our investment strategy on terms favorable to us. In originating and acquiring our targeted assets, we may compete with other REITs, numerous regional and community banks, specialty finance companies, savings and loan associations, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, other lenders and other entities, and we expect that others may be organized in the future. The effect of the existence of additional REITs and other institutions may be increased competition for the available supply of assets suitable for investment by us, which may cause the price for such assets to rise, which may limit our ability to generate desired returns. Additionally, origination of our target loans by our competitors may increase the availability of such loans which may result in a reduction of interest rates on these loans. Some competitors may have a lower cost of funds and access to funding sources that may not be available to us. Many of our competitors are not subject to the operating constraints associated with REIT tax compliance or maintenance of an exclusion or exemption from the 1940 Act. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of real estate-related loans and establish more relationships than us.
We cannot assure you that the competitive pressures we may face will not have a material adverse effect on our results of operations, financial condition and cash flows. Also, as a result of this competition, desirable investments in our targeted assets may be limited in the future and we may not be able to take advantage of attractive investment opportunities from time to time, as we can provide no assurance that we will be able to identify and make investments that are consistent with our investment objectives.
Our loans are dependent on the ability of the commercial property owner to generate net income from operating the property, which may result in the inability of such property owner to repay a loan, as well as the risk of foreclosure.
Our loans may be secured by office, multifamily, student housing, hotel, commercial or warehouse properties, and are subject to risks of delinquency, foreclosure and of loss that may be greater than similar risks associated with loans made on the security of single-family residential property. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. Net operating income of an income-producing property can be adversely affected by, among other things:
•tenant mix;
•success of tenant businesses;
•property management decisions;
•property location, condition and design;
•competition from comparable types of properties;
•changes in national, regional or local economic conditions and/or specific industry segments;
•declines in regional or local real estate values;
•declines in regional or local rental or occupancy rates;
•increases in interest rates, real estate tax rates and other operating expenses;
•costs of remediation and liabilities associated with environmental conditions;
•the potential for uninsured or underinsured property losses;
•changes in governmental laws and regulations, including fiscal policies, zoning ordinances and environmental legislation and the related costs of compliance;
•pandemics or other calamities that may affect tenants' ability to pay their rent; and
•acts of God, terrorism, social and political unrest, armed conflict, geopolitical events and civil disturbances.
In the event of any default under a mortgage loan held directly by us, we bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on our results of operations, financial condition and cash flows. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law.
Foreclosure can be an expensive and lengthy process, and foreclosing on certain properties where we directly hold the mortgage loan and the borrower’s default under the mortgage loan is continuing could result in actions that could be costly to our operations, in addition to having a substantial negative effect on our anticipated return on the foreclosed mortgage loan. If property securing or underlying loans become real estate owned as a result of foreclosure, we bear the risk of not being able to sell the property and recovering our investment and of being exposed to the risks attendant to the ownership of real property.
Our loan portfolio may at times be concentrated in certain property types or secured by properties concentrated in a limited number of geographic areas, which increases our exposure to economic downturn with respect to those property types or geographic locations.
We are not required to observe specific diversification criteria. Therefore, our portfolio of assets may, at times, be concentrated in certain property types that are subject to higher risk of foreclosure, or secured by properties concentrated in a limited number of geographic locations.
Terra Property Trust’s loans are concentrated in California, New York, Georgia, North CarolinaTexas and UtahNew Jersey representing approximately 46.4%24.0%, 15.7%14.5%, 13.2%11.4%, 11.0%10.7% and 6.9%9.8%, respectively, of its net loan portfolio as of December 31, 2021, respectively.2022. Additionally, Terra Property Trust owns a multi-tenant office building in California. If economic conditions in these or in any other state in which we have a significant concentration of borrowers were to deteriorate, such adverse conditions could have a material and adverse effect on our business by reducing demand for new financings, limiting the ability of customers to repay existing loans and impairing the value of our real estate collateral and real estate owned properties.
Further, Terra Property Trust’s loans are concentrated in office, multifamilyindustrial and hotelmultifamily property types representing approximately 41.1%27.1%, 18.1%23.3% and 14.1%16.5%, respectively, of its net loan portfolio as of December 31, 2021, respectively.2022. As a result, a downturn in any particular industry in which Terra Property Trust are heavily invested may significantly impact the aggregate returns it realizes. If an industry in which Terra Property Trust is heavily invested suffers from adverse business or economic conditions,
(as a result of the COVID-19 pandemic or otherwise), a material portion of its investment could be affected adversely, which, in turn, could adversely affect our results of operations, financial condition and cash flows.
In addition, from time to time, there have been proposals to base property taxes on commercial properties on their current market value, without any limit based on purchase price. In California, pursuant to an existing state law commonly referred to as Proposition 13, properties are reassessed to market value only at the time of change in ownership or completion of
construction, and thereafter, annual property reassessments are limited to 2% of previously assessed values. As a result, Proposition 13 generally results in significant below-market assessed values over time. From time to time, including recently, lawmakers and political coalitions have initiated efforts to repeal or amend Proposition 13 to eliminate its application to commercial and industrial properties. If successful, a repeal of Proposition 13 could substantially increase the assessed values and property taxes for our customers in California which in turn could limit their ability to borrow funds.
To the extent that our portfolio is concentrated in any region, or by type of property, downturns relating generally to such region, type of borrower or security may result in defaults on a number of our assets within a short time period, which may reduce our net income, which in turn may have a material adverse effect on our results of operations, financial condition and cash flows.
We expect that a significant portion of the mortgage loans invested in by us may be development mortgage loans on infill land, which are speculative in nature.
We expect that a significant portion of Terra Property Trust’s assets may be mortgage loans for the development of real estate, which will initially be secured by infill land. These types of loans are speculative, because:
•until improvement, the property may not generate separate income for the borrower to make loan payments;
•the completion of planned development may require additional development financing by the borrower, which may not be available; and
•there is no assurance that we will be able to sell unimproved infill land promptly if we are forced to foreclose upon it.
If in fact the land is not developed, the borrower may not be able to refinance the loan and, therefore, may not be able to make the balloon payment when due. If a borrower defaults and we foreclose on the collateral, we may not be able to sell the collateral for the amount owed to us by the borrower. In calculating our loan-to-value ratios for the purpose of determining maximum borrowing capacity, we use the estimated value of the property at the time of completion of the project, which increases the risk that, if we foreclose on the collateral before it is fully developed, we may not be able to sell the collateral for the amount owed to us by the borrower, which in turn may have an adverse effect on our results of operations, financial condition and cash flows.
Loans to small businesses involve a high degree of business and financial risk, which can result in substantial losses that would adversely affect our business, results of operation and financial condition.
Our operations and activities include loans to small, privately owned businesses to purchase real estate used in their operations or by investors seeking to acquire small office, multifamily, student housing, hotel, warehouse properties. Additionally, such loans are also often accompanied by personal guarantees. Often, there is little or no publicly available information about these businesses. Accordingly, we must rely on our own due diligence to obtain information in connection with our investment decisions. Our borrowers may not meet net income, cash flow and other coverage tests typically imposed by banks. A borrower’s ability to repay its loan may be adversely impacted by numerous factors, including a downturn in its industry or other negative local or more general economic conditions. Deterioration in a borrower’s financial condition and prospects may be accompanied by deterioration in the collateral for the loan. In addition, small businesses typically depend on the management talents and efforts of one person or a small group of people for their success. The loss of services of one or more of these persons could have a material and adverse impact on the operations of the small business. Small companies are typically more vulnerable to customer preferences, market conditions and economic downturns and often need additional capital to expand or compete. These factors may have an impact on loans involving such businesses. Loans to small businesses, therefore, involve a high degree of business and financial risk, which can result in substantial losses.
Terra Property Trust’s investments may include subordinated tranches of CMBS, which are subordinate in right of payment to more senior securities.
Terra Property Trust’s investments may include subordinated tranches of CMBS, which are subordinated classes of securities in a structure of securities collateralized by a pool of assets consisting primarily of commercial loans and, accordingly, are the first or among the first to bear the loss upon a restructuring or liquidation of the underlying collateral and the last to receive payment of interest and principal. Additionally, estimated fair values of these subordinated interests tend to be more sensitive to changes in economic conditions than more senior securities. As a result, such subordinated interests generally are not actively traded and may not provide holders thereof with liquid investments.
Any credit ratings assigned to our loans and CMBS assets will be subject to ongoing evaluations and revisions and we cannot assure you that those ratings will not be downgraded.
Some of our loan and CMBS assets may be rated by Moody’s Investors Service, Standard & Poor’s or Fitch Ratings. Any credit ratings on our loans and CMBS assets are subject to ongoing evaluation by credit rating agencies, and we cannot assure you that any such ratings will not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. Rating agencies may assign a lower than expected rating or reduce or withdraw, or indicate that they may reduce or withdraw, their ratings of our loans and CMBS assets in the future. In addition, we may originate or acquire assets with no rating or with below investment grade ratings. If the rating agencies take adverse action with respect to the rating of our loans and CMBS assets or if our unrated assets are illiquid, the value of these loans and CMBS assets could significantly decline, which would adversely affect the value of our investment portfolio and could result in losses upon disposition or the failure of borrowers to satisfy their debt service obligations to us.
The mezzanine loans, preferred equity and other subordinated loans in which we invest involve greater risks of loss than senior loans secured by income-producing commercial properties.
We invest in mezzanine loans that take the form of subordinated loans secured by second mortgages on the underlying real property or loans secured by a pledge of the ownership interests of the entity owning the real property. These types of investments involve a higher degree of risk than long-term senior mortgage lending secured by income-producing real property because the investment may become unsecured as a result of foreclosure by the senior lender. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of such entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to such loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt is fully satisfied. As a result, we may not recover some or all of our investment. In addition, mezzanine loans may have higher loan-to-value ratios than conventional mortgage loans, resulting in less equity in the real property and increasing the risk of loss of principal.
Our investments in B-notes are generally subject to losses. The B-notes in which we may invest may be subject to additional risks relating to the privately negotiated structure and terms of the transaction, which may result in losses to us.
As part of our whole loan origination platform, we may retain from whole loans we originate or acquire, subordinate interests referred to as B-notes. B-notes are commercial real estate loans secured by a first mortgage on a single large commercial property or group of related properties and subordinated to a senior interest, referred to as an A-note. As a result, if a borrower defaults, there may not be sufficient funds remaining for B-note owners after payment to the A-note owners. In addition, our rights to control the process following a borrower default may be subject to the rights of A-note owners whose interests may not be aligned with ours. B-notes reflect similar credit risks to comparably rated CMBS. However, since each transaction is privately negotiated, B-notes can vary in their structural characteristics and risks. For example, the rights of holders of B-notes to control the process following a borrower default may be limited in certain investments. We cannot predict the terms of each B-note investment. Significant losses related to our B-notes would result in operating losses for us, which in turn may have a material adverse effect on our results of operations, financial condition and cash flows.
Any disruption in the availability and/or functionality of our technology infrastructure and systems and any failure or our security measures related to these systems could adversely impact our business.
Our ability to originate and acquire real estate-related loans and manage any related interest rate risks and credit risks is critical to our success and is highly dependent upon the efficient and uninterrupted operation of our computer and communications hardware and software systems. For example, we rely on our proprietary database to track and maintain all loan performance and servicing activity data for loans in our portfolio. This data is used to manage the portfolio, track loan performance, and develop and execute asset disposition strategies. In addition, this data is used to evaluate and price new
investment opportunities. If we lost access to our loan servicing activity data or other important business information due to a network or utility failure, our ability to effectively manage our business could be impaired.
Some of these systems are located at our facility and some are maintained by third-party vendors. Any significant interruption in the availability and functionality of these systems could harm our business. In the event of a systems failure or interruption by our third-party vendors, we will have limited ability to affect the timing and success of systems restoration. If such systems failures or interruptions continue for a prolonged period of time, there could be a material and adverse impact on our results of operations, financial condition and cash flows.
In addition, some of our security measures may not effectively prohibit others from obtaining improper access to our information. If a person is able to circumvent our security measures, he or she could destroy or misappropriate valuable information or disrupt our operations. Any security breach could expose us to risks of data loss, litigation and liability and could seriously disrupt our operations and harm our reputation.
Cybersecurity risk and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information and/or damage to our business relationships, all of which could have an adverse effect on our results of operations, financial condition and cash flows.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance cost, litigation and damage to our relationships. As our reliance on technology has increased, so have the risks posed to our information systems both internal and those provided by our Manager, the REIT Manager, Terra Capital Partners, its affiliates and third-party service providers. With respect to cybersecurity risk oversight, Terra Property Trust’s board of directorsthe TPT Board and its audit committee receive periodic reports and updates from management on the primary cybersecurity risks facing us and the Manager and its affiliates and the measures the Manager and its affiliates are taking to mitigate such risks. In addition to such periodic reports, Terra Property Trust’s board of directorsthe TPT Board and its audit committee receive updates from management as to changes to us and the Manager and its affiliates’ cybersecurity risk profile or certain newly identified risks. However, these measures, as well as our increased awareness of the nature and extent of a risk of a cyber incident, do not guarantee that our financial results, operations or confidential information will not be negatively impacted by such an incident.
Terra Property Trust’s acquisitions and the integration of acquired businesses subject it to various risks and may not result in all of the cost savings and benefits anticipated, which could adversely affect our financial condition or results of operations.
Terra Property Trust has in the past and may in the future seek to grow its business by acquiring other businesses that it believes will complement or augment its existing businesses. For example, Terra Property Trust completed the BDC Merger in October 2022. Neither Terra Property Trust nor we can predict with certainty the benefits of such acquisitions, which often constitute multi-year endeavors. There is risk that Terra Property Trust’s acquisitions may not have the anticipated positive results, including results relating to: correctly assessing the asset quality of the assets being acquired; the total cost and time required to complete the integration successfully; being able to profitably deploy funds acquired in an acquisition; or the overall performance of the combined entity.
If Terra Property Trust is unable to successfully integrate its acquisitions into its business, it may never realize their expected benefits. With each acquisition, Terra Property Trust may discover unexpected costs, liabilities for which it is not indemnified, delays, lower than expected cost savings or synergies, or incurrence of other significant charges such as impairment of goodwill or other intangible assets and asset devaluation. Terra Property Trust also may be unable to successfully integrate the diverse company cultures, retain key personnel, apply its expertise to new competencies, or react to adverse changes in industry conditions.
Acquisitions may also result in business disruptions that could cause customers to move their business to Terra Property Trust’s competitors. It is possible that the integration process related to acquisitions could result in the disruption of Terra Property Trust’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that could adversely affect its ability to maintain relationships with borrowers, clients, customers, and employees. The loss of key employees in connection with an acquisition could adversely affect Terra Property Trust’s ability to successfully conduct its business. Additionally, the operation of the acquired businesses may adversely affect Terra Property Trust’s existing profitability, and it may not be able to achieve results in the future similar to those achieved in the past. Acquisition and integration efforts could divert the attention and resources of Terra Property Trust’s management, which could ultimately have an adverse effect on our results of operations, financial condition and cash flows.
Risks Related to Regulation
The increasing number of proposed U.S. federal, state and local laws may affect certain mortgage-related assets in which we invest and could materially increase our cost of doing business.
Various bankruptcy legislation has been proposed that, among other provisions, could allow judges to modify the terms of residential mortgages in bankruptcy proceedings, could hinder the ability of the servicer to foreclose promptly on defaulted mortgage loans or permit limited assignee liability for certain violations in the mortgage loan origination process, any or all of which could adversely affect our business or result in us being held responsible for violations in the mortgage loan origination process even where we were not the originator of the loan. We do not know what impact this type of legislation, which has been primarily, if not entirely, focused on residential mortgage originations, would have on the commercial loan market. We are unable to predict whether U.S. federal, state or local authorities, or other pertinent bodies, will enact legislation, laws, rules, regulations, handbooks, guidelines or similar provisions that will affect our business or require changes in our practices in the future, and any such changes could have a material adverse effect on our results of operations, financial condition and cash flows.
Failure to obtain or maintain required approvals and/or state licenses necessary to operate our mortgage-related activities may adversely impact our investment strategy.
We may be required to obtain and maintain various approvals and/or licenses from federal or state governmental authorities, government sponsored entities or similar bodies in connection with some or all of our activities. There is no assurance that we can obtain and maintain any or all of the approvals and licenses that we desire or that we will avoid experiencing significant delays in seeking such approvals and licenses. Furthermore, we may be subject to various disclosure and other requirements to obtain and maintain these approvals and licenses, and there is no assurance that we will satisfy those requirements. Our failure to obtain or maintain licenses will restrict our options and ability to engage in desired activities, and could subject us to fines, suspensions, terminations and various other adverse actions if it is determined that we have engaged
without the requisite approvals or licenses in activities that required an approval or license, which could have a material adverse effect on our results of operation,operations, financial condition and cash flows.
The impact of financial reform legislation and legislation promulgated thereunder on us is uncertain.
The Dodd-Frank Wall Street ReformU.S. Federal government agencies, including the Federal Reserve, the Treasury Department and Consumer Protection Act (the “Dodd-Frank Act”) enacted in 2010 instituted a wide range of reforms that willthe SEC, as well as other governmental and regulatory bodies, have an impact on all financial institutions. Many of the requirements called fortaken, are taking or may in the Dodd-Frank Act will be implemented over time, mostfuture take, various actions to address financial crises or other areas of which will be subject to implementingnational regulatory concern. Such actions could materially and adversely impact our business and investments, and dramatically increase the costs of complying with any additional laws and regulations.The elimination or reduction in scope of various existing laws and regulations over the coursecould similarly materially and adversely impact our business and investments, results of several years. Many of these regulations have yet to be promulgated or are only recently promulgated. In February 2017, former President Trump signed an executive order for a broad review of federal regulation ofoperations and financial condition. Any far-ranging government intervention in the U.S. economic and financial system by the Secretary of the Treasury, in consultation with the heads of the member agencies of the Financial Stability Oversight Council, a panel comprising top U.S. financial regulators. In May 2018, the Congress passed,systems may carry unintended consequences and former President Trump signed, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “EGRRCPA”), which among other things, modified certain provisions of the Dodd-Frank Act relatedcause market distortions. We are unable to mortgage lending, consumer protection, regulatory relief for large banks, regulatory relief for community banks and regulatory relief in securities markets. The EGRRCPA will relax or eliminate so-called “enhanced regulation” of banks falling into certain ranges of asset value and will impact the application of the Volcker Rule and the Basel III guidelines as to certain banks. Specifically, the EGRRCPA relaxed (or eliminated) certain risk-based capital and leverage requirements for community banks with less than $10 billion in assets that maintain a certain “community bank leverage ratio” that bank regulators are directed to develop, but the impact and effect of the foregoing on market liquidity is uncertain. It is possible that Democratic majorities in the House and Senate, with the support of the Biden Administration, will roll back some of the changes made by EGRRCPA to the Dodd-Frank Act, although it is not possiblepredict at this time to predict the extent and nature or extent of any amendments.
such unintended consequences and market distortions, if any. The Biden Administration, along with the Democratic Congress, is likely to focus in the short-term on additional stimulus measures to address the economic impact of the ongoing COVID-19 pandemic, rather than comprehensive financial services and banking reform. However, in the long-term the Biden Administration and Congress are likely to take a more active approach to banking and financial regulation than the prior Trump Administration, particularly to promote policy goals involving climate change, racial equity, environmental, social, and corporate governance (“ESG”) matters, consumer financial protection and infrastructure.
In addition, the substance of regulatory supervision may be influenced through the appointment of individuals to the Federal Reserve Board and other financial regulatory bodies. Measures focused on deregulation of the U.S. financial services industry may, among other things, decrease the restrictions on banks and other financial institutions and allow them to compete with us for investment opportunities that were previously not available to them. Measures focused on deregulation of the U.S. financial services industry may have the effect of increasing competition for our business. Increased competition from banks and other financial institutions in the credit markets could have the effect of reducing credit spreads, which may adversely affect our revenues.
Given the uncertainty associated with financial reform legislation, including the implementation of the Dodd-Frank Act and any legislative and/or regulatory actions under a Biden Administration and Democratic Congress, the full impact such requirements will have on our business, results of operations or financial condition is unclear. The changes resulting from the Dodd-Frank Act, the EGRRCPA, and other legislative actions may require us to invest significant management attention and resourcesinability to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements or address resulting changes in the mortgage loan market. While we cannot predict what effect any changes in the laws or regulations or their interpretations would have on us, these changessuch potential impacts could be materially adverse to our business. In addition, failure to comply with any such laws, regulations or principles, or changes thereto, or to adapt to any changes in the marketplace, may have a material adverse effect on our results of operations, financial condition and cash flows.
Accounting rules for certain of our transactions are highly complex and involve significant judgment and assumptions, and changes in such rules, accounting interpretations or our assumptions could adversely impact our ability to timely and accurately prepare our consolidated financial statements.
We are subject to Financial Accounting Standards Board (“FASB”) interpretations that can result in significant accounting changes that could have a material and adverse impact on our results of operations and financial condition. Accounting rules for financial instruments, including the origination, acquisition and sales or securitization of mortgage loans, derivatives, investment consolidations and other aspects of our anticipated operations are highly complex and involve significant judgment and assumptions. For example, our estimates and judgments are based on a number of factors, including projected cash flows from the collateral securing our loans, the likelihood of repayment in full at the maturity of a loan, potential for a loan
refinancing opportunity in the future and expected market discount rates for varying property types. These complexities could lead to a delay in the preparation of financial information and the delivery of this information to our members.
Changes in accounting rules, interpretations or our assumptions could also undermine our ability to prepare timely and accurate financial statements, which could result in a lack of investor confidence in our financial information.
The Current Expected Credit Loss (“CECL”) accounting standard adopted by Terra Property Trust could result in a significant change in how it recognizes credit losses and its financial condition, which may in turn have a material adverse effect on our results of operations.
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the CECL model. Terra Property Trust adopted this ASU and related amendments on January 1, 2023. Under the CECL model, Terra Property Trust is required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet of Terra Property Trust and periodically thereafter. This differs significantly from the “incurred loss” model required under current United States generally accepted accounting principles (“U.S. GAAP”), which delays recognition until it is probable a loss has been incurred. The adoption of ASU 2016-13 resulted in an incremental reserve of Terra Property Trust of approximately $4.6 million, which included reserve on future loan funding commitments. Accordingly, Terra Property Trust’s adoption of the CECL model may materially affect how it determines its allowance for credit losses and require Terra Property Trust to increase its allowance. If Terra Property Trust is required to materially increase its level of allowance for credit losses for any reason, such increase could adversely affect its business, financial condition and results of operations, which may in turn have a material adverse effect on our results of operations.
We are an “emerging growth company” and a “smaller reporting company” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies or smaller reporting companies will make an investment in our units less attractive to investors. In particular, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act.
We are an “emerging growth company” as defined in the JOBS Act. We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (ii) the date on which we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, (iii) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period, and (iv) the end of the year in which the five yearfive-year anniversary of an initial public offering of our units occurs. We may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.
Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, and generally requires in the same report a report by our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. Under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until we are no longer an “emerging growth company.”
In addition, we are also a smaller reporting company, as defined in Rule 12b-2 under the Exchange Act. In the event that we are still considered a smaller reporting company at such time as we cease being an emerging growth company, the disclosure we will be required to provide in our SEC filings will increase, but will still be less than it would be if we were not considered either an emerging growth company or a smaller reporting company.
Rule 12b-2 of the Exchange Act defines a “smaller reporting company” as an issuer that is not an investment company, an asset-backed issuer or a majority-owned subsidiary of a parent that is not a smaller reporting company and that:
(1)had a public float of less than $250 million; or
(2)had annual revenues of less than $100 million during the most recently completed fiscal year for which audited financial statements are available and either had no public float or a public float of less than $700 million.
Similar to emerging growth companies, smaller reporting companies are able to provide simplified executive compensation disclosures in their filings, and have certain other decreased disclosure obligations in their SEC filings, including, among other things, being required to provide only two years of audited financial statements in annual reports.
To the extent we take advantage of some or all of the reduced reporting requirements applicable to emerging growth companies or smaller reporting companies, an investment in our units may be less attractive to investors.
We may be exposed to environmental liabilities with respect to properties to which we take title, which may in turn decrease the value of the underlying properties.
In the course of our business, we may take title to real estate, and, as a result, we could be subject to environmental liabilities with respect to these properties. In such a circumstance, we may be held liable to a governmental entity or to third-parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or we may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity, and results of operations could be materially and adversely affected. In addition, an owner or operator of real property may become liable under various federal, state and local laws, for the costs of removal of certain hazardous substances released on its property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous
substances. The presence of hazardous substances may adversely affect an owner’s ability to sell real estate or borrow using real estate as collateral. To the extent that an owner of an underlying property becomes liable for removal costs, the ability of the owner to make debt payments may be reduced, which in turn may adversely affect the value of the relevant mortgage-related assets held by us.
Insurance on the properties underlying our loans may not adequately cover all losses and uninsured losses could materially and adversely affect us.
Generally, our borrowers will be responsible for the costs of insurance coverage for the properties we lease, including for casualty, liability, fire, floods, earthquakes, extended coverage and rental or business interruption loss. However, there are certain risks, such as losses from terrorism, that are not generally insured against, or that are not generally fully insured against, because it is not deemed economically feasible or prudent to do so. In addition, changes in the cost or availability of insurance could expose us to uninsured casualty losses. Under certain circumstances insurance proceeds may not be sufficient to restore our economic position with respect to an affected property, and we could be materially and adversely affected. Furthermore, we do not have any insurance designated to limit any losses that we may incur as a result of known or unknown environmental conditions which are not caused by an insured event.
In addition, certain of the properties underlying our loans may be located in areas that are more susceptible to, and could be significantly affected by, natural disasters that could cause significant damage to the properties. If we or our borrowers experience a loss, due to such natural disasters or other relevant factors, that is uninsured or that exceeds policy limits, we could incur significant costs, which could have a material adverse effect on our results of operations, financial condition and cash flows.
Maintenance of our 1940 Act exclusion imposes limits on our operations.
Neither we nor Terra Property Trust are registered as an investment company under the 1940 Act. If we or Terra Property Trust were obligated to register as an investment company, we or Terra Property Trust would have to comply with a variety of substantive requirements under the 1940 Act that impose, among other things:
•limitations on our capital structure and the use of leverage;
•restrictions on specified investments;
•prohibitions on transactions with affiliates; and
•compliance with reporting, record keeping, and other rules and regulations that would significantly change our and Terra Property Trust’s operations.
We and Terra Property Trusty conduct our operations, and intend to continue to conduct our operations, so that we are not required to register as an investment company under the 1940 Act. Section 3(a)(1)(A) of the 1940 Act defines an investment company as any issuer that is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities. Section 3(a)(1)(C) of the 1940 Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. government
securities and cash items) on an unconsolidated basis. Excluded from the term “investment securities,” among other things, are U.S. government securities and securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on the exemptionexclusion from the definition of investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the 1940 Act. Because we are organized as a holding company and conduct our business primarily through Terra Property Trust, the value of the “investment securities” held by us must be less than 40% of the value of our total assets on an unconsolidated basis (exclusive of U.S. government securities and cash items). In addition, we conduct our operations so that we will not be considered an investment company under Section 3(a)(1)(A) of the 1940 Act, as we are not engaged primarily nor do we hold ourselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, through Terra Property Trust, we are primarily engaged in the non-investment company businesses of Terra Property Trust.
Terra Property Trust and certain of its subsidiaries may at times rely primarily on the exclusion from the definition of an investment company under Section 3(c)(5)(C) of the 1940 Act, or any other exclusions available to Terra Property Trust and its subsidiaries (other than Section 3(c)(1) or Section 3(c)(7)). Section 3(c)(5)(C) of the 1940 Act is available for entities “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real
estate.” This exclusion generally requires that at least 55% of Terra Property Trust’s (and any of its subsidiaries relying on Section 3(c)(5)(C)) portfolio must be comprised of “qualifying real estate” assets and at least 80% of Terra Property Trust’s (and any of its subsidiaries’, in relying on Section 3(c)(5)(C)) portfolio must be comprised of “qualifying real estate” assets and “real estate-related” assets (and no more than 20% comprised of miscellaneous assets) as determined in accordance with the 1940 Act and the rules and regulations promulgated thereunder. For purposes of the exclusion provided by Section 3(c)(5)(C) of the 1940 Act, Terra Property Trust (and any of its subsidiaries relying on Section 3(c)(5)(C)) classifies its investments based in large measure on no-action letters issued by the SEC staff and other SEC interpretive guidance and, in the absence of SEC guidance, on our view of what constitutes a “qualifying real estate” asset and a “real estate-related” asset. These no-action positions were issued in accordance with factual situations that may be substantially different from the factual situations Terra Property Trust (and any of its subsidiaries relying on Section 3(c)(5)(C)) may face, and a number of these no-action positions were issued more than twenty years ago. Pursuant to this guidance, and depending on the characteristics of the specific investments, certain mortgage loans, participations in mortgage loans, mortgage-backed securities, mezzanine loans, joint venture investments, preferred equity and equity securities of other entities may not constitute qualifying real estate assets and therefore investments in these types of assets may be limited. No assurance can be given that the SEC or its staff will concur with our classification of the assets held by Terra Property Trust and any of its subsidiaries for purposes of the 3(c)(5)(C) exclusion or any other exclusion or exemption under the 1940 Act. Future revisions to the 1940 Act or further guidance from the SEC or its staff may cause us, Terra Property Trust, or any of its subsidiaries relying on Section 3(c)(5)(C) to lose our or their exclusion from registration, or force us, Terra Property Trust, or any of its subsidiaries to re-evaluate our or their portfolios and our or their investment strategy. Such changes may prevent us from operating our business successfully.
Further, in order to maintain an exclusion from registration under the 1940 Act, we may be unable to sell assets that we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional income or loss generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire assets that we would otherwise want to acquire and would be important to its strategy.
Although we monitor the portfolio of Terra Property Trust and its subsidiaries periodically and prior to each acquisition and disposition, Terra Property Trust or its subsidiaries may not be able to maintain an exclusion from registration as an investment company. If Terra Property Trust or its subsidiaries were required to register as an investment company, but failed to do so, Terra Property Trust or its subsidiaries failing to so qualify would be prohibited from engaging in their business, and legal proceedings could be instituted against Terra Property Trust or any of its subsidiaries failing to so qualify. In addition, the contracts of Terra Property Trust or any of its subsidiaries failing to so qualify may be unenforceable, and a court could appoint a receiver to take control of Terra Property Trust or any of its subsidiaries failing to so qualify and liquidate their business, all of which could have a material adverse effect on our results of operations, financial condition and cash flows.
Risks Related to Our Management and Our Relationship With Our Manager and its Affiliates
We rely entirely on our Manager or its affiliates and the directors, employees and officers of our Manager or its affiliates for our day-to-day operations, and the directors, officers and employees of our Manager or its affiliates will face competing demands to their allocation of time and investment opportunities.
We have no employees and do not intend to have employees in the future. We rely entirely on the management team and employees of our Manger and its affiliates for our day-to-day operations, and our Manager and its affiliates have significant discretion as to the implementation of our operating policies and strategies. Our success depends substantially on the efforts and abilities of the directors and officers of our Manager and its affiliates, including Messrs. Uppal, Pinkus and Cooperman and our
REIT Manager’s debt finance professionals. The loss of any of such individuals could have a material adverse effect on our results of operations, financial condition and cash flows.
Certain other companies managed by our Manager or its affiliates, which have investment objectives similar to ours, also rely on many of these same officers and professionals. Our Manager or its affiliates may face conflicts of interest if we enter into transactions with an affiliate. In these circumstances, the persons who serve as the management team of our Manager or its affiliates may have a fiduciary responsibility to both us and the affiliate. Transactions between us and such affiliates will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated parties, possibly causing us to enter into a transaction that is not in our best interest and that may negatively impact our performance. Further, many investment opportunities that are suitable for us may also be suitable for other affiliates advised by our Manager or its affiliates. When the officers of our Manager or its affiliates identify an investment opportunity that may be suitable for us as well as an affiliated entity, they, in their sole discretion, will first evaluate the investment objectives of each program to determine if the opportunity is suitable for each program. If the proposed investment is appropriate for more than one program, our Manager or its affiliates will then evaluate the portfolio of each program, in terms of diversity of geography, underlying property type, tenant concentration and borrower, to determine if the investment is most suitable for one program in order to create portfolio
diversification. If such analysis is not determinative, our Manager or its affiliates will allocate the investment to the program with uncommitted funds available for the longest period or, to the extent feasible, prorate the investment between the programs in accordance with uninvested funds. As a result, the officers of our Manager or its affiliates could direct attractive investment opportunities to other affiliated entities or investors. Such events could result in the fund acquiring investments that provide less attractive returns, which would reduce the level of distributions we may be able to pay you.
Our Manager and certain of its affiliates are presently, and plan in the future to continue to be, involved with activities that are unrelated to us. As a result of these activities, our Manager, its employees and certain of its affiliates will have conflicts of interest in allocating their time between us and the other activities in which they are or may become involved, including the management of Terra Property Trust, Terra Fund 6LLC and RESOF. The employees of our Manager or its affiliates will devote only as much of its or their time to our business as it and its employees, in their judgment, determine is reasonably required, which may be substantially less than their full time. Therefore, our Manager, its personnel and certain affiliates may experience conflicts of interest in allocating management time, services and functions among us and any other business ventures in which they or any of their key personnel, as applicable, are or may become involved. This could result in actions that are more favorable to other affiliated entities than to us. Should our Manager or its affiliates, or the members of our Manager’s or its affiliates’ management teams, devote insufficient time or resources to our business, our returns on our direct or indirect investments, and the value of our units, may decline.
We face certain conflicts of interest with respect to our operations and our relationship with our Manager and Terra Property Trust’s relationship with the REIT Manager.
We are subject to conflicts of interest arising out of our and Terra Property Trust’s respective relationships with our Manager, the REIT Manager and their affiliates. We may enter into additional transactions with our Manager, its affiliates, or entities managed by our Manager or its affiliates. In particular, we may invest in, or acquire, certain of our investments through joint ventures or co-investments with other affiliates or purchase assets from, sell assets to or arrange financing from or provide financing to other affiliates or engage in other transactions with entities managed by our Manager or its affiliates. Future joint venture investments could be adversely affected by our lack of sole decision-making authority, or reliance on our Manager’s and its affiliates’ financial condition and liquidity, and disputes between us and our Manager or its affiliates. Certain of those transactions will be subject to certain regulatory restrictions as a result of the 1940 Act or the conditions of an order granting exemptive relief to our affiliate, Terra Fund 6. There can be no assurance that any procedural protections will be sufficient to assure that these transactions will be made on terms that will be at least as favorable to us as those that would have been obtained in an arm’s-length transaction.
Our Manager and its affiliates may be subject to conflicts of interest in making investment decisions on assets on our behalf as opposed to other entities that have similar investment objectives. Our Manager and its affiliates may have different incentives in determining when to sell assets with respect to which it is entitled to fees and compensation and such determinations may not be in our best interest.
Our Manager and its affiliates serve as manager of certain other funds and investment vehicles, all of which have investment objectives that overlap with ours. In addition, future programs may be sponsored by our Manager and its affiliates may serve as the dealer manager for these future programs. As a result, our Manager and its affiliates may face conflicts of interest arising from potential competition with other programs for investors and investment opportunities. There may be periods during which one or more programs managed by our Manager or its affiliates will be raising capital and which might compete with us for investment capital. Such conflicts may not be resolved in our favor and our investors will not have the opportunity to evaluate the manner in which these conflicts of interest are resolved before or after making their investment.
The compensation that the REIT Manager receives was not determined on an arm’s-length basis and therefore may not be on the same terms as we could achieve from a third-party.
The compensation paid by Terra Property Trust to the REIT Manager or its affiliates for services they provide to Terra Property Trust were not determined on an arm’s-length basis. We cannot assure you that a third-party unaffiliated with us would not be able to provide such services to us at a lower price.
The base management fee the REIT Manager receives for managing Terra Property Trust may reduce its incentive to devote its time and effort to seeking attractive assets for our portfolio because the fee is payable regardless of our performance.
Terra Property Trusty pays the REIT Manager a base management fee regardless of the performance of our portfolio. The REIT Manager’s entitlement to non-performance-based compensation might reduce its incentive to devote its time and effort to seeking assets that provide attractive risk-adjusted returns for our portfolio. This in turn could hurt both our ability to make distributions and the value of our units.
We cannot predict the amounts of compensation to be paid to the REIT Manager and its affiliates.
Because the fees that Terra Property Trust will pay to the REIT Manager and its affiliates are based in part on the level of our business activity, it is not possible to predict the amounts of compensation that Terra Property Trust will be required to pay these entities. In addition, becauseTerra Property Trust has entered into a cost sharing and reimbursement agreement with Terra LLC, effective October 1, 2022, pursuant to which Terra LLC will be responsible for its allocable share of Terra Property Trust’s expenses, including fees paid by Terra Property Trust to the REIT Manager. Because key employees of the REIT Manager and its affiliates are given broad discretion to determine when to consummate a transaction, we will rely on these key persons to dictate the level of our business activity. Fees paid to the REIT Manager and its affiliates reduce funds available for payment of distributions to us and principal and interest payments on Terra Property Trust’s outstanding indebtedness. Because we cannot predict the amount of fees due to these parties, we cannot predict how precisely such fees will impact such payments.
If our Manager or its affiliates causes us to enter into a transaction with an affiliate, our Manager or its affiliates may face conflicts of interest that would not exist if such transaction had been negotiated at arm’s-length with an independent party.
Our Manager and its affiliates may face conflicts of interests if we enter into transactions with an affiliate. In these circumstances, the persons who serve as the management team of our Manager or its affiliates may have a fiduciary responsibility to both us and the affiliate. Transactions between us and our Manager’s affiliates, including entities managed by our Manager or its affiliates, will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated parties. This conflict of interest may cause our Manager or its affiliates to sacrifice our best interests in favor of its affiliate or the entity it or its affiliates manage, thereby causing us to enter into a transaction that is not in our best interest and that may negatively impact our results of operations, financial condition and cash flows.
Our Manager and its affiliates have limited prior experience operating a REIT and therefore may have difficulty in successfully and profitably operating our business or complying with regulatory requirements, including REIT provisions of the Internal Revenue Code, which may hinder their ability to achieve our objectives or result in loss of Terra Property Trust’s qualification as a REIT.
Prior to the completion of the REIT formation transactions, our Manager and its affiliates had no experience operating a REIT or complying with regulatory requirements, including the REIT provisions of the Internal Revenue Code. The REIT rules and regulations are highly technical and complex, and the failure to comply with the income, asset, and other limitations imposed by these rules and regulations could prevent us from qualifying as a REIT or could force us to pay unexpected taxes and penalties. Our Manager and its affiliates have limited experience operating a business in compliance with the numerous technical restrictions and limitations set forth in the Internal Revenue Code or the 1940 Act applicable to REITs. We cannot assure you that our Manager, its affiliates or our management team will perform on our behalf as they have in their previous endeavors. The inexperience of our Manager and its affiliates described above may hinder its ability to achieve our objectives or result in loss of Terra Property Trust’s qualification as a REIT, or payment of taxes and penalties. As a result, we cannot assure you that we have been able to or will continue to be able to successfully operate as a REIT, execute our business strategies or comply with regulatory requirements applicable to REITs.
Risks Related to Financing and Hedging
Terra Property Trust’s board of directorsThe TPT Board may change Terra Property Trust’s leverage policy, and/or investment strategy and guidelines, asset allocation and financing strategy, without the consent of its common stockholders.
We currently have outstanding indebtedness and expect to deploy moderate amounts of additional leverage as part of our operating strategy. Our governing documents contain no limit on the amount of debt we may incur, and, subject to compliance with financial covenants under Terra Property Trust’s borrowings, including under its term loan, the unsecured notes, the repurchase agreement and revolving credit facility, we may significantly increase the amount of leverage we utilize at any time without approval of our unitholders or Terra Property Trust’s stockholders. Depending on market conditions, additional borrowings may include credit facilities, senior notes, repurchase agreements, additional first mortgage loans and securitizations. In addition, we may divide the loans we originate into senior and junior tranches and dispose of the more senior tranches as an additional means of providing financing to our business. To the extent that we use leverage to finance our assets,
we would expect to have a larger portfolio of loan assets, but our financing costs relating to our borrowings will reduce cash available for distributions to our unitholders. We may not be able to meet our financing obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to liquidation or sale to satisfy such obligations.
OurThe REIT Manager is authorized to follow broad investment guidelines that have been approved by Terra Property Trust’s board of directors.TPT Board. Those investment guidelines, as well as our target assets, investment strategy, financing strategy and hedging policies with respect to investments, originations, acquisitions, growth, operations, indebtedness, capitalization and distributions, may be changed at any time without notice to, or the consent of, our unitholders or Terra Property Trust’s stockholders. This could result in a loan
portfolio with a different risk profile. A change in our investment strategy may increase our exposure to interest rate risk, default risk and real estate market fluctuations. Furthermore, a change in our asset allocation could result in our making investments in asset categories different from those described herein. These changes could have a material adverse effect on our results of operations, financial condition and cash flows.
WeTerra Property Trust may pursue and not be able to successfully complete securitization transactions, which could limit potential future sources of financing and could inhibit the growth of our business.
WeTerra Property Trust may use additional credit facilities, senior notes, term loans, repurchase agreements, first mortgage loans or other borrowings to finance the origination and/or structuring of real estate-related loans until a sufficient quantity of eligible assets hashave been accumulated, at which time weit may decide to refinance these short-term facilities or repurchase agreements through the securitization market which could include the creation of CMBS, collateralized debt obligations (“CDO”s), or the private placement of loan participations or other long-term financing. If we employTerra Property Trust employs this strategy, we areit is subject to the risk that weit would not be able to obtain, during the period that ourits short-term financing arrangements are available, a sufficient amount of eligible assets to maximize the efficiency of a CMBS, CDO or private placement issuance. We areTerra Property Trust is also subject to the risk that we areit is not able to obtain short-term financing arrangements or areis not able to renew any short-term financing arrangements after they expire should weit find it necessary to extend such short-term financing arrangements to allow more time to obtain the necessary eligible assets for a long-term financing.
The inability to consummate securitizations of ourits portfolio to finance ourits real estate-related loans on a long-term basis could require usTerra Property Trust to seek other forms of potentially less attractive financing or to liquidate assets at an inopportune time or price, which could have a material and adverse effect on ourits results of operations, financial condition and cash flows.
We may be required to repurchase loans or indemnify investors if we breach representations and warranties, which could harm our earnings.
We may, on occasion, consistent with Terra Property Trust’s qualification as a REIT and our desire to avoid being subject to the “prohibited transaction” penalty tax, sell some of our loans in the secondary market or as a part of a securitization of a portfolio of our loans. If we sell loans, we would be required to make customary representations and warranties about such loans to the loan purchaser. Our loan sale agreements may require us to repurchase or substitute loans in the event we breach a representation or warranty given to the loan purchaser. In addition, we may be required to repurchase loans as a result of borrower fraud or in the event of early payment default on a loan. Likewise, we may be required to repurchase or substitute loans if we breach a representation or warranty in connection with our securitizations, if any.
The remedies available to a purchaser of loans are generally broader than those available to us against the originating broker or correspondent. Further, if a purchaser enforces its remedies against us, we may not be able to enforce the remedies we have against the sellers. The repurchased loans typically can only be financed at a steep discount to their repurchase price, if at all. They are also typically sold at a significant discount to the unpaid principal balance (“UPB”). Significant repurchase activity could have a material adverse effect on our results of operations, financial condition and cash flows.
Covenants in Terra Property Trust’s debt agreements may restrict our operating activities and adversely affect our financial condition, operating results and cash flows.
Terra Property Trust’s debt agreements contain various financial and operating covenants, including, among other things, certain coverage ratios and limitations on our ability to incur secured and unsecured debt. These restrictive covenants and operating restrictions could have a material adverse effect on its operating results, cause Terra Property Trust to lose its REIT status, restrict its ability to finance or securitize new originations and acquisitions, force us to liquidate collateral and negatively affect its financial condition and its ability to pay dividends. The breach of any of these covenants, if not cured within any applicable cure period, could result in a default, including a cross-default, and acceleration of certain of Terra Property Trust indebtedness. Accelerating repayment and terminating the agreements will require immediate repayment by Terra Property
Trust of the borrowed funds, which may require Terra Property Trust to liquidate assets at a disadvantageous time, causing it to incur further losses and adversely affecting its results of operations and financial condition, which may impair its ability to make principal and interest payments on its debt obligations. Any failure to make payments when due or upon acceleration could result in the foreclosure upon our assets by the lenders.
Our inability to access funding could have a material adverse effect on our results of operations, financial condition and cash flows. We may rely on short-term financing and thus are especially exposed to changes in the availability of financing.
We currently have outstanding indebtedness and expect to use additional borrowings, such as first mortgage financings, credit facilities, senior notes, term loans and repurchase agreements and other financings, as part of our operating strategy. Our use of financings exposes us to the risk that our lenders may respond to market conditions by making it more difficult for us to renew or replace on a continuous basis our maturing short-term borrowings. If we are not able to renew our then existing short-term facilities or arrange for new financing on terms acceptable to us, or if we default on our covenants or are otherwise unable to access funds under these types of financing, we may have to curtail our asset origination activities and/or dispose of assets.
It is possible that the lenders that provide us with financing could experience changes in their ability to advance funds to us, independent of our performance or the performance of our portfolio of assets. Further, if many of our potential lenders are unwilling or unable to provide us with financing, we could be forced to sell our assets at an inopportune time when prices are depressed. In addition, if the regulatory capital requirements imposed on our lenders change, they may be required to significantly increase the cost of the financing that they provide to us. Our lenders also may revise their eligibility requirements for the types of assets they are willing to finance or the terms of such financings, based on, among other factors, the regulatory environment and their management of perceived risk, particularly with respect to assignee liability. Moreover, the amount of financing we receive under our short-term borrowing arrangements will be directly related to the lenders’ valuation of our targeted assets that cover the outstanding borrowings.
The dislocations in the mortgage sector in the financial crisis that began in 2007 have caused many lenders to tighten their lending standards, reduce their lending capacity or exit the market altogether. Further contraction among lenders, insolvency of lenders or other general market disruptions could adversely affect one or more of our potential lenders and could cause one or more of our potential lenders to be unwilling or unable to provide us with financing on attractive terms or at all. This could increase our financing costs and reduce our access to liquidity, which in turn may have a material adverse effect on our results of operations, financial condition and cash flows.
An increase in our borrowing costs relative to the interest we receive on our leveraged assets may have a material adverse effect on our results of operations, financial condition and cash flows.
As our financings mature, we will be required either to enter into new borrowings or to sell certain of our assets. An increase in short-term interest rates at the time that we seek to enter into new borrowings would reduce the spread between the returns on our assets and the cost of our borrowings. This wouldcould adversely affect the returns on our assets, which would reduce our net income and, in turn, have a material adverse effect on our results of operations, financial condition and cash flows.
We may enter into hedging transactions that could expose us to contingent liabilities in the future and adversely impact our financial condition.
Subject to maintaining Terra Property Trust’s qualification as a REIT, part of our strategy may involve entering into hedging transactions that could require us to fund cash payments in certain circumstances (such as the early termination of a hedging instrument caused by an event of default or other early termination event). The amount due would be equal to the unrealized loss of the open swap positions with the respective counterparty and could also include other fees and charges, and these economic losses will be reflected in our results of operations. We may also be required to provide margin to our counterparties to collateralize our obligations under hedging agreements. Our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time. The need to fund these obligations could have a material adverse effect on our results of operations, financial condition and cash flows.
Risks Related to Owning Our Units
The interests of our company and our unitholders in respect of the matters covered by the voting agreement may differ from or conflict with the interests of Terra Property Trust, the REIT Manager and its affiliates.
Our company, the REIT Manager and Terra Property Trust entered into a voting agreement in respect of the shares of common stock of Terra Property Trust owned by our company (the “Voting(as amended and restated on March 2, 2020, the “2020 Voting Agreement”), which was intended, in part, to
provide for continuity on the board of directors of Terra Property Trust.TPT Board. For additional details related to the 2020 Voting Agreement, see “Item 13. Certain Relationships and Related Transactions, and Director Independence — Voting Agreement”Agreements Involving Terra Property Trust”. The nomination and voting terms contained in the 2020 Voting Agreement give the holders of such rights the ability to exercise substantial influence over Terra Property Trust and may otherwise limit the ability of the board of directors of Terra Property TrustTPT Board to appoint certain members to its board of directors which could adversely impact the composition of the board. In any of these matters, the interests of our company and our unitholders may differ from or conflict with the interests of Terra Property Trust, the REIT Manager and its affiliates.
Units issued by us that you hold are not freely transferrable; thus investors may not be able to liquidate their investment.
The issuance of our units in the REIT formation transactions and the concurrent private placement were not registered under the Securities Act or the securities laws of any state. Our units were offered in reliance upon an exclusion or exemption from the registration provisions of the Securities Act and state securities laws applicable only to offers and sales to investors meeting the suitability requirements set forth herein.
Each member has been required to represent that, unless waived by our Manager, he or she (i) is an “accredited investor” within the meaning of Rule 501(a) of the Securities Act at the time of acquisition of the units, (ii) acquired the units for investment and not with a view to distribution or resale, and (iii) understood that our units have not been registered under the Securities Act or any state “blue sky” or securities laws, are not freely transferable, and that such member must bear the economic risk of investment in the units for an indefinite period, and the units cannot be sold unless they are subsequently registered or an exclusion or exemption from such registration is available and such member complies with the other applicable provisions of our amended and restated operating agreement. There is no public market for the units and members cannot expect to be able to liquidate their units in the case of an emergency. Further, the sale of the units may have adverse federal income tax consequences. Our members may not sell, assign or transfer all or a portion of their units without the prior written consent of our Manager, which consent may be withheld in our Manager’s sole and absolute discretion.
The value you may receive upon the occurrence of an alternative liquidity transaction is uncertain, and there can be no assurance that you will receive a full return of your invested capital.
Under our amended and restated operating agreement, our Manager may cause us to consummate an alternative liquidity transaction without the approval of members. If we pursue and consummate an alternative liquidity transaction, the value you will receive upon the occurrence of such transaction will depend on the loans in the portfolio at the time of such transaction, the performance of the loans, market conditions, and other factors. There is no assurance that we will pursue or consummate an alternative liquidity transaction. In addition, if we pursue and consummate an alternative liquidity transaction, we cannot predict the value you will receive in such transaction, nor can we provide any assurance that you will receive a full return of your invested capital.
If we complete an alternative liquidity transaction by pursuing an initial public offering and listing or a direct listing of Terra Property Trust’s common stock in the future, you will be subject to additional risks.
Examples of the alternative liquidity transactions that may be available to us include a liquidation of assets, a sale of our company or its subsidiaries or affiliates, or a strategic business combination, a listing of the shares of common stock of Terra Property Trust on a national securities exchange, or an adoption of a share repurchase plan, in each case, which may include the distribution of our common stock of Terra Property Trust indirectly owned by our company and certain other fund vehicles managed by Terra Capital Partners or its affiliates to the ultimate investors in these vehicles. If we complete an alternative liquidity transaction that involves Terra Property Trust becoming a publicly traded company through an initial public offering and listing or a direct listing of Terra Property Trust’s shares on an exchange, you will subject to the following additional risks:
Trading Value of our Terra Property Trust’s Shares: If an alternative liquidity transaction involves Terra Property Trust becoming a publicly traded company through an initial public offering and listing or a direct listing of Terra Property Trust’s shares on a national securities exchange, Terra Property Trust’s shares will be publicly traded and investors will be able to assess the value of their shares by reference to their public trading prices.
Distributions: If anFollowing any alternative liquidity event, involves Terra Property Trust becoming a publicly traded company through an initial public offering listing of Terra Property Trust on an exchange we do not expect that the distributions investors receive following any such liquidity event would be adversely impacted. Following any such transaction, Terra Property Trust would be expected to pay regular monthly distributions to its stockholders and would continue to be required to distribute dividends equal to at least 90% of its taxable income (excluding(calculated without regard to its net capital gains)gain and the dividends paid deduction) to its investors each year in order to maintain its qualification as a REIT.
Manager Compensation: If an alternative liquidity event involves Terra Property Trust becoming a publicly traded company through an initial public offering and listing or a direct listing of Terra Property Trust,Trust’s shares on an exchange, it is expected that Terra Property Trust will enter into a new management agreement with ourthe REIT Manager or an affiliate of ourthe REIT Manager. The base management fees, incentive distributions or other amounts that would be payable to ourthe REIT Manager in the case of any such transaction are expected to be market-based fees determined in the case of any initial public offering by discussions between ourthe REIT Manager and the underwriters involved in the initial public offering. Any such fees are expected to be paid in lieu of the fees currently payable to ourthe REIT Manager by us or Terra Property Trust. In addition, if
in connection with any such alternative liquidity event or other transaction, we distribute shares of Terra Property Trust to our members, our Manager may be entitled to receive a portion of such distributed shares based on its incentive distribution interest in our Fund, with shares of Terra Property Trust being valued at the date of distribution at their book value (if distributed prior to an liquidity event), at the initial public offering price in the case of an initial public offering (if distributed within 60 days after such initial public offering) or at the trading value for such shares over the 10-trading period prior to such distribution (if distributed at any time after the expiration of such 60-day period).
Transfer Restrictions: If an alternative liquidity event involves Terra Property Trust becoming a publicly traded company through an initial public offering and listing or a direct listing of Terra Property TrustTrust’s shares on a national securities exchange, it is expected that, after the expiration of any lock-up period, our members will become the direct owners of shares of Terra Property Trust by way of a distribution of shares of Terra Property Trust to our members as described above. Terra Property Trust’s shares distributed to members will constitute restricted securities under the Securities Act and will be subject to restrictions on transfer under applicable U.S. securities laws.
As described above, following the consummation of the BDC Merger and as of December 31, 2022, Terra JV held 70.0% of the issued and outstanding shares of TPT Class B Common Stock and we and Terra Fund 7 owned an 87.6% and 12.4% interest, respectively, in Terra JV. On the date the First Conversion Date, one-third of the issued and outstanding shares of TPT Class B Common Stock will automatically and without any action on the part of the holder thereof convert into an equal number of shares of TPT Class A Common Stock. On the Second Conversion Date, one-half of the issued and outstanding shares of TPT Class B Common Stock will automatically and without any action on the part of the holder thereof convert into an equal number of shares of TPT Class A Common Stock. On the Third Conversion Date, all of the issued and outstanding shares of TPT Class B Common Stock will automatically and without any action on the part of the holder thereof convert into an equal number of shares of TPT Class A Common Stock.
A compulsory redemption could result in adverse tax and economic consequences for members.
Our Manager may, in its sole discretion, require a compulsory redemption of all or a portion of a member’s units, including but not limited to cases in which the ownership of units would result in our assets being deemed “plan assets” for Employee Retirement Income Security Act of 1974 (“ERISA”) purposes, as defined under ERISA or by any regulation of the U.S. Department of Labor, or other federal agency having jurisdiction, or the units have been transferred without our permission, or a member has acquired units otherwise than in compliance with applicable rules and regulations. Such compulsory redemption may result in adverse tax or economic consequences for the member.
Our members do not have legal representation.
Pursuant to the terms of our amended and restated operating agreement, each of our members acknowledges and agrees that counsel representing us, our Manager and its affiliates does not represent and shall not be deemed under the applicable codes of professional responsibility to have represented or to be representing any or all of our members in any respect.
We may not have sufficient funds to make cash distributions.
Following the completion of the REIT formation transactions, our Manager approved an increase in the monthly distribution payable in respect of each unit in respect of the first full quarterly period following the closing of the REIT formation transactions to 9.0% per annum on $50,000 per unit. The timing and amount of future distributions and payments will continue to be made at the sole discretion of our Manager and subject to such factors our Manager considers to be relevant, including the amount of funds available for distribution or payment, our financial condition, whether to reinvest or distribute such funds, capital expenditure and reserve requirements and general operational requirements. Because we cannot predict future cash flows or the performance of Terra Property Trust, no assurance can be given that we will be able to continue to maintain in future periods distributions on units at levels approved by our Manager.
Rapid changes in the values of our assets may make it more difficult for Terra Property Trust to maintain its qualification as a REIT or our exclusion from the 1940 Act.
If the fair market value or income potential of our assets declines as a result of increased interest rates, prepayment rates, general market conditions, government actions or other factors, we may need to increase our real estate assets and income or liquidate our non-qualifying assets to maintain Terra Property Trust’s or its subsidiaries’ qualification or our exclusion from the 1940 Act. If the decline in real estate asset values or income occurs quickly, this may be especially difficult to accomplish. We may have to make decisions that we otherwise would not make absent the REIT and 1940 Act considerations.
Tax Risks
Tax risks in general.
An investment in us involves complex U.S. federal, state and local income tax considerations that will differ for each investor. We intend to be treated as a partnership for U.S. federal income tax purposes. Assuming that we are so treated, we will not be subject to U.S. federal income tax, and each member will be required to include its allocable share of the items of our income, gain, loss and deduction in computing its U.S. federal income tax liability. We may, however, be subject to state and local tax, depending on the location and scope of our activities. In addition, entities through which we may make investments, including Terra Property Trust, may in certain circumstances be subject to U.S. federal, state, local or foreign tax.
No Internal Revenue Service ruling.
We have not sought rulings from the Internal Revenue Service with respect to any of the U.S. federal income tax considerations discussed herein. Thus, positions to be taken by the Internal Revenue Service as to tax consequences could differ from the positions taken by us.
Publicly traded partnership risk.
If we were treated as a publicly traded partnership (“PTP”) taxable as a corporation, we would be subject to U.S. federal income tax and applicable state and local taxes on our income, which would result in reduced returns to our members.
Our Manager intends to treat us as a partnership and not as an association or PTP taxed as a corporation for U.S. federal income tax purposes. No assurance can be given that the Internal Revenue Service will not challenge such classification or that a court will not sustain any such challenge.
A PTP is a partnership the interests in which are: (i) traded on an established securities market; or (ii) readily tradable on a secondary market or the substantial equivalent thereof. We may not qualify for any of the safe harbors set forth in the applicable Treasury regulations under which a partnership is not treated as a PTP. However, our Manager intends to operate us in such a manner so that we will not be classified as a PTP. Even if the Internal Revenue Service were to assert that we are a PTP, we will not be taxable as a corporation within a particular taxable year if 90% or more of our gross income is “qualifying income” for each taxable year in which we were a PTP and we were not required to register under the 1940 Act. Qualifying income generally includes interest (other than interest generated from a financial business), dividends, real property rents, gain from the sale of assets that produce qualifying income and certain other items. Since we conduct our real estate business through Terra Property Trust, substantially all of our income should be dividends from Terra Property Trust, which would be qualifying income. If, for any reason, we were treated as an association taxable as a corporation, we would be subject to U.S. federal income tax and applicable state and local taxes on our income.
Legislative, regulatory or administrative changes could adversely affect us.
Legislative, regulatory or administrative changes could be enacted or promulgated at any time, either prospectively or with retroactive effect, and may adversely affect us. No assurance can be given as to whether, when, or in what form, the U.S. federal income tax laws applicable to us and our members may be enacted. Changes to the U.S. federal income tax laws and interpretations of U.S. federal tax laws could adversely affect an investment in our units. Our members and prospective investors are urged to consult with their tax advisors regarding the effects of legislative, regulatory or administrative developments on an investment in our units.
Income taxes of members may exceed cash distributions.
Even if we have income or gains for U.S. federal income tax purposes, we will not be required to make distributions (or may lack sufficient cash available for distributions) to enable our members to pay their U.S. federal, state and local taxes as a result of such income or gain allocations. For example, in order to qualify as a REIT, Terra Property Trust must distribute dividends equal to at least 90% of its nettaxable income (excluding(calculated without regard to its net capital gain)gain and the dividends paid deduction) to its shareholders on an annual basis. Differences in timing between the recognition of taxable income and the actual receipt of cash may occur for Terra Property Trust, resulting in “phantom income,” which could impact Terra Property Trust’s ability to satisfy its annual distribution requirements. For example, Terra Property Trust generally will be required to recognize certain amounts in income no later than the time such amounts are reflected on its financial statements. The application of this rule may require Terra Property Trust to accrue certain items of income with respect to its debt instruments earlier than would be the case under the otherwise applicable tax rules; however, on September 5, 2019, the Treasury Department and Internal Revenue Service released proposedrecently promulgated Treasury regulations, which may be relied
upon by taxpayers, whichare effective for taxable years beginning on or after January 1, 2021, generally would exclude, among other items, original issue discount and market discount income from the requirement that taxpayers must take into account such income no later than the time such amounts are reflected on the taxpayer’s applicable financial statements.applicability of this rule. This rule could in certain circumstances increase Terra Property Trust’s “phantom income,” which may require Terra Property Trust to borrow funds or take other action to satisfy its REIT distribution requirements. For example, Terra Property Trust may request that we and its other shareholders, if any, agree to a consent dividend in order to meet the annual distribution requirements or avoid paying corporate tax on any undistributed net income. When a REIT makes a consent dividend, the REIT and its stockholders are generally treated for U.S. federal income tax purposes as if the REIT distributed cash to the stockholders and the stockholders immediately re-contributed the cash to the REIT as a contribution to capital. A consent dividend would result in the recognition of income by our members as if an actual distribution were made, but without any distribution of cash. As a result, our members
would be required to utilize other resources to satisfy tax liabilities and would not be able resort to distributions made by us to assist in satisfying such tax liabilities.
If Terra Property Trust does not qualify or maintain its qualification as a REIT, it will be subject to tax as a regular corporation and could face a substantial tax liability as a result, which would result in reduced returns to our members.
We expect to make substantially all of our investments through Terra Property Trust. Our Manager believes that itthe REIT Manager has taken and intends to continue to take such actions as are necessary or appropriate to cause Terra Property Trust to qualify for taxation as a REIT within the meaning of the Internal Revenue Code. However, qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code for which only limited judicial and administrative authorities exist and, accordingly, may require interpretations of such provisions, which could be successfully challenged by the Internal Revenue Service. Even a technical or inadvertent mistake could jeopardize the REIT qualification of Terra Property Trust. The continued REIT qualification of Terra Property Trust will depend on the ability of Terra Property Trust to satisfy certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis.
Furthermore, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it difficult or impossible for Terra Property Trust to qualify as a REIT. If Terra Property Trust were to fail to qualify as a REIT in any taxable year, then: (i) Terra Property Trust would be unable to deduct dividends it distributes in computing taxable income and would be subject to U.S. federal income tax on its taxable income at regular corporate rates; (ii) Terra Property Trust would no longer be required to distribute substantially all of its taxable income to us, and (iii) unless it were entitled to relief under applicable statutory provisions, Terra Property Trust would be disqualified from treatment as a REIT for the subsequent four taxable years following the year during which it failed to qualify.
Accordingly, Terra Property Trust’s failure to maintain its qualification as a REIT could have an adverse effect on our income, general financial condition and ability to pay distributions.
Complying with the REIT requirements may force Terra Property Trust to liquidate or forego otherwise attractive investments.
In order to qualify as a REIT, Terra Property Trust annually must satisfy two gross income requirements. First, at least 75% of its gross income for each taxable year, excluding gross income from prohibited transactions and certain hedging and foreign currency transactions, must be derived from investments relating to real property or mortgages on real property, including “rents from real property,” dividends received from and gain from the disposition of shares of other REITs, interest income derived from mortgage loans secured by real property (including certain types of qualified mezzanine loans and mortgage-backed securities), and gains from the sale of real estate assets, as well as income from certain kinds of qualified temporary investments. Second, at least 95% of Terra Property Trust’s gross income in each taxable year, excluding gross income from prohibited transactions and certain hedging and foreign currency transactions, must be derived from some combination of income that qualifies under the 75% gross income test described above, as well as other dividends, interest, and gain from the sale or disposition of stock or securities, which need not have any relation to real property.
Further, at the end of each calendar quarter, at least 75% of the value of Terra Property Trust’s total assets must consist of cash, cash items, government securities, shares in other REITs and other qualifying real estate assets, including certain mortgage loans, mezzanine loans and certain kinds of mortgage-backed securities. The remainder of Terra Property Trust’s investment in securities (other than government securities, securities issued by a TRS and securities that are qualifying real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of Terra Property Trust’s total assets (other than government securities, TRS securities and securities that are qualifying real estate assets) can consist of the securities of any one issuer, no more than 20% of the value of Terra Property Trust’s total assets can be represented by securities of one or more TRSs it may own, and no more than 25% of the value of Terra Property Trust’s total assets can consist of debt instruments issued by publicly offered REITs that are not otherwise secured by real property. If Terra
Property Trust fails to comply with these requirements at the end of any calendar quarter, it must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing its REIT qualification and suffering adverse tax consequences.
As a result, Terra Property Trust may be required to liquidate from its portfolio, or contribute to a TRS, should it decide to form one in the future, otherwise attractive investments, and may be unable to pursue investments that would be otherwise advantageous to it in order to satisfy the source of income or asset diversification requirements for qualifying as a REIT. These actions could have the effect of reducing Terra Property Trust’s income and amounts available for distribution to us. Thus,
compliance with the REIT requirements may hinder Terra Property Trust’s ability to make, and, in certain cases, maintain ownership of certain attractive investments.
Terra Property Trust’s preferred equity and mezzanine loan investments may fail to qualify as real estate assets for purposes of the REIT gross income and asset tests, which could jeopardize Terra Property Trust’s ability to qualify as a REIT.
The Internal Revenue Service has issued Revenue Procedure 2003-65, which provides a safe harbor pursuant to which a mezzanine loan that is secured by interests in a partnership or other pass-through entity will be treated by the Internal Revenue Service as a real estate asset for purposes of the REIT assets tests, and interest derived from such a loan will be treated as qualifying mortgage interest for purposes of the REIT 75% and 95% gross income tests. Although the Revenue Procedure provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law. Terra Property Trust owns, and may acquire in the future, certain mezzanine loans and preferred equity investments (which it intends to treat as mezzanine loans for U.S. federal income tax purposes) that do not satisfy all of the requirements for reliance on the safe harbor set forth in the Revenue Procedure. Consequently, there can be no assurance that the Internal Revenue Service will not successfully challenge the tax treatment of such mezzanine loans or preferred equity investments as qualifying real estate assets. To the extent that such mezzanine loans or preferred equity investments do not qualify as real estate assets, the interest income from such mezzanine loans or preferred equity investments would be qualifying income for the REIT 95% gross income test, but not for the REIT 75% gross income test and such mezzanine loans or preferred equity investments would not be qualifying assets for the REIT 75% asset test and would be subject to the REIT 5% and 10% asset tests, which could jeopardize Terra Property Trust’s ability to qualify as a REIT.
Risk of the Internal Revenue Service successfully challenging Terra Property Trust’s treatment of its preferred equity and mezzanine loan investments as debt for U.S. federal income tax purposes.
Terra Property Trust invests in certain real estate related investments, including mezzanine loans, first mortgage loans, and preferred equity investments. There is limited case law and administrative guidance addressing whether certain preferred equity investments or mezzanine loans will be treated as equity or debt for U.S. federal income tax purposes. OurThe REIT Manager received an opinion of prior tax counsel regarding the treatment of one of Terra Property Trust’s fixed return preferred equity investments and future similarly structured investments as debt for U.S. federal income tax purposes. Terra Property Trust treats the preferred equity investments which it currently holds as debt for U.S. federal income tax purposes and as mezzanine loans that qualify as real estate assets, as discussed above. No private letter rulings have been obtained on the characterization of these investments for U.S. federal income tax purposes and an opinion of counsel is not binding on the Internal Revenue Service; therefore, no assurance can be given that the Internal Revenue Service will not successfully challenge the treatment of such preferred equity investments as debt and as qualifying real estate assets. If a preferred equity investment or mezzanine loan owned by Terra Property Trust was treated as equity for U.S. federal income tax purposes, Terra Property Trust would be treated as owning its proportionate share of the assets and earning its proportionate share of the gross income of the partnership or limited liability company that issued the preferred equity interest. Certain of these partnerships and limited liability companies are engaged in activities, which could cause Terra Property Trust to be considered as earning significant nonqualifying income which would likely cause Terra Property Trust to fail to qualify as a REIT or pay a significant penalty tax to maintain its REIT qualification.
The failure of assets subject to repurchase agreements that Terra Property Trust enters into to qualify as real estate assets could adversely affect the ability of Terra Property Trust to qualify as a REIT.
Terra Property Trust has entered into financing arrangements that are structured as sale and repurchase agreements pursuant to which Terra Property Trust sells certain of its assets to a counterparty and simultaneously enters into an agreement to repurchase such assets at a later date in exchange for a purchase price. Economically, these agreements are financings that are secured by the assets sold pursuant thereto. We believe that Terra Property Trust will be treated for REIT asset and gross income test purposes as the owner of the assets that are the subject of such sale and repurchase agreement notwithstanding that such agreements may transfer record ownership of the assets to the counterparty during the term of the agreement. It is possible,
however, that the Internal Revenue Service could assert that Terra Property Trust is not the owner of the assets during the term of the sale and repurchase agreement, in which case Terra Property Trust could fail to qualify as a REIT.
Complying with REIT requirements may limit our ability to hedge effectively.
We make substantially all of our investments, and conduct substantially all of our real estate lending business, through Terra Property Trust, which has elected to be taxed as a REIT for U.S. federal income tax purposes. The REIT provisions of the Internal Revenue Code may limit our ability to hedge our assets and operations. Under these provisions, any income that we generateTerra Property Trust generates from transactions intended to hedge ourits interest rate and currency risks will generally be excluded from gross income for purposes of the 75% and 95% gross income tests if (i) the instrument (A) hedges interest rate risk or foreign
currency exposure on liabilities used to carry or acquire real estate assets, (B) hedges risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the 75% or 95% gross income tests or (C) hedges an instrument described in clause (A) or (B) for a period following the extinguishment of the liability or the disposition of the asset that was previously hedged by the hedged instrument, and (ii) such instrument is properly identified under the applicable regulations promulgated by the Treasury Regulations.
General Risk Factors
The effects of the ongoing COVID-19 pandemic, as well as any future pandemics or similar events, and the actions taken in response thereto, may adversely affect our investments and operations.
In December 2019, a COVID-19 outbreak was reported in China, and, in March 2020, the World Health Organization declared itpublicly characterized the outbreak of COVID-19 as a global pandemic. The ongoing COVID-19 pandemic has severely disruptedcaused, and may continue to cause, significant disruptions to the U.S. and global economic activityeconomy and cause significant volatility and negative pressure in the financial markets, which could worsen. Themarkets. During the early part of the pandemic, the U.S. and global economy came under severe pressure due to numerous factors, including measures taken by governing authorities to prevent the spread of COVID-19, such as instituting quarantines, restrictions on travel, school closures, bans on public events and on public gatherings, “shelter in place” or “stay at home” rules, restrictions on types of business that may continue to operate, and/or restrictions on types of construction projects that may continue. Many of such restrictions have long since been lifted, and the unprecedented global impact of the outbreak has continuedCOVID-19 pandemic appears to rapidly evolve and many countries, including the United States, have reacted by instituting quarantines, mandating business and school closures and restricting travel. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of the COVID-19 pandemic.largely subsided. Nevertheless, the negative impacts of COVID-19 pandemic presents material uncertaintyon the U.S. and risk with respect to our performanceglobal economy were quite severe and financial results.recovery is still in progress.
As a result of a significant portion of Terra Property Trust’s investments being in preferred equity of entities that own, mezzanine loans and first mortgages secured by office, multifamily and hospitality properties located in the United States, the ongoing COVID-19 pandemic will impact Terra Property Trust’s investments and operating results to the extent that it reduces occupancy, increases the cost of operation or results in limited hours or necessitates the closure of such properties. The borrowers under the first mortgages, mezzanine loans or preferred equity in which Terra Property Trust invests may fail to make timely and required payments under the terms of such instruments. In addition, quarantines, states of emergencies and other measures taken to curb the spread of the COVID-19 pandemic may negatively impact the ability of such properties to continue to obtain necessary goods and services or provide adequate staffing, which may also adversely affect Terra Property Trust’s investments and our operating results.
The world-wide economic downturn resulting from the COVID-19 pandemic could negatively impact our investments and operations, as well as our ability to make distributions to our unitholders. The extent to which the COVID-19 pandemic impacts our investments and operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the future rate of occurrence or mutation of COVID-19, continuation of or changes in governmental responses to the ongoing COVID-19 pandemic, and the effectiveness of responsive actions taken in the United States and other countries to contain and manage the disease. Although the U.S. Food and Drug Administration has approved certain therapies and three vaccines for emergency use and distribution to certain groups of individuals as of the date of this report, the rollout of vaccine distribution has encountered significant delays, and there remain uncertainties as to the amount of vaccine available for distribution, the logistics of implementing a national vaccine program, and the overall efficacy of the vaccines once widely administered, especially as new strains of COVID-19 have been discovered. In addition, the level of resistance that new strains of COVID-19 have to the existing vaccines, if any, and the overall percentage of the population able and willing to receive the vaccination, remains unknown. Until such therapies and vaccines are widely available and effective, the pandemic and publicPublic and private responses to the pandemic may lead to deterioration of economic conditions, an economic downturn or a recession at a global scale, which could materially affect our performance, financial condition, results of operations and cash flows. Any other pandemics or similar events in the future could also similarly have a material adverse effect on our investments and operations, as well as our ability to make distributions to our unitholders.
We and Terra Property Trust are subject to environmental, social and governance (“ESG”) risks that could adversely affect
our reputation, business, operations and earnings.
Certain organizations that provide corporate risk information to investors and shareholders have developed scores and ratings to evaluate companies based upon various ESG metrics. Currently, there are no universal standards for such scores or ratings, but ESG evaluations are increasingly being integrated into investment analysis. Views about ESG matters are diverse and rapidly changing, and companies are facing increasing scrutiny from regulators, investors, and other stakeholders related to their ESG practices and disclosure. If we or Terra Property Trust fail to adapt to or comply with regulatory requirements or investor or stakeholder ESG standards, our reputation, ability to do business with certain partners, access to capital, operations and earnings could be adversely affected.
Future recessions, downturns, disruptions or instability could have a materially adverse effect on our results of operations, financial condition and cash flows.
From time to time, the global capital markets may experience periods of disruption and instability, which could cause disruptions in liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit
risk in the broadly syndicated credit market and the failure of major financial institutions. Despite actions of U.S. and foreign governments, these events could contribute to worsening general economic conditions that materially and adversely impact the broader financial and credit markets and reduce the availability of debt and equity capital for the market as a whole and financial services firms in particular.
Deterioration of economic and market conditions in the future could negatively impact credit spreads as well as our ability to obtain financing, particularly from the debt markets, which in turn may have a material adverse effect on our results of operations, financial condition and cash flows.
Returns on our real estate-related loans may be limited by regulations.
Our loan investments may be subject to regulation by federal, state and local authorities and subject to various laws and judicial and administrative decisions. We may determine not to make or invest in real estate-related loans in any jurisdiction in which we believe we have not complied in all material respects with applicable requirements, which could reduce the amount of income we would otherwise receive.
Investors’ return may be reduced as a result of the additional expense of operating as a reporting company under the Exchange Act.
We are subject to the periodic and current reporting requirements of the Exchange Act. As a reporting company, we have to comply with a variety of substantive requirements under the Exchange Act that impose, among other things:
•preparation and filing of current reports on Form 8-K;
•preparation and filing of quarterly reports on Form 10-Q; and
•preparation and filing of annual reports on Form 10-K.
We are subject to these reporting and other requirements even though we have not yet completed an initial public offering or listed our units. Compliance with the Exchange Act will increase our operating expenses, which may reduce our ability to make distributions and the value of our units.
Your interests may be diluted if we issue additional units in the future.
Members will not have preemptive rights to acquire any units issued by us in the future. Therefore, investors may experience dilution of their investment if we sell additional units in the future.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our administrative and principal executive offices are located at 550 Fifth Avenue, 6th205 West 28th Street, 12th Floor, New York, New York 10036.10001. We believe that our office facilities are suitable and adequate for our business as it is presently conducted.
Item 3. Legal Proceedings.
Neither we, Terra JV, Terra Property Trust nor our Manager is currently subject to any material legal proceedings, nor, to our knowledge, are material legal proceedings threatened against us, Terra JV, Terra Property Trust or our Manager. From time to time, we, Terra JV, Terra Property Trust and individuals employed by our Manager or its affiliates may be a party to certain legal proceedings in the ordinary course of business. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
There is no established trading market for our units. As of March 11, 2022,10, 2023, we had 6,636.66,622.2 units outstanding held by a total of approximately 3,1863,204 investors. As of March 11, 2022,10, 2023, there were no outstanding options, warrants to purchase our units or securities convertible into our units.
We currently expect that comparable cash dividends will continue to be paid in the future. However, these dividends will be made at the discretion of our Manager and will depend upon, among other things, our actual results of operations and liquidity.
Unregistered Sales of Unregistered Equity Securities
NoneThere were no sales of unregistered equity securities during the year ended December 31, 2022.
Issuer Purchases of Equity Securities
NoneThere were no issuer purchases of equity securities during the year ended December 31, 2022.
Item 6. [Reserved].
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The information contained in this section should be read in conjunction with our audited consolidated financial statements and related notes thereto and other financial information included elsewhere in this annual report on Form 10-K.
Overview
We are a real estate credit focused company that originates, structures, funds and manages commercial real estate investments, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments throughout the United States. Our loans finance the acquisition, construction, development or redevelopment of quality commercial real estate in the United States. We focus on the origination of middle market loans in the approximately $10 million to $50 million range, to finance properties primarily in primary and secondary markets. We believe loans in this size range are subject to less competition, offer higher risk adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification. We were formed as a Delaware limited liability company on April 24, 2013 and commenced operations on August 8, 2013. We make substantially all of our investments, and conduct substantially all of our real estate lending business, through Terra Property Trust, which has elected to be taxed as a REIT for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2016. Our investment objectives are to (i) preserve our members’ capital contributions, (ii) realize income from our investments and (iii) make monthly distributions to our members from cash generated from investments. There can be no assurances that we will be successful in meeting our investment objectives.
On January 1, 2016, the Terra Fund 1, Terra Fund 2, Terra Fund 3 and Terra Fund 4Funds merged with and into our subsidiaries through a series of separate mergers.the Merger. Following the Merger, we contributed the consolidated portfolio of our net assets and the net assets of the Terra Funds to Terra Property Trust in exchange for all of the shares of common stock of Terra Property Trust. We elected to engage in the REIT formation transactions, to make our investments through Terra Property Trust and to provide our members with a more broadly diversified portfolio of assets, while providing us with enhanced access to capital and borrowings, lower operating costs and enhanced opportunities for growth.
On March 2, 2020, Terra Fund 1, Terra Fund 2 and Terra Fund 3 merged with and into Terra Fund 4, with Terra Fund 4 continuing as the surviving company, and we consolidated our holdings of shares of common stock of Terra Property Trust in Terra Fund 4. Subsequent to the Terra Fund Merger, the legal name of Terra Fund 4 was changed to Terra JV.JV, LLC. On March 2, 2020, Terra Property Trust engaged in a series of transactions pursuant to which Terra Property Trust 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 that Terra Property Trust owned, cash of $25.5 million and other working capital. On April 29, 2020,Following the consummation of the BDC Merger and as of December 31, 2022, former Terra Property Trust repurchased, at a purchase price of $17.02 per share, 212,691 shares of common stock that Terra Property TrustBDC stockholders owned approximately 19.9%
had previously sold toof Terra Offshore REIT on September 30, 2019.As of December 31, 2021,Property Trust’s common equity, Terra JV held 87.4%70.0% of the issued and outstanding shares of Terra Property Trust’s common stock with the remainder of 10.1% held by Terra Offshore REIT; and we and Terra Fund 7 owned an 87.6% and 12.4% percentage interest, respectively, in Terra JV. Accordingly, as of December 31, 2021,2022, we indirectly beneficially owned 76.5%61.3% of the outstanding shares of common stock of Terra Property Trust through Terra JV.
As previously disclosed, we continue to explore alternative liquidity transactions on an opportunistic basis to maximize value for our investors. Examples of the alternative liquidity transactions that, depending on market conditions, may be available to us, or our subsidiaries or affiliates, include a listing of our shares of common stock of Terra Property Trust on a national securities exchange, adoption of a share repurchase plan, a liquidation of assets, a sale of our company or its subsidiaries or affiliates or a strategic business combination, in each case, which may include the in-kind distribution of shares of common stock of Terra Property Trust indirectly owned by our company and certain other fund vehicles managed by Terra Capital Partners or its affiliates to the ultimate investors in these vehicles. We cannot provide any assurance that any alternative liquidity transaction will be available to us or, if available, that we will pursue or be successful in completing any such alternative liquidity transaction.
Recent Developments
The COVID-19 pandemic has hadTerra BDC Merger
On October 1, 2022, pursuant to that certain Agreement and Plan of Merger, dated as of May 2, 2022 , Terra BDC merged with and into Terra LLC, a significant impact on local, nationalwholly owned subsidiary of Terra Property Trust, with Terra LLC continuing as the surviving entity of the merger and global economies and has resulted in a world-wide economic slowdown. While certain economies have exhibited growth as a resultwholly owned subsidiary of vaccine distributions when comparedTerra Property Trust. The Certificate of Merger and Articles of Merger with respect to 2020, the amountTerra BDC Merger were filed with the Secretary of economic recovery will continue to be impacted by reductions and restrictions in economic activity resulting from increased COVID-19 cases. We continue to closely monitor the impactState of the COVID-19 pandemicState of Delaware and the State Department of Assessments and Taxation of Maryland (the “SDAT”), respectively, with an effective time and date of 12:02 a.m., Eastern Time, on all aspectsthe Closing Date (the “Effective Time”).
At the Effective Time, except for any shares of common stock, par value $0.001 per share (“Terra BDC Common Stock”), of Terra BDC held by Terra Property Trust or any of its wholly owned subsidiaries or Terra BDC, which shares were automatically retired and ceased to exist with no consideration paid therefor, each issued and outstanding share of Terra BDC Common Stock was automatically cancelled and retired and converted into the right to receive (i) 0.595 shares of TPT Class B Common Stock, and (ii) cash, without interest, in lieu of any fractional shares of TPT Class B Common Stock otherwise issuable in an amount, rounded to the nearest whole cent, determined by multiplying (x) the fraction of a share of TPT Class B Common Stock to which such holder would otherwise be entitled by (y) $14.38.
Pursuant to the terms of the transactions described in the Terra BDC Merger Agreement, approximately 4,847,910 shares of TPT Class B Common Stock were issued to former Terra BDC stockholders in connection with the Terra BDC Merger, based on the number of outstanding shares of Terra BDC Common Stock as of the Closing Date. Following the consummation of the Terra BDC Merger, former Terra BDC stockholders owned approximately 19.9% of the common equity of Terra Property Trust and we indirectly beneficially owned approximately 61.3% of the common equity of Terra Property Trust.
On the Closing Date, Terra Property Trust filed with the SDAT its Articles of Amendment to the Articles of Amendment and Restatement (the “TPT Charter Amendment”). Pursuant to the TPT Charter Amendment, (i) the authorized shares of its stock which Terra Property Trust has authority to issue were increased from 500,000,000 to 950,000,000, consisting of 450,000,000 shares of TPT Class A Common Stock, 450,000,000 shares of TPT Class B Common Stock, and 50,000,000 shares of Preferred Stock, $0.01 par value per share, and (ii) each share of Terra Property Trust’s common stock issued and outstanding immediately prior to the Effective Time was automatically changed into one issued and outstanding share of TPT Class B Common Stock.
The TPT Class B Common Stock rank equally with and have identical preferences, rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, and terms and conditions of redemption as each other share of our investments and operations. The extentcommon stock, except as set forth below with respect to whichconversion.
On the COVID-19 pandemic may impact our investments and operations going forward will depend on future developments, which are highly uncertain and cannot be predicted with confidence. These developments include the durationFirst Conversion Date, one-third of the COVID-19 pandemic,issued and outstanding shares of TPT Class B Common Stock will automatically and without any action on the impactpart of the global vaccination effort, any new strainsholder thereof convert into an equal number of shares of TPT Class A Common Stock. On the Second Conversion Date, one-half of the virus that are resistant to available vaccines,issued and outstanding shares of TPT Class B Common Stock will automatically and without any action on the impact of government stimulus, new information that may emerge concerning the severitypart of the COVID-19 pandemic,holder thereof convert into an equal number of shares of TPT Class A Common Stock. On the Third Conversion Date, all of the issued and actions takenoutstanding shares of TPT Class B Common Stock will automatically and without any action on the part of the holder thereof convert into an equal number of shares of TPT Class A Common Stock.
As of the Effective Time and in accordance with the Terra BDC Merger Agreement, the size of the TPT Board was increased by federal, statethree members and local agencieseach of Spencer Goldenberg, Adrienne Everett and Gaurav Misra (each a “Terra BDC Designee”, and collectively, the “Terra BDC Designees”) were elected to the TPT Board to fill the vacancies created by such increase, with each Terra BDC Designee to serve until Terra Property Trust’s next annual meeting of stockholders and until his or her successor is duly elected and qualifies. Each of the other members of the TPT Board immediately prior to the Effective Time continued as well asmembers following the general public to contain the COVID-19 pandemic or treat its impact, among others. Effective Time.
Portfolio Summary
The following tables provide a summary of Terra Property Trust’s net loan portfolio as of December 31, 20212022 and 2020:2021:
| | | December 31, 2021 | | December 31, 2022 |
| | Fixed Rate | | Floating
Rate (1)(2)(3) | | Total Gross Loans | | Obligations under Participation Agreements and Secured Borrowing | | Total Net Loans | | Fixed Rate | | Floating
Rate (1)(2)(3) | | Total Gross Loans | | Obligations under Participation Agreements | | Total Net Loans |
| Number of loans | Number of loans | 6 | | | 15 | | | 21 | | | 4 | | | 21 | | Number of loans | 8 | | | 23 | | | 31 | | | 1 | | | 31 | |
| Principal balance | Principal balance | $ | 74,880,728 | | | $ | 405,270,423 | | | $ | 480,151,151 | | | $ | 76,569,398 | | | $ | 403,581,753 | | Principal balance | $ | 90,990,183 | | | $ | 554,805,276 | | | $ | 645,795,459 | | | $ | 12,584,958 | | | $ | 633,210,501 | |
| Amortized cost | Amortized cost | 75,520,212 | | | 394,153,102 | | | 469,673,314 | | | 76,818,156 | | | 392,855,158 | | Amortized cost | 92,274,998 | | | 534,215,769 | | | 626,490,767 | | | 12,680,594 | | | 613,810,173 | |
| Fair value | Fair value | 75,449,410 | | | 391,752,209 | | | 467,201,619 | | | 75,900,089 | | | 391,301,530 | | Fair value | 90,729,098 | | | 532,416,656 | | | 623,145,754 | | | 12,680,595 | | | 610,465,159 | |
| Weighted average coupon rate | Weighted average coupon rate | 12.39 | % | | 7.01 | % | | 7.85 | % | | 10.40 | % | | 7.37 | % | Weighted average coupon rate | 13.82 | % | | 11.23 | % | | 11.59 | % | | 16.36 | % | | 11.50 | % |
Weighted-average remaining
term (years) | Weighted-average remaining
term (years) | 1.93 | | | 1.45 | | | 1.53 | | | 0.82 | | | 1.66 | | Weighted-average remaining
term (years) | 1.35 | | | 1.10 | | | 1.14 | | | 1.69 | | | 1.13 | |
| | | December 31, 2020 | | December 31, 2021 |
| | Fixed Rate | | Floating
Rate (1)(2)(3) | | Total Gross Loans | | Obligations under Participation Agreements and Secured Borrowing | | Total Net Loans | | Fixed Rate | | Floating
Rate (1)(2)(3) | | Total Gross Loans | | Obligations under Participation Agreements and Secured Borrowing | | Total Net Loans |
| Number of loans | Number of loans | 6 | | | 14 | | | 20 | | | 8 | | | 20 | | Number of loans | 6 | | | 15 | | | 21 | | | 4 | | | 21 | |
| Principal balance | Principal balance | $ | 56,335,792 | | | $ | 367,838,966 | | | $ | 424,174,758 | | | $ | 89,548,151 | | | $ | 334,626,607 | | Principal balance | $ | 74,880,728 | | | $ | 405,270,423 | | | $ | 480,151,151 | | | $ | 76,569,398 | | | $ | 403,581,753 | |
| Amortized cost | Amortized cost | 56,464,310 | | | 365,816,205 | | | 422,280,515 | | | 89,769,560 | | | 332,510,955 | | Amortized cost | 75,520,212 | | | 394,153,102 | | | 469,673,314 | | | 76,818,156 | | | 392,855,158 | |
| Fair value | Fair value | 56,284,334 | | | 363,122,860 | | | 419,407,194 | | | 87,730,239 | | | 331,676,955 | | Fair value | 75,449,410 | | | 391,752,209 | | | 467,201,619 | | | 75,900,089 | | | 391,301,530 | |
| Weighted average coupon rate | Weighted average coupon rate | 12.17 | % | | 7.95 | % | | 8.51 | % | | 10.16 | % | | 8.07 | % | Weighted average coupon rate | 12.39 | % | | 7.01 | % | | 7.85 | % | | 10.40 | % | | 7.37 | % |
Weighted-average remaining
term (years) | Weighted-average remaining
term (years) | 1.78 | | | 1.44 | | | 1.48 | | | 1.08 | | | 1.59 | | Weighted-average remaining
term (years) | 1.93 | | | 1.45 | | | 1.53 | | | 0.82 | | | 1.66 | |
_______________
(1)These loans pay a coupon rate of LIBOR or SOFR plus a fixed spread. Coupon rate shown was determined using LIBOR of 0.10%4.39%, average SOFR of 4.06% and 0.14%forward-looking term rate based on SOFR (“Term SOFR”) of 4.36% as of December 31, 20212022 and 2020.LIBOR of 0.10% as of December 31, 2021.
(2)As of December 31, 2022 and 2021, and 2020, amountsamount included $163.1$413.1 million and $184.2$163.1 million of senior mortgages used as collateral for $93.8$261.0 million and $107.6$93.8 million of borrowings under a term loan,credit facilities, respectively. As of December 31, 2021, amounts also included $60.1 million of senior mortgages used as collateral for $38.6 million of borrowings under a revolving line of credit and $67.4 million of senior mortgages used as collateral for $44.6 million of borrowings under a repurchase agreement. Borrowings under the term loan bear interest at an annual rate of LIBOR plus 4.25% with a LIBOR floor of 1.00%. Borrowings under the revolving line of credit bear interest at a minimum rate of 4.0%. Borrowings under the repurchase agreement bears interest at an annual rate of LIBOR plus an applicable spread which ranges from 1.60% to 1.85%.
(3)As of both December 31, 2022 and 2021, twenty-one and 2020, thirteen and twelve of these loans, respectively, are subject to a LIBOR floor.or SOFR floor, as applicable.
In addition to itsTerra Property Trust’s net loan portfolio, as of December 31, 20212022, Terra Property Trust owned a multi-tenant office building acquired pursuant to a foreclosure and 2020,as of December 31, 2021, Terra Property Trust owned 4.9 acres of adjacent land acquired pursuant to a deed in lieu of foreclosure and athe aforementioned multi-tenant office building acquired pursuant to a foreclosure.building. The land and buildingwas sold in the second quarter of 2022. The real estate and related lease intangible assets and liabilities had a net carrying value of $56.1$40.6 million and $62.9$56.1 million as of December 31, 20212022 and 2020,December 31, 2021, respectively. The mortgage loan payable encumbering the multi-tenant office building had an outstanding principal amount of $32.0$29.3 million and $44.0$32.0 million as of December 31, 2022 and 2021, and 2020.respectively.
Additionally, as of December 31, 20212022 and 2020,2021, Terra Property Trust owned 50.0%27.9% and 90.3%50.0%, respectively, of equity interest in a limited partnership that invests primarily in performing and non-performing mortgages, loans, mezzanines and other credit instruments supported by underlying commercial real estate assets. During 2021, we purchasedTerra Property Trust also beneficially owned equity interests in twothree joint ventures. ventures that invest in real estate properties. In 2022, in connection with a mezzanine loan Terra Property Trust originated, Terra Property Trust entered into a residual profit sharing arrangement with the borrower. Terra Property Trust accounted for this arrangement as an equity investment. As of December 31, 20212022 and 2020,2021, these equity interestsinvestments had total carrying value of $62.5 million and $69.7 million, and $36.3 million, respectively.
Portfolio Investment Activity
For the years ended December 31, 20212022 and 2020,2021, Terra Property Trust invested $117.3$126.9 million and $48.2$117.3 million in new and add-on investments and had $85.1$33.3 million and $31.3$85.1 million of repayments, resulting in net investments of $32.5$93.6 million and $16.9$32.2 million, respectively. Amounts are net of obligations under participation agreements, secured borrowing, borrowings under the master repurchase agreement, the term loan, the repurchase agreementagreements and the revolving line of credit.
Portfolio Information
The tables below set forth the types of assets in Terra Property Trust’s portfolio, as well as the property type and geographic location of the properties securing the loans in the portfolio, on a net loan basis, which represents Terra Property Trust’s proportionate share of the loans, based on its economic ownership of these loans.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Investment Structure | | Principal Balance | | Amortized Cost | | Fair
Value | | % of Total | | Principal Balance | | Amortized Cost | | Fair
Value | | % of Total |
| First mortgages | | $ | 310,933,350 | | | $ | 313,515,326 | | | $ | 312,735,452 | | | 58.3 | % | | $ | 209,660,270 | | | $ | 210,694,778 | | | $ | 210,517,299 | | | 47.9 | % |
Preferred equity
investments | | 63,441,546 | | | 63,515,633 | | | 49,187,299 | | | 9.2 | % | | 101,019,788 | | | 101,267,732 | | | 97,472,723 | | | 22.2 | % |
| Mezzanine loans | | 17,444,357 | | | 17,622,804 | | | 17,518,902 | | | 3.3 | % | | 23,946,549 | | | 24,287,203 | | | 23,686,933 | | | 5.4 | % |
| Credit facility | | 11,762,500 | | | 11,859,876 | | | 11,859,877 | | | 2.2 | % | | — | | | — | | | — | | | — | % |
Allowance for loan
losses | | — | | | (13,658,481) | | | — | | | — | % | | — | | | (3,738,758) | | | — | | | — | % |
Total loan
investments | | $ | 403,581,753 | | | 392,855,158 | | | 391,301,530 | | | 73.0 | % | | $ | 334,626,607 | | | 332,510,955 | | | 331,676,955 | | | 75.5 | % |
Marketable
securities | | | | 1,176,006 | | | 1,310,000 | | | 0.2 | % | | | | 1,176,006 | | | 1,287,500 | | | 0.3 | % |
| Real estate owned | | | | 56,067,129 | | | 75,043,111 | | | 14.0 | % | | | | 63,385,339 | | | 70,717,229 | | | 16.1 | % |
Equity investment
in unconsolidated
Investments | | | | 69,713,793 | | | 68,898,535 | | | 12.8 | % | | | | 36,385,339 | | | 35,678,585 | | | 8.1 | % |
| Total | | | | $ | 519,812,086 | | | $ | 536,553,176 | | | 100.0 | % | | | | $ | 433,457,639 | | | $ | 439,360,269 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Property Type | | Principal Balance | | Amortized
Cost | | Fair
Value | | % of Total | | Principal Balance | | Amortized Cost | | Fair
Value | | % of Total |
| Office | | $ | 166,071,342 | | | $ | 166,836,320 | | | $ | 163,723,036 | | | 30.6 | % | | $ | 145,560,299 | | | $ | 146,010,011 | | | $ | 144,654,237 | | | 32.9 | % |
| Multifamily | | 72,999,417 | | | 73,955,240 | | | 74,017,225 | | | 13.9 | % | | 103,057,678 | | | 103,678,464 | | | 103,502,170 | | | 23.5 | % |
Hotel - full/select
service | | 56,847,381 | | | 57,395,682 | | | 57,565,411 | | | 10.7 | % | | 49,142,809 | | | 49,393,251 | | | 49,052,148 | | | 11.2 | % |
| Student housing | | 31,000,000 | | | 31,565,670 | | | 31,911,158 | | | 5.9 | % | | 3,000,000 | | | 3,204,375 | | | 2,988,110 | | | 0.7 | % |
| Infill land | | 28,960,455 | | | 28,923,827 | | | 29,173,344 | | | 5.4 | % | | 5,847,837 | | | 5,901,575 | | | 5,864,339 | | | 1.3 | % |
| Mixed use | | 28,940,658 | | | 28,977,024 | | | 16,069,378 | | | 3.0 | % | | 16,767,984 | | | 16,767,984 | | | 14,314,585 | | | 3.3 | % |
| Industrial | | 18,762,500 | | | 18,859,876 | | | 18,841,978 | | | 3.5 | % | | 7,000,000 | | | 7,000,000 | | | 7,007,397 | | | 1.6 | % |
Hotel - extended
stay | | — | | | — | | | — | | | — | % | | 4,250,000 | | | 4,294,053 | | | 4,293,969 | | | 1.0 | % |
Allowance for loan
losses | | — | | | (13,658,481) | | | — | | | — | % | | — | | | (3,738,758) | | | — | | | — | % |
Total loan
investments | | $ | 403,581,753 | | | 392,855,158 | | | 391,301,530 | | | 73.0 | % | | $ | 334,626,607 | | | 332,510,955 | | | 331,676,955 | | | 75.5 | % |
Marketable
securities | | | | 1,176,006 | | | 1,310,000 | | | 0.2 | % | | | | 1,176,006 | | | $ | 1,287,500 | | | 0.3 | % |
| Real estate owned | | | | 56,067,129 | | | 75,043,111 | | | 14.0 | % | | | | 63,385,339 | | | 70,717,229 | | | 16.1 | % |
Equity investment
in unconsolidated
Investments | | | | 69,713,793 | | | 68,898,535 | | | 12.8 | % | | | | 36,385,339 | | | 35,678,585 | | | 8.1 | % |
| Total | | | | $ | 519,812,086 | | | $ | 536,553,176 | | | 100.0 | % | | | | $ | 433,457,639 | | | $ | 439,360,269 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| Investment Structure | | Principal Balance | | Amortized Cost | | Fair
Value | | % of Total | | Principal Balance | | Amortized Cost | | Fair
Value | | % of Total |
| First mortgages | | $ | 456,408,889 | | | $ | 461,299,182 | | | $ | 458,085,397 | | | 63.1 | % | | $ | 310,933,350 | | | $ | 313,515,326 | | | $ | 312,735,452 | | | 58.3 | % |
Preferred equity
investments | | 121,231,434 | | | 122,132,177 | | | 97,127,877 | | | 13.4 | % | | 63,441,546 | | | 63,515,633 | | | 49,187,299 | | | 9.2 | % |
| Mezzanine loans | | 26,767,345 | | | 26,770,521 | | | 26,325,341 | | | 3.6 | % | | 17,444,357 | | | 17,622,804 | | | 17,518,902 | | | 3.3 | % |
| Credit facility | | 28,802,833 | | | 29,080,183 | | | 28,926,544 | | | 4.0 | % | | 11,762,500 | | | 11,859,876 | | | 11,859,877 | | | 2.2 | % |
Allowance for loan
losses | | — | | | (25,471,890) | | | — | | | — | % | | — | | | (13,658,481) | | | — | | | — | % |
Total loan
investments | | $ | 633,210,501 | | | 613,810,173 | | | 610,465,159 | | | 84.1 | % | | $ | 403,581,753 | | | 392,855,158 | | | 391,301,530 | | | 73.0 | % |
Marketable
securities | | | | 136,265 | | | 147,960 | | | — | % | | | | 1,176,006 | | | 1,310,000 | | | 0.2 | % |
| Real estate owned | | | | 40,581,847 | | | 52,500,000 | | | 7.2 | % | | | | 56,067,129 | | | 75,043,111 | | | 14.0 | % |
Equity investment
in unconsolidated
Investments | | | | 62,498,340 | | | 63,161,348 | | | 8.7 | % | | | | 69,713,793 | | | 68,898,535 | | | 12.8 | % |
| Total | | | | $ | 717,026,625 | | | $ | 726,274,467 | | | 100.0 | % | | | | $ | 519,812,086 | | | $ | 536,553,176 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Geographic Location | | Principal Balance | | Amortized Cost | | Fair
Value | | % of Total | | Principal Balance | | Amortized Cost | | Fair
Value | | % of Total |
| United States | | | | | | | | | | | | | | | | |
| California | | $ | 187,209,547 | | | $ | 189,082,380 | | | $ | 189,447,577 | | | 35.3 | % | | $ | 143,454,602 | | | $ | 144,066,584 | | | $ | 143,989,756 | | | 32.9 | % |
| New York | | 63,441,546 | | | 63,515,633 | | | 49,187,299 | | | 9.1 | % | | 56,058,669 | | | 56,139,234 | | | 52,378,785 | | | 11.9 | % |
| Georgia | | 53,289,288 | | | 53,536,884 | | | 52,031,363 | | | 9.7 | % | | 74,116,787 | | | 74,505,752 | | | 74,411,107 | | | 16.9 | % |
| North Carolina | | 44,492,971 | | | 44,704,699 | | | 44,453,133 | | | 8.3 | % | | 28,647,837 | | | 28,802,869 | | | 28,734,218 | | | 6.5 | % |
| Utah | | 28,000,000 | | | 28,420,056 | | | 28,851,547 | | | 5.4 | % | | — | | | — | | | — | | | — | % |
| Texas | | 13,625,000 | | | 13,725,690 | | | 13,735,569 | | | 2.6 | % | | 3,848,712 | | | 3,887,200 | | | 3,533,118 | | | 0.8 | % |
| Massachusetts | | 7,000,000 | | | 7,000,000 | | | 6,982,101 | | | 1.3 | % | | 7,000,000 | | | 7,000,000 | | | 7,007,397 | | | 1.6 | % |
| Washington | | 3,523,401 | | | 3,382,683 | | | 3,553,330 | | | 0.7 | % | | 18,500,000 | | | 18,643,699 | | | 18,634,464 | | | 4.2 | % |
| South Carolina | | 3,000,000 | | | 3,145,614 | | | 3,059,611 | | | 0.6 | % | | 3,000,000 | | | 3,204,375 | | | 2,988,110 | | | 0.7 | % |
Allowance for loan
losses | | — | | | (13,658,481) | | | — | | | — | % | | — | | | (3,738,758) | | | — | | | — | % |
Total loan
investments | | $ | 403,581,753 | | | 392,855,158 | | | 391,301,530 | | | 73.0 | % | | $ | 334,626,607 | | | 332,510,955 | | | 331,676,955 | | | 75.5 | % |
Marketable
securities | | | | 1,176,006 | | | 1,310,000 | | | 0.2 | % | | | | 1,176,006 | | | 1,287,500 | | | 0.3 | % |
| Real estate owned | | | | 56,067,129 | | | 75,043,111 | | | 14.0 | % | | | | 63,385,339 | | | 70,717,229 | | | 16.1 | % |
Equity investment
in unconsolidated
Investments | | | | 69,713,793 | | | 68,898,535 | | | 12.8 | % | | | | 36,385,339 | | | 35,678,585 | | | 8.1 | % |
| Total | | | | $ | 519,812,086 | | | $ | 536,553,176 | | | 100.0 | % | | | | $ | 433,457,639 | | | $ | 439,360,269 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| Property Type | | Principal Balance | | Amortized
Cost | | Fair
Value | | % of Total | | Principal Balance | | Amortized Cost | | Fair
Value | | % of Total |
| Office | | $ | 171,611,750 | | | $ | 172,042,063 | | | $ | 159,780,622 | | | 22.0 | % | | $ | 166,071,342 | | | $ | 166,836,320 | | | $ | 163,723,036 | | | 30.6 | % |
| Industrial | | 147,796,164 | | | 148,891,742 | | | 148,409,441 | | | 20.4 | % | | 18,762,500 | | | 18,859,876 | | | 18,841,978 | | | 3.5 | % |
| Multifamily | | 104,589,464 | | | 105,570,432 | | | 103,784,913 | | | 14.3 | % | | 72,999,417 | | | 73,955,240 | | | 74,017,225 | | | 13.9 | % |
| Mixed use | | 64,880,450 | | | 65,838,965 | | | 52,303,392 | | | 7.2 | % | | 28,940,658 | | | 28,977,024 | | | 16,069,378 | | | 3.0 | % |
| Infill land | | 48,860,291 | | | 49,565,437 | | | 49,864,054 | | | 6.9 | % | | 28,960,455 | | | 28,923,827 | | | 29,173,344 | | | 5.4 | % |
Hotel - full/select
service | | 43,222,382 | | | 43,758,804 | | | 43,062,933 | | | 5.9 | % | | 56,847,381 | | | 57,395,682 | | | 57,565,411 | | | 10.7 | % |
| Student housing | | 31,000,000 | | | 31,774,261 | | | 31,816,276 | | | 4.4 | % | | 31,000,000 | | | 31,565,670 | | | 31,911,158 | | | 5.9 | % |
| Infrastructure | | 21,250,000 | | | 21,840,359 | | | 21,443,528 | | | 3.0 | % | | — | | | — | | | — | | | — | % |
Allowance for loan
losses | | — | | | (25,471,890) | | | — | | | — | % | | — | | | (13,658,481) | | | — | | | — | % |
Total loan
investments | | $ | 633,210,501 | | | 613,810,173 | | | 610,465,159 | | | 84.1 | % | | $ | 403,581,753 | | | 392,855,158 | | | 391,301,530 | | | 73.0 | % |
Marketable
securities | | | | 136,265 | | | 147,960 | | | — | % | | | | 1,176,006 | | | 1,310,000 | | | 0.2 | % |
| Real estate owned | | | | 40,581,847 | | | 52,500,000 | | | 7.2 | % | | | | 56,067,129 | | | 75,043,111 | | | 14.0 | % |
Equity investment
in unconsolidated
Investments | | | | 62,498,340 | | | 63,161,348 | | | 8.7 | % | | | | 69,713,793 | | | 68,898,535 | | | 12.8 | % |
| Total | | | | $ | 717,026,625 | | | $ | 726,274,467 | | | 100.0 | % | | | | $ | 519,812,086 | | | $ | 536,553,176 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| Geographic Location | | Principal Balance | | Amortized Cost | | Fair
Value | | % of Total | | Principal Balance | | Amortized Cost | | Fair
Value | | % of Total |
| United States | | | | | | | | | | | | | | | | |
| California | | $ | 151,668,387 | | | $ | 153,158,967 | | | $ | 150,237,383 | | | 20.8 | % | | $ | 187,209,547 | | | $ | 189,082,380 | | | $ | 189,447,577 | | | 35.3 | % |
| New York | | 91,845,479 | | | 91,877,084 | | | 67,737,205 | | | 9.3 | % | | 63,441,546 | | | 63,515,633 | | | 49,187,299 | | | 9.1 | % |
| Georgia | | 72,401,718 | | | 73,101,964 | | | 71,971,448 | | | 9.9 | % | | 53,289,288 | | | 53,536,884 | | | 52,031,363 | | | 9.7 | % |
| Texas | | 67,625,000 | | | 68,142,046 | | | 68,142,046 | | | 9.4 | % | | 13,625,000 | | | 13,725,690 | | | 13,735,569 | | | 2.6 | % |
| New Jersey | | 62,228,622 | | | 62,958,482 | | | 63,290,218 | | | 8.7 | % | | — | | | — | | | — | | | — | % |
| Washington | | 56,671,267 | | | 57,027,639 | | | 57,191,604 | | | 7.9 | % | | 3,523,401 | | | 3,382,683 | | | 3,553,330 | | | 0.7 | % |
| Utah | | 49,250,000 | | | 50,698,251 | | | 50,345,762 | | | 6.9 | % | | 28,000,000 | | | 28,420,056 | | | 28,851,547 | | | 5.4 | % |
| North Carolina | | 43,520,028 | | | 44,041,162 | | | 43,634,806 | | | 6.0 | % | | 44,492,971 | | | 44,704,699 | | | 44,453,133 | | | 8.3 | % |
| Arizona | | 31,000,000 | | | 31,276,468 | | | 31,276,468 | | | 4.3 | % | | — | | | — | | | — | | | — | % |
| Massachusetts | | 7,000,000 | | | 7,000,000 | | | 6,638,219 | | | 0.9 | % | | 7,000,000 | | | 7,000,000 | | | 6,982,101 | | | 1.3 | % |
| South Carolina | | — | | | — | | | — | | | — | % | | 3,000,000 | | | 3,145,614 | | | 3,059,611 | | | 0.6 | % |
Allowance for loan
losses | | — | | | (25,471,890) | | | — | | | — | % | | — | | | (13,658,481) | | | — | | | — | % |
Total loan
investments | | $ | 633,210,501 | | | 613,810,173 | | | 610,465,159 | | | 84.1 | % | | $ | 403,581,753 | | | 392,855,158 | | | 391,301,530 | | | 73.0 | % |
Marketable
securities | | | | 136,265 | | | 147,960 | | | — | % | | | | 1,176,006 | | | 1,310,000 | | | 0.2 | % |
| Real estate owned | | | | 40,581,847 | | | 52,500,000 | | | 7.2 | % | | | | 56,067,129 | | | 75,043,111 | | | 14.0 | % |
Equity investment
in unconsolidated
Investments | | | | 62,498,340 | | | 63,161,348 | | | 8.7 | % | | | | 69,713,793 | | | 68,898,535 | | | 12.8 | % |
| Total | | | | $ | 717,026,625 | | | $ | 726,274,467 | | | 100.0 | % | | | | $ | 519,812,086 | | | $ | 536,553,176 | | | 100.0 | % |
Factors Impacting Operating Results
Our results of operations are affected by a number of factors and primarily depend on, among other things, the level of the interest income generated by Terra Property Trust from targeted assets, the market value of our assets and the supply of, and demand for, real estate-related loans, including mezzanine loans, first mortgage loans, subordinated mortgage loans, preferred equity investments and other loans related to high quality commercial real estate in the United States, and the financing and other costs associated with our business. Interest income and borrowing costs of Terra Property Trust may vary as a result of changes in interest rates, which could impact the net interest we receive on our assets. Our operating results may also be impacted by conditions in the financial markets and unanticipated credit events experienced by borrowers under our loan assets.
Market Risk
Terra Property Trust’s loans are highly illiquid, and there is no assurance that it will achieve its investment objectives, including targeted returns. Due to the illiquidity of the loans, valuation of Terra Property Trust’s loans may be difficult, as there generally will be no established markets for these loans.
Credit Risk
Credit risk represents the potential loss that Terra Property Trust would incur if the borrowers failed to perform pursuant to the terms of their obligations to Terra Property Trust. Terra Property Trust manages exposure to credit risk by limiting exposure to any one individual borrower and any one asset class. Additionally, Terra Property Trust employs an asset management approach and monitors the portfolio of loans through, at a minimum, quarterly financial review of property performance including net operating income, loan-to-value ratio, debt service coverage ratio, and the debt yield. Terra Property Trust also requires certain borrowers to establish a cash reserve, as a form of additional collateral, for the purpose of providing for future interest or property-related operating payments.
The performance and value of Terra Property Trust’s loans depend upon the sponsors’ ability to operate or manage the development of the respective properties that serve as collateral so that each property’s value ultimately supports the repayment of the loan balance. Mezzanine loans and preferred equity investments are subordinate to senior mortgage loans and, therefore, involve a higher degree of risk. In the event of a default, mezzanine loans and preferred equity investments will be satisfied
only after the senior lender’s investment is fully recovered. As a result, in the event of a default, Terra Property Trust may not recover all of its investments.
In addition, Terra Property Trust is exposed to the risks generally associated with the commercial real estate market, including variances in occupancy rates, capitalization rates, absorption rates, and other macroeconomic factors beyond its control. Terra Property Trust seeks to manage these risks through its underwriting and asset management processes.
The COVID-19 pandemic has significantly impacted the commercial real estate markets, causing reduced occupancy, requests from tenants for rent deferral or abatement, and delays in construction and development projects currently planned or underway. These negative conditions may persist into the future and impair Terra Property Trust’s borrowers’ ability to pay principal and interest due to Terra Property Trust under its loan agreements.
We and Terra Property Trust maintain all of our cash at financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation.
Concentration Risk
Terra Property Trust holds real estate-related loans. Thus, its loan portfolio may be subject to a more rapid change in value than would be the case if it were required to maintain a wide diversification among industries, companies and types of loans. The result of such concentration in real estate assets is that a loss in such loans could materially reduce Terra Property Trust’s capital.
Liquidity Risk
Liquidity risk represents the possibility that we may not be able to sell, directly or indirectly, our equity interest in Terra Property Trust or Terra JV at a reasonable price in times of low trading volume, high volatility and financial stress.
Interest Rate Risk
Interest rate risk represents the effect from a change in interest rates, which could result in an adverse change in the fair value of our interest-bearing financial instruments. With respect to Terra Property Trust’s business operations, increases in interest rates, in general, may over time cause: (i) the interest expense associated with variable rate borrowings to increase; (ii) the value of real estate-related loans to decline; (iii) coupons on variable rate loans to reset, although on a delayed basis, to higher interest rates; (iv) to the extent applicable under the terms of Terra Property Trust’s investments, prepayments on real estate-related loans to slow; and (v) to the extent we enter into interest rate swap agreements as part of Terra Property Trust’s hedging strategy, the value of these agreements to increase.
Conversely, decreases in interest rates, in general, may over time cause: (i) the interest expense associated with variable rate borrowings to decrease; (ii) the value of real estate-related loans to increase; (iii) coupons on variable rate real estate-related loans to reset, although on a delayed basis, to lower interest rates (iv) to the extent applicable under the terms of Terra Property Trust’s investments, prepayments on real estate-related loans to increase; and (v) to the extent Terra Property Trust enters into interest rate swap agreements as part of its hedging strategy, the value of these agreements to decrease.
Prepayment Risk
Prepayments can either positively or adversely affect the yields on Terra Property Trust’s loans. Prepayments on debt instruments, where permitted under the debt documents, are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control, and consequently, such prepayment rates cannot be predicted with certainty. If Terra Property Trust does not collect a prepayment fee in connection with a prepayment or are unable to invest the proceeds of such prepayments received, the yield on the portfolio will decline. In addition, Terra Property Trust may acquire assets at a discount or premium and if the asset does not repay when expected, the anticipated yield may be impacted. Under certain interest rate and prepayment scenarios Terra Property Trust may fail to recoup fully its cost of acquisition of certain loans.
Extension Risk
Extension risk is the risk that Terra Property Trust’s assets will be repaid at a slower rate than anticipated and generally increases when interest rates rise. In which case, to the extent Terra Property Trust has financed the acquisition of an asset, Terra Property Trust may have to finance its asset at potentially higher costs without the ability to reinvest principal into higher
yielding securities because borrowers prepay their mortgages at a slower pace than originally expected, adversely impacting its net interest spread, and thus its net interest income.
Real Estate Risk
The market values of commercial and residential mortgage assets are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; retroactive changes to building or similar codes; pandemics; natural disasters; and other acts of god. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loans, which could also cause Terra Property Trust to suffer losses.
Use of Leverage
Terra Property Trust deploys moderate amounts of leverage as part of its operating strategy, which may consist of borrowings under first mortgage financings, warehouse facilities, term loans, repurchase agreements and other credit facilities. While borrowing and leverage present opportunities for increasing total return, they may have the effect of potentially creating or increasing losses.
Results of Operations
The following table presents the comparative results of our operations for the years ended December 31, 20212022 and 2020:2021:
| | | | | Years Ended December 31, | | | | Years Ended December 31, |
| | | | 2021 | | 2020 | | Change | | | | 2022 | | 2021 | | Change |
| Investment income | Investment income | | | | | | | | | Investment income | | | | | | | |
| Dividend income | Dividend income | | | | $ | 1,883,284 | | | $ | 4,283,576 | | | $ | (2,400,292) | | Dividend income | | | $ | 6,868,609 | | | $ | 1,883,284 | | | $ | 4,985,325 | |
| Other operating income | Other operating income | | | | 53 | | | 232 | | | (179) | | Other operating income | | | 65 | | | 53 | | | 12 | |
| Total investment income | Total investment income | | | | 1,883,337 | | | 4,283,808 | | | (2,400,471) | | Total investment income | | | 6,868,674 | | | 1,883,337 | | | 4,985,337 | |
| Operating expenses | Operating expenses | | | | | | | | | Operating expenses | | | | | | | |
| Professional fees | Professional fees | | | | 442,093 | | | 552,648 | | | (110,555) | | Professional fees | | | 538,348 | | | 442,093 | | | 96,255 | |
| Other | Other | | | | 3,310 | | | 10,964 | | | (7,654) | | Other | | | 4,666 | | | 3,310 | | | 1,356 | |
| Total operating expenses | Total operating expenses | | | | 445,403 | | | 563,612 | | | (118,209) | | Total operating expenses | | | 543,014 | | | 445,403 | | | 97,611 | |
| Net investment income | Net investment income | | | | 1,437,934 | | | 3,720,196 | | | (2,282,262) | | Net investment income | | | 6,325,660 | | | 1,437,934 | | | 4,887,726 | |
| Net change in unrealized depreciation on investment | Net change in unrealized depreciation on investment | | | | (6,822,621) | | | 1,104,433 | | | (7,927,054) | | Net change in unrealized depreciation on investment | | | (2,682,270) | | | (6,822,621) | | | 4,140,351 | |
Net (decrease) increase in members’ capital resulting from
operations | | | | $ | (5,384,687) | | | $ | 4,824,629 | | | $ | (10,209,316) | | |
Net increase (decrease) in members’ capital resulting from
operations | | Net increase (decrease) in members’ capital resulting from
operations | | | $ | 3,643,390 | | | $ | (5,384,687) | | | $ | 9,028,077 | |
Dividend Income
Dividend income associated with our indirect ownership of Terra Property Trust primarily represents our proportionate share of Terra Property Trust’s net income or loss for the period. Any excess of distributions received from Terra Property Trust over its net income is recorded as return of capital. As of both December 31, 2022 and 2021, and 2020,through Terra JV we indirectly beneficially owned 61.3% and 76.5% through Terra JV, respectively, of the outstanding shares of common stock of Terra Property Trust.
For the years ended December 31, 20212022 and 2020,2021, we received distributions of $11.5 million and $13.1 million, or $0.78 and $17.3 million, or $0.88 and $1.16 per share, respectively, from Terra Property Trust, of which $1.9$6.9 million and $4.3$1.9 million was recorded as dividend income and $11.2$4.6 million and $13.0$11.2 million was recorded as return of capital, respectively.
For the year ended December 31, 2021, Terra Property Trust recorded net loss of $12.4 million, compared to net income of $5.3 million recorded in the same period in 2020. The change in Terra Property Trust’s net income or loss for the year ended December 31, 20212022 as compared to the same period in 2020 was2021 Terra Property Trust’s net loss decreased by $5.4 million, primarily due to (i) a decreasean increase in net interest income of $9.5$6.6 million resulting from the suspensionas a result of interest income accrual of $3.6 million on three loans, because recovery of such income was doubtful, as well as decreasesan increase in the weighted average principal balance of net loans and an increase in the weighted average coupon rate on net loans; (ii)loans due to new loans Terra Property Trust entered into in 2022 and as well as loans acquired in connection with the BDC Merger, a gain on extinguishment of debt of $3.4 million due to obligations under participation agreements with Terra BDC being released in connection with the BDC Merger, a decrease in real estate operating loss of $2.1 million as a result of lease termination income recognized in 2022 in connection with a termination notice received in November 2021, and an increase in provision for loan lossesprepayment fee income of $7.2$1.8 million resulting fromas a decline in the fair valueresult of the collateral on a loan; (iii) increase in net operating loss from real estate property of $4.2 million resulting from an impairment charge of $3.4 million recorded on a
parcel of land in order to reduce the carrying value of the land to its estimated fair value, which reflected the selling price, as well as an increase in ground rent expense dueloans with minimum yield provisions repaid before maturity. These increases in net income were partially offset by an increase in fees paid and operating expenses reimbursed to the Manager of $3.0 million as a rent reset; and (iv)result of an increase in total assets under management resulting, a decrease in realized gains on sale of marketable securities of $1.0 million, partially offset by equity income from unconsolidated investments of $5.9$3.2 million recognizedresulting from a decrease in ownership interest in RESOF and loss generated from the current year period (therethree joint ventures and an increase in professional fees of $1.9 million resulting from legal fees incurred in connection with litigation related to the ground rent reset as well as a loan refinancing in 2022 which was no such equity income in the prior year period).accounted for as a loan modification.
Net Loan Portfolio
In assessing the performance of Terra Property Trust’s loans, we believe it is appropriate to evaluate the loans on an economic basis, that is, gross loans net of obligations under participation agreements and secured borrowing, term loan payable, revolving line of credit and repurchase agreement payable.
The following tables present a reconciliation of Terra Property Trust’s loan portfolio on a weighted average basis from a gross basis to a net basis for the years ended December 31, 20212022 and 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| | Weighted Average Principal Amount (1) | | Weighted Average Coupon Rate (2) | | Weighted Average Principal Amount (1) | | Weighted Average Coupon Rate (2) |
| Total portfolio | | | | | | | | |
| Gross loans | | $ | 456,344,152 | | | 8.5 | % | | $ | 411,157,772 | | | 9.2 | % |
Obligations under participation agreements
and secured borrowing | | (114,437,021) | | 11.0 | % | | (83,248,489) | | 10.9 | % |
| Repurchase agreement payable | | (6,349,642) | | | 2.6 | % | | (64,382,360) | | 3.9 | % |
| Term loan payable | | (103,433,296) | | | 5.3 | % | | (34,923,075) | | | 5.3 | % |
| Revolving line of credit | | (16,721,744) | | | 4.0 | % | | — | | | — | % |
Net loans (3) | | $ | 215,402,449 | | | 9.2 | % | | $ | 228,603,848 | | | 10.7 | % |
| Senior loans | | | | | | | | |
| Gross loans | | 272,577,220 | | 6.5 | % | | 221,461,896 | | 6.7 | % |
Obligations under participation agreements
and secured borrowing | | (51,693,824) | | 8.9 | % | | (30,779,483) | | 9.1 | % |
| Repurchase agreement payable | | (6,349,642) | | | 2.6 | % | | (64,382,360) | | 3.9 | % |
| Term loan payable | | (103,433,296) | | | 5.3 | % | | (34,923,075) | | | 5.3 | % |
| Revolving line of credit | | (16,721,744) | | | 4.0 | % | | — | | | — | % |
Net loans (3) | | $ | 94,378,714 | | | 7.2 | % | | $ | 91,376,978 | | | 8.4 | % |
Subordinated loans (4) | | | | | | | | |
| Gross loans | | 183,766,932 | | 11.4 | % | | 189,695,876 | | 12.1 | % |
| Obligations under participation agreements | | (62,743,197) | | 12.8 | % | | (52,469,006) | | 12.1 | % |
Net loans (3) | | $ | 121,023,735 | | | 10.7 | % | | $ | 137,226,870 | | | 12.1 | % |
______________ | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
| | Weighted Average Principal Amount (1) | | Weighted Average Coupon Rate (2) | | Weighted Average Principal Amount (1) | | Weighted Average Coupon Rate (2) |
| Total portfolio | | | | | | | | |
| Gross loans | | $ | 550,062,087 | | | 10.7 | % | | $ | 456,344,152 | | | 8.5 | % |
Obligations under participation agreements
and secured borrowing | | (59,931,021) | | 12.1 | % | | (114,437,021) | | 11.0 | % |
| Repurchase agreement payable | | (167,507,961) | | | 6.2 | % | | (6,349,642) | | 2.6 | % |
| Term loan payable | | (10,303,678) | | | 5.3 | % | | (103,433,296) | | | 5.3 | % |
| Revolving line of credit | | (47,383,467) | | | 7.6 | % | | (16,721,744) | | | 4.0 | % |
Net loans (3) | | $ | 264,935,960 | | | 14.0 | % | | $ | 215,402,449 | | | 9.2 | % |
| Senior loans | | | | | | | | |
| Gross loans | | 408,607,321 | | 9.7 | % | | 272,577,220 | | 6.5 | % |
Obligations under participation agreements
and secured borrowing | | (24,800,580) | | 8.1 | % | | (51,693,824) | | 8.9 | % |
| Repurchase agreement payable | | (167,507,961) | | | 6.2 | % | | (6,349,642) | | 2.6 | % |
| Term loan payable | | (10,303,678) | | | 5.3 | % | | (103,433,296) | | 5.3 | % |
| Revolving line of credit | | (47,383,467) | | | 7.6 | % | | (16,721,744) | | | 4.0 | % |
Net loans (3) | | $ | 158,611,635 | | | 14.6 | % | | $ | 94,378,714 | | | 7.2 | % |
Subordinated loans (4) | | | | | | | | |
| Gross loans | | 141,454,766 | | 13.6 | % | | 183,766,932 | | 11.4 | % |
| Obligations under participation agreements | | (35,130,441) | | 13.7 | % | | (62,743,197) | | 12.8 | % |
Net loans (3) | | $ | 106,324,325 | | | 13.6 | % | | $ | 121,023,735 | | | 10.7 | % |
_______________
(1)Amount is calculated based on the number of days each loan is outstanding.
(2)Amount is calculated based on the underlying principal amount of each loan.
(3)The weighted average coupon rate represents net interest income over the period calculated using the weighted average coupon rate and weighted average principal amount shown on the table (interest income on the loans less interest expense) divided by the weighted average principal amount of the net loans during the period.
(4)Subordinated loans include mezzanine loans, preferred equity investments and credit facilities.
For the year ended December 31, 2021 as compared to the same period in 2020, the decrease in weighted average coupon rate was primarily due to a higher volume of loan originations with lower coupon rates.
Professional Fees
For the year ended December 31, 2021 as compared to the same period in 2020, professional fees decreased by $0.1 million as a result of a decrease in the cost of compliance.
Net Change in Unrealized Depreciation on Investment
Net change in unrealized appreciation or depreciation on investment reflects the change in Terra Property Trust’s fair value during the reporting period. There may be fluctuations in unrealized gains and losses of the underlying portfolio as loans within the portfolio approach their respective maturity dates. In addition, the unrealized gains or losses in the portfolio may fluctuate over time due to changes in the market yields.
For the year ended December 31, 2022 as compared to the same period in 2021, we recorded an increase in net change in unrealized depreciation on investment decreased by $4.1 million, as a result of $6.8 million, primarily due to a declinedecrease in the fair value of an underlying loan resulting fromTerra Property Trust’s investment portfolio, the decline in which was primarily due to the fair valueimpact of increases in the collateral. Additionally, net changeunderlying discount rates due to the macro-economic conditions, partially offset by a decrease in unrealized depreciation on investment increased as a resultthe trading price of debt issuance costs incurred in connection with Terra Property Trust’s financing activities in 2021, which reduced the carrying value of the indebtedness. For the year ended December 31, 2020, we recorded an increase in net change in unrealized appreciation on investment of $1.1 million, primarily due to decreases in underlying index rates as a result of the macro-economic conditions.unsecured notes payable.
Net Increase (Decrease) Increase in Members’ Capital Resulting from Operations
For the year ended December 31, 2021, we recorded a net decrease in members’ capital2022, the resulting from operations of $5.4 million, compared to a net increase in members’ capital resulting from operations was $3.6 million, compared to the resulting net decrease in members’ capital resulting from operations of $4.8$5.4 million recorded infor the same period in the 2020.2021.
Financial Condition, Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements, including funding and maintaining our assets and operations, making distributions to our members and other general business needs. Our primary cash requirements for the next twelve months are making the discretionary recurring distributions to our members. We expect to use cash distributions received from Terra Property Trust to meet such cash requirements. Distributions are made at the discretion of Terra Property Trust’s board of directorsthe TPT Board and will depend upon, among other things, its actual results of operations and liquidity.
A total of $7.8 million of Terra Property Trust’s obligations under participation agreements and $34.5 million of secured borrowing will mature in the next twelve months, and Terra Property Trust expects to use the proceeds from the repayment of the corresponding investments to repay the participation obligations. Additionally, Terra Property Trust expects to fund approximately $53.0$44.1 million of the unfunded commitments to borrowers during the next twelve months. Terra Property Trust expects to maintain sufficient cash on hand to fund such commitments through matching these commitments with principal repayments on outstanding loans.loans or draw downs on its credit facilities. Additionally, Terra Property Trust had $32.0$29.3 million of borrowings outstanding under a mortgage loan payable that bears interest at an annual rate of LIBOR plus 3.85% with a LIBOR floor of 2.23%, that is collateralized by an office building. The mortgage loan payable matures on September 27, 2022.May 31, 2023. Terra Property Trust expects to refinance the mortgage loan payable bybefore it matures. In connection with the time it matures.BDC Merger, Terra Property Trust assumed a $25.0 million delayed draw term loan. This term loan bears interest at an annual rate of 5.625% and matures on July 1, 2023. Terra Property Trust expects to either maintain sufficient cash on hand to repay the facility or refinance the facility. Terra Property Trust may also issue additional equity, equity-related and debt securities to fund its investment strategies. Terra Property Trust may issue these securities to unaffiliated third parties or to vehicles advised by affiliates of Terra Capital Partners or third parties. As part of its capital raising transactions, Terra Property Trust may grant to one or more of these vehicles certain control rights over its activities including rights to approve major decisions it takes as part of its business.
On September 3, 2020,Summary of Financing
The table below summarizes Terra Property Trust entered into an indenture and credit agreement that provides for a floating rate term loan of $103.0 million, $3.6 million of additional future advances, and may provide up to $11.6 million of additional future discretionary advances, in connection with certain outstanding funding commitments under mortgage assets owned by Terra Property Trust and financed under the indenture and credit agreement. The floating rate loan bears interest at a rate equal to LIBOR plus 4.25% with a LIBOR floor of 1.0%, and was scheduled to mature on March 14, 2025. On February 18, 2022, Terra Property Trust refinanced the term loan with a new repurchase agreement that provides for advances up to $200.0 million with an initial term of two years. AsTrust’s debt financing as of December 31, 2021, the amount outstanding under the indenture and credit agreement was $93.8 million.
On March 12, 2021, Terra Property Trust entered into a Business Loan and Security Agreement (the “revolving line of credit”) to provide for advances up to the lesser of $75.0 million or the amount determined by the borrowing base, which is based on the eligible assets pledged to the lender. Borrowings under the revolving line of credit bear interest at an annual rate of LIBOR + 3.25% with a combined floor of 4.0% per annum. The revolving line of credit was scheduled to mature on March 12, 2023. On January 4, 2022, Terra Property Trust amended the revolving line of credit to increase the maximum amount available to $125.0 million and extended the maturity date of the facility to March 12, 2024 with an annual 12-month extension available at Terra Property Trust’s option, which are subject to certain conditions. As of December 31, 2021, the revolving line of credit had an outstanding balance of $38.6 million.
In June 2021, Terra Property Trust issued $85.1 million in aggregate principal amount of its 6.00% notes due 2026, for net proceeds of $82.5 million after deducting underwriting commissions of $2.7 million, but before offering expenses payable by Terra Property Trust. Terra Property Trust used the net proceeds from the notes issuance to make new investments as well as for general corporate purposes.
On November 8, 2021, Terra Property Trust entered into a master repurchase agreement that provides for advances of up to $195.0 million in the aggregate, which Terra Property Trust expects to use to finance certain secured performing commercial real estate loans, including senior mortgage loans. Advances under the master repurchase agreement accrue interest at an annual rate equal to the sum of LIBOR plus an applicable spread, which ranges from 1.60% to 1.85%, and have a maturity date of November 7, 2024. As of December 31, 2021, the master repurchase agreement had an outstanding balance of $44.6 million. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Type of Financing | | Maximum Amount Available | | Outstanding Balance | | Amount Remaining Available | | Interest Rate | | Maturity Date |
| Fixed Rate: | | | | | | | | | | |
| Senior unsecured notes | | N/A | | $ | 85,125,000 | | | N/A | | 6.00% | | 6/30/2026 |
| Senior unsecured notes | | N/A | | 38,375,000 | | | N/A | | 7.00% | | 3/31/2026 |
| Delayed draw term loan | | $ | 25,000,000 | | | 25,000,000 | | | — | | | 5.63% | | 7/1/2023 |
| | $ | 25,000,000 | | | $ | 148,500,000 | | | $ | — | | | | | |
| Variable Rate: | | | | | | | | | | |
| Mortgage loan payable | | N/A | | $ | 29,252,308 | | | N/A | | LIBOR plus 3.85% with a LIBOR floor of 2.23% | | 5/31/2023 |
| Line of credit | | $ | 125,000,000 | | | 90,135,865 | | | $ | 34,864,135 | | | LIBOR plus 3.25% with a combined floor of 4.00% | | 3/12/2024 |
| UBS repurchase agreement | | 195,000,000 | | | 51,050,000 | | | 143,950,000 | | | LIBOR or Term SOFR depending on repurchased asset index plus a spread ranging from 1.60% to 2.25% | | 11/7/2024 |
| GS repurchase agreement | | 200,000,000 | | | 119,826,606 | | | 80,173,394 | | | Term SOFR (subject to underlying loan floors on a case-by-case basis) plus a spread ranging from 1.75% to 3.00%) | | 2/18/2024 |
| | $ | 520,000,000 | | | $ | 290,264,779 | | | $ | 258,987,529 | | | | | |
Cash Flows Provided by Operating Activities
20212022 — For the year ended December 31, 2022, cash flows provided by operating activities were $11.0 million, primarily due to $11.5 million of dividends received from Terra JV, of which $4.6 million was recorded as a return of capital.
2021—For the year ended December 31, 2021, cash flows provided by operating activities were $12.6 million, primarily due to $13.1 million of dividends received from Terra JV, of which $11.2 million was recorded as a return of capital.
2020— For the year ended December 31, 2020, cash flows provided by operating activities were $16.6 million, primarily due to $17.3 million of dividends received from Terra Property Trust and/or Terra JV, as applicable, of which $13.0 million was recorded as a return of capital.
Cash Flows used in Financing Activities
2022 — For the year ended December 31, 2022, cash flows used in financing activities were $11.7 million, primarily related to distributions paid to members of $11.3 million and payment for capital redemptions of $0.5 million.
2021— For the year ended December 31, 2021, cash flows used in financing activities werewas $12.0 million, primarily related to distributions paid to members.
2020— For the year ended December 31, 2020, cash flows used in financing activities was $16.5 million, primarily related to distributions paid to members.
Critical Accounting Policies and Use of Estimates
Our financial statements are prepared in conformity with United States generally accepted accounting principles, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. In preparing the financial statements, management has utilized available information, including industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As we execute our expected operating plans, we will describe additional critical accounting policies in the notes to our future financial statements in addition to those discussed below.
Fair Value Measurements
The fair value of our investment is categorized based on the priority of the inputs to the valuation technique and categorized into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Our investment was recorded at fair value on our statements of assets and liabilities and were categorized based on the inputs valuation techniques as follows:
•Level 1. Quoted prices for identical assets or liabilities in an active market.
•Level 2. Financial assets and liabilities whose values are based on the following:
◦Quoted prices for similar assets or liabilities in active markets.
◦Quoted prices for identical or similar assets or liabilities in non-active markets.
◦Pricing models whose inputs are observable for substantially the full term of the asset or liability.
◦Pricing models whose inputs are derived principally from or corroborated by observable market data for substantially full term of the asset or liability.
•Level 3. Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value measurement.
Unobservable inputs reflect our assumptions about the factors that market participants would use in pricing an asset or liability, and would be based on the best information available.
Any changes to the valuation methodology will be reviewed by management to ensure the changes are appropriate. As markets and products develop and the pricing for certain products becomes more transparent, we will continue to refine our valuation methodologies. The methods used may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we anticipate that our valuation methods will be appropriate and consistent with 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. We will use inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced.
Management Agreement with Terra REIT Advisors
Terra Property Trust currently pays the following fees to theTerra REIT ManagerAdvisors pursuant to the Management Agreement:a management agreement:
Origination and Extension Fee. An origination fee in the amount of 1.0% of the amount used to originate, acquire, fund, acquire or structure real estate-related investments, including any third-party expenses related to such loan. In the event that the term of any real estate-related loan is extended, theTerra REIT ManagerAdvisors also receives an extension fee equal to the lesser of (i) 1.0% of the principal amount of the loan being extended or (ii) the amount of fee paid by the borrower in connection with such extension.
Asset Management Fee. A monthly asset management fee at an annual rate equal to 1.0% of the aggregate funds under management, which includes the loan origination amount or aggregate gross acquisition cost, as applicable, for each real estate-related loan and cash held by Terra Property Trust.
Asset Servicing Fee. A monthly asset servicing fee at an annual rate equal to 0.25% of the aggregate gross origination price or aggregate gross acquisition price for each real estate related loan then held by Terra Property Trust (inclusive of closing costs and expenses).
Disposition Fee. A disposition fee in the amount of 1.0% of the gross sale price received by Terra Property Trust from the disposition of each loan, but not upon the maturity, prepayment, workout, modification or extension of a loan unless there is a corresponding fee paid by the borrower, in which case the disposition fee will be the lesser of (i) 1.0% of the principal amount of the loan and (ii) the amount of the fee paid by the borrower in connection with such transaction. If Terra Property Trust takes ownership of a property as a result of a workout or foreclosure of a loan, Terra Property Trust will pay a disposition fee upon the sale of such property equal to 1.0% of the sales price.
Transaction Breakup Fee. In the event that Terra Property Trust receives any “breakup fees,” “busted-deal fees,” termination fees, or similar fees or liquidated damages from a third-party in connection with the termination or non-consummation of any loan or disposition transaction, theTerra REIT ManagerAdvisors will be entitled to receive one-half of such amounts, in addition to the reimbursement of all out-of-pocket fees and expenses incurred by theTerra REIT ManagerAdvisors with respect to its evaluation and pursuit of such transactions.
In addition to the fees described above, Terra Property Trust reimburses theTerra REIT ManagerAdvisors for operating expenses incurred in connection with services provided to the operations of Terra Property Trust, including Terra Property Trust’s allocable share of theTerra REIT Manager’sAdvisors’s overhead, such as rent, employee costs, utilities, and technology costs.
The following table presents a summary of fees paid and costs reimbursed to the predecessor to theTerra REIT Manager and the REIT ManagerAdvisors in the aggregate in connection with providing services to Terra Property Trust:
| | | | | Years Ended December 31, | | | | Years Ended December 31, |
| | | | 2021 | | 2020 | | | | 2022 | | 2021 |
Origination and extension fee expense (1)(2) | Origination and extension fee expense (1)(2) | | | | $ | 2,729,598 | | | $ | 1,383,960 | | Origination and extension fee expense (1)(2) | | | | $ | 2,967,291 | | | $ | 2,729,598 | |
| Asset management fee | Asset management fee | | | | 5,134,149 | | | 4,480,706 | | Asset management fee | | | | 6,556,492 | | | 5,134,149 | |
| Asset servicing fee | Asset servicing fee | | | | 1,181,924 | | | 1,008,256 | | Asset servicing fee | | | | 1,560,044 | | | 1,181,924 | |
| Operating expenses reimbursed to Manager | | | | 6,916,371 | | | 6,041,075 | | |
| Operating expenses reimbursed to Terra REIT Advisors | | Operating expenses reimbursed to Terra REIT Advisors | | | | 8,076,321 | | | 6,916,371 | |
Disposition fee (3) | Disposition fee (3) | | | | 1,006,302 | | | 504,611 | | Disposition fee (3) | | | | 890,194 | | | 1,006,302 | |
| Total | Total | | | | $ | 16,968,344 | | | $ | 13,418,608 | | Total | | | | $ | 20,050,342 | | | $ | 16,968,344 | |
_______________
(1)Origination and extension fee expense is generally offset with origination and extension fee income. Any excess is deferred and amortized to interest income over the term of the loan.
(2)Amount for the years ended December 31, 2022 and 2021 excluded $0.2 million and 2020 excluded $0.3 million, and $0.5 millionrespectively, of origination fee, respectively,fees paid to theTerra REIT ManagerAdvisors in connection with Terra Property Trust’sits equity investment in an unconsolidated investments.investment. These origination fees were capitalized to the carrying value of the unconsolidated investmentsinvestment as a transaction costs.cost.
(3)Disposition fee is generally offset with exit fee income and included in interest income on the consolidated statements of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We may be subject to financial market risks, including changes in interest rates. To the extent that we borrow money to make investments, our net investment income will be dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. In periods of rising interest rates, our cost of funds would increase, which may reduce our net investment income. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.
As of December 31, 2021,2022, Terra Property Trust had 1510 investments with an aggregate principal balance of $349.7$295.0 million, net of obligations under participation agreements, and secured borrowing, that provide for interest income at an annual rate of LIBOR plus a spread, 138 of which are subject to a LIBOR floor. A decrease of 100 basis points in LIBOR would decrease Terra Property Trust’s annual interest income, net of interest expense on participation agreements, by approximately $0.1$2.9 million, and an increase of 100 basis points in LIBOR would increase Terra Property Trust’s annual interest income, net of interest expense on participation agreements, by approximately $1.8$2.9 million. Additionally, Terra Property Trust had 13 investments with an aggregate principal balance of $247.2 million that provide for interest income at an annual rate of SOFR or Term SOFR plus a spread, all of which were subject to a SOFR or Term SOFR floor. A decrease of 100 basis points in SOFR or Term SOFR would decrease Terra Property Trust’s annual interest income by $2.5 million, and an increase of 100 basis points would increase Terra Property Trust’s annual interest income by $2.5 million.
Additionally, as of December 31, 2022, Terra Property Trust had $32.0$29.3 million of borrowings outstanding under a mortgage loan payable that bear interest at an annual rate of LIBOR plus 3.85% with a LIBOR floor of 2.23%,spread that is collateralized by an office building; $93.8 million of borrowings outstanding under an indenture and credit facility that bear interest at an annual rate of LIBOR plus 4.25% with a LIBOR floor of 1.0% collateralized by $163.1 million of first mortgages, a revolving line of credit with an outstanding balance of $38.6 million that bears interest at an annual rate of LIBOR + 3.25% with a combined floor of 4.0% collateralized by $60.1 million of first mortgages and a repurchase agreement with an outstanding balance of $44.6$90.1 million that bears interest at an annual rate of LIBOR plus a spread ranging from 1.60% to 1.85% with a LIBOR floor of 0.10%that is collateralized by $67.4$177.4 million of first mortgages; a repurchase agreement with an outstanding balance of $51.1 million that bears interest at an annual rate of LIBOR or Term SOFR, as applicable, plus a spread that is collateralized by $68.1 million of first mortgages; and another repurchase agreement with an outstanding balance of $119.8 million that bears interest at an annual rate of Term SOFR plus a spread that is collateralized by $167.5 million of first mortgages. A decrease of 100 basis points in LIBOR had no impact onand Term SOFR would decrease Terra Property Trust’s total annual interest expense because the debts are protected by LIBOR floorsapproximately $2.9 million, and an increase of 100 basis points in LIBOR and Term SOFR would increase Terra Property Trust’s annual interest expense by approximately $0.7$2.9 million.
In July 2017, the U.K. Financial Conduct Authority, which regulates the LIBOR administrator, IBA, announced that it would cease to compel banks to participate in setting LIBOR as a benchmark by the end of 2021, which has subsequently been delayed to June 30, 2023. The Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions convened by the U.S. Federal Reserve, has recommended SOFR as a more robust reference rate alternative to U.S. dollar LIBOR. SOFR is calculated based on overnight transactions under repurchase agreements, backed by Treasury securities. SOFR is observed and backward looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members. Given that SOFR is a secured rate backed by government securities, it will be a rate that does not take into account bank credit risk (as is the case with LIBOR). SOFR is therefore likely to be lower than LIBOR and is less likely to correlate with the funding costs of
financial institutions. Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question. As such, the future of LIBOR at this time is uncertain.
Potential changes, or uncertainty related to such potential changes, may adversely affect the market for LIBOR-based loans, including Terra Property Trust’s portfolio of LIBOR-indexed, floating-rate loans, or the cost of its borrowings. In addition, changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based loans, including the value of the LIBOR-indexed, floating-rate loans in Terra Property Trust’s portfolio, or the cost of its borrowings. In the event LIBOR is unavailable, Terra Property Trust’s investment documents provide for a substitute index, on a basis generally consistent with market practice, intended to put us in substantially the same economic position as LIBOR.
We may hedge against interest rate fluctuations by using standard hedging instruments, such as futures, options and forward contracts, subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in benefits of lower interest rates with respect to our portfolio of investments with fixed interest rates. For the years ended December 31, 20212022 and 2020,2021, we did not engage in interest rate hedging activities.
In addition, we may have risks regarding portfolio valuation. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Fair Value Measurements” in this annualquarterly report on Form 10-K.
Item 8. Financial Statements and Supplementary Data.
Our financial statements are annexed to this annual report on Form 10-K beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including the chief executive officer and chief financial officer of our Manager (performing functions equivalent to those a principal executive officer and principal financial officer of our company would perform if we had any officers), of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2021.2022. Based on that evaluation, the chief executive officer and chief financial officer of our Manager concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we would meet our disclosure obligations. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute assurance that it will detect or uncover failures within our company to disclose material information otherwise required to be set forth in our periodic reports.
Evaluation of Internal Controls over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our Manager, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements in our consolidated financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including the chief executive officer and chief financial officer of our Manager (performing functions equivalent to those a principal executive officer and principal financial officer of our company would perform if we had any officers), we conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on its evaluation, our management concluded that our internal control over financial reporting was effective as of the end of the fiscal year covered by this Annual Report on Form 10-K.
This Annual Report on Form 10-K does not include an attestation report of our independent registered accounting firm due to a transition period established by the rules of the SEC for “emerging growth companies.”
Changes in Internal Control Over Financial Reporting
During the most recent fiscal quarter, there was no change in our internal controls over financial reporting, as defined under
Rule 13a-15(f) under the Exchange Act, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The sole managing member of our Fund is our Manager, which is responsible for managing our business and affairs. In such capacity, our Manager controls decisions taken by us relating to our indirect ownership of shares of common stock of Terra Property Trust, subject to the 2020 Voting Agreement described below,and the 2022 Voting Agreement (as defined below), and advises us on all matters related to our operations and administration, which encompasses managing our relationship and communications with our members, managing our liquidity and the payment of monthly and liquidating distributions to our members, and preparing financial statements, tax returns and member tax statements.
Board of Directors of Terra Property Trust
We do not have any officers, directors or employees. We conduct substantially all of our business through Terra Property Trust, which is supervised by its board of directors,the TPT Board, comprised of threesix directors, pursuant to the terms and provisions of Terra Property Trust’s charter and bylaws. Terra Property Trust's board of directorsThe TPT Board has determined that each of its directors satisfies the listing standards for independence of the New York Stock Exchange (“NYSE”), except for Vikram S. Uppal, its Chairman, Chief Executive Officer and Chief ExecutiveInvestment Officer. The name, age, position and biography of each member of Terra Property Trust’s board of directorsthe TPT Board is set forth below:
| | | | | | | | | | | | | | |
| Name | | Age | | Position held with Terra Property Trust |
Vikram S. Uppal * | | 3839 | | Chairman of the Board of Directors, Chief Executive Officer, Chief
Investment Officer |
| Roger H. Beless | | 6061 | | Director |
| Michael L. Evans | | 6970 | | Director |
| Adrienne M. Everett * | | 36 | | Director |
| Spencer E. Goldenberg * | | 40 | | Director |
| Gaurav Misra * | | 46 | | Director |
*On November 10, 2021, Andrew M. Axelrod,October 1, 2022 and in accordance with the then Chairman of the Board of Directors, resigned as our director effectively immediately. Following Mr. Axelrod’s resignation, our board of directors designated Vikram S. Uppal as our Chairmen of the Board of Director andTerra BDC Merger Agreement, the size of our boardthe TPT Board was increased by three members and each of directorsthe Terra BDC Designees was deduced from four directorselected to three directors.the TPT Board to fill the vacancies created by such increase, with each to serve until Terra Property Trust’s next annual meeting of stockholders and until his or her successor is duly elected and qualifies.
Vikram S. Uppal has served as served as the Chairman of the Board of Directors of Terra Property Trust since November 2021, as one of Terra Property Trust’s directors from February 2018 to November 2021; as Chief Executive Officer for Terra Property Trust, the REIT Manager, our Manager and Terra Capital Partners since December 1, 2018; and as a director of RESFORESOF since October 2020. Mr. Uppal has also served as Chief Investment Officer for Terra Property Trust, Terra Capital Partners and the REIT Manager since February 2018. Mr. Uppal is also2018, and as the Chief Executive Officer of Terra Income Advisors and Terra Fund 6 sinceBDC from April 2019 and October 2022. Mr. Uppal also served as the Chairman of the board of directorBoard and President of Terra Fund 6 sinceBDC from November 2019.2019 to October 2022. Prior to joining Terra Capital Partners, Mr. Uppal was a Partner and Head of Real Estate at Axar Capital Management since 2016. Prior to Axar Capital Management, Mr. Uppal was a Managing Director on the Investment Team at Fortress Investment Group's Credit and Real Estate Funds from 2015 to 2016. From 2012 to 2015, Mr. Uppal worked at Mount Kellett Capital Management, a private investment organization, and served as Co-Head of North American Real Estate Investments. Mr. Uppal holds a B.S. from the University of St. Thomas and a M.S. from Columbia University.
Roger H. Beless has served as one of Terra Property Trust’s independent directors since February 2018. Since May 2016, Mr. Beless has served as Chief Operating Officer at Street Lights Residential, where he oversees capital markets, asset and portfolio management and acquisitions, and company operations. From June 2012 until March 2016, Mr. Beless served as Managing Director for Mount Kellett Capital Management, where he oversaw global real estate asset management. Prior to
joining Mount Kellett, Mr. Beless spent nearly 20 years with Goldman Sachs/Archon Group where he held a number of positions, including co-head of US Real Estate and Chief Operating Officer for Archon Residential, where he oversaw acquisitions, asset management, property management and dispositions. Mr. Beless also spent four years in Tokyo, Japan where he led the startup of Goldman Sachs Realty Japan, Ltd. He currently serves on the board of Lion Heart Children’s Academy and the advisory board of Apartment Life. Mr. Beless holds a Bachelor’s of B.A. in Economics and Finance from Baylor University and a M.B.A from Southern Methodist University.
Michael L. Evans has served as one of Terra Property Trust’s independent directors since October 2017. Mr. Evans has served since March 2015 as a member of the board of directors of Terra Capital Partners, where he is the audit committee chair and a member of the valuation committee and as a director of Terra Fund 6 from March 2015 to April 2019. Since December 2012, Mr. Evans has been the Managing Director and Chief Financial Officer of Newport LLC (formerly known as Newport Board Group), a CEO and board advisory firm. From June 2010 to September 2011, Mr. Evans served as the Interim Country Manager and Advisory Board Member for Concern Worldwide U.S. Inc., a non-profit humanitarian organization. From January 1977 until June 2010, Mr. Evans was with Ernst & Young, LLP (“Ernst & Young”), and served as a partner since 1984. During his nearly 34 years with Ernst & Young, he served as a tax, audit and consulting services partner, specializing in real estate companies and publicly-traded entities. Mr. Evans currently serves on the Advisory Board of Marcus & Millichap, Inc., the Independent Counsel Board of Prologis Targeted U.S. Logistics Fund and the board of directors of Newport LLC and Sen Plex, Inc. Mr. Evans is a licensed attorney and a C.P.A. (inactive) in California. He is currently a contributing business writer for Forbes.com and Allbusiness.com. Mr. Evans received a B.S.B. in accounting from the University of Minnesota, a J.D. from William Mitchell College of Law and an M.B.A. from Golden Gate University.
Adrienne M. Everett has served as Terra Property Trust’s independent director since October 2022. Ms. Everett served as a director of Terra BDC from September 2021 to October 2022 until the consummation of the BDC Merger, at which point she was appointed to the TPT Board. Since May 2020, Ms. Everett has served as an Enterprise Account Director for LinkedIn Corporation. Ms. Everett previously served on the Leadership Team, and as a Strategy and Business Development Lead for Neyber Ltd from January 2019 to April 2020. Prior to that, Ms. Everett served with Morgan Stanley as Vice President, Business Development and Regional Diversity Officer from January 2018 to December 2018, an Associate Vice President from July 2016 to January 2018, and an Associate from February 2015 to July 2016. Ms. Everett holds a Bachelor of Arts in English from Duke University and is in the process of completing a certificate in Women’s Leadership from Oxford University’s Said Business School.
Spencer E. Goldenberg has served as Terra Property Trust’s independent director since October 2022 and from February 2018 to February 2020. Mr. Goldenberg served as the independent director of Terra BDC from April 2019 to October 2022 until the consummation of the BDC Merger, at which point he was appointed to the TPT Board. Mr. Goldenberg has served as an independent director of StoneMor Inc. (NYSE: STON) since June 2019 where he has served as a member of the Audit Committee since June 2019 and the Compensation, Nominating and Governance Committee since December 2019. Mr. Goldenberg previously served as an independent director of American Gilsonite Company from March 2019 to February 2020. Mr. Goldenberg has served as Chief Financial Officer of Menin Hospitality since June 2018, having previously served as Vice President of Corporate Development from June 2015 to June 2018. Prior to his time at Menin, Mr. Goldenberg was employed as an accountant at the firm of Gerstle, Rosen & Goldenberg P.A. from February 2008 to June 2015. From October 2005 until February 2008, he served as a legislative aide to Florida State Senator Gwen Margolis. Mr. Goldenberg holds an active certified public accountant’s license in the state of Florida. He holds a Bachelor of Arts in International Affairs from Florida State University.
Gaurav Misra has served as Terra Property Trust’s independent director since October 2022. Mr. Misra served as a director of Terra BDC from September 2021 to October 2022 until the consummation of the BDC Merger, at which point he was appointed to the TPT Board. Since October 2018, Mr. Misra has served as President of Direct-to-Consumer Brands at RxSense LLC. Mr. Misra previously served as Chief Marketing Officer of Raise Inc. from May 2017 to October 2018, and as Chief Marketing Officer of Vroom Inc. from September 2016 to April 2017. Mr. Misra was Chief Executive Officer of BG Media from July 2012 to August 2016. From April 2009 to June 2012, Mr. Misra served as Head of Marketing & Product at Zagat, LLC. Prior to that, Mr. Misra served as Senior Partner with Venturethree Ltd. from 1999 to 2002, and as Business Analyst with McKinsey & Co. from 1997 to 1999. Mr. Misra holds a B.Eng. in Mechanical Engineering from Imperial College London and an M.B.A. from Harvard Business School.
Executive Officers of the REIT Manager and our Manager
The sole managing member of our Fund is our Manager, andManager. Terra Property Trust has entered into the Management Agreement with the REIT Manager, pursuant to which the REIT Manager provides certain services to Terra Property Trust and Terra Property Trust pays fees associated with such services. The REIT Manager is responsible for managing Terra Property Trust’s
day-to-day operations and all matters affecting its business and affairs, including responsibility for determining when to buy and sell real estate-related assets. The REIT Manager is not obligated under the Management Agreement to dedicate any of its personnel exclusively to Terra Property Trust, nor is it or its personnel obligated to dedicate any specific portion of its or their time to the business.
The names, ages, positions and biographies of the officers of the REIT Manager and our Manager are as follows:
| | | | | | | | | | | | | | | | | | | | |
| Name | | Age | | Position(s) Held with the REIT Manager | | Position(s) Held with our Manager |
| Vikram S. Uppal | | 3839 | | Chief Executive Officer, Chief Investment
Officer | | Chief Executive Officer, Chief Investment
Officer |
| Gregory M. Pinkus | | 5758 | | Chief Operating Officer and Chief Financial
Officer | | Chief Operating Officer and Chief Financial
Officer |
| Daniel J. Cooperman | | 4748 | | Chief Originations Officer | | Chief Originations Officer |
For biographical information regarding Mr. Uppal, see “Item 10. — Board of Directors of Terra Property Trust” above.
Gregory M. Pinkus has served as the Chief Financial Officer, Treasurer and Secretary of Terra Property Trust and Chief Operating Officer of our Manager and the REIT Manager and Terra Income Advisors since January 2016 and October 2017, and May 2013, respectively. He has served as (i) the Chief Financial Officer of Terra Capital Advisors, Terra Capital Advisors 2 and Terra Income Advisors 2 since May 2012, September 12 and October 2016; (ii) the Chief Operating Officer of Terra Capital Advisors, Terra Capital Advisors 2 and Terra Capital Partners since July 2014; (iii) the Chief Operating Officer of Terra Income Advisors 2 since October 2016; (iv) the Chief Financial Officer, Treasurer and Secretary of Terra Fund 6 sinceBDC from May 2013 to October 2022 and the Chief Operating Officer of Terra Fund 6 sinceBDC and Terra Income Advisors from July 2014;2014 to October 2022 and May 2013 to October 2022, respectively; (v) the Chief Financial Officer and Chief Operating Officer of Fund 5 International, Terra International and Terra Fund 7 since June 2014, October 2016 and October 2016, respectively; and (vi) a director of RESOF since October 2020. Prior to joining Terra Capital Partners in May 2012, he served as Assistant Controller for W.P. Carey & Co. from 2006 to August 2010 and as Controller from August 2010 to May 2012. Mr. Pinkus also served as Controller and Vice President of Finance for several early-stage technology companies during the period of 1999 to 2005. Additionally, he managed large-scale information technology budgets at New York Life Insurance Company from 2003 to 2004 and oversaw an international reporting group at Bank of America from 1992 to 1996. Mr. Pinkus is a Certified Public Accountant and member of the American Institute of Certified Public Accountants. He holds a B.S. in Accounting from the Leonard N. Stern School of Business at New York University.
Daniel J. Cooperman has served as Chief Originations Officer of Terra Property Trust, our Manager and the REIT Manager and Terra Income Advisors since January 2016, September 2017 and September 2017, and February 2015, respectively. Mr. Cooperman has served as Chief Originations Officer of (i) each of Terra Capital Advisors and Terra Capital Advisors 2 since January 2015, having previously served as Managing Director of Originations until January 2015 of Terra Capital Advisors and Terra Capital Advisors 2 since April 2009 and September 2012, respectively; (ii) Fund 5 International since January 2015, having previously served as Managing Director of Originations from June 2014 to June 2014; (iii) Terra Fund 6 sinceIncome Advisors and Terra BDC from February 2015 to October 2022, having previously served as Managing Director of Originations of Terra BDC from May 2013 until February 2015; and (iv) each of Terra Income Advisors 2, Terra International, and Terra Fund 7 since October 2016. Mr. Cooperman has 18 years’ experience in the acquisition, financing, leasing and asset management of commercial real estate with an aggregate value of over $5 billion. Prior to the formation of Terra Capital Partners in 2001 and its commencement of operations in 2002, Mr. Cooperman handled mortgage and mezzanine placement activities for The Greenwich Group International, LLC. Prior to joining The Greenwich Group, Mr. Cooperman worked in Chase Manhattan Bank’s Global Properties Group, where he was responsible for financial analysis and due diligence for the bank’s strategic real estate acquisitions and divestitures. Prior to that time, he was responsible for acquisitions and asset management for JGS, a Japanese conglomerate with global real estate holdings. Mr. Cooperman holds a B.S. in Finance from the University of Colorado at Boulder.
Code of Ethics
Our Manager or its affiliates has adopted a Code of Business Conduct and Ethics (the “Code of Ethics”) pursuant to Rule 17j‑1 of the Advisers Act, which applies to, among others, the senior officers of our Manager, including the chief executive officer and the chief financial officer, as well as every officer, director, employee and “access person” (as defined within the Code of Ethics). We will also provide the Code of Ethics, free of charge, to unitholders who request it. Requests should be directed to Bernadette Murphy, at Terra Secured Income Fund 5, LLC, 550 Fifth Avenue, 6th205 West 28th Street, 12th Floor, New York, New York 10036.10001.
Audit Committee
Terra Property Trust has established an audit committee of its board of directorsthe TPT Board (the “Audit Committee”) that operates pursuant to a charter and consists of two members. The Audit Committee is responsible for selecting, engaging and supervising Terra Property Trust’s independent accountants, reviewing the plans, scope and results of the audit engagement with its independent accountants, approving professional services provided by its independent accountants (including compensation therefor), reviewing the independence of its independent accountants and reviewing the adequacy of its internal controls over financial reporting. The members of the Audit Committee are Messrs. Beless, Evans and Evans,Goldenberg, each of whom is independent. Mr. Evans serves as the chairman of the Audit Committee. Terra Property Trust’s board of directorsThe TPT Board has determined that Mr. Evans is an “audit committee financial expert” as defined under Item 407 of regulation S-K promulgated under the Exchange Act. The TPT Board has determined that each of Messrs. Beless, Evans and EvansGoldenberg meets the current independence and experience requirements of Rule 10A-3 of the Exchange Act.
Item 11. Executive Compensation.
The sole managing member of our Fund is our Manager, and we do not have any officers, directors or employees. Terra Property Trust has entered into the Management Agreement with the REIT Manager, pursuant to which the REIT Manager provides certain services to Terra Property Trust and Terra Property Trust pays fees associated with such services. The officers of our Manager and the REIT Manager do not receive any compensation from our Fund. The REIT Manager is responsible for managing Terra Property Trust’s day-to-day operations and all matters affecting its business and affairs, including responsibility for determining when to buy and sell real estate-related assets. The REIT Manager is not obligated under the Management Agreement to dedicate any of its personnel exclusively to Terra Property Trust, nor is it or its personnel obligated to dedicate any specific portion of its or their time to the business.
Compensation of the Directors of Terra Property Trust
We do not pay compensation to the directors of Terra Property Trust.
Compensation Committee Interlocks and Insider Participation
We do not have any officers, directors or employees. Terra Property Trust currently does not have a compensation committee of its board of directorsthe TPT Board because it does not plan to pay any compensation to its officers. There are no interlocks or insider participation as to compensation decisions required to be disclosed pursuant to SEC regulations.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth, as of March 11, 2022,10, 2023, certain information regarding the ownership of units of our Manager and any person who is known by us to be the beneficial owner of more than 5% of our units. The sole managing member of our Fund is our Manager, and we do not have any officers, directors or employees.
Each listed person’s beneficial ownership includes:
•all units the investor actually owns beneficially or of record;
•all units over which the investor has or shares voting or dispositive control (such as in the capacity as a general partner of an investment fund); and
•all units the investor has the right to acquire within 60 days.
Unless otherwise indicated, all units are owned directly, and the indicated person has sole voting and investment power. Except as indicated in the footnotes to the table below, the business address of the members listed below is the address of our principal executive office, 550 Fifth Avenue, 6th205 West 28th Street, 12th Floor, New York, NY 10036.10001. | | Name | Name | | Number of Units Beneficially Owned | | Percentage of All Units (1) | Name | | Number of Units Beneficially Owned | | Percentage of All Units (1) |
Terra Fund Advisors (2) | Terra Fund Advisors (2) | | 22 | | * | Terra Fund Advisors (2) | | 22 | | * |
| 5% or Greater Beneficial Owners | 5% or Greater Beneficial Owners | | 5% or Greater Beneficial Owners | |
John Sonnentag (3) | John Sonnentag (3) | | 505.5 | | 7.62% | John Sonnentag (3) | | 505.5 | | 7.63% |
* Less than 1% of the outstanding units.
(1)Based on a total of 6,636.66,622.2 units issued and outstanding as of March 11, 2022.10, 2023.
(2)On April 6, 2020, Mr. Uppal purchased 22 units in a secondary market transaction. As reported on the Form 4 filed by Mr. Uppal with the SEC on April 8, 2020 reporting the transaction, the units are held through Lakshmi 15 LLC, a family limited liability company over which Mr. Uppal exercises voting and investment control. Mr. Uppal is the Chief Executive Officer and Chief Investment Officer of Terra Fund Advisors. Accordingly, Mr. Uppal disclaims beneficial ownership of the units except to the extent of his pecuniary interest therein, and this report shall not be deemed an admission that he is the beneficial owner of such units for purposes of Section 16 or for any other purpose.
(3)Consists of: (i) 303.3 units owned by the Sonnentag Foundation Ltd. for which Mr. Sonnentag serves as President and Director and has the sole voting and investment power over these shares and (ii) 202.2 units owned by the John J. Sonnentag Living Trust for which Mr. Sonnentag serves as trustee and has sole voting and investment power.
Securities Authorized for Issuance under Equity Compensation Plans
None
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Director Independence
For information relating to Terra Property Trust's independent directors, see Item 10, “Directors, Executive Officers and Corporate Governance” of this Annual Report on Form 10-K.
Certain relations and Related Transactions
Various conflicts of interest exist in the relationship between us and our Manager and its affiliates. Our Manager has sole control over our organization and operations and will resolve conflicts of interest through the exercise of its judgment. Our Manager has a fiduciary responsibility for the safekeeping and use of all of our funds and assets, whether or not in our immediate possession and control, and may not use or permit another to use such funds or assets in any manner except for our exclusive benefit. In addition, our amended and restated operating agreement contains provisions designed to guard against conflicts of interest. However, our amended and restated operating agreement does not directly address each potential conflict and does not provide for any particular mechanism to fully resolve these conflicts. There is a possibility that not all conflicts will be resolved in a manner favorable to us. Potential conflicts include those set forth below.
Terra International Fund 3, L.P.
On September 30, 2019, Terra Property Trust entered into a Contribution and Repurchase Agreement with Terra International Fund 3, L.P. (“Terra International 3”) and Terra Offshore REIT, a then wholly-owned subsidiary of Terra International 3, which Terra Property Trust amended and restated on November 13, 2019.
Pursuant to this agreement, Terra International 3, through Terra Offshore REIT, contributed cash in the amount of $3,620,000 to us in exchange for 212,690.95 shares of common stock, at a price of $17.02 per share. The shares were issued in a private placement in reliance on Section 4(a)(2) of the Securities Act, and the rules and regulations promulgated thereunder. On April 29, 2020, Terra Property Trust repurchased, at a price of $17.02 per share, the 212,690.95 shares of common stock that it had previously sold to Terra Offshore REIT on September 30, 2019. At the same time, Terra International 3 redeemed all of its limited partnership interest and ceased operations.
The REIT Manager also serves as adviser to the Terra Offshore REIT.
Issuance of Common Stock
On March 2, 2020, Terra Fund 1, Terra Fund 2 and Terra Fund 3 merged with and into Terra Fund 4, with Terra Fund 4 continuing as the surviving company, and we consolidated our holdings of shares of common stock of Terra Property Trust in Terra Fund 4. Subsequent to the Terra Fund Merger, the legal name of Terra Fund 4 was changed to Terra JV.JV, LLC. On March 2, 2020, Terra Property Trust engaged in a series of transactions pursuant to which Terra Property Trust 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 that Terra Property Trust owned, cash of $25.5 million and other working capital. On April 29, 2020, Terra Property Trust repurchased, at a purchase price of $17.02 per share, 212,691 shares of common stock that Terra Property Trust had previously sold to Terra Offshore REIT on September 30, 2019. AsOn October 1, 2022, pursuant to that certain Agreement and Plan of Merger, dated as of May 2, 2022, Terra BDC merged with and into Terra LLC, with Terra LLC continuing as the surviving entity of the merger and as a wholly owned subsidiary of Terra Property Trust. In connection with the Merger, 4,847,910 shares of Class B Common Stock were issued to former Terra BDC stockholders, based on the number of outstanding shares of Terra BDC Common Stock as of the Closing Date. Following the consummation of the BDC Merger and as of December 31, 2021,2022, Terra JV, former shareholders of Terra BDC and Terra Offshore REIT held 87.4%70.0%, 19.9% and 10.1% of the issued and outstanding shares of Terra Property Trust’s common stock with the remainder held by Terra Offshore REIT;newly designated Class B Common Stock, par value $0.01 per share, respectively; and we and Terra Fund 7 owned an 87.6% and 12.4% percentage interest, respectively, in Terra JV. Accordingly, as of December 31, 2021, we indirectly beneficially owned 76.5% of the outstanding shares of common stock of Terra Property Trust through Terra JV.
Voting AgreementAgreements involving Terra Property Trust
On March 2, 2020, we, Terra Property Trust, Terra JV and Terra REIT Advisors entered into the amended and restated2020 Voting Agreement, pursuant to which we assigned our rights and obligations under the 2020 Voting Agreement to Terra JV. Consistent with the original voting agreement dated February 8, 2018, for the period that Terra REIT Advisors remains the external manager of Terra Property Trust, Terra REIT Advisors will have the right to nominate two individuals to serve as directors of Terra
directors of Terra Property Trust (which nominees need not be independent directors) and for so long as Terra JV holds at least 10% of the outstanding shares of common stock of Terra Property Trust, Terra JV will have the right to nominate one individual to serve as a director of Terra Property Trust (who need not be an independent director).
Except as otherwise required by law or the provisions of other agreements to which the parties are or may in the future become bound, the parties have agreed to vote all shares of common stock of Terra Property Trust directly or indirectly owned in favor (or against removal) of the directors properly nominated in accordance with the 2020 Voting Agreement. Other than with respect to the election of directors, the 2020 Voting Agreement requires that we vote all shares of common stock of Terra Property Trust directly or indirectly owned by us in accordance with the recommendations made by the boardTPT Board.
On October 1, 2022, Terra Property Trust, Terra JV and Terra Offshore REIT entered into a Voting Support Agreement (the “2022 Voting Agreement”). Pursuant to the 2022 Voting Agreement, effective as of October 1, 2022, Terra JV and Terra Offshore REIT have agreed to, at any meeting of Terra Property Trust.Trust’s stockholders called for the purpose of electing directors (or by any consent in writing or by electronic transmission in lieu of any such meeting), cast all votes entitled to be cast by each of them in favor of the election of the Terra BDC Designees until the earlier of (i) the first anniversary of October 1, 2022, (ii) the TPT Class B Common Stock Distributions (as defined in the 2022 Voting Agreement) or (iii) an amendment and restatement of the amended and restated management agreement between Terra Property Trust and Terra REIT Advisors approved by the TPT Board, including the Terra BDC Designees.
Receipt of Fees and Other Compensation by Our Manager and its Affiliates
Terra Property Trust will pay substantial fees to the REIT Manager and its affiliates. Further, we and Terra Property Trust must reimburse the REIT Manager and its affiliates for costs incurred by them in managing Terra Property Trust and its portfolio of real estate-related loans.
Terra Property Trust has entered into the Management agreement with the REIT Manager pursuant to which the REIT Manager provides certain management services to Terra Property Trust, subject to oversight by its board of directors.the TPT Board. The REIT Manager’s responsibilities to Terra Property Trust include, among others, investing in, and disposing of, assets, borrowing money, entering into contracts and agreements in connection with Terra Property Trust’s business and purpose, providing administrative support and performing such other services as are delegated to the REIT Manager by Terra Property Trust’s board of directors.the TPT Board. In performing its duties, the REIT Manager is subject to a fiduciary responsibility for the safekeeping and use of all funds and assets of Terra Property Trust. In consideration of its providing such services, the REIT Manager is entitled to certain fees from Terra Property Trust as described below. The Management Agreement runs co-terminus with our amended and restated operating agreement, which terminates on December 31, 2023, unless sooner dissolved in accordance with the terms of our amended and restated operating agreement.
During the years ended December 31, 20212022 and 2020,2021, Terra Property Trust paid the REIT Manager in the aggregate the following fees under the Management Agreement: $5.1$6.6 million and $4.5$5.1 million in asset management fee,fees, respectively, $1.2$1.6 million and $1.0$1.2 million in asset servicing fees, respectively, $2.7$3.0 million and $1.4$2.7 million in origination and extension fees, respectively; $1.0$0.9 million and $0.5$1.0 million in disposition, respectively, and $6.9$8.1 million and $6.0$6.9 million of operating expense reimbursements, respectively.
Subject to its fiduciary responsibilities and the terms of our amended and restated operating agreement, our Manager has sole discretion with respect to the terms and timing of our investments, although it is anticipated that those investments will be consistent with our investment objectives and strategy. It is further anticipated that the REIT Manager will exercise its discretion through the Management Agreement with Terra Property Trust. The agreements and arrangements, including those relating to compensation, between Terra Property Trust and the REIT Manager and its affiliates are not the result of arm’s-length negotiations and may create conflicts between the interests of our Manager, the REIT Manager and their affiliates, on the one hand, and us, our members and Terra Property Trust on the other.
Our Manager and its Affiliates May Compete With Us
Our Manager and its affiliates may engage in real estate-related transactions on their own behalf or on behalf of other entities.
Our Manager and its affiliates have, and in the future will have, legal and financial obligations with respect to its other programs that are similar to our Manager’s obligations to us. For example, affiliates of our Manager are the external managers to Terra Fund 6LLC and RESOF, allboth of which follow investment strategies that are similar to our strategy. Competition for investments among the real estate-related investment programs sponsored by our Manager and its affiliates will create a conflict
of interest. In determining which program should receive an investment opportunity, our Manager or its affiliates will first evaluate the investment objectives of each program to determine if the opportunity is suitable for each program. If the proposed investment is appropriate for more than one program, our Manager or its affiliates will then evaluate the portfolio of each program, in terms of diversity of geography, underlying property type, tenant concentration and borrower, to determine if the investment is most suitable for one program in order to create portfolio diversification. If such analysis is not determinative, our Manager or its affiliates will allocate the investment to the program with uncommitted funds available for the longest period or, to the extent feasible, prorate the investment between the programs in accordance with uninvested funds.
Related Party Transactions
Related party transactions are those where we or our Manager on our behalf, transact with affiliated companies. Our Manager and its affiliates are permitted to enter into certain transactions and perform certain services for us. Although those transactions will be subject to the limitations set forth in our amended and restated operating agreement, those transactions, or the potential for those transactions, could cause conflicts for our Manager with respect to performing its duties. Related party transactions will not be the result of an arm’s-length negotiation.
Allocation of Our Manager’s Time
We rely on our Manager or its affiliates to manage our day-to-day activities and to implement our investment strategy. Our Manager and certain of its affiliates are presently, and plan in the future to continue to be, involved with activities that are unrelated to us. As a result of these activities, our Manager, its employees and certain of its affiliates will have conflicts of interest in allocating their time between us and the other activities in which they are or may become involved, including the management of Terra Property Trust, Terra Fund 6LLC and RESOF. The employees of our Manager or its affiliates will devote only as much of its or their time to our business as it and its employees, in their judgment, determine is reasonably required, which may be substantially less than their full time. Therefore, our Manager, its personnel and certain affiliates may experience conflicts of interest in allocating management time, services and functions among us and any other business ventures in which they or any of their key personnel, as applicable, are or may become involved. This could result in actions that are more favorable to other affiliated entities than to us.
However, we believe that the members of our Manager’s senior management and the other key debt finance professionals performing services for us on behalf of our Manager have sufficient time to fully discharge their responsibilities to us and to the other businesses in which they are involved. We believe that our Manager’s executive officers will devote the time required to manage our business and expect that the amount of time a particular executive officer or affiliate devotes to us will vary during the course of the year and depend on business activities at the given time. We expect that these executive officers and affiliates will generally devote more time to programs raising and investing capital than to programs that have completed their offering stages, though from time to time each program will have its unique demands. Because many of the operational aspects of Terra Capital Partners-sponsored programs are very similar, there are significant efficiencies created by the same team of individuals at our Manager providing services to multiple programs. For example, our Manager has streamlined the structure for financial reporting, internal controls and investment approval processes for the programs.
Competition and Allocation of Investment Opportunities
Employees of our Manager or its affiliates are simultaneously providing investment advisory or management services to other affiliated entities, including Terra Property Trust, Terra Fund 6LLC and RESOF.
Our Manager may determine it appropriate for us and one or more other investment programs managed by our Manager or any of its affiliates to participate in an investment opportunity. To the extent we are able to make co-investments with investment programs managed by our Manager or its affiliates, these co-investment opportunities may give rise to conflicts of interest or perceived conflicts of interest among us and the other participating programs. In addition, conflicts of interest or perceived conflicts of interest may also arise in determining which investment opportunities should be presented to us and other participating programs.
To mitigate these conflicts, our Manager will seek to execute such transactions on a fair and equitable basis and in accordance with its allocation policies, taking into account various factors, which may include: the source of origination of the investment opportunity; objectives and strategies; tax considerations; risk, diversification or investment concentration parameters; characteristics of the security; size of available investment; available liquidity and liquidity requirements; regulatory restrictions; and/or such other factors as may be relevant to a particular transaction.
Receipt of Compensation by Affiliates
The payments to the REIT Manager and certain of its affiliates have not been determined through arm’s-length negotiations, and are payable regardless of our profitability. The REIT Manager and its affiliates receive fees for their services, including an origination fee, asset management fee, asset servicing fee, disposition fee and transaction break-up fee. In addition, our Manager is entitled to receive incentive distributions equal to 15% of distributions paid by us once we pay cumulative distributions to holders of units equal to the capital invested by such members plus a preferred return ranging from 8.5% to 9.0%, depending on the historical preferred return applicable to their Terra Fund units. The preferred return applicable to the units sold in the private placement concurrent with the REIT formation transactions is 8.5%.
To the extent the terms of the Management Arrangement with the REIT Manager are amended in the future, including if we enter into a new management agreement with the REIT Manager or its affiliates, the terms of any such arrangement will not have been determined through arm’s-length negotiations and may be payable, in whole or in part, regardless of profitability.
Loans Involving Affiliates
We do not make any loans to our Manager or to any of its affiliates. In addition, we do not make any loans to its dealer manager or any entities or individuals affiliated with its dealer manager.
Under our amended and restated operating agreement, our Manager or its affiliates may, but will have no obligation to, make loans to us to acquire assets or to pay our operating expenses. Any such loan will bear interest at the actual cost of funds to our Manager and provide for the payment of principal and any accrued but unpaid interest in accordance with the terms of the promissory note evidencing such loan, but in no event later than our dissolution. Any such loans would not be the result of arm’s-length negotiations and could create conflicts between the interests of our Manager and its affiliates on the one hand and us and our members on the other.
Resolution of Conflicts will be Undertaken by Employees of Our Manager and its Affiliates
In the event of a conflict between us and our Manager or our Manager’s affiliates, the conflict will be resolved by our Manager. Although our Manager has certain fiduciary responsibilities to us and to our members, a conflict of interest policy relating to the resolution of conflicts between us or Terra Property Trust, the REIT Manager and our Manager and its affiliates does not exist.
No Independent Counsel
Pursuant to the terms of our amended and restated operating agreement, each of our members acknowledges and agrees that counsel representing us, our Manager and its affiliates does not represent, and shall not be deemed under the applicable codes of professional responsibility to have represented or to be representing, any or all of our members in any respect.
Representation in Tax Audit Proceedings
Our Manager is designated as our “tax matters partner” and is authorized and directed by our amended and restated operating agreement to represent us and our members, at our expense, in connection with all examinations of our affairs by federal tax authorities, including any resulting administrative or judicial proceedings. Those proceedings may involve or affect other programs for which our Manager or its affiliates act as manager. In those situations, the positions taken by our Manager with respect to us may have differing effects on us and the other programs. Any decisions made by our Manager with respect to those matters will be made in a manner consistent with its duties to us and to our members.
Other Conflicts of Interest
We will be subject to conflicts of interest arising out of our relationship with our Manager and its affiliates. In the future, we may enter into additional transactions with Terra Capital Partners or its affiliates. In particular, we may invest in, or acquire, certain of our investments through joint ventures with Terra Capital Partners or its affiliates or purchase assets from, sell assets to or arrange financing from or provide financing to its other vehicles. Any such transactions will require approval of our Manager. There can be no assurance that any procedural protections will be sufficient to assure that these transactions will be made on terms that will be at least as favorable to us as those that would have been obtained in an arm’s-length transaction.
Item 14. Principal Accounting Fees and Services.
During the years ended December 31, 20212022 and 2020,2021, KPMG LLP (“KPMG”) served as our independent auditor and provided certain tax and other services. Our Manager currently anticipates that it will engage KPMG as our independent auditor to audit our financial statements for the year ending December 31, 2022,2023, subject to agreeing on fee estimates for the audit work. Our Manager reserves the right, however, to select a new auditor at any time in the future in its discretion if it deems such decision to be in the best interests of us and our members. Any such decision would be disclosed to the members in accordance with applicable securities laws.
The following table displays fees for professional services by KPMG for the years ended December 31, 20212022 and 2020:2021:
| | | Years Ended December 31, | | Years Ended December 31, |
| | 2021 | | 2020 | | 2022 | | 2021 |
| Audit Fees | Audit Fees | | $ | 165,700 | | | $ | 155,500 | | Audit Fees | | $ | 180,000 | | | $ | 165,700 | |
| Audit-Related Fees | Audit-Related Fees | | — | | | — | | Audit-Related Fees | | — | | | — | |
| Tax Fees | Tax Fees | | 46,820 | | | 51,753 | | Tax Fees | | 55,616 | | | 46,820 | |
| All Other Fees | All Other Fees | | — | | | — | | All Other Fees | | — | | | — | |
| Total | Total | | $ | 212,520 | | | $ | 207,253 | | Total | | $ | 235,616 | | | $ | 212,520 | |
Audit Fees. Audit fees include fees for services that normally would be provided by KPMG in connection with statutory and regulatory filings or engagements and that generally only an independent accountant can provide. In addition to fees for the audit of our annual financial statements and the review of our quarterly financial statements in accordance with generally accepted auditing standard, this category contains fees for comfort letters, statutory audits, consents, and assistance with and review of documents filed with the SEC.
Audit-Related Fees. Audit-related services consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees.” These services include attest services that are not required by statute or regulation and consultations concerning financial accounting and reporting standards.
Tax Services Fees. Tax services fees consist of fees billed for professional tax services. These services also include assistance regarding federal, state, and local tax compliance.
All Other Fees. Other fees would include fees for products and services other than the services reported above.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
The following exhibits are included, or incorporated by reference, in this annual report on Form 10-K:
(1) Financial Statements
The index to our financial statements and schedule is on page F-1 of this annual report on Form 10-K.
Other Financial Statements:
Terra Property Trust, Inc. (Incorporated by reference to Annual Report on Form 10-K (File No. 001-40496) filed with the SEC on March 11, 202210, 2023 by Terra Property Trust, Inc.)
(2) Financial Statement Schedule
None
(3) Exhibits
The following exhibits are filed with this report. Documents other than those designated as being filed herewith are incorporated herein by reference.
| | | | | | | | |
| Exhibit No. | | Description and Method of Filing |
| 2.1 | | |
| | | |
| 2.2 | | |
| | |
| 2.3 | | |
| | | |
| 2.4 | | |
| | |
| 2.5 | | Contribution Agreement by and among Terra Secured Income Fund, LLC, Terra Secured Income Fund 2, LLC, Terra Secured Income Fund 3, LLC, Terra Secured Income Fund 4, LLC, the registrant, and Terra Property Trust, Inc., dated January 1, 2016 (incorporated by reference to Exhibit 2.5 to the Registration Statement on Form 10 (File No. 000-55780) filed with the SEC on April 28, 2017). |
| | |
| 2.6 | | Amendment No. 1 to the Contribution Agreement by and among Terra Secured Income Fund, LLC, Terra Secured Income Fund 2, LLC, Terra Secured Income Fund 3, LLC, Terra Secured Income Fund 4, LLC, the registrant, and Terra Property Trust, Inc., dated December 31, 2016 (incorporated by reference to Exhibit 2.6 to the Registration Statement on Form 10 (File No. 000-55780) filed with the SEC on April 28, 2017). |
| | |
| 2.7 | | |
| | |
| 2.8 | | Agreement and Plan of Merger, dated as of May 2, 2022, by and among Terra Property Trust, Inc., Terra Income Fund 6, Inc., Terra Merger Sub, LLC, Terra Income Advisors, LLC and Terra REIT Advisors, LLC (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by Terra Income Fund 6, Inc. with the SEC on May 5, 2022). |
| | |
| 3.1 | | |
| | |
| 4.1 | | |
| | |
| 10.1 | | |
| | |
| 10.2 | | |
| | |
| 10.3 | | |
| | |
| 10.4 | | |
| | | | | | | | |
| Exhibit No. | | Description and Method of Filing |
| | |
| 10.5 | | |
| | |
| 10.7 | | |
| | |
| | | | | | | | |
Exhibit No. | | Description and Method of Filing |
| | |
| 10.8 | | Indenture and Credit Agreement, dated as of September 3, 2020, by and among Terra Mortgage Capital I, LLC, as Issuer, Goldman Sachs Bank USA, as initial Class A lender, and Wells Fargo, National Association, as trustee, custodian, collateral agent, loan agent and note administrator (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on September 17, 2020). |
| | |
| 10.9 | | |
| | |
| 10.10 | | |
| | |
| 10.11 | | |
| | |
10.12 * | | First Amendment to Loan Documents dated as of June 9, 2021, by and amount Terra Mortgage Portfolio II, LLC, as Borrower, Terra Property Trust, Inc., as Guarantor, and Western Alliance Bank, as Lender.Lender (incorporated by reference to Exhibit 10.10 to the Annual Report on Form 10-K filed with the SEC on March 11, 2022). |
| | |
10.13*10.13 | | |
| | |
10.14 * | | |
| | |
10.15 * | | Second Amendment to Loan Documents dated as of January 4, 2022, by and amount Terra Mortgage Portfolio II, LLC, as Borrower, Terra Property Trust, Inc., as Guarantor, and Western Alliance Bank, as Lender.Lender (incorporated by reference to Exhibit 10.13 to the Annual Report on Form 10-K filed with the SEC on March 11, 2022). |
| | |
10.16 * | | |
| | |
10.17*10.17 | | |
| | |
| 10.18 | | |
| | |
| 10.19 | | |
| | |
| 21* | | |
| | |
| 31.1* | | |
| | | |
| 31.2* | | |
| | | |
| 32** | | |
| | |
| | | | | | | | |
| Exhibit No. | | Description and Method of Filing |
| 101.INS** | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
| | |
| 101.SCH** | | Inline XBRL Taxonomy Extension Schema Document |
| | |
| 101.CAL** | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
| 101.LAB** | | Inline XBRL Taxonomy Extension Label Linkbase Document |
| | |
| 101.PRE** | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
| 101.DEF** | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| | |
| 104 | | Cover Page Interactive Data File Included as Exhibit 101 (embedded within the Inline XBRL document) |
_______________
* Filed herewith.
** Furnished herewith.
Item 16. Form 10-K Summary.
None.
Terra Secured Income Fund 5, LLC
Index to Financial Statements
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Page |
| KPMG LLP | New York, NY | PCAOB ID: | 185 | | |
| Financial Statements: | | | | | | |
| | | |
| | | |
| | | |
| | | |
| | | | | | |
| | | | | | |
Report of Independent Registered Public Accounting Firm
To the Members
Terra Secured Income Fund 5, LLC:
Opinion on the Financial Statements
We have audited the accompanying statements of financial condition of Terra Secured Income Fund 5, LLC (the Company), including the schedule of investment,investments, as of December 31, 20212022 and 2020,2021, the related statements of operations, changes in members’ capital, and cash flows for the years then ended, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20212022 and 2020,2021, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2016.
New York, New York
March 11, 202210, 2023
Terra Secured Income Fund 5, LLC
Statements of Financial Condition
| | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| Assets | | | | |
Equity investment in Terra JV, LLC at fair value (cost of $219,704,515 and
$230,915,151, respectively) | | $ | 217,324,720 | | | $ | 235,357,977 | |
| Cash and cash equivalents | | 836,052 | | | 225,214 | |
| Other assets | | 33,830 | | | 33,830 | |
| Total assets | | $ | 218,194,602 | | | $ | 235,617,021 | |
| | | | |
| Liabilities and Members’ Capital | | | | |
| Liabilities | | | | |
| Accounts payable and accrued expenses | | $ | 118,025 | | | $ | 199,602 | |
| Total liabilities | | 118,025 | | | 199,602 | |
Commitments and contingencies (Note 5) | | 0 | | 0 |
| Members’ capital: | | | | |
| Managing member | | — | | | — | |
| Non-managing members | | 218,076,577 | | | 235,417,419 | |
| Total members’ capital | | 218,076,577 | | | 235,417,419 | |
| Total liabilities and members’ capital | | $ | 218,194,602 | | | $ | 235,617,021 | |
| Net asset value per unit | | $ | 32,860 | | | $ | 35,467 | |
| | | | | | | | | | | | | | | |
| | December 31, | |
| | 2022 | | 2021 | |
| Assets | | | | | |
Equity investment in Terra JV, LLC at fair value (cost of $215,070,522 and $219,704,515, respectively) | | $ | 210,008,457 | | | $ | 217,324,720 | | |
| Cash and cash equivalents | | 102,256 | | | 836,052 | | |
| Other assets | | 40,434 | | | 33,830 | | |
| Total assets | | $ | 210,151,147 | | | $ | 218,194,602 | | |
| | | | | |
| Liabilities and Members’ Capital | | | | | |
| Liabilities | | | | | |
| Accounts payable and accrued expenses | | $ | 161,088 | | | $ | 118,025 | | |
| Total liabilities | | 161,088 | | | 118,025 | | |
Commitments and contingencies (Note 5) | | | | | |
| Members’ capital: | | | | | |
| Managing member | | — | | | — | | |
| Non-managing members | | 209,990,059 | | | 218,076,577 | | |
| Total members’ capital | | 209,990,059 | | | 218,076,577 | | |
| Total liabilities and members’ capital | | $ | 210,151,147 | | | $ | 218,194,602 | | |
| Net asset value per unit | | $ | 31,710 | | | $ | 32,860 | | |
See notes to financial statements.
Terra Secured Income Fund 5, LLC
Statements of Operations
| | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2021 | | 2020 |
| Investment income | | | | |
| Dividend income | | $ | 1,883,284 | | | $ | 4,283,576 | |
| Other operating income | | 53 | | | 232 | |
| Total investment income | | 1,883,337 | | | 4,283,808 | |
| Operating expenses | | | | |
| Professional fees | | 442,093 | | | 552,648 | |
| Other | | 3,310 | | | 10,964 | |
| Total operating expenses | | 445,403 | | | 563,612 | |
| Net investment income | | 1,437,934 | | | 3,720,196 | |
| Net change in unrealized (depreciation) appreciation on investment | | (6,822,621) | | | 1,104,433 | |
| Net (decrease) increase in members’ capital resulting from operations | | $ | (5,384,687) | | | $ | 4,824,629 | |
| Per unit data: | | | | |
| Net investment income per unit | | $ | 217 | | | $ | 560 | |
| Net (decrease) increase in members’ capital resulting from operations per unit | | $ | (811) | | | $ | 727 | |
| Weighted average units outstanding | | 6,635.9 | | | 6,637.8 | |
| | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| | | | | | 2022 | | 2021 |
| Investment income | | | | | | | |
| Dividend income | | | | | $ | 6,868,609 | | | $ | 1,883,284 | |
| Other operating income | | | | | 65 | | | 53 | |
| Total investment income | | | | | 6,868,674 | | | 1,883,337 | |
| Operating expenses | | | | | | | |
| Professional fees | | | | | 538,348 | | | 442,093 | |
| Other | | | | | 4,666 | | | 3,310 | |
| Total operating expenses | | | | | 543,014 | | | 445,403 | |
| Net investment income | | | | | 6,325,660 | | | 1,437,934 | |
| Net change in unrealized depreciation on investment | | | | | (2,682,270) | | | (6,822,621) | |
| Net increase (decrease) in members’ capital resulting from operations | | | | | $ | 3,643,390 | | | $ | (5,384,687) | |
| Per unit data: | | | | | | | |
| Net investment income per unit | | | | | $ | 954 | | | $ | 217 | |
| Net increase (decrease) in members’ capital resulting from operations per unit | | | | | $ | 550 | | | $ | (811) | |
| Weighted average units outstanding | | | | | 6,627.7 | | | 6,635.9 | |
See notes to financial statements.
Terra Secured Income Fund 5, LLC
Statements of Changes in Members’ Capital
| | | | | | | | | | | | | | | | | |
| Managing
Member | | Non-Managing Members | | Total |
| Balance, January 1, 2021 | $ | — | | | $ | 235,417,419 | | | $ | 235,417,419 | |
| Capital distributions | — | | | (11,916,928) | | | (11,916,928) | |
| Capital redemptions | — | | | (39,227) | | | (39,227) | |
| Decrease in members’ capital resulting from operations: | | | | | |
| Net investment income | — | | | 1,437,934 | | | 1,437,934 | |
| Net change in unrealized depreciation on investment | — | | | (6,822,621) | | | (6,822,621) | |
| Net decrease in members’ capital resulting from operations | — | | | (5,384,687) | | | (5,384,687) | |
| Balance, December 31, 2021 | $ | — | | | $ | 218,076,577 | | | $ | 218,076,577 | |
| | | | | | | | | | | | | | | | | |
| Managing
Member | | Non-Managing Members | | Total |
| Balance, January 1, 2022 | $ | — | | | $ | 218,076,577 | | | $ | 218,076,577 | |
| Capital distributions | — | | | (11,256,444) | | | (11,256,444) | |
| Capital redemptions | — | | | (473,464) | | | (473,464) | |
| Increase in members’ capital resulting from operations: | | | | | |
| Net investment income | — | | | 6,325,660 | | | 6,325,660 | |
| Net change in unrealized depreciation on investment | — | | | (2,682,270) | | | (2,682,270) | |
| Net increase in members’ capital resulting from operations | — | | | 3,643,390 | | | 3,643,390 | |
| Balance, December 31, 2022 | $ | — | | | $ | 209,990,059 | | | $ | 209,990,059 | |
| | | | | | | | | | | | | | | | | |
| Managing
Member | | Non-Managing Members | | Total |
| Balance, January 1, 2020 | $ | — | | | $ | 247,066,913 | | | $ | 247,066,913 | |
| Capital distributions | — | | | (16,474,123) | | | (16,474,123) | |
| Increase in members’ capital resulting from operations: | | | | | |
| Net investment income | — | | | 3,720,196 | | | 3,720,196 | |
| Net change in unrealized appreciation on investment | — | | | 1,104,433 | | | 1,104,433 | |
| Net increase in members’ capital resulting from operations | — | | | 4,824,629 | | | 4,824,629 | |
| Balance, December 31, 2020 | $ | — | | | $ | 235,417,419 | | | $ | 235,417,419 | |
| | | | | | | | | | | | | | | | | |
| Managing
Member | | Non-Managing Members | | Total |
| Balance, January 1, 2021 | $ | — | | | $ | 235,417,419 | | | $ | 235,417,419 | |
| Capital distributions | — | | | (11,916,928) | | | (11,916,928) | |
| Capital redemptions | — | | | (39,227) | | | (39,227) | |
| Decrease in members’ capital resulting from operations: | | | | | |
| Net investment loss | — | | | 1,437,934 | | | 1,437,934 | |
| Net change in unrealized depreciation on investment | — | | | (6,822,621) | | | (6,822,621) | |
| Net decrease in members’ capital resulting from operations | — | | | (5,384,687) | | | (5,384,687) | |
| Balance, December 31, 2021 | $ | — | | | $ | 218,076,577 | | | $ | 218,076,577 | |
See notes to financial statements.
Terra Secured Income Fund 5, LLC
Statements of Cash Flows
| | | Years Ended December 31, | | Years Ended December 31, |
| | 2021 | | 2020 | | 2022 | | 2021 |
| Cash flows from operating activities: | Cash flows from operating activities: | | | | Cash flows from operating activities: | | | |
| Net (decrease) increase in members’ capital resulting from operations | $ | (5,384,687) | | | $ | 4,824,629 | | |
Adjustments to reconcile net (decrease) increase in members’ capital resulting
from operations to net cash provided by operating activities: | | |
| Net increase (decrease) in members’ capital resulting from operations | | Net increase (decrease) in members’ capital resulting from operations | $ | 3,643,390 | | | $ | (5,384,687) | |
Adjustments to reconcile net increase (decrease) in members’ capital resulting
from operations to net cash provided by operating activities: | | Adjustments to reconcile net increase (decrease) in members’ capital resulting
from operations to net cash provided by operating activities: | |
| Return of capital on investment | Return of capital on investment | 11,210,636 | | | 13,009,701 | | Return of capital on investment | 4,633,993 | | | 11,210,636 | |
| Net change in unrealized depreciation (appreciation) on investment | 6,822,621 | | | (1,104,433) | | |
| | Net change in unrealized depreciation on investment | | Net change in unrealized depreciation on investment | 2,682,270 | | | 6,822,621 | |
| Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
| Decrease in other assets | — | | | (18,766) | | |
| Decrease in accounts payable and accrued expenses | (81,577) | | | (71,731) | | |
| Decrease in due to related party | — | | | (38,000) | | |
| Increase in other assets | | Increase in other assets | (6,604) | | | — | |
| Increase (decrease) in accounts payable and accrued expenses | | Increase (decrease) in accounts payable and accrued expenses | 43,063 | | | (81,577) | |
| Net cash provided by operating activities | Net cash provided by operating activities | 12,566,993 | | | 16,601,400 | | Net cash provided by operating activities | 10,996,112 | | | 12,566,993 | |
| | Cash flows from financing activities: | Cash flows from financing activities: | | Cash flows from financing activities: | |
| Distributions paid | Distributions paid | (11,916,928) | | | (16,474,123) | | Distributions paid | (11,256,444) | | | (11,916,928) | |
| Payment for capital redemptions | Payment for capital redemptions | (39,227) | | | — | | Payment for capital redemptions | (473,464) | | | (39,227) | |
| Net cash used in financing activities | Net cash used in financing activities | (11,956,155) | | | (16,474,123) | | Net cash used in financing activities | (11,729,908) | | | (11,956,155) | |
| | Net increase in cash and cash equivalents | 610,838 | | | 127,277 | | |
| Net (decrease) increase in cash and cash equivalents | | Net (decrease) increase in cash and cash equivalents | (733,796) | | | 610,838 | |
| Cash and cash equivalents at beginning of year | Cash and cash equivalents at beginning of year | 225,214 | | | 97,937 | | Cash and cash equivalents at beginning of year | 836,052 | | | 225,214 | |
| Cash and cash equivalents at end of year | Cash and cash equivalents at end of year | $ | 836,052 | | | $ | 225,214 | | Cash and cash equivalents at end of year | $ | 102,256 | | | $ | 836,052 | |
| | Supplemental Non-Cash Disclosure: | | |
Transfer of ownership interest in Terra Property Trust, Inc. to | $ | — | | | $ | 244,006,890 | | |
See notes to financial statements.
Terra Secured Income Fund 5, LLC
Schedule of Investment
December 31, 20212022 and 20202021
On January 1, 2016, the Company,Terra Secured Income Fund 5, LLC (the “Company”), the then parent of Terra Property Trust, Inc. (“Terra Property Trust”), contributed its consolidated portfolio of net assets to Terra Property Trust pursuant to a contribution agreement in exchange for shares of Terra Property Trust’s common stock, par value $0.01 per share. Upon receipt of the contribution of the consolidated portfolio of net assets from the Company, Terra Property Trust commenced its operations on January 1, 2016. As discussed in Note 4, on March 2, 2020, Terra Property Trust engaged in a series of transactions pursuant to which Terra Property Trust 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 that Terra Property Trust owned, cash of $25.5 million and other working capital. As of both December 31, 2021, and 2020, Terra JV, LLC (“Terra JV”) held 87.4% of the issued and outstanding shares of Terra Property Trust’s common stock with the remainder held by Terra Offshore Funds REIT, LLC (“Terra Offshore REIT”), and the Company and Terra Secured Income Fund 7, LLC (“Terra Fund 7”) owned an 87.6% and 12.4% percentage interest, respectively, in Terra JV. On October 1, 2022, pursuant to that certain Agreement and Plan of Merger, dated as of May 2, 2022 (the “Terra BDC Merger Agreement”), Terra Income Fund 6, Inc. (“Terra BDC”) merged with and into Terra Income Fund 6, LLC (formerly Terra Merger Sub, LLC), a wholly owned subsidiary of Terra Property Trust (“Terra LLC”), with Terra LLC continuing as the surviving entity of the merger (the “BDC Merger”) and as a wholly owned subsidiary of Terra Property Trust. Following the consummation of the BDC Merger and as of December 31, 2022, Terra JV, former shareholders of Terra BDC and Terra Offshore REIT held 70.0%, 19.9% and 10.1% of the issued and outstanding shares of Terra Property Trust’s newly designated Class B Common Stock, par value $0.01 per share (“TPT Class B Common Stock”), respectively. Accordingly, as of both December 31, 20212022 and 2020,2021, the Company indirectly beneficially owned 61.3% and 76.5%, respectively, of the outstanding shares of common stock of Terra Property Trust through Terra JV. Additionally, as of both December 31, 2022 and 2021, Terra JV was jointly-controlled by the Company and Terra Fund 7.
The following table presents a summary of the Company’s investment as of December 31, 20212022 and 2020:2021:
| | | Percentage Interest | | December 31, 2021 | | December 31, 2020 | | Percentage Interest | | December 31, 2022 | | December 31, 2021 |
| Investment | Investment | | Date Acquired | | Cost | | Fair Value | | % of Members’ Capital | | Cost | | Fair Value | | % of Members’ Capital | Investment | | Date Acquired | | Cost | | Fair Value | | % of Members’ Capital | | Cost | | Fair Value | | % of Members’ Capital |
| Terra JV, LLC | Terra JV, LLC | | 3/2/2020 | | 87.6 | % | | $ | 219,704,515 | | | $ | 217,324,720 | | | 99.7 | % | | $ | 230,915,151 | | | $ | 235,357,977 | | | 100.0 | % | Terra JV, LLC | | 3/2/2020 | | 87.6 | % | | $ | 215,070,522 | | | $ | 210,008,457 | | | 100.0 | % | | $ | 219,704,515 | | | $ | 217,324,720 | | | 99.7 | % |
As of both December 31, 2021 and 2020, the Company indirectly beneficially owned 76.5% of the outstanding shares of common stock of Terra Property Trust. Additionally, as of both December 31, 2021 and 2020, Terra JV was jointly-controlled by the Company and Terra Fund 7.
Terra Secured Income Fund 5, LLC
Schedule of Investment (Continued)
December 31, 2022 and 2021
The following table presents a schedule of loans held for investment by Terra Property Trust at 100% and the Company’s pro-rata share of the fair value at December 31, 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Portfolio Company | Collateral Location | Property
Type | Coupon
Rate | Current Interest Rate | Exit Fee | Acquisition Date | Maturity
Date | Principal Amount | Amortized
Cost | Fair Value (1) | Pro Rata Fair Value (2) | % (3) |
| Loans held for investment: | | | | | | | | | | | | |
| Mezzanine loans: | | | | | | | | | | | | |
| 150 Blackstone River Road, LLC | US - MA | Industrial | 8.5 | % | 8.5 | % | — | % | 9/21/2017 | 9/6/2027 | $ | 7,000,000 | | $ | 7,000,000 | | $ | 6,982,101 | | $ | 5,341,307 | | 2.4 | % |
| High Pointe Mezzanine Investments, LLC | US - SC | Student housing | 13.0 | % | 13.0 | % | 1.0 | % | 12/27/2013 | 1/6/2024 | 3,000,000 | | 3,145,614 | | 3,059,611 | | 2,340,602 | | 1.1 | % |
UNJ Sole Member, LLC (4) | US - CA | Mixed-use | 15.0 | % | 15.0 | % | 1.0 | % | 11/24/2021 | 6/1/2017 | 7,444,357 | | 7,477,190 | | 7,477,190 | | 5,720,050 | | 2.6 | % |
| | | | | | | | 17,444,357 | | 17,622,804 | | 17,518,902 | | 13,401,959 | | 6.1 | % |
| Preferred equity investments: | | | | | | | | | | | | |
370 Lex Part Deux, LLC (5)(6) | US - NY | Office | LIBOR + 8.25% (2.44% Floor) | 10.7 | % | — | % | 12/17/2018 | 1/9/2023 | 60,012,639 | | 60,012,639 | | 57,858,019 | | 44,261,385 | | 20.3 | % |
REEC Harlem Holdings Company, LLC (7) | US - NY | Mixed-use | LIBOR + 12.5% (no Floor) | 12.6 | % | — | % | 3/9/2018 | 3/9/2023 | 16,633,292 | | 16,633,292 | | 3,708,310 | | 2,836,857 | | 1.3 | % |
RS JZ Driggs, LLC (5)(6)(8) | US - NY | Multifamily | 12.3 | % | 12.3 | % | 1.0 | % | 5/1/2018 | 1/1/2021 | 15,606,409 | | 15,754,641 | | 15,748,942 | | 12,047,941 | | 5.5 | % |
| | | | | | | | 92,252,340 | | 92,400,572 | | 77,315,271 | | 59,146,183 | | 27.1 | % |
See notes to financial statements.
Terra Secured Income Fund 5, LLC
Schedule of Investment (Continued)
December 31, 2021 and 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Portfolio Company | Collateral Location | Property
Type | Coupon
Rate | Current Interest Rate | Exit Fee | Acquisition Date | Maturity
Date | Principal Amount | Amortized
Cost | Fair Value (1) | Pro Rata Fair Value (2) | % (3) |
| Loans held for investment: | | | | | | | | | | | | |
| Mezzanine loans: | | | | | | | | | | | | |
| 150 Blackstone River Road, LLC | US - MA | Industrial | 8.5 | % | 8.5 | % | — | % | 9/21/2017 | 9/6/2027 | $ | 7,000,000 | | $ | 7,000,000 | | $ | 6,638,219 | | $ | 4,069,228 | | 1.9 | % |
610 Walnut Investors LLC (4)(5) | US - CA | Office | Term SOFR + 12.0% (2.0% Floor) | 16.4 | % | 1.0 | % | 8/30/2022 | 9/7/2024 | 18,625,738 | | 18,738,386 | | 18,767,281 | | 11,504,343 | | 5.5 | % |
| Dwight Mezz II, LLC | US - CA | Student
housing | 11.0 | % | 11.0 | % | — | % | 5/11/2017 | 5/6/2027 | 3,000,000 | | 2,916,369 | | 2,914,042 | | 1,786,308 | | 0.9 | % |
Havemeyer TSM LLC (6) | US - NY | Mixed-use | 15.0 | % | 15.0 | % | 1.0 | % | 12/18/2020 | 3/1/2023 | 3,282,208 | | 3,313,813 | | 3,315,293 | | 2,032,275 | | 1.0 | % |
UNJ Sole Member, LLC (6) | US - CA | Mixed-use | 15.0 | % | 15.0 | % | 1.0 | % | 11/24/2021 | 6/1/2027 | 7,444,357 | | 7,482,547 | | 7,371,101 | | 4,518,485 | | 2.2 | % |
| | | | | | | | 39,352,303 | | 39,451,115 | | 39,005,936 | | 23,910,639 | | 11.5 | % |
| Preferred equity investments: | | | | | | | | | | | | |
370 Lex Part Deux, LLC (7) | US - NY | Office | LIBOR + 8.25% (2.44% Floor) | 12.6 | % | — | % | 12/17/2018 | 7/9/2022 | 67,586,792 | | 67,586,792 | | 56,338,079 | | 34,535,242 | | 16.5 | % |
| Ann Street JV LLC | US - GA | Multifamily | 14.0 | % | 14.0 | % | 1.0 | % | 11/12/2021 | 6/7/2024 | 15,217,540 | | 15,648,482 | | 15,127,126 | | 9,272,928 | | 4.4 | % |
| Asano Bankers Hill, LLC | US - CA | Mixed-use | SOFR + 15.0% (0.25% Floor) | 19.1 | % | 1.0 | % | 2/2/2022 | 7/31/2024 | 17,450,623 | | 17,920,424 | | 17,578,839 | | 10,775,828 | | 5.1 | % |
REEC Harlem Holdings Company, LLC (8) | US - NY | Mixed-use | LIBOR + 12.5% | 16.9 | % | — | % | 3/9/2018 | 3/9/2023 | 15,983,234 | | 15,983,234 | | 3,090,588 | | 1,894,530 | | 0.9 | % |
RS JZ Driggs, LLC (9) | US - NY | Multifamily | 12.3 | % | 12.3 | % | 1.0 | % | 5/1/2018 | 1/1/2021 | 4,993,245 | | 4,993,245 | | 4,993,245 | | 3,060,859 | | 1.5 | % |
| | | | | | | | 121,231,434 | | 122,132,177 | | 97,127,877 | | 59,539,387 | | 28.4 | % |
| First mortgages: | | | | | | | | | | | | |
14th & Alice Street Owner, LLC (10) | US - CA | Multifamily | LIBOR + 4.0% (0.25% Floor) | 8.4 | % | 2.0 | % | 10/15/2021 | 4/15/2023 | 1,364,944 | | 1,364,944 | | — | | — | | — | |
1389 Peachtree St, LP; 1401 Peachtree St, LP; 1409 Peachtree St, LP (11) | US - GA | Office | LIBOR + 4.50% | 8.9 | % | 0.5 | % | 2/22/2019 | 8/10/2023 | 57,184,178 | | 57,453,482 | | 56,844,322 | | 34,845,569 | | 16.7 | % |
330 Tryon DE LLC (11) | US - NC | Office | Term SOFR+ 4.25% (0.1% Floor) | 8.6 | % | 0.5 | % | 2/7/2019 | 3/1/2024 | 22,800,000 | | 22,902,215 | | 22,687,235 | | 13,907,275 | | 6.6 | % |
AGRE DCP Palm Springs, LLC (11) | US - CA | Hotel - full/
select service | LIBOR +5.0% (1.8% Floor) | 9.4 | % | 1.5 | % | 12/12/2019 | 1/1/2024 | 43,222,382 | | 43,758,804 | | 43,062,933 | | 26,397,578 | | 12.6 | % |
AARSHW Property LLC (12)(13) | US - NJ | Industrial | SOFR +7.5% (0.15% Floor) | 11.6 | % | 0.9 | % | 3/7/2022 | 8/17/2024 | 44,368,331 | | 44,669,513 | | 44,702,632 | | 27,402,713 | | 13.0 | % |
AAESUF Property LLC (11) | US - NJ | Land | SOFR + 11.95% (0.05% Floor) | 16.0 | % | 5%-10% | 3/15/2022 | 3/1/2024 | 17,860,291 | | 18,288,969 | | 18,587,586 | | 11,394,190 | | 5.4 | % |
Terra Property Trust’s Schedule of Loans Held for Investment as of December 31, 2021 (Continued):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Portfolio Company | Collateral Location | Property
Type | Coupon
Rate | Current Interest Rate | Exit Fee | Acquisition Date | Maturity
Date | Principal Amount | Amortized
Cost | Fair Value (1) | Pro Rata
Fair Value (2) | % (3) |
| Loans held for investment: | | | | | | | | | | | | |
| First mortgages: | | | | | | | | | | | | |
14th & Alice Street Owner, LLC (9) | US - CA | Multifamily | LIBOR + 4.0% (0.25% Floor) | 4.3 | % | 2.0 | % | 10/15/2021 | 4/15/2023 | $ | 39,384,000 | | $ | 40,089,153 | | $ | 40,130,448 | | $ | 30,699,793 | | 14.1 | % |
1389 Peachtree St, LP; 1401 Peachtree St, LP; 1409 Peachtree St, LP (10) | US - GA | Office | LIBOR + 4.5% (no Floor) | 4.6 | % | 0.5 | % | 2/22/2019 | 8/10/2023 | 53,289,288 | | 53,536,884 | | 52,031,363 | | 39,803,993 | | 18.3 | % |
330 Tryon DE LLC (10) | US - NC | Office | LIBOR + 4.25% (0.10% Floor) | 4.4 | % | 0.5 | % | 2/7/2019 | 3/1/2024 | 22,800,000 | | 22,902,354 | | 22,594,654 | | 17,284,910 | | 7.9 | % |
606 Fayetteville LLC and 401 E. Lakewood LLC (11) | US - NC | Land | 9.0 | % | 9.0 | % | 1.0 | % | 8/16/2021 | 8/1/2023 | 16,829,962 | | 16,935,803 | | 16,974,601 | | 12,985,570 | | 6.0 | % |
870 Santa Cruz, LLC (11) | US - CA | Office | LIBOR + 6.75% (0.5% Floor) | 7.3 | % | 1.0 | % | 12/15/2020 | 12/15/2023 | 17,540,875 | | 17,669,303 | | 17,781,285 | | 13,602,683 | | 6.2 | % |
AGRE DCP Palm Springs, LLC (10)(12) | US - CA | Hotel - full/
select service | LIBOR + 5.0% (1.80% Floor) | 6.8 | % | 1.5 | % | 12/12/2019 | 1/1/2024 | 43,222,381 | | 43,669,992 | | 43,829,842 | | 33,529,829 | | 15.5 | % |
Austin H. I. Borrower LLC (11)(13) | US- TX | Hotel - full/
select service | LIBOR + 7.5% (0.25% Floor) | 7.8 | % | 1.0 | % | 9/21/2021 | 10/1/2024 | 13,625,000 | | 13,725,690 | | 13,735,569 | | 10,507,710 | | 4.8 | % |
D-G Acquisition #6, LLC and D-G Quimisa, LLC (11) | US - CA | Land | LIBOR + 7.0% (0.25% Floor) | 7.3 | % | 0.5 | % | 7/21/2021 | 7/21/2023 | 8,607,092 | | 8,605,341 | | 8,645,413 | | 6,613,741 | | 3.0 | % |
Hillsborough Owners LLC (14) | US - NC | Mixed-use | LIBOR + 8.0% (0.25% Floor) | 8.3 | % | 1.0 | % | 10/27/2021 | 11/1/2023 | 4,863,009 | | 4,866,542 | | 4,883,878 | | 3,736,167 | | 1.7 | % |
NB Factory TIC 1, LLC (9) | US - UT | Student housing | LIBOR + 5.0% (0.25% Floor) | 5.3 | % | 3.3 | % | 8/16/2021 | 3/5/2023 | 28,000,000 | | 28,420,056 | | 28,851,547 | | 22,071,433 | | 10.1 | % |
Patrick Henry Recovery Acquisition, LLC (10) | US - CA | Office | LIBOR + 2.95% (1.5% Floor) | 4.5 | % | 0.3 | % | 11/25/2019 | 12/1/2023 | 18,000,000 | | 18,041,124 | | 18,055,377 | | 13,812,363 | | 6.3 | % |
The Lux Washington, LLC (11) | US - WA | Land | LIBOR + 7.0% (0.75% floor) | 7.8 | % | 1.0 | % | 7/22/2021 | 1/22/2024 | 3,523,401 | | 3,382,683 | | 3,553,330 | | 2,718,297 | | 1.2 | % |
University Park Berkeley, LLC (10)(15) | US - CA | Multifamily | LIBOR + 4.2% (1.50% Floor) | 5.7 | % | 0.8 | % | 2/27/2020 | 3/1/2023 | 25,815,378 | | 25,991,962 | | 26,015,500 | | 19,901,858 | | 9.1 | % |
Windy Hill PV Five CM, LLC (16) | US - CA | Office | LIBOR + 6.0% (2.05% Floor) | 8.1 | % | 0.5 | % | 9/20/2019 | 9/20/2022 | 49,954,068 | | 50,264,568 | | 50,077,674 | | 38,309,421 | | 17.6 | % |
| | | | | | | | 345,454,454 | | 348,101,455 | | 347,160,481 | | 265,577,768 | | 121.8 | % |
| Credit facility: | | | | | | | | | | | | |
William A. Shopoff & Cindy L. Shopoff (5)(6) | US - PA | Industrial | 15.0 | % | 15.0 | % | 1.0 | % | 10/4/2021 | 4/4/2023 | 25,000,000 | | 25,206,964 | | 25,206,965 | | 19,283,328 | | 8.8 | % |
| | | | | | | | 25,000,000 | | 25,206,964 | | 25,206,965 | | 19,283,328 | | 8.8 | % |
| Total gross loans held for investment | | | | | | | | 480,151,151 | | 483,331,795 | | 467,201,619 | | 357,409,238 | | 163.8 | % |
Obligations under participation agreements and secured borrowing (5)(6)(16) | | | | | | (76,569,398) | | (76,818,156) | | (75,900,089) | | (58,063,568) | | (26.6) | % |
| Allowance for loan losses | | | | | | | | — | | (13,658,481) | | — | | — | | — | % |
| Net loans held for investment | | | | | | | | $ | 403,581,753 | | $ | 392,855,158 | | $ | 391,301,530 | | $ | 299,345,670 | | 137.2 | % |
See notes to financial statements.
Terra Secured Income Fund 5, LLC
Schedule of Investment (Continued)
December 31, 20212022 and 20202021
Terra Property Trust’s Schedule of Loans Held for Investment as of December 31, 20212022 (Continued):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating real estate: | | | | | | | | | | | | | | | | |
| Description | | Acquisition Date | | Fair Value of Real Estate (1) | | Encumbrance | | Net Investment | | Pro Rata Net Investment (2) | | % (3)(19) | | | |
|
Multi-tenant office building in Santa Monica, CA (17) | | 7/30/2018 | | $ | 65,043,111 | | | $ | 31,962,692 | | | $ | 33,080,419 | | | $ | 25,306,521 | | | 11.6 | % | | | | |
Land in Conshohocken, PA (18) | | 1/9/2019 | | 10,000,000 | | | — | | | 10,000,000 | | | 7,650,000 | | | 3.5 | % | | | | |
| | | | $ | 75,043,111 | | | $ | 31,962,692 | | | $ | 43,080,419 | | | $ | 32,956,521 | | | 15.1 | % | | | | |
| | | | | | | | | | | | | | | | |
| Portfolio Company | | Dividend Yield | | Acquisition Date | | Maturity Date | | Shares | | Cost | | Fair Value | | Pro Rata Fair Value (2) | | % (3) |
Marketable securities (20): | | | | | | | | | | | | | | | | |
| Common and preferred shares: | | | | | | | | | | | | | | | | |
Nexpoint Real Estate Finance, Inc. - Cumulative
Series A Preferred Shares | | 8.5 | % | | 7/30/2020 | | 7/24/2025 | | 50,000 | | | $ | 1,176,006 | | | $ | 1,310,000 | | | $ | 1,002,150 | | | 0.5 | % |
| Total marketable securities | | | | | | | | | | $ | 1,176,006 | | | $ | 1,310,000 | | | $ | 1,002,150 | | | 0.5 | % |
| | | | | | | | | | | | | | | | |
| Equity investments: | | | | | | | | | | | | | | | | |
| Portfolio Company | | | | Ownership Interest | | Cost | | Fair Value | | Pro Rata Fair Value (2) | | % (3) |
Mavik Real Estate Special Opportunities Fund, LP - limited partnership interest (21) | | | | 50% | | $ | 40,458,282 | | | $ | 39,643,024 | | | $ | 30,326,913 | | | 13.9 | % |
LEL Arlington JV LLC - limited liability member units (22) | | | | 80% | | 23,949,044 | | | 23,949,044 | | | 18,321,019 | | | 8.4 | % |
LEL NW 49th LV LLC - limited liability member units (22) | | | | 80% | | 5,306,467 | | | 5,306,467 | | | 4,059,447 | | | 1.9 | % |
| | | | | | | | | | $ | 69,713,793 | | | $ | 68,898,535 | | | $ | 52,707,379 | | | 24.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Portfolio Company | Collateral Location | Property
Type | Coupon
Rate | Current Interest Rate | Exit Fee | Acquisition Date | Maturity
Date | Principal Amount | Amortized
Cost | Fair Value (1) | Pro Rata
Fair Value (2) | % (3) |
| Loans held for investment: | | | | | | | | | | | | |
| First mortgages (Continued): | | | | | | | | | | | | |
| American Gilsonite Company | US - UT | Infrastructure | 14.0 | % | 14.0 | % | 1.0 | % | 8/31/2021 | 8/31/2023 | $ | 21,250,000 | | $ | 21,840,359 | | $ | 21,443,528 | | $ | 13,144,883 | | 6.3 | % |
Dallas - Big Town Owner, LLC (12) | US - TX | Industrial | Term SOFR + 4.5% (2.5% Floor) | 8.9 | % | 1.0 | % | 12/28/2022 | 12/27/2025 | 26,635,183 | | 26,838,830 | | 26,838,830 | | 16,452,203 | | 7.8 | % |
Dallas - Oakland Owner, LLC (12) | US - TX | Industrial | Term SOFR + 4.5% (2.5% Floor) | 8.9 | % | 1.0 | % | 12/28/2022 | 12/27/2025 | 9,673,597 | | 9,747,559 | | 9,747,559 | | 5,975,254 | | 2.8 | % |
Dallas - US HWY 80 Owner, LLC (12) | US - TX | Industrial | Term SOFR + 4.5% (2.5% Floor) | 8.9 | % | 1.0 | % | 12/28/2022 | 12/27/2025 | 11,395,169 | | 11,482,294 | | 11,482,294 | | 7,038,646 | | 3.4 | % |
Dallas - 11333 Pagemill Owner, LLC (12) | US - TX | Industrial | Term SOFR + 4.5% (2.5% Floor) | 8.9 | % | 1.0 | % | 12/28/2022 | 12/27/2025 | 12,296,945 | | 12,390,965 | | 12,390,965 | | 7,595,662 | | 3.6 | % |
Dallas - 11221 Pagemill Owner, LLC (12) | US - TX | Industrial | Term SOFR + 4.5% (2.5% Floor) | 8.9 | % | 1.0 | % | 12/28/2022 | 12/27/2025 | 7,624,106 | | 7,682,398 | | 7,682,398 | | 4,709,310 | | 2.2 | % |
Grandview’s Madison Place, LLC (14) | US - WA | Multifamily | Term SOFR + 4.45% (0.05% Floor) | 8.8 | % | 0.8 | % | 2/10/2022 | 2/10/2025 | 17,000,000 | | 17,105,928 | | 17,105,928 | | 10,485,934 | | 5.0 | % |
Grandview’s Remington Place, LLC (14) | US - WA | Multifamily | Term SOFR + 4.45% (0.05% Floor) | 8.8 | % | 0.5 | % | 4/22/2022 | 4/22/2024 | 23,100,000 | | 23,199,620 | | 23,203,343 | | 14,223,649 | | 6.8 | % |
| Hillsborough Owners LLC | US - NC | Mixed-use | LIBOR + 8.0% (0.25% Floor) | 12.4 | % | 1.0 | % | 10/27/2021 | 11/1/2023 | 20,720,028 | | 21,138,947 | | 20,947,571 | | 12,840,861 | | 6.1 | % |
Mesa AZ Industrial Owner, LLC (4)(12) | US - AZ | Land | Term SOFR + 12.7% (2.3% Floor) | 17.1 | % | 1.0 | % | 9/15/2022 | 9/14/2023 | 31,000,000 | | 31,276,468 | | 31,276,468 | | 19,172,475 | | 9.1 | % |
NB Factory TIC 1, LLC (14) | US - UT | Student housing | LIBOR + 5.0% (0.25% Floor) | 9.4 | % | 3.3 | % | 8/16/2021 | 3/5/2023 | 28,000,000 | | 28,857,892 | | 28,902,234 | | 17,717,069 | | 8.4 | % |
Patrick Henry Recovery Acquisition, LLC (11) | US - CA | Office | LIBOR +2.95% (1.5% Floor) | 7.3 | % | 0.3 | % | 11/25/2019 | 12/1/2023 | 18,000,000 | | 18,041,782 | | 17,824,300 | | 10,926,296 | | 5.2 | % |
The Lux Washington, LLC (12) | US - WA | Multifamily | LIBOR + 7.0% (0.75% floor) | 11.4 | % | 1.0 | % | 7/22/2021 | 1/22/2024 | 16,571,267 | | 16,722,091 | | 16,882,333 | | 10,348,870 | | 4.9 | % |
University Park Berkeley, LLC (11) | US - CA | Multifamily | LIBOR + 4.2% (1.5% Floor) | 8.6 | % | 0.8 | % | 2/27/2020 | 3/1/2023 | 26,342,468 | | 26,536,122 | | 26,472,938 | | 16,227,911 | | 7.7 | % |
| | | | | | | | 456,408,889 | | 461,299,182 | | 458,085,397 | | 280,806,348 | | 133.6 | % |
See notes to financial statements.
Terra Secured Income Fund 5, LLC
Schedule of Investment (Continued)
December 31, 2022 and 2021
Terra Property Trust’s Schedule of Loans Held for Investment as of December 31, 2022 (Continued):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Portfolio Company | Collateral Location | Property
Type | Coupon
Rate | Current Interest Rate | Exit Fee | Acquisition Date | Maturity
Date | Principal Amount | Amortized
Cost | Fair Value (1) | Pro Rata
Fair Value (2) | % (3) |
| Loans held for investment: | | | | | | | | | | | | |
| Credit facility: | | | | | | | | | | | | |
William A. Shopoff & Cindy L. Shopoff (15) | US - CA | Industrial | 15.0 | % | 15.0 | % | 1.0 | % | 10/4/2021 | 4/4/2023 | $ | 28,802,833 | | $ | 29,080,183 | | $ | 28,926,544 | | $ | 17,731,971 | | 8.4 | % |
| | | | | | | | 28,802,833 | | 29,080,183 | | 28,926,544 | | 17,731,971 | | 8.4 | % |
| Total gross loans held for investment | | | | | | | | 645,795,459 | | 651,962,657 | | 623,145,754 | | 381,988,345 | | 181.9 | % |
Obligations under participation agreements (4)(5) | | | | | | (12,584,958) | | (12,680,594) | | (12,680,595) | | (7,773,205) | | (3.7) | % |
| Allowance for loan losses | | | | | | | | — | | (25,471,890) | | — | | — | | — | % |
| Net loans held for investment | | | | | | | | $ | 633,210,501 | | $ | 613,810,173 | | $ | 610,465,159 | | $ | 374,215,140 | | 178.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating real estate: | | | | | | | | | | | | | | | | | | | |
| Description | | Acquisition Date | | Fair Value of Real Estate (1) | | Encumbrance | | Net Investment | | Pro Rata Net Investment (2) | | % (3)(17) | | | |
| | | |
Multi-tenant office building in Santa Monica, CA (16) | | 7/30/2018 | | $ | 52,500,000 | | | $ | 29,252,308 | | | $ | 23,247,692 | | | $ | 14,250,835 | | | 6.8 | % | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Portfolio Company | | Dividend Yield | | Acquisition Date | | Maturity Date | | Shares | | Cost | | Fair Value | | Pro Rata Fair Value (2) | | % (3) | | | |
Marketable securities (18): | | | | | | | | | | | | | | | | | | | |
| Corporate Bonds | | | | | | | | | | | | | | | | | | | |
| Terra Property Trust, Inc. Corporate Bonds | | 6.0 | % | | Various | | 6/30/2026 | | 7,398 | | | $ | 136,265 | | | $ | 147,960 | | | $ | 90,699 | | | 0.04 | % | | | |
| Total marketable securities | | | | | | | | | | $ | 136,265 | | | $ | 147,960 | | | $ | 90,699 | | | 0.04 | % | | | |
| | | | | | | | | | | | | | | | | | | |
| Equity investments: | | | | | | | | | | | | | | | | | | | |
| Portfolio Company | | | | Ownership Interest | | Cost | | Fair Value | | Pro Rata Fair Value (2) | | % (3) | | | |
Mavik Real Estate Special Opportunities Fund, LP - limited partnership interest (19) | | | | 27.9% | | $ | 36,794,674 | | | $ | 35,718,022 | | $ | 21,895,147 | | | 10.4 | % | | | |
LEL Arlington JV LLC - limited liability member units (20) | | | | | 27.2% | | 7,271,603 | | | 7,483,563 | | 4,587,424 | | | 2.2 | % | | | |
LEL NW 49th JV LLC - limited liability member units (20) | | | | 27.2% | | 1,521,556 | | | 2,519,781 | | 1,544,626 | | | 0.7 | % | | | |
TCG Corinthian FL Portfolio JV LLC (20) | | | | | | | | 34.0% | | 6,896,816 | | | 7,426,291 | | 4,552,316 | | | 2.2 | % | | | |
SF-Dallas Industrial, LLC (21) | | | | | | | | N/A | | 10,013,691 | | | 10,013,691 | | 6,138,393 | | | 2.9 | % | | | |
| | | | | | | | | | $ | 62,498,340 | | | $ | 63,161,348 | | $ | 38,717,906 | | | 18.4 | % | | | |
__________________________
(1)Because there is no readily available market for these investments, these loans were valued using significant unobservable inputs under Level 3 of the fair value hierarchy and were approved in good faith by Terra REIT Advisors, LLC (“Terra REIT Advisors”), Terra Property Trust’s manager, pursuant to Terra Property Trust’s valuation policy.
(2)Amount represents the Company’s portion, or 61.3%, of the fair value or net investment value.
(3)Percentage is based on the Company’s pro rata share of the fair value or net investment value over the Company’s total members’ capital of $210.0 million at December 31, 2022.
(4)Terra Property Trust sold a portion of its interest in this loan through a participation agreement to a third party.
(5)The loan participations from Terra Property Trust do not qualify for sale accounting and therefore, the gross amount of these loans remain in Terra Property Trust’s consolidated balance sheets.
(6)Terra Property Trust purchased a portion of the interest in this loan from Mavik Real Estate Special Opportunities Fund REIT, LLC, a related-party real estate investment trust managed by Terra REIT Advisors, via a participation agreement.
(7)This loan is currently in maturity default. For the year ended December 31, 2022, Terra Property Trust suspended interest income accrual of $3.7 million on this loan because recovery of such income was doubtful. As of December 31, 2022, Terra Property Trust recorded a specific allowance for loan losses of $11.2 million on the loan as a result of a decline in the fair value of the collateral.
(8)For the year ended December 31, 2022, Terra Property Trust suspended interest income accrual of $2.9 million on this loan because recovery of such income was doubtful. Additionally, the fair value of the loan declined as a result of a decline in the fair value of the collateral. As of December 31, 2022, Terra Property Trust recorded a specific allowance for loan losses of $12.9 million on the loan as a result of a decline in the fair value of the collateral.
(9)This loan is in maturity default. Terra Property Trust initiated a litigation to seek full repayment of the loan from the sponsor. For the year ended December 31, 2022, Terra Property Trust suspended interest income accrual of $2.0 million on this loan because recovery of such income was doubtful.
(10)This loan is classified as a trouble debt restructuring. Terra Property Trust does not anticipate a full recovery of the remaining principal balance, as such, the loan is fully reserved.
(11)These loans were used as collateral for $119.8 million of borrowings under a repurchase agreement.
(12)These loans were used as collateral for $90.1 million of borrowings under a revolving line of credit.
(13)Amount included $4.0 million of incremental borrowing that bears interest at an annual rate of 20.0% until certain conditions are met, at which time the interest rate will be the same as the original loan.
(14)These loans were used as collateral for $51.1 million of borrowings under a repurchase agreement.
(15)Amount included $3.0 million of incremental borrowing that bears interest at an annual rate of Term SOFR plus 7.0% with a SOFR floor of 4.30%.
(16)Terra Property Trust acquired this property through foreclosure of a $54.0 million first mortgage.
(17)Percentage is based on Terra Property Trust’s net exposure on the property (real estate owned less encumbrance).
(18)From time to time, Terra Property Trust may invest in short-term debt and equity securities. These securities are comprised of shares of common and preferred stock and bonds.
(19)On August 3, 2020, Terra Property Trust entered into a subscription agreement with Mavik Real Estate Special Opportunities Fund, LP (“RESOF”) whereby Terra Property Trust committed to fund up to $50.0 million to purchase a limited partnership interest in RESOF. RESOF’s primary investment objective is to generate attractive risk-adjusted returns by purchasing performing and non-performing mortgages, loans, mezzanines and other credit instruments supported by underlying commercial real estate assets. As of December 31, 2022, the unfunded commitment was $22.4 million.
(20)As of December 31, 2022, Terra Property Trust beneficially owned equity interest in three joint ventures that invest in real estate properties.
(21)On December 28, 2022, Terra Property Trust originated a $10.0 million mezzanine loan to a borrower to finance the acquisition of a real estate portfolio. Additionally, Terra Property Trust entered into a residual profit sharing agreement with the borrower where the borrower will pay Terra Property Trust an additional amount of 35.0% of remaining net cash flow from the sale of the real estate portfolio. Terra Property Trust accounts for this arrangement using the equity method of accounting.
See notes to financial statements.
Terra Secured Income Fund 5, LLC
Schedule of Investment (Continued)
December 31, 2022 and 2021
The following table presents a schedule of loans held for investment held by Terra Property Trust as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Portfolio Company | Collateral Location | Property
Type | Coupon
Rate | Current Interest Rate | Exit Fee | Acquisition Date | Maturity
Date | Principal Amount | Amortized
Cost | Fair Value (1) | Pro Rata Fair Value (2) | % (3) |
| Loans held for investment: | | | | | | | | | | | | |
| Mezzanine loans: | | | | | | | | | | | | |
| 150 Blackstone River Road, LLC | US - MA | Industrial | 8.5 | % | 8.5 | % | — | % | 9/21/2017 | 9/6/2027 | $ | 7,000,000 | | $ | 7,000,000 | | $ | 6,982,101 | | $ | 5,341,307 | | 2.4 | % |
| High Pointe Mezzanine Investments, LLC | US - SC | Student housing | 13.0 | % | 13.0 | % | 1.0 | % | 12/27/2013 | 1/6/2024 | 3,000,000 | | 3,145,614 | | 3,059,611 | | 2,340,602 | | 1.1 | % |
UNJ Sole Member, LLC (4) | US - CA | Mixed-use | 15.0 | % | 15.0 | % | 1.0 | % | 11/24/2021 | 6/1/2017 | 7,444,357 | | 7,477,190 | | 7,477,190 | | 5,720,050 | | 2.6 | % |
| | | | | | | | 17,444,357 | | 17,622,804 | | 17,518,902 | | 13,401,959 | | 6.1 | % |
| Preferred equity investments: | | | | | | | | | | | | |
370 Lex Part Deux, LLC (5)(6) | US - NY | Office | LIBOR + 8.25% (2.44% Floor) | 10.7 | % | — | % | 12/17/2018 | 1/9/2023 | 60,012,639 | | 60,012,639 | | 57,858,019 | | 44,261,385 | | 20.3 | % |
REEC Harlem Holdings Company, LLC (7) | US - NY | Mixed-use | LIBOR + 12.5% | 12.6 | % | — | % | 3/9/2018 | 3/9/2023 | 16,633,292 | | 16,633,292 | | 3,708,310 | | 2,836,857 | | 1.3 | % |
RS JZ Driggs, LLC (5)(6)(8) | US - NY | Multifamily | 12.3 | % | 12.3 | % | 1.0 | % | 5/1/2018 | 1/1/2021 | 15,606,409 | | 15,754,641 | | 15,748,942 | | 12,047,941 | | 5.5 | % |
| | | | | | | | 92,252,340 | | 92,400,572 | | 77,315,271 | | 59,146,183 | | 27.1 | % |
| First mortgages: | | | | | | | | | | | | |
14th & Alice Street Owner, LLC (9) | US - CA | Multifamily | LIBOR + 4.0% (0.25% Floor) | 4.3 | % | 2.0 | % | 10/15/2021 | 4/15/2023 | 39,384,000 | | 40,089,153 | | 40,130,448 | | 30,699,793 | | 14.1 | % |
1389 Peachtree St, LP; 1401 Peachtree St, LP; 1409 Peachtree St, LP (10) | US - GA | Office | LIBOR + 4.5% | 4.6 | % | 0.5 | % | 2/22/2019 | 8/10/2023 | 53,289,288 | | 53,536,884 | | 52,031,363 | | 39,803,993 | | 18.3 | % |
330 Tryon DE LLC (10) | US - NC | Office | LIBOR+ 4.25% (0.1% Floor) | 4.4 | % | 0.5 | % | 2/7/2019 | 3/1/2024 | 22,800,000 | | 22,902,354 | | 22,594,654 | | 17,284,910 | | 7.9 | % |
606 Fayetteville LLC and 401 E. Lakewood LLC (11) | US - NC | Land | 9.0 | % | 9.0 | % | 1.0 | % | 8/16/2021 | 8/1/2023 | 16,829,962 | | 16,935,803 | | 16,974,601 | | 12,985,570 | | 6.0 | % |
870 Santa Cruz, LLC (11) | US - CA | Office | LIBOR + 6.75% (0.5% Floor) | 7.3 | % | 1.0 | % | 12/15/2020 | 12/15/2023 | 17,540,875 | | 17,669,303 | | 17,781,285 | | 13,602,683 | | 6.2 | % |
AGRE DCP Palm Springs, LLC (10)(12) | US - CA | Hotel - full/
select service | LIBOR +5.0% (1.8% Floor) | 6.8 | % | 1.5 | % | 12/12/2019 | 1/1/2024 | 43,222,381 | | 43,669,992 | | 43,829,842 | | 33,529,829 | | 15.5 | % |
Austin H. I. Borrower LLC (11)(13) | US- TX | Hotel - full/
select service | LIBOR + 7.5% (0.25% Floor) | 7.8 | % | 1.0 | % | 9/21/2021 | 10/1/2024 | 13,625,000 | | 13,725,690 | | 13,735,569 | | 10,507,710 | | 4.8 | % |
D-G Acquisition #6, LLC and D-G Quimisa, LLC (11) | US - CA | Land | LIBOR + 7.0% (0.25% Floor) | 7.3 | % | 0.5 | % | 7/21/2021 | 7/21/2023 | 8,607,092 | | 8,605,341 | | 8,645,413 | | 6,613,741 | | 3.0 | % |
Hillsborough Owners LLC (14) | US - NC | Mixed-use | LIBOR + 8.0% (0.25% Floor) | 8.3 | % | 1.0 | % | 10/27/2021 | 11/1/2023 | 4,863,009 | | 4,866,542 | | 4,883,878 | | 3,736,167 | | 1.7 | % |
NB Factory TIC 1, LLC (9) | US - UT | Student housing | LIBOR + 5.0% (0.25% Floor) | 5.3 | % | 3.3 | % | 8/16/2021 | 3/5/2023 | 28,000,000 | | 28,420,056 | | 28,851,547 | | 22,071,433 | | 10.1 | % |
Patrick Henry Recovery Acquisition, LLC (10) | US - CA | Office | LIBOR + 2.95% (1.5% Floor) | 4.5 | % | 0.3 | % | 11/25/2019 | 12/1/2023 | 18,000,000 | | 18,041,124 | | 18,055,377 | | 13,812,363 | | 6.3 | % |
The Lux Washington, LLC (11) | US - WA | Land | LIBOR + 7.0% (0.75% floor) | 7.8 | % | 1.0 | % | 7/22/2021 | 1/22/2024 | 3,523,401 | | 3,382,683 | | 3,553,330 | | 2,718,297 | | 1.2 | % |
University Park Berkeley, LLC (10)(15) | US - CA | Multifamily | LIBOR + 4.2% (1.5% Floor) | 5.7 | % | 0.8 | % | 2/27/2020 | 3/1/2023 | 25,815,378 | | 25,991,962 | | 26,015,500 | | 19,901,858 | | 9.1 | % |
Windy Hill PV Five CM, LLC (16) | US - CA | Office | LIBOR + 6.0% (2.05% Floor) | 8.1 | % | 0.5 | % | 9/20/2019 | 9/20/2022 | 49,954,068 | | 50,264,568 | | 50,077,674 | | 38,309,421 | | 17.6 | % |
| | | | | | | | 345,454,454 | | 348,101,455 | | 347,160,481 | | 265,577,768 | | 121.8 | % |
See notes to financial statements.
Terra Secured Income Fund 5, LLC
Schedule of Investment (Continued)
December 31, 2022 and December 31, 2021
Terra Property Trust’s Schedule of Loans Held for Investment as of December 31, 2021 (Continued):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Portfolio Company | Collateral Location | Property
Type | Coupon
Rate | Current Interest Rate | Exit Fee | Acquisition Date | Maturity
Date | Principal Amount | Amortized
Cost | Fair Value (1) | Pro Rata
Fair Value (2) | % (3) |
| Loans held for investment: | | | | | | | | | | | | |
| Credit facility: | | | | | | | | | | | | |
William A. Shopoff & Cindy L. Shopoff (5)(6) | US - CA | Industrial | 15.0 | % | 15.0 | % | 1.0 | % | 10/4/2021 | 4/4/2023 | $ | 25,000,000 | | $ | 25,206,964 | | $ | 25,206,965 | | $ | 19,283,328 | | 8.8 | % |
| | | | | | | | 25,000,000 | | 25,206,964 | | 25,206,965 | | 19,283,328 | | 8.8 | % |
| Total gross loans held for investment | | | | | | | | 480,151,151 | | 483,331,795 | | 467,201,619 | | 357,409,238 | | 163.8 | % |
Obligations under participation agreements and secured borrowing (5)(6)(16) | | | | | | (76,569,398) | | (76,818,156) | | (75,900,089) | | (58,063,568) | | (26.6) | % |
| Allowance for loan losses | | | | | | | | — | | (13,658,481) | | — | | — | | — | % |
| Net loans held for investment | | | | | | | | $ | 403,581,753 | | $ | 392,855,158 | | $ | 391,301,530 | | $ | 299,345,670 | | 137.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating real estate: | | | | | | | | | | | | | | | | |
| Description | | Acquisition Date | | Fair Value of Real Estate (1) | | Encumbrance | | Net Investment | | Pro Rata Net Investment (2) | | % (3)(19) | | | |
|
Multi-tenant office building in Santa Monica, CA (17) | | 7/30/2018 | | $ | 65,043,111 | | | $ | 31,962,692 | | | $ | 33,080,419 | | | $ | 25,306,521 | | | 11.6 | % | | | | |
Land in Conshohocken, PA (18) | | 1/9/2019 | | 10,000,000 | | | — | | | 10,000,000 | | | 7,650,000 | | | 3.5 | % | | | | |
| | | | $ | 75,043,111 | | | $ | 31,962,692 | | | $ | 43,080,419 | | | $ | 32,956,521 | | | 15.1 | % | | | | |
| | | | | | | | | | | | | | | | |
| Portfolio Company | | Dividend Yield | | Acquisition Date | | Maturity Date | | Shares | | Cost | | Fair Value | | Pro Rata Fair Value (2) | | % (3) |
Marketable securities (20): | | | | | | | | | | | | | | | | |
| Common and preferred shares: | | | | | | | | | | | | | | | | |
Nexpoint Real Estate Finance, Inc. - Cumulative
Series A Preferred Shares | | 8.5 | % | | 7/30/2020 | | 7/24/2025 | | 50,000 | | | $ | 1,176,006 | | | $ | 1,310,000 | | | $ | 1,002,150 | | | 0.5 | % |
| Total marketable securities | | | | | | | | | | $ | 1,176,006 | | | $ | 1,310,000 | | | $ | 1,002,150 | | | 0.5 | % |
| | | | | | | | | | | | | | | | |
| Equity investments: | | | | | | | | | | | | | | | | |
| Portfolio Company | | | | Ownership Interest | | Cost | | Fair Value | | Pro Rata Fair Value (2) | | % (3) |
Mavik Real Estate Special Opportunities Fund, LP - limited partnership interest (21) | | | | 50% | | $ | 40,458,282 | | | $ | 39,643,024 | | | $ | 30,326,913 | | | 13.9 | % |
LEL Arlington JV LLC - limited liability member units (22) | | | | 80% | | 23,949,044 | | | 23,949,044 | | | 18,321,019 | | | 8.4 | % |
LEL NW 49th LV LLC - limited liability member units (22) | | | | 80% | | 5,306,467 | | | 5,306,467 | | | 4,059,447 | | | 1.9 | % |
| | | | | | | | | | $ | 69,713,793 | | | $ | 68,898,535 | | | $ | 52,707,379 | | | 24.2 | % |
__________________________
(1)Because there is no readily available market for these investments, these loans were valued using significant unobservable inputs under Level 3 of the fair value hierarchy and were approved in good faith by Terra REIT Advisors, Terra Property Trust’s manager, pursuant to Terra Property Trust’s valuation policy.
(2)Amount represents the Company’s portion, or 76.5%, of the fair value or net investment value.
(3)Percentage is based on the Company’s pro rata share of the fair value or net investment value over the Company’s total members’ capital of $218.1 million at December 31, 2021.
(4)Terra Property Trust purchased a portion of the interest in this loan from Mavik Real Estate Special Opportunities Fund REIT, LLC, a related-party real estate investment trust managed by Terra REIT Advisors, via a participation agreement.
(5)The loan participations from Terra Property Trust do not qualify for sale accounting and therefore, the gross amount of these loans remain in Terra Property Trust’s consolidated balance sheets.
(6)Terra Property Trust sold a portion of its interest in this loan through a participation agreement to Terra Income Fund 6, Inc., an affiliated fund advised by Terra Income Advisors, LLC, an affiliate of our sponsor and Terra REIT Advisors.
(7)For the year ended December 31, 2021, Terra Property Trust suspended interest income accrual of $2.3 million on this loan, because recovery of such income was doubtful. Additionally, the fair value of the loan declined as a result of a decline in the fair value of the collateral.
(8)This loan is in maturity default. Terra Property Trust has exercised its rights and is facilitating the completion of construction of the asset in anticipation of lease up and disposition of the asset. For the year ended December 31, 2021, Terra Property Trust suspended interest income accrual of $0.9 million on this loan because recovery of such income was doubtful.
(9)These loans were used as collateral for $44.6 million of borrowings under a repurchase agreement.
(10)These loans were used as collateral for $93.8 million of borrowings under a term loan payable.
(11)These loans were used as collateral for $38.6 million of borrowings under a revolving line of credit.
(12)In March 2021, Terra Property Trust amended the loan agreement to change the spread on the interest rate to 5.0%, increased the exit fee to 1.5% and extended the maturity to January 1, 2024. Additionally, under the loan amendment, the borrower made a partial repayment of $2.6 million.
(13)In September 2021, Terra Property Trust refinanced a previously-defaulted mezzanine loan with a new first mortgage. This refinancing was accounted for as a troubled debt restructuring and Terra Property Trust recognized a loss of $0.3 million on the restructuring.
(14)Terra Property Trust purchased a portion of the interest in this loan from Terra Income Fund 6, Inc. via a participation agreement.
(15)In December 2020, Terra Property Trust entered into a forbearance agreement with the borrower pursuant to which interest accrues on the loan during the 90-day forbearance period from November 2020 to January 2021. In March 2021, the forbearance period was extended through August 2021.
(16)In March 2020, Terra Property Trust entered into a financing transaction where a third-party purchased an A-note position. Because the transaction does not qualify for sale accounting, the gross amount of the loan remains in the consolidated balance sheets. The liability is reflected as secured borrowing in Terra Property Trust’s consolidated balance sheets.
(17)Terra Property Trust acquired this property through foreclosure of a $54.0 million first mortgage.
(18)Terra Property Trust acquired the collateral for this loan pursuant to a deed in lieu of foreclosure. The land is currently vacant and the fair value reflects its estimated selling price.
(19)Percentage is based on Terra Property Trust’s net exposure on the property (real estate owned less encumbrance).
(20)From time to time, Terra Property Trust may invest in short-term debt and equity securities. These securities are comprised of shares of common and preferred stock and bonds.
(21)On August 3, 2020, Terra Property Trust entered into a subscription agreement with Mavik Real Estate Special Opportunities Fund, LP (“RESOF”)RESOF whereby Terra Property Trust committed to fund up to $50.0 million to purchase a limited partnership interest in RESOF. RESOF’s primary investment objective is to generate attractive risk-adjusted returns by purchasing performing and non-performing mortgages, loans, mezzanines and other credit instruments supported by underlying commercial real estate assets. As of December 31, 2021, the unfunded commitment was $15.1 million.
(22)In the fourth quarter of 2021, Terra Property Trust purchased equity interests in two joint ventures that invest in real estate properties.
See notes to financial statements.
Terra Secured Income Fund 5, LLC
Schedule of Investment (Continued)
December 31, 2021 and 2020
The following table presents a schedule of loans held for investment held by Terra Property Trust as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Portfolio Company | Collateral Location | Property
Type | Coupon
Rate | Current Interest Rate | Exit Fee | Acquisition Date | Maturity
Date | Principal Amount | Amortized
Cost | Fair Value (1) | Pro Rata Fair Value (2) | % (3) |
| Loans held for investment: | | | | | | | | | | | | |
| Mezzanine loans: | | | | | | | | | | | | |
| 150 Blackstone River Road, LLC | US - MA | Industrial | 8.5 | % | 8.5 | % | — | % | 9/21/2017 | 9/6/2027 | $ | 7,000,000 | | $ | 7,000,000 | | $ | 7,007,397 | | $ | 5,360,659 | | 2.3 | % |
Austin H. I. Owner LLC (4) | US - TX | Hotel | 12.5 | % | 12.5 | % | 1.0 | % | 9/30/2015 | 10/6/2020 | 3,848,712 | | 3,887,200 | | 3,533,118 | | 2,702,835 | | 1.1 | % |
High Pointe Mezzanine Investments, LLC (5) | US - SC | Student housing | 15.0 | % | 15.0 | % | 1.0 | % | 12/27/2013 | 1/6/2024 | 3,000,000 | | 3,204,375 | | 2,988,110 | | 2,285,904 | | 1.0 | % |
LD Milipitas Mezz, LLC (6) | US - CA | Hotel | LIBOR +10.25% (2.75% Floor) | 13.0 | % | 1.0 | % | 6/27/2018 | 6/27/2021 | 4,250,000 | | 4,294,053 | | 4,293,969 | | 3,284,886 | | 1.4 | % |
Stonewall Station Mezz LLC (5)(7)(8) | US - NC | Infill land | 12.0% current
2.0% PIK | 14.0 | % | 1.0 | % | 5/31/2018 | 5/20/2021 | 10,442,567 | | 10,537,512 | | 10,472,034 | | 8,011,106 | | 3.4 | % |
| | | | | | | | 28,541,279 | | 28,923,140 | | 28,294,628 | | 21,645,390 | | 9.2 | % |
| Preferred equity investments: | | | | | | | | | | | | |
370 Lex Part Deux, LLC (7)(8) | US - NY | Office | LIBOR + 8.25% (2.44% Floor) | 10.7 | % | — | % | 12/17/2018 | 1/9/2022 | 53,874,507 | | 53,912,363 | | 51,935,025 | | 39,730,294 | | 16.9 | % |
City Gardens 333 LLC (7)(8) | US - CA | Student housing | LIBOR + 9.95% (2.0% Floor) | 12.0 | % | — | % | 4/11/2018 | 4/1/2021 | 28,303,628 | | 28,307,408 | | 28,276,767 | | 21,631,727 | | 9.2 | % |
Orange Grove Property Investors, LLC (7)(8) | US - CA | Condominium | LIBOR + 8.0% (4.0% Floor) | 12.0 | % | 1.0 | % | 5/24/2018 | 6/1/2021 | 10,600,000 | | 10,701,924 | | 10,707,274 | | 8,191,065 | | 3.5 | % |
| REEC Harlem Holdings Company, LLC | US - NY | Land | LIBOR + 12.5% (no Floor) | 12.6 | % | — | % | 3/9/2018 | 3/9/2023 | 16,767,984 | | 16,767,984 | | 14,314,585 | | 10,950,658 | | 4.7 | % |
RS JZ Driggs, LLC (7)(8)(9) | US - NY | Multifamily | 12.3 | % | 12.3 | % | 1.0 | % | 5/1/2018 | 1/1/2021 | 8,544,513 | | 8,629,929 | | 8,612,869 | | 6,588,845 | | 2.8 | % |
The Bristol at Southport, LLC (7)(10) | US - WA | Multifamily | 12.0 | % | 12.0 | % | 1.0 | % | 9/22/2017 | 9/22/2022 | 23,500,000 | | 23,682,536 | | 23,670,806 | | 18,108,167 | | 7.6 | % |
| | | | | | | | 141,590,632 | | 142,002,144 | | 137,517,326 | | 105,200,756 | | 44.7 | % |
See notes to financial statements.
Terra Secured Income Fund 5, LLC
Schedule of Investment (Continued)
December 31, 2021 and 2020
Terra Property Trust’s Schedule of Loans Held for Investment as of December 31, 2020 (Continued):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Portfolio Company | Collateral Location | Property
Type | Coupon
Rate | Current Interest Rate | Exit Fee | Acquisition Date | Maturity
Date | Principal Amount | Amortized
Cost | Fair Value (1) | Pro Rata
Fair Value (2) | % (3) |
| Loans held for investment: | | | | | | | | | | | | |
| First mortgages: | | | | | | | | | | | | |
14th & Alice Street Owner, LLC (7)(10) | US - CA | Multifamily | LIBOR + 5.75% (3.25% Floor) | 9.0 | % | 0.5 | % | 3/5/2019 | 3/5/2022 | $ | 32,625,912 | | $ | 32,877,544 | | $ | 32,551,137 | | $ | 24,901,620 | | 10.6 | % |
1389 Peachtree St, LP; 1401 Peachtree St, LP; 1409 Peachtree St, LP (11) | US - GA | Office | LIBOR + 4.5% (no Floor) | 4.6 | % | 0.5 | % | 2/22/2019 | 2/10/2022 | 50,808,453 | | 51,068,554 | | 50,982,247 | | 39,001,419 | | 16.6 | % |
330 Tryon DE LLC (11) | US - NC | Office | LIBOR + 3.85% (2.51% Floor) | 6.4 | % | 0.5 | % | 2/7/2019 | 3/1/2022 | 22,800,000 | | 22,901,294 | | 22,869,879 | | 17,495,457 | | 7.4 | % |
| 870 Santa Cruz, LLC | US - CA | Office | LIBOR + 6.75% (0.5% Floor) | 7.3 | % | 1.0 | % | 12/15/2020 | 12/15/2023 | 10,760,355 | | 10,724,590 | | 10,859,726 | | 8,307,690 | | 3.5 | % |
AGRE DCP Palm Springs, LLC (11)(12) | US - CA | Hotel | LIBOR +4.75% (1.80% Floor) | 6.6 | % | 0.5 | % | 12/12/2019 | 1/1/2023 | 45,294,097 | | 45,506,051 | | 45,519,030 | | 34,822,058 | | 14.8 | % |
MSC Fields Peachtree Retreat, LLC (11) | US - GA | Multifamily | LIBOR + 3.85% (2.0% Floor) | 5.9 | % | 0.5 | % | 3/15/2019 | 4/1/2022 | 23,308,334 | | 23,437,198 | | 23,428,860 | | 17,923,078 | | 7.6 | % |
Patrick Henry Recovery Acquisition, LLC (11) | US - CA | Office | LIBOR + 2.95% (1.5% Floor) | 4.5 | % | 0.3 | % | 11/25/2019 | 12/1/2023 | 18,000,000 | | 18,039,456 | | 17,994,495 | | 13,765,789 | | 5.8 | % |
University Park Berkeley, LLC (11)(13) | US - CA | Student housing | LIBOR + 4.2% (1.50% Floor) | 5.7 | % | 0.8 | % | 2/27/2020 | 3/1/2023 | 23,990,786 | | 24,131,808 | | 24,162,710 | | 18,484,473 | | 7.9 | % |
Windy Hill PV Five CM, LLC (14) | US - CA | Office | LIBOR + 6.0% (2.05% Floor) | 8.1 | % | 0.5 | % | 9/20/2019 | 9/20/2022 | 26,454,910 | | 26,407,494 | | 25,227,156 | | 19,298,774 | | 8.2 | % |
| | | | | | | | 254,042,847 | | 255,093,989 | | 253,595,240 | | 194,000,358 | | 82.4 | % |
| Total gross loans held for investment | | | | | | | | 424,174,758 | | 426,019,273 | | 419,407,194 | | 320,846,504 | | 136.3 | % |
Obligations under participation agreements and secured borrowing (7)(8)(10)(14) | | | | | (89,548,151) | | (89,769,560) | | (87,730,239) | | (67,113,633) | | (28.5) | % |
| Allowance for loan losses | | | | | | | | — | | (3,738,758) | | — | | — | | — | % |
| Net loans held for investment | | | | | | | | $ | 334,626,607 | | $ | 332,510,955 | | $ | 331,676,955 | | $ | 253,732,871 | | 107.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating real estate: | | | | | | | | | | | | | | | | |
| Description | | Acquisition Date | | Fair Value of Real Estate | | Encumbrance | | Net Investment | | Pro Rata Net Investment (2) | | % (3)(17) | | | |
|
Multi-tenant office building in Santa Monica, CA (15) | | 7/30/2018 | | $ | 57,321,799 | | | $ | 44,020,225 | | | $ | 13,301,574 | | | $ | 10,175,704 | | | 4.3 | % | | | | |
Land in Conshohocken, PA (16) | | 1/9/2019 | | 13,395,430 | | | — | | | 13,395,430 | | | 10,247,504 | | | 4.4 | % | | | | |
| | | | $ | 70,717,229 | | | $ | 44,020,225 | | | $ | 26,697,004 | | | $ | 20,423,208 | | | 8.7 | % | | | | |
| | | | | | | | | | | | | | | | |
| Portfolio Company | | Interest/Dividend Rate | | Acquisition Date | | Maturity Date | | Shares | | Cost | | Fair Value | | Pro Rata Fair Value (2) | | % (3) |
Marketable securities (18): | | | | | | | | | | | | | | | | |
| Preferred shares: | | | | | | | | | | | | | | | | |
Nexpoint Real Estate Finance, Inc. - Cumulative
Series A Preferred Shares | | 8.50 | % | | 7/30/2020 | | 7/24/2025 | | 50,000 | | | $ | 1,176,006 | | | $ | 1,287,500 | | | $ | 984,938 | | | 0.42 | % |
| Total marketable securities | | | | | | | | | | $ | 1,176,006 | | | $ | 1,287,500 | | | $ | 984,938 | | | 0.42 | % |
See notes to financial statements.
Terra Secured Income Fund 5, LLC
Schedule of Investment (Continued)
December 31, 2021 and 2020
__________________________
(1)Because there is no readily available market for these loans, these loans were valued using significant unobservable inputs under Level 3 of the fair value hierarchy and were approved in good faith by Terra REIT Advisors, Terra Property Trust’s manager, pursuant to Terra Property Trust’s valuation policy.
(2)Amount represents the Company’s portion, or 76.5%, of the fair value or net investment value.
(3)Percentage is based on the Company’s pro rata share of the fair value or net investment value over the Company’s total members’ capital of $235.4 million at December 31, 2020.
(4)This loan is currently past due. Terra Property Trust is evaluating the options of recovering the principal amount, including foreclosing on the collateral.
(5)In May 2020, Terra Property Trust entered into a forbearance agreement with the borrower to allow for more time to make the interest payment.
(6)On June 27, 2018, Terra Property Trust entered into a participation agreement with Terra Income Fund 6, Inc. to purchase a 25% interest, or $4.3 million, in a mezzanine loan. As of December 31, 2020, the commitment was fully funded.
(7)The loan participations from Terra Property Trust do not qualify for sale accounting and therefore, the gross amount of these loans remain in the consolidated balance sheets.
(8)Terra Property Trust sold a portion of its interest in this loan through a participation agreement to Terra Income Fund 6, Inc., an affiliated fund advised by Terra Income Advisors, an affiliate of our sponsor and Terra Property Trust’s manager.
(9)This loan is in maturity default. Terra Property Trust has exercised its rights and is facilitating the completion of construction of the asset in anticipation of lease up and disposition of the asset.
(10)Terra Property Trust sold a portion of its interest in this loan pursuant to a participation agreement to a third-party.
(11)These loans were used as collateral for $107.6 million of borrowings under a term loan payable.
(12)In July 2020, Terra Property Trust amended the loan agreement to change the interest rate to payment-in-kind of 15% for the period from July 2020 through January 2021.
(13)In December 2020, Terra Property Trust entered into a forbearance agreement with the borrower pursuant to which interest is accrued on the loan during the 90-day forbearance period from November 2020 to January 2021. In connection with entering into the forbearance agreement, the spread on the interest rate was increased to 4.2% and the exit fee was increased to 0.75%.
(14)In March 2020, Terra Property Trust entered into a financing transaction where a third-party purchased an A-note position. However, the sale did not qualify for sale accounting and therefore, the gross amount of the loan remains in the consolidated balance sheets. The liability is reflected as secured borrowing in Terra Property Trust’s consolidated balance sheets.
(15)Terra Property Trust acquired this property through foreclosure of a $54.0 million first mortgage.
(16)Terra Property Trust acquired the collateral for this loan pursuant to deed in lieu of foreclosure.
(17)Percentage is based on Terra Property Trust’s net exposure on the property (real estate owned less encumbrance).
(18)From time to time, Terra Property Trust may invest in short-term debt and equity securities. These securities are comprised of shares of preferred stock and bonds.
See notes to financial statements.
Terra Secured Income Fund 5, LLC
Notes to Financial Statements
December 31, 20212022
Note 1. Business
Terra Secured Income Fund 5, LLC (the “Company”), is a real estate credit focused company that originates, structures, funds and manages high yielding commercial real estate investments, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments throughout the United States. The Company’s loans finance the acquisition, construction, development or redevelopment of quality commercial real estate in the United States. The Company focuses on the origination of middle market loans in the approximately $10 million to $50 million range, to finance properties in primary and secondary markets. The Company was formed as a Delaware limited liability company on April 24, 2013 and commenced operations on August 8, 2013. The Company makes substantially all of its investments and conducts substantially all of its real estate lending business through Terra Property Trust, which has elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2016. The Company’s investment objectives are to (i) preserve its members’ capital contributions, (ii) realize income from its investments and (iii) make monthly distributions to its members from cash generated from investments. There can be no assurances that the Company will be successful in meeting its investment objectives.
In December 2015, the members approved the merger of Terra Secured Income Fund, LLC (“Terra Fund 1”), Terra Secured Income Fund 2, LLC (“Terra Fund 2”), Terra Secured Income Fund 3, LLC (“Terra Fund 3”) and Terra Secured Income Fund 4, LLC (“Terra Fund 4”) with and into subsidiaries of the Company (individually, each a “Terra Fund” and collectively, the “Terra Funds”) through a series of separate mergers effective January 1, 2016 (collectively, the “Merger”). Following the Merger, the Company contributed the consolidated portfolio of net assets of the 5five Terra Funds to Terra Property Trust, a newly-formed and wholly-owned subsidiary of the Company that elected to be taxed as a REIT, in exchange for the shares of common stock of Terra Property Trust. Upon completion of the Merger, the Company became the parent company of Terra Funds 1 through 4 and the direct and indirect sole common stockholder of, and began conducting substantially all of its real estate lending business through, Terra Property Trust.
On March 2, 2020, Terra Fund 1, Terra Fund 2 and Terra Fund 3 merged with and into Terra Fund 4, with Terra Fund 4 continuing as the surviving company (the “Terra Fund Merger”), and the Company consolidated its holdings of shares of common stock of Terra Property Trust in Terra Fund 4. Subsequent to the Terra Fund Merger, the legal name of Terra Fund 4 was changed to Terra JV. On March 2, 2020, Terra Property Trust engaged in a series of transactions pursuant to which Terra Property Trust 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 that Terra Property Trust owned, cash of $25.5 million and other working capital. As of December 31, 2021, Terra JV held 87.4% of the issued and outstanding shares of Terra Property Trust’s common stock with the remainder held by Terra Offshore REIT, and the Company and Terra Fund 7 owned an 87.6% and 12.4% percentage interest, respectively, in Terra JV (Note 4). The Company does not consolidate Terra JV because the Company and Terra Fund 7 share joint approval rights with respect to certain major decisions that are taken by Terra JV and Terra Property Trust (Note 4).
The Company’s investment activities are externally managed by Terra Fund Advisors, LLC (“Terra Fund Advisors” or the “Manager”). 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 its affiliates or by individuals who were contracted by the Company or by the Manager or its affiliates to work on behalf of the Company pursuant to the terms of the operating agreement, as amended.
The Company’s amended and restated operating agreement provides that the Company’s existence will continue until December 31, 2023, unless sooner terminated. However, the Company expects that prior to such date it will consummate a liquidity transaction, which could occur as early as this year and may include an orderly liquidation of its assets or an alternative liquidity event such as a strategic business combination, a sale of the Company or an initial public offering and listing of Terra Property Trust’s shares of common stock on a national securities exchange. The Manager would pursue an alternative liquidity event only if it believes such a transaction would be in the best interests of the Company’s members.
On April 1, 2021, Mavik Capital Management, LP (“Mavik”), an entity controlled by Vikram S. Uppal, the Chief Executive Officer of the Company, completed a series of related transactions that resulted in all of the outstanding interests in Terra Capital Partners, LLC, being acquired by Mavik for a combination of cash and interests in Mavik.
On October 1, 2022, pursuant to the BDC Merger Agreement, Terra BDC merged with and into Terra LLC, a wholly owned subsidiary of Terra Property Trust, with Terra LLC continuing as the surviving entity of the merger and as a wholly owned subsidiary of Terra Property Trust (Note 4). As of December 31, 2022, Terra JV, former shareholders of Terra BDC and Terra Offshore REIT held 70.0%, 19.9% and 10.1% of the issued and outstanding shares of Terra Property Trust’s common stock, respectively, and the Company and Terra Fund 7 owned an 87.6% and 12.4% percentage interest, respectively, in Terra
Notes to Financial Statements
JV (Note 4). Accordingly, as of December 31, 2022, the Company indirectly beneficially owned 61.3% of the outstanding shares of common stock of Terra Property Trust through Terra JV. The Company does not consolidate Terra JV because the Company and Terra Fund 7 share joint approval rights with respect to certain major decisions that are taken by Terra JV and Terra Property Trust (Note 4).
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The annual financial statements have been prepared in accordance with United States generally accepted accounting principles (U.S.(“U.S. GAAP”). The financial statements for the period from January 1, 2020 to March 1, 2020 included all of the Company’s accounts and those of its consolidated subsidiaries. All intercompany balances and transactions had been eliminated. As discussed in Note 1, on March 2, 2020, the Company’s subsidiaries completed the Terra Fund Merger. As a result of the Terra Fund Merger, the Company no longer consolidates the subsidiaries. The financial statements as of December 31, 2021 and 2020 and for the period from March 2, 2020 to December 31, 2020 and the year ended December 31, 2021 include all of the Company’s accounts only.
accounts. The accompanying annual financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-K and Articles 6 or 10 of Regulation S-X. The Company is an investment company, as defined under U.S. GAAP, and applies accounting and reporting guidance in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services — Investment Companies.
Use of Estimates
The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may ultimately differ from those estimates.
The coronavirus (“COVID-19”) pandemic has had a significant impact on local, national and global economies and has resulted in a world-wide economic slowdown. However, after two years, the real estate market has started to recover from the dislocation it experienced in the beginning of the COVID-19 pandemic. A strong pace of vaccination along with aggressive fiscal stimulus, has improved the outlook for the real estate market. The Company continues to closely monitor the impact of the COVID-19 pandemic on all aspects of its investments and operations. The Company believes the estimates, and assumptions underlying its financial statements are reasonable and supportable based on the information available as of December 31, 2021; however, the extent to which the COVID-19 pandemic may impact the Company’s investments and operations going forward will depend on future developments, which are highly uncertain and cannotthose differences could be predicted with confidence. These developments include the duration of the outbreak, the impact of the global vaccination effort, any new strains of the virus that are resistant to available vaccines, the impact of government stimulus, new information that may emerge concerning the severity of the COVID-19 pandemic, and actions taken by federal, state and local agencies as well as the general public to contain the COVID-19 pandemic or treat its impact, among others. Accordingly, any estimates and assumptions as of December 31, 2021 are inherently less certain than they would be absent the current and potential impacts of the COVID-19 pandemic.material.
Equity Investment in Terra JV
Equity investment in Terra JV represents the Company’s equity interest in Terra JV, which was initially recorded at cost. Subsequent to the asset contribution, the equity investment is reported, at each reporting date, at fair value on the statements of financial condition. Change in fair value is reported in net change in unrealized appreciation or depreciation on investment on the statements of operations.
Revenue Recognition
Dividend Income: Dividend income associated with the Company’s ownership of Terra JV or Terra Property Trust is recognized on the record date as declared by Terra JV or Terra Property Trust. Any excess of distributions over Terra JV or Terra Property Trust’s cumulative taxable net income are recorded as return of capital.
Other Operating Income: All other income is recognized when earned.
Cash and Cash Equivalents
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.
Notes to Financial Statements
Income Taxes
No provision for U.S. federal and state income taxes has been made in the accompanying financial statements, as individual members are responsible for their proportionate share of the Company’s taxable income. The Company, however, may be liable for New York City Unincorporated Business Tax (the “NYC UBT”) and similar taxes of various other municipalities. New York City imposes the NYC UBT at a statutory rate of 4% on net income generated from ordinary business activities carried on in New York City. For the years ended December 31, 20212022 and 2020,2021, none of the Company’s income was subject to the NYC UBT.
Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statements and tax basis assets and liabilities using enacted tax rates in effect for the year in which differences are expected to reverse. Such deferred tax assets and liabilities were not material.
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
Notes to Financial Statements
recognizes interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in its statements of operations. For the years ended December 31, 20212022 and 2020,2021, the Company did not incur any interest or penalties. Although the Company files federal and state tax returns, its primary tax jurisdiction is federal. The Company’s 2018-20202019-2022 federal tax years remain subject to examination by the Internal Revenue Service.
Recent Accounting Pronouncement
London Interbank Offered Rate (“LIBOR”) is a benchmark interest rate referenced in a variety of agreements that are used by all types of entities. In July 2017, the U.K. Financial Conduct Authority, which regulates the LIBOR administrator, ICE Benchmark Administration Limited (“IBA”), announced that it would cease to compel banks to participate in setting LIBOR as a benchmark by the end of 2021, which has subsequently been delaydelayed to June 30, 2023. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) — Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The amendments in ASU 2020-04 provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848), which expanded the scope of Topic 848 to include derivative instruments impacted by discounting transition (“ASU 2021-01”). In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848) — Deferral of the Sunset Date of Topic 848 (“ASU 2022-06”). ASU 2022-06 deferred the sunset date of ASU 2020-04 and ASU 2021-01 are effective for all entities throughto December 31, 2022. The expedients and exceptions provided by the amendments do not apply to contract modifications and hedging relationships entered into or evaluated after December 31, 2022, except for hedging transactions as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship.2024. In the event LIBOR is unavailable, Terra Property Trust’s investment documents provide for a substitute index, on a basis generally consistent with market practice, intended to put the Terra Property Trust in substantially the same economic position as LIBOR. As a result, the Company does not expect the reference rate reform and the adoption of ASU 2020-04 and ASU 2021-01 to have a material impact on its financial statements and disclosures
Note 3. Investment and Fair Value
Equity Investment in Terra JV
The Company invested substantially all of its equity capital in the purchase of shares of common stock of Terra Property Trust. On March 2, 2020, Terra Property Trust engaged in a series of transactions pursuant to which Terra Property Trust 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 that Terra Property Trust owned, cash of $25.5 million and other working capital. As of both December 31, 20212022 and 2020,2021, Terra JV held 70.0% and 87.4%, respectively, of the issued and outstanding shares of Terra Property Trust’s common stock, with the remainder held by Terra Offshore REIT, and the Company and Terra Fund 7 owned an 87.6% and 12.4% percentage interest, respectively, in Terra JV, and Terra JV became the Company’s only investment (Note 4).
The following tables present a summary of the Company’s investment at December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| Investment | | Cost | | Fair Value | | % of Members’ Capital | | Cost | | Fair Value | | % of Members’ Capital |
| 87.6% interest in Terra JV, LLC | | $ | 215,070,522 | | | $ | 210,008,457 | | | 100.0 | % | | $ | 219,704,515 | | | $ | 217,324,720 | | | 99.7 | % |
For the years ended December 31, 2022 and 2021, the Company received $11.5 million and $13.1 million of distributions from Terra JV, of which $4.6 million and $11.2 million were returns of capital, respectively.
Notes to Financial Statements
The following tables present a summary of the Company’s investment at December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Investment | | Cost | | Fair Value | | % of Members’ Capital | | Cost | | Fair Value | | % of Members’ Capital |
| 87.6% interest in Terra JV, LLC | | $ | 219,704,515 | | | $ | 217,324,720 | | | 99.7 | % | | $ | 230,915,151 | | | $ | 235,357,977 | | | 100.0 | % |
For the years ended December 31, 2021 and 2020, the Company received approximately $13.1 million and $17.3 million of distributions from Terra JV and/or Terra Property Trust as applicable, of which $11.2 million and $13.0 million were returns of capital, respectively.
As of both December 31, 20212022 and 2020,2021, the Company indirectly beneficially owned 61.3% and 76.5%, respectively, (Note 4) of the outstanding shares of common stock of Terra Property Trust.Trust (Note 4). The following tables present the summarized financial information of Terra Property Trust: | | | December 31, | | December 31, |
| | 2021 | | 2020 | | 2022 | | 2021 |
| Carrying value of loans held for investment | Carrying value of loans held for investment | | $ | 469,673,314 | | | $ | 422,280,515 | | Carrying value of loans held for investment | | $ | 626,490,767 | | | $ | 469,673,314 | |
| Equity investment in unconsolidated investments | Equity investment in unconsolidated investments | | 69,713,793 | | | 36,259,959 | | Equity investment in unconsolidated investments | | 62,498,340 | | | 69,713,793 | |
| Real estate owned, net | Real estate owned, net | | 65,776,839 | | | 73,178,939 | | Real estate owned, net | | 49,228,687 | | | 65,776,839 | |
| Cash, cash equivalent and restricted cash | Cash, cash equivalent and restricted cash | | 51,098,647 | | | 32,920,323 | | Cash, cash equivalent and restricted cash | | 36,469,592 | | | 51,098,647 | |
| Other assets | Other assets | | 37,279,565 | | | 23,837,445 | | Other assets | | 38,649,506 | | | 37,279,565 | |
| Total assets | Total assets | | 693,542,158 | | | 588,477,181 | | Total assets | | 813,336,892 | | | 693,542,158 | |
Term loan payable, unsecured notes payable, obligations under participation
agreements, repurchase agreement payable, mortgage loan payable, revolving
line of credit and secured borrowing | Term loan payable, unsecured notes payable, obligations under participation
agreements, repurchase agreement payable, mortgage loan payable, revolving
line of credit and secured borrowing | | (364,910,392) | | | (239,132,654) | | Term loan payable, unsecured notes payable, obligations under participation
agreements, repurchase agreement payable, mortgage loan payable, revolving
line of credit and secured borrowing | | (442,811,751) | | | (364,910,392) | |
| Accounts payable, accrued expenses and other liabilities | Accounts payable, accrued expenses and other liabilities | | (45,078,478) | | | (35,769,686) | | Accounts payable, accrued expenses and other liabilities | | (39,996,127) | | | (45,078,478) | |
| Lease intangible liabilities | Lease intangible liabilities | | (9,709,710) | | | (10,249,776) | | Lease intangible liabilities | | (8,646,840) | | | (9,709,710) | |
| Total liabilities | Total liabilities | | (419,698,580) | | | (285,152,116) | | Total liabilities | | (491,454,718) | | | (419,698,580) | |
| Stockholder’s equity | | $ | 273,843,578 | | | $ | 303,325,065 | | |
| Total equity | | Total equity | | $ | 321,882,174 | | | $ | 273,843,578 | |
| | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 |
| Revenues | | $ | 46,685,257 | | | $ | 50,320,888 | |
| Expenses | | (64,600,545) | | | (46,056,001) | |
| Net loss on extinguishment of obligations under participation agreements | | — | | | (319,453) | |
| Realized gains on marketable securities | | 129,248 | | | 1,160,162 | |
| Unrealized gains on marketable securities | | 22,500 | | | 111,494 | |
| Equity income from unconsolidated investments | | 5,925,802 | | | 38,640 | |
| Realized loss on loan repayments | | (517,989) | | | — | |
| Net (loss) income | | $ | (12,355,727) | | | $ | 5,255,730 | |
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 |
| Revenues | | | | | $ | 56,614,446 | | | $ | 46,685,257 | |
| Expenses | | | | | (70,442,473) | | | (64,600,545) | |
| Equity income from unconsolidated investments | | | | | 2,731,477 | | | 5,925,802 | |
| Other gains and losses | | | | | 4,144,857 | | | (366,241) | |
| Net loss | | | | | $ | (6,951,693) | | | $ | (12,355,727) | |
Fair Value Measurements
The Company adoptedfollows the provisions of ASC 820, Fair Value Measurement (“ASC 820”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 established a fair value hierarchy that prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment, the characteristics specific to the investment, and the state of the marketplace (including the existence and transparency of transactions between market participants). Investments with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
Notes to Financial Statements
Investments measured and reported at fair value are classified and disclosed into one of the following categories based on the inputs as follows:
Level 1 — Quoted prices (unadjusted) in active markets for identical assets and liabilities that the Company has the ability to access.
Level 2 — Pricing inputs are other than quoted prices in active markets, including, but not limited to, quoted prices for similar assets and liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market corroborated inputs.
Level 3 — Significant unobservable inputs are based on the best information available in the circumstances, to the extent observable inputs are not available, including the Company’s own assumptions used in determining the fair value of investments. Fair value for these investments are determined using valuation methodologies that consider a range of factors, including but not limited to the price at which the investment was acquired, the nature of the investment, local market
Notes to Financial Statements
conditions, trading values on public exchanges for comparable securities, current and projected operating performance, and financing transactions subsequent to the acquisition of the investment. The inputs into the determination of fair value require significant management judgment.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.
Assets and Liabilities Reported at Fair Value
The following table summarizes the Company’s equity investment at fair value on a recurring basis as of December 31, 20212022 and 2020:2021:
| | | December 31, 2021 | | December 31, 2022 |
| | Fair Value Measurements | | Fair Value Measurements |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Investment: | Investment: | | | | | | | | Investment: | | | | | | | |
| Equity investment in Terra JV | Equity investment in Terra JV | $ | — | | | $ | — | | | $ | 217,324,720 | | | $ | 217,324,720 | | Equity investment in Terra JV | $ | — | | | $ | — | | | $ | 210,008,457 | | | $ | 210,008,457 | |
| | | December 31, 2020 | | December 31, 2021 |
| | Fair Value Measurements | | Fair Value Measurements |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Investment: | Investment: | | | | | | | | Investment: | | | | | | | |
| Equity investment in Terra JV | Equity investment in Terra JV | $ | — | | | $ | — | | | $ | 235,357,977 | | | $ | 235,357,977 | | Equity investment in Terra JV | $ | — | | | $ | — | | | $ | 217,324,720 | | | $ | 217,324,720 | |
Changes in Level 3 investment for the years ended December 31, 20212022 and 20202021 were as follows:
| | | | | | | | | | | | | | | | | |
| Equity Investment in Terra JV | | Equity Investment in Terra Property Trust |
| Year Ended December 31, 2021 | | Period from March 2, 2020 to December 31, 2020 | | Period from January 1, 2020 to March 1, 2020 |
| Beginning balance | $ | 235,357,977 | | | $ | — | | | $ | 247,263,245 | |
Transfer of ownership interest in Terra Property Trust to
Terra JV | — | | | 244,006,890 | | | (244,006,890) | |
| Return of capital | (11,210,636) | | | (9,226,094) | | | (3,783,607) | |
| Net change in unrealized (depreciation) appreciation on investment | (6,822,621) | | | 577,181 | | | 527,252 | |
| Ending balance | $ | 217,324,720 | | | $ | 235,357,977 | | | $ | — | |
Net change in unrealized (depreciation) appreciation on investment
for the period relating to those Level 3 assets that were still held by
the Company | $ | (6,822,621) | | | $ | 577,181 | | | $ | — | |
Notes to Financial Statements
| | | | | | | | | | | |
| Equity Investment in Terra JV |
| Years Ended December 31, |
| 2022 | | 2021 |
| Beginning balance | $ | 217,324,720 | | | $ | 235,357,977 | |
| Return of capital | (4,633,993) | | | (11,210,636) | |
| Net change in unrealized depreciation on investment | (2,682,270) | | | (6,822,621) | |
| Ending balance | $ | 210,008,457 | | | $ | 217,324,720 | |
Net change in unrealized depreciation on investment for the period
relating to those Level 3 assets that were still held by the Company | $ | (2,682,270) | | | $ | (6,822,621) | |
Transfers between levels, if any, are recognized at the beginning of the period in which transfers occur. For the years ended December 31, 20212022 and 2020,2021, there were no transfers.
The Company estimated that its other financial assets and liabilities had fair values that approximated their carrying values at December 31, 20212022 and 20202021 due to their short-term nature.
Valuation Process for Fair Value Measurement
Market quotations are not readily available for the Company’s investment in Terra Property Trust or Terra JV, which is included in Level 3 of the fair value hierarchy. The fair value of the Company’s sole investment takes into consideration the fair value of Terra Property Trust’s assets and liabilities which are valued utilizing a yield approach, i.e. a discounted cash flow methodology. In following this methodology, loans are evaluated individually, and management takes into account, in determining the risk-adjusted discount rate for each of Terra Property Trust’s loans, relevant factors, which may include available current market data on applicable yields of comparable debt/preferred equity instruments; market credit spreads and yield curves; the investment’s yield; covenants of the investment, including prepayment provisions; the portfolio company’s ability to make payments, its net operating income, debt-service coverage ratio; construction progress reports and construction budget analysis; the nature, quality, and realizable value of any collateral (and loan-to-value ratio); and the forces that influence the local markets in which the asset (the collateral) is purchased and sold, such as capitalization rates, occupancy rates, rental
Notes to Financial Statements
rates, replacement costs and the anticipated duration of each real estate-related loan. Valuation of Terra Property Trust’s investment in a 4.9 acre development parcel iswas based on the estimated selling price. The development parcel was sold in the second quarter of 2022. The fair value of Terra Property Trust’s investment in an office building is determined using the direct capitalization method.method, which is using the projected income over the capitalization rate.
The Manager designates a valuation committee to oversee the entire valuation process of Terra Property Trust’s Level 3 investments. The valuation committee is comprised of members of the Manager’s senior management, deal and portfolio management teams, who meet on a quarterly basis, or more frequently as needed, to review Terra Property Trust investments being valued as well as the inputs used in the proprietary valuation model. Valuations determined by the valuation committee are supported by pertinent data and, in addition to a proprietary valuation model, are based on market data, third-party valuation data and discount rates or other methods the valuation committee deems to be appropriate.
The following tables summarize the valuation techniques and significant unobservable inputs used by the Company to value the Level 3 investments as of December 31, 20212022 and 2020.2021. The tables are not intended to be all-inclusive, but instead identify the significant unobservable inputs relevant to the determination of fair values.
| | | Fair Value | Primary Valuation Technique | | Unobservable Inputs | | December 31, 2021 | | Fair Value | Primary Valuation Technique | | Unobservable Inputs | | December 31, 2022 |
| Asset Category | Asset Category | | Minimum | Maximum | Weighted Average | Asset Category | | Minimum | Maximum | Weighted Average |
| Assets: | Assets: | | | | | | | | | Assets: | | | | | | | | |
| Equity investment in Terra JV | Equity investment in Terra JV | | $ | 217,324,720 | | | Discounted cash flow (1)(2) | | Discount rate (1)(2) | | 2.45 | % | 15.00 | % | 12.66 | % | Equity investment in Terra JV | | $ | 210,008,457 | | ` | Discounted cash flow (1)(2) | | Discount rate (1)(2) | | 5.22 | % | 18.51 | % | 16.80 | % |
| | | Fair Value | Primary Valuation Technique | | Unobservable Inputs | | December 31, 2020 | | Fair Value | Primary Valuation Technique | | Unobservable Inputs | | December 31, 2021 |
| Asset Category | Asset Category | | Minimum | Maximum | Weighted Average | Asset Category | | Minimum | Maximum | Weighted Average |
| Assets: | Assets: | | | | | | | | | Assets: | | | | | | | | |
| Equity investment in Terra JV | Equity investment in Terra JV | | $ | 235,357,977 | | | Discounted cash flow (1)(2) | | Discount rate (1)(2) | | 5.25 | % | 20.05 | % | 14.17 | % | Equity investment in Terra JV | | $ | 217,324,720 | | | Discounted cash flow (1)(2) | | Discount rate (1)(2) | | 2.45 | % | 15.00 | % | 12.66 | % |
_______________
(1)Discounted cash flows and discount rates applied to Terra Property Trust’s assets and liabilities.
(2)The fair value of Terra Property Trust’s investment in an office building is determined using the direct capitalization method with capcapitalization rate ranges from 6.00% to 6.25% as of December 31, 2022 and 5.25% to 6.00% as of December 31, 2021 and 5.77% as of December 31, 2020, respectively.2021. Additionally, the fair value of Terra Property Trust’s investment in a 4.9 acre development parcel isas of December 31, 2021 was based on the estimated selling price. The developmental parcel was sold in the second quarter of 2022.
Risks and Uncertainties
The Company’s investment in Terra Property Trust through Terra JV is highly illiquid and there is no assurance that the Company will achieve its investment objectives, including targeted returns. Terra Property Trust’s loans are highly illiquid. Due
Notes to Financial Statements
to the illiquidity of the loans, valuation of the loans may be difficult, as there generally will be no established markets for these loans.
The COVID-19 pandemic has resulted in extreme volatility in a variety of global markets, including the real estate-related debt markets. U.S. financial markets, in particular, are experiencing limited liquidity and forced selling by certain market participants with insufficient liquidity available to meet current obligations, which puts further downward pressure on asset prices.
As the Company’s investment is carried at fair value with fair value changes recognized in the statements of operations, any changes in fair value would directly affect the Company’s members’ capital.
Note 4. Related Party Transactions
Operating Agreement
The Company has an operating agreement, as amended, with Terra Fund Advisors. The operating agreement, as amended, is scheduled to terminate on December 31, 2023 unless the Company is dissolved earlier. Starting January 1, 2016, the Company conducts all of its real estate lending business through Terra Property Trust. As such, Terra Property Trust is responsible for management compensation paid and operating expenses reimbursed to its manager pursuant to a management agreement with the manager.
Dividend Income
As discussed in Note 3, for the years ended December 31, 20212022 and 2020,2021, the Company received approximately $13.1$11.5 million and $17.3$13.1 million of distributions from Terra JV, and/or Terra Property Trust as applicable, of which $11.2$4.6 million and $13.0$11.2 million were returns of capital, respectively.
TPT2 Merger
On February 28, 2020, Terra Property Trust entered into certain Agreement and Plan of Merger (the “Merger Agreement”), by and among Terra Property Trust, Terra Property Trust 2, Inc. (“TPT2”) and Terra Fund 7, the sole stockholder of TPT2, pursuant to which TPT2 merged with and into Terra Property Trust, with Terra Property Trust continuing as the surviving corporation (the “TPT2 Merger”), effective March 1, 2020. In connection with the TPT2 Merger, each share of common stock, par value $0.01 per share, of TPT2 issued and outstanding immediately prior to the effective time of the TPT2 Merger was converted into the right to receive from Terra Property Trust a number of shares of common stock, par value $0.01 per share, of Terra Property Trust equal to an exchange ratio, which was 1.2031. The exchange ratio was based on the relative fair value of Terra Property Trust and TPT2 as of December 31, 2019 as adjusted to reflect changes in net working capital of each of Terra Property Trust and TPT2 during the period from January 1, 2020 through March 1, 2020, the effective time for the TPT2 Merger. For purposes of determining the respective fair values of Terra Property Trust and TPT2, the value of the loans (or participation interests therein) held by each of Terra Property Trust and TPT2 was the value of such loans (or participation interests) as set forth in the audited financial statements of Terra Property Trust as of and for the year ended December 31, 2019. As a result, Terra Fund 7 received 2,116,785.76 shares of common stock of Terra Property Trust as consideration in the TPT2 Merger and subsequently contributed these shares to Terra JV. The shares of Terra Property Trust common stock issued in connection with the TPT2 Merger were issued in a private placement in reliance on Section 4(a)(2) under the U.S. Securities Act of 1933, as amended (the “Securities Act”), and the rules and regulations promulgated thereunder.
Issuance of Common Stock to Terra Offshore REIT
In addition, on March 2, 2020, Terra Property Trust entered into two separate contribution agreements, (i) by and among Terra Property Trust, Terra Offshore REIT and Terra Income Fund International, and (ii) by and among Terra Property Trust, Terra Offshore REIT and Terra Secured Income Fund 5 International, pursuant to which Terra Property Trust issued 2,457,684.59 shares of common stock of Terra Property Trust to Terra Offshore REIT in exchange for the settlement of $32.1 million of participation interests in loans also held by Terra Property Trust, $8.6 million in cash and other working capital (“Issuance of Common Stock to Terra Offshore REIT”). The shares of common stock were issued in a private placement in reliance on Section 4(a)(2) under the Securities Act and the rules and regulations promulgated thereunder. On April 29, 2020, Terra Property Trust repurchased, at a purchase price $17.02 per share, 212,691 shares of common stock that Terra Property Trust had previously sold to Terra Offshore REIT on September 30, 2019.
Notes to Financial Statements
Terra JV, LLCBDC Merger
PriorOn October 1, 2022 (the “Closing Date”), pursuant to the completionTerra BDC Merger Agreement, Terra BDC merged with and into Terra LLC, with Terra LLC surviving as a wholly owned subsidiary of Terra Property Trust. The Certificate of Merger and Articles of Merger with respect to the Terra BDC Merger were filed with the Secretary of State of the TPT2State of Delaware and State Department of Assessments and Taxation of Maryland (the “SDAT”), respectively, with an effective time and date of 12:02 a.m., Eastern Time, on the Closing Date (the “Effective Time”).
At the Effective Time, except for any shares of common stock, par value $0.001 per share, of Terra BDC (“Terra BDC Common Stock”) held by Terra Property Trust or any wholly owned subsidiary of Terra Property Trust or Terra BDC, which shares were automatically retired and ceased to exist with no consideration paid therefor, each issued and outstanding share of Terra BDC Common Stock was automatically cancelled and retired and converted into the right to receive (i) 0.595 shares of TPT Class B Common Stock, and (ii) cash, without interest, in lieu of any fractional shares of TPT Class B Common Stock otherwise issuable in an amount, rounded to the nearest whole cent, determined by multiplying (x) the fraction of a share of TPT Class B Common Stock to which such holder would otherwise be entitled by (y) $14.38.
Pursuant to the terms of the transactions described in the Terra BDC Merger Agreement, approximately 4,847,910 shares of TPT Class B Common Stock were issued to former Terra BDC stockholders in connection with the Terra BDC Merger, based on the number of outstanding shares of Terra BDC Common Stock as of the Closing Date. Following the consummation of the Terra BDC Merger, former Terra BDC stockholders owned approximately 19.9% of the common equity of Terra Property Trust and the Company indirectly beneficially owned approximately 61.3% of the common equity of Terra Property Trust.
Assumption of Notes
As previously reported by Terra BDC, on February 3, 2021, Terra BDC and Terra Income Advisors, LLC entered into an Underwriting Agreement with Ladenburg Thalmann & Co. Inc., on behalf of the underwriters named in Schedule I thereto (the “Underwriters”), in connection with the offer and sale by Terra BDC to the Underwriters of $34,750,000 aggregate principal amount of Terra BDC’s 7.00% Notes due 2026 (the “TIF6 Notes”), which closed on February 10, 2021. On February 25, 2021, the Underwriters partially exercised their over-allotment option to purchase an additional $3,635,000 aggregate principal amount of the TIF6 Notes, which closed on February 26, 2021.
Pursuant to the Terra BDC Merger Agreement, Terra LLC agreed to take all necessary action to assume the payment of the principal of and interest on all of the TIF6 Notes outstanding as of the Effective Time and the performance of every covenant of the Indenture, dated February 10, 2021 (the “TIF6 Indenture”), between Terra BDC and U.S. Bank National Association (the “TIF6 Trustee”), as supplemented by the First Supplemental Indenture, dated February 10, 2021, by and between Terra BDC and the TIF6 Trustee (the “First Supplemental Indenture”), to be performed or observed by Terra BDC, including, without limitation, the execution and delivery to the TIF6 Trustee of a supplement to the TIF6 Indenture in form satisfactory to the TIF6 Trustee.
On the Closing Date, Terra BDC, Terra LLC and the TIF6 Trustee entered into a Second Supplemental Indenture (the “Second Supplemental Indenture”) pursuant to which Terra LLC assumed the payment of the TIF6 Notes and the performance of every covenant of the TIF6 Indenture, as supplemented by the First Supplemental Indenture, to be performed or observed by Terra BDC.
The TIF6 Notes will mature on March 31, 2026, unless earlier repurchased or redeemed. The TIF6 Notes bear interest at a rate of 7.00% per annum, payable on March 30, June 30, September 30 and December 30 of each year. The TIF6 Notes are Terra LLC’s direct unsecured obligations and rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by Terra LLC; effectively subordinated in right of payment to any of Terra LLC’s existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to all existing and future indebtedness and other obligations of any of Terra LLC’s subsidiaries and financing vehicles. Terra LLC may redeem the TIF6 Notes in whole or in part at any time on or after February 10, 2023, at a redemption price equal to 100% of the outstanding principal amount thereof, plus accrued and unpaid interest.
The TIF6 Indenture contains certain covenants that, among other things, limit the ability of Terra LLC, subject to exceptions, to incur indebtedness in violation of the Investment Company Act of 1940, as amended, and to make distributions, incur indebtedness or repurchase shares of Terra LLC’s capital stock unless it satisfies asset coverage requirements set forth in the First Supplemental Indenture after giving effect to such transaction. The TIF6 Indenture also provides for customary events
Notes to Financial Statements
of default which, if any of them occurs, would permit or require the principal of and accrued interest on the TIF6 Notes to become or to be declared due and payable.
Amendment to Credit Facility
As previously reported by Terra BDC, on April 9, 2021, Terra BDC, as borrower, entered into a credit agreement (the “Credit Agreement”) with Eagle Point Credit Management LLC, as the administrative agent and collateral agent (“Eagle Point”), and certain funds and accounts managed by Eagle Point, as lenders (in such capacity, collectively, the “Lenders”). The Credit Agreement provides for (i) a delayed draw term loan of $25,000,000 and (ii) additional incremental loans in a minimum amount of $1,000,000 and multiples of $500,000 in excess thereof, which may be approved by a Lender in its sole discretion.
On September 27, 2022, Terra BDC, Terra LLC, Eagle Point and the Lenders entered into a Consent Letter and Amendment (the “Credit Facility Amendment”). Pursuant to the Credit Facility Amendment (i) Eagle Point and the Lenders consented to the consummation of the Terra BDC Merger and the Issuanceassumption by Terra LLC of all of the obligations of Terra BDC under the Credit Agreement, (ii) and the Credit Agreement was amended to, among other things, change the scheduled maturity date to July 1, 2023, and remove the make whole premium on voluntary prepayments of the loans.
Amendment to the Charter
On the Closing Date, Terra Property Trust filed with the SDAT Articles of Amendment to the Articles of Amendment and Restatement of Terra Property Trust (the “TPT Charter Amendment”). Pursuant to the TPT Charter Amendment, (i) the authorized shares of stock which Terra Property Trust has authority to issue were increased from 500,000,000 to 950,000,000, consisting of 450,000,000 shares of Class A Common Stock, $0.01 par value per share (“TPT Class A Common Stock”), 450,000,000 shares of TPT Class B Common Stock, and 50,000,000 shares of Preferred Stock, $0.01 par value per share, and (ii) each share of Terra Property Trust’s common stock issued and outstanding immediately prior to the Effective Time was automatically changed into one issued and outstanding share of TPT Class B Common Stock.
The TPT Class B Common Stock rank equally with and have identical preferences, rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, and terms and conditions of redemption as each other share of Terra Offshore REIT transactions described above,Property Trust’s common stock, except as set forth below with respect to conversion.
On the Company owned approximately 98.6%date that is 180 calendar days (or, if such date is not a business day, the next business day) after the date (the “First Conversion Date”) of initial listing of shares of TPT Class A Common Stock for trading on a national securities exchange or such earlier date as approved by the Terra Property Trust board of directors (the “TPT Board”), one-third of the issued and outstanding shares of Terra Property Trust’s common stock indirectly through its wholly owned subsidiary, Terra JV,TPT Class B Common Stock will automatically and without any action on the part of which the Company was the sole managing member, and the remaining issued and outstandingholder thereof convert into an equal number of shares of Terra Property Trust’s common stock were owned by Terra Offshore REIT.
As described above, Terra Property Trust acquired TPT2 inTPT Class A Common Stock. On the TPT2 Merger and, in connection withdate that is 365 calendar days (or, if such transaction, Terra Fund 7 contributeddate is not a business day, the next business day) after the date of initial listing of shares of Terra Property Trust’s common stock receivedTPT Class A Common Stock for trading on a national securities exchange or such earlier date following the First Conversion Date as consideration inapproved by the TPT2 Merger to Terra JV and became a co-managing member of Terra JV pursuant to the amended and restated operating agreement of Terra JV, dated March 2, 2020TPT Board (the “JV Agreement”). The JV Agreement and related stockholders agreement between Terra JV and Terra Property Trust, dated March 2, 2020, provide for the joint approval of the Company and Terra Fund 7 with respect to certain major decisions that are taken by Terra JV and Terra Property Trust.
On March 2, 2020, Terra Property Trust, the Company, Terra JV and Terra REIT Advisors also entered into the Amended and Restated Voting Agreement (the “Voting Agreement”“Second Conversion Date”), pursuant to which the Company assigned its rights and obligations under the Voting Agreement to Terra JV. Consistent with the original voting agreement dated February 8, 2018, for the period that Terra REIT Advisors remains the external manager of Terra Property Trust, Terra REIT Advisors will have the right to nominate two individuals to serve as directors of Terra Property Trust, until Terra JV no longer holds at least 10% of the outstanding shares of Terra Property Trust’s common stock, Terra JV will have the right to nominate one individual to serve as a director of Terra Property Trust.
As of December 31, 2021, Terra JV owns approximately 87.4%one-half of the issued and outstanding shares of TPT Class B Common Stock will automatically and without any action on the part of the holder thereof convert into an equal number of shares of TPT Class A Common Stock. On the date that is 545 calendar days (or, if such date is not a business day, the next business day) after the date of initial listing of shares of TPT Class A Common Stock for trading on a national securities exchange or such earlier date following the Second Conversion Date as approved by the TPT Board, all of the issued and outstanding shares of TPT Class B Common Stock will automatically and without any action on the part of the holder thereof convert into an equal number of shares of TPT Class A Common Stock.
Appointment of Directors
As of the Effective Time and in accordance with the Terra BDC Merger Agreement, the size of the TPT Board was increased by three members and each of Spencer Goldenberg, Adrienne Everett and Gaurav Misra (each a “Terra BDC Designee”, and collectively, the “Terra BDC Designees”) were elected to the TPT Board to fill the vacancies created by such increase, with each Terra BDC Designee to serve until Terra Property Trust’s next annual meeting of stockholders and until his or her successor is duly elected and qualifies. Each of the other members of the TPT Board immediately prior to the Effective Time will continue as members following the Effective Time.
Voting Support Agreement
On the Closing Date, Terra Property Trust, common stock with the remainder held byTerra JV and Terra Offshore REIT andentered into a Voting Support Agreement (the “2022 Voting Agreement”). Pursuant to the Company2022 Voting Agreement, effective as of the Closing Date, Terra JV and Terra Fund 7 own an 87.6% and 12.4% interest, respectively, in Terra JV. As a result, as of December 31, 2021, the Company indirectly beneficially owned 76.5%
Notes to Financial Statements
Offshore REIT have agreed to, at any meeting of Terra Property Trust's outstanding common stock throughTrust’s stockholders called for the purpose of electing directors (or by any consent in writing or by electronic transmission in lieu of any such meeting), cast all votes entitled to be cast by each of them in favor of the election of the Terra JV.BDC Designees until the earlier of (i) the first anniversary of the Closing Date, (ii) the TPT Class B Common Stock Distributions (as defined in the 2022 Voting Agreement) or (iii) an amendment and restatement of the Amended and Restated Management Agreement between Terra Property Trust and TPT Advisor approved by the TPT Board, including the Terra BDC Designees.
Indemnification Agreements
Terra Property Trust has entered into customary indemnification agreements with each member of the TPT Board (including each Terra BDC Designee).These agreements, among other things, require Terra Property Trust to indemnify each director to the maximum extent permitted by Maryland law, including indemnification of expenses such as attorney’s fees, judgments, fines and settlement amounts incurred in any action or proceeding, including any action or proceeding by or in right of Terra Property Trust, arising out of his or her service as a director.
Note 5. Commitments and Contingencies
The Company enters into contracts that contain a variety of indemnification provisions. The Company’s maximum exposure under these arrangements is unknown; however, the Company has not had prior claims or losses pursuant to these contracts. The Manager has reviewed the Company’s existing contracts and expects the risk of loss to the Company to be remote.
The Company is not currently subject to any material legal proceedings and, to the Company’s knowledge, no material legal proceedings are threatened against the Company. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company’s rights under contracts with its portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, the Company does not expect that any such proceedings will have a material adverse effect upon its financial condition or results of operations.
Note 6. Members’ Capital
As of December 31, 20212022 and 2020,2021, the Company had 6,636.66,622.2 and 6,637.76,636.6 units outstanding, respectively. The net asset value per unit was $32,860$31,710 and $35,467$32,860 as of December 31, 20212022 and 2020,2021, respectively.
Capital Distributions
At the discretion of the Manager, the Company may make distributions from net cash flow from operations, net disposition proceeds, or other cash available for distribution. Distributions are made to holders of Continuing Income Units (regular units of limited liability company interest in the Company) in proportion to their unit holdings until they receive a return of their initial Deemed Capital Contribution, as defined in the operating agreement, plus a preferred return ranging from 8.5% to 9.0% depending on the historical preferred return applicable to their Terra FundFunds units, after which time distributions are made 15% to the Manager which the Company refers to as the carried interest distribution, and 85% to the holders of Continuing Income Units. The preferred return applicable to the Continuing Income Units sold in the offering concurrent with the Merger is 8.5%.
Notes to Financial Statements
For the years ended December 31, 20212022 and 2020,2021, the Company made total distributions to non-managing members of $11.9$11.3 million and $16.5$11.9 million, respectively. For the yearsyear ended months ended December 31, 20212022 and 2020,2021, the Company did not accrue or make any carried interest distributions to the Manager.
Capital Redemptions
At the discretion of the Manager, a reserve of 5% of cash from operations may be established in order to repurchase units from non-managing members. The Manager is under no obligation to redeem non-managing members’ units. As of December
Notes to Financial Statements
31, 2022 and 2021, and 2020, 0no such reserve was established. For the years ended December 31, 2022 and 2021, the Company redeemed 14.4 units and 1.1 units for $39,227. For the year ended December 31, 2020, the Company did not redeem any units.$0.5 million. and $0.04 million, respectively.
Allocation of Income (Loss)
Profits and losses are allocated to the members in proportion to the units held in a given calendar year.
Note 7. Financial Highlights
The financial highlights represent the per unit operating performance, return and ratios for the non-managing members’ class, taken as a whole, for the years ended December 31, 20212022 and 2020.2021. These financial highlights consist of the operating performance, the internal rate of return (“IRR”) since inception of the Company, and the expense and net investment income ratios which are annualized except for the non-recurring expenses.
The IRR, net of all fees and carried interest (if any), is computed based on actual dates of the cash inflows (capital contributions), outflows (capital distributions), and the ending capital at the end of the respective period (residual value) of the non-managing members’ capital account.
The following summarizes the Company’s financial highlights for the years ended December 31, 20212022 and 2020:2021:
| | | Years Ended December 31, | | Years Ended December 31, |
| | 2021 | | 2020 | | 2022 | | 2021 |
| Per unit operating performance: | Per unit operating performance: | | | | Per unit operating performance: | | | |
| Net asset value per unit, beginning of period | $ | 35,467 | | | $ | 37,222 | | |
(Decrease) increase in members’ capital from operations (1): | | |
| Net asset value per unit, beginning of year | | Net asset value per unit, beginning of year | $ | 32,860 | | | $ | 35,467 | |
Increase (decrease) in members’ capital from operations (1): | | Increase (decrease) in members’ capital from operations (1): | |
| Net investment income | Net investment income | 217 | | | 560 | | Net investment income | 954 | | | 217 | |
| Net change in unrealized (depreciation) appreciation on investment | (1,028) | | | 167 | | |
| Total (decrease) increase in members’ capital from operations | (811) | | | 727 | | |
| Net change in unrealized depreciation on investment | | Net change in unrealized depreciation on investment | (404) | | | (1,028) | |
| Total increase (decrease) in members’ capital from operations | | Total increase (decrease) in members’ capital from operations | 550 | | | (811) | |
Distributions to members (2): | Distributions to members (2): | | | | Distributions to members (2): | | | |
| Capital distributions | Capital distributions | (1,796) | | | (2,482) | | Capital distributions | (1,698) | | | (1,796) | |
| Net decrease in members’ capital resulting from distributions | Net decrease in members’ capital resulting from distributions | (1,796) | | | (2,482) | | Net decrease in members’ capital resulting from distributions | (1,698) | | | (1,796) | |
| Net asset value per unit, end of period | $ | 32,860 | | | $ | 35,467 | | |
| Capital share transactions: | | Capital share transactions: | | | |
| Capital redemption and other | | Capital redemption and other | (2) | | | — | |
| Net decrease in members’ capital resulting from capital share transactions | | Net decrease in members’ capital resulting from capital share transactions | (2) | | | — | |
| Net asset value per unit, end of year | | Net asset value per unit, end of year | $ | 31,710 | | | $ | 32,860 | |
| | Ratios to average net assets: | Ratios to average net assets: | | Ratios to average net assets: | |
| Expenses | Expenses | 0.20 | % | | 0.24 | % | Expenses | 0.25 | % | | 0.20 | % |
| Net investment income | Net investment income | 0.63 | % | | 1.55 | % | Net investment income | 2.93 | % | | 0.63 | % |
| | IRR, beginning of year | IRR, beginning of year | 5.82 | % | | 6.40 | % | IRR, beginning of year | 4.91 | % | | 5.82 | % |
| IRR, end of year | IRR, end of year | 4.91 | % | | 5.82 | % | IRR, end of year | 4.65 | % | | 4.91 | % |
(1)The per unit data was derived by using the weighted average units outstanding during the applicable periods, which were 6,635.96,627.7 and 6,637.86,635.9 for the years ended December 31, 20212022 and 2020.2021.
(2)The per unit data for distributions reflects the actual amount of distributions paid per unit during the periods.
Notes to Financial Statements
Note 9.8. Subsequent Events
Management has evaluated subsequent events through the date the financial statements were available to be issued. Management has determined that there are no material events other than the oneones below that would require adjustment to, or disclosure in, the Company’s financial statements.
On February 18, 2022, Terra Mortgage Capital I, LLC (the “Seller”), a special-purpose indirect wholly-owned subsidiary of the Terra Property Trust, entered into an Uncommitted Master Repurchase and Securities Contract Agreement (the “Repurchase Agreement”) with Goldman Sachs Bank USA ( the “Buyer”). The Repurchase Agreement provides for advances of up
Notes to $200.0 million in the aggregate, which Terra Property Trust expects to use to finance the originations of certain secured performing commercial real estate loans and the acquisitions of certain secured non-performing commercial real estate loans. The Repurchase Agreement replaced the term loan, at which time all mortgage assets under the term loan were assigned as purchased assets under the Repurchase Agreement.Financial Statements
Advances underOn January 20, 2023, the Repurchase Agreement accrue interest atTPT Board adopted a per annum pricing rate equal to the sum of (i) Term SOFR (subject to underlying loan floors on a case-by-case basis) and (ii) the applicable spread, which ranges from 1.75% to 3.00%, and have a maturity date of February 18, 2024. The actual terms of financing for each asset will be determined at the time of financing in accordance with the Repurchase Agreement. Subject to satisfaction of certain conditions, the Seller may extend the maturity date of the Repurchase Agreement for another 12-month term.
The Repurchase Agreement contains margin call provisions that provide the Buyer with certain rights in the event of a decline in debt yield, loan-to-value ratio, and value of the underlying loans purchased under the Repurchase Agreement. Upon the occurrence of a margin deficit event, the Buyer may require the Seller to make a payment to reduce the purchase price to eliminate any margin deficit.
In connection with the Repurchase Agreement, Terra Property Trust entered into a Guarantee Agreement in favor of the Buyerdistribution reinvestment plan (the “Guarantee Agreement”“Plan”), pursuant to which Terra Property Trust will guarantee the obligations of the Seller under the Repurchase Agreement. SubjectTrust’s stockholders may elect to certain exceptions, the maximum liability under the Repurchase Agreement will not exceed 25% of the then currently outstanding repurchase obligations for performing loans and 50% of the then currently outstanding repurchase obligations for non-performing loans under the Repurchase Agreement
The Repurchase Agreement and the Guarantee Agreement contain various representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of these types. In addition, the Guarantee Agreement contains financial covenants, which requirereinvest cash distributions payable by Terra Property Trust in additional shares of Class A Common Stock and Class B Common Stock, at the price per share determined pursuant to maintain: (i) cash liquidity of at least the greater of $5 million or 5% of the then-current outstanding amount under the Repurchase Agreement; (ii) total liquidity in an amount equal to or greater than the lesser of $15 million or 10% of the then-current outstanding amount under the Repurchase Agreement (iii) tangible net worth at an amount no less than 75% of that at closing; (iv) an EBITDA to adjusted interest expense ratio of not less than 1.50 to 1.00; and (v) a total indebtedness to tangible net worth ratio of not more than 3.00 to 1.00.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned in the capacities indicated* thereunto duly authorized.
Date: March 11, 202210, 2023
| | | | | | | | |
| | TERRA SECURED INCOME FUND 5, LLC |
| | | |
| | By: | /s/ Vikram S. Uppal |
| | | Vikram S. Uppal |
| | | Chief Executive Officer and Chief Investment Officer |
| | | (Principal Executive Officer) |
| | | |
| | By: | /s/ Gregory M. Pinkus |
| | | Gregory M. Pinkus |
| | | Chief Financial Officer and Chief Operating Officer, |
| | | (Principal Financial and Accounting Officer) |
___________
* The registrant is a limited liability company managed by Terra Fund Advisors, LLC, its sole and managing member and the persons are signing in their respective capacities as officers of Terra Fund Advisors, LLC.