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Terra Secured Income Fund 5

Filed: 13 May 21, 1:46pm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2021
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-55780
Terra Secured Income Fund 5, LLC
(Exact name of registrant as specified in its charter)
Delaware90-0967526
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
550 Fifth Avenue, 6th Floor
New York, New York 10036
(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 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.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
    If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
As of May 13, 2021, the registrant had 6,637.7 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.



TABLE OF CONTENTS

1


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Terra Secured Income Fund 5, LLC
Statements of Financial Condition
March 31, 2021December 31, 2020
(unaudited)
Assets
Equity investment in Terra JV, LLC at fair value (cost of $229,062,384 and
   $230,915,151, respectively)
$233,997,676 $235,357,977 
Cash and cash equivalents135,654 225,214 
Other assets26,330 33,830 
Total assets$234,159,660 $235,617,021 
Liabilities and Members’ Capital
Liabilities
Accounts payable and accrued expenses$222,962 $199,602 
Total liabilities222,962 199,602 
Commitments and contingencies (Note 5)
00
Members’ capital:
Managing member0 0 
Non-managing members233,936,698 235,417,419 
Total members’ capital233,936,698 235,417,419 
Total liabilities and members’ capital$234,159,660 $235,617,021 
Net asset value per unit$35,244 $35,467 

See notes to unaudited financial statements.
    
2


Terra Secured Income Fund 5, LLC
Statements of Operations
(Unaudited)

 Three Months Ended March 31,
 20212020
Investment income
Dividend income$1,126,895 $1,264,438 
Other operating income20 144 
Total investment income1,126,915 1,264,582 
Operating expenses
Professional fees120,135 174,099 
Other385 1,449 
Total operating expenses120,520 175,548 
Net investment income1,006,395 1,089,034 
Net change in unrealized appreciation (depreciation) on investment492,466 (2,286,298)
Net increase (decrease) in members’ capital resulting from operations$1,498,861 $(1,197,264)
Per unit data:
Net investment income per unit$152 $164 
Net increase (decrease) in members’ capital resulting from operations per unit$226 $(180)
Weighted average units outstanding6,638 6,638 


See notes to unaudited financial statements.
3


Terra Secured Income Fund 5, LLC
Statements of Changes in Members’ Capital
(Unaudited)
Managing
Member
Non-Managing MembersTotal
Balance, January 1, 2021$235,417,419 $235,417,419 
Capital distributions(2,979,582)(2,979,582)
Increase in members’ capital resulting from operations:
Net investment income1,006,395 1,006,395 
Net change in unrealized appreciation on investment492,466 492,466 
Net increase in members’ capital resulting from operations1,498,861 1,498,861 
Balance, March 31, 2021$$233,936,698 $233,936,698 

Managing
Member
Non-Managing MembersTotal
Balance, January 1, 2020$247,066,913 $247,066,913 
Capital distributions(7,467,271)(7,467,271)
Increase in members’ capital resulting from operations:
Net investment income1,089,0341,089,034 
Net change in unrealized depreciation on investment(2,286,298)(2,286,298)
Net decrease in members’ capital resulting from operations(1,197,264)(1,197,264)
Balance, March 31, 2020$$238,402,378 $238,402,378 

See notes to unaudited financial statements.
4


Terra Secured Income Fund 5, LLC
Statements of Cash Flows
(Unaudited)

Three Months Ended March 31,
20212020
Cash flows from operating activities:
Net increase (decrease) in members’ capital resulting from operations$1,498,861 $(1,197,264)
Adjustments to reconcile net increase (decrease) in members’ capital resulting
   from operations to net cash provided by operating activities:
Return of capital on investment1,852,767 6,562,736 
Net change in unrealized (appreciation) depreciation on investment(492,466)2,286,298 
Changes in operating assets and liabilities:
Decrease (increase) in other assets7,500 (4,873)
Increase in accounts payable and accrued expenses23,360 68,885 
Decrease in due to related party(38,000)
Net cash provided by operating activities2,890,022 7,677,782 
Cash flows from financing activities:
Distributions paid(2,979,582)(7,467,271)
Net cash used in financing activities(2,979,582)(7,467,271)
Net (decrease) increase in cash and cash equivalents(89,560)210,511 
Cash and cash equivalents at beginning of period225,214 97,937 
Cash and cash equivalents at end of period$135,654 $308,448 
Supplemental Non-Cash Disclosure:
Transfer of ownership interest in Terra Property Trust, Inc. to
   Terra JV, LLC (Note 3)
$$244,006,890 



See notes to unaudited financial statements.
5


Terra Secured Income Fund 5, LLC
Schedule of Investment
March 31, 2021 (unaudited) and December 31, 2020

On January 1, 2016, 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 March 31, 2021 and December 31, 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. Accordingly, as of both March 31, 2021 and December 31, 2020, the Company indirectly beneficially owned 76.5% of the outstanding shares of common stock of Terra Property Trust through Terra JV.

    The following table presents a summary of the Company’s investment as of March 31, 2021 and December 31, 2020:
Percentage InterestMarch 31, 2021December 31, 2020
InvestmentDate AcquiredCostFair Value% of Members’ CapitalCostFair Value% of Members’ Capital
Terra JV, LLC3/2/202087.6 %$229,062,384 $233,997,676 100.0 %$230,915,151 $235,357,977 100.0 %

As of both March 31, 2021 and December 31, 2020, the Company indirectly beneficially owned 76.5% of the outstanding shares of common stock of Terra Property Trust. Additionally, as of both March 31, 2021 and December 31, 2020, Terra JV was jointly-controlled by the Company and Terra Fund 7.

    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 March 31, 2021:
Portfolio CompanyCollateral LocationProperty
Type
Coupon
Rate
Current Interest RateExit FeeAcquisition DateMaturity
Date
Principal AmountAmortized
Cost
Fair
Value (1)
Pro Rata
Fair Value (2)
% (3)
Loans held for investment:
Mezzanine loans:
150 Blackstone River Road, LLCUS - MAIndustrial8.5 %8.5 %%9/21/20179/6/2027$7,000,000 $7,000,000 $6,995,064 $5,351,224 2.3 %
Austin H. I. Owner LLC (4)
US - TXHotel - full/
   select service
12.5 %12.5 %1.0 %9/30/201510/6/20203,890,140 3,929,042 3,637,281 2,782,520 1.2 %
High Pointe Mezzanine Investments, LLC (5)
US - SCStudent housing13.0 %13.0 %1.0 %12/27/20131/6/20243,000,000 3,189,700 2,986,866 2,284,952 1.0 %
LD Milipitas Mezz, LLC (6)
US - CAHotel - extended
   stay
LIBOR +10.25% (2.75% Floor)13.0 %1.0 %6/27/20186/27/20214,250,000 4,292,148 4,292,450 3,283,724 1.4 %
Stonewall Station Mezz LLC (5)(7)(8)
US - NCInfill land12.0% current
2.0% PIK
14.0 %1.0 %5/31/20185/20/202110,669,168 10,768,255 10,789,750 8,254,159 3.5 %
28,809,308 29,179,145 28,701,411 21,956,579 9.4 %

See notes to unaudited financial statements.



Terra Secured Income Fund 5, LLC
Schedule of Investment (Continued)
March 31, 2021 (unaudited) and December 31, 2020

Terra Property Trust’s Schedule of Loans Held for Investment as of March 31, 2021 (Continued):
Portfolio CompanyCollateral LocationProperty
Type
Coupon
Rate
Current Interest RateExit FeeAcquisition DateMaturity
Date
Principal AmountAmortized
Cost
Fair
Value (1)
Pro Rata
Fair Value
(2)
% (3)
Loans held for investment:
Preferred equity investments:
370 Lex Part Deux, LLC (7)(8)
US - NYOfficeLIBOR + 8.25% (2.44% Floor)10.7 %%12/17/20181/9/2022$55,327,153 $55,355,545 $53,455,746 $40,893,646 17.5 %
Orange Grove Property Investors, LLC (7)(8)
US - CAMultifamilyLIBOR + 8.0% (4.0% Floor)12.0 %1.0 %5/24/20186/1/202110,600,000 10,703,482 10,703,776 8,188,389 3.5 %
REEC Harlem Holdings Company, LLC (9)
US - NYMixed useLIBOR + 12.5% (no Floor)12.6 %%3/9/20183/9/202316,512,842 16,512,842 13,817,239 10,570,188 4.5 %
RS JZ Driggs, LLC (7)(8)(10)
US - NYMultifamily12.3 %12.3 %1.0 %5/1/20181/1/20218,981,615 9,071,429 9,026,292 6,905,113 3.0 %
The Bristol at Southport, LLC (7)(11)
US - WAMultifamily12.0 %12.0 %1.0 %9/22/20179/22/202223,500,000 23,688,144 23,664,725 18,103,515 7.7 %
114,921,610 115,331,442 110,667,778 84,660,851 36.2 %
First mortgages:
14th & Alice Street Owner, LLC (7)(11)
US - CAMultifamilyLIBOR + 5.75% (3.25% Floor)9.0 %0.5 %3/5/20193/5/202236,558,763 36,837,952 36,537,911 27,951,502 11.9 %
1389 Peachtree St, LP; 1401 Peachtree St, LP;
   1409 Peachtree St, LP (12)
US - GAOfficeLIBOR + 4.5% (no Floor)4.6 %0.5 %2/22/20192/10/202251,649,149 51,917,594 51,814,815 39,638,333 16.9 %
330 Tryon DE LLC (12)
US - NCOfficeLIBOR + 3.85% (2.51% Floor)6.4 %0.5 %2/7/20193/1/202222,800,000 22,903,897 22,892,124 17,512,475 7.5 %
870 Santa Cruz, LLCUS - CAOfficeLIBOR + 6.75% (0.5% Floor)7.3 %1.0 %12/15/202012/15/202311,867,818 11,863,875 11,979,443 9,164,274 3.9 %
AGRE DCP Palm Springs, LLC (12)(13)
US - CAHotel - full/
   select service
LIBOR +5.0% (1.80% Floor)6.8 %1.5 %12/12/20191/1/202443,222,382 43,775,181 43,864,855 33,556,614 14.4 %
MSC Fields Peachtree Retreat, LLC (12)
US - GAMultifamilyLIBOR + 3.85% (2.0% Floor)5.9 %0.5 %3/15/20194/1/202223,308,334 23,434,926 23,421,439 17,917,401 7.7 %
Patrick Henry Recovery Acquisition, LLC (12)
US - CAOfficeLIBOR + 2.95% (1.5% Floor)4.5 %0.3 %11/25/201912/1/202318,000,000 18,039,903 18,030,565 13,793,382 5.9 %
University Park Berkeley, LLC (12)(14)
US - CAMultifamilyLIBOR + 4.2% (1.50% Floor)5.7 %0.8 %2/27/20203/1/202324,709,132 24,863,082 24,877,473 19,031,267 8.1 %
Windy Hill PV Five CM, LLC (15)
US - CAOfficeLIBOR + 6.0% (2.05% Floor)8.1 %0.5 %9/20/20199/20/202231,883,812 31,936,652 30,679,466 23,469,791 10.0 %
263,999,390 265,573,062 264,098,091 202,035,039 86.3 %
Total gross loans held for investment407,730,308 410,083,649 403,467,280 308,652,469 131.9 %
Obligations under participation agreements and secured borrowing (7)(8)(11)(15)
(93,310,285)(93,596,454)(91,599,071)(70,073,289)(30.0)%
Allowance for loan losses (4,014,778)   %
Net loans held for investment$314,420,023 $312,472,417 $311,868,209 $238,579,180 101.9 %

See notes to unaudited financial statements.
7


Terra Secured Income Fund 5, LLC
Schedule of Investment (Continued)
March 31, 2021 (unaudited) and December 31, 2020

Terra Property Trust’s Schedule of Loans Held for Investment as of March 31, 2021 (Continued):
Operating real estate:
DescriptionAcquisition Date
Fair Value of Real Estate (1)
EncumbranceNet Investment
Pro Rata Net Investment (2)
% (3)(18)

Multi-tenant office building in Santa Monica, CA (16)
7/30/2018$57,321,799 $40,596,980 $16,724,819 $12,794,487 5.5 %
Land in Conshohocken, PA (17)
1/9/201913,395,430 13,395,430 10,247,504 4.4 %
$70,717,229 $40,596,980 $30,120,249 $23,041,991 9.9 %
Portfolio CompanyDividend YieldAcquisition DateMaturity DateSharesCostFair Value
Pro Rata
Fair Value (2)
% (3)
Marketable securities (19):
Common and preferred shares:
Nexpoint Real Estate Finance, Inc. - Cumulative
   Series A Preferred Shares
8.5 %7/30/20207/24/202550,000 $1,176,006 $1,305,000 $998,325 0.4 %
Blackstone Mortgage Trust, Inc. - Class A
   common shares
7.6 %3/11/2021N/A110,1003,489,396 3,413,100 2,611,022 1.1 %
Starwood Property Trust, Inc. - Common Shares7.6 %3/11/2021N/A62,0001,489,692 1,533,880 1,173,418 0.5 %
Total marketable securities$6,155,094 $6,251,980 $4,782,765 2.00 %
__________________________
(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, 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 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 $233.9 million at March 31, 2021.
(4)This loan is currently in maturity default. Terra Property Trust is currently evaluating the options of recovering the principal amount, including foreclosing on the collateral. For the three months ended March 31, 2021, Terra Property Trust suspended interest income accrual of $0.1 million on this loan because recovery of such income was doubtful.
(5)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.
(7)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.
(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.
8


(9)For the three months ended March 31, 2021, Terra Property Trust suspended interest income accrual of $0.5 million on this loan because recovery of such income was doubtful.
(10)This loan is currently 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.
(11)Terra Property Trust sold a portion of its interest in this loan via a participation agreement to a third-party.
(12)These loans were used as collateral for $106.5 million of borrowings under a term loan payable.
(13)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.
(14)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.
(15)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.
(16)Terra Property Trust acquired this property through foreclosure of a $54.0 million first mortgage.
(17)Terra Property Trust acquired the collateral for this loan via deed in lieu of foreclosure. The land is currently vacant.
(18)Percentage is based on Terra Property Trust’s net exposure on the property (real estate owned less encumbrance).
(19)From time to time, Terra Property Trust might invest in short-term debt and equity securities. These securities are comprised of shares of common and preferred stock and bonds.






See notes to unaudited financial statements.
9


Terra Secured Income Fund 5, LLC
Schedule of Investment (Continued)
March 31, 2021 (unaudited) and December 31, 2020
    
    The following table presents a schedule of loans held for investment held by Terra Property Trust as of December 31, 2020:
Portfolio CompanyCollateral LocationProperty
Type
Coupon
Rate
Current Interest RateExit FeeAcquisition DateMaturity
Date
Principal AmountAmortized
Cost
Fair
Value (1)
Pro Rata
Fair Value (2)
% (3)
Loans held for investment:
Mezzanine loans:
150 Blackstone River Road, LLCUS - MAIndustrial8.5 %8.5 %%9/21/20179/6/2027$7,000,000 $7,000,000 $7,007,397 $5,360,659 2.3 %
Austin H. I. Owner LLC (4)
US - TXHotel12.5 %12.5 %1.0 %9/30/201510/6/20203,848,712 3,887,200 3,533,118 2,702,835 1.1 %
High Pointe Mezzanine Investments, LLC (5)
US - SCStudent housing15.0 %15.0 %1.0 %12/27/20131/6/20243,000,000 3,204,375 2,988,110 2,285,904 1.0 %
LD Milipitas Mezz, LLC (6)
US - CAHotelLIBOR +10.25% (2.75% Floor)13.0 %1.0 %6/27/20186/27/20214,250,000 4,294,053 4,293,969 3,284,886 1.4 %
Stonewall Station Mezz LLC (5)(7)(8)
US - NCInfill land12.0% current
2.0% PIK
14.0 %1.0 %5/31/20185/20/202110,442,567 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 - NYOfficeLIBOR + 8.25% (2.44% Floor)10.7 %%12/17/20181/9/202253,874,507 53,912,363 51,935,025 39,730,294 16.9 %
City Gardens 333 LLC (7)(8)
US - CAStudent housingLIBOR + 9.95% (2.0% Floor)12.0 %%4/11/20184/1/202128,303,628 28,307,408 28,276,767 21,631,727 9.2 %
Orange Grove Property Investors, LLC (7)(8)
US - CACondominiumLIBOR + 8.0% (4.0% Floor)12.0 %1.0 %5/24/20186/1/202110,600,000 10,701,924 10,707,274 8,191,065 3.5 %
REEC Harlem Holdings Company, LLCUS - NYlandLIBOR + 12.5% (no Floor)12.6 %%3/9/20183/9/202316,767,984 16,767,984 14,314,585 10,950,658 4.7 %
RS JZ Driggs, LLC (7)(8)(9)
US - NYMultifamily12.3 %12.3 %1.0 %5/1/20181/1/20218,544,513 8,629,929 8,612,869 6,588,845 2.8 %
The Bristol at Southport, LLC (7)(10)
US - WAMultifamily12.0 %12.0 %1.0 %9/22/20179/22/202223,500,000 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 %


10


Terra Secured Income Fund 5, LLC
Schedule of Investment (Continued)
March 31, 2021 (unaudited) and December 31, 2020

Terra Property Trust’s Schedule of Loans Held for Investment as of December 31, 2020 (Continued):
Portfolio CompanyCollateral LocationProperty
Type
Coupon
Rate
Current Interest RateExit FeeAcquisition DateMaturity
Date
Principal AmountAmortized
Cost
Fair
Value (1)
Pro Rata
Fair Value
(2)
% (3)
Loans held for investment:
First mortgages:
14th & Alice Street Owner, LLC (7)(10)
US - CAMultifamilyLIBOR + 5.75% (3.25% Floor)9.0 %0.5 %3/5/20193/5/2022$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 - GAOfficeLIBOR + 4.5% (no Floor)4.6 %0.5 %2/22/20192/10/202250,808,453 51,068,554 50,982,247 39,001,419 16.6 %
330 Tryon DE LLC (11)
US - NCOfficeLIBOR + 3.85% (2.51% Floor)6.4 %0.5 %2/7/20193/1/202222,800,000 22,901,294 22,869,879 17,495,457 7.4 %
870 Santa Cruz, LLCUS - CAOfficeLIBOR + 6.75% (0.5% Floor)7.3 %1.0 %12/15/202012/15/202310,760,355 10,724,590 10,859,726 8,307,690 3.5 %
AGRE DCP Palm Springs, LLC (11)(12)
US - CAHotelLIBOR +4.75% (1.80% Floor)6.6 %0.5 %12/12/20191/1/202345,294,097 45,506,051 45,519,030 34,822,058 14.8 %
MSC Fields Peachtree Retreat, LLC (11)
US - GAMultifamilyLIBOR + 3.85% (2.0% Floor)5.9 %0.5 %3/15/20194/1/202223,308,334 23,437,198 23,428,860 17,923,078 7.6 %
Patrick Henry Recovery Acquisition, LLC (11)
US - CAOfficeLIBOR + 2.95% (1.5% Floor)4.5 %0.3 %11/25/201912/1/202318,000,000 18,039,456 17,994,495 13,765,789 5.8 %
University Park Berkeley, LLC (11)(13)
US - CAStudent housingLIBOR + 4.2% (1.50% Floor)5.7 %0.8 %2/27/20203/1/202323,990,786 24,131,808 24,162,710 18,484,473 7.9 %
Windy Hill PV Five CM, LLC (14)
US - CAOfficeLIBOR + 6.0% (2.05% Floor)8.1 %0.5 %9/20/20199/20/202226,454,910 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 investment424,174,758 426,019,273 419,407,194 320,846,504 136.3 %
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:
DescriptionAcquisition DateFair Value of Real EstateEncumbranceNet 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)
1/9/201913,395,430 13,395,430 10,247,504 4.4 %
$70,717,229 $44,020,225 $26,697,004 $20,423,208 8.7 %
Portfolio CompanyInterest/Dividend RateAcquisition DateMaturity DateSharesCostFair Value
Pro Rata
Fair Value (2)
% (3)
Marketable securities (18):
Preferred shares:
Nexpoint Real Estate Finance, Inc. - Cumulative
   Series A Preferred Shares
8.50 %7/30/20207/24/202550,000 $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 unaudited financial statements.
11


Terra Secured Income Fund 5, LLC
Schedule of Investment (Continued)
March 31, 2021 (unaudited) and December 31, 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 currently evaluating the options of recovering the principal amount, including foreclosing on the collateral.
(5)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 currently 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 via 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 PIK 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 via 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 might invest in short-term debt and equity securities. These securities are comprised of shares of preferred stock and bonds.




See notes to unaudited financial statements.
12


Terra Secured Income Fund 5, LLC
Notes to Financial Statements (Unaudited)
March 31, 2021

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 believes loans of this size are subject to less competition, offer higher risk adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification. 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 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 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 5 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 March 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 may include an orderly liquidation of its assets or an alternative liquidity event such as 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.
13


Notes to Unaudited Financial Statements

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

    The interim financial statements have been prepared in accordance with United States generally accepted accounting principles (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 March 31, 2021 and December 31, 2020 and for the period from March 2, 2020 to March 31, 2020 and the three months ended March 31, 2021 include all of the Company’s accounts only.

    The accompanying interim financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Articles 6 or 10 of Regulation S-X. 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.

As of March 31, 2021, the outbreak of the coronavirus (“COVID-19”) pandemic around the globe continues to adversely impact global commercial activity and has contributed to significant volatility in financial markets The COVID-19 pandemic and preventative measures taken by local, state and federal authorities to alleviate the public health crisis have had a continued and prolonged adverse impact on economic and market conditions and have caused a global economic slowdown which has had and could further have a material adverse effect on the Company’s results and financial condition. The pandemic continues to evolve, and the full impact of COVID-19 on the real estate industry, the commercial real estate market, and the credit markets generally, and consequently on the Company’s financial condition and results of operations is uncertain and cannot be predicted at the current time as it depends on several factors beyond the control of the Company including, but not limited to, (i) the uncertainty around the severity and duration of the outbreak, (ii) the effectiveness of the United States public health response, including the administration of vaccines throughout the United States (iii) the pandemic’s impact on the U.S. and global economies, (iv) the timing, scope and effectiveness of governmental responses to the pandemic, including the PPP and other programs under the CARES Act, (v) the timing and speed of economic recovery, (vi) the availability of a treatment or vaccination for COVID-19, and (vii) the negative impact on our borrowers, real estate values and cost of capital. The Company believes the estimates and assumptions underlying its financial statements are reasonable and supportable based on the information available as of March 31, 2021, however uncertainty over the ultimate impact COVID-19 will have on the global economy generally, and the Company’s business in particular, makes any estimates and assumptions as of March 31, 2021 inherently less certain than they would be absent the current and potential impacts of COVID-19. Actual results may ultimately differ from those estimates.

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.

14


Notes to Unaudited Financial Statements

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.
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 three months ended March 31, 2021 and 2020, 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 recognizes interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in its statements of operations. For the three months ended March 31, 2021 and 2020, 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 2017-2019 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. At the end of 2021, banks will no longer be required to report certain information that is used to determine LIBOR. As a result, LIBOR could be discontinued. Other interest rates used globally could also be discontinued for similar reasons. 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”). ASU 2020-04 and ASU 2021-01 are effective for all entities through 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. 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 March 31, 2021 and December 31, 2020, 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, and Terra JV became the Company’s only investment (Note 4).

15


Notes to Unaudited Financial Statements

The following tables present a summary of the Company’s investment at March 31, 2021 and December 31, 2020:
March 31, 2021December 31, 2020
InvestmentCostFair Value% of Members’ CapitalCostFair Value% of Members’ Capital
87.6% interest in Terra JV, LLC$229,062,384 $233,997,676 100.0 %$230,915,151 $235,357,977 100.0 %

For the three months ended March 31, 2021 and 2020, the Company received approximately $3.0 million and $7.8 million of distributions from Terra JV and/or Terra Property Trust as applicable, respectively, of which $1.9 million and $6.6 million were returns of capital, respectively.


    As of both March 31, 2021 and December 31, 2020, the Company indirectly beneficially owned 76.5% (Note 4) of the outstanding shares of common stock of Terra Property Trust. The following tables present the summarized financial information of Terra Property Trust:
March 31, 2021December 31, 2020
Carrying value of loans held for investment$406,068,871 $422,280,515 
Equity investment in a limited partnership, net50,505,511 36,259,959 
Real estate owned, net72,242,825 73,178,939 
Cash, cash equivalent and restricted cash27,600,059 32,920,323 
Other assets29,380,759 23,837,445 
Total assets585,798,025 588,477,181 
Term loan payable, obligations under participation agreements, mortgage loan
   payable, revolving line of credit and secured borrowing
(245,967,816)(239,132,654)
Accounts payable, accrued expenses and other liabilities(28,798,305)(35,769,686)
Lease intangible liabilities(10,128,244)(10,249,776)
Total liabilities(284,894,365)(285,152,116)
Stockholder’s equity$300,903,660 $303,325,065 
Three Months Ended March 31,
20212020
Revenues$10,289,252 $12,077,571 
Expenses(10,136,375)(11,188,049)
Net loss on extinguishment of obligations under participation agreements(319,453)
Realized gains on marketable securities8,894 
Unrealized losses on marketable securities(14,608)
Equity income from investment in a limited partnership1,337,827 $
Net income$1,476,096 $578,963 

Fair Value Measurements

    The Company adopted 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). Investments measured and reported at fair value are classified and disclosed into one of the following categories based on the inputs as follows:

16


Notes to Unaudited Financial Statements

        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 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 March 31, 2021 and December 31, 2020:
March 31, 2021
Fair Value Measurements
Level 1Level 2Level 3Total
Investment:
Equity investment in Terra JV$$$233,997,676 $233,997,676 
December 31, 2020
Fair Value Measurements
Level 1Level 2Level 3Total
Investment:
Equity investment in Terra JV$$$235,357,977 $235,357,977 

    Changes in Level 3 investment for the three months ended March 31, 2021 and 2020 were as follows:
Equity Investment in Terra JVEquity Investment in Terra Property Trust
Three Months Ended March 31, 2021Period from March 2, 2020 to March 31, 2020Period 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(1,852,767)(2,779,129)(3,783,607)
Net change in unrealized appreciation (depreciation) on investment492,466 (2,813,550)527,252 
Ending balance$233,997,676 $238,414,211 $
Net change in unrealized appreciation (depreciation) on investment
   for the period relating to those Level 3 assets that were still held by
   the Company
$492,466 $(2,813,550)$

    Transfers between levels, if any, are recognized at the beginning of the period in which transfers occur. For the three months ended March 31, 2021 and 2020, there were no transfers.
17


Notes to Unaudited Financial Statements


The Company estimated that its other financial assets and liabilities had fair values that approximated their carrying values at March 31, 2021 and December 31, 2020 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, including 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 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 is based on the estimated selling price. The fair value of Terra Property Trust’s investment in an office building is determined using the direct capitalization method.

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 March 31, 2021 and December 31, 2020. The tables are not intended to be all-inclusive, but instead identify the significant unobservable inputs relevant to the determination of fair values.
Fair ValuePrimary Valuation TechniqueUnobservable InputsMarch 31, 2021
Asset CategoryMinimumMaximumWeighted Average
Assets:
Equity investment in Terra JV$233,997,676
Discounted cash flow (1)(2)
Discount rate (1)(2)
4.00 %20.05 %14.68 %
Fair ValuePrimary Valuation TechniqueUnobservable InputsDecember 31, 2020
Asset CategoryMinimumMaximumWeighted Average
Assets:
Equity investment in Terra JV$235,357,977 
Discounted cash flow (1)(2)
Discount rate (1)(2)
5.25 %20.05 %14.17 %
_______________
(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 a cap rate of 5.77%.

Risks and Uncertainties

    The Company’s investment in Terra Property Trust or 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 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
18


Notes to Unaudited Financial Statements

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 three months ended March 31, 2021 and 2020, the Company received approximately $3.0 million and $7.8 million of distributions from Terra JV and/or Terra Property Trust as applicable, respectively, of which $1.9 million and $6.6 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, one by and among Terra Property Trust, Terra Offshore REIT and Terra Income Fund International, and another 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.
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Notes to Unaudited Financial Statements


Terra JV, LLC

    Prior to the completion of the TPT2 Merger and the Issuance of Common Stock to Terra Offshore REIT transactions described above, the Company owned approximately 98.6% of the issued and outstanding shares of Terra Property Trust’s common stock indirectly through its wholly owned subsidiary, Terra JV, of which the Company was the sole managing member, and the remaining issued and outstanding shares of Terra Property Trust’s common stock were owned by Terra Offshore REIT.

    As described above, Terra Property Trust acquired TPT2 in the TPT2 Merger and, in connection with such transaction, Terra Fund 7 contributed the shares of Terra Property Trust’s common stock received as consideration in 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, 2020 (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”), 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 March 31, 2021, Terra JV owns approximately 87.4% of the issued and outstanding shares of Terra Property Trust common stock with the remainder held by Terra Offshore REIT, and the Company and Terra Fund 7 own an 87.6% and 12.4% interest, respectively, in Terra JV. As a result, as of March 31, 2021, the Company indirectly beneficially owned 76.5% of Terra Property Trust's outstanding common stock through Terra JV.

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 both March 31, 2021 and December 31, 2020, the Company had 6,637.7 units outstanding. The net asset value per unit was $35,244 and $35,467 as of March 31, 2021 and December 31, 2020, 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 Fund 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%.

20


Notes to Unaudited Financial Statements

    For the three months ended March 31, 2021 and 2020, the Company made total distributions to non-manager members of $3.0 million and $7.5 million, respectively. For the three months ended March 31, 2021 and 2020, the Company did not 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 March 31, 2021 and December 31, 2020, no such reserve was established. For the three months ended March 31, 2021 and 2020, the Company did not redeem any units.

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 three months ended March 31, 2021 and 2020. 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 three months ended March 31, 2021 and 2020:
Three Months Ended March 31,
20212020
Per unit operating performance:
Net asset value per unit, beginning of period$35,467 $37,222 
Increase (decrease) in members’ capital from operations (1):
Net investment income152 164 
Net change in unrealized appreciation (depreciation) on investment74 (344)
Total increase (decrease) in members’ capital from operations226 (180)
Distributions to members (2):
Capital distributions(449)(1,126)
Net decrease in members’ capital resulting from distributions(449)(1,126)
Net asset value per unit, end of period$35,244 $35,916 
Ratios to average net assets:
Expenses0.21 %0.29 %
Net investment income1.72 %1.79 %
IRR, beginning of period5.82 %6.40 %
IRR, end of period5.73 %6.08 %
_______________
(1)The per unit data was derived by using the weighted average units outstanding during the applicable periods, which were 6,638 units for both the three months ended March 31, 2021 and 2020.
(2)The per unit data for distributions reflects the actual amount of distributions paid per unit during the periods.

21


Notes to Unaudited Financial Statements

Note 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 that would require adjustment to, or disclosure in, the Company’s financial statements.    

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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.

    The information contained in this section should be read in conjunction with our unaudited financial statements and related notes thereto and other financial information included elsewhere in this quarterly report on Form 10-Q. In this report, the “Company,” “we,” “us” and “our” refer to Terra Secured Income Fund 5, LLC.

FORWARD-LOOKING STATEMENTS
    We make forward-looking statements in this quarterly report on Form 10-Q within the meaning of Section 27A of the Securities Act of 1933, as amended, 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 quarterly report on Form 10-Q 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;

the potential negative impacts of COVID-19 on the global economy and the impacts of COVID-19 on our financial condition, results of operations, liquidity and capital resources and business operations;

actions that may be taken by governmental authorities to contain the COVID-19 outbreak or to treat its impact;

the efficacy of the vaccines or other remedies and the speed of their distribution and administration;

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 Fund Advisors, LLC (“Terra Fund Advisors” or the “Manager”), Terra REIT Advisors, LLC (“Terra REIT Advisors”), Terra Income Advisors, LLC; Terra Capital Partners, LLC (“Terra Capital Partners”), our sponsor; Terra JV, LLC (“Terra JV”); Terra Income Fund 6, Inc. (“Terra Fund 6”);Terra Secured Income Fund 5 International; Terra Income Fund International; Terra Secured Income Fund 7, LLC (“Terra Fund 7”); Terra Property Trust, Inc. (“Terra Property Trust”); Terra International Fund 3, L.P. (“Terra International 3”); Terra Offshore Funds REIT, LLC (“Terra Offshore REIT”); Mavik Real Estate Special Opportunities Fund, LP (“Mavik RESOF”) (formerly known as Terra Real Estate Credit Opportunities Fund, LP); or any of their affiliates;

our dependence on our Manager or its affiliates and the availability of its senior management team and other personnel;

23


liquidity transactions that may be available to us in the future, including a liquidation of our assets, a sale of our company or an initial public offering and listing of the shares of common stock of Terra Property Trust on a national securities exchange, 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 from registration under the Investment Company Act of 1940, as amended (the “1940 Act”), and 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 quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Part I — Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2020 and in “Part II - Item 1A. Risk Factors” in this quarterly report on Form 10-Q. 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 quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. 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.

Overview
    
    We are 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. 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 of this size 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 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 objectives.

    On January 1, 2016, Terra Secured Income Fund, LLC (“Terra Fund 1”), Terra Fund 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”) merged with and into our subsidiaries (collectively, the “Terra Funds”) through a series of separate mergers (collectively, 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 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 at the same time providing us with enhanced access to capital and borrowings, lower operating costs and enhanced opportunities for growth.

24


    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, 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. As of March 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 we and Terra Fund 7 owned an 87.6% and 12.4% percentage interest, respectively, in Terra JV. Accordingly, as of March 31, 2021, we indirectly beneficially owned 76.5% of the outstanding shares of common stock of Terra Property Trust through Terra JV.

Recent Developments

    The coronavirus (“COVID-19”) pandemic has had, and is expected to continue to have, a significant impact on local, national and global economies and has resulted in a world-wide economic slowdown. While certain economies have exhibited growth of late when compared to earlier months of 2020, the amount of economic recovery will continue to be impacted by reductions and restrictions in economic activity resulting from increased coronavirus cases. We continue to closely monitor the impact of the coronavirus pandemic on all aspects of our investments and operations. The extent to which the coronavirus 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 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 coronavirus, and actions taken by federal, state and local agencies as well as the general public to contain the coronavirus or treat its impact, among others.
    
    We believe, however, that compelling opportunities for us will emerge as a result of the economic downtown caused by the COVID-19 pandemic. While it has had a demonstrable effect on employment, the economy and the national psyche, the impact of the pandemic 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 for property. As these factors become clear and commercial real estate is repriced accordingly, we believe there will be abundant opportunities available to experienced alternative lenders such as us to provide financing for property acquisition, refinancing, development and redevelopment on attractive terms that reflect the new realities of the economy. 

Portfolio Summary

The following tables provide a summary of Terra Property Trust’s net loan portfolio as of March 31, 2021 and December 31, 2020:
March 31, 2021
Fixed Rate
Floating
Rate
(1)(2)(3)
Total Gross LoansObligations under Participation Agreements and Secured BorrowingTotal Net Loans
Number of loans13 19 19 
Principal balance$57,040,923 $350,689,385 $407,730,308 $93,310,285 $314,420,023 
Amortized cost57,157,301 348,911,570 406,068,871 93,596,454 312,472,417 
Fair value57,099,978 346,367,302 403,467,280 91,599,071 311,868,209 
Weighted average coupon rate12.07 %7.66 %8.28 %9.97 %7.78 %
Weighted-average remaining
   term (years)
1.57 1.41 1.43 0.90 1.59 
25


December 31, 2020
Fixed Rate
Floating
Rate
(1)(2)(3)
Total Gross LoansObligations under Participation Agreements and Secured BorrowingTotal Net Loans
Number of loans14 20 20 
Principal balance$56,335,792 $367,838,966 $424,174,758 $89,548,151 $334,626,607 
Amortized cost56,464,310 365,816,205 422,280,515 89,769,560 332,510,955 
Fair value56,284,334 363,122,860 419,407,194 87,730,239 331,676,955 
Weighted average coupon rate12.17 %7.95 %8.51 %10.16 %8.07 %
Weighted-average remaining
   term (years)
1.78 1.44 1.48 1.08 1.59 
_______________
(1)These loans pay a coupon rate of London Interbank Offered Rate (LIBOR) plus a fixed spread. Coupon rate shown was determined using LIBOR of 0.11% and 0.14% as of March 31, 2021 and December 31, 2020.
(2)As of March 31, 2021 and December 31, 2020, amounts included $183.7 million and $184.2 million of senior mortgages used as collateral for $106.5 million and $107.6 million of borrowings under a term loan, respectively. As of March 31, 2021, amounts also included $11.9 million of senior mortgages used as collateral for $8.0 million of borrowings under a revolving line of credit. 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%.
(3)As of March 31, 2021 and December 31, 2020, eleven and twelve of these loans, respectively, are subject to a LIBOR floor.

    In addition to its net loan portfolio, as of March 31, 2021 and December 31, 2020, Terra Property Trust owned 4.9 acres of adjacent land acquired via deed in lieu of foreclosure and a multi-tenant office building acquired via foreclosure. The land and building and related lease intangible assets and liabilities had a net carrying value of $62.1 million and $62.9 million as of March 31, 2021 and December 31, 2020, respectively. The mortgage loan payable encumbering the office building had an outstanding principal amount of $40.6 million and $44.0 million as of March 31, 2021 and December 31, 2020, respectively.

Additionally, as of March 31, 2021 and December 31, 2020, Terra Property Trust owned 83.5% and 90.3%, respectively, of equity interest in a limited partnership that invests in performing and non-performing mortgages, loans, mezzanines and other credit instruments supported by underlying commercial real estate assets. As of March 31, 2021 and December 31, 2020, the equity interest had a carrying value of $50.5 million and $36.3 million, respectively.

Portfolio Investment Activity    
    
    For the three months ended March 31, 2021 and 2020, Terra Property Trust invested $15.5 million and $12.6 million in new investments and had $25.0 million and $10.0 million of repayments, resulting in net repayments of $9.4 million and net investments of $2.6 million, respectively. Amounts are net of obligations under participation agreements, secured borrowing, borrowings under the master repurchase agreement, the term loan and the revolving line of credit.

    In addition, in March 2020, Terra Property Trust issued 4,574,470.35 shares of common stock in exchange for the settlement of an aggregate of $49.8 million of participation interests in loans that it owned, cash of $25.5 million and other working capital. In connection with the transactions, the related participation obligations were settled.





26


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.
March 31, 2021December 31, 2020
Loan StructurePrincipal BalanceAmortized CostFair
Value
% of TotalPrincipal BalanceAmortized CostFair
Value
% of Total
First mortgages$212,718,851 $214,217,072 $214,067,237 48.8 %$209,660,270 $210,694,778 $210,517,299 47.9 %
Preferred equity
   investments
77,586,298 77,828,409 73,847,051 16.8 %101,019,788 101,267,732 97,472,723 22.2 %
Mezzanine loans24,114,874 24,441,714 23,953,921 5.5 %23,946,549 24,287,203 23,686,933 5.4 %
Allowance for loan
   losses
— (4,014,778)— — %— (3,738,758)— — %
Total loan
   investments
$314,420,023 312,472,417 311,868,209 71.1 %$334,626,607 332,510,955 331,676,955 75.5 %
Marketable
   securities
6,155,094 6,251,980 1.4 %1,176,006 1,287,500 0.3 %
Real estate owned62,114,581 70,717,229 16.1 %63,385,339 70,717,229 16.1 %
Equity investment
   in a limited
   partnership
50,505,511 49,919,016 11.4 %36,385,339 35,678,585 8.1 %
Total$431,247,603 $438,756,434 100.0 %$433,457,639 $439,360,269 100.0 %

March 31, 2021December 31, 2020
Property TypePrincipal BalanceAmortized CostFair
Value
% of TotalPrincipal BalanceAmortized CostFair
Value
% of Total
Office$150,129,899 $150,669,866 $149,342,121 34.1 %$145,560,299 $146,010,011 $144,654,237 32.9 %
Multifamily80,440,026 81,087,592 80,890,073 18.4 %103,057,678 103,678,464 103,502,170 23.5 %
Hotel - full/select
   service
47,112,522 47,704,223 47,502,136 10.8 %49,142,809 49,393,251 49,052,148 11.2 %
Mixed use16,512,842 16,512,842 13,817,239 3.1 %16,767,984 16,767,984 14,314,585 3.3 %
Industrial7,000,000 7,000,000 6,995,064 1.6 %7,000,000 7,000,000 7,007,397 1.6 %
Infill land5,974,734 6,030,824 6,042,260 1.4 %5,847,837 5,901,575 5,864,339 1.3 %
Hotel - extended
   stay
4,250,000 4,292,148 4,292,450 1.0 %4,250,000 4,294,053 4,293,969 1.0 %
Student housing3,000,000 3,189,700 2,986,866 0.7 %3,000,000 3,204,375 2,988,110 0.7 %
Allowance for loan
   losses
— (4,014,778)— — %— (3,738,758)— — %
Total loan
   investments
$314,420,023 312,472,417 311,868,209 71.1 %$334,626,607 332,510,955 331,676,955 75.5 %
Marketable
   securities
6,155,094 6,251,980 1.4 %1,176,006 $1,287,500 0.3 %
Real estate owned62,114,581 70,717,229 16.1 %63,385,339 70,717,229 16.1 %
Equity investment
   in a limited
   partnership
50,505,511 49,919,016 11.4 %36,385,339 35,678,585 8.1 %
Total$431,247,603 $438,756,434 100.0 %$433,457,639 $439,360,269 100.0 %
27


March 31, 2021December 31, 2020
Geographic LocationPrincipal BalanceAmortized CostFair
Value
% of TotalPrincipal BalanceAmortized CostFair
Value
% of Total
United States
California$121,331,368 $122,393,503 $122,372,064 28.0 %$143,454,602 $144,066,584 $143,989,756 32.9 %
Georgia74,957,483 75,352,520 75,236,254 17.1 %74,116,787 74,505,752 74,411,107 16.9 %
New York56,966,298 57,039,596 53,076,619 12.1 %56,058,669 56,139,234 52,378,785 11.9 %
North Carolina28,774,734 28,934,721 28,934,384 6.6 %28,647,837 28,802,869 28,734,218 6.5 %
Washington18,500,000 18,648,113 18,629,677 4.2 %18,500,000 18,643,699 18,634,464 4.2 %
Massachusetts7,000,000 7,000,000 6,995,064 1.6 %7,000,000 7,000,000 7,007,397 1.6 %
Texas3,890,140 3,929,042 3,637,281 0.8 %3,848,712 3,887,200 3,533,118 0.8 %
South Carolina3,000,000 3,189,700 2,986,866 0.7 %3,000,000 3,204,375 2,988,110 0.7 %
Allowance for loan
   losses
— (4,014,778)— — %— (3,738,758)— — %
Total loan
   investments
$314,420,023 312,472,417 311,868,209 71.1 %$334,626,607 332,510,955 331,676,955 75.5 %
Marketable
   securities
6,155,094 6,251,980 1.4 %1,176,006 1,287,500 0.3 %
Real estate owned62,114,581 70,717,229 16.1 %63,385,339 70,717,229 16.1 %
Equity investment
   in a limited
   partnership
50,505,511 49,919,016 11.4 %36,385,339 35,678,585 8.1 %
Total$431,247,603 $438,756,434 100.0 %1$433,457,639 $439,360,269 100.0 %

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.

    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.

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
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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.

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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. Market volatility has been particularly heightened due to the COVID-19 global pandemic. COVID-19 has disrupted economic activities and could have a continued significant adverse effect on economic and market conditions including limited lending from financial institutions, depressed asset values, and limited market liquidity.

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 three months ended March 31, 2021 and 2020:
Three Months Ended March 31,
20212020Change
Investment income
Dividend income$1,126,895 $1,264,438 $(137,543)
Other operating income20 144 (124)
Total investment income1,126,915 1,264,582 (137,667)
Operating expenses
Professional fees120,135 174,099 (53,964)
Other385 1,449 (1,064)
Total operating expenses120,520 175,548 (55,028)
Net investment income1,006,395 1,089,034 (82,639)
Net change in unrealized appreciation (depreciation) on investment492,466 (2,286,298)2,778,764 
Net increase (decrease) in members’ capital resulting from operations$1,498,861 $(1,197,264)$2,696,125 

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 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 March 31, 2021 and December 31, 2020, we indirectly beneficially owned 76.5% through Terra JV of the outstanding shares of common stock of Terra Property Trust.

    For the three months ended March 31, 2021 and 2020, we received distributions of $3.0 million and $7.8 million, or $0.20 and $0.53 per share, from Terra Property Trust, of which $1.1 million and $1.3 million was recorded as dividend income and $1.9 million and $6.6 million was recorded as return of capital, respectively.

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For the three months ended March 31, 2021 as compared to the same period in 2020, Terra Property Trust’s net income increased by $0.9 million, primarily due to equity income from Terra Property Trust’s equity investment in a limited partnership of $1.3 million and a decrease in provision for loan losses of $0.9 million, partially offset by a decrease in net interest income of $1.1 million as a result of a decrease in the weighted average interest rate on net investments driven by new loan originations having lower coupon rates than those of the loans that were repaid.

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 from a gross basis to a net basis for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31, 2021Three Months Ended March 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$408,985,092 8.4 %$388,164,960 9.5 %
Obligations under participation agreements
   and secured borrowing
(88,594,532)10.1 %(88,056,951)11.7 %
Repurchase agreement payable— %(94,465,741)4.0 %
Term loan payable(107,776,898)5.3 %— — %
Revolving line of credit(1,745,785)4.0 %— — %
Net loans (3)
$210,867,877 9.3 %$205,642,268 11.1 %
Senior loans
Gross loans255,124,6346.4 %189,925,0276.9 %
Obligations under participation agreements
   and secured borrowing
(45,478,823)8.6 %(17,680,599)10.6 %
Repurchase agreement payable— %(94,465,741)4.0 %
Term loan payable(107,776,898)5.3 %— — %
Revolving line of credit(1,745,785)4.0 %— — %
Net loans (3)
$100,123,128 6.6 %$77,778,687 9.7 %
Subordinated loans (4)
Gross loans153,860,45811.7 %198,239,93312.0 %
Obligations under participation agreements(43,115,709)11.6 %(70,376,352)12.0 %
Net loans (3)
$110,744,749 11.7 %$127,863,581 12.0 %
_______________
(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 three months ended March 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 three months ended March 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.

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Net Change in Unrealized Appreciation (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 three months ended March 31, 2021, we recorded an increase in unrealized appreciation on investment of $0.5 million, as a result of the recovery of the fair value of Terra Property Trust’s investments, compared to an increase in unrealized depreciation on investment of $2.3 million recorded for the same period in 2020, as a result of the widening credit spreads partially offset by decreases in underlying index rates due to the macro-economic conditions impacted by the COVID-19 pandemic.

Net Increase (Decrease) in Members’ Capital Resulting from Operations

    For the three months ended March 31, 2021, the net increase in members’ capital resulting from operations was $1.5 million, compared to the net decrease in members’ capital resulting from operations of $1.2 million for the same period in 2020.

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 and will depend upon, among other things, its actual results of operations and liquidity.

A total of $66.3 million of Terra Property Trust’s obligations under participation agreements 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 $53.4 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. Additionally, Terra Property Trust had $40.6 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%, that is collateralized by an office building. The mortgage loan payable matures on September 27, 2022. 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, 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 matures on March 14, 2025. As of March 31, 2021, the amount outstanding under the indenture and credit agreement was $106.5 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 matures on March 12, 2023 with an annual 12-month extension available at the Company’s option, which are subject to certain conditions. As of March 31, 2021, the Revolving Line of Credit had an outstanding balance of $8.0 million.

Cash Flows Provided by Operating Activities

2021 — For the three months ended March 31, 2021, cash flows provided by operating activities were $2.9 million, primarily due to $3.0 million of dividends received from Terra JV, of which $1.9 million was recorded as a return of capital.

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2020 For the three months ended March 31, 2020, cash flows provided by operating activities were $7.7 million, primarily due to $7.8 million of dividends received from Terra Property Trust, of which $6.6 million was recorded as a return of capital.

Cash Flows used in Financing Activities

2021 — For the three months ended March 31, 2021, cash flows used in financing activities were $3.0 million primarily related to distributions paid to members.

2020 For the three months ended March 31, 2020, cash flows used in financing activities was $7.5 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 (“U.S. GAAP”), 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
33


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.

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 our taxable income. We, 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 three months ended March 31, 2021 and 2020, none of our income was subject to the NYC UBT.

    We did not have any uncertain tax positions that met the recognition or measurement criteria of Accounting Standards Codification 740-10-25, Income Taxes, nor did we have any unrecognized tax benefits as of the periods presented herein. We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in our statements of operations. For the three months ended March 31, 2021 and 2020, we did not incur any interest or penalties. Although we file federal and state tax returns, our major tax jurisdiction is federal. Our 2015-2019 federal tax years remain subject to examination by the Internal Revenue Service.

Contractual Obligations of Terra Property Trust

    The following table provides a summary of Terra Property Trust’s contractual obligations at March 31, 2021:
TotalLess than
1 year
1-3 years3-5 yearsMore than 5 years
Obligations under participation
   agreements — principal (1)
$71,276,756 $66,276,756 $5,000,000 $— $— 
Secured borrowing — principal (1)
22,033,529 — 22,033,529 — — 
Mortgage loan payable — principal (2)
40,596,980 801,547 39,795,433 — — 
Term loan payable — principal (3)
106,454,107 — 44,614,424 61,839,683 — 
Revolving Line of Credit payable —
   principal (4)
8,030,611 — 8,030,611 — — 
Interest on borrowings (5)
33,582,806 15,913,261 15,171,799 2,497,746 — 
Unfunded lending commitments (6)
55,545,829 53,402,223 2,143,606 — — 
Ground lease commitment (7)
82,877,438 1,264,500 2,529,000 2,529,000 76,554,938 
$420,398,056 $137,658,287 $139,318,402 $66,866,429 $76,554,938 
___________________________
(1)In the normal course of business, Terra Property Trust enters into participation agreements with related parties, and to a lesser extent, unrelated parties, whereby Terra Property Trust transfers a portion of the loans to them. Additionally, Terra Property Trust may sell a portion of a loan to a third-party. These loan participations and sale do not qualify for sale treatment. As such, the loans remain on Terra Property Trust’s consolidated balance sheets and the proceeds are recorded as obligations under participation agreements or secured borrowing, as applicable. Similarly, interest earned on the entire loan balance is recorded within “Interest income” and the interest related to the participation interest or sold interest is recorded within “Interest expense on obligations under participation agreements” or “Interest expense on secured borrowing”, as applicable, in the consolidated statements of operations. Terra Property Trust has no direct liability to a participant under its participation agreements with respect to the underlying loan, and the participants’ share of the loan is repayable only from the proceeds received from the related borrower/issuer of the loans.
(2)Amount excludes unamortized origination and exit fees of $0.1 million.
(3)Amount excludes unamortized deferred financing costs of $2.2 million.
(4)Amount excludes unamortized deferred financing costs of $0.6 million.
(5)Interest was calculated using the applicable annual variable interest rate and balance outstanding at March 31, 2021. Amount represents interest expense through maturity plus exit fee as applicable.
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(6)Certain of Terra Property Trust’s loans provide for a commitment to fund the borrower at a future date. As of March 31, 2021, Terra Property Trust had seven of such loans with total funding commitments of $256.0 million, of which $200.5 million had been funded.
(7)Represents rental obligation under the ground lease, inclusive of imputed interest, for Terra Property Trust’s office building that it acquired through foreclosure.

The table above does not include Terra Property Trust’s commitment under a subscription agreement with Mavik RESOF to fund up to $50.0 million to purchase the limited partnership interests in Mavik RESOF as the subscription agreement does not have fixed or determinable payments. As of March 31, 2021, the unfunded commitment was $1.3 million.

Management Agreement with Terra REIT Advisors

    Terra Property Trust currently pays the following fees to Terra REIT Advisors pursuant to 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, Terra REIT Advisors 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, Terra REIT Advisors 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 Terra REIT Advisors with respect to its evaluation and pursuit of such transactions.

    In addition to the fees described above, Terra Property Trust reimburses Terra REIT Advisors for operating expenses incurred in connection with services provided to the operations of Terra Property Trust, including Terra Property Trust’s allocable share of Terra REIT Advisors’ 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 Terra REIT Advisors and Terra REIT Advisors in the aggregate in connection with providing services to Terra Property Trust:
Three Months Ended March 31,
20212020
Origination and extension fee expense (1)
$345,384 $437,617 
Asset management fee1,156,543 1,029,533 
Asset servicing fee273,207 234,208 
Operating expenses reimbursed to Manager1,342,758 1,367,189 
Disposition fee (2)
250,988 75,520 
Total$3,368,880 $3,144,067 
_______________
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(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)Disposition fee is generally offset with exit fee income and included in interest income on the consolidated statements of operations.

Off-Balance Sheet Arrangements

Other than contractual commitments and other legal contingencies incurred in the normal course of our business, we do not have any off-balance sheet financings or liabilities.

Item 3. 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 March 31, 2021, Terra Property Trust had 13 investments with an aggregate principal balance of $271.4 million, net of obligations under participation agreements, that provide for interest income at an annual rate of LIBOR plus a spread, 11 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 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 $0.8 million.

    Additionally, Terra Property Trust had $40.6 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%, that is collateralized by an office building; and $106.5 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 $183.7 million of first mortgages. A decrease of 100 basis points in LIBOR had no impact on Terra Property Trust’s total annual interest expense because the debts are protected by LIBOR floors and an increase of 100 basis points in LIBOR would increase Terra Property Trust’s annual interest expense by approximately $0.1 million.

    At the end of 2021, banks will no longer be required to report information that is used to determine LIBOR. As a result, LIBOR could be discontinued. The Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions convened by the U.S. Federal Reserve, has recommended Secured Overnight Financing Rate (“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 three months ended March 31, 2021 and 2020, we did not engage in interest rate hedging activities.

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In addition, we may have risks regarding portfolio valuation. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Fair Value Measurements” in this quarterly report on Form 10-Q.

Item 4. 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 March 31, 2021. 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.
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.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.
Neither we, Terra Property Trust, Terra JV nor our Manager is currently subject to any material legal proceedings, nor, to our knowledge, are material legal proceedings threatened against us, Terra Property Trust, Terra JV or our Manager. From time to time, we, Terra Property Trust, Terra JV 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 1A. Risk Factors.
There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.

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Item 6.  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 
2.6 
2.7
3.1 
31.1*
31.2*
32**
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**XBRL Taxonomy Extension Schema Document
101.CAL**XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**XBRL Taxonomy Extension Label Linkbase Document
101.PRE**XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File Included as Exhibit 101 (embedded within the Inline XBRL document)
_______________
* Filed herewith.
** Furnished herewith.
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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: May 13, 2021
 TERRA SECURED INCOME FUND 5, LLC
   
 By:/s/ Vikram S. Uppal
  Vikram S. Uppal
  Chief Executive 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.


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