Item 9A. Controls and Procedures
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of John L. Villano, our chief executive and interim chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2023 (the “Evaluation Date”). Based upon that evaluation, Mr. Villano concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) are recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) are accumulated and communicated to our management, including our chief executive and interim chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the SEC, internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of John L. Villano, our principal executive and principal accounting officer, and effected by the Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting is supported by written policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Our internal control system was designed to provide reasonable assurances to our management and the Board regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations which may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2023. In making this assessment, management used the framework set forth in the report entitled Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO (the “COSO Framework”). The COSO Framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2023 .
This Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Report.
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Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) identified in connection with the evaluation required by Rules 13a-15(d) or 15d-15(d) that occurred during the fiscal quarter ended December 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
N o n e .
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Our directors are elected annually by our shareholders and serve for one-year terms until his/her successor is elected and qualified or until such director’s earlier death, resignation or removal. The executive officers are appointed by and serve at the pleasure of the Board.
Our executive officers and directors, and their respective ages as of March 29, 2024, are as follows:
Name
Age
Position
John L. Villano
63
Chairman of the Board, Chief Executive Officer, President and interim Chief Financial Officer
Leslie Bernhard (1, 2)
80
Director
Arthur L. Goldberg (1, 3)
85
Director
Brian A. Prinz (1, 4)
71
Director
(1) Member of the Audit, Compensation and Nominating and Corporate Governance Committees.
(2) Chair of the Compensation Committee.
(3) Chair of the Audit Committee.
(4) Chair of the Nominating and Corporate Governance Committee.
Set forth below is a brief description of the background and business experience of our executive officers and directors:
John L. Villano is Chairman of the Board, Chief Executive Officer, President and Interim Chief Financial Officer. Mr. Villano is one of our founders. Mr. Villano was appointed as a director and Chairman of the Board, Co-Chief Executive Officer, Chief Financial Officer and Secretary in February 2017, immediately prior to our initial public offering. In November 2019, upon the resignation of his brother, Jeffrey C. Villano, he became our sole Chief Executive Officer and was appointed Treasurer in addition to his then current positions with the Company and resigned as Secretary. Mr. Villano served as our Chief Financial Officer until August 2022, when we hired John E. Warch, and as our Treasurer until July 2022. He was appointed as our Interim Chief Financial Officer in May 2023 upon the departure of Mr. Warch, our then Chief Financial Officer. Mr. Villano has been designated as our principal executive officer and principal accounting officer. Mr. Villano is a certified public accountant and was engaged in the private practice of accounting and auditing for almost 30 years. His responsibilities include overseeing all aspects of our business operations, including loan origination and servicing, investor relations, brand development and business development. He is also responsible for all our accounting and financial matters. Mr. Villano holds a bachelor’s degree in accounting from the University of Rhode Island in 1982. We believe that Mr. Villano’s experience in managing our business since its inception and his professional background as a certified public accountant make him an important part of our management team and make him a worthy candidate to serve on the Board.
Leslie Bernhard was appointed as a director in February 2017 immediately prior to the consummation of our initial public offering. In February 2024, she also joined the board of directors of Sharplink Gaming Inc. (NASDAQ: SBET), an online technology company, as a director. In addition, since November 2023, she has been serving as the chairman of the board of Nexalin Technology, Inc. (NASDAQ: NXL), a company that designs and develops medical devices that utilizes bioelectronic medical technology. Prior to that, she served as an independent director of Milestone Scientific Inc. (NYSE American: MLSS), a developer and manufacturer of medical and dental devices, from May 2003 until January 4, 2023 and as the non-executive chairman of the Milestone board of directors from October 2009 through January 4, 2023. She also served as interim chief executive officer of Milestone from October 2017 to December 2017. From 2007 through September 2018, Ms. Bernhard served as an independent director of Universal Power Group, Inc., a global supplier of power solutions (“UPG”), and as a consultant to UPG from September 2018 to December 2020. In 1986, Ms. Bernhard co-founded AdStar, Inc., an electronic ad intake service to the newspaper industry, and served as its president, chief executive officer and executive director until 2012. Ms. Bernhard holds a BS Degree in Education from St. John’s University. We believe that Ms. Bernhard’s experience as an entrepreneur and her service as a director of other public corporations will enable her to make an important contribution to the Board.
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Arthur L. Goldberg was appointed as a director in February 2017 immediately prior to the consummation of our initial public offering. He has been a private accounting and business consultant since April 2012. From March 2011 through June 2015, he served as a director of Sport Haley Holdings, Inc., a manufacturer and distributor of sportswear and furniture. From January 2008 through March 2013, he served as a member of the board of directors of SED International Holdings, Inc. (OTC: SEDN), a distributor of consumer electronics. From January 2008 through March 2012, he served as the chief financial officer of Clear Skies Solar, Inc., an installer of solar panels. Mr. Goldberg has held senior executive positions, including chief financial officer and chief operating officer, and served as a director of several public companies. From January 2008 through June 2008, he served as the chief financial officer of Milestone Scientific, Inc. (NYSE American: MLSS), a developer and manufacturer of medical and dental devices. From June 1999 through April 2005, Mr. Goldberg was a partner with Tatum CFO Partners, LLP, which provided interim CFO staffing services for public and private companies. Mr. Goldberg is an attorney and a certified public accountant and holds a B.B.A. degree from the City College of New York, an M.B.A. from the University of Chicago and J.D. and LLM degrees from the New York University School of Law. Mr. Goldberg was selected as a director because of his experience as the senior executive, operations and financial officer of several public companies and because of his background in law and accounting. We believe that his background and experience will provide the Board with a perspective on corporate finance matters. Given his financial experience, the Board has also determined that Mr. Goldberg qualifies as the Audit Committee financial expert, pursuant to Item 407(d)(5) of Regulation S-K promulgated by the U.S. Securities and Exchange Commission (the “SEC”).
Brian A. Prinz was appointed as a director in February 2017 immediately prior to the consummation of our initial public offering. Since 1976, Mr. Prinz has been employed by Current, Inc., a leading manufacturer of laminated products including sheeting, tubes, rods, spacers and standoffs, as well as electrical grade laminates, a variety of carbon fiber products and other industrial products, which are used in various industries including construction, recreation, energy exploration and defense. Since 2011, Mr. Prinz has served as its president and chief financial officer. Mr. Prinz graduated from Bryant College with a B.A. in 1976. We believe that his background and experience make him well qualified to serve as a member of the Board.
Director Independence and Committees of the Board of Directors
The members of the Board are John L. Villano, Leslie Bernhard, Arthur Goldberg and Brian Prinz. The Board has determined, in accordance with the NYSE American LLC Company Guide, that: (i) Ms. Bernhard and Messrs. Goldberg and Prinz are independent and represent a majority of the directors; and (ii) Ms. Bernhard and Messrs. Goldberg and Prinz, as the members of the Audit Committee, the Nominating and Corporate Governance and Compensation Committee, are independent for such purposes. In determining director independence, the Board applies the independence standards set by NYSE American. In applying these standards, the Board considers all transactions with the independent directors and the impact of such transactions, if any, on any of the independent directors’ ability to continue to serve on the Board.
We have three standing committees: an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. Each committee is made up entirely of independent directors as defined under the NYSE American LLC Company Guide. Mr. Goldberg is the chairman of the Audit Committee and qualifies as the “audit committee financial expert” pursuant to Item 407(d)(5) of Regulation S-K; Ms. Bernhard is the chairman of the Compensation Committee; and Mr. Prinz is the chairman of the Nominating and Corporate Governance Committee. As members of the committees, independent directors meet without the presence of non-independent directors in executive session.
Audit Committee. The Audit Committee oversees our accounting and financial reporting processes, internal systems of accounting and financial controls, relationships with auditors and audits of financial statements. Specifically, the Audit Committee’s responsibilities include the following:
● selecting, hiring and terminating our independent auditors;
● evaluating the qualifications, independence and performance of our independent auditors;
● approving the audit and non-audit services to be performed by the independent auditors;
● reviewing the design, implementation and adequacy and effectiveness of our internal controls and critical policies;
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● overseeing and monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to our financial statements and other accounting matters;
● with management and our independent auditors, reviewing any earnings announcements and other public announcements regarding our results of operations; and
● preparing the report that the SEC requires in our annual proxy statement.
Compensation Committee. The Compensation Committee assists the Board in determining the compensation of our officers and directors. The Compensation Committee is comprised entirely of directors who satisfy the standards of independence applicable to compensation committee members established under 162(m) of the Code and Section 16(b) of the Exchange Act. Specific responsibilities include the following:
● approving the compensation and benefits of our executive officers;
● reviewing the performance objectives and actual performance of our officers; and
● administering our stock option and other equity and incentive compensation plans.
Nominating and Corporate Governance Committee. The Corporate Governance and Nominating Committee assists the Board by identifying and recommending individuals qualified to become members of the Board. Specific responsibilities include the following:
● evaluating the composition, size and governance of the Board and its committees and making recommendations regarding future planning and the appointment of directors to our committees;
● establishing a policy for considering shareholder nominees to the Board;
● reviewing our corporate governance principles and making recommendations to the Board regarding possible changes; and
● reviewing and monitoring compliance with our Code of Ethics and insider trading policy.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than ten percent (10%) shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.
To the best of our knowledge, based solely on review of the copies of such forms furnished to us, or written representations that no other forms were required, we believe that all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% shareholders were complied with during the year ended December 31, 2023 except as set forth below.
Delinquent Section 16(a) Reports
None.
Code of Ethics
We have adopted a code of ethics that applies to our directors, principal executive officer, principal financial officer and other persons performing similar functions. The Code of Ethics is posted on our web site at www.sachemcapitalcorp.com . We will also provide a copy of the Code of Ethics to any person without charge, upon written request addressed to John L. Villano at our principal executive office located at 568 East Main Street, Branford, CT 06405.
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Item 11. Executive Compensation.
The following Summary Compensation Table sets forth all compensation earned by or paid to, in all capacities, during the years ended December 31, 2023 and 2022 to John L. Villano. Other than Mr. Villano, no one else qualified as a “Named Executive Officer” as defined in Item 402(a)(3) of Regulation S-K.:
Summary Compensation Table
Stock
All Other
Name and Principal Position
Year
Salary
Bonus
Awards (1)
Compensation
Total
($)
($)
($)
($)
($)
John L. Villano
Chairman of the Board, Chief Executive Officer, President, interim Chief Financial Officer and Director
2023
$
750,000
$
337,500
$
506,544
(2)
$
114,392
(4)
$
1,708,436
2022
$
750,000
$
250,000
$
500,000
(3)
$
24,990
$
1,524,990
(1) Represents the aggregate grant-date fair value of the awards computed in accordance with Financial Accounting Standards Board Accounting Standards Codified Topic 718 (“FASB ASC Topic 718”).
(2) Represents the grant-date fair value on an aggregate of 130,890 Common Shares awarded on February 17, 2023, computed in accordance with FASB ASC Topic 718.
(3) Represents the grant-date fair value on an aggregate of 98,425 Common Shares awarded on April 5, 2022, computed in accordance with FASB ASC Topic 718.
(4) Represents an auto allowance of $26,000 per annum and a one-time payment by the Company, in the amount of $88,392, to cover the estimated tax liability for the 2023 Stock Award.
Employment Agreements — John L. Villano
In August 2016, in anticipation of our initial public offering, we entered into an employment agreement with John L. Villano. The material terms of Mr. Villano’s employment agreement are as follows.
● Mr. Villano serves as our chairman, chief executive officer, president and interim chief financial officer.
● The term of his employment, which commenced in February 2017, is five years, unless terminated earlier in accordance with his employment agreement. The termination date is extended one year on each anniversary date of the agreement unless either party to the agreement provides written notice at least 180 days before the next anniversary date that it is electing not to renew the agreement, in which case the agreement will terminate at the end of the fourth year from the next anniversary date.
● As of April 2021, Mr. Villano’s base salary was $500,000 per annum. In addition, for the year ended December 31, 2021, he was entitled to a one-time cash bonus of $250,000, which was paid in 2021. He was also entitled to a “target bonus” of up to $250,000, as determined by the Compensation Committee, which would have been payable in 2022. Mr. Villano waived his right to receive the target bonus.
● In April 2022, Mr. Villano’s base salary was increased to $750,000 per annum, retroactive to January 1, 2022.
● Mr. Villano is entitled to incentive compensation in such amount as shall be determined by the Compensation Committee of the Board in its sole and absolute discretion, based on our achievement of the financial performance goals set by the Board of directors and capital transactions.
● Mr. Villano has the right to participate in all retirement, pension, deferred compensation, insurance and other benefit plans adopted and maintained by us for the benefit of employees and be entitled to additional compensation in an amount equal to the cost of any such benefit plan or program if he chooses not to participate.
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● Mr. Villano is indemnified to the full extent permitted by law against and for any claims, liabilities, losses, expenses and costs incurred that relate to any acts or omission taken in his capacity as an officer or director.
● We have the right to terminate the employment agreement at any time with or without cause and for death or disability (as defined in the employment agreement). See below for the payments due upon a termination.
● Mr. Villano is subject to a two-year non-competition provision if we terminate the employment agreement for cause.
● In the event any payment to the employee is subject to an excise tax under the Code, we are obligated to pay Mr. Villano an additional amount equal to the amount of the excise tax and any other taxes (whether in the nature of excise taxes or income taxes) due with respect to such payment.
In April 2021, Mr. Villano received a grant of 89,928 restricted Common Shares (based on the closing price of $5.56 per Common Share on April 8, 2021) vesting in three equal installments on each of January 1, 2022, 2023 and 2024, which are subject to forfeiture, to the extent unvested, if he voluntary resigns as an employee of the Company without “Good Reason” or if his employment is terminated for “Cause.”
In April 2022, Mr. Villano received a grant of 98,425 restricted Common Shares (based on the closing price of $5.08 per Common Share on April 5, 2022) vesting in three equal installments on each of January 1, 2023, 2024 and 2025, which are subject to forfeiture under the same terms and conditions as the 2021 grant.
In February 2023, Mr. Villano received a grant of 130,890 restricted Common Shares (based on the closing price of $3.82 per Common Share on February 16, 2023) vesting in three equal installments on each of January 1, 2024, 2025 and 2026, which are subject to forfeiture under the same terms and conditions as the 2021 grant.
In March 2024, Mr. Villano received a grant of 111,857 restricted Common Shares (based on the closing price of $4.53 per Common Share on March 19, 2024) vesting in three equal installments on each of January 1, 2025, 2026, and 2027, which are subject to forfeiture under the same terms and conditions as the 2021 grant.
For the year ended December 31, 2022, Mr. Villano was entitled to a “target bonus” of $250,000 as determined by the Compensation Committee, which was paid in March 2023. In addition, for 2023, he was entitled to a “target bonus” of $375,000. The Compensation Committee approved a bonus of $337,500 which is payable in 2024.
Termination and Change of Control Arrangement
Mr. Villano’s employment agreement provides that we may terminate his employment at any time with or without cause. It also provides that his employment will terminate upon his death or disability. If we terminate his employment for cause, we are only liable for his base salary and benefits through the date of termination. In addition, he will not forfeit any rights to payments, options or benefits that have vested or have been earned or to which he is entitled as of the date of termination. If we terminate his employment without cause or the agreement terminates due to Mr. Villano’s death or disability or if Mr. Villano terminates his employment for “Good Reason” (as defined in the employment agreement), he is also entitled to receive: (i) a lump sum payment equal to 48 times his monthly salary on the date of termination; (ii) any deferred compensation or accrued vacation pay; (iii) continuation for a 12-month period after termination of health and welfare and long-term disability benefits; and (iv) a pro rata share of any incentive compensation and any other compensation or benefits to which he would have been entitled had he not been wrongfully terminated.
Good Reason includes a “change in control” with respect to us. A “change in control” means (1) if we merge into another corporation and, as a result of such merger, our shareholders immediately prior to such merger own less than 50% of the surviving corporation; (2) we sell, lease or otherwise dispose of all or substantially all of our assets; (3) the acquisition of beneficial ownership, directly or indirectly, of our Common Shares or any other securities having voting rights that we may issue in the future, rights to acquire our voting securities (including, without limitation, securities that are convertible into voting securities and rights, options warrants and other agreements or arrangements to acquire such voting securities) by any person, corporation or other entity or group thereof acting jointly, in such amount or amounts as would permit such person, corporation or other entity or group thereof acting jointly to elect a majority of the members of the Board, as then constituted; or (4) the acquisition of beneficial ownership, directly or indirectly, of voting securities and rights to acquire voting securities having voting power equal to 40% or more of the combined voting power of our then outstanding voting securities by any person, corporation or other entity or group thereof acting jointly unless such acquisition is expressly approved by resolution of the Board passed upon affirmative vote of not less than a majority of the
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directors and adopted at a meeting of the Board held not later than the date of the next regularly scheduled or special meeting held following the date we obtain actual knowledge of such acquisition (which approval may be limited in purpose and effect solely to affecting the rights of the executive under his employment agreement). Notwithstanding the preceding sentence, any transaction that involves a mere change in identity form or place of organization within the meaning of Section 368(a)(1)(F) of the Code, or a transaction of similar effect, will not constitute a “change in control.”
Outstanding Equity Awards at December 31, 2023
The following table sets forth information concerning outstanding equity awards to the Named Executives as of December 31, 2023.
Stock Awards
Number of shares or units of
Market value of shares or
stock that have not vested
units of stock that have not vested
Name
(#)
($) (1)
John L. Villano
226,483
(2)
$
847,046
(1) Calculated based on the closing market price of $3.74 on December 29, 2023.
(2) 106,414 of these restricted Common Shares vest on January 1, 2024, 76,439 of these restricted Common Shares vest on January 1, 2025 and 43,630 of these restricted Common Shares vest on January 1, 2026. Unvested shares may not be transferred, sold, pledged, hypothecated or assigned, and are subject to forfeiture.
Compensation of Directors
Our non-employee director compensation plan, as amended on April 8, 2021 and retroactively effective as of January 1, 2021 (the “Director Plan”), provides as follows:
● each non-employee director will receive cash compensation at a rate of $60,000 per year, which amount shall be paid in equal quarterly installments of $15,000 on the first day of each calendar quarter ( i.e., January 1, April 1, July 1 and October 1);
● the additional cash compensation payable to the chairperson of each of the Audit Committee, the Compensation Committee and the Corporate Governance and Nominating Committee will remain unchanged as follows:
● the chairperson of the Audit Committee will receive additional cash compensation of $7,500 per year, payable in equal quarterly installments of $1,875 on the first day of each calendar quarter ( i.e., January 1, April 1, July 1 and October 1);
● the chairperson of the Compensation Committee will receive additional cash compensation of $5,000 per year, payable in equal quarterly installments of $1,250 on the first day of each calendar quarter ( i.e., January 1, April 1, July 1 and October 1);
● the chairperson of the Corporate Governance and Nominating Committee will receive additional cash compensation of $2,500 per year, payable in equal quarterly installments of $625 on the first day of each calendar quarter ( i.e., January 1, April 1, July 1 and October 1);
● each non-employee director will receive a grant of 5,000 Common Shares on the date he or she is re-elected to serve on the Board; and
● the non-employee director serving on our Loan Approval Committee will receive additional cash compensation of $7,500 per year, payable in equal quarterly installments of $1,875 on the first day of each calendar quarter ( i.e., January 1, April 1, July 1 and October 1).
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The Named Executives, who are also directors, do not receive additional compensation in connection with their positions as members of the Board.
The following table provides compensation information for the year ended December 31, 2023 for each of our non-employee directors.
Fees Earned or Paid
in Cash
Stock Awards
Total
Name
($) (1)
($) (2)
($)
Leslie Bernhard
$
95,000
$
21,240
$
116,240
Arthur L. Goldberg
$
97,500
$
21,240
$
118,740
Brian A. Prinz
$
100,000
$
21,240
$
121,240
(1) During the year ended December 31, 2023, each of Ms. Bernhard and Messrs. Goldberg and Prinz was awarded a bonus of $30,000, which is included in their respective amount.
(2) During the year ended December 31, 2023, under the Director Plan, each of Ms. Bernhard and Messrs. Goldberg and Prinz was awarded an aggregate of 6,000 Common Shares, respectively. The dollar amounts reflected in the table are the aggregate grant date fair value for the Common Shares awarded computed in accordance with FASB ASC Topic 718.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The following table, together with the accompanying footnotes, sets forth information, as of March 28, 2024, regarding stock ownership of all persons known by us to own beneficially more than 5% of our outstanding Common Shares, Named Executives, all directors, and all directors and officers of Sachem Capital as a group:
Number of Common
Shares Beneficially
Percentage of
Name of Beneficial Owner (1)
Owned (2)
Class (3)
Executive Officers and Directors
John L. Villano (4)
1,678,496
3.54
%
Leslie Bernhard (5)
8,250
*
Arthur L. Goldberg (5)
36,628
*
Brian A. Prinz (5)
381,118
*
All officers and directors as a group (4 persons)
2,104,492
4.44
%
*Less than 1%.
(1) Unless otherwise provided, the address of each of the individuals above is c/o Sachem Capital Corp., 568 East Main Street, Branford, CT 06405.
(2) A person is deemed to be a beneficial owner of securities that can be acquired by such person within 60 days upon the exercise of options and warrants or conversion of convertible securities. Each beneficial owner’s percentage ownership is determined by assuming that options, warrants and convertible securities that are held by such person (but not held by any other person) and that are exercisable or convertible within 60 days have been exercised or converted. Except as otherwise indicated, and subject to applicable community property and similar laws, each of the persons named has sole voting and investment power with respect to the shares shown as beneficially owned.
(3) All percentages are determined based on 47,446,051 Common Shares outstanding as of March 28, 2024.
(4) Includes 231,926 restricted Common Shares which are subject to vesting including: (i) 113,725 shares vest on January 1, 2025; (ii) 80,916 shares vest on January 1, 2026; and 37,285 shares vest on January 1, 2027. Also includes 6,827 Common Shares owned by Mr. Villano’s wife. Mr. Villano disclaims ownership of the 6,827 Common Shares owned by his wife for the purposes of section 13(d) or 13(g) of the Exchange Act.
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(5) Includes 8,250 restricted Common Shares that vest as follows: (i) 1,500 shares vest on each of September 7, 2024, 2025 and 2026; (ii) 2,500 shares vest on October 13, 2024; and (iii) 1,250 shares vest on October 13, 2025.
Equity Compensation Plan Information
On October 27, 2016, we adopted the 2016 Equity Compensation Plan (the “Plan), the purpose of which is to align the interests of our officers, other employees, advisors and consultants or any subsidiary, if any, with those of our shareholders and to afford an incentive to such officers, employees, consultants and advisors to continue as such, to increase their efforts on our behalf and to promote the success of our business. The basis of participation in the Plan is upon discretionary grants of awards by the Board. The Plan is administered by the Compensation Committee. The maximum number of Common Shares reserved for the grant of awards under the Plan is 1,500,000, subject to adjustment as provided in Section 5 of the Plan. Approximately 35 individuals are eligible to participate in the Plan including, our executive officer, 31 other employees and our three independent directors.
Number of securities
remaining available for
Number of securities
Weighted-average
future issuance under
to be issued upon
exercise price of
equity compensation
exercise of
outstanding
plans (excluding
outstanding options,
options, warrants
securities reflected in
Plan category
warrants and rights
and rights
column (a)
(a)
(b)
(c)
Equity compensation plans approved by security holders
—
Not applicable
988,785
Total
—
Not applicable
988,785
During the fiscal year ended December 31, 2023, we granted an aggregate of 196,056 restricted Common Shares under the Plan.
Types and Terms of Awards
Awards under the Plan may take the form of stock options (either incentive stock options or non- qualified stock options) or restricted shares. Subject to restrictions that are set forth in the Plan, the Compensation Committee has complete and absolute authority to set the terms, conditions and provisions of each award, including the size of the award, the exercise or base price, the vesting and exercisability schedule (including provisions regarding acceleration of vesting and exercisability) and termination and forfeiture provisions.
The Compensation Committee is subject to the following specific restrictions regarding the types and terms of awards:
● The exercise price for a stock option may not be less than 100% of the fair market value of the stock on the date of grant.
● No award may be granted after the expiration of the Plan (more than ten years after the Plan adoption date).
No stock option can be “repriced” without the consent of the shareholders and of the option holder if the effect would be to reduce the exercise price per share.
Amendment and Termination of the Plan
The Plan expires on the tenth anniversary of the date of its adoption by the Board. Prior to the expiration date, the board of directors may at any time, and from time to time, suspend or terminate the Plan in whole or in part or amend it from time to time; provided, however, that unless otherwise determined by the Board, an amendment that requires shareholder approval in order for the Plan to continue to comply with Section 162(m) or any other law, regulation or stock exchange requirement shall not be effective unless approved by the requisite vote of shareholders. Notwithstanding the foregoing, no amendment to or termination of the Plan shall affect adversely any of the rights of any grantee under any outstanding award granted under the Plan without such grantee’s consent.
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Exercise Price of an Option Granted Under the Plan
The exercise price of an option granted under the Plan may be no less than the fair market value of a common share on the date of grant, unless, with respect to nonqualified stock options that are not intended as incentive stock options within the meaning of Section 422 of the Code from time to time, otherwise determined by the Compensation Committee. However, incentive stock options granted to a ten percent (10%) shareholder must be priced at no less than 110% of the fair market value of our Common Shares on the date of grant and their term may not exceed five years. All options granted under the Plan are for a term of no longer than ten years unless otherwise determined by the Compensation Committee. The Compensation Committee also determines the exercise schedule of each option grant.
Federal Income Tax Consequences
The following is a summary of the effect of federal income taxation upon the recipients and us with respect to the shares under the Plan and does not purport to be complete.
Non-qualified Stock Options. The grant of non-qualified stock options will have no immediate tax consequences to us or the grantee. The exercise of a non-qualified stock option will require a grantee to include in his gross income the amount by which the fair market value of the acquired shares on the exercise date (or the date on which any substantial risk of forfeiture lapses) exceeds the option price. Upon a subsequent sale or taxable exchange of the shares acquired upon exercise of a non-qualified stock option, a grantee will recognize long or short-term capital gain or loss equal to the difference between the amount realized on the sale and the tax basis of such shares. We will be entitled (provided applicable withholding requirements are met) to a deduction for Federal income tax purposes at the same time and in the same amount as the grantee is in receipt of income in connection with the exercise of a non-qualified stock option.
Incentive Stock Options. The grant of an incentive stock option will have no immediate tax consequences to us or our employee. If the employee exercises an incentive stock option and does not dispose of the acquired shares within two years after the grant of the incentive stock option nor within one year after the date of the transfer of such shares to him (a “disqualifying disposition”), he will realize no compensation income and any gain or loss that he realizes on a subsequent disposition of such shares will be treated as a long-term capital gain or loss. For purposes of calculating the employee’s alternative minimum taxable income, however, the option will be taxed as if it were a non-qualified stock option.
Restricted Shares. Generally, unless the participant elects, pursuant to Section 83(b) of the Code to recognize income in the taxable year in which restricted shares have been awarded, the participant is required to recognize income for federal income tax purposes in the first taxable year during which the participant’s rights over the restricted shares are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier. At such time, we will be entitled (provided applicable withholding requirements are met) to a deduction for Federal income tax purposes except to the extent that such participant’s total compensation for the taxable year exceeds $1.0 million, in which case such deduction may be limited by Section 162(m) of the Code unless any such grant of restricted shares is made pursuant to a performance-based benchmark established by the Compensation Committee.
As of December 31, 2023, there were no options granted under the Plan.
Item 13. Certain Relationships and Related Transactions and Director Independence.
We have adopted a policy that prohibits any transaction between us and a related party unless the terms of that transaction are no less favorable to us than if we had entered into the same transaction with an unrelated party and the transaction is approved by our Audit Committee or other independent committee of the board of directors, in the case where it is inappropriate for our Audit Committee to review such a transaction due to a conflict of interest.
During the years ended December 31, 2023 and 2022: (i) the wife of our chief executive officer was paid $-0- and $63,168, respectively, for accounting and financial reporting services provided to us. She retired in the third quarter of 2022; and (ii) the daughter of our chief executive officer was paid $192,346 and $141,652, respectively, for internal audit and compliance services provided to us.
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Item 14. Principal Accounting Fees and Services
The aggregate fees billed by Hoberman & Lesser, CPA’s, LLP , our principal accounting firm, for the fiscal years ended December 31, 2023 and 2022, are set forth below.
2023
2022
Audit fees
$
232,250
$
257,500
All other fees
—
—
Total fees
$
232,250
$
257,500
● In 2023, the audit fees include fees for professional services rendered for (i) the review of our quarterly financial statements and (ii) other services that are normally provided in connection with statutory and regulatory filings.
● In 2022, the audit fees include fees for professional services rendered for (i) the review of our quarterly financial statements, (ii) the review of our shelf registration statement (File No. 333-262859) on Form S-3 under the Securities Act of 1933, as amended, which was declared effective by the SEC on February 25, 2022, (iii) the review of four separate prospectus supplements to the aforementioned shelf registration statement on Form S-3 and (iv) other services that are normally provided in connection with statutory and regulatory filings.
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee charter provides that the Audit Committee will pre-approve audit services and non- audit services to be provided by the independent auditors before the accountant is engaged to render these services. The Audit Committee may consult with management in the decision-making process but may not delegate this authority to management. The Audit Committee may delegate its authority to preapprove services to one or more committee members, provided that the designees present the pre-approvals to the full committee at the next committee meeting. All audit and non-audit services performed by the independent accountants must be pre-approved by the Audit Committee to assure that such services do not impair the auditors’ independence from us.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)
1.
Financial Statements — See Index to Financial Statements on page F-1.
2.
Financial Statement Schedules — See (c) below.
3.
Exhibits — See (b) below.
(b)
Certain of the following exhibits were filed as Exhibits to the registration statement on Form S-11 , Registration No. 333-214323 and amendments thereto (the “Registration Statement”) filed by us under the Securities Act and are hereby incorporated by reference.
Exhibit
No.
Description
2.1
Form of Amended and Restated Exchange Agreement(1)
3.1
Certificate of Incorporation(1)
3.1(a)
Certificate of Amendment to Certificate of Incorporation(1)
3.1(b)
Certificate of Amendment to Certificate of Incorporation filed on October 7, 2019(2)
3.1(c)
Certificate of Amendment to Certificate of Incorporation filed on June 25, 2021(9)
3.1(d)
Certificate of Amendment to Certificate of Incorporation filed on July 19, 2022 (19)
3.1(e)
Certificate of Amendment to Certificate of Incorporation filed on August 23, 2022 (20)
3.2
Amended and Restated Bylaws, effective as of November 25, 2019(3)
4.1
Indenture, dated as of June 21, 2019, between Sachem Capital Corp. and U.S. Bank National Association, as Trustee (4)
4.2
First Supplemental Indenture, dated as of June 25, 2019, between Sachem Capital Corp. and U.S. Bank National Association, as Trustee (4)
4.3
Form of 7.125% Notes due 2024(4)
4.4
Second Supplemental Indenture between Sachem Capital Corp. and U.S. Bank National Association, as Trustee (2)
4.5
Form of 6.875% Notes due 2024(6)
4.6
Third Supplemental Indenture between Sachem Capital Corp. and U.S. Bank National Association, as Trustee (7)
4.7
Form of 7.75% Notes due 2025 (included as Exhibit A to Exhibit 4.6 above)
4.8
Specimen 7.75% Series A Cumulative Redeemable Preferred Stock Certificate.(9)
4.9
Fourth Supplemental Indenture between Sachem Capital Corp. and U.S. Bank National Association, as Trustee (10)
4.10
Form of 6.00% Note due 2026 (attached as Exhibit A to Exhibit 4.9 above).
4.11
Fifth Supplemental Indenture between Sachem Capital Corp. and U.S. Bank Trust Company, National Association, as Trustee (14)
4.12
Form of 6.00% Note due 2027 (attached as Exhibit A to Exhibit 4.11 above)
4.13
Sixth Supplemental Indenture between Sachem Capital Corp. and U.S. Bank Trust Company, National Association, as Trustee (16)
4.14
Form of 7.125% Note due 2027 (attached as Exhibit A to Exhibit 4.13 above)
4.15
Seventh Supplemental Indenture between Sachem Capital Corp. and U.S. Bank Trust Company, National Association, as Trustee (21)
4.16
Form of 8.00% Note due 2027 (attached as Exhibit A to Exhibit 4.15 above)
4.17
Revolving Credit Note, dated March 2, 2023, in the principal amount of $45 million in favor of Needham Bank, as lender (22)
10.1**
Employment Agreement by and between John L. Villano and Sachem Capital Corp. (1)
10.2
Sachem Capital Corp. 2016 Equity Compensation Plan(1)
10.3**
Final Form of the Restrictive Stock Grant Agreement dated April 2021 under the Sachem Capital Corp. 2016 Equity Compensation Plan between Sachem Capital Corp. and John L. Villano (11)
10.4
Master Repurchase Agreement and Securities Contract, dated as of July 21, 2021, between Sachem Capital Corp. and Churchill MRA Funding I LLC(12)
10.5
Custodial Agreement, dated as of July 21, 2021, among Sachem Capital Corp., Churchill MRA Funding I LLC. and U.S. Bank National Association(12)
10.6**
Agreement and General Release, dated as of January 14, 2022, between Sachem Capital Corp. and Peter J. Cuozzo (15)
10.7**
Final Form of the Restrictive Stock Grant Agreement dated April 2022 under the Sachem Capital Corp. 2016 Equity Compensation Plan between Sachem Capital Corp. and John L. Villano (17)
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10.8**
Final Form of the Restrictive Stock Grant Agreement dated October 13, 2021 under the Sachem Capital Corp. 2016 Equity Compensation Plan between Sachem Capital Corp. and each of Leslie Bernhard, Arthur Goldberg and Brian Prinz (19)
10.9**
Final Form of the Restrictive Stock Grant Agreement dated July 19, 2022 under the Sachem Capital Corp. 2016 Equity Compensation Plan between Sachem Capital Corp. and each of Leslie Bernhard, Arthur Goldberg and Brian Prinz (19)
10.10
Credit and Security Agreement, dated as of March 2, 2023, among Sachem Capital Corp., the lenders party thereto and Needham Bank, as administrative agent (22)
10.11(a)
First Amendment to the Credit and Security Agreement, dated as of September 8, 2023, among Sachem Capital Corp., the lenders party thereto and Needham Bank, as administrative agent (24)
10.12
Final Form of the Restrictive Stock Grant Agreement dated February 17, 2023 under the Sachem Capital Corp. 2016 Equity Compensation Plan between the Company and John L. Villano (23)
10.13
Separation Agreement and General Release, dated as of May 5, 2023, between Sachem Capital Corp. and John E. Warch (23)
10.14
Final Form of the Restricted Stock Grant Agreement dated March 19, 2024 under the Sachem Capital Corp. 2016 Equity Compensation Plan between the Company and John L. Villano *
14.1
Code of Ethics(8)
21.1
List of Subsidiaries(13)
23.1
Consent of Hoberman & Lesser CPA’s, LLP, dated March 29, 2024*
31.1
Chief Executive and Financial Officer Certification as required under section 302 of the Sarbanes Oxley Act *
32.1
Chief Executive and Financial Officer Certification pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 906 of the Sarbanes Oxley Act ***
97.1
Policy Relating to Recovery of Erroneously Awarded Compensation*
99.1
Open-End Construction Mortgage, Security Agreement and Assignment of Leases and Rents, dated February 28, 2023, by Sachem Capital Corp., in connection with the New Haven Bank Mortgage refinancing (22)
99.2
Commercial Term Note made by Sachem Capital Corp to New Haven Bank, dated February 28, 2023, in the principal amount of $1,660,000 (attached as Exhibit B to Exhibit 99.1 above)
99.3
Loan Agreement between Sachem Capital Corp. and New Haven Bank, dated as of February 28, 2023 (22)
99.4
Mortgage Release releasing Sachem Capital Corp. from the $1.4 million NHB Mortgage (22)
101.INS
XBRL Instance Document *
101.SCH
XBRL Taxonomy Extension Schema Document *
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document *
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document *
101.LAB
XBRL Taxonomy Extension Label Linkbase Document *
101. PRE
XBRL Taxonomy Extension Presentation Linkbase Document *
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)*
*
Filed herewith.
**
Compensation plan or arrangement for current or former executive officers and directors.
***
Furnished, not filed, in accordance with item 601(32)(ii) of Regulation S-K.
(1) Previously filed as an exhibit to the Registration Statement on Form S-11, as amended (SEC File No.: 333-214323) and incorporated herein by reference.
(2) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the period ended September 30, 2019 and incorporated herein by reference.
(3) Previously filed as an exhibit to the Current Report on Form 8-K on November 27, 2019 and incorporated herein by reference.
(4) Previously filed as an exhibit to the Current Report on Form 8-K on June 25, 2019 and incorporated herein by reference.
(5) Intentionally omitted.
(6) Previously filed as an exhibit to the Current Report on Form 8-K on November 6, 2019 and incorporated herein by reference.
(7) Previously filed as an exhibit to the Current Report on Form 8-K on September 9, 2020 and incorporated herein by reference.
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(8) Previously filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 2016 and incorporated herein by reference.
(9) Previously filed as an exhibit to the Current Report on Form 8-K on June 29, 2021 and incorporated herein by reference.
(10) Previously filed as an exhibit to the Current Report on Form 8-K on December 20, 2021 and incorporated herein by reference.
(11) Previously filed as an exhibit to the Current Report on Form 8-K on April 13, 2021 and incorporated herein by reference.
(12) Previously filed as an exhibit to the Current Report on Form 8-K on July 27, 2021 and incorporated herein by reference.
(13) None.
(14) Previously filed as an exhibit to the Current Report on Form 8-K on March 9, 2022 and incorporated herein by reference.
(15) Previously filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 2021 and incorporated herein by reference.
(16) Previously filed as an exhibit to the Current Report on Form 8-K on May 12, 2022 and incorporated herein by reference.
(17) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the period ended March 31, 2022 and incorporated herein by reference.
(18) Intentionally omitted.
(19) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the period ended June 30, 2022 and incorporated herein by reference.
(20) Previously filed as an exhibit to the Current Report on Form 8-K on August 24, 2022 and incorporated herein by reference.
(21) Previously filed as an exhibit to the Current Report on Form 8-K on August 23, 2022 and incorporated herein by reference.
(22) Previously filed as an exhibit to the Current Report on Form 8-K on March 3, 2023 and incorporated herein by reference.
(23) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the period ended March 31, 2023 and incorporated herein by reference.
(24) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the period ended September 30, 2023 and incorporated herein by reference.
(c)
No financial statement schedules are included because the information is either provided in the financial statements or is not required under the related instructions or is inapplicable and such schedules therefore have been omitted.
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SACHEM CAPITAL CORP.
By:
/s/ John L. Villano
John L. Villano, CPA
President, Chief Executive Officer and Interim Chief Financial Officer
(Principal Executive, Accounting and Financial Officer)
Date: April 1, 2024
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on April 1, 2024:
Signature
Title
/s/ John L. Villano
Chairman, Chief Executive Officer, President, Interim Chief Financial Officer and Director
John L. Villano, CPA
(Principal Executive, Accounting and Financial Officer)
/s/ Leslie Bernhard
Director
Leslie Bernhard
/s/ Arthur L. Goldberg
Director
Arthur L. Goldberg
/s/ Brian A. Prinz
Director
Brian A. Prinz
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INDEX TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022
Reports of Independent Registered Public Accounting Firms ( PCAOB ID 694 )
F-2
Consolidated Financial Statements:
Consolidated Balance Sheets
F-4
Consolidated Statements of Comprehensive Income
F-5
Consolidated Statements of Changes in Shareholders’ Equity
F-6
Consolidated Statements of Cash Flows
F-7
Notes to Consolidated Financial Statements
F-9
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Sachem Capital Corp.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Sachem Capital Corp. (the “Company”) as of December 31, 2023 and 2022, and the related statements of comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2023, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2023, due to the adoption of Accounting Standards Update 2016-13 Financial Instruments – Credit Losses (FASB ASC 326): Measurement of Credit Losses on Financial Instruments . The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter below.
Basis of Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
MGI Worldwide is a network of independent audit, tax, accounting and consulting firms. MGI Worldwide does not provide any services and its member firms are not an international partnership. Each member firm is a separate entity and neither MGI Worldwide nor any member firm accepts responsibility for the activities, work, opinions or services of any other member firm. For more information visit www.mgiworld.com/legal
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Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.
Mortgages Receivable and Allowance for Credit Losses
As discussed in Note 2 to the financial statements, the Company estimates its allowance for credit losses (“ACL”) in accordance with Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (the “ASU”). The Company adopted Accounting Standards Codification (“ASC”) Topic 326 as of January 1, 2023 as described in Note 2 to the financial statements. The ASU requires credit losses on loans to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model) which estimates credit losses over the expected life of the loan. Estimates of expected credit losses are based on historical experience, adjusted for management’s evaluation of current conditions and reasonable and supportable forecasts. The impact of adoption of this standard on January 1, 2023 was a $2.0 million increase to the allowance for credit losses, a $0.5 million increase to the allowance for unfunded commitments, and an increase of $2.5 million to accumulated deficit for the cumulative effect adjustment recorded upon adoption.
The Company’s measurement of expected credit losses of loans on a pooled basis, when the loans share similar risk characteristics, is based on historical data that is adjusted, as necessary, for both internal and external qualitative factors where there are differences in the historical loss data of the Company and current or projected future conditions. The Company currently pools its portfolio based on geographic locations. Consideration of the relevant qualitative factors is used to bring the ACL to the level management believes is appropriate based on factors that are otherwise unaccounted for in the quantitative process. The ACL also includes reserves for loans evaluated on an individual basis, such as certain loans identified for potential foreclosure proceedings for either non-performance or other similar criteria. Management applies its judgment in the determination of the qualitative factors and establishes reserves on an individual basis to estimate the ACL.
Auditing the initial adoption of the relative qualitative factors used in the allowance for credit losses and the subsequent application of the qualitative factors was identified by us as a critical audit matter because of the significant auditor judgement applied and significant audit effort needed to evaluate the subjective and complex judgements made by management during adoption and subsequent application of the qualitative factor framework.
The primary procedures we performed, with the assistance of our valuation specialist, to address this critical audit matter included:
● Obtained an understanding of the Company ’ s process for establishing the ACL, including determination of the qualitative factors and reserve assumptions for loans evaluated on an individual basis.
● We tested the underlying data, including all historical information used in the Company ’ s model for establishing the ACL for completeness and accuracy, including recalculation of the analyses.
● We assessed all significant assumptions and subjective adjustments made by management to the vintage/historical information used in the model by analyzing the facts and circumstances provided by management for such adjustments.
● For loans evaluated on an individual basis, we obtained and evaluated valuations from the Company ’ s third-party valuation specialists, as well as obtained and evaluated other publicly available market data, and compared said values to the aggregate amounts owed by borrowers, for indication of loan losses; We also evaluated managements significant judgments applied in determining whether indicators of impairment were present, with respect to the Company ’ s loan portfolio and the underlying collateral, by obtaining evidence to corroborate such judgments and searching for evidence contrary to such judgments, which included consideration of evidence obtained after the balance sheet date but before the issuance of this report.
We have served as the Company’s auditor since 2015.
New York , New York
April 1, 2024
F-3
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SACHEM CAPITAL CORP.
CONSOLIDATED BALANCE SHEETS
Years Ended
December 31,
2023
2022
Assets
Cash and cash equivalents
$
12,598,256
$
23,713,097
Investment securities, net (at fair value)
37,776,032
24,576,462
Mortgages receivable
499,235,371
460,738,268
Less: Allowance for credit losses
( 7,523,160 )
( 105,000 )
Mortgages receivable, net of allowance for credit losses
491,712,211
460,633,268
Investments in rental real estate, net
10,554,461
—
Interest and fees receivable, net
8,474,820
6,309,845
Due from borrowers, net
5,596,883
5,276,967
Real estate owned
3,461,519
5,216,149
Investments in partnerships
43,035,895
30,831,180
Property and equipment, net
3,373,485
4,121,721
Other assets
8,955,250
4,983,173
Total assets
$
625,538,812
$
565,661,862
Liabilities and Shareholders' Equity
Liabilities:
Notes payable (net of deferred financing costs of $ 6,048,490 and $ 8,352,597 )
$
282,353,260
$
280,049,153
Repurchase facility
26,461,098
42,533,466
Mortgage payable
1,081,303
750,000
Lines of credit
61,792,330
3,587,894
Accrued dividends payable
5,144,203
5,342,160
Accounts payable and accrued liabilities
2,321,535
1,439,219
Advances from borrowers
10,998,351
9,892,164
Below market lease intangible
664,737
—
Deferred revenue
4,647,302
4,360,452
Total liabilities
395,464,119
347,954,508
Commitments and Contingencies
Shareholders' equity:
Preferred shares - $ .001 par value; 5,000,000 shares authorized; 2,903,000 shares designated as Series A Preferred Stock; 2,029,923 and 1,903,000 shares of Series A Preferred Stock issued and outstanding at December 31, 2023 and December 31, 2022, respectively
$
2,030
$
1,903
Common stock - $ .001 par value; 200,000,000 shares authorized; 46,765,483 and 41,093,536 issued and outstanding at December 31, 2023 and December 31, 2022
46,765
41,094
Paid-in capital
249,825,780
226,220,990
Accumulated other comprehensive income (loss)
315,614
( 561,490 )
Accumulated deficit
( 20,115,496 )
( 7,995,143 )
Total shareholders’ equity
230,074,693
217,707,354
Total liabilities and shareholders’ equity
$
625,538,812
$
565,661,862
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
SACHEM CAPITAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended
December 31,
2023
2022
Revenue:
Interest income from loans
$
49,265,040
$
42,618,817
Investment gain, net
1,233,537
521,662
Income from partnership investments
3,521,721
1,809,564
Origination and modification fees, net
5,940,393
7,320,625
Fee and other income
4,812,629
2,969,117
Unrealized gain (loss) on investment securities
835,818
( 2,963,760 )
Total revenue
65,609,138
52,276,025
Operating costs and expenses:
Interest and amortization of deferred financing costs
29,189,901
21,549,859
Compensation, fees and taxes
6,931,757
5,315,455
General and administrative expenses
5,293,057
3,097,219
Other expenses
1,032,520
544,684
(Gain) Loss on sale of real estate and property and equipment, net
88,115
( 44,752 )
Provision for credit losses related to loans
5,571,612
105,000
Provision for credit losses related to available-for-sale debt securities
808,561
—
Impairment loss
794,462
799,909
Total operating costs and expenses
49,709,985
31,367,374
Net income
15,899,153
20,908,651
Preferred stock dividend
( 3,795,389 )
( 3,687,062 )
Net income attributable to common shareholders
12,103,764
17,221,589
Other comprehensive income
Unrealized gain (loss) on investment securities, net
877,104
( 85,474 )
Total Comprehensive income
$
12,980,868
$
17,136,115
Basic and diluted net income per common share outstanding:
Basic
$
0.27
$
0.46
Diluted
$
0.27
$
0.46
Weighted average number of common shares outstanding:
Basic
44,244,988
37,741,657
Diluted
44,244,988
37,749,169
The accompanying notes are an integral part of these consolidated financial statements.
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SACHEM CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022
Accumulated
Additional
Other
Preferred Stock
Common Stock
Paid in
Comprehensive
Accumulated
Shares
Amount
Shares
Amount
Capital
Income (Loss)
Deficit
Totals
Balance, December 31, 2021
1,903,000
$
1,903
32,730,004
$
32,730
$
185,516,394
$
( 476,016 )
$
( 4,992,450 )
$
180,082,561
Issuance of Series A Preferred Stock, net of expenses
—
—
—
—
( 70,000 )
—
—
( 70,000 )
Issuance of Common Shares, net of expenses
—
—
7,879,907
7,880
39,284,065
—
—
39,291,945
Acquisition of Urbane Capital, LLC
—
—
300,000
300
995,700
—
—
996,000
Exercise of warrants
—
—
19,658
20
( 20 )
—
—
—
Stock based compensation
—
—
163,967
164
494,851
—
—
495,015
Unrealized loss on investments
—
—
—
—
—
( 85,474 )
—
( 85,474 )
Dividends paid on Common Shares
—
—
—
—
—
—
( 14,882,122 )
( 14,882,122 )
Dividends paid on Series A Preferred Stock
—
—
—
—
—
—
( 3,687,062 )
( 3,687,062 )
Dividends declared
—
—
—
—
—
—
( 5,342,160 )
( 5,342,160 )
Net income
—
—
—
—
—
—
20,908,651
20,908,651
Balance, December 31, 2022
1,903,000
1,903
41,093,536
41,094
226,220,990
( 561,490 )
( 7,995,143 )
217,707,354
Cumulative effect of adoption of new accounting principle (ASU 2016-13)
—
—
—
—
—
—
( 2,489,574 )
( 2,489,574 )
Issuance of Series A Preferred Stock, net of expenses
126,923
127
—
—
2,563,683
—
—
2,563,810
Issuance of Common Shares, net of expenses
—
—
5,546,891
5,546
20,445,328
—
—
20,450,874
Repurchase of Common Shares
—
—
( 71,000 )
( 71 )
( 226,256 )
—
—
( 226,327 )
Stock based compensation
—
—
196,056
196
822,035
—
—
822,231
Unrealized gain on investments
—
—
—
—
—
877,104
—
877,104
Dividends paid on Common Shares
—
—
—
—
—
—
( 16,590,340 )
( 16,590,340 )
Dividends paid on Series A Preferred Stock
—
—
—
—
—
—
( 3,795,389 )
( 3,795,389 )
Dividends declared
—
—
—
—
—
—
( 5,144,203 )
( 5,144,203 )
Net income
—
—
—
—
—
—
15,899,153
15,899,153
Balance, December 31, 2023
2,029,923
$
2,030
46,765,483
$
46,765
$
249,825,780
$
315,614
$
( 20,115,496 )
$
230,074,693
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
SACHEM CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended
December 31,
2023
2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$
15,899,153
$
20,908,651
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of deferred financing costs and bond discount
2,415,405
2,104,093
Depreciation expense
266,331
106,414
Write-off of failed deal expenses
477,047
—
Stock based compensation
822,231
495,015
Provision for credit losses related to loans
5,571,612
105,000
Provision for credit losses related to available-for-sale debt securities
808,561
—
Impairment loss
794,462
799,909
Loss (Gain) on sale of real estate and property and equipment, net
88,115
( 44,752 )
Unrealized (gain) loss on investment securities
( 835,818 )
2,963,760
Gain on sale of investment securities
—
( 521,662 )
Changes in operating assets and liabilities:
(Increase) decrease in operating assets:
Interest and fees receivable, net
( 2,285,064 )
( 2,616,200 )
Other assets - miscellaneous
( 3,504,390 )
( 3,599,779 )
Due from borrowers, net
( 334,253 )
( 1,605,951 )
Accrued dividends payable
—
( 1,414,560 )
Other assets - prepaid expenses
( 100,649 )
—
(Decrease) increase in operating liabilities:
Accrued Interest
158,973
158,687
Accounts payable and accrued liabilities
220,757
766,723
Deferred revenue
286,850
( 283,038 )
Advances from borrowers
1,106,187
( 5,173,950 )
Total adjustments
5,956,357
( 7,760,291 )
NET CASH PROVIDED BY OPERATING ACTIVITIES
21,855,510
13,148,360
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities
( 30,415,304 )
( 51,651,930 )
Proceeds from the sale of investment securities
18,120,095
85,113,227
Purchase of interests in investment partnerships, net
( 12,235,563 )
( 24,775,342 )
Proceeds from sale of real estate owned
450,420
2,090,879
Acquisitions of and improvements to real estate owned, net
( 229,587 )
( 126,442 )
Proceeds from sale (purchases) of property and equipment, net
515,391
( 1,581,350 )
Investment in rental real estate, net
( 10,845,107 )
—
Principal disbursements for mortgages receivable
( 204,884,592 )
( 300,277,303 )
Principal collections on mortgages receivable
167,036,071
131,840,244
Other assets - pre-offering costs
—
( 170,606 )
NET CASH USED FOR INVESTING ACTIVITIES
( 72,488,176 )
( 159,538,623 )
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (repayment of) lines of credit
58,204,436
( 29,590,137 )
Net proceeds from (repayment of) repurchase facility
( 16,072,368 )
23,446,277
Proceeds from mortgage
331,303
—
Accounts payable and accrued liabilities - principal payments on other notes
( 6,014 )
( 24,907 )
Dividends paid on common shares
( 21,932,500 )
( 18,809,722 )
Dividends paid on Series A Preferred Stock
( 3,795,389 )
( 3,687,062 )
Proceeds from issuance of common shares, net of expenses
20,450,874
39,291,945
Repurchase of common shares
( 226,327 )
—
Proceeds from issuance of Series A Preferred Stock, net of expenses
2,563,810
( 70,000 )
Gross proceeds from issuance of fixed rate notes
—
122,125,000
Financings costs incurred in connection with fixed rate notes
—
( 4,516,931 )
NET CASH PROVIDED BY FINANCING ACTIVITIES
39,517,825
128,164,463
NET DECREASE IN CASH AND CASH EQUIVALENTS
( 11,114,841 )
( 18,225,800 )
CASH AND CASH EQUIVALENTS- BEGINNING OF YEAR
23,713,097
41,938,897
CASH AND CASH EQUIVALENTS - END OF YEAR
$
12,598,256
$
23,713,097
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
SACHEM CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOW (Continued)
Years Ended
December 31,
2023
2022
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid during the year for interest
$
26,615,523
$
19,286,819
SUPPLEMENTAL SCHEDULE OF NON-CASH
Dividends declared and payable
$
5,144,203
$
5,342,360
Real estate acquired in connection with the foreclosure of certain mortgages, inclusive of interest and other fees receivable, during the years ended December 31, 2023 and 2022 totaled $ 1,756,125 and $ 1,376,733 , respectively. Increase in mortgage receivable from sale of real estate owned during the year ended December 31, 2023 was $ 2,576,855 .
The accompanying notes are an integral part of these consolidated financial statements .
F-8
Table of Contents
SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
1. The Company
Sachem Capital Corp. (the “Company”), a New York corporation, specializes in originating, underwriting, funding, servicing and managing a portfolio of first mortgage loans. The Company operates its business as one segment. The Company offers short-term ( i.e. , one to three years ), secured, non-bank loans (sometimes referred to as “hard money” loans) to real estate owners and investors to fund their acquisition, renovation, development, rehabilitation or improvement of properties located primarily in the northeastern and southeastern sections of the United States. The properties securing the Company’s loans are generally classified as residential or commercial real estate and, typically, are held for resale or investment. Each loan is secured by a first mortgage lien on real estate and may also be secured with additional collateral, such as other real estate owned by the borrower or its principals, a pledge of the ownership interests in the borrower by the principals thereof, and/or personal guarantees by the principals of the borrower. The Company does not lend to owner occupants of residential real estate. The Company’s primary underwriting criteria is a conservative loan to value ratio. In addition, the Company may make opportunistic real estate purchases apart from its lending activities.
2. Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management will base the use of estimates on (a) various assumptions that consider prior reporting results, (b) the Company’s projections regarding future operations and (c) general financial market and local and general economic conditions. Actual amounts could differ from those estimates.
The consolidated financial statements of the Company include the accounts of all subsidiaries in which the Company has control over significant operating, financial and investing decisions of the entity. All intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all demand deposits, cashier’s checks, money market accounts and certificates of deposit with an original maturity of three months or less to be cash equivalents.
Investment Securities
Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in other comprehensive income. Fair value is calculated based on publicly available market information or other estimates determined by management. If the cost of an investment exceeds its fair value, management evaluates, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. To determine credit losses, management may employ a systematic methodology that considers available quantitative and qualitative evidence. In addition, management may consider specific adverse conditions related to the financial health of, and business outlook for, the investee. If the Company plans to sell the security or it is more likely than not that it will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in net income and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, the Company may incur future losses and/or impairments.
Equity investments with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). Management performs a qualitative assessment on a periodic basis and
F-9
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in value are recorded in net income.
Allowance for Current Expected Credit Losses
The Company adopted the current expected credit loss (“CECL”) standard effective January 1, 2023 in accordance with ASU No. 2016-13. The initial CECL allowance adjustment of $ 2,489,574 was recorded effective January 1, 2023 as a cumulative-effect of change in accounting principle through a direct charge to accumulated deficit on the consolidated statements of shareholders’ equity. Subsequent changes to the CECL allowance will be recognized in the consolidated statements of comprehensive income.
The Company records an allowance for credit losses in accordance with the CECL standard on the Company’s loan portfolio, including unfunded construction commitments, on a collective basis by assets with similar risk characteristics. This methodology replaces the probable incurred loss impairment methodology. In addition, interest and fees receivable and amounts included in due from borrowers, other than reimbursements, which include origination, modification and other fees receivable are also analyzed for credit losses in accordance with the CECL standard, as they represent a financial asset that is subject to credit risk. As allowed under the CECL standard used by the Company, as a practical expedient, the fair value of the collateral at the reporting date is compared to the net carrying amount of the loan when determining the allowance for credit losses for loans in pending/pre-foreclosure status, as defined. Fair value of collateral is reduced by estimated cost to sell if the collateral is expected to be sold. The amount of loans in pending/pre-foreclosure including unpaid interest and other charges, as of December 31, 2023 and December 31, 2022 was approximately $ 68.1 million and $ 24.0 million, respectively.
The CECL standard requires an entity to consider historical loss experience, current conditions, and a reasonable and supportable forecast of the economic environment. The Company utilizes a loss-rate method for estimating current expected credit losses. The loss rate method involves applying a loss rate to a pool of loans with similar risk characteristics to estimate the expected credit losses on that pool of loans. In determining the CECL allowance, the Company considers various factors including (1) historical loss experience in its portfolio, (2) loan specific losses for loans deemed collateral dependent based on excess amortized cost over the fair value of the underlying collateral, and (3) its current and future view of the macroeconomic environment. The Company utilizes a forecast of three years which approximates its longer-term loans, which are often the construction loans.
Management estimates the allowance for credit losses using relevant information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. The allowance for credit losses is maintained at a level sufficient to provide for expected credit losses over the life of the loans based on evaluating historical credit loss experience and to make adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio. The CECL allowance related to the principal outstanding is presented within “Mortgages receivable, net” and for unfunded commitments is within accounts payable and accrued liabilities in the Company’s consolidated balance sheets. The CECL allowance related to the late payment fees are presented in “Interest and fees receivable, net”, and “Due from borrowers, net” in the Company’s consolidated balance sheets.
The below table represents the financial statement line items that are impacted by the CECL allowance:
Provision for
credit losses on
loans – pre-
Provision for credit
Adoption as of January 1, 2023
adoption
losses related to loans
Balance as of December 31, 2023
Mortgages receivable
$
1,921,447
$
105,000
$
5,496,713
$
7,523,160
Interest receivable
26,127
—
93,962
120,089
Due from borrower
19,900
—
( 5,563 )
14,337
Unfunded commitments
522,100
—
( 13,500 )
508,600
Total CECL allowance
$
2,489,574
$
105,000
$
5,571,612
$
8,166,186
F-10
Table of Contents
SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
In addition, CECL made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell. As of December 31, 2023 and 2022 the Company had a CECL allowance of $ 808,561 and $ 0 , respectively, which is presented in “Investment securities, net” on the Company’s consolidated balance sheets. In connection with the allowance, during the years December 31, 2023 and 2022, the Company had a provision for credit losses related to available-for-sale debt securities of $ 808,561 and $ 0 , respectively, which is presented on the Company’s consolidated statements of comprehensive income. As of December 31, 2023 and 2022, fair market value of these securities was $ 839,280 and $ 813,650 , respectively. The cost basis of these securities were $ 1,647,841 . The implementation of the CECL standard’s effect on the Company’s earnings per share, for the year ended December 31, 2023, was $ 0.15 .
Fair Value Measurements
The framework for measuring fair value provides a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820 are described as follows:
Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company can access.
Level 2 Inputs to the valuation methodology include:
● quoted prices for similar assets or liabilities in active markets;
● quoted prices for identical or similar assets or liabilities in inactive markets;
● inputs other than quoted prices that are observable for the asset or liability; and
● inputs that are derived principally from or corroborated by observable market data by correlation to other means.
If the asset or liability has a specified (i.e., contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Property and Equipment
Land and building acquired in December 2016 to serve as the Company’s office facilities is stated at cost. The building is being depreciated using the straight-line method over its estimated useful life of 40 years . Expenditures for repairs and maintenance are charged to expense as incurred. The Company relocated its entire operations to this property in March 2019. On August 14, 2023 this property was sold. The Company realized a loss of approximately $ 183,000 on the sale, which is included in (gain) loss on sale of real estate and property and equipment, net in the consolidated statements of comprehensive income, for the year ended December 31, 2023.
Land and building acquired in 2021 to serve as the Company’s future corporate headquarters is stated at cost. Renovation of the building was completed in the first quarter of 2023 and the Company relocated its operations to the new building in March 2023. The building is being depreciated using the straight-line method over its estimated useful life of 40 years . The new building was placed in service in March 2023 when the Company received the Temporary Certificate of Occupancy.
F-11
Table of Contents
SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
The following tables represent the Company’s Property and Equipment, Net as of December 31, 2023 and 2022:
Year ended December 31, 2023
Cost
Accumulated Depreciation
Property and Equipment, Net
Building
$
2,541,214
$
( 50,694 )
2,490,520
Land
262,631
—
262,613
Furniture and fixtures
319,898
( 68,891 )
251,098
Computer hardware and software
352,573
( 227,687 )
124,886
Vehicles
305,980
( 61,612 )
244,368
Total Property and Equipment, Net
$
3,782,369
$
( 408,884 )
3,373,485
Year ended December 31, 2022
Cost
Accumulated Depreciation
Property and Equipment, Net
Building
$
1,165,063
$
( 103,169 )
1,061,894
Land
199,789
—
199,789
Furniture and fixtures
174,957
( 63,272 )
111,685
Computer hardware and software
209,106
( 159,370 )
49,736
Vehicles
470,081
( 42,780 )
427,301
Construction in progress
2,271,316
—
2,271,316
Total Property and Equipment, Net
$
4,490,312
$
( 368,591 )
4,121,721
Investment in Rental Real Estate
Real estate is carried at cost, net of accumulated depreciation and amortization. Betterments, major renewals and certain costs directly related to the improvement and leasing of real estate are capitalized. Maintenance and repairs are expensed as incurred. For redevelopment of existing operating properties, the net book value of the existing property under redevelopment plus the cost for the construction and improvements incurred in connection with the redevelopment, including interest and debt expense, are capitalized to the extent the capitalized costs of the property do not exceed the estimated fair value of the redeveloped property when complete. If the cost of the redeveloped property, including the net book value of the existing property, exceeds the estimated fair value of the redeveloped property, the excess is charged to expense. Depreciation is recognized on a straight-line basis over the estimated useful lives of these assets which range from 7 to 40 years . Tenant allowances are amortized on a straight-line basis over the lives of the related leases, which approximate the useful lives of the assets.
Upon the acquisition of real estate, the Company assesses whether the transaction should be accounted for as an asset acquisition or as a business combination. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset acquisitions. Acquisitions of real estate generally will not meet the definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e. land, buildings, and related identified intangible assets).
The Company allocates the purchase price of real estate to land and building (inclusive of site and tenant improvements) and, if determined to be material, intangibles, such as the value of above- and below-market leases and origination costs associated with the in-place leases.
The allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed involves subjectivity as the allocations are based on an analysis of the respective fair values. In determining the fair value of the real estate acquired, the Company utilized a third-party valuation which primarily utilizes cash flow projections that apply, among other things, estimated revenue and expense growth rates, discount rates and capitalization rates, as well as sales comparison approach, which utilizes comparable sales, listings and sales contracts. The Company assesses the fair value of the acquired leases based on estimated cash flow projections that utilize appropriate discount rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property. The determined and allocated fair values to the real estate acquired will affect the amount of depreciation and amortization we record over the respective estimated useful lives or term of the lease.
F-12
Table of Contents
SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
2023 Acquisition
On June 23, 2023, the Company entered into a purchase and sale contract (the “Westport Purchase Agreement”) for $ 10,600,000 to acquire a commercial office building in Westport, CT (the “Westport Asset”). The transaction was completed on August 31, 2023. In connection with this transaction, which was accounted for as an asset acquisition, the Company allocated the purchase price and acquisition-related costs to the tangible and intangible assets acquired based on fair value. In addition, the Company recorded a lease liability stemming from below-market rental rates. Total consideration, including capitalized acquisition-related costs, was $ 10,725,237 .
The following table summarizes the allocation for the acquisition:
Amount
Land
$
3,956,786
Building
4,935,714
Site improvements
359,249
Tenant improvements
1,182,842
Below market lease intangible
( 664,737 )
Lease in-place intangible (included in other assets)
568,460
Deferred leasing costs (included in other assets)
386,923
Total
$
10,725,237
Building and site improvements are being depreciated using the straight-line method over its estimated useful life of 40 years and 15 years , respectively. Tenant improvements are amortized over the life of the respective lease using the straight-line method. Lease in-place intangible assets, deferred leasing costs and acquired below market leases are amortized on a straight-line basis over the respective life of the lease. For the year ended December 31, 2023, depreciation and amortization related to the asset was approximately $ 30,800 .
Estimated annual amortization of acquired below market lease intangible is as follows:
Years Ending December 31,
Amount
2024
$
66,474
2025
66,474
2026
66,474
2027
66,474
2028
66,474
Thereafter
332,367
Total
$
664,737
Estimated annual amortization of acquired in-place lease intangible is as follows:
Years Ending December 31,
Amount
2024
$
56,846
2025
56,846
2026
56,846
2027
56,846
2028
56,846
Thereafter
284,230
Total
$
568,460
Estimated annual amortization of deferred leasing costs is as follows:
F-13
Table of Contents
SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
Years Ending December 31,
Amount
2024
$
38,692
2025
38,692
2026
38,692
2027
38,692
2028
38,692
Thereafter
193,463
Total
$
386,923
In addition, the Westport Purchase Agreement contains a provision requiring the payment of an Additional Purchase Price, as defined, upon the earlier to occur of:
● The Company closing on any construction financing on the Project, as defined, or
● Twelve months following receipt of all zoning and other State and municipal permits and approvals necessary to construct certain residential units, as defined.
These payments represent contingent consideration in connection with this acquisition, requiring accrual when the payments are deemed probable and reasonably estimable. The Company notes that neither of these events which would give rise to a payment of Additional Purchase Price is considered probable or estimatable as of the acquisition date and as of December 31, 2023. Accordingly, no accrual for these payments has been made in the consolidated balance sheet. The agreed payment is $ 75,000 per approved and sold or permitted market rate residential units. As of January 2024, the Company submitted a proposal to the town of Westport for 8 market rate residential units and 2 affordable rate units. Those units were approved in March of 2024, subject to a 30 day appeal period, which extends into April 2024. This indicates the potential payment could be as high as $ 600,000 , as of the date of this filing.
See Note 5 – Investment in Rental Real Estate, Net for further details surrounding the above acquisition as of December 31, 2023.
Real Estate Owned (“REO”)
REO is initially measured at fair value and is thereafter subject to an ongoing impairment analysis. After an REO acquisition, events or circumstances may occur that result in a material and sustained decrease in the cash flows generated from the property or other market indicators including listing data may signal a decline in the liquidation value. REO is evaluated for recoverability when impairment indicators are identified. Any impairment losses are included in the consolidated statements of comprehensive income.
Impairment of Long-Lived Assets
The Company continually monitors events or changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. When such events or changes in circumstances occur, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the undiscounted cash flows is less than the carrying amount of these assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets.
Goodwill
Goodwill is not amortized, but rather tested for impairment annually or more frequently if events or changes in circumstances indicate potential impairment. Goodwill at December 31, 2023 represents the excess of the consideration paid over the fair value of net assets acquired from Urbane New Haven, LLC in October 2022.
In testing goodwill for impairment, the Company adheres to FASB ASC 350, “Intangibles—Goodwill and Other”, which permits a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying value including goodwill. If the qualitative assessment determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying value including goodwill, then no impairment is determined to exist for the reporting unit. However, if the
F-14
Table of Contents
SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
qualitative assessment determines that it is more likely than not that the fair value of the reporting unit is less than its carrying value including goodwill, or the Company chooses not to perform the qualitative assessment, then it compares the fair value of that reporting unit with its carrying value, including goodwill.
As of December 31, 2023, and 2022 Goodwill was approximately $ 0.4 million. As of December 31, 2023, and 2022 there was no impairment to goodwill.
Deferred Financing Costs
Costs incurred in connection with the Company’s revolving credit facilities, described in Note 8—Line of Credit, Mortgage Payable and Churchill Facility are amortized over the term of the applicable facility using the straight-line method.
Costs incurred by the Company in connection with the public offering of its unsecured, unsubordinated notes, described in Note 9–Notes Payable, are being amortized over the term of the respective Notes.
Revenue Recognition
Interest income from the Company’s loan portfolio is earned over the loan period and is calculated using the simple interest method on principal amounts outstanding. Generally, the Company’s loans provide for interest to be paid monthly in arrears. The Company, generally, does not accrue interest income on mortgages receivable that are more than 90 days past due or interest charged at default rates. However, interest income not accrued at December 31, 2023, but collected prior to the issuance of this report is included in income for the year ended December 31, 2023.
Origination, modification fee and other revenue, generally 1 % – 3 % of either the original loan principal or the modified loan balance, is collected at loan funding and is recognized ratably over the contractual life of the loan in accordance with FASB ASC 310.
Income Taxes
The Company believes it qualifies as a real estate investment trust (“REIT”) for federal income tax purposes and operates accordingly. It made the election to be taxed as a REIT on its 2017 Federal income tax return. The Company’s qualification as a REIT depends on its ability to meet on a continuing basis, through actual investment and operating results, various complex requirements under the Internal Revenue Code of 1986, as amended, relating to, among other things, the sources of its income, the composition and values of its assets, its compliance with the distribution requirements applicable to REITs and the diversity of ownership of its outstanding capital stock. So long as it qualifies as a REIT, the Company, generally, will not be subject to U.S. federal income tax on its taxable income distributed to its shareholders. However, if it fails to qualify as a REIT in any taxable year and does not qualify for certain statutory relief provisions, it will be subject to U.S. federal income tax at regular corporate rates and may also be subject to various penalties and may be precluded from re-electing REIT status for the four taxable years following the year during in which it lost its REIT qualification.
The Company has elected, and may elect in the future, to treat certain of its existing or newly created corporate subsidiaries as taxable REIT subsidiaries (“TRSs”). In general, a TRS may hold assets that the Company cannot hold directly and generally may engage in any real estate or non-real estate related business. The TRSs generate income, resulting in federal and state income tax liability for these entities. The Company does not expect to incur any corporate federal income tax liability outside of the TRSs, as it believes it has maintained our qualification as a REIT. During the years ended December 31, 2023 and 2022, the Company recognized a provision for federal and state income taxes in the amount of $ 90,440 and $ 0 , respectively.
The income tax provision for the Company differs from the amount computed from applying the statutory federal income tax rate to income before income taxes due to non-taxable REIT income and other permanent differences including the non-deductibility of acquisition costs of business combinations for federal income tax reporting.
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
FASB ASC Topic 740-10 “Accounting for Uncertainty in Income Taxes” prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and disclosure required. Under this standard, an entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in interest expense. The Company has determined that there are no uncertain tax positions requiring accrual or disclosure in the accompanying consolidated financial statements as of December 31, 2023 and 2022.
Earnings Per Share
Basic and diluted earnings per share are calculated in accordance with ASC 260 — “ Earnings Per Share. ” Under ASC 260, basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. The computation of diluted earnings per share is similar to basic earnings per share, except that the denominator is increased to include the potential dilution from the exercise of stock options and warrants for common shares using the treasury stock method. The numerator in calculating both basic and diluted earnings per common share for each period is the reported net income.
The computation of diluted earnings per common share is based on the weighted average number of participating securities outstanding plus the incremental shares that would be outstanding assuming exercise of the warrants. As of December 31, 2023 the Company had basic and diluted weighted average shares of 44,244,988 outstanding, resulting in basic and diluted earnings per share of $0.27 , respectively. As of December 31, 2022, the Company had basic weighted averages shares of 37,741,657 and a weighted average of 7,512 outstanding warrants resulting diluted weighted average shares of 37,749,169 . Both basic and diluted earnings per share were $ 0.46 .
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments”, (ASU 2016-13), which changes accounting requirements for the measurement and recognition of expected credit losses from an incurred or probable methodology to a current expected credit loss methodology. Mortgages receivable, unfunded loan commitments, interest and fees receivable and amounts included in due from borrowers, other than reimbursements, which include origination, modification and other fees receivable are the only items currently held by the Company that are within the scope of ASU 2016-13. The Company adopted this ASU effective January 1, 2023 and applied a modified retrospective approach through a cumulative-effect adjustment to retained earnings upon adoption. At transition on January 1, 2023, the cumulative effect of adopting this ASU resulted in a decrease in retained earnings of $ 2,489,574 and an increase in the allowance for credit losses. The increase in the allowance is driven by the fact that the allowance under CECL covers expected credit losses over the full expected life of the loan portfolios and takes into account forecasts of expected future economic conditions.
In March 2022, the FASB issued ASU 2022-02, “Financial Instruments-Credit Losses (FASB ASC 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the current expected credit loss (“CECL”) model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. This guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. This update did not have a material effect on the Company’s consolidated financial statements, except for requiring additional disclosure relating to loan modifications to borrowers experiencing financial difficulty.
In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 was issued to (1) to clarify the guidance in FASB ASC Topic 820, “Fair Value Measurement”, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale
F-16
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
restrictions that are measured at fair value in accordance with FASB ASC Topic 820. The amendments in this update are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the accounting and disclosure requirements of ASU 2022-03 and plans to adopt this new guidance on January 1, 2024. The Company does not anticipate that this update will have a material impact on its consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (FASB ASC Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 intends to improve reportable segment disclosure requirements, enhance interim disclosure requirements and provides new segment disclosure requirements for entities with a single reportable segment. This standard is effective for the Company beginning with its 2024 annual reporting. ASU 2023-07 is to be adopted retrospectively to all prior periods presented. The Company does not anticipate that this update will have a material impact on its consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the Company’s consolidated financial statements.
Reclassifications
Certain amounts included in the December 31, 2022 consolidated financial statements have been reclassified to conform to the December 31, 2023 presentation.
3. Fair Value Measurement
The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair market value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
The following table sets forth by Level, within the fair value hierarchy, the fair value of the Company’s assets as of December 31, 2023:
Level 1
Level 2
Level 3
Total
Stocks and ETF’s
$
—
$
1,755,219
$
—
$
1,755,219
Mutual funds
16,236,445
—
—
16,236,445
Debt securities
18,945,087
839,281
—
19,784,368
Total investment securities
$
35,181,532
$
2,594,500
$
—
$
37,776,032
The following table sets forth by Level, within the fair value hierarchy, the fair value of the Company’s assets as of December 31, 2022:
Level 1
Level 2
Level 3
Total
Stocks and ETF’s
$
3,282,659
$
1,446,065
$
—
$
4,728,724
Mutual funds
14,850,839
—
—
14,850,839
Debt securities
3,880,045
1,116,854
—
4,996,899
Total investment securities
$
22,013,543
$
2,562,919
$
—
$
24,576,462
Following is a description of the methodologies used for assets measured at fair value:
Stocks and ETFs (Level 1 and 2): Valued at the closing price reported in the active market in which the individual securities are traded.
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
Mutual funds (Level 1 and 2): Valued at the daily closing price reported by the fund. Mutual funds held by the Company are open-end mutual funds that are registered with the U.S. Securities and Exchange Commission. These funds are required to publish their daily net asset values and to transact at that price. The mutual funds held by the Company are deemed to be actively traded.
Debt securities : Valued at the closing price reported in the active market in which the individual securities are traded.
Impact of Fair Value of AFS Securities on OCI
The carrying value of the Company’s financial instruments approximates fair value generally due to the relative short-term nature of such instruments. Our other financial assets and financial liabilities have fair value that approximate their carrying value.
Pursuant to ASC 326-30-50-4 and 50-5, the Company is required to disclose investment securities that have been in a continuous unrealized loss position for 12 months or more as of the balance sheet date. As of December 31, 2023 and 2022, the Company had continuous unrealized losses over 12 months in Available-For-Sale debt securities (AFS’s) of $ 808,561 and $ 530,987 , respectively. The Company reviewed several factors to assess the credit quality of the debt instruments including, but not limited to, current cash position, operating cash flow, corporate earnings, and the impending maturity date of said securities, as of the most recently filed financial statements. As such, during the year ended December 31, 2023, the Company has recorded an allowance for credit losses regarding AFS’s debt securities totaling $ 808,561 , which is included in net income on the Company’s consolidated statements of comprehensive income. The remaining available-for-sale debt securities with a fair market value of $ 35.2 million had an unrealized gain of $ 315,614 at December 31, 2023.
The following table presents the impact of the Company’s Available-For-Sale (AFS) securities – debt securities on its Other Comprehensive Income (OCI) for the years ended December 31, 2023 and 2022:
Year Ended
December 31,
2023
2022
OCI from AFS securities – debt securities:
Unrealized (losses) on AFS-debt securities at beginning of period
$
( 561,490 )
$
( 476,016 )
Reversal of losses from unrealized to realized
—
310,000
Reclassification of losses from unrealized to provision for credit losses
808,561
—
Unrealized (losses) on securities available-for-sale – debt securities
68,543
( 395,474 )
Unrealized gain (loss) on investment securities, net
68,543
( 85,474 )
Balance at end of period
$
315,614
$
( 561,490 )
As of December 31, 2023 and 2022, the investment securities cost basis were approximately $ 40.5 million and $ 40.0 million, respectively.
4. Mortgages Receivable, net
The Company offers secured, non-bank loans to real estate owners and investors (also known as “hard money” loans) to fund their acquisition, renovation, development, rehabilitation or improvement of properties located primarily in Connecticut, New York and Florida. The Company’s lending standards typically require that the original principal amount of all mortgage receivable notes be secured by first mortgage liens on one or more properties owned by the borrower or related parties and that the maximum LTV be no greater than 70% of the appraised value of the underlying collateral, as determined by an independent appraiser at the time of the loan origination. The Company considers the maximum LTV as an indicator for the credit quality of a mortgage note receivable. In the case of properties undergoing renovation, the loan-to-value ratio is calculated based on the estimated fair market value of the property after the renovations have been completed. However, the Company makes exceptions to this guideline if the facts and circumstances support the incremental risk. These factors include the additional collateral provided by the borrower, the credit profile of the
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
borrower, the Company’s previous relationship, if any, with the borrower, the nature of the property, the geographic market in which the property is located and any other information the Company deems appropriate.
The loans are generally for a term of one to three years . The loans are initially recorded and carried thereafter, in the financial statements, at cost. Most of the loans provide for monthly payments of interest only (in arrears) during the term of the loan and a “balloon” payment of the principal on the maturity date.
As of December 31, 2023 and 2022, loans on nonaccrual status had an outstanding principal balance of $ 84,592,411 and $ 55,691,857 , respectively. The nonaccrual loans are inclusive of loans pending foreclosure. For the year ended December 31, 2023 and 2022, $ 598,109 and $ 350,861 of interest income was recorded on nonaccrual loans due to payments received, respectively.
For the years ended December 31, 2023 and 2022, the aggregate amounts of loans funded by the Company were $ 204,884,592 and $ 300,277,303 , respectively, offset by principal repayments of $ 167,036,071 and $ 131,840,244 , respectively.
As of December 31, 2023, the Company’s mortgage loan portfolio includes loans ranging in size up to approximately $ 37.4 million with stated interest rates ranging from 5.0 % to 15.0 %. The default interest rate is generally 18 % but could be more or less depending on state usury laws and other considerations deemed relevant by the Company.
As of December 31, 2023 the Company had one borrower representing 10.1 % of the outstanding mortgage loan portfolio, or approximately $ 50.4 million. As of December 31, 2022, no such borrower represented more than 10 % of the outstanding loan portfolio.
The Company may agree to extend the term of a loan if, at the time of the extension, the loan and the borrower meet all the Company’s underwriting requirements. The Company treats a loan extension as a new loan. If an interest reserve is established at the time a loan is funded, accrued interest is paid out of the interest reserve and recognized as interest income at the end of each month. If no reserve is established, the borrower is required to pay the interest monthly from its own funds. The deferred origination, loan servicing and amendment fee income represents amounts that will be recognized over the contractual life of the underlying mortgage notes receivable.
Allowance for credit loss
Allowance for credit losses (“CECL Allowance”) are charged to income in amounts sufficient to maintain an allowance for credit losses inherent in the loans that are established systematically by management as of the reporting date. Management’s estimate of expected credit losses is based on an evaluation of relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the future collectability of the reported amounts. The Company uses static pool modeling techniques to determine the allowance for loan losses expected over the remaining life of the loans, which is supplemented by management’s judgment. Expected losses are estimated for groups of accounts aggregated by geographical location.
The Company’s estimate of expected credit losses includes a reasonable and supportable forecast period equal to the contractual term of the loan plus any applicable short-term extensions that are reasonably expected for construction loans. The Company reviews charge-off experience factors, contractual delinquency, historical collection rates, the value of underlying collateral and other information to make the necessary judgments as to credit losses expected in the portfolio as of the reporting date. While management utilizes the best information available to make its evaluations, changes in macroeconomic conditions, interest rate environments, or both, may significantly impact the assumptions and inputs used in determining the allowance for credit losses. The Company’s charge-off policy is determined by a review of each delinquent loans. The Company has an accounting policy to not place loans on nonaccrual status unless they are more than 90 days delinquent. Accrual of interest income is generally resumed when the
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
delinquent contractual principal and interest is paid in full or when a portion of the delinquent contractually payments are made and the ongoing required contractual payments have been made for an appropriate period.
In assessing the CECL Allowance, the Company considers historical loss experience, current conditions, and a reasonable and supportable forecast of the macroeconomic environment. The Company derived an annual historical loss rate based on its historical loss experience in its portfolio, adjusted to incorporate the risks of construction lending and to reflect the Company’s expectations of the macroeconomic environment.
The following table summarizes the activity in the Mortgages receivable allowance for credit losses from adoption on January 1, 2023 through December 31, 2023:
Allowance for credit losses
Allowance for credit losses
as of
Provision for credit losses
Provision
as of
December 31,
Adoption of ASU
related to
for
December 31,
(dollars in thousands)
2022(1) (1)
2016-13
loans pending foreclosure
credit losses
2023
Geographical Location
New England
$
105
$
1,302
$
4,069
$
288
$
5,764
West
—
7
—
( 7 )
—
South
—
402
97
( 64 )
435
Mid-Atlantic
—
210
892
222
1,324
Total
$
105
$
1,921
$
5,058
$
439
$
7,523
(1) As of December 31, 2022, amounts represent probable loan loss provisions recorded before the adoption of the ASU 2016-13.
Presented below is the Company’s loan portfolio by geographical location:
December 31, 2023
December 31, 2022
(dollars in thousands)
Carrying Value
% of Portfolio
Carrying Value
% of Portfolio
Geographical Location
New England
$
232,437
46.6
%
$
225,603
49.0
%
West
4,101
0.8
%
3,150
0.7
%
South
163,409
32.7
%
135,857
29.5
%
Mid-Atlantic
99,288
19.9
%
96,128
20.8
%
Total
499,235
100.0
%
460,738
100.0
%
Less, Allowance for credit losses
( 7,523 )
( 105 )
Carrying value, net
$
491,712
$
460,633
Presented below are the carrying values by property type:
December 31, 2023
December 31, 2022
Outstanding
Outstanding
(dollars in thousands)
Principal
% of Portfolio
Principal
% of Portfolio
Property Type
Residential
$
246,520
49.4
%
$
229,944
49.9
%
Commercial
186,524
37.4
%
154,929
33.6
%
Pre-Development Land
35,920
7.2
%
46,499
10.1
%
Mixed use
30,271
6.0
%
29,366
6.4
%
Total
499,235
100.0
%
460,738
100.0
%
Less, Allowance for credit losses
( 7,523 )
( 105 )
Carrying value, net
$
491,712
$
460,633
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
The following tables allocate the carrying value of the Company’s loan portfolio based on internal credit quality indicators in assessing estimated credit losses and vintage of origination at the dates indicated:
December 31, 2023
Year Originated (1)
Carrying
% of
FICO Score (2) (dollars in thousands)
Value
Portfolio
2023
2022
2021
2020
Prior
Under 500
$
6,664
1.3
%
$
216
$
4,900
$
—
$
—
$
1,548
501-550
6,555
1.3
%
2,331
1,440
1,864
—
920
551-600
33,723
6.8
%
15,019
9,839
6,854
1,127
884
601-650
103,601
20.8
%
16,053
26,981
52,073
3,988
4,506
651-700
97,284
19.5
%
17,862
40,318
30,203
3,662
5,239
701-750
167,977
33.6
%
19,935
51,276
83,946
7,411
5,409
751-800
59,413
11.9
%
14,461
15,906
27,027
592
1,427
801-850
24,018
4.8
%
865
23,096
—
—
57
Total
499,235
100.0
%
$
86,742
$
173,756
$
201,967
$
16,780
$
19,990
Less, Allowance for credit losses
( 7,523 )
Carrying value, net
$
491,712
(1) Represents the year of origination or amendment where the loan was subject to a full re-underwriting.
(2) The FICO Scores are calculated at the inception of the loan and are updated if the loan is modified or on an as needed basis.
December 31, 2022
Year Originated (1)
Carrying
% of
FICO Score (2) (dollars in thousands)
Value
Portfolio
2022
2021
2020
2019
Prior
Under 500
$
629
0.1
%
$
—
$
—
$
185
$
235
$
209
501-550
4,786
1.0
%
—
1,779
87
803
2,117
551-600
15,977
3.5
%
3,061
8,256
1,836
1,357
1,467
601-650
40,349
8.8
%
21,382
7,474
6,273
1,547
3,673
651-700
84,085
18.3
%
33,832
31,342
7,398
5,269
6,244
701-750
174,347
37.8
%
65,190
90,524
11,892
5,527
1,214
751-800
125,347
27.2
%
68,826
45,038
9,470
1,640
373
801-850
15,218
3.3
%
14,554
—
399
—
265
Total
460,738
100.0
%
$
206,845
$
184,413
$
37,540
$
16,378
$
16,562
Less, Allowance for credit losses
( 105 )
Carrying value, net
$
460,633
(1) Represents the year of origination or amendment where the loan was subject to a full re-underwriting.
(2) The FICO Scores are calculated at the inception of a loan and are updated if the loan is modified or on an as needed basis.
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
The following is the maturities of mortgages receivable as of December 31,2023:
Years Ending December 31, (Dollars in thousands)
Amount
2023 and prior
$
123,769
2024
288,534
2025
86,836
Thereafter
96
Total
499,235
Less, Allowance for credit losses
( 7,523 )
Total
$
491,712
At December 31, 2023, of the 311 mortgage loans in the Company’s portfolio, 56 were the subject of foreclosure proceedings. The aggregate outstanding principal balance of these loans and the accrued but unpaid interest and borrower charges, as of December 31, 2023 was approximately $ 68.1 million. As of December 31, 2023 and 2022, the Company has taken an allowance against loans subject to foreclosure proceedings of approximately $ 6.2 million and $- 0 -, respectively.
At December 31, 2022, of the 444 mortgage loans in the Company’s portfolio, 40 were the subject of foreclosure proceedings. The aggregate outstanding principal balance of these loans and the accrued but unpaid interest and borrower charges as of December 31, 2022 was approximately $ 24.0 million. In the case of each of these loans, the Company believed the value of the collateral exceeded the outstanding balance on the loan.
Loan modifications made to borrowers experiencing financial difficulty
In certain situations, the Company may provide loan modifications to borrowers experiencing financial difficulty. These modifications may include term extensions, and adding unpaid interest, charges and taxes to the principal balance intended to minimize the Company’s economic loss and to avoid foreclosure or repossession of collateral. The Company generally receives additional collateral as part of extending the terms of the loan for loans experiencing financial difficulty.
The table below presents loan modifications made to borrowers experiencing financial difficulty:
Year Ended December 31, 2023
% of Total
Carrying Value of
(in thousands)
Carrying Value
Loans, net
Financial Effect
Loans modified during the period ended
Term extension
$
71,988
14.6
%
A weighted average of 17.1 months were added to the life of the loans
Other
$
25,492
5.17
%
Unpaid interest/taxes/charges added to principal balance
F-22
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
The Company monitors the performance of loans modified to borrowers experiencing financial difficulty. The table below presents the performance of loans that have been modified in the last 12 months to borrowers experiencing financial difficulty. The Company considers loans that are 90 days past due to be in payment default.
Year Ended December 31, 2023
(in thousands)
Current
90-119 days past due
120+ days past due
Total
Loans modified during the period ended
Term extension
$
71,988
$
—
$
—
$
71,988
Other
$
25,492
$
—
$
—
$
25,492
The Company has committed to lend additional amounts totaling approximately $ 18.7 million to borrowers experiencing financial difficulty.
5. Investment in Rental Real Estate, net
At December 31, 2023, investment in rental real estate, net consisted of the following:
Amount
Land
$
3,956,786
Building, net
4,904,866
Site improvements, net
353,262
Tenant improvements
1,182,842
Construction in progress
156,705
Total
$
10,554,461
Additionally, the Company leases space to a tenant under an operating lease. The lease provides for the payment of fixed base rent payable monthly in advance and periodic step-ups in rent over the term of the lease and a pass through to tenants their share of increases in real estate taxes and operating expenses over a base year. The lease also provides for free rent and a tenant improvement allowance of approximately $ 1.8 million.
As of December 31, 2023, future minimum rents under non-cancelable operating leases were as follows:
Years Ending December 31,
Amount
2024
$
—
2025
623,953
2026
1,260,385
2027
1,285,592
2028
1,311,304
Thereafter
9,182,983
Total
$
13,664,217
6. Real Estate Owned
Property acquired through foreclosure are included on the consolidated balance sheet as real estate owned and further categorized as held for sale or held for rental, described in detail below.
As of December 31, 2023 and 2022, real estate owned totaled $ 3,461,519 and $ 5,216,149 . During the year ended December 31, 2023, the Company’s real estate owned portfolio recorded an impairment loss of $ 794,462 compared to an impairment loss of $ 799,909 in 2022, which is considered a level 3 non-recurring fair market value adjustment.
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
The following table presents the Company’s REO as of December 31, 2023 and 2022:
Year Ended
December 31,
2023
2022
Real estate owned at the beginning of year
$
5,216,149
$
6,559,010
Principal basis transferred to real estate owned
1,756,125
1,376,733
Charges and building improvements
229,587
126,443
Proceeds from sale of real estate owned
( 3,027,275 )
( 2,090,880 )
Impairment loss
( 794,462 )
( 799,909 )
Gain on sale of real estate owned
93,869
44,752
Balance at end of year
$
3,461,519
$
5,216,149
As of December 31, 2023, REO included $ 800,000 of properties held for rental and $ 2,661,519 of properties held for sale. As of December 31, 2022, REO included $ 801,394 of properties for rental and $ 4,414,755 of properties held for sale.
Properties Held for Sale
During the year ended December 31, 2023, the Company sold seven properties held for sale and recognized an aggregate gain of $ 87,633 . During the year ended December 31, 2022, the Company sold five properties held for sale and recognized an aggregate loss of $ 44,752 .
Properties Held for Rental
As of December 31, 2023, one property, a commercial building, was held for rental. The tenant signed a 5-year lease that commenced on August 1, 2021.
As of December 31, 2023, future minimum rents under this lease were as follows:
Years Ending December 31,
Amount
2024
$
53,200
2025
53,200
2026
31,033
Total
$
137,433
7. Other Assets
As of December 31, 2023 and December 31, 2022, other assets consists of the following:
December 31, 2023
December 31, 2022
Prepaid expenses
$
511,022
$
410,373
Other receivables
1,922,513
3,519,804
Other assets
4,737,064
477,048
Deferred financing costs, net
307,868
54,548
Deferred leasing cost
386,923
—
Leases in place intangible
568,460
—
Goodwill
391,000
391,000
Intangible asset - trade name
130,400
130,400
Total
$
8,955,250
$
4,983,173
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
8. Line of Credit, Mortgage Payable, and Churchill Facility
Wells Fargo Margin Line of Credit
During the year ended December 31, 2020, the Company established a margin loan account at Wells Fargo Advisors that is secured by the Company’s portfolio of short-term securities. The Wells Fargo credit line bears interest at a rate equal to 1.75 % below the prime rate ( 6.77 % at December 31, 2023 and 5.75 % at December 31, 2022) after certain minor adjustments. As of December 31, 2023 and December 31, 2022 the total outstanding balance on the Wells Fargo credit line was $ 26,792,330 and $ 3,587,894 respectively.
Mortgage Payable
In 2021, the Company obtained a $ 1.4 million adjustable-rate mortgage loan from New Haven Bank (the “NHB Mortgage”) of which $ 750,000 was funded at closing and remained outstanding as of December 31, 2022. The NHB Mortgage accrued interest at an initial rate of 3.75 % per annum for the first 72 months and was due and payable in full on December 1, 2037. During the first 12 months , from December 1, 2021 to November 30, 2022, only interest was due and payable. Beginning on December 1, 2022 principal and interest on the NHB Mortgage were to be due and payable on a monthly basis. All payments under the NHB Mortgage was to be amortized based on a 20 -year amortization schedule. The interest rate was to be adjusted on each of December 1, 2027 and 2032 to the then published 5 -year Federal Home Loan Bank of Boston Classic Advance Rate, plus 2.60 %. The NHB Mortgage was a non-recourse loan, secured by a first mortgage lien on each of the properties, located at 698 Main Street, Branford, Connecticut, and 568 East Main Street, Branford, Connecticut. The $ 750,000 of proceeds funded at closing were used to reimburse the Company for out-of-pocket costs relating to the acquisition of the East Main Street property.
On February 28, 2023, the Company refinanced the NHB Mortgage with a new $ 1.66 million adjustable-rate mortgage loan from New Haven Bank (the “New NHB Mortgage”). The new loan accrues interest at an initial rate of 5.75 % per annum for the first 60 months . The interest rate will be adjusted on each of March 1, 2028 and March 1, 2033 to the then published 5-year Federal Home Loan Bank of Boston Classic Advance Rate, plus 1.75 %. Beginning on April 1, 2023 and through March 1, 2038, principal and interest will be due and payable on a monthly basis. All payments under the new loan are amortized based on a 20-year amortization schedule. The unpaid principal amount of the loan and all accrued and unpaid interest are due and payable in full on March 1, 2038. The new loan is a non-recourse obligation, secured by a first mortgage lien on the property located at 568 East Main Street, Branford, Connecticut.
Churchill MRA Funding I LLC Repurchase Financing Facility
On July 21, 2021, the Company consummated a $ 200 million master repurchase financing facility (“Facility”) with Churchill MRA Funding I LLC (“Churchill”), a subsidiary of Churchill Real Estate, a vertically integrated real estate finance company based in New York, New York. Under the terms of the Facility, the Company has the right, but not the obligation, to sell mortgage loans to Churchill, and Churchill has the right, but not the obligation, to purchase those loans. In addition, the Company has the right and, in some instances the obligation, to repurchase those loans from Churchill. The amount that Churchill will pay for each mortgage loan it purchases will vary based on the attributes of the loan and various other factors. The repurchase price is calculated by applying an interest factor, as defined, to the purchase price of the mortgage loan. The Company has also pledged the mortgage loans sold to Churchill to secure its repurchase obligation. The cost of capital under the Facility is equal to the sum of (a) the greater of (i) 0.25 % and (ii) the 90-day SOFR (which replaced the 90-day LIBOR) plus (b) 3 %- 4 %, depending on the aggregate principal amount of the mortgage loans held by Churchill at that time.
The Facility is subject to other terms and conditions, including representations and warranties, covenants and agreements typically found in these types of financing arrangements. Under one such covenant, the Company (A) is prohibited from (i) paying any dividends or making distributions in excess of 90% of its taxable income, (ii) incurring any indebtedness or (iii) purchasing any of its capital stock, unless, it has an asset coverage ratio of at least 150 %; and (B) must maintain unencumbered cash and cash equivalents in an amount equal to or greater than 2.50 % of the amount of its repurchase obligations. Churchill has the right to terminate the Facility
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
at any time upon 180 days prior notice to the Company. The Company then has an additional 180 days after termination to repurchase all the mortgage loans held by Churchill.
The Company uses the proceeds from the Facility to finance the continued expansion of its lending business and for general corporate purposes. At December 31, 2023, the total amount outstanding under the Facility was $ 26,461,098 . The collateral pledged to Churchill at December 31, 2023 was 14 mortgage loans that in the aggregate had unpaid principal balance of approximately $ 50.6 million. As of December 31, 2023 the effective rate charged under the Facility was 9.47 %. The collateral pledged to Churchill at December 31, 2022 was 32 mortgage loans that in the aggregate had unpaid principal balance of approximately $ 77.8 million.
Each of the New NHB Mortgage and the Facility contain cross-default provisions.
Line of Credit – Needham Bank
On March 2, 2023, the Company entered into a Credit and Security Agreement (the “Credit Agreement”), with Needham Bank, a Massachusetts co-operative bank, as the administrative agent (the “Administrative Agent”) for the lenders party thereto (the “Lenders”) with respect to a $ 45 million revolving credit facility (the “Needham Credit Facility”). Under the Credit Agreement, the Company also has the right to request an increase in the size of the Needham Credit Facility up to $ 75 million, subject to certain conditions, including the approval of the Lenders. As of September 8, 2023, the Needham Credit Facility was increased to $ 65 million. Loans under the Needham Credit Facility accrue interest at the greater of (i) the annual rate of interest equal to the “prime rate,” as published in the “Money Rates” column of The Wall Street Journal minus one-quarter of one percent ( 0.25 %), and (ii) four and one-half percent ( 4.50 %). All amounts borrowed under the Needham Credit Facility are secured by a first priority lien on virtually all Company’s assets. Assets excluded from the lien include real estate owned by the Company (other than real estate acquired pursuant to foreclosure) and mortgages sold to Churchill under the Facility. The Needham Credit Facility expires March 2, 2026 but the Company has a right to extend the term for one year upon the consent of the Administrative Agent and the Lenders, which consent cannot be unreasonably withheld, and so long as it is not in default and satisfies certain other conditions. All outstanding revolving loans and accrued but unpaid interest are due and payable on the expiration date. The Company may terminate the Needham Credit Facility at any time without premium or penalty by delivering written notice to the Administrative Agent at least ten ( 10 ) days prior to the proposed date of termination. The Needham Credit Facility is subject to other terms and conditions, including representations and warranties, covenants and agreements typically found in these types of financing arrangements, including a covenant that requires the Company to maintain: (A) a ratio of Adjusted EBITDA (as defined in the Credit Agreement) to Debt Service (as defined in the Credit Agreement) of less than 1.40 to 1.0 , tested on a trailing-twelve-month basis at the end of each fiscal quarter; (B) a sum of cash, cash equivalents and availability under the facility equal to or greater than $ 10 million; and (C) an asset coverage ratio of at least 150 %.
The Company uses the proceeds from the Needham Credit Facility to finance the continued expansion of its lending business and for general corporate purposes. At December 31, 2023, the total amount outstanding under the Needham Credit Facility was $ 35.0 million, and the interest rate was 8.25 %.
9. Unsecured Notes Payable
At December 31, 2023, the Company had an aggregate of $ 282,353,260 of unsecured, unsubordinated notes payable outstanding, net of $ 6,048,490 of deferred financing costs (collectively, the “Notes”).
(i) Notes having an aggregate principal amount of $ 23,663,000 bearing interest at 7.125 % per annum and maturing June 30, 2024 (“the June 2024 Notes”);
(ii) Notes having an aggregate principal amount of $ 34,500,000 bearing interest at 6.875 % per annum and maturing December 30, 2024 (the “December 2024 Notes”);
(iii) Notes having an aggregate principal amount of $ 56,363,750 bearing interest at 7.75 % per annum and maturing September 30, 2025 (the “September 2025 Notes”);
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
(iv) Notes having an aggregate principal amount of $ 51,750,000 bearing interest at 6.0 % per annum and maturing December 30, 2026 (the “December 2026 Notes”);
(v) Notes having an aggregate principal amount of $ 51,875,000 bearing interest at 6.0 % per annum and maturing March 30, 2027 (the “March 2027 Notes”);
(vi) Notes having an aggregate principal amount of $ 30,000,000 bearing interest at 7.125 % per annum and maturing June 30, 2027 (the “June 2027 Notes”); and
(vii) Notes having an aggregate principal amount of $ 40,250,000 bearing interest at 8.00 % per annum and maturing September 30, 2027 (the “September 2027 Notes”).
The Notes were sold in underwritten public offerings, were issued in denomination of $ 25.00 each and are listed on the NYSE American and trade under the symbols “SCCB,” “SACC,” “SCCC,” “SCCD,” “SCCE,” “SCCF” and “SCCG,” respectively. All the Notes were issued at par except for the last tranche of the September 2025 notes, in the original principal amount of $ 28 million, which were issued at $ 24.75 each. Interest on the Notes is payable quarterly on each March 30, June 30, September 30 and December 30 that they are outstanding. So long as the Notes are outstanding, the Company is prohibited from making distributions in excess of 90 % of its taxable income, incurring any additional indebtedness or purchasing any shares of its capital stock unless it has an “Asset Coverage Ratio” of at least 150 % after giving effect to the payment of such dividend, the incurrence of such indebtedness or the application of the net proceeds, as the case may be. The Company may redeem the Notes, in whole or in part, without premium or penalty, at any time after their second anniversary of issuance upon at least 30 days prior written notice to the holders of the Notes. The redemption price will be equal to the outstanding principal amount of the Notes redeemed plus the accrued but unpaid interest thereon up to, but not including the date of redemption. Currently, the June 2024 Notes, December 2024 Notes, the September 2025, the December 2026 Notes and the March 2027 Notes are callable at any time. The June 2027 Notes will be callable at any time after May 11, 2024, and the September 2027 Notes will be callable at any time after August 23, 2024.
The following are the future principal payments on the notes payable as of December 31, 2023:
Years ending December 31,
Amount
2024
$
58,163,000
2025
56,363,750
2026
51,750,000
2027
122,125,000
Total principal payments
288,401,750
Deferred financing costs
( 6,048,490 )
Total notes payable, net of deferred financing costs
$
282,353,260
The estimated amortization of the deferred financing costs as of December 31, 2023 is as follows:
Years ending December 31,
Amount
2024
$
2,336,228
2025
1,807,606
2026
1,410,319
2027
494,337
Total deferred costs
$
6,048,490
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
10. Accounts Payable and Accrued Liabilities
As of December 31, 2023 and 2022, accounts payable and accrued liabilities include the following:
December 31, 2023
December 31, 2022
Accounts payable and accrued expenses
$
1,330,546
$
1,109,789
Allowance for unfunded contractual obligation credit losses
508,600
—
Other notes
—
6,014
Accrued interest
482,389
323,416
Total
$
2,321,535
$
1,439,219
11. Fee and Other Income
For the years ended December 31, 2023 and 2022, fee and other income consists of the following:
Year Ended
December 31,
2023
2022
Late and other fees
$
719,235
$
415,728
Processing fees
120,940
194,000
Rental income, net
53,200
65,847
Extension fees
1,235,920
666,036
Construction servicing fees
1,015,148
—
Project fees
562,750
—
Other fees
133,907
316,407
Legal fees
432,210
321,555
Other income
539,319
989,544
Total
$
4,812,629
$
2,969,117
12. Commitments and Contingencies
Origination, Modification, and Construction Servicing Fees
Loan origination, modification and construction servicing fees generally range from 1 %- 3 % of the original loan principal or the modified loan balance and, generally, are payable at the time the loan is funded or modified. The unamortized portion is recorded as deferred revenue on the balance sheet. At December 31, 2023, deferred revenue was $ 4,647,302 , which will be recorded as income as follows:
Years ending December 31,
Amount
2024
$
4,145,890
2025
501,412
Total
$
4,647,302
In instances in which mortgages are repaid before their maturity date, the balance of any unamortized deferred revenue is generally recognized in full at the time of repayment.
Employment Agreements
In February 2017, the Company entered into an employment agreement with John Villano, the material terms of which are as follows: (i) the employment term is five years with extensions for successive one-year periods unless either party provides written
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
notice at least 180 days prior to the next anniversary date of its intention to not renew the agreement; (ii) a base salary of $ 260,000 , which was increased in April 2018, April 2021 and April 2022 to $ 360,000 , $ 500,000 and $ 750,000 , respectively; (iii) incentive compensation in such amount as determined by the Compensation Committee of the Company’s Board of Directors; (iv) participation in the Company’s employee benefit plans; (v) full indemnification to the extent permitted by law; (vi) a two-year non-competition period following the termination of employment without cause; and (vii) payments upon termination of employment or a change in control. In April 2021, the Company granted 89,928 restricted common shares (having a market value of approximately $ 500,000 ) to Mr. Villano. All shares pursuant to this grant were fully vested on January 1, 2024. In April 2022, the Company granted 98,425 restricted common shares (having a fair market value of approximately $ 500,000 ) to Mr. Villano. One -third of such shares vested on January 1, 2023 and 2024, and the remaining one -third will vest on January 1, 2025. In February 2023, the Company granted 130,890 restricted common shares (having a fair market value of approximately $ 506,000 ) to Mr. Villano. One -third of such shares vested on January 1, 2024 and an additional one -third will vest on each of January 1, 2025 and 2026 . As of December 31, 2023, there were 120,068 restricted common shares that remain unvested and $ 743,885 of future stock compensation expense.
In July 2022, the Company entered into an employment agreement with John E. Warch, the material terms of which are as follows: (i) the employment term commenced on August 1, 2022 and will continue until terminated by either party; (ii) a base salary of $ 325,000 ; (iii) incentive compensation in such amount as determined by the Compensation Committee of the Company’s Board of Directors; (iv) participation in the Company’s employee benefit plans; (v) full indemnification to the extent permitted by law; and (vi) payments upon termination of employment or a change in control. In February 2023, the Company granted 8,000 restricted common shares (having a fair market value of approximately $ 30,000 ) to Mr. Warch. One -third of such shares vested on February 9, 2023, and an additional one -third were to vest on each of February 9, 2024 and 2025. In connection with the termination of Mr. Warch’s employment effective May 4, 2023, the 5,333 unvested restricted common shares were forfeited to the Company.
Unfunded Commitments
At December 31, 2023, the Company had future funding obligations totaling approximately $ 97.9 million, which can be drawn by the borrowers when the conditions relating thereto have been satisfied. The unfunded commitments will be funded from loan payoffs and additional drawdowns under existing and future credit facilities and proceeds from sale of debt and equity securities.
Other
In the normal course of its business, the Company is named as a party-defendant because it is a mortgagee having interests in real properties that are being foreclosed upon, primarily resulting from unpaid property taxes. The Company actively monitors these actions and, in all cases, believes there remains sufficient value in the subject property to assure that no loan impairment exists. At December 31, 2023, there were three such properties. The unpaid principal balance on the properties that are subject to this proceeding was approximately $ 0.8 million.
In accordance with the asset purchase agreement with Urbane New Haven, LLC (“Urbane”) in October 2022, under certain circumstances the Company will be required to pay Urbane 20 % of the net proceeds, as defined, of certain real estate development projects completed by the Company until such time that the former principal owner of Urbane, who is currently employed by the Company, is no longer employed by the Company. Any future payments will be expensed.
On September 11, 2023, the Company entered into a contract to acquire a residential property in Miami, FL. The purchase price for the property is $ 2,300,000 . The Company paid $ 230,000 upon the execution and delivery of the contract, which amount is refundable if the seller fails to satisfy certain closing conditions or fails to transfer ownership of the property. The balance of the purchase price is due at closing. As of the date of this report, the Company expects the closing to occur during the second quarter of 2024.
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
13. Related Party Transactions
In the ordinary course of business, the Company may originate, fund, manage and service loans to shareholders. The underwriting process on these loans adheres to prevailing Company policy. The terms of such loans, including the interest rate, income, origination fees and other closing costs are the same as those applicable to loans made to unrelated third parties in the portfolio. As of December 31, 2023, and 2022, loans to known shareholders totaled $ 25,551,356 and $ 23,545,094 , respectively. Interest income earned on these loans totaled $ 2,447,943 and $ 1,896,834 for the years ended December 31, 2023 and 2022, respectively.
Until the third quarter of 2022, the wife of the Company’s chief executive officer was employed by the Company as its director of finance. For 2023 and 2022, she received compensation of $- 0 - and $ 63,168 , respectively. She retired in the third quarter of 2022.
In December 2021, the Company hired the daughter of the Company’s chief executive officer to perform certain internal audit and compliance services. For 2023 and 2022, she received compensation of $ 192,346 and $ 141,652 , respectively.
14. Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, investments in securities, investments in partnerships, and mortgage loans.
The Company maintains its cash and cash equivalents with various financial institutions. Accounts at the financial institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $ 250,000 per depositor.
The Company is potentially subject to concentration of credit risk in its investment securities. Currently, all of its investment securities, which include common stocks, preferred stock, corporate bonds and mutual funds, are held at Wells Fargo Advisors. Wells Fargo Advisors is a member of the Securities Investor Protection Corporation (SIPC). SIPC protects clients against the custodial risk of a member investment firm becoming insolvent by replacing missing securities and cash up to $500,000, including up to $250,000 in cash, per client in accordance with SIPC rules.
The Company makes loans that are secured by first mortgage liens on real property located primarily in Connecticut (approximately 39.8 %), Florida (approximately 25.4 %) and New York (approximately 13.8 %). This concentration of credit risk may be affected by changes in economic or other conditions of the particular geographic area.
Credit risks associated with the Company’s mortgage loan portfolio and related interest receivable are described in Note 4 - Mortgages Receivable.
15. Stock-Based Compensation and Employee Benefits
Stock-Based Compensation
On October 27, 2016, the Company adopted the 2016 Equity Compensation Plan (the “Plan”), the purpose of which is to align the interests of the Company’s officers, other employees, advisors and consultants or any subsidiary, if any, with those of the Company’s shareholders and to afford an incentive to such officers, employees, consultants and advisors to continue as such, to increase their efforts on the Company’s behalf and to promote the success of the Company’s business. The Plan is administered by the Compensation Committee. The maximum number of common shares reserved for the grant of awards under the Plan is 1,500,000 , subject to adjustment as provided in Section 5 of the Plan. The number of securities remaining available for future issuance under the Plan as of December 31, 2023 was 988,785 .
During the years ended December 31, 2023 and 2022, the Company granted an aggregate of 196,056 and 163,967 restricted common shares (including CEO granted restricted common shares, see Note 12) under the Plan, respectively. With respect to the
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
restricted common shares granted in 2023, (i) an aggregate of 23,500 shares vested immediately on the date of grant, an additional aggregate of 20,833 shares will vest on each of the first and second anniversaries of the date of grant, (ii) 43,630 shares vested on January 1, 2024, and (iii) 43,630 shares will vest on each of January 1, 2025 and 2026, respectively.
Stock-based compensation for the years ended December 31, 2023 and 2022 was $ 822,231 and $ 495,015 , respectively. As of December 31, 2023, there were 120,068 restricted common shares that remain unvested and $ 743,885 of future stock compensation expense.
Employee Benefits
On April 16, 2018, the Company’s Board of Directors approved the adoption of the Sachem Capital Corp. 401(k) Profit Sharing Plan (the “401(k) Plan”). All employees who meet the participation criteria are eligible to participate in the 401(k) Plan. Under the terms of the 401(k) Plan, the Company is obligated to contribute 3 % of a participant’s compensation to the 401(k) Plan on behalf of an employee-participant. For the years ended December 31, 2023 and 2022, the 401(k) Plan expense was $ 170,973 and $ 92,831 , respectively and is included under Compensation, fees and taxes in the Consolidated Statements of Comprehensive Income.
16. Equity Offerings
On August 24, 2022, the Company filed a prospectus supplement to its Form S-3 Registration Statement covering the sale of up to $ 75,000,000 of its common shares and shares of its Series A Preferred Stock (as defined in Note 19 below) with an aggregate liquidation preference of up to $ 25,000,000 in an “at-the market” offering, which is ongoing. During the year ended December 31, 2023, the Company sold an aggregate of 126,923 shares of Series A Preferred Stock having an aggregate liquidation preference of $ 3,173,075 and an aggregate of 5,546,891 common shares, realizing net proceeds of approximately $ 20.5 million. During the year ended December 31, 2022, the Company did not sell any shares of Series A Preferred Stock and sold an aggregate of 7,879,907 common shares, realizing net proceeds of approximately $ 39.3 million. At December 31, 2023, approximately $ 45.4 million of common shares and shares of Series A Preferred Stock having a liquidation preference of $ 22.4 million were available for future sale under the ongoing “at-the market” offering.
17. Partnership Investments
As of December 31, 2023, the Company had invested an aggregate of approximately $ 43.0 million in five limited liability companies in which it held non-controlling interests. The Company’s ownership interest in four of the limited liability companies ranges from approximately 7 % to 49 % and one of the partnerships is owned 100 % by the Company. The Company accounts for these investments at cost because the Company does not manage the entities and thus, has no control or have significant influence over the investments. The third-party manager of the investments is a commercial real estate finance company that provides debt capital solutions to local and regional commercial real estate owners in the Northeastern United States. The Company’s withdrawal from each limited liability company may only be granted by the manager of such entity. Each limited liability company has elected to be treated as a partnership for income tax purposes.
The Company’s partnership investments can be categorized into two fund structures, fund investments and direct loan investments. The fund investments primarily include investments in two partnerships that invest in mortgage loans. The direct loan investments are through three partnerships whereby the Company directly invests in the participation of individual loans. Both the fund and direct loan structure primarily invest in mortgage loans to borrowers with a majority of the deals being leveraged by a bank. These loans are primarily two- to three- year collateralized mortgage loans, often with contractual extension options for the borrowers of an additional year. The Company receives quarterly dividends from the partnerships that are composed of a preferred return, return of capital and promote depending on each loan’s waterfall calculation, as defined by the loan agreements. The Company’s interests in the funds are not redeemable at any time, as its investment will be repaid as the underlying loans are repaid. The Company expects to be repaid on its current investments by December 31, 2027.
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
For the year ended December 31, 2023 and 2022, the partnerships generated $ 3,521,721 and $ 1,809,564 , respectively, of income for the Company.
At December 31, 2023, the Company had unfunded partnership commitments totaling approximately $ 3.9 million.
18. Special Purpose Acquisition Corporation
During the year ended December 31, 2023, the Company expensed its investment in Sachem Acquisition Corp., a special purpose acquisition company as it no longer deemed it a viable investment. The amount was $ 477,047 and is reflected in general and administrative expenses in the Consolidated Statements of Comprehensive Income.
19. Series A Preferred Stock
The Company has designated 2,903,000 shares of its authorized preferred shares, par value $ 0.001 per share, as shares of Series A Preferred Stock (the “Series A Preferred Stock”) with the powers, designations, preferences and other rights as set forth in an Amended and Restated Certificate of Designation (the “Series A Designation Certificate”). The Series A Designation Certificate provides that the Company will pay quarterly cumulative dividends on the Series A Preferred Stock, in arrears, on the 30th day of each of March, June, September and December, and including, the date of original issuance of the Series A Preferred Stock until redeemed at 7.75 % of the $ 25.00 per share liquidation preference per annum (equivalent to $ 1.9375 per annum per share). The Series A Preferred Stock is not redeemable before June 29, 2026, except upon the occurrence of a Change of Control (as defined in the Series A Designation Certificate). On or after June 29, 2026, the Company may, at its option, redeem any or all of the shares of the Series A Preferred Stock at $ 25.00 per share plus any accumulated and unpaid dividends to, but not including, the redemption date. Upon the occurrence of a Change of Control, the Company may, at its option, redeem any or all of the shares of Series A Preferred Stock within 120 days after the first date on which such Change of Control occurred at $ 25.00 per share plus any accumulated and unpaid dividends to, but not including, the redemption date. The Series A Preferred Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and will remain outstanding indefinitely unless repurchased or redeemed by the Company or converted into common shares in connection with a Change of Control by the holders of the Series A Preferred Stock. Upon the occurrence of a Change of Control, each holder of Series A Preferred Stock will have the right (subject to the Company’s election to redeem the Series A Preferred Stock in whole or in part, as described above, prior to the Change of Control Conversion Date as defined in the Series A Designation Certificate) to convert some or all of the Series A Preferred Stock held by such holder on the Change of Control Conversion Date into a number of the common shares determined by formula, in each case, on the terms and subject to the conditions described in the Series A Designation Certificate, including provisions for the receipt, under specified circumstances, of alternative consideration as described in the Series A Designation Certificate. Except under limited circumstances, holders of the Series A Preferred Stock generally do not have any voting rights. The Company has reserved 72,575,000 common shares for issuance upon conversion of the Series A Preferred Stock.
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
20. Subsequent Events
The Company evaluated subsequent events from January 1, 2024 until the financial statements were issued.
On January 10, 2024, the Company paid a dividend of $ 0.11 per share, or $ 5,342,160 in the aggregate, to common shareholders of record as of December 29, 2023.
Between January 2, 2024 and January 24, 2024, through its at-the-market offering facility, the Company sold an aggregate of 568,711 Common Shares, realizing gross proceeds of approximately $ 2.1 million and 79,034 shares of its Series A Preferred Stock having an aggregate liquidation preference of $ 1,975,850 , realizing gross proceeds of $ 1,587,954 (representing a discount of approximately 20 % from the liquidation preference.) There were no sales of capital stock pursuant to the Company’s at -the- market offering facility subsequent to January 24, 2024.
On January 12, 2024, the Company’s tenant in the Westport Asset exercised their option to upsize the lease from approximately 33 % to approximately 50 % occupancy of the leasable square footage, pursuant to the terms outlined in the original lease agreement.
In January 2024, the Company submitted a proposal to the town of Westport for 8 market rate residential units and 2 affordable rate units. Those units were approved in March of 2024, subject to a 30 day appeal period, which extends into April 2024.
On March 19, 2024, the Company’s Board of Directors authorized a one time bonus of a restricted grant of 111,857 shares to John L. Villano. The fair market value on the date of the grant was approximately $ 500,000 .
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