What changed in this filing

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Item 1. Financial Statements

2020-08-10 compared with 2020-05-15 · 647 added, 439 removed, 1179 unchanged (48% of the section changed)

2 unchanged sentences

Consolidated Balance Sheets

March 31, 2020

December 31, 2019

June 30, 2020 December 31, 2019

Cash and cash equivalents $ 82,553,933 $ 29,609,484

9 unchanged sentences

Interest receivable 2,566,443 1,876,799

Other assets 2,231,969 2,594,411

Total assets $ 614,232,263 $ 527,343,078

Liabilities and Equity

Obligations under participation agreements ( Note 7 )

$ 78,246,519 $ 103,186,327

Repurchase agreement payable, net of deferred financing fees 94,571,367 79,608,437

Mortgage loan payable, net of deferred financing fees and other 44,753,239 44,753,633

Revolving credit facility payable, net of deferred financing fees

Revolving credit facility payable 35,000,000 —

Interest reserve and other deposits held on investments 18,459,391 18,542,163

1 unchanged sentence

Lease intangible liabilities, net ( Note 5 )

11,127,360 11,424,809

Due to Manager ( Note 7 )

1,895,105 1,037,168

Interest payable 1,154,023 1,076,231

1 unchanged sentence

Unearned income 334,290 624,021

Distributions payable

Other liabilities 1,078,934 1,684,106

2 unchanged sentences

Preferred stock, $0.01 par value, 50,000,000 shares authorized and

none issued — —

12.5% Series A Cumulative Non-Voting Preferred Stock at liquidation

preference, 125 shares authorized and 125 shares issued and outstanding at

both March 31, 2020 and December 31, 2019

both June 30, 2020 and December 31, 2019 125,000 125,000

Common stock, $0.01 par value, 450,000,000 shares authorized and

19,487,460 and 15,125,681 shares issued and outstanding at

March 31, 2020 and December 31, 2019, respectively

June 30, 2020 and December 31, 2019, respectively 194,875 151,257

Additional paid-in capital 373,443,672 301,727,297

Accumulated deficit ( 64,534,674 ) ( 54,459,821 )

Accumulated other comprehensive income

Total equity 309,228,873 247,543,733

Total liabilities and equity $ 614,232,263 $ 527,343,078

2 unchanged sentences

Consolidated Statements of Operations

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Interest income $ 9,585,175 $ 10,805,438 $ 19,237,040 $ 21,014,402

2 unchanged sentences

Other operating income 228,359 — 341,014 108,957

12,064,629 13,332,694 24,142,200 26,070,628

Operating expenses

5 unchanged sentences

Depreciation and amortization 946,494 946,494 1,892,988 1,892,988

Impairment charge — 1,550,000 — 1,550,000

Professional fees 373,098 2,545,321 667,859 2,718,107

Directors fees 33,750 83,750 117,500 167,500

Other 267,702 75,694 332,651 93,278

5,750,168 8,362,430 11,860,564 12,538,935

Operating income 6,314,461 4,970,264 12,281,636 13,531,693

Other income and expenses

Interest expense from obligations under participation agreements

Interest expense from obligations under

participation agreements ( 1,992,743 ) ( 2,974,837 ) ( 4,593,501 ) ( 5,899,147 )

Interest expense on repurchase agreement payable ( 1,469,669 ) ( 1,366,562 ) ( 3,020,939 ) ( 2,300,535 )

1 unchanged sentence

Interest expense on revolving credit facility ( 599,989 ) — ( 774,978 ) —

Net loss on extinguishment of obligations under participation agreements

Net loss on extinguishment of obligations under

participation agreements — — ( 319,453 ) —

Realized gains on marketable securities 1,076,213 — 1,085,107 —

Unrealized gains on marketable securities 67,522 — 67,522 —

( 3,668,419 ) ( 5,123,749 ) ( 9,056,631 ) ( 9,762,303 )

Net income (loss) $ 2,646,042 $ ( 153,485 ) $ 3,225,005 $ 3,769,390

Preferred stock dividend declared ( 3,906 ) ( 3,906 ) ( 7,812 ) ( 7,812 )

Net income allocable to common stock

Earnings per share — basic and diluted

Net income (loss) allocable to common stock $ 2,642,136 $ ( 157,391 ) $ 3,217,193 $ 3,761,578

Earnings (loss) per share — basic and diluted

$ 0.14 $ ( 0.01 ) $ 0.18 $ 0.25

Weighted-average shares — basic and diluted

19,555,241 14,912,990 18,131,260 14,912,990

Distributions declared per common share $ 0.23 $ 0.51 $ 0.76 $ 1.02

2 unchanged sentences

Consolidated Statements of Comprehensive Income

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Comprehensive income, net of tax

Other comprehensive income

Net income (loss) $ 2,646,042 $ ( 153,485 ) $ 3,225,005 $ 3,769,390

Other comprehensive income (loss)

Net unrealized gains on marketable securities — — 192,919 —

Reclassification of net realized gains on marketable securities into earnings

Total comprehensive income

Reclassification of net realized gains on marketable

securities into earnings ( 184,025 ) — ( 192,919 ) —

( 184,025 ) — — —

Total comprehensive income (loss) $ 2,462,017 $ ( 153,485 ) $ 3,225,005 $ 3,769,390

Preferred stock dividend declared ( 3,906 ) ( 3,906 ) ( 7,812 ) ( 7,812 )

Comprehensive income attributable to common shares

Comprehensive income (loss) attributable to

common shares $ 2,458,111 $ ( 157,391 ) $ 3,217,193 $ 3,761,578

See notes to unaudited consolidated financial statements.

1 unchanged sentence

Consolidated Statements of Changes in Equity

Three Months Ended March 31, 2020 and 2019

Preferred Stock

12.5% Series A Cumulative Non-Voting Preferred Stock

Accumulated Deficit

Accumulated Other Comprehensive Income

Three Months Ended June 30, 2020 and 2019

Preferred Stock 12.5% Series A Cumulative Non-Voting Preferred Stock Common Stock Additional

Capital Accumulated Deficit Accumulated Other Comprehensive Income

$0.01 Par Value

Shares Amount Shares Amount Total equity

Balance at April 1, 2020 $ — 125 $ 125,000 19,700,151 197,002 377,061,545 ( 62,716,835 ) $ 184,025 $ 314,850,737

Issuance of common stock ( Note 3 )

— — — — — — — — —

Repurchase of common stock — — — ( 212,691 ) ( 2,127 ) ( 3,617,873 ) — — ( 3,620,000 )

Distributions declared on common

share ($0.23 per share) — — — — — — — ( 4,459,975 ) — ( 4,459,975 )

Distributions declared on preferred

shares — — — — — — — ( 3,906 ) — ( 3,906 )

Comprehensive income:

Net income — — — — — — 2,646,042 — 2,646,042

Net unrealized gains on marketable

securities — — — — — — — — —

Reclassification of net realized

gains on marketable securities

into earnings — — — — — — — ( 184,025 ) ( 184,025 )

Balance at June 30, 2020 $ — 125 $ 125,000 19,487,460 $ 194,875 $ 373,443,672 $ ( 64,534,674 ) $ — $ 309,228,873

See notes to unaudited consolidated financial statements .

Terra Property Trust, Inc.

Consolidated Statements of Changes in Equity

Three Months Ended June 30, 2020 and 2019 (Continued)

Preferred Stock 12.5% Series A Cumulative Non-Voting Preferred Stock Common Stock Additional

Capital Accumulated Deficit Accumulated Other Comprehensive Income

$0.01 Par Value

Shares Amount Shares Amount Total equity

Balance at April 1, 2019 $ — 125 $ 125,000 14,912,990 $ 149,130 $ 298,109,424 $ ( 36,728,639 ) $ — $ 261,654,915

Distributions declared on common

share ($0.51 per share) — — — — — — ( 7,626,503 ) — ( 7,626,503 )

Distributions declared on preferred

shares — — — — — — ( 3,906 ) — ( 3,906 )

Comprehensive income:

Net loss — — — — — — ( 153,485 ) — ( 153,485 )

Net unrealized gains on marketable

securities — — — — — — — — —

Reclassification of net realized

gains on marketable securities

into earnings — — — — — — — — —

Balance at June 30, 2019 $ — 125 $ 125,000 14,912,990 $ 149,130 $ 298,109,424 $ ( 44,512,533 ) $ — $ 253,871,021

See notes to unaudited consolidated financial statements .

Terra Property Trust, Inc.

Consolidated Statements of Changes in Equity

Six Months Ended June 30, 2020 and 2019

Preferred Stock 12.5% Series A Cumulative Non-Voting Preferred Stock Common Stock Additional

Capital Accumulated Deficit Accumulated Other Comprehensive Income

$0.01 Par Value

Shares Amount Shares Amount Total equity

Balance at January 1, 2020 $ — 125 $ 125,000 15,125,681 $ 151,257 $ 301,727,297 $ ( 54,459,821 ) $ — $ 247,543,733

Issuance of common stock ( Note 3 )

— — — 4,574,470 45,745 75,334,248 — — 75,379,993

Repurchase of common stock — — — ( 212,691 ) ( 2,127 ) ( 3,617,873 ) — — ( 3,620,000 )

Distributions declared on common

1 unchanged sentence

Distributions declared on preferred

shares — — — — — — ( 7,812 ) — ( 7,812 )

Comprehensive income:

Net income — — — — — — 3,225,005 — 3,225,005

Net unrealized gains on marketable

securities — — — — — — — 192,919 192,919

Reclassification of net realized

1 unchanged sentence

into earnings — — — — — — — ( 192,919 ) ( 192,919 )

Balance at March 31, 2020

Balance at June 30, 2020 $ — 125 $ 125,000 19,487,460 $ 194,875 $ 373,443,672 $ ( 64,534,674 ) $ — $ 309,228,873

See notes to unaudited consolidated financial statements .

1 unchanged sentence

Consolidated Statements of Changes in Equity

Three Months Ended March 31, 2020 and 2019 (Continued)

Preferred Stock

12.5% Series A Cumulative Non-Voting Preferred Stock

Accumulated Deficit

Accumulated Other Comprehensive Income

Six Months Ended June 30, 2020 and 2019 (Continued)

Preferred Stock 12.5% Series A Cumulative Non-Voting Preferred Stock Common Stock Additional

Capital Accumulated Deficit Accumulated Other Comprehensive Income

$0.01 Par Value

Shares Amount Shares Amount Total equity

Balance at January 1, 2019 $ — 125 $ 125,000 14,912,990 $ 149,130 $ 298,109,424 $ ( 33,091,195 ) $ — $ 265,292,359

2 unchanged sentences

Distributions declared on preferred

shares — — — — — — ( 7,812 ) — ( 7,812 )

Comprehensive income:

Net income — — — — — — 3,769,390 — 3,769,390

Net unrealized gains on marketable

securities — — — — — — — — —

Reclassification of net realized

1 unchanged sentence

into earnings — — — — — — — — —

Balance at March 31, 2019

Balance at June 30, 2019 $ — 125 $ 125,000 14,912,990 $ 149,130 $ 298,109,424 $ ( 44,512,533 ) $ — $ 253,871,021

See notes to unaudited consolidated financial statements .

1 unchanged sentence

Consolidated Statements of Cash Flows

Three Months Ended March 31,

Six Months Ended June 30,

Cash flows from operating activities:

Net income $ 3,225,005 $ 3,769,390

Adjustments to reconcile net income to net cash provided by operating activities:

2 unchanged sentences

Provision for loan losses 1,314,294 —

Impairment charge — 1,550,000

Amortization of net purchase premiums on loans 26,460 62,338

1 unchanged sentence

Amortization of deferred financing costs 1,109,771 867,181

Net loss on extinguishment of obligations under participation agreements

Net loss on extinguishment of obligations under

participation agreements 319,453 —

Amortization of above- and below-market rent intangibles ( 223,497 ) ( 223,499 )

1 unchanged sentence

Amortization of above-market rent ground lease ( 65,174 ) ( 65,174 )

Realized gains on marketable securities ( 1,085,107 ) —

Unrealized gains on marketable securities ( 67,522 ) —

Changes in operating assets and liabilities:

Interest receivable ( 689,644 ) ( 134,763 )

Other assets 389,123 2,383,836

Due to Manager 537,530 ( 69,607 )

19 unchanged sentences

Repayment of borrowings under repurchase agreement ( 3,395,740 ) —

Payment for repurchase of common stock ( 3,620,000 ) —

Change in interest reserve and other deposits held on investments ( 82,772 ) 2,259,688

6 unchanged sentences

Cash, cash equivalents and restricted cash at end of period ( Note 2 )

$ 102,945,300 $ 40,054,220

Terra Property Trust, Inc.

Consolidated Statements of Cash Flows (Continued)

Three Months Ended March 31,

Six Months Ended June 30,

Supplemental Disclosure of Cash Flows Information:

12 unchanged sentences

Interest receivable 134,543

Other assets 18,384

Accounts payable and accrued expenses ( 57,433 )

11 unchanged sentences

Net assets acquired excluding cash and cash equivalents $ 32,149,378

For the three months ended March 31, 2020 , the Company declared distributions of $ 3,906 on its 12.5% Series A Cumulative Non-Voting Preferred Stock to be paid in June 2020.

Terra Property Trust, Inc.

3 unchanged sentences

On January 9, 2019, the Company acquired 4.9 acres of adjacent land encumbering a $ 14.3 million first mortgage via deed in lieu of foreclosure in exchange for the payment of the first mortgage and related fees and expenses ( Note 5 ).

The following table summarizes the carrying value of the first mortgage and the fair value of asset acquired in the transaction:

The following table summarizes the carrying value of the first mortgage and the fair value of asset acquired in the transaction as of the date of the deed in lieu of foreclosure:

Carrying Value of First Mortgage

3 unchanged sentences

Assets Acquired at Fair Value

Land $ 14,703,359

See notes to unaudited consolidated financial statements .

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2020

June 30, 2020

Terra Property Trust, Inc.

7 unchanged sentences

On March 2, 2020, the Company engaged in a series of transactions pursuant to which the Company issued an aggregate of 4,574,470.35 shares of our common stock in exchange for the settlement of an aggregate of $ 49.8 million of participation interests in loans held by the Company, cash of $ 25.5 million and other working capital.

Following the completion of the transactions, as of March 31, 2020, Terra JV, LLC (“Terra JV”) held 86.4 % of the issued and outstanding shares of the Company's common stock with the remainder held by TIF3 REIT ( Note 3 ).

As of June 30, 2020, Terra JV, LLC (“Terra JV”) held 87.4 % of the issued and outstanding shares of the Company's common stock with the remainder held by TIF3 REIT ( Note 3 ).

The Company has elected to be taxed, and to qualify annually thereafter, as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), commencing with the taxable year ended December 31, 2016.

37 unchanged sentences

Based on a 5-point scale, the Company’s loans are rated “1” through “5”, from less risk to greater risk, as follows:

Risk Rating Description

1 Very low risk

3 Moderate/average risk

4 Higher risk

5 Highest risk

The Company records an allowance for loan losses equal to (i) 1.5% of the aggregate carrying amount of loans rated as a “4”, plus (ii) 5% of the aggregate carrying amount of loans rated as a “5”, plus (iii) impaired loan reserves, if any.

5 unchanged sentences

These securities are classified as available-for-sale and are carried at fair value.

Unrealized gains or losses on available-for-sale securities are reported in other comprehensive income or loss until they are realized.

Changes in the fair value of equity securities are recognized in earnings.

Changes in the fair value of debt securities are reported in other comprehensive income until a gain or loss on the securities is realized.

Real Estate Owned, Net

41 unchanged sentences

These intangible assets and liabilities are amortized to lease revenue over the remaining contractual lease term.

Notes to Unaudited Consolidated Financial Statements

Other Revenues:

1 unchanged sentence

All other income is recognized when earned.

Notes to Unaudited Consolidated Financial Statements

Cash, Cash Equivalents and Restricted Cash

7 unchanged sentences

The following table provides a reconciliation of cash, cash equivalents and restricted cash in the Company’s consolidated balance sheets to the total amount shown in its consolidated statements of cash flows:

March 31, 2020

March 31, 2019

June 30, 2020 June 30, 2019

Cash and cash equivalents $ 82,553,933 $ 18,334,372

14 unchanged sentences

The Company has not elected the fair value option for its financial instruments, including loans held for investment, loans held for investment acquired through participation, obligations under participation agreements, mortgage loan payable, repurchase agreement payable and revolving credit facility payable.

Such financial instruments are carried at cost, less impairment.

Such financial instruments are carried at cost, less impairment, where applicable.

Marketable securities are financial instruments that are reported at fair value.

2 unchanged sentences

These costs are presented in the consolidated balance sheets as a direct deduction of the debt liability to which the costs pertain.

These costs are amortized using the effective interest method and are included in interest expense on mortgage loan payable in the consolidated statements of operations over the life of the borrowings.

These costs are amortized using the effective interest method and are included in interest expense on the applicable borrowings in the consolidated statements of operations over the life of the borrowings.

Notes to Unaudited Consolidated Financial Statements

6 unchanged sentences

federal and state income taxes at regular corporate rates.

As of March 31, 2020 , the Company has satisfied all the requirements for a REIT and accordingly, no provision for federal income taxes has been included in the consolidated financial statements for the three months ended March 31, 2020 and 2019 .

As of June 30, 2020, the Company has satisfied all the requirements for a REIT.

No provision for federal income taxes has been included in the consolidated financial statements for the three and six months ended June 30, 2020 and 2019.

The Company did not have any uncertain tax positions that met the recognition or measurement criteria of Accounting Standards Codification (“ASC”) 740-10-25, Income Taxes , nor did the Company have any unrecognized tax benefits as of the periods presented herein.

The Company recognizes interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in its consolidated statements of operations.

For the three months ended March 31, 2020 and 2019 , the Company did not incur any interest or penalties.

For the three and six months ended June 30, 2020 and 2019, the Company did not incur any interest or penalties.

Although the Company files federal and state tax returns, its major tax jurisdiction is federal.

7 unchanged sentences

GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

During the first quarter of 2020, there was a global outbreak of a novel coronavirus (“COVID-19”), which has spread to over 200 countries and territories, including the United States, and has spread to every state in the United States.

During the first half of 2020, there was a global outbreak of a novel coronavirus (“COVID-19”), which has spread to over 200 countries and territories, including the United States, and has spread to every state in the United States.

The World Health Organization has designated COVID-19 as a pandemic, and numerous countries, including the United States, have declared national emergencies with respect to COVID-19.

3 unchanged sentences

The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions.

The Company believes the estimates and assumptions underlying its consolidated financial statements are reasonable and supportable based on the information available as of March 31, 2020 , however uncertainty over the ultimate impact COVID-19 will have on the global economy generally, and the Company’s business in particular, makes any estimates and assumptions as of March 31, 2020 inherently less certain than they would be absent the current and potential impacts of COVID-19.

The Company believes the estimates and assumptions underlying its consolidated financial statements are reasonable and supportable based on the information available as of June 30, 2020, however uncertainty over the ultimate impact COVID-19 will have on the global economy generally, and the Company’s business in particular, makes any estimates and assumptions as of June 30, 2020 inherently less certain than they would be absent the current and potential impacts of COVID-19.

Actual results may ultimately differ from those estimates.

Notes to Unaudited Consolidated Financial Statements

Segment Information

3 unchanged sentences

The Company operates in a single segment focused on mezzanine loans, other loans and preferred equity investments, and to a lesser extent, owning and managing real estate.

Notes to Unaudited Consolidated Financial Statements

Recent Accounting Pronouncements

33 unchanged sentences

In connection with the Merger, each share of common stock, par value $ 0.01 per share, of TPT2 issued and outstanding immediately prior to the effective time of the Merger was converted into the right to receive from the Company a number of shares of common stock, par value $ 0.01 per share, of the Company equal to an exchange ratio, which was 1.2031 .

The exchange ratio was based on the relative net asset values of the Company and TPT2 as of December 31, 2019 as adjusted to reflect changes in the net working capital of each of the Company and TPT2 during the period from January 1, 2020 through March 1, 2020, the effective time for the Merger.

The exchange ratio was based on the

Notes to Unaudited Consolidated Financial Statements

relative net asset values of the Company and TPT2 as of December 31, 2019 as adjusted to reflect changes in the net working capital of each of the Company and TPT2 during the period from January 1, 2020 through March 1, 2020, the effective time for the Merger.

For purposes of determining the respective fair values of the Company and TPT2, the value of the loans (or participation interests therein) held by each of the Company and TPT2 was the value of such loans (or participation interests) as set forth in the audited financial statements of the Company as of and for the year ended December 31, 2019.

1 unchanged sentence

The shares of common stock were issued in a private placement in reliance on Section 4(a)(2) under the Securities Act of 1933, as amended (the “Securities Act”), and the rules and regulations promulgated thereunder.

Notes to Unaudited Consolidated Financial Statements

The following table presents a summary of the consideration exchanged and settlement of the Company’s obligations under participation agreements as a result of the Merger:

5 unchanged sentences

Interest receivable 134,543

Other assets 18,384

Accounts payable and accrued expenses ( 57,433 )

11 unchanged sentences

The fair value of the 2,457,684.59 shares of the Company’s stock issued in the transaction as consideration paid for TIF3 REIT was derived from the fair value per share of the Company as of December 31, 2019, which was the most recently determined fair value per share of the Company.

Notes to Unaudited Consolidated Financial Statements

The following table presents a summary of the consideration exchanged and settlement of the Company’s obligations under participation agreements as a result of the Issuance of Common Stock to TIF3 REIT:

7 unchanged sentences

Total identifiable net assets $ 40,749,378

Notes to Unaudited Consolidated Financial Statements

On April 29, 2020, the Company repurchased 212,691 shares of common stock that the Company had previously sold to TIF3 REIT on September 30, 2019.

Terra JV, LLC

4 unchanged sentences

Consistent with the original voting agreement dated February 8, 2018, for the period that Terra REIT Advisors remains the external manager of the Company, Terra REIT Advisors will have the right to nominate two individuals to serve as directors of the Company and, until Terra JV no longer holds at least 10 % of the outstanding shares of the Company’s common stock, Terra JV will have the right to nominate one individual to serve as a director of the Company.

Following the completion of the transactions described above, as of March 31, 2020 , Terra JV owns 86.4 % of the issued and outstanding shares of the Company’s common stock with the remainder held by TIF3 REIT, and Terra Fund 5 and Terra Fund 7 own an 87.6 % and 12.4 % interest, respectively, in Terra JV.

As of June 30, 2020, Terra JV owns 87.4 % of the issued and outstanding shares of the Company’s common stock with the remainder held by TIF3 REIT, and Terra Fund 5 and Terra Fund 7 own an 87.6 % and 12.4 % interest, respectively, in Terra JV.

Net Loss on Extinguishment of Obligations Under Participation Agreements

1 unchanged sentence

The obligations under participation agreements were released as a result of the Merger and the Issuance of Common Stock to TIF3 REIT.

In connection with these transactions, the Company recognized a net loss of $ 0.3 million , which was primarily transaction costs incurred in connection with both transactions.

In connection with these transactions, the Company recognized a net loss of $ 0.3 million for the three months ended March 31, 2020, which was primarily related to transaction costs incurred in connection with both transactions.

Notes to Unaudited Consolidated Financial Statements

Loans Held for Investment

Portfolio Summary

The following table provides a summary of the Company’s loan portfolio as of March 31, 2020 and December 31, 2019 :

March 31, 2020

December 31, 2019

Rate (1)(2)(3)

The following table provides a summary of the Company’s loan portfolio as of June 30, 2020 and December 31, 2019:

June 30, 2020 December 31, 2019

Fixed Rate Floating Rate (1)(2)(3)

Total Fixed Rate Floating Rate (1)(2)(3)

Number of loans 9 13 22 8 15 23

1 unchanged sentence

Carrying value $ 102,402,613 $ 312,045,669 $ 414,448,282 $ 71,469,137 $ 307,143,631 $ 378,612,768

Fair value $ 102,651,392 $ 310,024,461 $ 412,675,853 $ 71,516,432 $ 307,643,983 $ 379,160,415

Weighted-average coupon rate 10.29 % 8.91 % 9.25 % 11.93 % 9.13 % 9.65 %

Weighted-average remaining

term (years) 1.33 1.92 1.77 2.28 2.09 2.13

_______________

(1) These loans pay a coupon rate of LIBOR plus a fixed spread.

Coupon rate shown was determined using LIBOR of 0.99% and 1.76 % as of March 31, 2020 and December 31, 2019 , respectively.

As of March 31, 2020 and December 31, 2019 , amounts included $136.1 million and $ 114.8 million, respectively, of senior mortgages used as collateral for $92.5 million and $ 81.1 million, respectively, of borrowings under a repurchase agreement ( Note 8 ).

These borrowings bear interest at an annual rate of LIBOR plus a spread ranging from 2.00 % to 2.50 % as of March 31, 2020 and LIBOR plus a spread ranging from 2.25 % to 2.50 % as of December 31, 2019 .

As of both March 31, 2020 and December 31, 2019 , twelve of these loans are subject to a LIBOR floor.

Notes to Unaudited Consolidated Financial Statements

Coupon rate shown was determined using LIBOR of 0.16 % and 1.76 % as of June 30, 2020 and December 31, 2019, respectively.

(2) As of June 30, 2020 and December 31, 2019, amounts included $ 142.8 million and $ 114.8 million, respectively, of senior mortgages used as collateral for $ 95.4 million and $ 81.1 million, respectively, of borrowings under a repurchase agreement ( Note 8 ).

These borrowings bear interest at an annual rate of LIBOR plus a spread ranging from 2.00 % to 2.50 % as of June 30, 2020 and LIBOR plus a spread ranging from 2.25 % to 2.50 % as of December 31, 2019.

(3) As of June 30, 2020 and December 31, 2019, eleven and twelve of these loans, respectively, are subject to a LIBOR floor.

Lending Activities

The following table presents the activities of the Company’s loan portfolio for the three months ended March 31, 2020 and 2019 :

Loans Held for Investment

Loans Held for Investment through Participation Interests

The following table presents the activities of the Company’s loan portfolio for the six months ended June 30, 2020 and 2019:

Loans Held for Investment Loans Held for Investment through Participation Interests Total

Balance, January 1, 2020 $ 375,462,222 $ 3,150,546 $ 378,612,768

2 unchanged sentences

PIK interest (1)

1,363,310 — 1,363,310

Net amortization of premiums on loans ( 30,696 ) — ( 30,696 )

Accrual, payment and accretion of investment-related fees and other,

net 446,550 18,331 464,881

Provision for loan losses ( 1,314,294 ) — ( 1,314,294 )

Balance, March 31, 2020

Loans Held for Investment

Loans Held for Investment through Participation Interests

Balance, June 30, 2020 $ 410,150,293 $ 4,297,989 $ 414,448,282

Notes to Unaudited Consolidated Financial Statements

Loans Held for Investment Loans Held for Investment through Participation Interests Total

Balance, January 1, 2019 $ 388,243,974 $ — $ 388,243,974

2 unchanged sentences

Foreclosure of collateral (2)

( 14,325,000 ) — ( 14,325,000 )

PIK interest (1)

1,766,213 — 1,766,213

Net amortization of premiums on loans ( 73,730 ) — ( 73,730 )

Accrual, payment and accretion of investment-related fees, net (3)

Balance, March 31, 2019

( 1,005,797 ) ( 15,703 ) ( 1,021,500 )

Balance, June 30, 2019 $ 389,057,359 $ 730,449 $ 389,787,808

_______________

(1) Certain loans in the Company’s portfolio contain PIK interest provisions.

The PIK interest represents contractually deferred interest that is added to the principal balance.

PIK interest related to obligations under participation agreements amounted to $ 0.2 million for both the three months ended March 31, 2020 and 2019 .

PIK interest related to obligations under participation agreements amounted to $ 0.6 million and $ 0.4 million for the six months ended June 30, 2020 and 2019, respectively.

(2) On January 9, 2019, the Company acquired 4.9 acres of adjacent land encumbering a $ 14.3 million first mortgage via deed in lieu of foreclosure in exchange for the relief of the first mortgage and related fees and expenses ( Note 5 ).

Notes to Unaudited Consolidated Financial Statements

(3) Amount for the six months ended June 30, 2019 included $ 0.5 million of deferred origination fees that were previously recorded as unearned income.

Portfolio Information

The tables below detail the types of loans in the Company’s loan portfolio, as well as the property type and geographic location of the properties securing these loans as of March 31, 2020 and December 31, 2019 :

March 31, 2020

December 31, 2019

Loan Structure

Principal Balance

Carrying Value

Principal Balance

Carrying Value

The tables below detail the types of loans in the Company’s loan portfolio, as well as the property type and geographic location of the properties securing these loans as of June 30, 2020 and December 31, 2019:

June 30, 2020 December 31, 2019

Loan Structure Principal Balance Carrying Value % of Total Principal Balance Carrying Value % of Total

First mortgages $ 222,314,510 $ 222,901,117 53.8 % $ 178,130,623 $ 178,203,675 47.1 %

2 unchanged sentences

Allowance for loan losses — ( 1,314,294 ) ( 0.3 ) % — — — %

March 31, 2020

December 31, 2019

Property Type

Principal Balance

Carrying Value

Principal Balance

Carrying Value

Total $ 414,103,939 $ 414,448,282 100.0 % $ 377,388,317 $ 378,612,768 100.0 %

June 30, 2020 December 31, 2019

Property Type Principal Balance Carrying Value % of Total Principal Balance Carrying Value % of Total

Office $ 151,307,119 $ 151,380,556 36.5 % $ 142,055,845 $ 141,870,355 37.5 %

Multifamily 115,668,971 116,325,996 28.1 % 76,640,369 77,136,016 20.4 %

Student housing 45,920,115 46,343,726 11.2 % 58,049,717 58,553,496 15.5 %

Hotel 50,848,687 51,074,169 12.3 % 46,598,011 46,731,939 12.3 %

Infill land 32,759,047 32,939,047 7.9 % 36,444,375 36,624,375 9.7 %

Condominium 10,600,000 10,699,082 2.6 % 10,600,000 10,696,587 2.8 %

Industrial 7,000,000 7,000,000 1.7 % 7,000,000 7,000,000 1.8 %

Allowance for loan losses — ( 1,314,294 ) ( 0.3 ) % — — — %

March 31, 2020

December 31, 2019

Geographic Location

Principal Balance

Carrying Value

Principal Balance

Carrying Value

Total $ 414,103,939 $ 414,448,282 100.0 % $ 377,388,317 $ 378,612,768 100.0 %

Notes to Unaudited Consolidated Financial Statements

June 30, 2020 December 31, 2019

Geographic Location Principal Balance Carrying Value % of Total Principal Balance Carrying Value % of Total

United States

California $ 186,233,959 $ 186,692,977 45.0 % $ 150,988,463 $ 151,108,109 39.9 %

New York 73,996,576 74,129,631 17.9 % 79,734,323 79,896,663 21.1 %

Georgia 68,980,282 69,295,471 16.7 % 61,772,764 61,957,443 16.4 %

North Carolina 32,810,007 32,993,616 8.0 % 32,592,767 32,766,311 8.7 %

Washington 23,500,000 23,671,815 5.7 % 23,500,000 23,661,724 6.2 %

Massachusetts 7,000,000 7,000,000 1.7 % 7,000,000 7,000,000 1.8 %

Texas 3,613,000 3,647,936 0.9 % 3,500,000 3,531,776 0.9 %

Illinois 3,404,877 3,433,814 0.8 % 8,004,877 8,071,562 2.1 %

Kansas 3,098,139 3,124,469 0.8 % 6,200,000 6,251,649 1.7 %

11,467,099 11,772,847 2.8 % 4,095,123 4,367,531 1.2 %

Allowance for loan losses — ( 1,314,294 ) ( 0.3 ) % — — — %

Total $ 414,103,939 $ 414,448,282 100.0 % $ 377,388,317 $ 378,612,768 100.0 %

_______________

Other includes $5.1 million and $ 1.1 million of unused portion of a credit facility at March 31, 2020 and December 31, 2019 , respectively.

Other also includes a $3.0 million loan with collateral located in South Carolina at both March 31, 2020 and December 31, 2019 .

Notes to Unaudited Consolidated Financial Statements

(1) Other includes $ 8.5 million and $ 1.1 million of the unused portion of a credit facility at June 30, 2020 and December 31, 2019, respectively.

Other also includes a $ 3.0 million loan with collateral located in South Carolina at both June 30, 2020 and December 31, 2019.

Loan Risk Rating

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In conjunction with the quarterly review of the Company’s loan portfolio, the Manager assesses the risk factors of each loan, and assigns a risk rating based on a five-point scale with “1” being the lowest risk and “5” being the greatest risk.

The following table allocates the principal balance and the carrying value of the Company’s loans based on the loan risk rating as of March 31, 2020 and December 31, 2019 :

March 31, 2020

December 31, 2019

Loan Risk Rating

Number of Loans

Principal Balance

Carrying Value

Number of Loans

Principal Balance

Carrying Value

The following table allocates the principal balance and the carrying value of the Company’s loans based on the loan risk rating as of June 30, 2020 and December 31, 2019:

June 30, 2020 December 31, 2019

Loan Risk Rating Number of Loans Principal Balance Carrying Value % of Total Number of Loans Principal Balance Carrying Value % of Total

1 0 $ — $ — — % — $ — $ — — %

2 2 25,000,000 25,180,000 6.1 % 5 50,000,000 50,284,751 13.3 %

3 15 301,484,356 302,707,562 72.8 % 17 322,648,317 323,588,017 85.4 %

5 87,619,583 87,875,014 21.1 % — — — — %

5 0 — — — % — — — — %

0 — — — % 1 4,740,000 4,740,000 1.3 %

22 $ 414,103,939 415,762,576 100.0 % 23 $ 377,388,317 378,612,768 100.0 %

Allowance for loan losses ( 1,314,294 ) —

2 unchanged sentences

(1) The increase in number of loans with a loan risk rating of “4” was due to the higher risk in loans collateralized by hospitality and select other asset classes that are particularly negatively impacted by the COVID-19 pandemic.

These loans were deemed impaired and removed from the pool of loans on which a general allowance is calculated.

As of March 31, 2020 and December 31, 2019 , no specific reserve for loan losses was recorded on these loans because the fair value of the collateral was greater than carrying value for each loan.

The Company entered into forbearance agreement with the borrower for the two loans categorized as “other” above as of March 31, 2020 .

The Company expects to recover in full the principal balance of these two loans.

In March 2020, the loan categorized as “other” above as of December 31, 2019 was repaid in full.

As of March 31, 2020 , the Company had three loans with a loan risk rating of “4” and recorded a general allowance for loan losses of $1.1 million

The following table presents the activity in the Company’s allowance for loan losses for the three months ended March 31, 2020 and 2019 :

Three Months Ended March 31,

(2) This loan was deemed impaired and removed from the pool of loans on which a general allowance is calculated.

As of December 31, 2019, no specific reserve for loan losses was recorded on this loan because the fair value of the collateral was greater than carrying value of the loan.

In March 2020, this loan was repaid in full.

As of June 30, 2020, the Company had five loans with a loan risk rating of “4” and recorded a general allowance for loan losses of $ 1.3 million.

Notes to Unaudited Consolidated Financial Statements

The following table presents the activity in the Company’s allowance for loan losses for the six months ended June 30, 2020 and 2019:

Six Months Ended June 30,

Allowance for loan losses, beginning of period $ — $ —

Provision for loan losses 1,314,294 —

Charge-offs — —

Recoveries — —

Allowance for loan losses, end of period $ 1,314,294 $ —

2 unchanged sentences

Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion of COVID-19.

Notes to Unaudited Consolidated Financial Statements

Real Estate Owned, Net

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Real estate owned:

Land $ 14,703,359

The Company capitalized transaction costs of approximately $ 0.2 million to land.

For the three and six months ended June 30, 2019, the Company recorded an impairment charge of $ 1.6 million on the land in order to reduce the carrying value of the land to its estimated fair value, which is the estimated selling price less the cost of sale.

Notes to Unaudited Consolidated Financial Statements

Real Estate Owned, Net

1 unchanged sentence

The following table presents the components of real estate owned, net:

March 31, 2020

December 31, 2019

Accumulated Depreciation/Amortization

June 30, 2020 December 31, 2019

Cost Accumulated Depreciation/Amortization Net Cost Accumulated Depreciation/Amortization Net

Land $ 13,395,430 $ — $ 13,395,430 $ 13,395,430 $ — $ 13,395,430

Building and building

improvements 51,725,969 ( 2,478,562 ) 49,247,407 51,725,969 ( 1,831,980 ) 49,893,989

Tenant improvements 1,854,640 ( 531,451 ) 1,323,189 1,854,640 ( 392,812 ) 1,461,828

9 unchanged sentences

Total real estate $ 70,717,229 $ ( 6,149,881 ) $ 64,567,348 $ 70,717,229 $ ( 4,545,563 ) $ 66,171,666

Notes to Unaudited Consolidated Financial Statements

Real Estate Operating Revenues and Expenses

The following table presents the components of real estate operating revenues and expenses that are included in the consolidated statements of operations:

Three Months Ended March 31, 2020

Three Months Ended March 31, 2019

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Real estate operating revenues:

1 unchanged sentence

Other operating income 329,018 604,769 719,941 1,003,469

Total $ 2,251,095 $ 2,527,256 $ 4,564,146 $ 4,848,494

Real estate operating expenses:

Utilities $ 34,008 $ 35,838 $ 73,030 $ 69,600

Real estate taxes 232,875 80,359 465,750 160,719

3 unchanged sentences

Other operating expenses 103,281 94,880 198,531 181,883

Total $ 871,207 $ 764,108 $ 1,815,725 $ 1,519,963

On July 30, 2018, the Company foreclosed on a multi-tenant office building in full satisfaction of a first mortgage and related fees and expenses.

In connection with the foreclosure, the Company assumed four leases whereby the Company is the lessor to the leases.

These four tenant leases had remaining lease terms ranging from 6.3 years to 8.8 years as of July 30, 2018 and provide for annual fixed rent increase.

These four tenant leases had remaining lease terms ranging from 6.3 years to 8.8 years as of July 30, 2018

Notes to Unaudited Consolidated Financial Statements

and provide for annual fixed rent increase.

Three of the tenant leases each provides two options to renew the lease for five years each and the remaining tenant lease provides one option to renew the lease for five years.

In addition, the Company assumed a ground lease whereby the Company is the lessee (or a tenant) to the ground lease.

The ground lease had a remaining lease term of 68.3 years and provides for a new base rent every five years based on the greater of the annual base rent for the prior lease year or 9 % of the fair market value of the land.

The ground lease had a remaining lease term of 68.3 years and provides for a new base rent every 5 years based on the greater of the annual base rent for the prior lease year or 9 % of the fair market value of the land.

The next rent reset on the ground lease is scheduled for November 1, 2020.

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The Company elected to continue to amortize the remaining leasing commission through the end of the lease terms.

Notes to Unaudited Consolidated Financial Statements

Scheduled Future Minimum Rent Income

Scheduled future minimum rents, exclusive of renewals and expenses paid by tenants, under non-cancelable operating leases at March 31, 2020 are as follows:

Years Ending December 31,

2020 (April 1 through December 31)

Scheduled future minimum rents, exclusive of renewals and expenses paid by tenants, under non-cancelable operating leases at June 30, 2020 are as follows:

Years Ending December 31, Total

2020 (July 1 through December 31) $ 3,305,851

2021 7,025,413

2022 7,547,261

2023 7,787,842

2024 8,026,943

Thereafter 5,836,010

Total $ 39,529,320

Scheduled Annual Net Amortization of Intangibles

Based on the intangible assets and liabilities recorded at March 31, 2020 , scheduled annual net amortization of intangibles for each of the next five calendar years and thereafter is as follows:

Years Ending December 31,

Net Decrease in Real Estate Operating Revenue (1)

Based on the intangible assets and liabilities recorded at June 30, 2020, scheduled annual net amortization of intangibles for each of the next five calendar years and thereafter is as follows:

Years Ending December 31, Net Decrease in Real Estate Operating Revenue (1)

Increase in Depreciation and Amortization (1)

Decrease in Rent Expense (1)

2020 (April 1 through December 31)

2020 (July 1 through December 31) $ ( 223,499 ) $ 1,107,768 $ ( 65,174 ) $ 819,095

2021 ( 446,995 ) 2,215,536 ( 130,348 ) 1,638,193

2022 ( 446,995 ) 2,215,536 ( 130,348 ) 1,638,193

2023 ( 446,995 ) 2,215,536 ( 130,348 ) 1,638,193

2024 ( 446,995 ) 2,215,536 ( 130,348 ) 1,638,193

Thereafter ( 346,552 ) 1,635,877 ( 8,059,870 ) ( 6,770,545 )

Total $ ( 2,358,031 ) $ 11,605,789 $ ( 8,646,436 ) $ 601,322

_______________

Notes to Unaudited Consolidated Financial Statements

(1) Amortization of below-market rent and above-market rent intangibles is recorded as an adjustment to lease revenues;

3 unchanged sentences

Supplemental balance sheet information related to the ground lease was as follows:

March 31, 2020

June 30, 2020 December 31, 2019

Operating lease

4 unchanged sentences

The component of lease expense for the ground lease was as follows:

Three Months Ended March 31, 2020

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Operating lease cost $ 316,125 $ 316,125 $ 632,250 $ 632,250

Notes to Unaudited Consolidated Financial Statements

Supplemental non-cash information related to the ground lease was as follows:

Three Months Ended March 31, 2020

Six Months Ended June 30,

Cash paid for amounts included in the measurement of lease liabilities:

3 unchanged sentences

Maturities of operating lease liabilities are as follows:

Years Ending December 31,

Operating Lease

2020 (April 1 through December 31) (Year of rent reset)

Years Ending December 31, Operating Lease

2020 (July 1 through December 31) (Year of rent reset) $ 632,250

2021 1,264,500

2022 1,264,500

2023 1,264,500

2024 1,264,500

Thereafter 78,135,563

Total lease payments 83,825,813

Imputed interest ( 67,716,337 )

Total $ 16,109,476

Fair Value Measurements

2 unchanged sentences

Market price observability is impacted by a number of factors, including the type of investment, the characteristics specific to the investment, and the state of the marketplace (including the existence and transparency of transactions between market participants).

Investments with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

Notes to Unaudited Consolidated Financial Statements

of judgment used in measuring fair value.

The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

8 unchanged sentences

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.

Notes to Unaudited Consolidated Financial Statements

As of March 31, 2020 and December 31, 2019 , the Company has not elected the fair value option for its financial instruments, including loans held for investment, loans held for investment acquired through participation, obligations under participation agreements, mortgage loan payable, repurchase agreement payable and revolving credit facility payable.

Such financial instruments are carried at cost, less impairment.

As of June 30, 2020 and December 31, 2019, the Company has not elected the fair value option for its financial instruments, including loans held for investment, loans held for investment acquired through participation, obligations under participation agreements, mortgage loan payable, repurchase agreement payable and revolving credit facility payable.

Such financial instruments are carried at cost, less impairment, where applicable.

Marketable securities are financial instruments that are reported at fair value.

Financial Instruments Carried at Fair Value on a Recurring Basis

In March 2020, the Company invested $3.4 million in short-term debt and equity securities.

These securities are comprised of preferred stock and bonds.

The Company classified these short-term marketable securities as available-for-sale securities, which are presented at fair value on the consolidated balance sheet with the change in fair value reported in other comprehensive income until the securities are realized.

The following tables present fair value measurements of marketable securities, by major class, as of March 31, 2020 , according to the fair value hierarchy:

March 31, 2020

From time to time, the Company may invest in short-term debt and equity securities which are classified as available-for-sale securities, which are presented at fair value on the consolidated balance sheet.

Changes in the fair value of equity securities are recognized in earnings.

Changes in the fair value of debt securities are reported in other comprehensive income until the securities are realized.

The following tables present fair value measurements of marketable securities, by major class, as of June 30, 2020, according to the fair value hierarchy:

June 30, 2020

Fair Value Measurements

Level 1 Level 2 Level 3 Total

Marketable Securities:

Preferred stock

Equity securities $ 236,085 $ — $ — $ 236,085

Debt securities — — — —

Total $ 236,085 $ — $ — $ 236,085

Notes to Unaudited Consolidated Financial Statements

The following table presents the activities of the marketable securities for the periods presented.

Three Months Ended March 31,

Six Months Ended June 30,

Beginning balance $ — $ —

Purchases 4,863,561 —

Proceeds from sale ( 5,780,105 ) —

Net unrealized gains on marketable securities

Reclassification of realized gains (2)

Realized gains on marketable securities 1,085,107 —

Unrealized gains on marketable securities 67,522 —

Ending balance $ 236,085 $ —

_______________

Amount is presented as Net unrealized gains on marketable securities on the consolidated statements of comprehensive income.

Amount is presented as realized gains on marketable securities on the consolidated statements of operations.

Notes to Unaudited Consolidated Financial Statements

Financial Instruments Not Carried at Fair Value

The following table presents the carrying value, which represents the principal amount outstanding, adjusted for the accretion of purchase discounts on loans and exit fees, and the amortization of purchase premiums on loans and origination fees, and estimated fair value of the Company’s financial instruments that are not carried at fair value on the consolidated balance sheets:

March 31, 2020

December 31, 2019

Principal Amount

Carrying Value

Principal Amount

Carrying Value

June 30, 2020 December 31, 2019

Level Principal Amount Carrying Value Fair Value Principal Amount Carrying Value Fair Value

Loans held for investment, net 3 $ 409,853,939 $ 411,464,587 $ 408,378,123 $ 374,267,430 $ 375,462,222 $ 375,956,154

3 unchanged sentences

Allowance for loan losses — ( 1,314,294 ) — — — —

Total loans $ 414,103,939 $ 414,448,282 $ 412,675,853 $ 377,388,317 $ 378,612,768 $ 379,160,415

Obligations under participation

agreements 3 $ 78,116,748 $ 78,246,519 $ 77,898,387 $ 102,564,795 $ 103,186,327 $ 103,188,783

Mortgage loan payable 3 44,481,855 44,753,239 44,812,068 44,614,480 44,753,633 44,947,378

1 unchanged sentence

Revolving credit facility

payable 3 35,000,000 35,000,000 35,000,000 — — —

Total liabilities $ 252,954,963 $ 252,571,125 $ 253,066,815 $ 228,313,711 $ 227,548,397 $ 229,270,597

The Company estimated that its other financial assets and liabilities, not included in the tables above, had fair values that approximated their carrying values at both March 31, 2020 and December 31, 2019 due to their short-term nature.

The Company estimated that its other financial assets and liabilities, not included in the tables above, had fair values that approximated their carrying values at both June 30, 2020 and December 31, 2019 due to their short-term nature.

Valuation Process for Fair Value Measurement

The fair value of the Company’s investment in preferred stock is determined based on quoted prices in an active market and is classified as Level 1 of the fair value hierarchy.

The fair value of the Company’s investment in bonds is determined based on a matrix which takes the following factors into consideration:

structured product markets, interest rate movements, trends, spreads, new issue information and other pertinent data to produce price evaluations that are designed to represent closing market bids or means for the current day.

Valuation of bonds falls within Level 2 of the fair value hierarchy.

The fair value of the Company’s investment in equity securities is determined based on quoted prices in an active market and is classified as Level 1 of the fair value hierarchy.

Market quotations are not readily available for the Company’s real estate-related loan investments, all of which are included in Level 3 of the fair value hierarchy, and therefore these investments are valued utilizing a yield approach, i.e.

7 unchanged sentences

the nature, quality and realizable value of any collateral (and loan-to-value ratio);

the forces that influence the local markets in which the asset (the collateral) is purchased and sold, such as capitalization rates, occupancy rates, rental rates and replacement costs;

the forces that influence the

Notes to Unaudited Consolidated Financial Statements

local markets in which the asset (the collateral) is purchased and sold, such as capitalization rates, occupancy rates, rental rates and replacement costs;

and the anticipated duration of each real estate-related loan investment.

3 unchanged sentences

Because there is no readily available market for these investments, the fair values of these investments are approved in good faith by the Manager pursuant to the Company’s valuation policy.

Notes to Unaudited Consolidated Financial Statements

The fair values of the Company’s mortgage loan payable, repurchase agreement payable and revolving credit facility payable are determined by discounting the contractual cash flows at the interest rate the Company estimates such arrangements would bear if executed in the current market.

The following table summarizes the valuation techniques and significant unobservable inputs used by the Company to value the Level 3 loans as of March 31, 2020 and December 31, 2019 .

The following table summarizes the valuation techniques and significant unobservable inputs used by the Company to value the Level 3 loans as of June 30, 2020 and December 31, 2019.

The tables are not intended to be all-inclusive, but instead identify the significant unobservable inputs relevant to the determination of fair values.

Fair Value at March 31, 2020

Primary Valuation Technique

Unobservable Inputs

March 31, 2020

Asset Category

Weighted Average

Loans held for investment, net

Discounted cash flow

Discount rate

Fair Value at June 30, 2020 Primary Valuation Technique Unobservable Inputs June 30, 2020

Asset Category Minimum Maximum Weighted Average

Loans held for investment, net $ 408,378,123 Discounted cash flow Discount rate 4.45 % 19.05 % 11.02 %

Loans held for investment acquired through

participation, net

Discounted cash flow

Discount rate

participation, net 4,297,730 Discounted cash flow Discount rate 12.95 % 12.95 % 12.95 %

Total Level 3 Assets $ 412,675,853

Obligations under Participation Agreements

Discounted cash flow

Discount rate

Mortgage loan payable

Discounted cash flow

Discount rate

Repurchase agreement payable

Discounted cash flow

Discount rate

Revolving credit facility payable

Discounted cash flow

Discount rate

Obligations under Participation Agreements $ 77,898,387 Discounted cash flow Discount rate 9.76 % 19.05 % 13.06 %

Mortgage loan payable 44,812,068 Discounted cash flow Discount rate 6.08 % 6.08 % 6.08 %

Repurchase agreement payable 95,356,360 Discounted cash flow Discount rate 2.51 % 5.80 % 3.79 %

Revolving credit facility payable 35,000,000 Discounted cash flow Discount rate 6.00 % 6.00 % 6.00 %

Total Level 3 Liabilities $ 253,066,815

Fair Value at December 31, 2019

Primary Valuation Technique

Unobservable Inputs

December 31, 2019

Asset Category

Weighted Average

Loans held for investment, net

Discounted cash flow

Discount rate

Fair Value at December 31, 2019 Primary Valuation Technique Unobservable Inputs December 31, 2019

Asset Category Minimum Maximum Weighted Average

Loans held for investment, net $ 375,956,154 Discounted cash flow Discount rate 4.71 % 14.95 % 9.77 %

Loans held for investment acquired

through participation, net

Discounted cash flow

Discount rate

through participation, net 3,204,261 Discounted cash flow Discount rate 11.90 % 11.90 % 11.90 %

Total Level 3 Assets $ 379,160,415

Obligations under Participation Agreements

Discounted cash flow

Discount rate

Mortgage loan

Discounted cash flow

Discount rate

Repurchase agreement payable

Discounted cash flow

Discount rate

Obligations under Participation Agreements $ 103,188,783 Discounted cash flow Discount rate 9.00 % 14.95 % 11.99 %

Mortgage loan 44,947,378 Discounted cash flow Discount rate 6.08 % 6.08 % 6.08 %

Repurchase agreement payable 81,134,436 Discounted cash flow Discount rate 4.11 % 4.75 % 4.33 %

Total Level 3 Liabilities $ 229,270,597

4 unchanged sentences

The following table presents a summary of fees paid and costs reimbursed to the Manager in connection with providing services to the Company that are included on the consolidated statements of operations:

Three Months Ended March 31,

Notes to Unaudited Consolidated Financial Statements

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Origination and extension fee expense (1)

$ 250,601 $ 117,380 $ 688,218 $ 800,552

Asset management fee 1,140,426 956,985 2,169,959 1,837,340

3 unchanged sentences

220,424 167,091 295,944 637,024

Notes to Unaudited Consolidated Financial Statements

Total $ 3,559,642 $ 2,681,534 $ 6,703,709 $ 6,034,675

_______________

(1) Origination and extension fee expense is generally offset with origination and extension fee income.

11 unchanged sentences

In the event that the Company receives any “breakup fees,” “busted-deal fees,” termination fees, or similar fees or liquidated damages from a third-party in connection with the termination or non-consummation of any loan or disposition transaction, the Manager will be entitled to receive one-half of such amounts, in addition to the reimbursement of all out-of-pocket fees and expenses incurred by the Manager with respect to its evaluation and pursuit of such transactions.

As of March 31, 2020 , the Company has not received any breakup fees.

As of June 30, 2020, the Company has not received any breakup fees.

Operating Expenses

The Company reimburses the Manager for operating expenses incurred in connection with services provided to the operations of the Company, including the Company’s allocable share of the Manager’s overhead, such as rent, employee costs, utilities, and technology costs.

Disposition and Extension Fee

Disposition Fee

Pursuant to the Management Agreement, the Manager or its affiliates receives a disposition fee in the amount of 1 % of the gross sale price received by the Company from the disposition of any real estate-related loan, or any portion of, or interest in, any real estate-related loan.

The disposition fee is paid concurrently with the closing of any such disposition of all or any portion of any real estate-related loan or any interest therein, which is the lesser of (i) 1% of the principal amount of the loan or debt-related loan prior to such transaction or (ii) the amount of the fee paid by the borrower in connection with such transaction.

Notes to Unaudited Consolidated Financial Statements

If the Company takes ownership of a property as a result of a workout or foreclosure of a loan, the Company will pay a disposition fee upon the sale of such property equal to 1% of the sales price.

Distributions Paid

For the three months ended March 31, 2020 , the Company made distributions to Terra Fund 5, Terra JV and TIF3 REIT in the aggregate of $8.8 million , of which $8.3 million were returns of capital ( Note 10 ).

For the three months ended March 31, 2019 , the Company made distributions to Terra Fund 5 totaling $7.6 million , of which $3.6 million were returns of capital ( Note 10 ).

Notes to Unaudited Consolidated Financial Statements

For the three and six months ended June 30, 2020, the Company made distributions to Terra Fund 5, Terra JV and TIF3 REIT in the aggregate of $ 4.5 million and $ 13.3 million, respectively, of which $ 1.8 million and $ 10.1 million were returns of capital, respectively ( Note 10 ).

For the three and six months ended June 30, 2019, the Company made distributions to Terra Fund 5 totaling $ 7.6 million and $ 15.2 million, respectively, of which $ 7.6 million and $ 11.3 million were returns of capital, respectively ( Note 10 ).

Due to Manager

As of March 31, 2020 and December 31, 2019 , approximately $1.4 million and $1.0 million was due to the Manager, respectively, as reflected on the consolidated balance sheets, primarily related to the present value of the disposition fees on individual loans due to the Manager.

As of June 30, 2020 and December 31, 2019, approximately $ 1.9 million and $ 1.0 million was due to the Manager, respectively, as reflected on the consolidated balance sheets, primarily related to the present value of the disposition fees on individual loans due to the Manager.

Merger and Issuance of Common Stock to TIF3 REIT

4 unchanged sentences

The JV Agreement and related stockholders agreement between Terra JV and the Company, dated March 2, 2020, provide for the joint approval of Terra Fund 5 and Terra Fund 7 with respect to certain major decisions that are taken by Terra JV and the Company.

Following the completion of the transactions described above, as of March 31, 2020 , Terra JV owns 86.4% of the issued and outstanding shares of the Company’s common stock with the remainder held by TIF3 REIT, and Terra Fund 5 and Terra Fund 7 own an 87.6% and 12.4% interest, respectively, in Terra JV.

Terra International 3

6 unchanged sentences

On September 24, 2019, Terra International 3 amended its private placement memorandum to change its term from finite life to perpetual life with limited opportunity for liquidity, as well as to change the selling commission structure and to provide for a dividend reinvestment plan.

As a result of the change in the terms of the offering, as of today, Terra International 3 received requests to rescind all of the units of its limited partnership interest at a price of $ 50,000 per unit.

Terra International 3 expects to honor all the requests.

As a result of the rescission requests, TIF3 REIT redeemed the previously purchased of 212,691 shares of the Company’s common stock on April 29, 2020.

As a result of the change in the terms of the offering, Terra International 3 received requests to rescind all of the units of its limited partnership interest at a price of $ 100,000 per unit.

On April 29, 2020, the Company repurchased, at a price of $ 17.02 per share, the 212,691 shares of common stock that the Company had previously sold to TIF3 REIT on September 30, 2019.

Terra International 3 honored all of the rescission requests that it had received with proceeds from the repurchase.

Participation Agreements

2 unchanged sentences

The Company may transfer portions of its investments to other Participants or it may be a Participant to a loan held by another entity.

Notes to Unaudited Consolidated Financial Statements

ASC 860, Transfers and Servicing (“ASC 860”) , establishes accounting and reporting standards for transfers of financial assets.

1 unchanged sentence

The Company has determined that the participation agreements it enters into are accounted for as secured borrowings under ASC 860 (See “ Participation interests ” in Note 2 and “ Obligations under Participation Agreements ” in ( Note 7 ).

Notes to Unaudited Consolidated Financial Statements

Participation Interests Purchased by the Company

The below table lists the loan interests participated in by the Company via PAs as of March 31, 2020 and December 31, 2019 .

The below table lists the loan interests participated in by the Company via PAs as of June 30, 2020 and December 31, 2019.

In accordance with the terms of each PA, each Participant’s rights and obligations, as well as the proceeds received from the related borrower/issuer of the loan, are based upon their respective pro rata participation interest in the loan.

March 31, 2020

December 31, 2019

Participating Interests

Principal Balance

Carrying Value

Participating Interests

Principal Balance

Carrying Value

June 30, 2020 December 31, 2019

Participating Interests Principal Balance Carrying Value Participating Interests Principal Balance Carrying Value

LD Milpitas Mezz, LP (1)

25.00 % 4,250,000 4,297,989 25.00 % 3,120,887 3,150,546

________________

(1) On June 27, 2018, the Company entered into a participation agreement with Terra Income Fund 6, Inc.

(“Terra Fund 6”) to purchase a 25 % participation interest, or $ 4.3 million, in a $ 17.0 million mezzanine loan.

As of March 31, 2020 , the unfunded commitment was $ 0.3 million.

As of June 30, 2020, all of the commitment has been funded.

Transfers of Participation Interest by the Company

The following tables summarize the loans that were subject to PAs with affiliated entities as of March 31, 2020 and December 31, 2019 :

The following tables summarize the loans that were subject to PAs with affiliated entities as of June 30, 2020 and December 31, 2019:

Transfers Treated as Obligations Under Participation Agreements as of

March 31, 2020

Principal Balance

Carrying Value

% Transferred

Principal Balance (6)

June 30, 2020

Principal Balance Carrying Value % Transferred Principal Balance (6)

Carrying Value (6)

14th & Alice Street Owner, LLC (5)

$ 24,510,905 $ 24,689,333 80.00 % $ 19,608,724 $ 19,689,912

370 Lex Part Deux, LLC (2)

51,037,529 51,094,313 35.00 % 17,863,135 17,863,135

City Gardens 333 LLC (2)

27,449,731 27,461,070 14.00 % 3,842,964 3,844,468

NB Private Capital, LLC (2)

19,670,115 19,837,285 16.67 % 3,282,565 3,310,427

Orange Grove Property Investors, LLC (2)

10,600,000 10,699,082 80.00 % 8,480,000 8,559,225

RS JZ Driggs, LLC (2)

8,200,000 8,276,271 50.00 % 4,100,000 4,138,136

Stonewall Station Mezz LLC (2)

10,010,007 10,097,447 44.00 % 4,404,403 4,442,374

The Bristol at Southport, LLC (5)

23,500,000 23,671,815 21.28 % 5,000,000 5,036,556

TSG-Parcel 1, LLC (2)

18,000,000 18,180,000 11.11 % 2,000,000 2,020,000

Windy Hill PV Five CM, LLC (5)

13,797,643 13,498,117 69.11 % 9,534,957 9,342,286

$ 206,775,930 $ 207,504,733 $ 78,116,748 $ 78,246,519

Notes to Unaudited Consolidated Financial Statements

1 unchanged sentence

December 31, 2019

Principal Balance

Carrying Value

% Transferred

Principal Balance (6)

Principal Balance Carrying Value % Transferred Principal Balance (6)

Carrying Value (6)

14th & Alice Street Owner, LLC (5)

$ 12,932,034 $ 12,957,731 80.00 % $ 10,345,627 $ 10,387,090

2539 Morse, LLC (1)(3)(7)

7,000,000 7,067,422 40.00 % 2,800,001 2,825,519

370 Lex Part Deux, LLC (2)(4)(7)

48,349,948 48,425,659 47.00 % 22,724,476 22,724,476

Owner LLC (1)(7)

3,500,000 3,531,776 30.00 % 1,050,000 1,059,532

City Gardens 333 LLC (1)(2)(3)(4)(7)

28,049,717 28,056,179 47.00 % 13,182,584 13,184,648

High Pointe Mezzanine Investments,

3,000,000 3,263,285 37.20 % 1,116,000 1,217,160

NB Private Capital, LLC (1)(2)(3)(4)(7)

20,000,000 20,166,610 72.40 % 14,480,392 14,601,021

Orange Grove Property Investors, LLC (2)

10,600,000 10,696,587 80.00 % 8,480,000 8,557,205

RS JZ Driggs, LLC (2)

8,200,000 8,286,629 50.00 % 4,100,000 4,142,264

SparQ Mezz Borrower, LLC (1)(3)(7)

8,700,000 8,783,139 36.81 % 3,202,454 3,231,689

Stonewall Station Mezz LLC (2)

9,792,767 9,875,162 44.00 % 4,308,817 4,344,635

The Bristol at Southport, LLC (1)(3)(4)(7)

23,500,000 23,661,724 42.44 % 9,974,444 10,043,088

TSG-Parcel 1, LLC (1)(2)(7)

18,000,000 18,180,000 37.78 % 6,800,000 6,868,000

Participant is Terra Secured Income Fund 5 International, an affiliated fund advised by the Manager.

$ 201,624,466 $ 202,951,903 $ 102,564,795 $ 103,186,327

________________

(1) Participant was Terra Secured Income Fund 5 International, an affiliated fund advised by the Manager.

(2) Participant is Terra Fund 6, an affiliated fund advised by Terra Income Advisors.

Participant is Terra Income Fund International, an affiliated fund advised by the Manager.

Participant is TPT2, an affiliated fund managed by the Manager.

(3) Participant was Terra Income Fund International, an affiliated fund advised by the Manager.

(4) Participant was TPT2, an affiliated fund managed by the Manager.

(5) Participant is a third-party.

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Pursuant to the PAs with these entities, the Company receives and allocates the interest income and other related investment income to the Participants based on their respective pro rata participation interest.

The Participants pay related expenses also based on their respective pro rata participation interest ( i.e.

, asset management and asset servicing fees, disposition fees) directly to the Manager.

The Participants pay any expenses, including any fees to the Manager, only on their respective pro rata participation interest, subject to the terms of the respective governing fee arrangements.

Co-investment

3 unchanged sentences

In August 2019, the loan was repaid in full.

Repurchase Agreement

On December 12, 2018, Terra Mortgage Capital I, LLC (the “Seller”), a special-purpose indirect wholly-owned subsidiary of the Company, entered into an Uncommitted Master Repurchase Agreement (the “Master Repurchase Agreement”) with Goldman

Notes to Unaudited Consolidated Financial Statements

Sachs Bank USA (the “Buyer”).

Repurchase Agreement

The Master Repurchase Agreement provides for advances of up to $ 150.0 million in the aggregate, which the Company expects to use to finance certain secured performing commercial real estate loans.

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Upon the occurrence of a margin deficit event, the Buyer may require the Seller to make a payment to reduce the outstanding obligation to eliminate any margin deficit.

During the three months ended March 31, 2020 , the Company received a margin call on one of the borrowings and as a result, made a repayment of $3.4 million to reduce the outstanding obligation under the Master Repurchase Agreement.

During the six months ended June 30, 2020, the Company received a margin call on one of the borrowings and as a result, made a repayment of $ 3.4 million to reduce the outstanding obligation under the Master Repurchase Agreement.

In connection with the Master Repurchase Agreement, the Company entered into a Guarantee Agreement in favor of the Buyer (the “Guarantee Agreement”), pursuant to which the Company will guarantee the obligations of the Seller under the Master Repurchase Agreement.

2 unchanged sentences

The Company currently expects the actual interest paid in calendar year 2020 on borrowings under the Master Repurchase Agreement to be less than $ 4.2 million.

As a result, the Company accrued approximately $ 0.1 million for the three months ended March 31, 2020 to make up for the difference between the actual interest paid and the $ 4.2 million.

As a result, the Company accrued approximately $ 0.3 million for the six months ended June 30, 2020 to make up for the difference between the actual interest paid and the $ 4.2 million.

The Master Repurchase Agreement and the Guarantee Agreement contain various representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of these types.

5 unchanged sentences

and (v) a total indebtedness to tangible net worth ratio of not more than 3.00 to 1.00.

As of March 31, 2020 and December 31, 2019 , the Company is in compliance with these covenants.

As of June 30, 2020 and December 31, 2019, the Company is in compliance with these covenants.

In connection with entering into the Master Repurchase Agreement, the Company incurred $ 2.8 million of deferred financing costs, which are being amortized to interest expense over the term of the facility.

As of March 31, 2020 and December 31, 2019 , unamortized deferred financing costs were $ 1.2 million and $ 1.5 million , respectively.

The following tables present summary information with respect to the Company’s outstanding borrowing under the Master Repurchase Agreement as of March 31, 2020 and December 31, 2019 :

March 31, 2020

Amount Outstanding

Master Repurchase Agreement

As of June 30, 2020 and December 31, 2019, unamortized deferred financing costs were $ 0.8 million and $ 1.5 million, respectively.

The following tables present summary information with respect to the Company’s outstanding borrowing under the Master Repurchase Agreement as of June 30, 2020 and December 31, 2019:

June 30, 2020

Arrangement Weighted Average Rate (1)

Amount Outstanding Amount

Available Weighted Average Term (2)

Master Repurchase Agreement 3.8 % $ 95,356,360 $ 54,643,640 1.47 years

Notes to Unaudited Consolidated Financial Statements

December 31, 2019

Amount Outstanding

Master Repurchase Agreement

Arrangement Weighted Average Rate (1)

Amount Outstanding Amount

Available Weighted Average Term (2)

Master Repurchase Agreement 4.3 % $ 81,134,436 $ 68,865,564 1.55 years

_______________

Amount is calculated using LIBOR of 0.99% and 1.76% as of March 31, 2020 and December 31, 2019 , respectively.

Notes to Unaudited Consolidated Financial Statements

(1) Amount is calculated using LIBOR of 0.16 % and 1.76 % as of June 30, 2020 and December 31, 2019, respectively.

(2) The weighted average term is determined based on the current maturity of the corresponding loan.

1 unchanged sentence

The Company may extend the maturity date of the Master Repurchase Agreement for a period of one year, subject to satisfaction of certain conditions.

The following tables present detailed information with respect to each borrowing under the Master Repurchase Agreement as of March 31, 2020 and December 31, 2019 :

March 31, 2020

Borrowings Under Master Repurchase Agreement

Principal Amount

Carrying Value

Borrowing Date

Principal Amount

330 Tryon DE LLC

LIBOR+2.25% (LIBOR floor of 2.52%)

1389 Peachtree St, LP;

The following tables present detailed information with respect to each borrowing under the Master Repurchase Agreement as of June 30, 2020 and December 31, 2019:

June 30, 2020

Collateral Borrowings Under Master Repurchase Agreement

Principal Amount Carrying Value Fair

Value Borrowing Date Principal Amount Interest

330 Tryon DE LLC $ 22,800,000 $ 22,896,169 $ 22,898,866 02/15/2019 $ 17,100,000 LIBOR+2.25% (LIBOR floor of 2.52%)

1389 Peachtree St, LP;

1401 Peachtree St, LP;

AGRE DCP Palm Springs, LLC

LIBOR+2.50% (LIBOR floor of 1.8%)

MSC Fields Peachtree Retreat, LLC

1409 Peachtree St, LP 45,671,947 45,853,379 45,821,197 3/7/2019 24,448,101 LIBOR+2.35%

2,489,416 LIBOR+3.85%

AGRE DCP Palm Springs, LLC 32,975,680 33,030,797 33,084,469 12/23/2019 19,242,798 LIBOR+2.50% (LIBOR floor of 1.8%)

320,145 LIBOR+4.00% (LIBOR floor of 1.8%)

MSC Fields Peachtree Retreat, LLC 23,308,335 23,442,092 23,108,448 3/25/2019 17,355,900 LIBOR+2.25% (LIBOR floor of 2.00%)

Patrick Henry Recovery

Acquisition, LLC

LIBOR + 2.00% (1.5% Floor)

Acquisition, LLC 18,000,000 18,038,578 17,845,715 1/6/2020 14,400,000 LIBOR + 2.00% (1.5% Floor)

$ 142,755,962 $ 143,261,015 $ 142,758,695 $ 95,356,360

December 31, 2019

Borrowings Under Master Repurchase Agreement

Principal Amount

Carrying Value

Borrowing Date

Principal Amount

330 Tryon DE LLC

LIBOR+2.25% (LIBOR floor of 2.49%)

1389 Peachtree St, LP;

Collateral Borrowings Under Master Repurchase Agreement

Principal Amount Carrying Value Fair

Value Borrowing Date Principal Amount Interest

330 Tryon DE LLC $ 22,800,000 $ 22,891,149 $ 22,906,207 2/15/2019 $ 17,100,000 LIBOR+2.25% (LIBOR floor of 2.49%)

1389 Peachtree St, LP;

1401 Peachtree St, LP;

AGRE DCP Palm Springs, LLC

LIBOR+2.50% (LIBOR floor of 1.8%)

MSC Fields Peachtree Retreat, LLC

LIBOR+2.25% (LIBOR floor of 2.00%)

For the three months ended March 31, 2020 and 2019 , the Company borrowed $14.8 million and $3.4 million under the Master Repurchase Agreement, respectively, for the financing of new and follow-on investments.

For the three months ended March 31, 2020 , the Company made a repayment of $3.4 million as a result of a margin call described above.

For the three months ended March 31, 2019 , there was no repayment on borrowings under the Master Repurchase Agreement.

1409 Peachtree St, LP 38,464,429 38,510,650 38,655,000 3/7/2019 24,040,268 LIBOR+2.35%

AGRE DCP Palm Springs, LLC 30,184,357 30,174,455 30,326,076 12/23/2019 22,638,268 LIBOR+2.50% (LIBOR floor of 1.8%)

MSC Fields Peachtree Retreat, LLC 23,308,335 23,446,793 23,418,996 3/25/2019 17,355,900 LIBOR+2.25% (LIBOR floor of 2.00%)

$ 114,757,121 $ 115,023,047 $ 115,306,279 $ 81,134,436

Notes to Unaudited Consolidated Financial Statements

For the six months ended June 30, 2020 and 2019, the Company borrowed $ 17.6 million and $ 47.9 million under the Master Repurchase Agreement, respectively, for the financing of new and follow-on investments.

For the six months ended June 30, 2020, the Company made a repayment of $ 3.4 million as a result of a margin call described above.

For the six months ended June 30, 2019, there was no repayment on borrowings under the Master Repurchase Agreement and no margin call.

Revolving Credit Facility

On June 20, 2019, Terra LOC Portfolio I, LLC, a special-purpose indirect wholly-owned subsidiary of the Company, entered into a credit agreement with Israel Discount Bank of New York to provide for revolving credit loans of up to $ 35.0 million in the aggregate (“Revolving Credit Facility”), which the Company expects to use solely for short term financing needed to bridge the timing of anticipated loans repayments and funding obligations.

On June 20, 2019, Terra LOC Portfolio I, LLC, a special-purpose indirect wholly-owned subsidiary of the Company, entered into a credit agreement with Israel Discount Bank of New York to provide for revolving credit loans of up to $ 35.0 million in the aggregate (“Revolving Credit Facility”), which the Company expects to use for short term financing needed to bridge the timing of anticipated loans repayments and funding obligations.

Borrowings under the Revolving Credit Facility can be either prime rate loans or LIBOR rate loans and accrue interest at an annual rate of prime rate plus 1 % or LIBOR plus 4 % with a floor of 6 %.

Each loan made under the Revolving Credit Facility shall be in a minimum aggregate principal amount of the lesser of $ 1.0 million or the then unused amount under the facility and cannot be more than $ 25.0 million in the aggregate with respect to

Notes to Unaudited Consolidated Financial Statements

each asset purchased with the proceeds from the Revolving Credit Facility.

The Revolving Credit Facility matures on June 20, 2020.

The Revolving Credit Facility was scheduled to mature on June 20, 2020 .

In June and July 2020, the Company amended the Credit Facility twice to extend the maturity of the Credit Facility to September 3, 2020.

In connection with obtaining the Revolving Credit Facility, the Company incurred deferred financing costs of $ 0.3 million, which are being amortized to interest expense over the term of the facility.

As of March 31, 2020 , the amount outstanding under the Revolving Credit Facility was $ 35.0 million.

As of June 30, 2020, the amount outstanding under the Revolving Credit Facility was $ 35.0 million.

The Revolving Credit Facility requires the Company to maintain:

4 unchanged sentences

Additionally, the Revolving Credit Facility requires Terra LOC Portfolio I, LLC to maintain a tangible net worth of at least $ 100.0 million.

As of March 31, 2020 and December 31, 2019 , both the Company and Terra LOC Portfolio I, LLC are in compliance with these covenants.

For the three months ended March 31, 2020 , the Company borrowed $35.0 million under the Revolving Credit Facility.

As of June 30, 2020 and December 31, 2019, both the Company and Terra LOC Portfolio I, LLC are in compliance with these covenants.

For the six months ended June 30, 2020, the Company borrowed $ 35.0 million under the Revolving Credit Facility.

There was no outstanding balance on the Revolving Credit Facility for the six months ended June 30, 2019.

Mortgage Loan Payable

As of March 31, 2020 , the Company had a $ 44.5 million mortgage loan payable collateralized by a multi-tenant office building that the Company acquired through foreclosure.

The following table presents certain information about the mortgage loan payable as of March 31, 2020 and December 31, 2019 :

March 31, 2020

December 31, 2019

Interest Rate

Principal Amount

Carrying Value

Carrying Value of

Carrying Value

Carrying Value of

Centennial Bank

LIBOR + 3.85%

(LIBOR Floor of 2.23%)

September 27, 2020

As of June 30, 2020, the Company had a $ 44.5 million mortgage loan payable collateralized by a multi-tenant office building that the Company acquired through foreclosure.

The following table presents certain information about the mortgage loan payable as of June 30, 2020 and December 31, 2019:

June 30, 2020 December 31, 2019

Lender Current

Interest Rate Maturity

Principal Amount Carrying Value Carrying Value of

Collateral Carrying Value Carrying Value of

Centennial Bank LIBOR + 3.85%

(LIBOR Floor of 2.23%) September 27, 2020 $ 44,481,855 $ 44,753,239 $ 51,171,918 $ 44,753,633 $ 52,776,236

_______________

(1) The Company has an option to extend the maturity of the mortgage loan payable by two years subject to certain conditions provided in the credit and security agreement.

Notes to Unaudited Consolidated Financial Statements

Scheduled Debt Principal Payments

Scheduled debt principal payments for each of the five calendar years following March 31, 2020 are as follows:

Years Ending December 31,

2020 (April 1 through December 31)

Scheduled debt principal payments for each of the five calendar years following June 30, 2020 are as follows:

Years Ending December 31, Total

2020 (July 1 through December 31) $ 174,838,215

Unamortized deferred financing costs ( 513,609 )

At March 31, 2020 and December 31, 2019 , the unamortized deferred financing costs were $1.1 million and $ 1.4 million , respectively.

Total $ 174,324,606

At June 30, 2020 and December 31, 2019, the unamortized deferred financing costs were $ 0.5 million and $ 1.4 million, respectively.

Obligations Under Participation Agreements

2 unchanged sentences

Loan participations from the Company which do not qualify for sale treatment remain on the Company’s consolidated balance sheets and the proceeds are recorded as obligations under participation agreements.

As of March 31, 2020 and December 31, 2019 , obligations under participation agreements had a carrying value of approximately $67.7 million and $ 103.2 million, respectively, and the carrying value of the loans that are associated with these obligations under participation agreements was approximately $177.2 million and $ 203.0 million, respectively, (see “ Participation Agreements ” in Note 7 ).

The weighted-average interest rate on the obligations under participation agreements was approximately 10.8% and 11.8 % as of March 31, 2020 and December 31, 2019 , respectively.

Notes to Unaudited Consolidated Financial Statements

As of June 30, 2020 and December 31, 2019, obligations under participation agreements had a carrying value of approximately $ 78.2 million and $ 103.2 million, respectively, and the carrying value of the loans that are associated with these obligations under participation agreements was approximately $ 207.5 million and $ 203.0 million, respectively, (see “ Participation Agreements ” in Note 7 ).

The weighted-average interest rate on the obligations under participation agreements was approximately 10.8 % and 11.8 % as of June 30, 2020 and December 31, 2019, respectively.

Commitments and Contingencies

1 unchanged sentence

As further discussed in Note 2 , the full extent of the impact of COVID-19 on the global economy generally, and the Company’s business in particular, is uncertain.

As of March 31, 2020 , no contingencies have been recorded on the Company’s consolidated balance sheet as a result of COVID-19, however as the global pandemic continues and the economic implications worsen, it may have long-term impacts on the Company’s financial condition, results of operations, and cash flows.

As of June 30, 2020, no contingencies have been recorded on the Company’s consolidated balance sheet as a result of COVID-19, however as the global pandemic continues and the economic implications worsen, it may have long-term impacts on the Company’s financial condition, results of operations, and cash flows.

Refer to Note 2 for further discussion of COVID-19.

1 unchanged sentence

Certain of the Company’s loans contain provisions for future fundings, which are subject to the borrower meeting certain performance-related metrics that are monitored by the Company.

These fundings amounted to approximately $107.0 million and $ 116.7 million as of March 31, 2020 and December 31, 2019 , respectively.

These fundings amounted to approximately $ 92.7 million and $ 116.7 million as of June 30, 2020 and December 31, 2019, respectively.

The Company expects to maintain sufficient cash on hand to fund such unfunded commitments, primarily through matching these commitments with principal repayments on outstanding loans and proceeds from the Revolving Credit Facility.

4 unchanged sentences

The Company is not currently subject to any material legal proceedings and, to the Company’s knowledge, no material legal proceedings are threatened against the Company.

From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company’s rights under contracts with its portfolio companies.

From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company’s rights

Notes to Unaudited Consolidated Financial Statements

under contracts with its portfolio companies.

While the outcome of any legal proceedings cannot be predicted with certainty, the Company does not expect that any such proceedings will have a material adverse effect upon its financial condition or results of operations.

See Note 7 for a discussion of the Company’s commitments to the Manager.

Earnings Per Share

The following table presents earnings per share for the three and six months ended June 30, 2020 and June 30, 2019:

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Net income (loss) $ 2,646,042 $ ( 153,485 ) $ 3,225,005 $ 3,769,390

Preferred stock dividend declared ( 3,906 ) ( 3,906 ) ( 7,812 ) ( 7,812 )

Net income (loss) allocable to common stock $ 2,642,136 $ ( 157,391 ) $ 3,217,193 $ 3,761,578

Weighted-average shares outstanding - basic

and diluted 19,555,241 14,912,990 18,131,260 14,912,990

Earnings (loss) per share - basic and diluted $ 0.14 $ ( 0.01 ) $ 0.18 $ 0.25

Preferred Stock Classes

2 unchanged sentences

The Company’s board of directors may classify any unissued shares of Preferred Stock and reclassify any previously classified but unissued shares of Preferred Stock of any series from time to time, into one or more classes or series of stock.

As of March 31, 2020 and December 31, 2019 , there were no Preferred Stock issued or outstanding.

As of June 30, 2020 and December 31, 2019, there were no Preferred Stock issued or outstanding.

Series A Preferred Stock

10 unchanged sentences

and (iii) any reclassification of the Series A Preferred Stock.

Notes to Unaudited Consolidated Financial Statements

As discussed in Note 3 , on March 1, 2020, TPT2 merged with and into the Company with the Company continuing as the surviving corporation.

2 unchanged sentences

As described in Note 3 , Terra Fund 7 contributed the shares of the Company’s common stock received as consideration in the Merger to Terra JV and became a co-managing member of Terra JV pursuant to the JV Agreement.

As of March 31, 2020 , Terra JV owns 86.4 % of the issued and outstanding shares of the Company’s common stock with the remainder held by TIF3 REIT, and Terra Fund 5 and Terra Fund 7 own an 87.6 % and 12.4 % interest, respectively, in Terra JV.

Notes to Unaudited Consolidated Financial Statements

Terra JV and the Company.

On September 30, 2019, the Company issued 212,691 shares of its common stock to TIF3 REIT at a price of $ 17.02 per share for total proceeds of $ 3.6 million.

On April 29, 2020, the Company repurchased the 212,691 shares it previously sold to TIF3 REIT ( Note 7 ).

On April 29, 2020, the Company repurchased, at a price of $ 17.02 per share, the 212,691 shares it previously sold to TIF3 REIT ( Note 7 ).

Distributions

2 unchanged sentences

All distributions will be made at the discretion of the Company’s board of directors and will depend upon its taxable income, financial condition, maintenance of REIT status, applicable law, and other factors as its board of directors deems relevant.

For the three months ended March 31, 2020 , the Company made distributions to Terra Fund 5, Terra JV and TIF3 REIT in the aggregate of $8.8 million , of which $8.3 million were returns of capital.

For the three months ended March 31, 2019 , the Company made distributions to Terra Fund 5 totaling $7.6 million , of which $3.6 million were returns of capital.

Additionally, for both the three months ended March 31, 2020 and 2019 , the Company made distributions to preferred stockholders of $3,906 .

Additionally, for both the six months ended June 30, 2020 and 2019, the Company made distributions to preferred stockholders of $ 7,812 .

Subsequent Events

31 unchanged sentences

Terra Income Fund International;

Terra Secured Income Fund 7, LLC (“Terra Fund 7”);Terra International Fund 3, L.P.

Terra Secured Income Fund 7, LLC (“Terra Fund 7”);

Terra International Fund 3, L.P.

(“Terra International 3”);

23 unchanged sentences

Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise.

are advised to consult any additional disclosures that we may make directly to stockholders or through reports that we may file in the future with the Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Stockholders are advised to consult any additional disclosures that we may make directly to stockholders or through reports that we may file in the future with the Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

We are a real estate credit focused company that originates, structures, funds and manages high yielding commercial real estate credit investments, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments throughout the United States, which we collectively refer to as our targeted assets.

4 unchanged sentences

There can be no assurances that we will be successful in meeting our objective.

As of March 31, 2020 , we held a net investment portfolio (gross investments less obligations under participation agreements) comprised of 22 investments in 10 states with an aggregate net principal balance of $335.1 million , a weighted average coupon rate of 9.1% , a weighted average loan-to-value ratio of 81.4% and a weighted average remaining term to maturity of 2.1 years.

As of June 30, 2020, we held a net investment portfolio (gross investments less obligations under participation agreements) comprised of 22 investments in 10 states with an aggregate net principal balance of $336.0 million, a weighted average coupon rate of 8.9%, a weighted average loan-to-value ratio of 81.6% and a weighted average remaining term to maturity of 1.9 years.

Each of our loans was originated by Terra Capital Partners or its affiliates.

6 unchanged sentences

At the beginning of 2016, we completed the merger of these private partnerships into a single entity as part of our plan to reorganize our business as a REIT for federal income tax purposes (the “REIT formation transaction”).

Following the REIT formation transaction, Terra Fund 5 contributed the consolidated portfolio of net assets of Terra Secured Income Fund, LLC, Terra Secured Income Fund 2, LLC, Terra Secured Income Fund 3, LLC, Terra Secured Income Fund 4, LLC and Terra Fund 5 to us in exchange for all of the shares of common stock of our company.

Following the REIT formation transaction, Terra Fund 5 contributed the consolidated portfolio of net assets of Terra Secured Income Fund, LLC, Terra Secured Income Fund 2,

LLC, Terra Secured Income Fund 3, LLC, Terra Secured Income Fund 4, LLC and Terra Fund 5 to us in exchange for all of the shares of common stock of our company.

On March 1, 2020, Terra Property Trust 2, Inc.

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We consummated these transactions with the objective of increasing the size and scale of our loan portfolio, further strengthening our balance sheet and positioning us for future growth.

Following the completion of these transactions, as of March 31, 2020, Terra JV held 86.5% of the issued and outstanding shares of our common stock with the remainder held by TIF3 REIT, and Terra Fund 5 and TIF7 owned an 87.6% and 12.4% interest, respectively, in Terra JV.

On April 29, 2020, we repurchased the 212,691 shares of common stock we had previously sold to TIF3 REIT on September 30, 2019.

As of June 30, 2020, Terra JV held 87.4% of the issued and outstanding shares of our common stock with the remainder held by TIF3 REIT, and Terra Fund 5 and TIF7 owned an 87.6% and 12.4% interest, respectively, in Terra JV.

We have elected to be taxed as a REIT for U.S.

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Recent Developments

During the first quarter of 2020, there was a global outbreak of a novel coronavirus, or COVID-19, which has spread to over 200 countries and territories, including the United States, and has spread to every state in the United States.

During the first half of 2020, there was a global outbreak of a novel coronavirus, or COVID-19, which has spread to over 200 countries and territories, including the United States, and has spread to every state in the United States.

The World Health Organization has designated COVID-19 as a pandemic, and numerous countries, including the United States, have declared national emergencies with respect to COVID-19.

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Portfolio Summary

The following tables provide a summary of our net loan portfolio as of March 31, 2020 and December 31, 2019 :

March 31, 2020

Rate (1)(2)(3)

Total Gross Loans

Obligations under Participation Agreements

Total Net Loans

The following tables provide a summary of our net loan portfolio as of June 30, 2020 and December 31, 2019:

June 30, 2020

Fixed Rate Floating Rate (1)(2)(3)

Total Gross Loans Obligations under Participation Agreements Total Net Loans

Number of loans 9 13 22 9 22

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Amortized cost 102,402,613 312,045,669 414,448,282 78,246,519 336,201,763

Fair value 102,651,392 310,024,461 412,675,853 77,898,387 334,777,466

Weighted average coupon rate 10.29 % 8.91 % 9.25 % 10.83 % 8.88 %

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December 31, 2019

Rate (1)(2)(3)

Total Gross Loans

Obligations under Participation Agreements

Total Net Loans

Fixed Rate Floating Rate (1)(2)(3)

Total Gross Loans Obligations under Participation Agreements Total Net Loans

Number of loans 8 15 23 13 23

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Amortized cost 71,469,137 307,143,631 378,612,768 103,186,327 275,426,441

Fair value 71,516,432 307,643,983 379,160,415 103,188,783 275,971,632

Weighted average coupon rate 11.93 % 9.13 % 9.65 % 11.77 % 8.87 %

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(1) These loans pay a coupon rate of London Interbank Offered Rate ( “ LIBOR ” ) plus a fixed spread.

Coupon rate shown was determined using LIBOR of 0.99% and 1.76% as of March 31, 2020 and December 31, 2019 .

As of March 31, 2020 and December 31, 2019 , amounts included $136.1 million and $114.8 million, respectively, of senior mortgages used as collateral for $92.5 million and $81.1 million, respectively, of borrowings under a repurchase agreement.

These borrowings bear interest at an annual rate of LIBOR plus a spread ranging from 2.00% to 2.50% as of March 31, 2020 and LIBOR plus a spread ranging from 2.25% to 2.50% as of December 31, 2019 .

As of both March 31, 2020 and December 31, 2019 , twelve of these loans are subject to a LIBOR floor.

In addition to our net loan portfolio, as of March 31, 2020 and December 31, 2019 , we own 4.9 acres of adjacent land acquired via deed in lieu of foreclosure and a multi-tenant office building acquired via foreclosure.

The land and building and related lease intangible assets and liabilities had a net carrying value of $65.4 million and $66.2 million as of March 31, 2020 and December 31, 2019 , respectively.

The mortgage loan payable encumbering the office building had an outstanding principal amount of $44.5 million and $44.6 million as of March 31, 2020 and December 31, 2019 , respectively.

Coupon rate shown was determined using LIBOR of 0.16% and 1.76% as of June 30, 2020 and December 31, 2019.

(2) As of June 30, 2020 and December 31, 2019, amounts included $142.8 million and $114.8 million, respectively, of senior mortgages used as collateral for $95.4 million and $81.1 million, respectively, of borrowings under a repurchase agreement.

These borrowings bear interest at an annual rate of LIBOR plus a spread ranging from 2.00% to 2.50% as of June 30, 2020 and LIBOR plus a spread ranging from 2.25% to 2.50% as of December 31, 2019.

(3) As of June 30, 2020 and December 31, 2019, eleven and twelve of these loans, respectively, are subject to a LIBOR floor.

In addition to our net loan portfolio, as of June 30, 2020 and December 31, 2019, we own 4.9 acres of adjacent land acquired via deed in lieu of foreclosure and a multi-tenant office building acquired via foreclosure.

The land and building and related lease intangible assets and liabilities had a net carrying value of $64.6 million and $66.2 million as of June 30, 2020 and December 31, 2019, respectively.

The mortgage loan payable encumbering the office building had an outstanding principal amount of $44.5 million and $44.6 million as of June 30, 2020 and December 31, 2019, respectively.

Portfolio Investment Activity

For the three months ended March 31, 2020 and 2019 , we invested $9.3 million and $19.7 million in new and add-on loans, respectively, and had $10.0 million and $35.4 million of repayments, respectively, resulting in net repayments of $0.7 million and $15.7 million , respectively.

Amounts are net of obligations under participation agreements, borrowings under the master repurchase agreement and proceeds from partial sale of a loan.

For the three months ended June 30, 2020 and 2019, we invested $2.6 million and $8.6 million in new and/or add-on loans, respectively, and had $5.2 million and $9.8 million of repayments, respectively, resulting in net repayments of $2.5 million and $1.2 million, respectively.

Amounts are net of obligations under participation agreements and borrowings under the master repurchase agreement.

For the six months ended June 30, 2020 and 2019, we invested $11.9 million and $28.3 million in new and/or add-on loans, respectively, and had $15.1 million and $45.2 million of repayments, respectively, resulting in net repayments of $3.2 million and $16.9 million, respectively.

Amounts are net of obligations under participation agreements and borrowings under the master repurchase agreement.

In addition, in March 2020, we issued 4,574,470.35 shares of our common stock in exchange for the settlement of an aggregate of $49.8 million of participation interests in loans that we owned, cash of $25.5 million and other working capital.

In connection with the Merger and Issuance of Common Stock to TIF3 REIT, the related participation obligations were settled.

For each of the three and six months ended June 30, 2020, we sold $5.8 million of marketable securities and recognized net gains on sale of marketable securities of $1.1 million.

In January 2019, we acquired 4.9 acres of adjacent land encumbering a $14.3 million first mortgage via deed in lieu of foreclosure in exchange for the release of the first mortgage and related fees and expenses.

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The tables below set forth the types of loans in our loan portfolio, as well as the property type and geographic location of the properties securing these loans, on a net loan basis, which represents our proportionate share of the loans, based on our economic ownership of these loans.

March 31, 2020

December 31, 2019

Loan Structure

Principal Balance

June 30, 2020 December 31, 2019

Loan Structure Principal Balance Carrying

Value % of Total Principal Balance Carrying

Value % of Total

First mortgages $ 191,170,829 $ 191,848,919 57.1 % $ 160,984,996 $ 160,948,585 58.4 %

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Allowance for loan losses — (1,314,294) (0.4) % — — — %

March 31, 2020

December 31, 2019

Property Type

Principal Balance

Total $ 335,987,191 $ 336,201,763 100.0 % $ 274,823,522 $ 275,426,441 100.0 %

June 30, 2020 December 31, 2019

Property Type Principal Balance Carrying

Value % of Total Principal Balance Carrying

Value % of Total

Office $ 123,909,027 $ 124,175,135 36.9 % $ 119,331,369 $ 119,145,879 43.3 %

Student housing 42,637,550 43,033,299 12.8 % 26,470,740 26,725,148 9.7 %

Multifamily 83,117,283 83,616,924 24.9 % 49,017,844 49,331,885 17.9 %

Hotel 46,444,284 46,631,795 13.9 % 41,239,194 41,327,772 15.0 %

Infill land 30,759,047 30,919,047 9.2 % 29,644,375 29,756,375 10.8 %

Industrial 7,000,000 7,000,000 2.1 % 7,000,000 7,000,000 2.5 %

Condominium 2,120,000 2,139,857 0.6 % 2,120,000 2,139,382 0.8 %

Allowance for loan losses — (1,314,294) (0.4) % — — — %

March 31, 2020

December 31, 2019

Geographic Location

Principal Balance

Total $ 335,987,191 $ 336,201,763 100.0 % $ 274,823,522 $ 275,426,441 100.0 %

June 30, 2020 December 31, 2019

Geographic Location Principal Balance Carrying

Value % of Total Principal Balance Carrying

Value % of Total

United States

California $ 141,982,974 $ 142,446,080 42.4 % $ 102,774,905 $ 102,622,718 37.3 %

Georgia 68,980,282 69,295,471 20.6 % 61,772,764 61,957,443 22.5 %

New York 52,033,441 52,128,360 15.5 % 52,909,847 53,029,923 19.3 %

North Carolina 28,405,604 28,551,242 8.5 % 28,283,950 28,421,676 10.3 %

Washington 18,500,000 18,635,259 5.5 % 13,525,556 13,618,636 4.9 %

Massachusetts 7,000,000 7,000,000 2.1 % 7,000,000 7,000,000 2.5 %

Texas 3,613,000 3,647,936 1.0 % 2,450,000 2,472,244 0.9 %

Illinois 2,836,668 2,860,776 0.9 % 2,209,189 2,227,593 0.8 %

12,635,222 12,950,933 3.9 % 3,897,311 4,076,208 1.5 %

Allowance for loan losses — (1,314,294) (0.4) % — — — %

Total $ 335,987,191 $ 336,201,763 100.0 % $ 274,823,522 $ 275,426,441 100.0 %

_______________

Other includes $4.2 million and $0.3 million of unused portion of a credit facility, $5.2 million and a $1.7 million of loans with collateral located in Kansas, and $3.0 million and $1.9 million of loans with collateral located in South Carolina at March 31, 2020 and December 31, 2019 , respectively.

(1) Other includes $7.1 million and $0.3 million of unused portion of a credit facility, $2.6 million and a $1.7 million of loans with collateral located in Kansas, and $3.0 million and $1.9 million of loans with collateral located in South Carolina at June 30, 2020 and December 31, 2019, respectively.

Factors Impacting Operating Results

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Results of Operations

The following table presents the comparative results of our operations for the three months ended March 31, 2020 and 2019 :

Three Months Ended March 31,

The following table presents the comparative results of our operations for the three and six months ended June 30, 2020 and 2019:

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 Change 2020 2019 Change

Interest income $ 9,585,175 $ 10,805,438 $ (1,220,263) $ 19,237,040 $ 21,014,402 $ (1,777,362)

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Other operating income 228,359 — 228,359 341,014 108,957 232,057

12,064,629 13,332,694 (1,268,065) 24,142,200 26,070,628 (1,928,428)

Operating expenses

Operating expenses reimbursed to Manager

Operating expenses reimbursed to

Manager 1,694,875 1,213,314 481,561 3,062,064 2,328,518 733,546

Asset management fee 1,140,426 956,985 183,441 2,169,959 1,837,340 332,619

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Depreciation and amortization 946,494 946,494 — 1,892,988 1,892,988 —

Impairment charge — 1,550,000 (1,550,000) — 1,550,000 (1,550,000)

Professional fees 373,098 2,545,321 (2,172,223) 667,859 2,718,107 (2,050,248)

Directors fees 33,750 83,750 (50,000) 117,500 167,500 (50,000)

Other 267,702 75,694 192,008 332,651 93,278 239,373

5,750,168 8,362,430 (2,612,262) 11,860,564 12,538,935 (678,371)

Operating income 6,314,461 4,970,264 1,344,197 12,281,636 13,531,693 (1,250,057)

Other income and expenses

Interest expense from obligations under participation agreements

Interest expense on repurchase agreement payable

Interest expense on mortgage loan payable

Interest expense on revolving credit facility

Net loss on extinguishment of obligations under participation

Realized gains on marketable securities

Interest expense from obligations

under participation agreements (1,992,743) (2,974,837) 982,094 (4,593,501) (5,899,147) 1,305,646

Interest expense on repurchase

agreement payable (1,469,669) (1,366,562) (103,107) (3,020,939) (2,300,535) (720,404)

Interest expense on mortgage

loan payable (749,753) (782,350) 32,597 (1,500,389) (1,562,621) 62,232

Interest expense on revolving

credit facility (599,989) — (599,989) (774,978) — (774,978)

Net loss on extinguishment of

obligations under participation

agreements — — — (319,453) — (319,453)

Realized gains on marketable

securities 1,076,213 — 1,076,213 1,085,107 — 1,085,107

Unrealized gains on marketable

securities 67,522 — 67,522 67,522 — 67,522

(3,668,419) (5,123,749) 1,455,330 (9,056,631) (9,762,303) 705,672

Net income (loss) $ 2,646,042 $ (153,485) $ 2,799,527 $ 3,225,005 $ 3,769,390 $ (544,385)

Net Loan Portfolio

In assessing the performance of our loans, we believe it is appropriate to evaluate the loans on an economic basis, that is, gross loans net of obligations under participation agreements and repurchase agreement payable.

The following tables presents a reconciliation of our loan portfolio from a gross basis to net basis for the three months ended March 31, 2020 and 2019 :

Three Months Ended March 31, 2020

Three Months Ended March 31, 2019

The following tables presents a reconciliation of our loan portfolio from a gross basis to net basis for the three and six months ended June 30, 2020 and 2019 :

Three Months Ended June 30, 2020 Three Months Ended June 30, 2019

Weighted Average Principal Amount (1)

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Total portfolio

Gross loans $ 403,107,647 9.3% $ 383,193,015 10.8%

Obligations under participation agreements (73,120,692) 10.9% (95,337,563) 12.2%

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Net loans (3)

$ 235,218,648 11.0% $ 209,714,606 12.4%

Gross loans $ 212,859,783 6.7% $ 143,125,696 7.9%

Obligations under participation agreements (27,807,684) 9.1% (6,800,000) 12.4%

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Net loans (3)

$ 90,283,792 9.1% $ 58,184,850 11.6%

Subordinated loans (4)

Gross loans $ 190,247,864 12.2% $ 240,067,319 12.5%

Obligations under participation agreements (45,313,008) 12.0% (88,537,563) 12.2%

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$ 144,934,856 12.2% $ 151,529,756 12.7%

Six Months Ended June 30, 2020 Six Months Ended June 30, 2019

Weighted Average Principal Amount (1)

Weighted Average Coupon Rate (2)

Weighted Average Principal Amount (1)

Weighted Average Coupon Rate (2)

Total portfolio

Gross loans $ 395,636,304 9.4 % $ 368,486,550 11.0 %

Obligations under participation agreements (81,213,576) 11.5 % (96,415,887) 12.2 %

Repurchase agreement payable (94,617,024) 3.9 % (61,443,378) 4.8 %

Net loans (3)

$ 219,805,704 11.0 % $ 210,627,285 12.3 %

Gross loans 201,392,405 6.7 % 127,213,974 8.3 %

Obligations under participation agreements (23,368,896) 9.7 % (9,200,440) 12.3 %

Repurchase agreement payable (94,617,024) 3.8 % (61,443,378) 4.8 %

Net loans (3)

$ 83,406,485 9.1 % $ 56,570,156 11.4 %

Subordinated loans (4)

Gross loans 194,243,899 12.2 % 241,272,576 12.5 %

Obligations under participation agreements (57,844,680) 12.2 % (87,215,447) 12.2 %

Net loans (3)

$ 136,399,219 12.2 % $ 154,057,129 12.7 %

_______________

(1) Amount is calculated based on the number of days each loan is outstanding.

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(4) Subordinated loans include mezzanine loans, preferred equity investments and credit facilities.

For the three months ended March 31, 2020 as compared to the same period in 2019 , the decrease in weighted average coupon rate was primarily due to a higher volume of loan originations with lower coupon rates.

For the three and six months ended June 30, 2020 as compared to the same periods in 2019, the decrease in weighted average coupon rate was primarily due to a higher volume of loan originations with lower coupon rates.

Interest Income

For the three months ended March 31, 2020 as compared to the same period in 2019 , interest income decreased by approximately $0.6 million , primarily due to a $0.5 million decrease in contractual interest income as a result of a decrease in the weighted average interest rate on gross loans driven by new loan originations having lower coupon rates than those of the loans that were repaid, partially offset by an increase in the weighted average principal balance of gross loans driven by higher volume of new loan originations than repayments.

For the three and six months ended June 30, 2020 as compared to the same periods in 2019, interest income decreased by approximately $1.2 million and $1.8 million, respectively, primarily due to a decrease in contractual interest income as a result of a decrease in the weighted average interest rate on gross loans driven by new loan originations having lower coupon rates than those of the loans that were repaid, partially offset by an increase in the weighted average principal balance of gross loans driven by higher volume of new loan originations than repayments.

Real Estate Operating Revenue

For each of the three and six months ended June 30, 2020 as compared to the same periods in 2019, real estate operating revenue decreased by $0.3 million, primarily due to a decrease in parking fee income.

Prepayment Fee Income

Prepayment fee income represents prepayment fees charged to borrowers for the early repayment of loans.

For the three months ended March 31, 2019 , we received prepayment fee income of $0.1 million on the early repayment of a loan.

There was no prepayment fee income for the three months ended March 31, 2020 .

For the six months ended June 30, 2019, we received prepayment fee income of $0.1 million on the early repayment of a loan.

There was no prepayment fee income for the three months ended June 30, 2020 and 2019 and the six months ended June 30, 2020.

Other Operating Income

Other operating income includes loan processing fee, administrative fee, application fee and non-refundable deal deposits.

For each of the three and six months ended June 30, 2020 as compared to the same periods in 2019, other operating income increased by $0.2 million, primarily due to an increase in non-refundable deal deposits.

Operating Expenses Reimbursed to Manager

Under the terms of the management agreement with the Manager, we reimburse the Manager for operating expenses incurred in connection with services provided to us, including our allocable share of the Manager’s overhead, such as rent, employee costs, utilities, and technology costs.

For the three months ended March 31, 2020 as compared to the same period in 2019 , operating expenses reimbursed to Manager increased by $0.3 million , primarily due to an increase in gross allocable costs, mostly related to compensation expense, as well as an increase in our allocation ratio in relation to affiliated funds managed by our Manager and its affiliates.

For the three and six months ended June 30, 2020 as compared to the same periods in 2019, operating expenses reimbursed to Manager increased by $0.5 million and $0.7 million, respectively, primarily due to an increase in our allocation ratio in relation to affiliated funds managed by our Manager and its affiliates as a result of the Merger and issuance of Common Stock to TIF3 REIT transactions.

Asset Management Fee

Under the terms of the management agreement with the Manager, we paid the Manager a monthly asset management fee at an annual rate of 1% of the aggregate funds under management, which included the aggregate gross acquisition price for each real estate-related investment and cash held by us.

For the three months ended March 31, 2020 as compared to the same period in 2019 , asset management fee increased by $0.1 million , primarily due to an increase in total funds under management.

For the three and six months ended June 30, 2020 as compared to the same periods in 2019, asset management fee increased by $0.2 million and $0.3 million, respectively, primarily due to an increase in total funds under management.

Provision for Loan Losses

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We record an allowance for loan losses equal to (i) 1.5% of the aggregate carrying amount of loans rated as a “4”, plus (ii) 5% of the aggregate carrying amount of loans rated as a “5”, plus (iii) impaired loan reserves, if any.

As of March 31, 2020 , we had three loans with a loan risk rating of “4” and as a result, we recorded a provision for loan losses of $1.1 million for the three months ended March 31, 2020 .

There was no provision for loan losses for the three months ended March 31, 2019 because we didn't have any loans with a loan risk rating of “4” or “5” as of March 31, 2019 .

For both the three months ended March 31, 2020 and 2019 , we did not record any specific allowance for loan losses.

As of June 30, 2020, we had five loans with a loan risk rating of “4” and recorded a provision for loan losses of $1.3 million for the six months ended June 30, 2020.

For the three months ended June 30, 2020, we recorded a provision for loan losses of $0.2 million as a result of an increase in loans with a risk rating of “4” in the second quarter of 2020.

There was no provision for loan losses for the three and six months ended June 30, 2019 because we didn't have any loans with a loan risk rating of “4” or “5” as of June 30, 2019.

For both the three and six months ended June 30, 2020 and 2019, we did not record any specific allowance for loan losses.

Real Estate Operating Expenses

Real estate operating expenses represent expenses incurred by the multi-tenant office building and the land, which include repairs and maintenances, utilities, real estate taxes, management fees and other operating expenses incurred in connection with the operation of the office building and the maintenance of the land.

For the three months ended March 31, 2020 as compared to the same period in 2019 , real estate operating expenses increased by $0.2 million , primarily due to an increase in real estate taxes.

For the three and six months ended June 30, 2020 as compared to the same periods in 2019, real estate operating expenses increased by $0.1 million and $0.3 million, respectively, primarily due to an increase in real estate taxes.

Impairment Charge

We did not record any impairment charge for the three and six months ended June 30, 2020.

For the three and six months ended June 30, 2019, we recorded an impairment charge of $1.6 million on the 4.9 acres of adjacent land that we acquired via deed in lieu of foreclosure in order to reduce the carrying value of the land to its estimated fair value, which is the estimated selling price less the cost of sale.

Professional Fees

For the three months ended March 31, 2020 as compared to the same period in 2019 , professional fees increased by $0.1 million , primarily due additional professional fees incurred in connection with financial reporting compliance since becoming a public reporting entity in December 2019.

For the three and six months ended June 30, 2020 as compared to the same periods in 2019, professional fees decreased by $2.2 million and $2.1 million, respectively, primarily due to $2.4 million of professional fees directly incurred in the second quarter of 2019, and which were previously deferred, in contemplation of Terra Property Trust becoming a public entity, partially offset by additional professional fees incurred in connection with financial reporting compliance since becoming a public reporting entity in December 2019.

For both the three and six months ended June 30, 2020 as compared to the same periods in 2019, other operating expenses increased by $0.2 million, primarily due to an increase in un-reimbursed transaction-related costs.

Interest Expense from Obligations under Participation Agreements

For the three months ended March 31, 2020 as compared to the same period in 2019 , interest expense from obligations under participation agreements decreased by $0.3 million , primarily due to a decrease in weighted average outstanding principal balance on obligations under participation agreements as a result of the Merger and Issuance of Common Stock to TIF3 REIT.

For the three and six months ended June 30, 2020 as compared to the same periods in 2019, interest expense from obligations under participation agreements decreased by $1.0 million and $1.3 million, respectively, primarily due to a decrease in weighted average outstanding principal balance on obligations under participation agreements as a result of the Merger and Issuance of Common Stock to TIF3 REIT as well as a decrease in the weighted average coupon rate on obligations under participation agreements.

Interest Expense on Repurchase Agreement Payable

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Advances under the master repurchase agreement accrue interest at a per annum pricing rate equal to the sum of (i) the 30-day LIBOR and (ii) the applicable spread.

For the three months ended March 31, 2020 as compared to the same period in 2019 , interest expense on repurchase agreement payable increased by $0.6 million reflecting an increase in the weighted average amount outstanding under the master repurchase agreement.

For the three and six months ended June 30, 2020 as compared to the same periods in 2019, interest expense on repurchase agreement payable increased by $0.1 million and $0.7 million, respectively, due to an increase in the weighted average amount outstanding, partially offset by a decrease in the weighted average interest rate, as well as an accrual for the minimum interest provision under the master repurchase agreement.

Interest Expense on Revolving Credit Facility

On June 20, 2019, we entered into a credit agreement to provide for revolving credit loans of up to $35.0 million in the aggregate, which we use solely for short term financing needed to bridge the timing of anticipated loans repayments and funding obligations.

For the three months ended March 31, 2020 , we recorded interest expense on revolving credit facility of $0.2 million .

There was no credit facility agreement during the three months ended March 31, 2019 .

On June 20, 2019, we entered into a credit agreement to provide for revolving credit loans of up to $35.0 million in the aggregate, which we use for short term financing needed to bridge the timing of anticipated loans repayments and funding obligations.

For the three and six months ended June 30, 2020, we recorded interest expense on revolving credit facility of $0.6 million and $0.8 million, respectively.

We entered into the credit facility agreement in June 2019 and there was no balance outstanding for the three and six months ended June 30, 2019.

Net Loss on Extinguishment of Obligations under Participation Agreements

In March 2020, as a result of the Merger and Issuance of Common Stock to TIF3 REIT, we settled an aggregate of $49.8 million of participation interests in loans that we owned with affiliates and recognized a net loss on extinguishment of obligations under participation agreements of $0.3 million.

For the three months ended March 31, 2020 as compared to the same period in 2019 , the resulting net income decreased by $3.3 million .

Realized Gains on Marketable Securities

For each of the three and six months ended June 30, 2020, we sold $5.8 million of marketable securities and recognized realized gains on marketable securities of $1.1 million.

There were no sales of marketable securities for the three and six months ended June 30, 2019.

Unrealized Gains on Marketable Securities

As of June 30, 2020, we owned $0.2 million of marketable securities and recorded unrealized gains on marketable securities of $0.1 million for each of the three and six months ended June 30, 2020, representing the change in the fair value of the marketable securities.

For the three months ended June 30, 2020, the resulting net income was $2.6 million, compared to a resulting net loss of $0.2 million for the same period in 2019.

For the six months ended June 30, 2020 as compared to the same period in 2019, the resulting net income decreased by $0.5 million.

Financial Condition, Liquidity and Capital Resources

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These distribution requirements limit our ability to retain earnings and thereby replenish or increase capital for our business.

During the three months ended June 30, 2020, we paid distributions of $0.0805, $0.0738 and $0.0738 per share of common stock for each of the months of April, May and June, respectively, which translated to a distribution rate of approximately 5.5% of the fair value per share.

Going forward, we intend to target a distribution rate of approximately 5.0% of the fair value per share, which we believe is more closely aligned with our earnings per share.

Distributions are made at the discretion of our board and will depend upon, among other things, our actual results of operations and liquidity.

Our obligations under participation agreements totaling $26.1 million will mature in the next twelve months.

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We expect to maintain sufficient cash on hand to fund such commitments through matching these commitments with principal repayments on outstanding loans as well as from proceeds from the unused portion of borrowing facilities.

Additionally, we had $44.5 million of borrowings outstanding under a mortgage loan payable that bear interest at an annual rate of LIBOR plus 3.85% with a LIBOR floor of 2.23%, that is collateralized by an office building.

The mortgage loan payable matures on September 27, 2020.

We expect to extend the maturity of the loan payable for another year.

On December 12, 2018, we entered into a master repurchase agreement that provides for advances of up to $150 million in the aggregate, which we expect to use to finance certain secured performing commercial real estate loans, including senior mortgage loans.

Advances under the master repurchase agreement accrue interest at an annual rate equal to the sum of (i) the 30-day LIBOR and (ii) the applicable spread, and have a maturity date of December 12, 2020.

As of March 31, 2020 , the weighted average interest rate on borrowings outstanding under the master repurchase agreement was approximately 4.0% , calculated using the 30-day LIBOR of 0.99% as of March 31, 2020 .

As of March 31, 2020 , the amount remaining available under the repurchase agreement was $57.5 million .

We expect to extend the maturity of the master repurchase agreement for another year or refinance it with a different facility.

As of June 30, 2020, the weighted average interest rate on borrowings outstanding under the master repurchase agreement was approximately 3.8%, calculated

using the 30-day LIBOR of 0.16% as of June 30, 2020.

As of June 30, 2020, the amount remaining available under the repurchase agreement was $54.6 million.

Under the master repurchase agreement, on the second anniversary of the closing date and on each anniversary thereafter, we are required to pay the buyer the difference, if positive, between $4.2 million and the interest paid during the immediately preceding 12-month period.

We currently expect the actual interest paid in calendar year 2020 on borrowings under the master repurchase agreement to be less than $4.2 million.

As a result, we accrued approximately $0.1 million for the three months ended March 31, 2020 to make up for the difference between the actual interest paid and the $4.2 million.

As a result, we accrued approximately $0.3 million for the six months ended June 30, 2020 to make up for the difference between the actual interest paid and the $4.2 million.

The master repurchase agreement contains margin call provisions that provide the buyer with certain rights in the event of a decline in the market value of the assets purchased under the master repurchase agreement.

Upon the occurrence of a margin deficit event, the buyer may require the seller to make a payment to reduce the outstanding obligation to eliminate any margin

During the three months ended March 31, 2020 , we received a margin call on one of the borrowings and as a result, made a repayment of $3.4 million to reduce the outstanding obligation under the master repurchase agreement.

On June 20, 2019, we entered into a credit agreement that provides for revolving credit loans of up to $35.0 million in the aggregate, which we expect to use solely for short term financing needed to bridge the timing of anticipated loans repayments and funding obligations.

Upon the occurrence of a margin deficit event, the buyer may require the seller to make a payment to reduce the outstanding obligation to eliminate any margin deficit.

During the six months ended June 30, 2020, we received a margin call on one of the borrowings and as a result, made a repayment of $3.4 million to reduce the outstanding obligation under the master repurchase agreement.

On June 20, 2019, we entered into a credit agreement that provides for revolving credit loans of up to $35.0 million in the aggregate, which we expect to use for short term financing needed to bridge the timing of anticipated loans repayments and funding obligations.

Borrowings under the revolving credit facility can be either prime rate loans or LIBOR rate loans and accrue interest at an annual rate of prime rate plus 1% or LIBOR plus 4% with a floor of 6%.

The credit facility matures on June 20, 2020.

As of March 31, 2020 , the revolving credit facility was fully utilized.

In June and July 2020, we amended the revolving credit facility twice to extend the maturity to September 3, 2020.

As of June 30, 2020, the revolving credit facility was fully utilized.

We have sufficient cash on hand to repay the amount outstanding under the revolving credit facility.

Cash Flows from Operating Activities

For the three months ended March 31, 2020 as compared to the same period in 2019 , cash flows from operating activities decreased by $0.8 million , primarily due to a decrease in contractual interest income.

For the six months ended June 30, 2020 as compared to the same period in 2019, cash flows from operating activities decreased by $3.2 million, primarily due to a decrease in contractual interest income.

Cash Flows used in Investing Activities

For the three months ended March 31, 2020 , cash flows used in investing activities were $28.3 million , primarily related to origination and purchase of loans of $38.4 million and the purchase of marketable securities of $3.4 million , partially offset by proceeds from repayments of loans of $13.4 million .

For the three months ended March 31, 2019 , cash flows used in investing activities were $10.7 million , primarily related to origination and purchase of loans of $70.8 million, partially offset by proceeds from repayments of loans of $60.3 million

For the six months ended June 30, 2020, cash flows used in investing activities were $34.4 million, primarily related to origination and purchase of loans of $54.3 million and the purchase of marketable securities of $4.9 million, partially offset by proceeds from repayments of loans of $19.0 million and proceeds from sale of marketable securities of $5.8 million.

For the six months ended June 30, 2019, cash flows used in investing activities were $15.4 million, primarily related to origination and purchase of loans of $85.3 million, partially offset by proceeds from repayments of loans of $70.1 million.

Cash Flows from Financing Activities

For the three months ended March 31, 2020 , cash flows from financing activities were $74.9 million , primarily due to proceeds from borrowings under revolving credit facility of $35.0 million , proceeds from borrowings under our repurchase agreement of $14.8 million , cash acquired from Terra Property Trust 2 of $16.9 million , cash contributed by TIF3 REIT of $8.6 million and proceeds from obligations under participation agreements of $14.3 million , partially offset by distributions paid of $8.8 million , repayment of borrowings under repurchase agreement of $3.4 million and a decrease in interest reserve and other deposits hold on investments of $2.3 million .

For the three months ended March 31, 2019 , cash flows from financing activities were $16.1 million , primarily due to proceeds from borrowings under repurchase agreement of $45.3 million , proceeds from obligations under participation agreements of $5.7 million , partially offset by repayments on obligations under participation agreements of $24.9 million , distributions paid of $7.6 million and a decrease in interest reserve and other deposits hold on investments of $2.3 million .

For the six months ended June 30, 2020, cash flows from financing activities were $81.9 million, primarily due to proceeds from borrowings under revolving credit facility of $35.0 million, proceeds from borrowings under our repurchase agreement of $17.6 million, cash acquired from Terra Property Trust 2 of $16.9 million, cash contributed by TIF3 REIT of $8.6 million and proceeds from obligations under participation agreements of $24.8 million, partially offset by distributions paid of $13.3 million, repayment of borrowings under repurchase agreement of $3.4 million, payment for repurchase of common stock of $3.6 million and repayments on obligations under participation agreements of $0.4 million.

For the six months ended June 30, 2019, cash flows from financing activities were $18.8 million, primarily due to proceeds from borrowings under repurchase agreement of $47.9 million, proceeds from obligations under participation agreements of $9.2 million and an increase in interest reserve and other deposits hold on investments of $2.3 million, partially offset by repayments on obligations under participation agreements of $24.9 million and distributions paid of $15.2 million.

Critical Accounting Policies and Use of Estimates

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Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods.

In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.

In preparing the consolidated financial statements, management has made estimates and

assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.

In preparing the consolidated financial statements, management has utilized available information, including industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality.

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As a result, we regularly evaluate the extent and impact of any credit migration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower/sponsor on a loan-by-loan basis.

Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether

cash from operations and/or reserve balances are sufficient to cover the debt service requirements currently and into the future;

Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash from operations and/or reserve balances are sufficient to cover the debt service requirements currently and into the future;

(ii) the ability of the borrower to refinance the loan;

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We did not have any uncertain tax positions that met the recognition or measurement criteria of ASC 740-10-25, Income Taxes, nor did we have any unrecognized tax benefits as of the periods presented herein.

We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in our consolidated statements of operations.

For the three months ended March 31, 2020 and 2019 , we did not incur any interest or penalties.

We recognize interest and penalties, if

any, related to unrecognized tax liabilities as income tax expense in our consolidated statements of operations.

For the three and six months ended June 30, 2020 and 2019, we did not incur any interest or penalties.

Our inception-to-date tax return remains subject to examination and consequently, the taxability of the distributions and other tax positions taken by us may be subject to change.

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Contractual Obligations

The following table provides a summary of our contractual obligations at March 31, 2020 :

More than 5 years

The following table provides a summary of our contractual obligations at June 30, 2020:

Total Less than

1 year 1-3 years 3-5 years More than 5 years

Obligations under participation

agreements — principal (1)

$ 78,116,748 $ 26,109,932 $ 52,006,816 $ — $ —

Mortgage loan payable — principal (2)

44,481,855 44,481,855 — — —

Repurchase agreement payable —

principal (3)

95,356,360 95,356,360 — — —

Revolving credit facility payable —

principal (4)

35,000,000 35,000,000 — — —

Interest on borrowings (5)

14,760,282 9,401,889 5,358,393 — —

Unfunded lending commitments (6)

92,711,428 81,641,923 11,069,505 — —

Ground lease commitment (7)

83,825,813 1,264,500 2,529,000 2,529,000 77,503,313

$ 444,252,486 $ 293,256,459 $ 70,963,714 $ 2,529,000 $ 77,503,313

___________________________

(1) In the normal course of business, we enter into participation agreements with related parties, and to a lesser extent, unrelated parties, whereby we transfer a portion of the loans to them.

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Amount excludes unamortized deferred financing costs of $0.8 million.

Our revolving credit facility matures on June 20, 2020.

(4) Our revolving credit facility was scheduled to mature on June 20, 2020.

In June 2020 and July 2020, we amended the credit agreement twice to extend the maturity date to September 3, 2020.

We have sufficient cash on hand to repay the amount outstanding under the revolving credit facility.

Amount excludes unamortized deferred financing costs of $0.1 million .

Interest was calculated using the applicable annual variable interest rate and balance outstanding at March 31, 2020 .

(5) Interest was calculated using the applicable annual variable interest rate and balance outstanding at June 30, 2020.

Amount represents interest expense through maturity plus exit fee as application.

(6) Certain of our loans provide for a commitment to fund the borrower at a future date.

As of March 31, 2020 , we had eight of such loans with total funding commitments of $308.3 million , of which $201.3 million had been funded.

As of June 30, 2020, we had eight of such loans with total funding commitments of $305.6 million, of which $212.9 million had been funded.

(7) Represents rental obligation under the ground lease, inclusive of imputed interest, for our office building that it acquired through foreclosure.

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Disposition Fee .

fee paid by the borrower, in which case the disposition fee will be the lesser of (i) 1.0% of the principal amount of the loan and (ii) the amount of the fee paid by the borrower in connection with such transaction.

A disposition fee in the amount of 1.0% of the gross sale price received by our company from the disposition of each loan, but not upon the maturity, prepayment, workout, modification or extension of a loan unless there is a corresponding fee paid by the borrower, in which case the disposition fee will be the lesser of (i) 1.0% of the principal amount of the loan and (ii) the amount of the fee paid by the borrower in connection with such transaction.

If we take ownership of a property as a result of a workout or foreclosure of a loan, we will pay a disposition fee upon the sale of such property equal to 1.0% of the sales price.

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The following table presents a summary of fees paid and costs reimbursed to our Manager in connection with providing services to us:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Origination and extension fee expense (1)

$ 250,601 $ 117,380 $ 688,218 $ 800,552

Asset management fee 1,140,426 956,985 2,169,959 1,837,340

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220,424 167,091 295,944 637,024

Total $ 3,559,642 $ 2,681,534 $ 6,703,709 $ 6,034,675

_______________

(1) Origination and extension fee expense is generally offset with origination and extension fee income.

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In connection with the Merger and Issuance of Common Stock to TIF3 REIT, the related participation obligations were settled.

As of March 31, 2020 , the principal balance of our participation obligations totaled $67.6 million , consisting of $43.7 million in participation obligations to Terra Fund 6 and $23.9 million in participation obligations to third-parties.

As of June 30, 2020, the principal balance of our participation obligations totaled $78.1 million, consisting of $44.0 million in participation obligations to Terra Fund 6 and $34.1 million in participation obligations to third-parties.

Terra Fund 6 is managed by Terra Income Advisors, LLC, an affiliate of our Manager.

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Similarly, interest earned on the entire loan balance is recorded within “Interest income” and the interest related to the participation interest is recorded within “Interest expense from obligations under participation agreements” in the consolidated statements of operations.

For the three months ended March 31, 2020 , the weighted average outstanding principal balance on obligations under participation agreements was approximately $88.1 million , and the weighted average interest rate was approximately 11.7% , compared to weighted average outstanding principal balance of approximately $97.5 million , and weighted average interest rate of approximately 12.2% for the three months ended March 31, 2019 .

Additionally, we have entered into a participation agreement with Terra Fund 6 to purchase a 25% participation interest, or $4.3 million, in a $17.0 million mezzanine loan.

As of March 31, 2020 , the unfunded commitment was $0.3 million.

For the three months ended June 30, 2020, the weighted average outstanding principal balance on obligations under participation agreements was approximately $73.1 million, and the weighted average interest rate was approximately 10.9%, compared to weighted average outstanding principal balance of approximately $95.3 million, and weighted average interest rate of approximately 12.2% for the three months ended June 30, 2019.

For the six months ended June 30, 2020, the weighted average outstanding principal balance on obligations under participation agreements was approximately $81.2 million, and the weighted average interest rate was approximately 11.5%, compared to weighted average outstanding principal balance of approximately $96.4 million, and weighted average interest rate of approximately 12.2% for the six months ended June 30, 2019.

Off-Balance Sheet Arrangements

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements