What changed in this filing

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Item 1. Business

2021-03-19 compared with 2020-03-02 · 45 added, 33 removed, 188 unchanged (29% of the section changed)

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

As of December 31, 2019 , we held a net investment portfolio (gross investments less obligations under participation agreements) comprised of 23 investments in 10 states with an aggregate net principal balance of $274.8 million , a weighted average coupon rate of 8.9% , a weighted average loan-to-value ratio of 73.5% and a weighted average remaining term to maturity of 2.3 years.

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

Our portfolio is diversified geographically with underlying properties located in 23 markets across 10 states and by loan structure and property type.

Our portfolio is diversified geographically with underlying properties located in 20 markets across eight states and by loan structure and property type.

The portfolio includes diverse property types such as multifamily housing, condominiums, hotels, student housing, commercial offices, medical offices and mixed-use properties.

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Our loans are structured across mezzanine debt, first mortgages, and preferred equity investments.

We believe there are compelling opportunities available to us in the commercial real estate lending market as a result of high demand for property financing, constraints on the availability of credit from banks and other traditional commercial mortgage lenders due to the regulatory environment, and a generally conservative real estate credit culture that evolved in response to the 2008 financial crisis.

Demand for property acquisition and development financing continues to be fueled by healthy economic conditions, population growth and the adaptive re-use of properties to accommodate new technologies and lifestyles.

In addition, there continues to be a large volume of commercial real estate loans that mature each year that require refinancing proceeds.

The confluence of these conditions — reduced lending by traditional lenders and strong demand for commercial real estate financing — has created opportunities for experienced alternative lenders such as us, particularly those with a focus on providing commercial real estate loans to creditworthy borrowers.

We believe that compelling opportunities for us will emerge as a result of the economic downtown caused by the COVID-19 pandemic.

While it has had a demonstrable effect on employment, the economy and the national psyche, the impact of the pandemic on property values has yet to be fully realized.

The reason is that property values are the result of slow moving forces, including consumer behavior, supply and demand for space, availability and pricing of mortgage financing and investor demand for property.

As these factors become clear and commercial real estate is repriced accordingly, we believe there will be abundant opportunities available to experienced alternative lenders such as us to provide financing for property acquisition, refinancing, development and redevelopment on attractive terms that reflect the new realities of the economy.

We believe that we are well positioned to capitalize on these opportunities through our relationship with our Manager and Terra Capital Partners.

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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 the Terra Funds to us in exchange for all of the shares of common stock of our company.

On March 1, 2020, Terra Property Trust 2 merged with and into our company and we continued as the surviving corporation (the “Merger”).

In connection with the Merger, we issued 2,116,785.76 shares of our common stock to Terra Fund 7, the sole stockholder of Terra Property Trust 2, in exchange for the settlement of $17.7 million of participation interests in loans held by us, cash of $16.9 million and other working capital.

Subsequent to the Merger, Terra Fund 5 and Terra Fund 7 contributed their shares of our common stock to Terra JV in exchange for ownership interest in Terra JV.

In addition, on March 2, 2020, we issued 2,457,684.59 shares of our common stock to Terra Offshore REIT in exchange for the settlement of $32.1 million of participation interests in loans also held by us, $8.6 million in cash and other net working capital (“Issuance of Common Stock to Terra Offshore REIT”).

As of December 31, 2020, Terra JV held 87.4% of the issued and outstanding shares of our common stock with the remainder held by Terra Offshore REIT;

and Terra Fund 5 and Terra Fund 7 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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We are externally managed by our Manager, which is registered as an investment adviser under the Investment Advisers Act of 1940 (the “Advisers Act”).

Our Manager is a subsidiary of Terra Capital Partners, a real estate credit focused investment manager based in New York City with a 16-year track record focused primarily on the origination and management of mezzanine loans, as well as first mortgage

loans, bridge loans, and preferred equity investments in all major property types through multiple public and private pooled investment vehicles.

Our Manager is a subsidiary of Terra Capital Partners, a real estate credit focused investment manager based in New York City with a 18-year track record focused primarily on the origination and management of mezzanine loans, as well as first mortgage loans, bridge loans, and preferred equity investments in all major property types through multiple public and private pooled investment vehicles.

Since its formation in 2001 and its commencement of operations in 2002, Terra Capital Partners has been engaged in providing financing on commercial properties of all major property types throughout the United States.

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One of the reasons we completed the REIT formation transactions, as described under “—Overview,” is to expand our financing options, access to capital and capital flexibility in order to position us for future growth.

We deploy moderate amounts of leverage as part of our operating strategy, which consists of borrowings under first mortgage financings, a revolving credit facility and repurchase agreements.

We may in the future also deploy leverage through other credit facilities and we may divide the loans we originate into senior and junior tranches and dispose of the more senior tranches as an additional means of providing financing to our business.

We deploy moderate amounts of leverage as part of our operating strategy, which consists of borrowings under first mortgage financings, a revolving credit facility, repurchase agreements and a term loan.

We may in the future also deploy leverage through other credit facilities and senior notes and we may divide the loans we originate into senior and junior tranches and dispose of the more senior tranches as an additional means of providing financing to our business.

In addition, we intend to match our use of floating rate leverage with floating rate investments.

In December 2018, we entered into a master repurchase agreement with Goldman Sachs Bank USA (the “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, primarily senior mortgage loans.

In June 2019, we entered into a credit facility with Israel Discount Bank 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 loan repayments and funding obligations.

As of December 31, 2019 , we had outstanding indebtedness, consisting of borrowings under a mortgage loan of $44.6 million and borrowings under our master repurchase agreement of $81.1 million .

As of December 31, 2019 , the amount remaining available under the master repurchase agreement was $68.9 million and the amount remaining available under the credit facility was $35.0 million.

Additionally, as of December 31, 2019 , we had obligations under participation agreements with an aggregate outstanding principal amount of $102.6 million .

In December 2018, we entered into a master repurchase agreement with Goldman Sachs Bank USA (“Goldman”) that provided for advances of up to $150 million in the aggregate, which we used to finance certain secured performing commercial real estate loans, primarily senior mortgage loans.

In September 2020, we terminated the master repurchase agreement and replaced it with a term loan from Goldman of $103.0 million.

In addition, Goldman has agreed to provide $3.6 million of additional future advances and may provide up to $11.6 million of additional future discretionary advances under the term loan.

In June 2019, we entered into a credit facility with Israel Discount Bank that provided for revolving credit loans of up to $35.0 million in the aggregate.

In October 2020, we amended the credit facility and reduced the amount available for borrowing to $15.0 million.

In March 2021, the credit facility was terminated.

The credit facility was used for short term financing needed to bridge the timing of anticipated loan repayments and funding obligations.

As of December 31, 2020, we had outstanding indebtedness, consisting of borrowings under a mortgage loan of $44.0 million and borrowings under the term loan of $107.6 million.

As of December 31, 2020, the amount remaining available under the credit facility was $15.0 million.

Additionally, as of December 31, 2020, we had obligations under participation agreements and secured borrowing with an aggregate outstanding principal amount of $89.5 million.

However, we do not have direct liability to a participant under the participation agreements with respect to the underlying loan and the participants’ share of the investments is repayable only from the proceeds received from the related borrower/issuer of the investments and, therefore, the participants also are subject to credit risk (i.e., risk of default by the underlying borrower/ issuer).

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By originating, not purchasing, loans, we are able to structure and underwrite financings that satisfy our standards, utilize our proprietary documentation and establish a direct relationship with our borrower.

Described below are some of the types of loans we own and seek to originate with respect to high-quality properties in the United States.

Described below are some of the

types of loans we own and seek to originate with respect to high-quality properties in the United States.

We continue to see attractive lending opportunities, and we expect market conditions to remain favorable for our strategy for the foreseeable future.

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Generally, we invest in mezzanine loans with last dollar loan-to-value ratios ranging from 60% to 85%.

As of December 31, 2019 , we owned seven mezzanine loans with a total net principal amount of $29.6 million , which constituted 10.8% of our net investment portfolio.

As of December 31, 2020, we owned five mezzanine loans with a total net principal amount of $23.9 million, which constituted 7.2% of our net loan investment portfolio.

Preferred Equity Investments .

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These investments are expected to have characteristics and returns similar to mezzanine loans.

As of December 31, 2019 , we owned seven preferred equity investments with a total net principal amount of $84.2 million , which constituted 30.6% of our net investment portfolio.

As of December 31, 2020, we owned six preferred equity investments with a total net principal amount of $101.0 million, which constituted 30.2% of our net loan investment portfolio.

First Mortgage Loans .

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However, such loans typically generate lower returns than subordinate debt such as mezzanine loans, B-notes, or preferred equity investments.

As of December 31, 2019 , we owned nine first mortgage loans with a total net principal amount of $161.0 million , which constituted 58.6% of our portfolio.

As of December 31, 2019 , we used $114.8 million of senior mortgage loans as collateral for $81.1 million of borrowings under our master repurchase agreement.

As of December 31, 2020, we owned nine first mortgage loans with a total net principal amount of $209.7 million, which constituted 62.7% of our net loan investment portfolio.

As of December 31, 2020, we used $184.2 million of senior mortgage loans as collateral for $107.6 million of borrowings under a term loan.

Subordinated Mortgage Loans (B-notes) .

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Equity participation can also take the form of a conversion feature, permitting the lender to convert a loan or preferred equity investment into equity in the borrower at a negotiated premium to the current net asset value of the borrower.

We expect to obtain equity participations in certain instances where the loan collateral consists of a property that is being repositioned, expanded or improved in some fashion which is anticipated to improve future cash flow.

We expect to obtain equity participations in certain instances where the loan collateral consists of a property that is being repositioned, expanded or improved in some

fashion which is anticipated to improve future cash flow.

In such case, the borrower may wish to defer some portion of the debt service or obtain higher leverage than might be merited by the pricing and leverage level based on historical performance of the underlying property.

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Certain of our real estate-related loans require the borrower to make payments of interest on the fully committed principal amount of the loan regardless of whether the full loan amount is outstanding.

As of December 31, 2019 , we did not own any other real estate-related investments.

As of December 31, 2020, we owned a 90.3% equity interest, or $35.9 million, in a limited partnership that invests in performing and non-performing mortgages, loans, mezzanines, B-notes and other credit instruments supported by underlying commercial real estate assets.

Operating Real Estate

From time to time, we might acquire operating real estate properties, including properties acquired in connection with foreclosures or deed in lieu of foreclosure.

In July 2018, we acquired a multi-tenant office building through foreclosure of a first

mortgage loan.

From time to time, we may acquire operating real estate properties, including properties acquired in connection with foreclosures or deed in lieu of foreclosure.

In July 2018, we acquired a multi-tenant office building through foreclosure of a first mortgage loan.

In January 2019, we acquired a 4.9 acre development parcel through deed in lieu of foreclosure.

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We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”) commencing with our taxable year ended December 31, 2016.

We believe that we have been organized and have operated in conformity with the requirements for qualification and taxation as a REIT under the Code, and that our manner of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT.

We believe that we have been organized and have operated in conformity with the

requirements for qualification and taxation as a REIT under the Code, and that our manner of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT.

To qualify as a REIT, we must meet on a continuing basis, through our organization and actual investment and operating results, various requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the diversity of ownership of shares of our stock.

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government securities and securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on the exclusion from the definition of investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the 1940 Act.

The value of the “investment securities” held by us must be less than 40% of the value of our total assets on an unconsolidated basis (exclusive of U.S.

The value of the “investment securities” held by an issuer must be less than 40% of the value of such issuer’s total assets on an unconsolidated basis (exclusive of U.S.

government securities and cash items).

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Rather, we are primarily engaged in the non-investment company businesses of our subsidiaries.

Certain of our subsidiaries rely primarily on the exclusion from the definition of an investment company under Section 3(c)(5)(C) of the 1940 Act, or any other exclusions that may be available to us (other than the exclusions under Section 3(c)(1) or Section 3(c)(7)).

We and certain of our subsidiaries may at times rely primarily on the exclusion from the definition of an investment company under Section 3(c)(5)(C) of the 1940 Act, or any other exclusions that may be available to us (other than the exclusions under Section 3(c)(1) or Section 3(c)(7)).

Section 3(c)(5)(C) of the 1940 Act is available for entities primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.

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Pursuant to this guidance, and depending on the characteristics of the specific investments, certain mortgage loans, participations in mortgage loans, mortgage-backed securities, mezzanine loans, joint venture investments, preferred equity and the equity securities of other entities may not constitute qualifying real estate assets and therefore our investments in these types of assets may be limited.

No assurance can be given that the SEC or its staff will concur with our classification of the assets we hold for purposes of the 3(c)(5)(C) exclusion or any other exclusion or exemption under the 1940 Act.

assurance can be given that the SEC or its staff will concur with our classification of the assets we hold for purposes of the 3(c)(5)(C) exclusion or any other exclusion or exemption under the 1940 Act.

Future revisions to the 1940 Act or further guidance from the SEC or its staff may cause us to lose our exclusion from registration or force us to re-evaluate our portfolio and investment strategy.

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Emerging Growth Company Status

executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

A number of these exemptions are not relevant to us, and in any event we do not currently intend to take advantage of any of these exemptions.

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”) and as such we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

A number of these exemptions are not relevant to us, but we intend to take advantage of the exemption from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002.

In addition, Section 107 of the JOBS Act provides that an emerging growth company can use the extended transition period provided in Section 13(a) of the Exchange Act for complying with new or revised accounting standards.

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Risk Factors — New entrants in the market for commercial loan originations and acquisitions could adversely impact our ability to originate and acquire real estate-related loans at attractive risk-adjusted returns” in this Annual Report on Form 10-K.

We are supervised by our board of directors consisting of eight directors.

Human Capital

We are supervised by our board of directors consisting of four directors.

We have entered into a management agreement with our Manager pursuant to which certain services are provided by our Manager and paid for by us.

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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-K

Item 1. Business