Terra Property Trust, Inc. 10-K

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information There is no established trading market for our shares of common stock. As of December 31, 2020, we had 19,487,460 shares of common stock outstanding held by two investors. As of December 31, 2020, there were no outstanding options, warrants to purchase our common stock or securities convertible into our shares of common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income. We generally intend over time to pay monthly dividends in an amount equal to our net taxable income. Any distributions we make are at the discretion of our board of directors and depend upon our actual results of operations and other factors. These results and our ability to pay distributions are affected by various factors, including the net interest and other income from our portfolio, restrictions under applicable law, our operating expenses and any other expenditures. We are generally not required to make distributions with respect to activities conducted through any of our TRSs, should we decide to form TRSs in the future, except with respect to dividends we receive from such TRSs. To the extent that in respect of any calendar year, cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions or make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. Although not currently anticipated, in the event that our board of directors determines to make distributions in excess of the income or cash flow generated from our target assets, we may make such distributions from the proceeds of future offerings of equity or debt securities or other forms of debt financing or the sale of assets. For more information regarding risk factors that could materially adversely affect our earnings and financial condition, see “Risk Factors.” We commenced making distributions to our stockholders in January 2016. Prior to September 30, 2019, all of the outstanding shares of our common stock were held by Terra Fund 5 and our distribution policy, including the amount and frequency of distributions, was determined by our board of directors in part based on Terra Fund 5’s cash requirements, including cash required to fund regular monthly distributions to Terra Fund 5’s unitholders and additional distribution amounts which were used to allow the repurchase of units from such unitholders. In connection with the Merger and the Issuance of Common Stock to Terra Offshore REIT described in “— Business” above, our board of directors has adopted a distribution policy to better match earnings with distributions. The following tables summarize the regular per share distributions declared by our board of directors during the years ended December 31, 2020 and 2019 with the additional distribution amounts to allow repurchase of units being set forth in the footnotes below the table. Year Ended December 31, 2020 Payment Date Distributions Per Share of Common Stock January 29, 2020 $ 0.17 February 25, 2020 $ 0.17 March 25, 2020 $ 0.19 April 28, 2020 $ 0.08 May 27, 2020 $ 0.07 June 26, 2020 $ 0.07 July 29, 2020 $ 0.07 August 26, 2020 $ 0.07 September 29, 2020 $ 0.07 October 27, 2020 $ 0.07 November 25, 2020 $ 0.07 December 29, 2020 $ 0.06 $ 1.16 36 Year Ended December 31, 2019 Payment Date Distributions Per Share of Common Stock January 31, 2019 $ 0.17 February 28, 2019 0.17 March 27, 2019 0.16 April 26, 2019 0.17 May 23, 2019 0.17 June 25, 2019 0.17 July 24, 2019 0.17 August 22, 2019 0.17 September 24, 2019 0.17 October 29, 2019 0.17 November 22, 2019 0.17 December 26, 2019 0.17 $ 2.03 The dividends that will be made in the future are at the discretion of our board of directors and will depend upon, among other things, our actual results of operations and liquidity. Unregistered Sales of Equity Securities On March 1, 2020, Terra Property Trust 2 merged with and into us with us continuing as the surviving company. 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, as consideration in the merger. In addition, on March 2, 2020, Terra Offshore REIT contributed cash and released the obligations under certain participation agreements to us in exchange for the issuance of 2,457,684.59 shares of our common stock. The shares of common stock were issued in private placements in reliance on Section 4(a)(2) under the Securities Act and the rules and regulations promulgated thereunder. Item 6. Selected Financial Data. The selected data presented below under the captions “Operating Data”, “Per Share Data” and “Balance Sheet Data” as of and for the years ended December 31, 2020 and 2019 are derived from our consolidated financial statements, which have been audited by KPMG LLP, an independent registered public accounting firm. The data should be read in conjunction with our “Management's Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto. Years Ended December 31, 2020 2019 Operating Data: Total revenues $ 50,320,888 $ 51,399,525 Total operating expenses 26,667,214 22,607,397 Other income and (expenses) (18,397,944) (19,749,353) Net income $ 5,255,730 $ 9,042,775 Net income allocable to common stock $ 5,240,106 $ 9,027,151 Per Share Data: Net income per share of common stock Basic and diluted $ 0.28 $ 0.60 Distribution declared per share of common stock $ 1.16 $ 2.03 37 December 31, 2020 2019 Balance Sheet Data: Loans held for investment, net $ 422,280,515 $ 378,612,768 Equity investment in a limited partnership 36,259,959 — Real estate owned, net 73,178,939 77,596,475 Other assets 56,757,768 71,133,835 Total assets 588,477,181 527,343,078 Debt 239,132,654 227,548,397 Lease intangible liabilities 10,249,776 11,424,809 Other liabilities 35,769,686 40,826,139 Total liabilities 285,152,116 279,799,345 Equity $ 303,325,065 $ 247,543,733 Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations. The information contained in this section should be read in conjunction with our audited consolidated financial statements and related notes thereto and other financial information included elsewhere in this annual report on Form 10-K. Overview We are a real estate credit focused company that originates, structures, funds and manages 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. Our loans finance the acquisition, construction, development or redevelopment of quality commercial real estate in the United States. We focus on the origination of middle market loans in the approximately $10 million to $50 million range, to finance properties primarily in primary and secondary markets. We believe loans of this size are subject to less competition, offer higher risk adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification. Our objective is to continue to provide attractive risk-adjusted returns to our stockholders, primarily through regular distributions. There can be no assurances that we will be successful in meeting our objective. As of December 31, 2020, we held a net loan portfolio (gross loans less obligations under participation agreements and secured borrowing) comprised of 20 loans in eight states with an aggregate net principal balance of $334.6 million, a weighted average coupon rate of 8.1%, a weighted average loan-to-value ratio of 76.0% and a weighted average remaining term to maturity of 1.59 years. Each of our loans was originated by Terra Capital Partners or its affiliates. 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. The profile of these properties ranges from stabilized and value-added properties to pre-development and construction. Our loans are structured across mezzanine debt, first mortgages, and preferred equity investments. We were incorporated under the general corporation laws of the State of Maryland on December 31, 2015. Through December 31, 2015, our business was conducted through a series of predecessor private partnerships. 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. Following the REIT formation transaction, Terra Fund 5 contributed the consolidated portfolio of net assets of the Terra Funds to our company in exchange for all of the shares of our common stock. On March 1, 2020, Terra Property Trust 2 merged with and into our company and we continued as the surviving corporation. 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. 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. The shares of common stock were issued in private placements in 38 reliance on Section 4(a)(2) under the Securities Act and the rules and regulations promulgated thereunder. 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. On April 29, 2020, we repurchased the 212,691 shares of common stock we had previously sold to Terra Offshore REIT on September 30, 2019. 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. federal income tax purposes commencing with our taxable year ended December 31, 2016. So long as we qualify as a REIT, we generally are not subject to U.S. federal income tax on our net taxable income to the extent that we annually distribute all of our net taxable income to our stockholders. Recent Developments As of December 31, 2020, there has been an ongoing 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. The global impact of the pandemic has been rapidly evolving, and as cases of COVID-19 have continued to be identified in additional countries, many countries have reacted by instituting quarantines and restrictions on travel, closing financial markets and/or restricting trading, and limiting operations of non-essential offices and retail centers. Such actions are creating disruption in global supply chains, increasing rates of unemployment and adversely impacting many industries. The pandemic could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown. 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. Portfolio Summary The following tables provide a summary of our net loan portfolio as of December 31, 2020 and 2019: December 31, 2020 Fixed Rate Floating Rate (1)(2)(3) Total Gross Loans Obligations under Participation Agreements and Secured Borrowing Total Net Loans Number of loans 6 14 20 8 20 Principal balance $ 56,335,792 $ 367,838,966 $ 424,174,758 $ 89,548,151 $ 334,626,607 Amortized cost 56,464,310 365,816,205 422,280,515 89,769,560 332,510,955 Fair value 56,284,334 363,122,860 419,407,194 87,730,239 331,676,955 Weighted average coupon rate 12.17 % 7.95 % 8.51 % 10.16 % 8.07 % Weighted-average remaining term (years) 1.78 1.44 1.48 1.08 1.59 December 31, 2019 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 Principal balance $ 70,692,767 $ 306,695,550 $ 377,388,317 102,564,795 $ 274,823,522 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 % Weighted-average remaining term (years) 2.28 2.09 2.13 1.58 2.33 39 _______________ (1) These loans pay a coupon rate of LIBOR plus a fixed spread. Coupon rate shown was determined using LIBOR of 0.14% and 1.76% as of December 31, 2020 and 2019. (2) As of December 31, 2020, amounts included $184.2 million of senior mortgages used as collateral for $107.6 million of borrowings under a term loan ( Note 9 ). These borrowings bear interest at an annual rate of LIBOR plus 4.25% with a LIBOR floor of 1.00% as of December 31, 2020. As of December 31, 2019, amount included $114.8 million of senior mortgages used as collateral for $81.1 million of borrowings under a repurchase agreement ( Note 9 ). These borrowings bore interest at an annual rate of LIBOR plus a spread ranging from 2.25% to 2.50% as of December 31, 2019. The repurchase agreement was terminated in September 2020. (3) As of both December 31, 2020 and 2019, twelve of these loans are subject to a LIBOR floor. In addition to our net loan portfolio, as of December 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 $62.9 million and $66.2 million as of December 31, 2020 and 2019, respectively. The mortgage loan payable encumbering the office building had an outstanding principal amount of $44.0 million and $44.6 million as of December 31, 2020 and 2019, respectively. Additionally, as of December 31, 2020, we owned a 90.3%, or $36.3 million, equity interest in a limited partnership that invests in performing and non-performing mortgages, loans, mezzanines and other credit instruments supported by underlying commercial real estate assets. Portfolio Investment Activity For the years ended December 31, 2020 and 2019, we invested $37.9 million and $53.5 million in new and/or add-on loans, respectively, and had $21.0 million and $84.3 million of repayments, respectively, resulting in net investments of $16.8 million and net repayment of $30.8 million, respectively. Amounts are net of obligations under participation agreements, secured borrowing, borrowings under the master repurchase agreement and the term loan. Additionally, for the year ended December 31, 2020, we used $35.9 million to purchase equity interest in a limited partnership. There was no such purchase for the year ended December 31, 2019. In addition, in March 2020, we issued an aggregate of 4,574,470.35 shares of our common stock in exchange for the obligation relief of an aggregate of $49.8 million of participation interests in loans that we owed, cash of $25.5 million and other working capital, in connection with the Merger and Issuance of Common Stock to Terra Offshore REIT transactions described under “Item 1. Business.” For the year ended December 31, 2020, we sold $6.0 million of marketable securities, and recognized net gains on sale of marketable securities of $1.2 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. Net Loan Portfolio Information 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. December 31, 2020 December 31, 2019 Loan Structure Principal Balance Carrying Value % of Total Principal Balance Carrying Value % of Total First mortgages $ 209,660,270 $ 210,694,778 63.3 % $ 160,984,996 $ 160,948,585 58.4 % Preferred equity investments 101,019,788 101,267,732 30.5 % 84,202,144 84,485,061 30.7 % Mezzanine loans 23,946,549 24,287,203 7.3 % 29,636,382 29,992,795 10.9 % Allowance for loan losses — (3,738,758) (1.1) % — — — % Total $ 334,626,607 $ 332,510,955 100.0 % $ 274,823,522 $ 275,426,441 100.0 % 40 December 31, 2020 December 31, 2019 Property Type Principal Balance Carrying Value % of Total Principal Balance Carrying Value % of Total Office $ 145,560,299 $ 146,010,011 44.0 % $ 119,331,369 $ 119,145,879 43.3 % Hotel 53,392,809 53,687,304 16.1 % 41,239,194 41,327,772 15.0 % Multifamily 52,605,773 53,061,857 16.0 % 49,017,844 49,331,885 17.9 % Student housing 51,331,905 51,680,581 15.5 % 26,470,740 26,725,148 9.7 % Infill land 22,615,821 22,669,559 6.8 % 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 2,140,401 0.6 % 2,120,000 2,139,382 0.8 % Allowance for loan losses — (3,738,758) (1.1) % — — — % Total $ 334,626,607 $ 332,510,955 100.0 % $ 274,823,522 $ 275,426,441 100.0 % December 31, 2020 December 31, 2019 Geographic Location Principal Balance Carrying Value % of Total Principal Balance Carrying Value % of Total United States California $ 143,454,602 $ 144,066,584 43.3 % $ 102,774,905 $ 102,622,718 37.3 % Georgia 74,116,787 74,505,752 22.4 % 61,772,764 61,957,443 22.5 % New York 56,058,669 56,139,234 16.9 % 52,909,847 53,029,923 19.3 % North Carolina 28,647,837 28,802,869 8.7 % 28,283,950 28,421,676 10.3 % Washington 18,500,000 18,643,699 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 3,848,712 3,887,200 1.2 % 2,450,000 2,472,244 0.9 % Illinois — — — % 2,209,189 2,227,593 0.8 % Other (1) 3,000,000 3,204,375 1.0 % 3,897,311 4,076,208 1.5 % Allowance for loan losses — (3,738,758) (1.1) % — — — % Total $ 334,626,607 $ 332,510,955 100.0 % $ 274,823,522 $ 275,426,441 100.0 % _______________ (1) As of December 31, 2020, Other includes $3.0 million of loans with collateral located in South Carolina. As of December 31, 2019, Other includes $0.3 million of unused portion of a credit facility, a $1.7 million of loans with collateral located in Kansas, and $1.9 million of loans with collateral located in South Carolina. Factors Impacting Operating Results Our results of operations are affected by a number of factors and primarily depend on, among other things, the level of the interest income from targeted assets, the market value of our assets and the supply of, and demand for, real estate-related loans, including mezzanine loans, first mortgage loans, subordinated mortgage loans, preferred equity investments and other loans related to high quality commercial real estate in the United States, and the financing and other costs associated with our business. Interest income and borrowing costs may vary as a result of changes in interest rates, which could impact the net interest we receive on our assets. Our operating results may also be impacted by conditions in the financial markets and unanticipated credit events experienced by borrowers under our loan assets. Credit Risk Credit risk represents the potential loss that we would incur if our borrowers failed to perform pursuant to the terms of their obligations to us. With respect to our loan portfolio, we seek to manage credit risk by limiting exposure to any one individual borrower and any one asset class. Additionally, our Manager employs an asset management approach and monitors the portfolio of investments, through, at a minimum, quarterly financial review of property performance including net operating income, loan-to-value, debt service coverage ratio and the debt yield. Our Manager also requires certain borrowers to establish an interest reserve, as a form of additional collateral, for the purpose of providing for future interest or property-related operating payments. 41 The performance and value of our loans depends upon the sponsors’ ability to operate or manage the development of the respective properties that serve as collateral so that each property’s value ultimately supports the repayment of the loan balance. Mezzanine loans and preferred equity investments are subordinate to senior mortgage loans and, therefore, involve a higher degree of risk. In the event of a default, mezzanine loans and preferred equity investments will be satisfied only after the senior lender’s investment is fully recovered. As a result, in the event of a default, we may not recover all of its investments. In addition, we are exposed to the risks generally associated with the commercial real estate market, including variances in occupancy rates, capitalization rates, absorption rates, and other macroeconomic factors beyond our control. We seek to manage these risks through our Manager's underwriting and asset management processes. The COVID-19 pandemic has significantly impacted the commercial real estate markets, causing reduced occupancy, requests from tenants for rent deferral or abatement, and delays in construction and development projects currently planned or underway. These negative conditions may persist into the future and impair our borrowers’ ability to pay principal and interest due to us under our loan agreements. We maintain all of our cash at financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation. Concentration Risk We hold real estate-related loans. Thus, our loan portfolio may be subject to a more rapid change in value than would be the case if it were required to maintain a wide diversification among industries, companies and types of loans. The result of such concentration in real estate assets is that a loss in such loans could materially reduce our capital. Interest Rate Risk Interest rate risk represents the effect from a change in interest rates, which could result in an adverse change in the fair value of our interest-bearing financial instruments. With respect to our business operations, increases in interest rates, in general, may over time cause: (i) the interest expense associated with variable rate borrowings to increase; (ii) the value of real estate-related loans to decline; (iii) coupons on variable rate loans to reset, although on a delayed basis, to higher interest rates; (iv) to the extent applicable under the terms of our investments, prepayments on real estate-related loans to slow, and (v) to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to increase. Conversely, decreases in interest rates, in general, may over time cause: (i) the interest expense associated with variable rate borrowings to decrease; (ii) the value of real estate-related loans to increase; (iii) coupons on variable rate real estate-related loans to reset, although on a delayed basis, to lower interest rates (iv) to the extent applicable under the terms of our investments, prepayments on real estate-related loans to increase, and (v) to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to decrease. Prepayment Risk Prepayments can either positively or adversely affect the yields on our loans. Prepayments on debt instruments, where permitted under the debt documents, are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control, and consequently, such prepayment rates cannot be predicted with certainty. If we do not collect a prepayment fee in connection with a prepayment or are unable to invest the proceeds of such prepayments received, the yield on the portfolio will decline. In addition, we may acquire assets at a discount or premium and if the asset does not repay when expected, the anticipated yield may be impacted. Under certain interest rate and prepayment scenarios we may fail to recoup fully our cost of acquisition of certain loans. Extension Risk Extension risk is the risk that our assets will be repaid at a slower rate than anticipated and generally increases when interest rates rise. In which case, to the extent we have financed the acquisition of an asset, we may have to finance our asset at potentially higher costs without the ability to reinvest principal into higher yielding securities because borrowers prepay their mortgages at a slower pace than originally expected, adversely impacting our net interest spread, and thus our net interest income. 42 Real Estate Risk The market values of commercial and residential mortgage assets are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes; pandemics; natural disasters and other acts of god. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loans, which could also cause us to suffer losses. Market volatility has been particularly heightened due to the COVID-19 global pandemic. COVID-19 has disrupted economic activities and could have a continued significant adverse effect on economic and market conditions including limited lending from financial institutions, depressed asset values, and limited market liquidity. Use of Leverage We deploy moderate amounts of leverage as part of our operating strategy, which may consist of borrowings under first mortgage financings, warehouse facilities, term loans, repurchase agreements and other credit facilities. While borrowing and leverage present opportunities for increasing total return, they may have the effect of potentially creating or increasing losses. Market Risk Our loans are highly illiquid and there is no assurance that we will achieve our objectives, including targeted returns. Due to the illiquidity of the loans, valuation of our loans may be difficult, as there generally will be no established markets for these loans. The COVID-19 pandemic has resulted in extreme volatility in a variety of global markets, including the real estate-related debt markets. U.S. financial markets, in particular, are experiencing limited liquidity and forced selling by certain market participants with insufficient liquidity available to meet current obligations, which puts further downward pressure on asset prices. In reaction to these tumultuous and unpredictable market conditions, banks and other lenders have generally restricted lending activity and requested margin posting or repayments where applicable for secured loans collateralized by assets with depressed valuations. Results of Operations The following table presents the comparative results of our operations for the years ended December 31, 2020 and 2019: Years Ended December 31, 2020 2019 Change Revenues Interest income $ 39,392,209 $ 40,888,079 $ (1,495,870) Real estate operating revenue 10,423,563 9,806,507 617,056 Prepayment fee income — 285,838 (285,838) Other operating income 505,116 419,101 86,015 50,320,888 51,399,525 (1,078,637) Operating expenses Operating expenses reimbursed to Manager 6,041,075 4,875,153 1,165,922 Asset management fee 4,480,706 3,671,474 809,232 Asset servicing fee 1,008,256 854,096 154,160 Provision for loan losses 3,738,758 — 3,738,758 Real estate operating expenses 4,505,119 3,989,911 515,208 Depreciation and amortization 4,635,980 3,785,977 850,003 Impairment charge — 1,550,000 (1,550,000) Professional fees 1,695,876 3,373,554 (1,677,678) Directors fees 190,000 335,000 (145,000) Other 371,444 172,232 199,212 26,667,214 22,607,397 4,059,817 Operating income 23,653,674 28,792,128 (5,138,454) 43 Years Ended December 31, 2020 2019 Change Other income and expenses Interest expense from obligations under participation agreements $ (8,514,804) $ (11,773,346) $ 3,258,542 Interest expense on repurchase agreement payable (3,727,466) (4,713,440) 985,974 Interest expense on mortgage loan payable (2,976,913) (3,093,284) 116,371 Interest expense on revolving credit facility (1,398,103) (169,283) (1,228,820) Interest expense on term loan payable (2,137,651) — (2,137,651) Interest expense on secured borrowing (633,850) — (633,850) Net loss on extinguishment of obligations under participation agreements (319,453) — (319,453) Realized gains on marketable securities 1,160,162 — 1,160,162 Unrealized gains on marketable securities 111,494 — 111,494 Income from equity investment in a limited partnership 38,640 — 38,640 (18,397,944) (19,749,353) 1,351,409 Net income $ 5,255,730 $ 9,042,775 $ (3,787,045) 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, term loan payable, revolving credit facility and repurchase agreement payable. The following tables presents a reconciliation of our loan portfolio from a gross basis to net basis for the years ended December 31, 2020 and 2019 : Year Ended December 31, 2020 Year Ended December 31, 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 $ 411,157,772 9.2 % $ 363,970,662 10.6 % Obligations under participation agreements and secured borrowing (83,248,489) 10.9 % (95,809,439) 12.0 % Repurchase agreement payable (64,382,360) 3.9 % (64,326,187) 4.3 % Term loan payable (34,923,075) 5.3 % — — % Revolving credit facility — — % (504,110) 6.1 % Net loans (3) $ 228,603,848 10.7 % $ 203,330,926 11.9 % Senior loans Gross loans 221,461,896 6.7 % 133,437,181 7.7 % Obligations under participation agreements and secured borrowing (30,779,483) 9.1 % (8,832,644) 11.7 % Repurchase agreement payable (64,382,360) 3.9 % (64,326,187) 4.3 % Term loan payable (34,923,075) 5.3 % — — % Net loans (3) $ 91,376,978 8.4 % $ 60,278,350 10.7 % Subordinated loans (4) Gross loans 189,695,876 12.1 % 230,533,481 12.3 % Obligations under participation agreements and secured borrowing (52,469,006) 12.1 % (86,976,795) 12.1 % Revolving credit facility — — % (504,110) 6.1 % Net loans (3) $ 137,226,870 12.1 % $ 143,052,576 12.5 % _______________ (1) Amount is calculated based on the number of days each loan is outstanding. (2) Amount is calculated based on the underlying principal amount of each loan. 44 (3) The weighted average coupon rate represents net interest income over the period calculated using the weighted average coupon rate and weighted average principal amount shown on the table (interest income on the loans less interest expense) divided by the weighted average principal amount of the net loans during the period. (4) Subordinated loans include mezzanine loans, preferred equity investments and credit facilities. For the year ended December 31, 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. Interest Income For the year ended December 31, 2020 as compared to the same period in 2019, interest income decreased by $1.5 million, primarily due to a net decrease of $0.7 million in origination and disposition fee income received and a decrease in contractual interest income of $0.9 million. Contractual interest income decreased 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 the year ended December 31, 2020 as compared to the same period in 2019, real estate operating revenue increased by $0.6 million, primarily due to lease termination fee income received and the write-off of the unamortized below-market rent intangible liabilities in connection with a lease termination, partially offset by 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 year ended December 31, 2020, there was no prepayment fee income. For the year ended December 31, 2019, we received prepayment fee income of $0.3 million on the early repayment of a loan. 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 year ended December 31, 2020 as compared to the same period in 2019, operating expenses reimbursed to Manager increased by $1.2 million, 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 Terra Offshore REIT transactions described under “Item 1. Business.” 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 year ended December 31, 2020 as compared to the same period in 2019, asset management fee increased by $0.8 million, primarily due to an increase in total funds under management resulting from new investments we entered into as well as the Merger and Issuance of Common Stock to Terra Offshore REIT transactions. Asset Servicing Fee Under the terms of the management agreement with the Manager, we paid the Manager a monthly servicing fee at an annual rate of 0.25% of the aggregate gross origination price or acquisition price for each real estate-related loan held by us. For the year ended December 31, 2020 as compared to the same period in 2019, asset servicing fee increased by $0.2 million, primarily due to an increase in total funds under management. 45 Provision for Loan Losses The Manager performs a quarterly evaluation for possible impairment of our portfolio of loans. 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 December 31, 2020, we had three loans with a loan risk rating of “4” and one loan with a loan risk rating of “5” and recorded a general provision for loan losses of $1.3 million for the year ended December 31, 2020. Additionally, as of December 31, 2020, we had one loan that was deemed impaired and recorded a specific provision for loan losses of $2.5 million for the year ended December 31, 2020, as a result of a decline in the fair value of the collateral. There was no provision for loan losses for the year ended December 31, 2019 because we didn't have any loans with a loan risk rating of “4” or “5” as of December 31, 2019. For the years ended December 31, 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 year ended December 31, 2020 as compared to the same period in 2019, real estate operating expenses increased by $0.5 million, primarily due to an increase in real estate taxes. Depreciation and Amortization For the year ended December 31, 2020 as compared to the same period in 2019, depreciation and amortization expense increased by $0.9 million, as a result of the write off of in-place lease intangible assets in connection with a lease termination. Impairment Charge We did not record any impairment charge for the year ended December 31, 2020. For the year ended December 31, 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 year ended December 31, 2020 as compared to the same period in 2019, professional fees decreased by $1.7 million, 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 us 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. Directors Fees For the year ended December 31, 2020 as compared to the same period in 2019, directors fees decreased by $0.1 million, reflecting the reduction in the number of independent directors in connection with the Merger and the Issuance of Common Stock to Terra Offshore REIT transactions. Other For the year ended December 31, 2020 as compared to the same period 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 year ended December 31, 2020 as compared to the same period in 2019, interest expense from obligations under participation agreements decreased by $3.3 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 Terra 46 Offshore REIT transactions as well as a decrease in the weighted average coupon rate on obligations under participation agreements. Interest Expense on Repurchase Agreement Payable On December 12, 2018, we entered into a master repurchase agreement that provides for advances of up to $150.0 million in the aggregate, which we use to finance certain secured performing commercial real estate loans. 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. On September 3, 2020, we terminated the master repurchase agreement and replaced it with the indenture and credit agreement. For the year ended December 31, 2020 as compared to the same period in 2019, interest expense on repurchase agreement payable decreased by $1.0 million as a result of a decrease in the weighted average amount outstanding. 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 for short term financing needed to bridge the timing of anticipated loans repayments and funding obligations. On October 2, 2020, we amended the credit facility and reduced the commitment to $15.0 million. On March 16, 2021, the credit facility was terminated. For the year ended December 31, 2020 as compared to the same period in 2019, interest expense on revolving credit facility increased by $1.2 million, as a result of an increase in the weighted average amount outstanding. Interest Expense on Term Loan Payable On September 3, 2020, we entered into an indenture and credit agreement that provides for a floating rate loan of $103.0 million, $3.6 million of additional future advances, and may provide up to $11.6 million of additional future discretionary advances, in connection with certain outstanding funding commitments under the mortgage assets owned by us and financed under the indenture and credit agreement. The loan currently bears interest at LIBOR plus 4.25% with a LIBOR floor of 1.0%. For the year ended December 31, 2020, interest expense on term loan payable was $2.1 million. There was no interest expense on term loan payable for the year ended December 31, 2019 because the indenture and credit agreement was entered into on September 3, 2020. Interest Expense on Secured Borrowing In March 2020, we entered into a financing transaction where a third-party purchased an A-note position. However, the sale of the A-note position did not qualify for sale accounting treatment and therefore, the gross amount of the loan remains in the consolidated balance sheets. The portion that was sold is reflected as secured borrowing in the consolidated balance sheet, and the associated interest is reflected as interest expense on secured borrowing in the consolidated statements of operations. For the year ended December 31, 2020, interest expense on secured borrowing was $0.6 million. There was no interest expense on secured borrowing for the year ended December 31, 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 Terra Offshore REIT transactions, 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, which was primarily related to transaction costs incurred in connection with both transactions. Realized Gains on Marketable Securities For the year ended December 31, 2020, we sold $6.0 million of marketable securities, respectively, and recognized realized gains on marketable securities of $1.2 million. There were no sales of marketable securities for the year ended December 31, 2019. 47 Net Income For the year ended December 31, 2020 as compared to the same period in 2019, the resulting net income decreased by $3.8 million. Financial Condition, Liquidity and Capital Resources Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, funding and maintaining our assets and operations, making distributions to our stockholders and other general business needs. We use significant cash to purchase our target assets, repay principal and interest on our borrowings, make distributions to our investors and fund our operations. Our primary sources of cash generally consist of payments of principal and interest we receive on our portfolio of investments, cash generated from our operating results and unused borrowing capacity under our financing sources. We deploy moderate amounts of leverage as part of our operating strategy and use a number of sources to finance our target assets, including our term loan and the revolving credit facility. We may use other sources to finance our target assets, including bank financing and arranged financing facilities with domestic or international financing providers. In addition, we may divide the loans we originate into senior and junior tranches and dispose of the more senior tranches as an additional means of providing financing to our business. We may also issue additional equity, equity-related and debt securities to fund our investment strategies. We may issue these securities to unaffiliated third parties or to vehicles advised by affiliates of Terra Capital Partners or third parties. As part of our capital raising transactions, we may grant to one or more of these vehicles certain control rights over our activities including rights to approve major decisions we take as part of our business. In order to qualify as a REIT, we must distribute to our stockholders, each calendar year, at least 90% of our REIT taxable income (including certain items of non-cash income), determined without regard to the deduction for dividends paid and excluding net capital gain. These distribution requirements limit our ability to retain earnings and thereby replenish or increase capital for our business. Our obligations under participation agreements totaling $21.3 million will mature in the next twelve months. We expect to use the proceeds from the repayment of the corresponding investments to repay the participation obligations. Additionally, we expect to fund approximately $64.1 million of the unfunded commitments to borrowers during the next twelve months. We expect to maintain sufficient cash on hand to fund such commitments through matching these commitments with principal repayments on outstanding loans. Additionally, we had $44.0 million of borrowings outstanding under a mortgage loan payable that bear interest at an annual rate of LIBOR plus 3.85% with a LIBOR floor of 2.23%, that is collateralized by an office building. The mortgage loan payable matures on September 27, 2022. On September 3, 2020, we entered into an indenture and credit agreement that provides for a floating rate term loan of $103.0 million, $3.6 million of additional future advances, and may provide up to $11.6 million of additional future discretionary advances, in connection with certain outstanding funding commitments under mortgage assets owned by us and financed under the indenture and credit agreement. The floating rate term loan bears interest at a rate equal to LIBOR plus 4.25% with a LIBOR floor of 1.0%, and matures on March 14, 2025. As of December 31, 2020, the amount outstanding under the indenture and credit agreement was $107.6 million. The indenture and credit agreement is a term loan and does not contain any mark-to-market or margin provisions. The indenture and credit agreement replaces the master repurchase agreement, which has been terminated on the same date. 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. On October 2, 2020, we amended the revolving credit facility, reduced the commitment amount to $15.0 million and extended the maturity to September 2, 2021. On March 16, 2021, the credit facility was terminated. Borrowings under the revolving credit facility can be either prime rate loans or LIBOR rate loans and accrued interest at an annual rate of prime rate plus 1% or LIBOR plus 4% with a floor of 4.5%. As of December 31, 2020, the amount remaining available under the credit facility was $15.0 million. Cash Flows From Operating Activities For the year ended December 31, 2020 as compared to the same period in 2019, cash flows from operating activities decreased by $9.6 million, primarily due to a decrease contractual interest income received in cash, an increase in operating expenses and an increase in interest expense on our borrowings. 48 Cash Flows Used In Investing Activities For the year ended December 31, 2020, cash flows used in investing activities were $78.2 million, primarily related to payments for investments of $150.4 million, partially offset by proceeds from sales and repayments of investments of $72.2 million. For the year ended December 31, 2019, cash flows used in investing activities were $4.4 million, primarily related to origination and purchase of loans of $185.3 million, partially offset by proceeds from repayments of loans of $181.1 million. Cash Flows From Financing Activities For the year ended December 31, 2020, cash flows from financing activities were $52.7 million, primarily due to proceeds from obligations under participation agreements of $22.5 million, proceeds from borrowings under our repurchase agreement of $22.9 million, cash acquired from Terra Property Trust 2 of $16.9 million and cash contributed by Terra Offshore REIT of $8.6 million, partially offset by distributions paid of $21.2 million, a decrease in interest reserve and other deposits held on investments of $6.4 million, payment for repurchase of common stock of $3.6 million and repayments on obligations under participation agreements of $5.9 million. Additionally, we replaced the repurchase agreement with an indenture and credit agreement, and received proceeds from borrowings under the indenture and credit agreement of $107.6 million and made repayments for borrowings under the repurchase agreement of $104.0 million, and made payments for financing costs of $2.4 million. We also received proceeds of $35.0 million from borrowings under revolving credit facility which we repaid in the same period. For the year ended December 31, 2019, cash flows from financing activities were $8.9 million, primarily due to proceeds from borrowings under repurchase agreement of $81.1 million, proceeds from obligations under participation agreements of $34.7 million, an increase in interest reserve and other deposits held on investments of $1.2 million and proceeds from issuance of common stock of $3.6 million, partially offset by repayments of borrowings under our repurchase agreement of $34.2 million, repayments on obligations under participation agreements of $46.2 million and distributions paid of $30.4 million. Additionally, we received proceeds of $16.0 million from borrowings under revolving credit facility which we repaid in the same period. Critical Accounting Policies and Use of Estimates Our consolidated financial statements are prepared in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the 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. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As we execute our expected operating plans, we will describe additional critical accounting policies in the notes to our future consolidated financial statements in addition to those discussed below. Allowance for Loan Losses Our loans are typically collateralized by either the sponsors’ equity interest in the real estate properties or the underlying real estate properties. 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; (ii) the ability of the borrower to refinance the loan; and/or (iii) the property’s liquidation value. We also evaluate the financial wherewithal of the sponsor as well as its competency in managing and operating the real estate property. In addition, we consider the overall economic environment, real estate sector, and geographic submarket in which the borrower operates. Such analyses are completed and reviewed by asset management and finance personnel, who utilize various data sources, including (i) periodic financial data such as debt service coverage ratio, property occupancy, tenant profile, rental rates, 49 operating expenses, the borrower’s exit plan, the capitalization and discount rates; (ii) site inspections; and (iii) current credit spreads and discussions with market participants. Our Manager performs a quarterly evaluation for possible impairment of our portfolio of loans. A loan is impaired if it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan. Impairment is measured based on the present value of expected future cash flows or the fair value of the collateral, if the loan is collateral dependent. Upon measurement of impairment, we record an allowance to reduce the carrying value of the loan with a corresponding charge to net income. In conjunction with the quarterly evaluation of loans not considered impaired, our Manager assesses the risk factors of each loan and assigns each loan a risk rating between 1 (very low risk) and 5 (highest risk), which is an average of the numerical ratings in the following categories: (i) sponsor capability and financial conditions; (ii) loan and collateral performance relative to underwriting; (iii) quality and stability of collateral cash flows and/or reserve balances; and (iv) loan to value. 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. There may be circumstances where we modify a loan by granting the borrower a concession that we might not otherwise consider when a borrower is experiencing financial difficulty or is expected to experience financial difficulty in the foreseeable future. Such concessionary modifications are classified as troubled debt restructurings (“TDRs”), unless the modification solely results in a delay in a payment that is insignificant. Loans classified as TDRs are considered impaired loans for reporting and measurement purposes. Income Taxes We elected to be taxed as a REIT and to comply with the related provisions of the Internal Revenue Code. Accordingly, we generally are not subject to U.S. federal income tax on income and gains distributed to our stockholders as long as certain asset, income and share ownership tests are met. To maintain our qualification as a REIT, we must annually distribute at least 90% of our net taxable income to our stockholders and meet certain other requirements. We may also be subject to certain state, local and franchise taxes. Under certain circumstances, U.S. federal income and excise taxes may be due on our undistributed taxable income. If we were to fail to meet these requirements, we would be subject to U.S. federal corporate income tax, which could have a material adverse impact on our results of operations and amounts available for distributions to our stockholders. We believe that all of the criteria to maintain our REIT qualification have been met for the applicable period, but there can be no assurance that these criteria will continue to be met in subsequent periods. We 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 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 years ended December 31, 2020 and 2019, we did not incur any interest or penalties. Our 2017-2019 federal 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. Distributions to stockholders generally will be taxable as ordinary income or may constitute a return of capital. We will furnish annually to each stockholder a statement setting forth distributions paid during the preceding year and their U.S. federal income tax treatment. 50 Contractual Obligations The following table provides a summary of our contractual obligations at December 31, 2020: Total Less than 1 year 1-3 years 3-5 years More than 5 years Obligations under participation agreements — principal (1) $ 71,266,303 $ 21,309,495 $ 49,956,808 $ — $ — Secured borrowing — principal (1) 18,281,848 — 18,281,848 — — Mortgage loan payable — principal (2) 44,020,225 789,486 43,230,739 — — Term loan payable — principal (3) 107,584,451 — — 107,584,451 — Interest on borrowings (4) 39,893,632 14,723,571 17,926,263 7,243,798 — Unfunded lending commitments (5) 67,904,211 64,129,777 3,774,434 — — Ground lease commitment (6) 83,193,563 1,264,500 2,529,000 2,529,000 76,871,063 $ 432,144,233 $ 102,216,829 $ 135,699,092 $ 117,357,249 $ 76,871,063 ___________________________ (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. Additionally, we may sell a portion of a loan to a third-party. These loan participations and sale do not qualify for sale treatment. As such, the loans remain on our consolidated balance sheets and the proceeds are recorded as obligations under participation agreements or secured borrowing, as applicable. Similarly, interest earned on the entire loan balance is recorded within “Interest income” and the interest related to the participation interest or sold interest is recorded within “Interest expense on obligations under participation agreements” or “Interest expense on secured borrowing”, as applicable, in the consolidated statements of operations. We have no direct liability to a participant under our participation agreements with respect to the underlying loan, and the participants’ share of the loan is repayable only from the proceeds received from the related borrower/issuer of the loans. (2) Amount excludes unamortized origination and exit fees of $0.1 million. (3) Amount excludes unamortized deferred financing costs of $2.3 million. (4) Interest was calculated using the applicable annual variable interest rate and balance outstanding at December 31, 2020. Amount represents interest expense through maturity plus exit fee as applicable. (5) Certain of our loans provide for a commitment to fund the borrower at a future date. As of December 31, 2020, we had eight of such loans with total funding commitments of $285.2 million, of which $217.3 million had been funded. (6) Represents rental obligation under the ground lease, inclusive of imputed interest, for our office building that it acquired through foreclosure. The table above does not include our commitment under a subscription agreement with Terra RECO to fund up to $50.0 million to purchase the limited partnership interests in Terra RECO as the subscription agreement does not have fixed or determinable payments. As of December 31, 2020, the unfunded commitment was $14.1 million. Management Agreement with Terra REIT Advisors We currently pay the following fees to Terra REIT Advisors pursuant to a management agreement: Origination and Extension Fee . An origination fee in the amount of 1.0% of the amount used to originate, acquire, fund or structure real estate-related investments, including any third-party expenses related to such loan. In the event that the term of any real estate-related loan is extended, our Manager also receives an origination fee equal to the lesser of (i) 1.0% of the principal amount of the loan being extended or (ii) the amount of fee paid by the borrower in connection with such extension. Asset Management Fee . A monthly asset management fee at an annual rate equal to 1.0% of the aggregate funds under management, which includes the loan origination amount or aggregate gross acquisition cost, as applicable, for each real estate-related loan and cash held by us. Asset Servicing Fee . A monthly asset servicing fee at an annual rate equal to 0.25% of the aggregate gross origination price or aggregate gross acquisition price for each real estate related loan then held by us (inclusive of closing costs and expenses). Disposition Fee . 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 51 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. Transaction Breakup Fee . In the event that we receive 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, our 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 our Manager with respect to its evaluation and pursuit of such transactions. In addition to the fees described above, we reimburse our Manager for operating expenses incurred in connection with services provided to the operations of our company, including our allocable share of our Manager’s overhead, such as rent, employee costs, utilities, and technology costs. The following table presents a summary of fees paid and costs reimbursed to our Manager in connection with providing services to us: Years Ended December 31, 2020 2019 Origination and extension fee expense (1)(2) $ 1,383,960 $ 1,992,492 Asset management fee 4,480,706 3,671,474 Asset servicing fee 1,008,256 854,096 Operating expenses reimbursed to Manager 6,041,075 4,875,153 Disposition fee (3) 504,611 1,408,055 Total $ 13,418,608 $ 12,801,270 _______________ (1) Origination and extension fee expense is generally offset with origination and extension fee income. Any excess is deferred and amortized to interest income over the term of the loan. (2) Amount for the year ended December 31, 2020 excluded $0.4 million of origination fee paid to the Manager in connection with our equity investment in a limited partnership. This origination fee was capitalized to the carrying value of the equity investment as transaction cost. (3) Disposition fee is generally offset with exit fee income and included in interest income on the consolidated statements of operations. Participation Agreements and Secured Borrowing We have further diversified our exposure to loans and borrowers by entering into participation agreements whereby we transferred a portion of certain of our loans on a pari passu basis to related parties, primarily other affiliated funds managed by our Manager or its affiliates, and to a lesser extent, unrelated parties. We have also sold a portion of a loan to a third-party that did not qualify for sale accounting. In March 2020, we settled an aggregate of $49.8 million of participation interests in loans held by us with affiliates. In connection with the Merger and Issuance of Common Stock to Terra Offshore REIT, the related participation obligations were settled. As of December 31, 2020, the principal balance of our participation obligations totaled $71.3 million, consisting of $40.2 million in participation obligations to Terra Fund 6 and $31.1 million in participation obligations to third-parties. Additionally, as of December 31, 2020, the principal balance of our secured borrowing was $18.3 million. Terra Fund 6 is managed by Terra Income Advisors, an affiliate of our Manager. If we enter into participation agreements in the future, we generally expect to enter into such agreements only at the time of origination of the investment. Our Manager may experience conflicts in allocating investments as a result of differing compensation arrangements of the Manager and its affiliates and Terra Fund 6. The loans that are subject to participation agreements are held in our name, but each of the participant’s rights and obligations, including with respect to interest income and other income (e.g., exit fee, prepayment income) and related fees/expenses (e.g., disposition fees, asset management and asset servicing fees), are based upon their respective pro rata 52 participation interest in such participated investments, as specified in the respective participation agreements. We do not have direct liability to a participant 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). Pursuant to the participation agreement with these entities, we receive and allocate the interest income and other related investment income to the participants based on their respective pro rata participation interest. The affiliated fund participant pays related expenses also based on their respective pro rata participation interest (i.e., asset management and asset servicing fees, disposition fees) directly to our Manager, as per the terms of each respective affiliate’s management agreement. Other than for U.S. federal income tax purposes, our loan participations do not qualify for sale treatment. As such, the investments remain on our combined consolidated balance sheets and the proceeds are recorded as obligations under participation agreements. 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 year ended December 31, 2020, the weighted average outstanding principal balance on obligations under participation agreements and secured borrowing was approximately $83.2 million, and the weighted average interest rate was approximately 10.9%, compared to weighted average outstanding principal balance of approximately $95.8 million, and weighted average interest rate of approximately 12% for the year ended December 31, 2019. Off-Balance Sheet Arrangements Other than contractual commitments and other legal contingencies incurred in the normal course of our business, we do not have any off-balance sheet financings or liabilities.